McMoRan Discovery May Open `Frontier' of Oil Deposits

By Joe Carroll

Oct. 22 (Bloomberg) -- McMoRan Exploration Co.'s South Timbalier 168 oil discovery in the Gulf of Mexico may become a catalyst for finds in areas previously deemed too far below the earth's surface to hold large crude deposits.

The field, abandoned two years ago by Exxon Mobil Corp., is yielding crude at depths where only natural gas was thought to exist, said John Rogers Smith, a petroleum engineering professor at Louisiana State University. It's under shallow waters off Louisiana and may be drilled to almost 7 miles (11 kilometers) beneath the seafloor.

``If what they're saying pans out, this represents a new frontier,'' Smith, a former Amoco Corp. engineer, said yesterday in a telephone interview from Baton Rouge. ``Finding it on the continental shelf, as opposed to out in the deep water, is very surprising. The implications are significant because we have all kinds of this rock spread around coastal Louisiana.''

South Timbalier 168 may hold ``several billion barrels of oil,'' McMoRan co-Chairman James ``Jim Bob'' Moffett told investors on a conference call this week. McMoRan is drilling to record depths to unlock a pool of crude that may be large enough to supply all 146 U.S. refineries for nine months at a time when prices are double what they were in 2003. If Moffett is correct, the discovery is one of the largest in the U.S. since the 1960s.

New Orleans-based McMoRan, which has posted five straight years of losses and is less than one-700th Exxon Mobil's size by sales, is leading the drilling effort at South Timbalier 168. Its partners in the prospect are Energy XXI (Bermuda) Ltd. and Plains Exploration & Production Co. If the field holds 4 billion barrels of recoverable oil, McMoRan's 32.3 percent stake would be 21 times the company's proved reserves.

Hefty Bill

McMoRan faces considerable challenges in turning South Timbalier 168 into a producing field, including getting enough cash to pay for pipes, valves and other equipment, said Steve Berman, a senior analyst at Pritchard Capital Partners LLC in New York. Drilling a second well may cost $130 million.

The company may be forced to take on additional partners, perhaps including major oil companies, to obtain financing, Berman said. McMoRan also needs to acquire more data about the geological properties of the reservoir and the proportion of oil to gas to convince investors and analysts it's commercially viable, he said.

``Even as good as it sounds, we have to keep in mind this is still just a potential discovery,'' Berman said. ``There's not enough meat on the bones yet to make a determination about whether this will be economical to develop.''

Shares Rise

McMoRan climbed 82 cents, or 6.2 percent, to $14 yesterday in New York Stock Exchange composite trading. The stock has climbed 7 percent this year, compared with a 30 percent drop by an index of oil and gas explorers in the Standard & Poor's 500.

Energy XXI, based in Hamilton, Bermuda, jumped 26 percent to $2.15, and Houston-based Plains rose 2.1 percent to $25.75.

Anadarko Petroleum Corp.'s K2 field, discovered in 2002, has an estimated 2 billion to 4 billion barrels. K2 is the biggest oil find in the U.S. Gulf of Mexico on record and the largest anywhere in the nation since Alaska's Kuparuk River discovery in 1969.

McMoRan reached a drilling depth of 33,000 feet this week, Moffett said on the conference call. The company will decide in the next few weeks whether to continue to 35,000 feet or stop so additional wells can be drilled nearby, he said.

Oil Tumbles

Moffett said it's too early to say how high energy prices need to be to justify pumping oil and gas from the field. Crude futures traded in New York tumbled 52 percent since touching a record at $147.27 a barrel on July 11 amid concern a global economic slowdown will erode demand for gasoline, diesel and other fuels.

Other companies are waiting for more details on what McMoRan has found and are eager to drill similar prospects, said Berman of Pritchard Capital. The search may expand beyond the traditional U.S. offshore exploration region off Louisiana and Texas to the East and West coasts after Congress lifted a quarter-century-long ban on drilling in those areas last month.

South Timbalier 168, formerly known as Blackbeard, covers 10,000 acres, an area twice the size of John F. Kennedy International Airport in New York. The rock formation is part of a layer of stone and sand that lies below and adjacent to reservoirs that have yielded the equivalent of 49 billion barrels of crude since production began in the 1950s.

Reserves Unknown

The overlying formations probably hold the equivalent of another 10 billion barrels of oil, according to the U.S. Geological Survey. No estimates exist for the region now being explored by McMoRan because of the scarcity of data.

Moffett, 70, declined to provide a more precise estimate of potential reserves until more wells are drilled to assess the extent of the deposits and the porosity of the rocks. If the field holds 4 billion barrels, the crude would be worth almost $300 billion at current prices, exceeding gross domestic products of all but 28 of the world's nations.

Moffett shocked oil-industry peers by saying the field may contain a mix of crude and gas, rather than all gas, because it's 10,000 feet deeper than the deepest U.S. gas fields, said Smith, the Louisiana State professor. Scientists had assumed that temperatures at the depths where McMoRan is exploring were so high that any crude would have been boiled into gas, he said.

``The best exploration geologists are usually those who tell us to go do something the rest of us don't want to do,'' Smith said.

Shallow Water

South Timbalier 168 is close to shore and beneath 70 feet (21 meters) of water, which means lower costs than for fields in the deepest reaches of the Gulf. The cost of a production platform to pump crude and gas ashore will probably reach a few hundred million dollars, compared with the $2 billion or more it can take to outfit a deepwater platform, Candida Scott, a senior director at Cambridge Energy Research Associates, said in a telephone interview from Houston.

Rather than requiring a vessel than can withstand the high seas that batter production facilities hundreds of miles from shore, South Timbalier 168 probably will only need a steel structure set atop a pylon on the gulf floor, she said.

Irving, Texas-based Exxon Mobil, the world's largest oil company, quit Blackbeard in 2006 after a failed $200 million effort to drill to 32,000 feet below the seafloor. At the time, spokesman Len D'Eramo said the well was being ``temporarily plugged and abandoned.'' Exxon Mobil, which was probing for gas, halted the project after drilling to 30,067 feet.

Exxon Mobil's Exit

McMoRan obtained control of Blackbeard last year in its $1.1 billion acquisition of offshore assets from Newfield Exploration Co., which held a stake in the field during Exxon Mobil's tenure as operator.

McMoRan is going ahead where Exxon Mobil stopped because the company has decades of experience drilling deep wells into high-pressure rock formations, co-Chairman Richard Adkerson said in a July interview.

The most sophisticated seismic technology, which gives geologists three-dimensional images of subterranean rock formations, doesn't work well at the depths McMoRan is plumbing. That forces crews to employ techniques from the 1960s that assess geologic structures sharing the characteristics of previous oil and gas discoveries, he said.

``What we're doing today is a carryover of the exploration technology that our company used historically in drilling,'' Adkerson said. ``We're drilling structures that were known to have been productive at shallower depths.''

If McMoRan proceeds to a depth of 35,000 feet, the company would break the record set by Chevron Corp. and its partners in 2005 at Knotty Head, which was bored to 34,189 feet below the sea surface.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net.