With the flow test at Davy Jones "imminent", McMoRan (NYSE:MMR) President and CEO Jim Bob Moffett wrote a letter to shareholders sharing his thoughts on Davy Jones.
For readers unfamiliar with the ultra-deep Davy Jones exploration program, the company and its partners are drilling potential natural gas wells to depths ranging between 30,000 to 35,000 feet below the earth's surface to test a geological model of drilling down below the salt weld in the Gulf of Mexico. These are the deepest wells in the world. Keep in mind though, the Davy Jones well is in 20 feet of water compared to deepwater Gulf of Mexico wells that are in water depths of multiple thousand feet.
Click here to read the letter on the company's website.
In the letter, Mr. Moffett provides a recap of the last two years, and how his company and partners, Plains Exploration & Production Company (NYSE:PXP), Energy XXI (NASDAQ:EXXI), JX Nippon Oil Exploration and Moncrief Offshore, were challenged with new drilling and completion obstacles never faced by the industry. The Davy Jones well has a measured depth of more than five miles.
In 2008, MMR and EXXI drilled the Blackbeard West well that encountered four hydrocarbon bearing sands in the Miocene and Oligocene. Data used from this well was used to drill the Davy Jones discovery well during 2010.
The discovery at Davy Jones opened a 20,000 acre block and confirmed 200 feet of net pay in the Wilcox zone. Mr. Moffett has said previously that 40 wells have been drilled in the deepwater Gulf of Mexico by other operators to test the Wilcox - only one well has been drilled successfully; however the test was inconclusive.
Click here for Oil & Gas 360® full write-up titled: "Profile on the Evolution of Ultra-Deep Shelf Exploration; Energy XXI Shares Advance on McMoRan's Confirmation of Geologic Model."
When MMR first began exploring the ultra-deep, the company believed that the 200 square mile area held nearly 30 Tcf of resource potential. Later, MMR and EXXI reported that the 200 square mile area could exceed 100 Tcf of resource potential. In McMoRan's June 29, 2011 presentation, the company reported that its break-even price (for a 15% internal rate of return) on the ultra-deep wells, assuming a gross well cost of $200 million per well, and an estimated ultimate recovery of 200 Bcfe per well, is $2.50 per Mcf. In the same presentation, MMR noted that for every 2 Tcfe net of gas that it finds in a $4.00 per Mcfe natural gas environment, the company could add an additional $1.8 billion of pre-tax PV-10 value to its shares. At the time of publication, natural gas (April '12) was trading at $2.38 per MMBtu.
To date, the four ultra-deep wells have identified five hydrocarbon bearing geologic sections including: Middle/Lower Miocene, Wilcox, Frio, Tuscaloosa and the Cretaceous Carbonates.
MMR and EXXI have confirmed that drilling below the salt weld on the Gulf of Mexico shelf can be achieved safely and reach hydrocarbon bearing formations (Middle/Lower Miocene, Wilcox, Frio, Tuscaloosa and Cretaceous Carbonate) that have been prolific onshore, in the deepwater Gulf of Mexico and in international locations.
With the well test "imminent", the oil and gas industry awaits first results from this wildcat well.