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McMoRan Exploration Co. MMR -0.50% today provided an update on the Davy Jones No. 1 workover currently in progress on South Marsh Island Block 230. As previously reported McMoRan successfully perforated 165 feet of Wilcox sands and on July 13 commenced operations to run production tubing. Prior to removing the blow out preventer and installing the production tree, McMoRan performed a routine pressure test on the seal system, which indicated that the seal assembly located at approximately 16,400 feet needed to be replaced. McMoRan believes the seal assembly was impacted by the increased use of high density mud used in operations designed to suppress flow in the well. Once the well is stable, McMoRan plans to install a production packer above a new seal assembly which would enable a double seal completion. As a result, the flow test previously anticipated during the week of July 30 is now expected to be conducted during the month of August 2012.

James R. Moffett, Co-Chairman, President and CEO of McMoRan, said: “In our efforts to unlock “Davy Jones’ Locker”, we encountered flow in the well prior to setting all of the production tubing. To address this, we have modified our original design to include a double seal which should allow us to achieve a measurable flow test and bring the well on production safely. While we are disappointed by the delay, we are encouraged by the well’s attempts to flow. We look forward to obtaining results from the measurable flow test as soon as possible to determine the potential of the first shallow water, ultra-deep sub-salt completion on the Gulf of Mexico Shelf.”

As previously reported, McMoRan has drilled two successful ultra-deep sub-salt wells in the Davy Jones field. The Davy Jones No. 1 well logged 200 net feet of pay in multiple Wilcox sands, which were all full to base. The Davy Jones offset appraisal well (Davy Jones No. 2), which is located two and a half miles southwest of Davy Jones No. 1, confirmed 120 net feet of pay in multiple Wilcox sands, indicating continuity across the major structural features of the Davy Jones prospect, and also encountered 192 net feet of potential hydrocarbons in the Tuscaloosa and Lower Cretaceous carbonate sections.

Davy Jones involves a large ultra-deep structure encompassing four OCS lease blocks (20,000 acres). McMoRan is the operator and holds a 63.4 percent working interest and a 50.2 percent net revenue interest in Davy Jones. Other working interest owners in Davy Jones include: Energy XXI EXXI -2.39% (15.8%), JX Nippon Oil Exploration (Gulf) Limited (12%) and Moncrief Offshore LLC (8.8%).

McMoRan Exploration Co. is an independent public company engaged in the exploration, development and production of natural gas and oil in the shallow waters of the GOM Shelf and onshore in the Gulf Coast area. Additional information about McMoRan is available on its internet website ” www.mcmoran.com “.

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Louisiana Department of Natural Resources (DNR) Secretary Scott Angelle said today that McMoran Exploration’s recent announcement of a planned 30,000-foot onshore well project in South Louisiana could be the start of a wider trend in exploration for oil and natural gas at depths greater than 22,000 feet – which could bring the promise of new investments, new energy resources and new jobs.

McMoran has also announced that it will be testing the flow rate of its first well in the Davy Jones natural gas prospect, drilled to a depth of more than 30,000 feet in a water depth of about 20 feet in federal Outer Continental Shelf (OCS) waters about 10 miles south of Vermilion Parish, next week. The Davy Jones project has been ongoing for approximately three years – and been the subject of interest throughout the energy industry for the potential it may hold to provide energy from an area that had been considered to be mostly played out.

In regard to the South Louisiana onshore project, McMoran leadership recently stated that the company has acquired approximately 70,000 acres in mineral leases in area where the borders of Iberia, St. Martin and Iberville parishes meet for what the company terms the “Highlander” prospect, with drilling on the planned 30,000-foot well to commence by the end of 2012.

McMoran is also partnered with Chevron on an already ongoing Lineham Creek ultra-deep well in eastern Cameron Parish, that is currently drilling past 19,000 feet, with a target depth of 29,000 feet. Both projects would beat the previous record depth in the state by nearly a mile. McMoran has indicated that the company estimates that the Highlander, Lineham Creek and other ultra-deep potential prospects it has identified onshore in South Louisiana in an area from Cameron Parish to Lafourche Parish potentially hold the equivalent of 30 trillion cubic feet of natural gas.

“McMoran has established itself as one of the pioneers in the new frontier of energy exploration in South Louisiana in the past several years, finding oil and natural gas at depths that were not considered feasible for energy production until that company found a way to do it,” Angelle said. “Attempting projects such as this require not only a substantial investment by exploration companies, but substantial confidence that the regulatory framework they will be working within includes efficient permitting processes that preserve safety and the environment while encouraging development that attracts investment and brings job creation.”

Angelle said that the potential to draw new investment and activity in ultra-deep energy exploration, bringing with it new energy industry spending that can support job creation both in the industry and in the communities surrounding new activity, was a primary driver in DNR having recommended new law in the recent legislative session that specifically addressed the Office of Conservation’s regulation of ultra-deep oil and natural gas wells. The law, as passed by the Legislature, defines “ultra-deep” wells as those drilled to tap into reservoirs at 22,000 feet or deeper below surface and includes provisions outlining rules for how drilling units can be established at that depth and determining the size of those units. The process of establishing a drilling unit for a well can be critical in establishing the rights of operators to explore for oil and natural gas and the rights of landowners to share in the proceeds of oil and natural gas production.

“The industry expressed its faith in Louisiana’s energy potential and governmental leaders by investing in a handful of ultradeep prospects in recent years without those rules in place, to prove their science was sound,” Angelle said. “Companies are now seeing that faith being rewarded in both new energy prospects and the state’s action to ensure fair and effective regulation, and Louisiana’s businesses and workers could be reaping the benefits for years to come if McMoran and other companies continue to expand their activity and investment.”

Angelle said that a strong success in the planned test of the Davy Jones prospect in federal waters next week could also be a signal to energy companies and investors that the science driving McMoran’s ultradeep exploration in both South Louisiana and the shallow coastal waters is sound.

“Ultradeep prospects both directly within the state and in the federal waters just off our shores bring with them the potential to strengthen our economy, because exploration companies will be looking to Louisiana’s ports, supply companies, support industries and workers to develop and produce the energy resources they discover,” Angelle said. “That potential growth within the industry can mean new opportunities for other businesses to expand as they gain customers with new jobs or better paying jobs who have more money to spend on everything from homes and cars to movies and restaurants.”

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For the last several months all eyes have been focused on the successful completion of The Davy Jones #1 Well in just 20’ of water in theLouisianaswamp.  McMoran is the operator and its key partners are Energy XXI and Tex Moncrief.   The well has cost a large fortune and has taken far more time and money to complete than ever expected.

That said, one of the tasks of the partnership group has been to explore the vast area that stretches from Blackbeard West, the first of MMR’s ultra deep Gulf of Mexico discoveries to Blackbeard East, Lafitte, and the two Davy Jones wells closer to shore. The targeted sands were down more than 30,000’ and some of the wells went further to see what was there to see. Conditions are harsh and forbidding. New equipment had to be invented to control the temperatures and pressures.

Along the way, the group has worked hard to correlate the sands they discovered and various geologic formations covering a vast geographic expanse in their efforts to prove their geologic theory about deposition of hydrocarbons deep under theGulf of Mexico. Most of their wells are the deepest drilled to date below the mudline. The original geologic concepts have had to be modified from theories to reflect what has actually been encountered with the drill bit.

On June 19^th, EXXI will be holding its Annual Analyst Day at the Waldorf Astoria in NYC.  It is always a really  informative event.  This year should be no exception.  EXXI has focused mainly on being an “oily” company in the properties it has purchased since the company was formed a few years ago.  It leapt forward into the bigger leagues by buying a large tract of older properties from XOM at the end of 2010 for a billion dollars. These wells  are very significant to EXXI but had become irrelevant to Exxon. When the deal was negotiated, oil was at $80. For the last 18 months, prices have been much higher than that so the debt paydown has  been far more rapid than ever expected.  EXXI also does a great job of hedging its exposures. It also sells based on Brent pricing instead of WTI and that helps, too.

EXXI has largely confined its gas efforts to be a significant junior partner to McMoran. Often Jim Bob Moffett disperses information about his drilling program by having John Schiller give updates on the latest progress. So it is reasonable to expect some new information at the meeting this week.

However, as the last year has unfolded, the Cupola Play has grown in importance to both of these companies and to the Moncriefs as well.  As the five wells listed above were drilled, the partners have refined their perception of the salt weld and what it portends for future exploration projects. In some cases, anomalies that presented themselves on the seismic data were believed to be extensive salt. When drilling, that was not always the case. In some of the wells, the salt was thin or absent.

The model has been revised in recent presentations by both MMR and EXXi showing the targeted sands much closer to the surface than originally believed.  It has sometimes been slow going just under the salt because significant rubble zones have been encountered that are much like glacial moraines or breccia, a zone of broken rock, that is typical of the rocks and debris pushed forward as a glacial moraine by advancing glaciers and then left behind when the glaciers begin to retreat. New York‘s  Long Island is such a glacial moraine left in the last ice age only 10,000 years ago.

We have already been told that Ship Shoal 188, AKA Blackbeard West #2, experienced a kick just as the salt weld was penetrated. That is a very encouraging sign for the theory that the cupolas provided very effective seals for hydrocarbons.  About a month ago, Schiller stated at one of his talks that they believed C5 hydrocarbons were present.  We also know that the pressures at Ship Shoal 188 are such that this well, if successful and a discovery, can be produced with conventional off the shelf equipment including just 20,000 lb. Blow Out Preventers.  The pressures increased by over 2000 lbs in the space of just 160 vertical feet of drilling as the salt was penetrated.  That kind of increase is significant and very promising for significant hydrocarbons to be present.  Also at these shallower depths, there is a very good chance that what is trapped is heavy hydrocarbons with far more economic value.

Ship Shoal 188 was drilled  because it helps to prove the Cupola Theory and to preserve MMR’s rights to the vast unit that is Blackbeard West, particularly if it is brought onto production rapidly.  MMR confirmed a few weeks ago that the expectation was that SS 188 might be coming online, if a discovery, simultaneously with Davy Jones #1.  Now it sounds as if this well will be fast tracked and completed perhaps even in the second half of 2012.  That is important to cash flow because what is likely to come out of this well is much higher value products than the natural gas at the bottom of the Ultra Deep wells. With Nat. gas selling in the low $2’s these days, production that can be sold for two or three times that would make SS 188 a very successful well.And the better news is that if the Cupola Theory is proved valid, just to the west is the Barbosa prospect which on seismic they have shared for months now looks many times the size of SS 188.  I expect the announcement of a rig out there at Barbosa soon. McMoRan always reports its quarterly results rapidly after the end of a fiscal quarter. I’d bet that Moffett will be talking a lot about Barbosa on his next quarterly call and maybe he will have some more information for us about Ship Shoal as well.

We also know that the partners will be showing up at lease sales this week to expand their acreage portfolios with the new focus onshore rather than offshore, or so they have said.  We know they are engaged with Chevron at Lineham Creek onshoreLouisiana. In SEC parlance, we and they are assembling the mosaic of information as they develop this enormous play which stretches for 200 square miles already and maybe soon even more.  We should learn soon what their areas of focus will be going forward.   This next week and the next month should be important ones for the Shallow Water Ultra Deep play. As Jim Bob always likes to say: “Stay tuned!”

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