Drilling advances

	Vol. 231 No. 3
JIM REDDEN, CONTRIBUTING EDITOR

Is Davy Jones a good, or bad, pill?

I’m sure you’ve seen the commercials. Some pharmaceutical company will spend 30 seconds telling you that it just came up with the next wonder drug that will cure every ailment known to man. Then they’ll spend a full minute warning that if you decide to take this wonder drug, all manner of calamity could befall you, from getting hives all over your body to suffering from a condition in which you and your partner aren’t as, ahem, close as you once were.

Those advertisements came to mind when I read an article in the Houston Chronicle that appeared only a couple of days after McMoRan and its partner Energy XXI announced what looks like the largest gas discovery in decades in the shallow water of the Gulf of Mexico shelf. The Davy Jones prospect was drilled to a total depth of more than 28,000 ft in only 20 ft of water, just 10 miles south of the Louisiana coast on South Timbalier Block 168. The gas find brought cheers from drillers, who believe it may be just what the doctor ordered to resuscitate a drilling theater that has been on life support of late. Some comrades in Louisiana told me last month that they are already seeing new signs of life on the shelf.

But leave it to the folks who make their living on Wall Street to try and put a damper on the party. Four days after word gushed out about the discovery, oilfield stock analysts actually told the Chronicle that Davy Jones was not entirely good news.

Come again? Try explaining that to the service and supply companies that have seen their profit margins take a nose dive for more than a year and are salivating over the prospect of a new drilling arena opening up and putting their jackups, mud and pipe back to work. So what possibly could possess these supposedly astute industry prophets to suggest that these giddy companies should put down the bubbly?

Their perspicacious reasoning holds that the conservative estimates of between 2 Tcf and 6 Tcf of natural gas the prospect is believed to contain are, well, too large. Leading the chorus was David Pursell, managing director of the investment bank Tudor, Pickering, Holt & Co., who says that all Davy Jones will do is further swell US gas supplies and add “one more brick to the natural gas wall of worry.”

He was further quoted as saying the discovery “could be meaningful to US supply in a time frame when we really don’t need more additions to supply.” As if production from this complex theater would be hitting burner tips anytime before 2014 at the earliest.

Excuse my naiveté, but now I’m thoroughly stumped. My non-economic savoir faire notwithstanding, I just assumed from my three-plus decades of experience in this industry that the objective of drilling was to actually, you know, find oil or gas. Now, if I read this correctly, it is advisable to “drill, drill, drill,” but just don’t find anything, and if you do, keep it small. I rather doubt that many operators are going to stampede to the Gulf of Mexico to drill deep HPHT stripper wells.

Even academia got into the wet blanket tossing. Tyler Priest, director of global studies at the University of Houston’s esteemed Bauer College of Business, said, “We’ve found ourselves in the past few years thinking, be careful what you wish for, because it might come true. All the sudden, we have gas everywhere now.”

And, if you look at it from their perspectives, there’s more bad news. John Schiller, CEO of Energy XXI, which holds 16% of Davy Jones, said it probably is just the beginning. “Go back through the history of development in our business, and, odds are, we’ve got more than one of these in front of us,” he was quoted as saying.

“It remains to be seen what this is going to do to total gas supply,” added Matt Prickard, market analyst for Quest Offshore Resources in Sugar Land, Texas, “but I would say it’s pretty rare that you would find one discovery by itself without other finds nearby.”

Yes, we’re all fully aware that the pipelines are full these days. The so-called gas bubble has been with us for years, and industry experts keep telling us it’s going to burst any moment now. It sure didn’t happen in 2009 when natural gas prices hit a seven-year low and US stockpiles were pushed to an all-time high. So it may seem entirely logical to question the economic prudence of continuing to invest millions of dollars to drill for a commodity that is “everywhere” and selling for rock-bottom, though rising, prices.

But what’s baffling to me is that the same Wall Streeters who look unfavorably on Davy Jones, at the same time, reward producers, who see their stock prices jump after announcing major new gas discoveries. Of course, their highest ratings are reserved for those companies that are able to increase production, while simultaneously “right-sizing”—a supposedly nice euphemism for laying off employees. For them, it’s all about the next quarter.

The detractors’ apprehension over Davy Jones also came at a time when gas production in the Gulf of Mexico fell to half of what it was in 2001 and prices in January rose to a one-year high, thanks partly to a blizzard that has left every state except Hawaii with snow and freezing temperatures. What’s more, just last month natural gas futures spiked on the heels of a US Department of Energy report showing that stockpiles were lower than expected.

In its annual Gulf of Mexico forecast review released last summer, the US Minerals Management Service forecast offshore gas production to continue its steady decline over the next four years, in large part, and get this, because of the maturity of shelf fields.

Meanwhile, shortly after the announcement of the discovery, stock prices for McMoRan and Energy XXI rose a staggering 50% and 40%, respectively, from their lows of the past year. At least there are some investors who apparently are looking down the road and see Davy Jones as a good pill in the long term.