(07/16/12) The Little Driller That Could

One intrepid explorer has defied skeptics to find valuable energy deposits in the Gulf of Mexico, says Joan E. Lappin, chairman and CIO of Gramercy Capital Management.

We are talking shallow water drilling opportunities with Joan Lappin. Joan, tell us what’s going on in this space that a lot of people haven’t really heard about. Where are the opportunities?

Well, I’m sure that everybody in our country has heard about the fact that we don’t really have an energy policy these days. And we know that as a nation we have to do something.

One of the greatest opportunities that is becoming increasingly apparent almost by the week is the opportunity to use natural gas to power our electric utilities, to possibly power automobiles, and to move away from our dependence on Middle Eastern oil. One of the companies that has been leading the charge on this is a small gas exploration company called McMoRan Exploration (MMR).

Are they part of Freeport McMoRan (FCX)?

Well, they’re related companies. They share co-chairmen, and Jim Bob Moffett—who discovered the largest copper find in the world that Freeport owns—is the same fantastic geologist who developed an idea about six or seven years ago that if we drilled deeper under the Gulf of Mexico than had ever been the case before, that possibly we would make major hydrocarbon discoveries. That’s exactly what’s happened.

So at this point, five years into it and hundreds of millions of dollars later, McMoRan and its partners—Energy 21, Tex Moncrief, a well known Texas wildcatter, and some other small partners—have been drilling at depths 30,000 feet below the mud line, which means where the water stops and the drilling begins.

What’s unique about their program is that they haven’t gone into the very deep water where Macondo blew up. That was in mile-deep water, and we all watched those videos of the oil gushing out of the earth. They’re drilling in some places in water right off the coast of Louisiana that’s as shallow as 20 feet. But once they’re in the ground, they’re going deeper than anyone ever has before.

And they have now made five major discoveries between 200 feet and 500 feet. Now the deeper into the earth they go, the more likely the hydrocarbons have been cooked into gas, but the shallower ones that are maybe in the 20,000 foot depth—which is where Macondo in theory was—have a good prospect of having a large amount of natural gas liquids.

So this has been an exasperating play. The disbelievers have felt that:

there was nothing to find
they could never recover it
they could never produce it

Well, at this point, they found it and they found lots of it. They are trying to produce the first well, and had enormous difficulties and it’s now running about six months beyond when they thought they would bring it on production. Bt the belief of the key players in the play is that by sometime in 2012, we will have production from one or more of these wells. So it’s very exciting.

Absolutely.

It’s a new frontier for the United States.