Freeport-McMoRan’s Potential Gusher Following Anadarko’s Massive Gulf Of Mexico Discovery

Submitted by Ogden Hammond, PhD as part of our contributors program

The recent discoveries of massive oil deposits in ultra-deepwater fields are shedding new light on the potential for huge discoveries in places like the Gulf of Mexico. Earlier this month, Anadarko (NYSE: APC) announced a well with more than 1,000 net feet of oil pay in reservoirs dating back to the Cretaceous period. The Shenandoah-2 well was drilled to a depth of 31,405 feet in 5,800 feet of water.

At one time geologists believed that oil could not exists below 10,000 feet given that the earth’s heat would decompose it; however discoveries in recent years prove what scientists at MIT Energy Lab theorized could exist as early as 1976 given the right conditions. With proof that these massive oil reservoirs in fact exist as deep as 30,000-40,000 feet, Freeport-McMoRan’s soon to be acquired McMoRan Exploration has expansive leases in the Gulf of Mexico that could potentially access Anadarko’s Shenandoah-2 massive deposit or have access to other fields of a similar scale.

History of Deepwater Oil Deposits

About 66 million years ago, an object 6 miles in diameter is believed to have smashed into what is now the Yucatan Peninsula in Mexico, leading to the demise of the dinosaurs, as well as most plant and animal life on Earth. Indeed, it is generally believed that 95% of all life on earth was wiped out. All this dead organic material was washed down into the seas. This was quickly covered with sediment – but then something else happened. Sea levels dropped some 500 to 700 feet as ice formed at the poles during the “nuclear winter” that followed the impact. Where the seas were shallow, they began to evaporate if they were near the tropics – laying down a thick layer of salt. It is instructive to look at maps of those shallow seas as scientists currently believe them to have been at the end of the Cretaceous period.

These are shown below:

Notice how close West Africa and what became Brazil are. Notice also that almost every major oil deposit has been found in the shallow seas of the period- this includes the Middle East.

For the purposes of this discussion, please take a look at another view of the western hemisphere shown below:

As can be easily seen, the shallow seas encompassed almost the entire Mississippi valley. Because the upper parts of the valley were at a higher elevation the majority of the organic material flowed downhill to the gulf coast – although some was stuck in the current oil shale regions which got less sediment and did not get a salt layer.

That salt layer is absolutely critical to an understanding of oil deposits in the Gulf and on land in the lower Mississippi. Until very recently geologists held that oil could not exist below 10,000 feet as it would be so hot that it would decompose. Some Chemical Engineers in the MIT Energy Lab held as early as 1976 that oil COULD exist if the pressure in the reservoir was sufficiently high- even though the oil was at a temperature of approximately 500 degrees F +/- 50 F. Oil is essentially CH2 – it can and will decompose to CH4 (methane) and carbon (coal) if the pressure is not high enough. This is what happened off Australia where there was no salt seal to keep the pressure sufficiently high.

The recent finds in the Gulf, off Brazil and in West Africa have proven that oil CAN exist down to 40,000 feet below sea level. The Gulf oil seems to be located below the salt layer at depths between 30,000 and 40,000 feet. It is much deeper than normal deposits because it has been covered by much more sediment, both above and below the salt seal.

Anadarko’s Significant Shenandoah-2 Discovery

Some recent events have drastically increased the probable amount of oil in this formation. Anadarco / Conoco find described below is the most dramatic.

HOUSTON, TX — (MARKETWIRE) — 03/19/13 — Anadarko Petroleum Corporation (NYSE: APC) today announced its Shenandoah-2 well in the deepwater Gulf of Mexico encountered more than 1,000 net feet of oil pay in multiple high-quality Lower Tertiary-aged reservoirs.

“The successful Shenandoah-2 well marks one of Anadarko’s largest oil discoveries in the Gulf of Mexico, with more than 1,000 net feet of oil pay and reservoir rock and fluid properties of much higher quality than previously encountered by industry in Lower Tertiary discoveries,” said Bob Daniels, Anadarko Sr. Vice President Deepwater and International Exploration. “With ownership in the successful Shenandoah wells, the adjacent Yucatan prospect, and the very encouraging results from the nearby Coronado well, Anadarko is strategically positioned in the Shenandoah Basin, which has the potential to become one of the most prolific new areas in the deepwater Gulf of Mexico.”

The Shenandoah-2 well, located in Walker Ridge block 51, was drilled to a total depth of 31,405 feet in approximately 5,800 feet of water, more than 1 mile southwest and approximately 1,700 feet structurally down-dip from the Shenandoah-1 discovery. Similar to the initial Shenandoah discovery well, log and pressure data from the Shenandoah-2 well indicate excellent-quality reservoir and fluid properties. The well was drilled to test the down-dip extent of the accumulation, and the targeted sands were full to base with no oil-water contact.

“We are incorporating the information obtained from Shenandoah-2 into our planning and anticipate further appraisal drilling to advance this potentially giant project,” Daniels added.

Anadarko is the operator of the Shenandoah-2 well and the previously announced Shenandoah-1 discovery well, located in Walker Ridge block 52, with a 30-percent working interest. Other co-owners in Shenandoah are ConocoPhillips (NYSE: COP) with a 30-percent working interest, Cobalt International Energy L.P. (NYSE: CIE) with a 20-percent working interest, Venari Resources LLC with a 10-percent working interest and Marathon Oil Company (NYSE: MRO) with a 10-percent working interest.

Additionally, in the Shenandoah Basin, Anadarko has a 15-percent working interest in both the Coronado well, located in Walker Ridge block 98, and the Yucatan prospect, located in Walker Ridge block 95.

A map of the Shenandoah Basin in the deepwater Gulf of Mexico will be available under the “Media Center/Anadarko News” tab at www.anadarko.com. For convenience, this map is shown below:

It should be noted that oil companies refer to the geologic period just after the end of the cretaceous as the lower tertiary – this can be confusing since it does not correspond to any scientific name.

To put the size of this find in perspective – it is useful to compare some statistics for the Great Lakes, remembering that oil reservoirs are not all oil – rather they contain between 70 to 95% useless sediment. Unlike water that will seek the deepest level it can, oil reservoirs tend to migrate toward the surface since they are lighter than their surroundings.

Lake Michigan is the only one of the Great Lakes wholly within the borders of the United States; the others are shared with Canada. It has a surface area of 22,400 square miles (58,000 km^2), making it the largest lake entirely within one country by surface area (Lake Baikal, in Russia, is larger by water volume), and the fifth largest lake in the world. It is 307 miles (494 km) long by 118 miles (190 km) wide with a shoreline 1,640 miles (2,640 km) long. The lake’s average depth is 46 fathoms 3 feet (279 ft; 85 m), while its greatest depth is 153 fathoms 5 feet (923 ft; 281 m). It contains a volume of 1,180 cubic miles (4,918 km³) of water. Hydrologically it forms a single body of water with Lake Huron, the whole being called Lake Michigan-Huron; the two sides are connected through the Straits of Mackinac and share an average surface elevation of 577 feet (176 m). ^[1]

Lake Huron: ^[2]
Max. length        206 mi (332 km)
Max. width         183 mi (295 km)
Surface area       23,000 sq mi (59,600 km^2)
Average depth   195 ft (59 m)
Max. depth         750 ft (229 m)
Water volume    850 cu mi (3,543 km^3)
Residence time  22 years
Shore length       3,827 mi (6,157 km)

Implications for Freeport-McMoRan

Given the extraordinary length of net pay (which to the best of my knowledge is the largest ever discovered in the entire world), it is highly likely that the deposit extends for hundreds of miles – and might even be deeper nearer the mouth of the Mississippi where the largest amount of organic material was most likely deposited.

McMoRan Exploration (NYSE: MMR) holds about 1,000,000 acres of leases approximately 200 miles north of the discovery. It would seem likely that such a huge acreage would contain a minimum of 5 billion barrels of oil. Valuing that oil in place at $5/barrel to account for the technical difficulties of extracting it as well as the partial ownership by MMR would yield a value for MMR of $25 billion – or approximately 10 times the current market cap. Even given the inclusion of the 1.15 units of a royalty trust which can be bought out at $10 per unit – it would seem that FCX is getting a real bargain.

The Anadarco find is Anadarko Petroleum Corporation, Walker Ridge, Block 51, Exploration Plan, SEA S-7513. It is located 152 miles from the nearest Louisiana shoreline, south of Terrebonne Parish, Louisiana. ^[3]

Some of MMR’s leases are less than 100 miles away, and the shallow Eugene Island block wells have experienced a mysterious replenishment from very deep, very old oil reservoirs – potentially the same that Anadarco has found. MMR is now drilling down to the same 30,000-40,000 feet that has been shown to hold oil in multiple Gulf wells.

It should be noted that drilling at these depths, especially on land, may require some new technology to cool the upcoming oil and to pressurize and cool the reservoir.

Chevron proved that water injection can have catastrophic results in the Frade field and would be even worse if the water became supercritical. It is possible that LNG injection as well as water jacketing the drill pipe may be required.

1. Lake Michigan, Wikipedia [↩]
2. Lake Huron, Wikipedia [↩]
3. GPO Records [↩]