EXPLORERS USA 2005: Gulf marching orders from Luke Corbett

Despite business distractions, Kerr-McGee’s chief executive seeks to recapture exploration momentum in deepwater Gulf of Mexico

Ray Tyson

Petroleum News Houston Correspondent

Last winter Kerr-McGee chief executive Luke Corbett put his exploration team on notice: come up with some Gulf of Mexico discoveries in 2005, or else!

That message was delivered on Jan. 26, 2005, when industry analysts tuned in to hear what Kerr-McGee management had to say about the company’s 2004 performance. When the subject turned to exploration in the U.S. Gulf, Corbett unloaded.

“I’m not only disappointed in our execution in the Gulf of Mexico deepwater, it’s unacceptable,” he said. “And if we don’t execute cleanly this year and have the success we need to have, I’m prepared to change our strategy in that region.”

Since that time Kerr-McGee has had some exploration success in Alaska. But as of early April 2005, one would have to go back a full year to find Kerr-McGee’s last announced deepwater discovery in the U.S. Gulf, Ticonderoga. That’s uncharacteristic of a company which not only blazed the exploration trail for independents in the deepwater U.S. Gulf but wrote the book on the economical “hub-and-spoke” style of offshore oil and gas development.

As of early 2005, Kerr-McGee produces 90,000 barrels of oil equivalent per day in the U.S. Gulf, 70,000 barrels of which come from the deepwater.

Issues with Carl Icahn

That threat prompted Kerr-McGee to file suit against Icahn and his partners, alleging the group had violated anti-trust laws and demanding the new shareholders file papers with the Security and Exchange Commission to make clear their intentions for the company. Kerr-McGee also charged that Icahn had illegally accumulated Kerr-McGee stock and sought to wage an unfair proxy contest.

Kerr-McGee’s board also unanimously rejected a proposal by Icahn that Kerr-McGee sell 250 million barrels or one-third of its oil equivalent reserves using a formula known as a Volumetric Production Payment, or VPP. The board said this would leave the company with insufficient capital to develop the more than 425 million barrels of oil equivalent reserves currently booked as proved but undeveloped.

Corbett said that Icahn’s VPP proposal was “tantamount to mortgaging the company’s future simply to provide Mr. Icahn and his partners with some quick cash.”

However, in an apparent move to appease shareholders, the board said it would seek “strategic alternatives” to sell or spin off Kerr-McGee’s shaky chemicals division and establish a pure exploration and production company.

Aggressive deepwater exploration

“We still think we have an inventory of strong prospects, but it’s time to show the results of that,” David Hagar, Kerr-McGee’s senior vice president of exploration and production, told analysts in January. “We recognize that this year we need to execute.”

Kerr-McGee’s list of oil and gas prospects includes:

Chilkoot, located in 2,700 feet of water on Green Canyon block 320, is operated by Kerr-McGee with a 33 percent working interest. The company is using the rig Noble Amos Runner to drill the prospect.

King Pao, located in 900 feet of water on Garden Banks 171, is operated by Kerr-McGee with a 50 percent working interest. The company plans to use the Ocean Valiant deepwater semi-submersible to drill the prospect.

Doubloon, located in 290 feet of water on Grand Island block, is operated by Kerr-McGee with a 50 percent working interest. The company said it would spud the prospect around the first quarter of the year.

Castleton is situated in 3,100 feet of water on Garden Banks block 668 and will be operated by Kerr-McGee with a 50 percent working interest. The company said it planned to drill the prospect in the second quarter of this year.

Covington is located in 3,900 feet of water on Green Canyon blocks 766 and 810 and will be operated by Kerr-McGee with a 50 percent working interest. Plans also called for this prospect to be spud in the second quarter.

Other Kerr-McGee prospects include Mission Deep on Green Canyon block 955, Nassau on Garden Banks block 521 and Kingstown on Garden Banks block 566.

Kerr-McGee, Technip win OTC award

The award recognizes the partnership between Kerr-McGee and Technip, which has pioneered and delivered three generations of spar technology to the deepwater Gulf of Mexico during the past decade.

Kerr-McGee and Technip have developed a total of five production spars, using three different designs, each pioneered by the companies. Each is an integral part of Kerr-McGee’s hub-and-spoke strategy in the deepwater Gulf of Mexico.

The world’s first production spar used the classic spar design and was employed in 1997 at the Kerr-McGee-operated Neptune field in the eastern Gulf of Mexico. The companies cooperated to develop and install the world’s first truss spars at the Kerr-McGee-operated Nansen and Boomvang fields in 2001. Another truss spar at the Gunnison field began production in 2002. 2004 brought another world’s first with the application of the cell spar at the Kerr-McGee-operated Red Hawk field. A sixth spar, using the truss design, currently is under construction for the development of another deepwater hub at Kerr-McGee’s 100 percent-owned Constitution field. Constitution is expected to achieve first production in mid-2006.

While Kerr-McGee and Technip were the first in the world to pioneer each of the three generations, other producers have since followed suit. Currently, there are 13 spar facilities producing in the Gulf of Mexico.

Each generation of the spar was invented by Ed Horton, president of Deepwater Technology, a subsidiary of Technip. Horton received the OTC Distinguished Achievement Award for individuals in 1999.