LLOG champions spec floater cause

July 1, 2011

Long content to remain under the radar, Louisiana's LLOG is set to make a big splash with its first Gulf of Mexico deepwater development using a floating production system. Russell McCulley joins LLOG officials at the company's new digs north of New Orleans to talk about the Who Dat project, the role of independents in the Gulf and the decision to raise the private company's public profile. LLOG's Who Dat field is scheduled to go onstream in the second half of 2011, barely four years after discovery and a little more than a year after the company signed a $400 million agreement with Belgium's Exmar to acquire the spec-built Opti-Ex semisubmersible (OE April 2009). It would be a rapid development schedule for even the most seasoned of deepwater operators, but is all the more remarkable for a company making its first foray into the deepwater floating production arena.

Who Dat will launch with three wells in Mississippi Canyon block 503 tied back via dual 6in insulated flowlines to the Opti-Ex, which will be moored in 2625ft water depths in the southeast corner of Mississippi Canyon block 547. By early summer 2011, 12 suction piles had been installed and mooring chains were in place, and Global Industries was preparing to deploy four vessels for the installation of the field's subsea architecture and flowlines. At startup, the field will produce an estimated 20,000b/d of oil and 20mmcf/d of gas; plans call for an additional seven wells to be added over the next few years, with the possibility of further expansion.

‘This is a big step up and a positive move for us, because we have other things of interest in that particular area,' says LLOG president and CEO Scott Gutterman. The Who Dat project and the company's first floating production facility ‘open up our ability to develop those other prospects without relying on industry for their infrastructure', he says.

‘We've gone the subsea tieback route,' Gutterman continues. ‘This is the first time we've had a floating facility.' But probably not the last: ‘We think we have three to five hub-class prospects we could justify putting a facility in,' he says.

‘From a geological standpoint, the characteristics of this inventory look very favorable for us. We're not going to drill all dry holes. We're going to make some discoveries. It would not surprise me if the majority of these larger prospects work.'

Gutterman's office overlooks a turtlefilled pond on LLOG's two-year-old campus, including an expansive health club and café, in Covington, a wooded bedroom community separated from New Orleans by Lake Pontchartrain. The new building and grounds reflect the company's ambitions in the Gulf of Mexico, where LLOG has acquired a large portfolio and a massive amount of seismic data.

‘We've got $150-200 million worth of 3D seismic data in the Gulf of Mexico, and we're constantly acquiring new data. That's really the lifeblood of any exploration company,' Gutterman says. Over the past decade – a period that has seen the privately held company refocus much of its efforts from outer continental shelf exploitation to exploration in the Gulf's deeper waters – LLOG has drilled more than 300 wells with an average 70% success rate, he says.

‘When you drill that many exploration prospects over time, you start to gain an intuitive feel for what works,' he says. ‘We're not always right, but we feel like we have a distinct advantage over most of our competitors. We've focused on what we do best, and grow at the rate our capital allows us to grow. We have 3D seismic data now that almost blankets the Gulf of Mexico. And cutting our teeth in an environment where we were doing exploitation and development work trained us to capture all of the engineering data as well, as a way to mitigate risk.'

Growth has become more challenging with projects like Who Dat, which LLOG operates and co-owns with a private equity group. In the company's early days ‘we didn't really need public financing', Gutterman says. ‘But as we moved into the deepwater, right around the turn of the century, we really became more of an exploration company. Prior to that, we typically kept 100% of everything we did; we'd develop it, and we would reach a certain critical mass and then we would sell it. And that worked well for us. But as we moved into the deepwater, the universe of companies that we could potentially sell our producing properties to began to get smaller and smaller. As much as by need as by design, we're moving into a true E&P company.'

LLOG has entered partnerships in other deepwater floating production projects, but Who Dat is a major turning point in the company's 34-year history. ‘Granted, it's a huge leg up to have a floater built already,' senior VP, operations Tim Lindsey says of the Opti-Ex semi. ‘But still, with all the other things that have to happen, we're going from saying "Go" to first oil in about a year. For a project of this magnitude, it's pretty remarkable.'

Discovery well
LLOG acquired the Mississippi Canyon block 503 lease in 2005's Lease Sale 194 for about $7 million, beating out seven other bids. It later acquired Mississippi Canyon block 547 in 2008's Lease Sale 206 for about $24 million, outbidding Eni, which operates the nearby Longhorn and Appaloosa producing developments (Eni and partner Nexen bid about $17 million on block 547). A 2007 discovery well confirmed hydrocarbons in the prospect; two successful follow-up wells, one in Mississippi Canyon block 503 and a second in Mississippi Canyon block 547, tested additional targets. Together, the wells encountered over 700ft of net pay in nine stacked amplitude-supported reservoirs.

At the time of the 2007 discovery, LLOG did not realize the extent of the play, says Rick Fowler, VP deepwater projects. ‘The first well showed mostly gas,' he says. ‘So at that time we were thinking along the lines of doing what Eni had done on the block next door and tying back to a shelf platform. Unfortunately, even at that time there were really no shelf platforms within reach that had the processing capacity that we wanted.'

LLOG was considering building a new shelf platform to serve as a host when good news started to roll in. ‘A couple years later we drilled the next two wells, which turned the field to an oil-dominant field. Not only that, but we got a mix of fluid properties that made it very beneficial to have a floating production system,' Fowler says.

Bruce Cooley, VP facilities engineering, says: ‘The shelf edge is about 120,000ft north. For gas, that's not out of reach for an extended-reach subsea tieback. But when we found oil, we realized that was not optimal.'

Fowler continues: ‘After the delineation wells were drilled, it got predominantly oil, first, and second, it got a lot bigger than we had envisioned. Every single zone worked that we thought would work.' The company estimates that the Who Dat field contains recoverable reserves of 100 million to 300 million boe, of which 70% is oil. With the ‘range of fluid properties we thought a shelf development was possible, but it would be advantageous to have a floating production system,' Fowler says.

The company entertained newbuild proposals from different engineering firms as well as a pair of existing floaters on the market: the Red Hawk cell spar, in production at the Anadarko-operated Garden Banks block 877 field, and the Opti-Ex, which had been built on spec and was docked at the Kiewit Offshore Services yard in Ingleside, Texas, for several months. The former had been designed for metocean conditions in the western Gulf of Mexico and had a six-line mooring system, whereas the Who Dat facility would require at least eight; neither challenge was insurmountable, but the needed modifications tilted the scale in favor of the Opti-Ex.

‘We had our first meeting with Exmar in April 2010; we had a contract signed with them in August,' Fowler says.

LLOG continued to work with Mustang Engineering, which had conducted topsides engineering for Exmar, throughout customization. ‘[Exmar's] design rates were for 40,000 barrels of oil per day and 25,000 barrels of water a day or so, and 50mmcf gas per day,' says Craig Mullett, LLOG's offshore construction manager. ‘But they had no high pressure gas capability. They designed the platform with what I call no inlets-and-outlets, because they didn't have a definition of which pipelines they were going to sell it to. So they didn't have a LACT [lease automatic custody transfer] unit, they didn't have a sales gas skid. They had reserved space to put the required equipment – they had placeholders for space and equipment weights but no detailed design for pig receiving for incoming lines. They had a big open spot on the deck. So after completing the wells, we looked at our design rates and ended up putting in a high pressure gas system, rated for 150mmcf/d. We upped the capacity of the flare system to a 250mmcf/d relief system.' As configured, the Opti-Ex can pump up to 60,000b/d and has a LACT that can measure up to 75,000b/d.

‘We left the original dehy system in place and retrofit an additional 150mmcf/d system,' says Cooley of the glycol dehydration system designed for the Opti-Ex. ‘Our typical specs for the Gulf of Mexico shelf are seven pounds of water per million cubic feet of gas. At Who Dat, it's 2.3 pounds of water per seven million cubic feet of gas – really tight specs.'

‘We stuck with [Exmar's] basic hull design,' Mullett says. ‘They did a good job of designing this thing for a wide range of uses. It could go anywhere you have a moderate climate, no ice floes. The Gulf of Mexico was a primary target.'

The only real modifications required for the hull, he says, involved adding fixtures for incoming and departing risers. The semi has 14 riser porches, only six of which will be used at startup, leaving eight slots for expanded production, either LLOG's or a third party's. ‘We have both weight capacity and space allocated for some future production modules if necessary,' Mullett says.

‘And we have some excess in the production trains at this time. If we drill all our wells out, then we'll fill up our production train as is.'

Mustang worked with Exterran on the Opti-Ex's dehydration and high pressure gas separator. Shamrock Management provided the LACT unit and sales gas equipment, and Omega Industries ‘did the inlet module and packaged everything together', Mullett says. ‘Mostly it was people we've worked with in the past.'

The pipeline pump capacity can be increased if necessary, he says. ‘The design pressures for the system were originally around 3400psig discharge at 20,000b/d, but our discharge pressure is around 2300 pounds max. So we have additional horsepower if we choose to re-plunger the pumps and get additional throughput.'

The subsea field layout, designed by Pinnacle Engineering, features two drill sites, dubbed A and E when LLOG filed the original plan of exploration. FMC Technologies provided subsea trees and hardware, manifolds and subsea controls. ‘We have two four-slot manifolds daisy chained together, so we have a total of eight slots available, at the E location,' says Cooley. ‘And one four-slot manifold will be installed at the A location for a total capacity of 12 wells for the entire field. Each drill site has two six-inch flowlines so we're able to round trip pig if we need to. That provides pipelines for allocation by well test and producing the field.

‘And we have two subsea control umbilicals, one to each well site, so the two sites are totally separate controlwise,' he says. ‘They can stand alone.'

Wellstream manufactured the risers for the flowlines and oil & gas export pipelines using flexible pipe – ‘a requirement for the hull motions and the loads in this water depth,' Cooley says.

For mooring, Exmar worked with Louisiana's Delmar Systems to design a 12-point system with 250m of 107mm-diameter chain, manufactured by Spain's Vicinay Cadenas, at the bottom and 210m of chain at the top, separated by 1350m of polyester rope built by Whitehill Manufacturing in Pennsylvania.

Who Dat's 14in, 19-mile oil pipeline will tie into Shell's Mars pipeline system and the 17-mile, 10in gas export line connects to Enterprise Products Partners' Independence Trail. ‘We were blessed with a number of options, both on the oil side and the gas side, in terms of where we would tie in,' Fowler says. ‘With the oil, we have some unique characteristics – a wide range of gravities, ranging from 17 up to 48 – so we considered what would give us the best value. We have sulfur that ranges quite a bit, over 1%, which is considered sour oil. We also have a high TAN, which is total acidity number, a property that more and more refiners are looking at when they determine the value of a particular crude. So we wanted a solution that would not penalize our oil for some of these properties. And the Mars system gave us the best.'

Flow assurance, he says, is a more important consideration than proximity. ‘You want to never be shut in,' he says. ‘(Mars) gave us adequate flow assurance. We weren't going to be curtailed, we could flow whatever we could manage. We were always very confident that we could flow 60,000b/d and they could handle our sulfur and low gravity and TAN without degrading our crude. So it gave us the best of all worlds in terms of price realization and flow assurance.'

Flow assurance was also the primary consideration when determining how to route Who Dat's gas production, he says. ‘More and more today, the value of the gas plant liquids that you can get on a given line does vary from line to line in terms of what percentage of the revenue they will give you from a gas plant. Given the disparity in BTU price, gas versus liquids, that becomes a driver, more so now than at any time in history, I think. You want to tie into a line that's going to give you the most value realized for the gas plant liquids that you bring to the table. That drove the decision here, and was enough to offset the higher pressure of the Independence Trail. We were required to compress up to some pretty high pressure. We looked at the numbers, and it was worth the extra fuel required to do that.'

Macondo challenge
LLOG was nearing the end of drilling operations on the third well when Transocean's Deepwater Horizon rig exploded 20 April 2010 while cementing the BP-operated Macondo well in Mississippi Canyon block 252. The disaster prompted the Obama administration to shut down all deepwater drilling activity in the Gulf for much of the remainder of 2010. The company kept Noble's Lorris Bouzigard rig, later replaced with the Amos Runner, active during the moratorium with well completions; LLOG had submitted a permit application for a fourth well but was still awaiting approval in late June. The Deepwater Horizon disaster ‘was a big challenge to the project', says Fowler. ‘Macondo happened at the moment we were in the heat of negotiations for the Opti-Ex. At the time, nobody knew if we would ever be able to complete another well. Nobody knew if we would ever be able to install anything in the deepwater Gulf of Mexico.'

Exmar ‘took some of the risk', he says. ‘If we did not get approval to complete additional wells, then the deal wouldn't have gone forward. They took some risks, we took some risks, and we'll share in the benefits.' The purchase agreement allows LLOG to pay for the semi in installments over a 62-month period following installation. ‘We consider Exmar a partner on this,' Fowler says.

The project was still known as Mississippi Canyon 503 when the New Orleans Saints American football club began an ascent to the team's first Super Bowl championship, in February 2010. The legions of Saints fans – known as Who Dats, after the crowd chant ‘Who dat say they gonna beat them Saints?' – included more than a few LLOG employees. ‘The Saints were 13-0 when we named it,' Fowler says. ‘This whole city was just alive. The Saints were on their way to being world champions, and we think of this as a world champion project too.'

It's fitting that the independent LLOG, founded in 1977 by former Texaco engineer Gerald Boelte, would identify with the perennial underdog Saints. The company established a niche as an exploitation firm, acquiring mature properties on the shelf, redeveloping and then selling them – a formula that worked well, but as the projects became bigger, access to capital became more of an issue. Growth, and the need to court bigger investors, has encouraged LLOG – which only very recently established a Web site – to shed some of its aversion to publicity. ‘Historically, we've tried to stay under the radar, and really had no discernible need to be public,' says Gutterman. ‘But as our business grew, we realized we should open up some.'

dA find like Who Dat, he says, is ‘like the proverbial dog that caught the bus – we recognize the tremendous amount of capital required to develop these deepwater properties. So we've had to be resourceful. We're a private company, so we don't have access to public capital per se. We've had modest banking arrangements, but we never really had the need to go out for capital.'

Remaining a privately held company has allowed LLOG to set its own pace of growth, he says. ‘We historically felt we weren't as comfortable leveraging in a big way, so it was nice for us to build, sell, recapitalize, take a little payday, exhale. But with these deepwater properties coming on, I don't see us selling things as frequently as we used to. The shelf is a high rate-of-return play, and we've made good money there. But it is truly a treadmill – there's a short reserve life, so you have to keep replacing inventory. Deepwater is more of a long-term return on investment, and a very healthy longterm.'

After Macondo, questions arose about the role of independent E&P companies in the deepwater Gulf of Mexico, with a number of critics voicing concerns about both the technological capabilities of smaller firms as well as their ability to shoulder the costs of another deepwater spill. Gutterman says such fears are unfounded. ‘It would be impractical to eliminate the role of independents in the Gulf,' he says. A pattern similar to what happened on the shelf is playing out in deepwater, with independents capturing a larger share of plays initially explored by the majors, and the larger international companies gravitating toward the Gulf's ultra-deepwater plays.

‘We're in different stages of the lifecycles of each of those plays,' he says. ‘To remove the independents would not only remove that component of the development evolution, but it would remove a level of activity that would make it difficult for the majors to sustain the service company infrastructure.'

Operationally, he says, there's ‘no question' that an independent company could handle a Macondo-style blowout and spill. ‘It was disappointing to me that it took so long to get that well under control, but we know how to do it now. And I'm confident that it will never happen again – to see a well flowing for three months.'

Liability costs and requirements for cash reserves to respond to accidents may increase, he says, but not to the degree that many feared – or encouraged – in the Deepwater Horizon aftermath. ‘That's going to factor into any economic analysis. But we have a handle on the insurance, and the underwriters understand the risk better than the general public. Statistically, our industry has been very safe,' he says.

‘If somebody comes in and says, you've got to be able to handle a $20 billion accident or you're not going to be able to work in the Gulf of Mexico, there would only be a handful of companies in the Gulf of Mexico. A very small handful. That wouldn't be good for anyone. It wouldn't even be good for those companies, because they need that service industry infrastructure to be healthy.'

Could LLOG's next stage of growth – or a move to mitigate the risk of geographic concentration – take the company out of its traditional Gulf of Mexico playing field? ‘We haven't positioned ourselves to gain a meaningful position in some of the onshore plays,' Gutterman says. ‘We would consider it, but it is a totally different business.' The international offshore market is a more likely possibility, he says. ‘I could easily see us within the next year or so starting to look overseas. For us, the geological side is not difficult; it's the deal side and the infrastructure and logistical things. We would likely partner with someone who has more experience and expertise in that.

‘I feel like there's some low hanging fruit out there,' he continues. ‘We get really charged up when we can find something from an exploration standpoint that looks really good. We're driven by opportunity, wherever we can find it.' OE

Exmar's spec bet pays off

Exmar Offshore sanctioned construction of the semisubmersible Opti-Ex floating production unit in early 2006. The unit was built on spec, with contracts for hull supply going to Samsung Heavy Industries and to Kiewit Offshore Services for fabrication of the deck and integration of the hull and deck, which took place in 2009. Many in the industry saw the decision to build the FPU on spec as an extraordinarily bold move. ‘The market in the Gulf of Mexico was very active at the time, and indications were that several large fields would soon be developed,' says David Lim, managing director of Exmar Offshore in Houston. ‘Everyone was talking about the need for new production facilities before 2010.'

Exmar was betting on the need for a versatile production unit: one that would be less field-specific than a traditional TLP or spar and could take advantage of existing pipeline infrastructure. Lim says the company did not have an ‘ideal client' in mind, but rather an operator that was ‘interested in approaching their production solution a little differently.'

‘We built a facility on spec, so you don't get everything you want, but you do get early production,' he says. ‘We signed a contract with LLOG in August 2010 and we will be on the (Who Dat) field in July 2011. In this respect LLOG is the ideal client.'

As the unit was nearing completion in late 2008, the market was pummeled by a precipitous drop in oil prices and a global recession. The BP Macondo disaster in April 2010 created more uncertainty for Gulf operators. ‘Still, we remained optimistic as oil prices recovered and there was still money for good projects,' Lim says. ‘Exmar was deeply committed to the Opti-Ex and the opportunity it would provide to the right operator. We met LLOG just weeks before Macondo, and they took the bold decision to push forward with the Opti-Ex and the Who Dat field under the most uncertain circumstances. I guess you could say that in LLOG we found a match for our ambition.'

The agreement allows LLOG to pay for the FPU in monthly installments over five years. LLOG has indicated that it may contract with Exmar for additional Opti-Ex units for use in future deepwater gulf developments. ‘We are continuously having discussions about what we might do together,' Lim says.

Exmar has made it clear that it has no plans to build on spec again, he says: ‘The Opti-Ex was one of a number of speculative units ordered around the same time. I think these are just different times, and expectations and appetites have changed.'

The Opti-Ex design, however, will remain an important part of the company's portfolio. ‘We believe the concept behind the Opti-Ex as a flexible production facility will continue to gain acceptance in the market,' Lim says.

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