Part VIII – Suemaur Exploration and Production – Challenges of the 90’s and the New Millennium

DanPedrottiGen8With the acquisition of the Harkins’ exploration assets and the partnering with the exploration staff under the management of Bill Maxwell, Bill Miller and I were ready to jump into the 90’s. We would no longer be restricted to exploring above geo pressure, and we would again be looking for major reserves using what we considered state of the art tools and professionals. We now had miles and miles of proprietary 2-D seismic, several very prospective lease blocks, geologists who could integrate seismic with subsurface and a number of prospects, all requiring protection pipe. Our first admonition to our new partners was “we want to explore from the grass roots down – not just in the geo pressure realm.”

The new staff did not have to move. Bill Maxwell had already relocated the Harkins exploration offices from Alice to the Texas Commerce Bank Plaza, now Frost Bank Plaza, in Corpus Christi. Bill Miller and I decided it best to stay in our offices in the Bank of America building down town so that we would not be constantly looking over the shoulders of our professionals and distracting them. Instead we met with management on a weekly basis, and if there were developments on existing prospects or new leads we would go to our exploration offices, see the work, make suggestions based on our experience and encourage the originator.

In the process of becoming acquainted with each other and strategizing on how we would get our prospects drilled and be able to keep twenty five percent, Bill Maxwell introduced us to the “Exploration Co-operative Model” that had been used successfully at Harkins. Instead of spending days walking the streets of Houston, Dallas, Corpus Christi and San Antonio selling deals this model involved forming a joint venture with three other industry partners. All exploration expenditures were shared in proportion to each company’s interest in the venture. Venture partners could elect to get out of a prospect at defined points including the election to drill the initial test well. Each partner who elected to stay in, including Suemaur would pay their share of well costs. At payout of all prospect costs, Suemaur would earn an additional reversionary interest. This model allowed our geologists more time to explore and much less time selling.

In the early stages of the company’s formation, we decided that we did not want Suemaur to become a huge production company with a large staff of engineers, accountants and pumpers with all the headaches. We preferred to focus all of our efforts on exploration. Thus we established a policy that if and when we made a discovery, we would develop it to the point where we could reasonably quantify the reserves and then divest the property. This would free up our investment plus any profits to be used to develop new prospects.

Bill Maxwell invited several of the companies and individuals whom he had worked with at Harkins to become Venture Partners and thus very soon we were on our way to drilling the prospects we had acquired in the Harkins purchase and generating new ones. Many of our early efforts were disappointing, resulting in dry holes or noncommercial completions. A few of them provided critical control for future discoveries by other operators, but we were not there to enjoy the benefits. However, two prospects generated by Owen Hopkins, Bill Maxwell and a third by Bill Miller and Dan Pedrotti in Duval County, proved to be commercial discoveries. These fields, Sage, West Sage and Dejay Deep resulted in multiple development wells. Subsequently, following our policy, the properties were sold to recoup all the investment we had accrued under our new venture including lease positions on several new prospects that resulted in significant Suemaur discoveries.

This is when I realized that our old 2-D seismic and exploration techniques, that our staff had been using successfully in the 80’s was not getting the job done. Now we were in the 90’s, and new technology was becoming available, so I started reading up on 3-D seismic methods. Also at this time many of the Majors were divesting their old onshore properties, and I thought this is the perfect time to evaluate the fields that were up for sale, acquire one of them with large potential and do a 3-D survey on it. This is when I got a big surprise. I always believed that it is the “Old Guys” who resist change, but here I was an old guy raring to move into the 90’s. Of course there were many considerations such as financing, training personnel and acquisition of computers and soft ware. Still I knew that some how we had to move forward or miss out on the some great opportunities.

Suemaur had acquired leases on a portion of the Cage Ranch covering a couple of shallow leads that really didn’t make our economics. That is when I convinced our management that the Cage Ranch Field, discovered in the 50’s and redeveloped in the 70’s still presented sizeable potential from both the shallow Frio sands and the deeper Loma Blanca sand section. A large block of HBP acreage along with some new leasehold was ultimately assembled for a proprietary 3-D survey. Thus with strong support from our venture partners, Suemaur Exploration, Inc. plunged in the exploration world of the 90’s.

This bold move is extremely significant to the history of Suemaur. We acquired computers, the latest soft ware, huge printers and we sent our geologists and geophysicists to every available 3-D seminar and school. We had to learn the best practices and programs for acquiring, processing, interpreting and integrating 3-D seismic and well control. Our land department, lead by Jim Devlin worked feverously acquiring leases, getting farmouts and making deals with other lease owners who wanted to participate. Then when the data came in we realized that we were in a brand new world. I am still awed by how quickly our geologists and geophysicists mastered the interpretation techniques and the structural and stratagraphic surprises the data revealed.

Based on this 3-D survey and the excellent work of our staff we were able to drill numerous shallow producers and several very prolific Loma Blanca gas wells. We found the most unusual structural feature that I have ever seen in my 50 years as a geologist. Our 3-D showed us a true “hook fault”. It started out as a down-to-the coast branch of the main flexure trending east north east then curved around to the southeast and finally turned southwest to become an up-to-the coast fault forming a productive trap in the graben. In the process of redeveloping the Cage Ranch Field, Suemaur increased the production from 5,800 bbls of condensate and .335 BCF of gas per year to more than 40,000 bbls of oil and condensate and 5.9 BCF of gas annually. In mid 1997, Suemaur sold the property with six or eight PUDs and twenty locations for probable and possible reserves on very favorable terms.

Now that we had the tools, the experience and the confidence, our geoscientists defined a large area in Nueces County that contained a number of prospective leads based on subsurface and a number of regional 2-D lines. Beginning in 1997, we permitted a 100 square mile proprietary 3-D survey and just as we mobilized the seismic crews in September the rains came. I think we paid three or four week’s standby time before we pulled the crews. Our patience paid off. Many of our leads turned into drillable prospects and we found and developed several substantial fields that we were able to divest on very good terms. We also shot proprietary surveys in San Patricio and Kleberg County, but they did not work out as well.

DanPedrottiGen8aTommy McCullough, Mike Lucente, Mike Pedrotti

About this time another geologist, Mike Lucente, who Bill Miller and I had been trying to hire, became available. We had become acquainted with Mike years earlier when while working for Getty Oil Company he discovered the prolific “El Gato-Lobo Field” in Webb County on acreage where we had a nice override. Mike came to Corpus to work for Edwin L. Cox where he proceeded to offset our El Gato leases with a number of the best Lobo wells in the entire trend. Needless to say we wanted Mike to work for us. He did not take the job, and that was probably a very smart move as Bill and I really did not know how to support an aggressive geologist like Mike.

Mike had a great career with Cox making a number of significant Wilcox discoveries and in the early 90’s when Cox shut down their offices in Corpus Christi, Mike was looking for an ownership position. But before we could talk to him, my son, Mike Pedrotti and his brother in law, Tommy McCullough, made Lucente a deal he couldn’t pass up. In 1993 they formed a three man partnership called LMP Petroleum, Inc., for Lucente, McCullough and Pedrotti to explore for oil and gas in the Texas Gulf Coast “on shore” and that is when we finally got to work with Lucente. LMP needed partners to cover overhead, prospect development costs and participate in the drilling and development of their prospects. We along with several other independents were asked to front these costs. Bill Miller and I immediately joined LMP as equity partners.

LMP was structured a little bit different from Suemaur. The equity partners would fund all the up front money and LMP would develop the prospects, acquire the critical acreage, sell as much promoted interest as we desired and get the exploration well drilled. They would then repay the sunk costs and share any remaining profits and back in interests with the equity partners. The equity partners could drill up to one half of their interest heads up without promotion and any additional interest subject to the promotion being offered on the street.

This turned out to be a very profitable and exciting venture. These guys were aggressive, well known in the industry and determined to be successful. Lucente, the geologist, using his incredible energy, Wilcox experience and a few suitcase ideas he had developed at Cox soon had a basket full of prospects for us to approve. Mike Pedrotti, well known by many landowners from his years as a bare back bronco rider in South Texas, and work in the land department of Texas Oil and Gas Corporation was the landman, and Tommy McCullough with drilling and engineering experience handled the economics and drilling contracts.

LMP also started with a fairly large library of 2-D seismic data, regional maps and quite a few tight logs, but soon became 3-D literate. At first they acquired commercially available data and after significant successes moved on to proprietary projects, and through data trades soon had access to hundreds of miles of 3-D coverage. Moving into the 90’s and using the new technology required a sizeable investment in computers, printers and a lot of software that was bought by the equity partners. This additional investment soon paid for itself with high quality prospects and several significant discoveries. In short order we all had quite a handsome revenue stream from oil and gas properties.

That was the 90’s. Now we are in the first decade of new millennium. All sorts and sizes of 3-D surveys are on the market. There are very few places to prospect that haven’t already been covered by 3-D projects. That’s the bad news, but the good news is that you can purchase this data either for a specific prospect or for regional work on some very reasonable terms. I was concerned that once all of our trends were explored with such comprehensive seismic coverage there would be nothing left to find. Again I was totally wrong. Although it still surprises me that data that has been looked at and reprocessed many times can still be useful to our creative people who use their intelligence, curiosity and experience to keep coming up with economically viable prospects leading to new fields and new trends.

Fortunately both Suemaur Exploration and Production, LMP and I hope most of you are well positioned to take full advantage of the new technology that is constantly evolving. By aggressively pursuing the educational development that will allow you to glean more and more ideas from new and existing data sets and new geological concepts, you have huge exploration opportunities. Hopefully the decade starting in 2010 will be as exciting as the last few.

Well this is the story of my 50 years as a geologist and investor searching for oil and gas in the onshore Gulf Coast region, mainly in Texas. It is not the end. I am looking forward to the new innovations to come in the next decade less than one year from now. We have been so successful utilizing the new technological advancements such as amplitudes, and all the other subtle attributes hidden in these masses of wiggles and traces that I am optimistic that we will continue to lead the challenge of finding domestic reserves. Be sure not to overlook new geological concepts. Who would have ever believed that Wilcox sands would be found in the Gulf of Mexico and possess prolific reserves of oil and gas? I want to be with you on the edge of the envelope as we move into the new decade starting in 2010.

Thanks for giving me the opportunity and incentive to give my view of the contributions made by geoscientists, both Independents and Major company employees since I entered the industry. May all of you be successful, find a lot of good prospects and enjoy the excitement and rewards of discovery as much as I have.

Dan Pedrotti