MCMORAN EXPLORATION CO /DE/ - 10-K Annual Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number 001-07791

McMoRan Exploration Co.

(Exact name of registrant as specified in its charter)

Delaware	72-1424200
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1615 Poydras Street
New Orleans, Louisiana	70112
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (504) 582-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share	New York Stock Exchange
Preferred Stock Purchase Rights	New York Stock Exchange
6% Convertible Senior Notes due 2008	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes [X] No [ ]

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $372,000,000 on March 1, 2005, and was approximately $172,000,000 on June 30, 2004.

On March 1, 2005, there were issued and outstanding 24,396,300 shares of the registrant's Common Stock, par value $0.01 per share, and on June 30, 2004 there were issued and outstanding 17,178,862 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement submitted to the registrant’s stockholders in connection with the registrant’s 2005 Annual Meeting of Stockholders to be held on May 5, 2005 are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this report.

McMoRan Exploration Co.

Annual Report on Form 10-K for

the Fiscal Year ended December 31, 2004

TABLE OF CONTENTS

	Page
Part I
Items 1. and 2. Business and Properties	1
Item 3. Legal Proceedings	27
Item 4. Submission of Matters to a Vote of Security Holders	27
Executive Officers of the Registrant	27

Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
Item 6. Selected Financial Data	29
Items 7. and 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operation and Quantitative and Qualitative Disclosures about Market Risk	30
Item 8. Financial Statements and Supplementary Data	48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	79
Item 9A. Controls and Procedures	79
Item 9B. Other Information

Part III
Item 10. Directors and Executive Officers of the Registrant	79
Item 11. Executive Compensation	79
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters	79
Item 13. Certain Relationships and Related Transactions	80
Item 14. Principal Accounting Fees and Services	80

Part IV

Item 15. Exhibits and Financial Statement Schedules	80

Signatures	S-1

Exhibit Index	E-1

PART I

Items 1. and 2. Business and Properties

All of our periodic report filings with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, through our website located at www.mcmoran.com, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to those reports. These reports and amendments are available through our website as soon as reasonably practicable after we electronically file or furnish such materials with the SEC. All references to Notes in this report refers to the Notes to the Consolidated Financial Statements located in Item 8. of this Form 10-K.

OVERVIEW

We have provided definitions for some of the industry terms we use in a glossary on page 24.

About the Company. We engage in the exploration, development and production of oil and gas offshore in the Gulf of Mexico and in the Gulf Coast region, with a focus on the potentially significant hydrocarbons we believe are contained in large, deep geologic structures located beneath the shallow waters of the Gulf of Mexico shelf and often lying below shallow reservoirs where significant reserves have been produced, commonly known as the “deep shelf.” We are also pursuing plans for the development of the Main Pass Energy Hub^TM (MPEH^TM) project located at our former sulphur facilities at Main Pass Block 299 (Main Pass) in the Gulf of Mexico. This project includes the transformation of our former Main Pass sulphur facilities into a hub for the receipt and processing of liquefied natural gas (LNG) and the storage and distribution of natural gas. During 2002 we exited the sulphur business, which involved the purchasing, transporting, terminaling, processing and marketing of sulphur.

Industry experts project declines in natural gas production from traditional sources in the U.S. and Canada, and an increase of nearly 40 percent in U.S. natural gas demand over the next 20 years. As a result, most industry observers believe that it is unlikely that U.S. demand can continue to be met entirely by traditional sources of supply. Accordingly, industry experts project that, over the next two decades, non-traditional sources of natural gas, such as Alaska, the Canadian Arctic, the deep shelf and LNG, will provide a significantly larger share of the supply. We believe that we are well positioned to pursue two of these alternative supply sources, namely deep shelf production and LNG imports, by exploiting our deep shelf exploration acreage and developing the MPEH^TM project.

Subsidiaries. We have two wholly owned subsidiaries through which we primarily conduct our business, McMoRan Oil & Gas LLC (MOXY), which conducts substantially all our oil and gas operations, and Freeport-McMoRan Energy LLC (Freeport Energy), which is pursuing the development of the MPEH^TMproject and owns 100 percent of the oil operations at Main Pass through K-Mc Ventures I LLC (K-Mc I) (Note 1). During 2003, in connection with our efforts to establish the MEPH^TM project, Freeport Energy changed its name from Freeport-McMoRan Sulphur LLC (Note 1).

Business Strategy. Our business strategy is to pursue exploration and development opportunities in the Gulf of Mexico and the Gulf Coast region, primarily high-risk, high-potential, deep exploration prospects in the shallow waters of the shelf of the Gulf of Mexico, and to develop the MPEH^TM. We believe that we have significant capabilities that position us for long-term success.

We believe we are well positioned to pursue our exploration and development opportunities because of the following:

·	We have established a multi-year exploration venture with a private exploration and production company through which we have jointly committed to spend an initial $500 million to acquire and exploit high potential prospects (see “Oil and Gas Operations - Multi-Year Exploration Venture” below);

·	We have raised over $360 million in gross proceeds through capital financing transactions during the past two years (Note 5);

·	We possess a significant exploration acreage portfolio in the Gulf of Mexico and Gulf Coast region (see Oil and Gas Operations - Acreage” below);

·	We have significant experience in the use of structural geology augmented by 3-D seismic technology and in drilling deep shelf natural gas prospects;

·	We own or have rights to an extensive seismic database, including 3-D seismic data on substantially all of our acreage;

·	We have completed an intensive evaluation of our acreage and have identified over 20 prospects, most of which are high-risk, high-potential deep gas prospects;

We have participated in two important discoveries in an area where we have a potential reversionary interest in a joint venture that controls approximately 13,000 gross acres and where we have identified multiple drilling opportunities (see “Oil and Gas Operations - Farm Out Arrangement with El Paso” below);

·	Our recent success in drilling deep exploratory wells on the shelf of the Gulf of Mexico and our availability of capital to fund further exploratory drilling activities are providing opportunities to partner with other companies to participate in their exploratory prospects.

We also believe that we are well positioned to pursue our MPEH^TM project because of the following:

·	We have offshore platform facilities with an adjacent two-mile diameter salt dome that are strategically located in an area we believe are suitable for the development of the MPEH^TMas an LNG port facility with onsite cavern storage for natural gas;

·	We have completed conceptual and preliminary engineering for the MPEH^TM project and have submitted an application for a license to develop an LNG terminal with cavern storage and pipeline connections to natural gas markets using our Main Pass facilities;

·	We are targeting receipt of our license in 2005, which together with the development of commercial arrangements for LNG supplies and distribution of natural gas and financing for the project could enable our project to become operational as one of the first U.S. offshore LNG terminals; and

·	We are engaged in discussions with potential LNG suppliers in the Atlantic Basin and with natural gas consumers in the United States regarding commercial arrangements for the facilities.

For more information regarding our MPEH^TMproject see “Main Pass Energy Hub Project” below.

OIL AND GAS OPERATIONS

Background. We and our predecessors have engaged in oil and gas exploration and production in the Gulf of Mexico and the Gulf Coast region for over 30 years. We have focused on this region because:

·	We have developed significant expertise and have an extensive database of information about the geology and geophysics of this region;

·	We believe there are significant reserves in this region that have not yet been discovered; and

·	The necessary infrastructure for efficiently developing, producing and transporting oil and natural gas exists in this region, which allows an operator to reduce costs and the time that it takes to develop, produce and transport oil and natural gas.

Our primary focus in this region is on shallow-water, deep shelf natural gas exploration and

production opportunities. We consider the deep shelf to be geologic structures located beneath the shallow waters of the Gulf of Mexico shelf at underground depths generally greater than 15,000 feet and often lying below reservoirs that have previously produced significant hydrocarbons. We believe that the U.S. market for natural gas has become increasingly attractive as demand continues to grow faster than available domestic and Canadian supplies. We also believe that the natural gas targets in the deep shelf of the Gulf of Mexico and the Gulf Coast region provide attractive drilling opportunities because the shallow water depths and close proximity to existing oil and natural gas production infrastructure allows discoveries to generate production and cash flow relatively quickly.

Multi-Year Exploration Venture. In January 2004, we announced the formation of a multi-year exploration venture with a private exploration and production company (exploration partner). In October 2004, we announced an expanded exploration venture with our exploration partner through which we have jointly committed to spend an initial $500 million to acquire and exploit high-potential, high risk prospects, primarily in Deep Miocene formations on the shelf of the Gulf of Mexico and in the Gulf Coast area. The exploration venture is also considering opportunities to participate in exploration activities in other areas of the Caribbean Basin. We and our exploration partner will share equally in all future revenues and costs associated with exploration venture’s activities except for the Dawson Deep prospect at Garden Banks Block 625, where the exploration partner is participating in 40 percent of our interests. The funds are expected to be spent over a multi-year period on our existing inventory of deep shelf prospects and on new prospects as they are identified and/or acquired. The exploration venture plans to participate in drilling at least 12 exploratory wells in 2005.

The exploration venture will enable us to continue to pursue significantly broader drilling activities. Since inception, we and our exploration partner have participated in 15 exploratory wells resulting in five discoveries, with a potential sixth discovery still being evaluated. Four additional wells are in progress and five wells were nonproductive. See below for more information regarding our drilling activities.

Oil and Gas Properties. As of December 31, 2004, we owned or controlled interests in 98 oil and gas leases in the Gulf of Mexico and onshore Louisiana and Texas covering approximately 252,000 gross acres (approximately 111,000 acres net to our interests). This acreage includes approximately 18,000 gross and 5,500 net acres associated with our potential reversionary interests, which are interests in properties that we have farmed-out or sold but may revert to us upon the achievement of a specified cumulative production threshold or specified net production proceeds.

In October 2004, we reacquired 29,000 gross acres in the Louisiana State Lease 340/Mound Point area (see “Farm-Out Arrangement with El Paso” below). This acreage includes the Blueberry Hill prospect, two Mound Point wells that were previously temporarily abandoned and the Mount Point - West Fault Block prospect. We are considering further operations with respect to the Mound Point wells that were temporarily abandoned, which may include sidetracking, deepening or re-drilling these two wells.

Ryder Scott Company, L.P., an independent petroleum engineering firm, estimated our proved oil and natural gas reserves at December 31, 2004 to be approximately 49.9 Bcfe, consisting of 21.2 Bcf of natural gas and 4.8 MMBbls of crude oil and condensate using the definitions required by the SEC (see “Oil and Gas Reserves” below). These estimated amounts include approximately 4.2 MMBbls (24.9 Bcfe) of crude oil associated with our ownership of K-Mc I, which we acquired complete ownership of in December 2004 (see “Producing Properties” below) and 4.8 Bcfe of reserves associated with reversionary interests in properties we sold in February 2002 (see “Disposition of Oil and Gas Properties” below). Our estimated proved reserves do not include any amounts that may be associated with our JB Mountain and Mound Point discoveries (see “Farm-Out Arrangement with El Paso” below). Our year-end 2004 proved reserve estimates also do not include any amounts associated with our discoveries at Eugene Island Block 213 and Garden Banks Block 625 because the status of the evaluation of the properties was not sufficiently advanced to enable the determination of proved reserve estimates at December 31, 2004. For additional information regarding our estimated reserves, see “Oil and Gas Reserves” below and Note 12. Our production during 2004 totaled approximately 2.0 Bcf of natural gas and 0.1 MMBbls of oil and condensate or an aggregate of 2.5 Bcfe.

Discoveries. Since inception of the exploration venture, we and our exploration partner have participated in five discoveries and a potential sixth discovery at Blueberry Hill, which are summarized below.

	Working Interest	Net Revenue Interest	Water Depth	Total Depth	Initial Production
	%	%	feet	feet	date
Eugene Island Block 193 “Deep Tern C-2” ^a	48.6	45.3^b	90	20,731	December 30, 2004
Eugene Island Block 213 “Minuteman”	33.3	29.8^b	100	20,432	February 25, 2005
South Marsh Island Block 217 “Hurricane Upthrown” ^a	27.5	22.9^b	10	19,664	April 2005
Garden Banks Block 625 “Dawson Deep”	30.0	24.0	2,900	22,790	Pending Final Development Plan
West Cameron Block 43	23.4	18.0^b	30	18,800	Pending Final Development Plan
Louisiana State Lease 340 "Blueberry Hill"	35.3	18.0	10	23,903	Pending Completion & Development Plan

a.	Wells operated by us.

Reflects the eligibility for deep gas royalty relief under current MMS guidelines adopted effective March 1, 2004. The guidelines exempt from U.S. government royalties production of as much as the first 25 Bcf from a depth of 18,000 feet or greater, and as much as 15 Bcf from depths between 15,000 and 18,000 feet, with gas production from all qualified wells on a lease counting towards the volume eligible for royalty relief. The exact amount of royalty relief depends on eligibility criteria, which include the well depth, nature of the well, and the timing of drilling and production. In addition, the guidelines include price threshold provisions that discontinue royalty relief if gas prices exceed a specified level.

Eugene Island Block 193. The Deep Tern C-2 well commenced production on December 30, 2004, at an initial rate of approximately 17 MMcfe/d on a 20/64^th choke with flowing tubing pressure of 12,650 pounds per square inch (psi). For the two months ended February 28, 2005, the well has produced at an average gross rate of approximately 15 MMcfe/d, approximately 7 MMcfe/d net to us. As previously reported, the well was drilled to a total measured depth of 20,731 feet in November 2004 and logged approximately 340 gross feet of hydrocarbons in five Basal Pliocene and Upper Miocene pay zones. Initial production was established through approximately 80 feet of perforations in the deepest Miocene interval. Following depletion of this reservoir, the shallower pay zones could be recompleted. We also plan to drill an offset well to delineate and develop the multiple gas sands encountered in the C-2 discovery. The Eugene Island Block 193 lease is eligible for royalty relief on the first 10 Bcf of natural gas production. Our net revenue interest will approximate 45.3 percent until gross production exceeds 10 Bcf, at which time our net revenue interest will revert to 37.2 percent in the deeper Basal Pliocene and Upper Miocene sections of the well.

The Deep Tern C-1 sidetrack 1 take point well commenced drilling on January 20, 2005 and has been drilled to 17,115 feet. The well is being sidetracked to target the Basal Pliocene sands seen in the original C-1 well and in the C-2 well. We hold a 20.6 percent net revenue interest in the C-1 sidetrack well, which is expected to commence production from the C-1 sidetrack 2 well by mid-2005. We control 17,500 acres in the Deep Tern area which is located approximately 50 miles offshore Louisiana.

Eugene Island Block 213. The Minuteman discovery commenced production on February 25, 2005 using our facilities at Eugene Island Block 215, located approximately seven miles west of the well. The initial gross rate for the well approximated 17 MMcfe/d (5 MMcfe/d net to us) on an 11/64^th choke with flowing tubing pressure of 14,720 psi. As previously disclosed, the by-pass well was drilled to 21,024 feet and encountered a laminated sand section from 19,790 to 20,230 feet. The well was sidetracked and wireline logs confirmed 60 gross feet of hydrocarbons with excellent porosity and permeability in the upper portion of the laminated sand section. The Eugene Island Block 213 lease is eligible for royalty relief on the first 25 Bcf of natural gas production. Our net revenue interest will approximate 29.8 percent until gross production exceeds 25 Bcf, at which time our net revenue interest would revert to 24.3 percent. This discovery is part of a prospect area controlled by us covering 9,600 acres. We control approximately 9,000 additional acres in the immediate area surrounding the prospect, which is located approximately 40 miles offshore Louisiana.

South Marsh Island Block 217. Drilling at the Hurricane Upthrown prospect reached a total depth of 19,664 feet in January 2005 and logged approximately 205 gross feet of hydrocarbons in two Rob-L pay zones. The exploration objectives lying below 15,500 feet were determined to be nonproductive. The well has been completed and we recently announced a successful production test for the well. The production test indicated a gross rate of approximately 30 MMcf/d of natural gas, 1,500 barrels of oil per day or a total of approximately 39 MMcfe/d (9 MMcfe/d net to us) on a 26/64^thchoke. Flowing tubing pressure was approximately 9,290 psi at the end of the testing period with approximately 10,700 psi shut-in tubing pressure. Initial production from the well is expected in April 2005. The well will be produced through the Tiger Shoal facilities being used for production of the Mound Point/JB Mountain wells (see “Farm-Out Arrangement with El Paso” below). The geologic data from this well is being combined with new 3-D seismic data to determine other exploration opportunities in the area. We have rights to approximately 7,700 gross acres in the Hurricane prospect area which is located offshore Louisiana.

Garden Banks Block 625. Estimated timing of first production at Dawson Deep is pending the final development plan, with sanctioning of the project anticipated in the first quarter of 2005. As previously reported, the “take point” well encountered hydrocarbon-bearing sands as indicated by more than 100 feet of total vertical thickness of resistivity in the shallow zones. An additional 100 feet of hydrocarbons were logged in the deepest zone which was the original objective of this “take point” well. The well was sidetracked and drilled to a total depth of 22,790 feet. This prospect is located on a 5,760 acre block located approximately 150 miles offshore Texas and is adjacent to the operator’s Gunnison spar facility.

West Cameron Block 43. The No. 3 exploratory well commenced on November 6, 2004 and was drilled to a total depth of 18,800 feet. Wireline logs have indicated the well has encountered three hydrocarbon-bearing sands in the lower Miocene with a total gross interval in excess of 100 feet. The West Cameron Block 43 lease, located 8 miles offshore Louisiana, is eligible for royalty relief on at least 15 Bcf of natural gas production; consequently, our net revenue interest will approximate 21.9 percent until 15 Bcf is produced, which at that time our net revenue interest would revert to 18.0 percent. Following completion and testing of the well, operations will be suspended pending planning of additional drilling and development activities for this discovery.

Louisiana State Lease 340. The Blueberry Hill well was drilled to a total depth of 23,903 feet. Wireline logs indicated the well encountered four potentially productive hydrocarbon-bearing sands. A 4½ inch production liner has been run and cemented to protect the identified potential pay zones. We have relocated the drilling rig to another exploratory prospect while the necessary 20,000-pound completion equipment for the anticipated high pressure well is procured. Completion and testing of the well will determine future plans for this prospect. Blueberry Hill is located seven miles east of the JB Mountain discovery and seven miles south southeast of the Mound Point Offset discovery (see “Farm-Out Arrangement with El Paso” below).

Near-Term Drilling Activities. Over the past several years, we have focused on identifying exploration prospects within our significant acreage position. These efforts resulted in the identification of over 20 high-potential, high-risk prospects, most of which are deep-gas targets near existing infrastructure in the shallow waters of the Gulf of Mexico and Gulf Coast area. Our exploration venture is currently drilling four prospects and expects to participate in drilling at least 12 exploratory wells during 2005. We expect our capital expenditures for 2005 will include $30 million of drilling costs incurred during 2004, $70 million for exploration costs incurred during 2005 and approximately $10 million for currently identified development costs. These costs are subject to change depending on the number of wells drilled, participant elections, availability of drilling rigs, the time it takes to drill each well, related personnel and material costs, and other factors, many of which are beyond our control. For more information regarding the factors affecting our drilling operations see “Risk Factors” below.

If our exploratory drilling is successful, significant additional capital will be required for the development and completion of these prospects. In addition, we may have funding requirements under our farm-out arrangement (see “Farm-Out Arrangement with El Paso” below) if and when interests in those prospects revert to us. While we have had recent success in our deep shelf drilling program, there are substantial risks associated with oil and gas exploration. For additional information regarding those risks, see “Risk Factors” below.

The table below sets forth approximate information with respect to prospects we have commenced drilling in the first quarter of 2005. Plans to drill additional wells in 2005 are subject to change based on various factors, as described in “Risk Factors” below.

	Working Interest ^a	Net Revenue Interest ^a	Water Depth	Proposed Total Depth^b	Spud Date
In-Progress Wells	%	%	feet	feet
South Timbalier Blocks 97/98 “Korn” ^d	18.8	15.4	60	23,000	February 3, 2005
Vermilion Blocks 16/17 “King Kong” ^c,d	40.0	29.2	12	19,500	February 20, 2005
Lake Sand Field Area “Delmonico”	25.0	18.8	10	19,000	March 8, 2005
Louisiana State Lease 5097 “Little Bay” ^c	37.5	27.4	<10	20,000	March 11, 2005

a.	Interests as of February 1, 2005, assuming participation by our exploration partner (see “Multi-Year Exploration Venture” above) for 50 percent of our interests in prospects.

b.	Planned target measured depth, which is subject to change.

c.	Wells in which we are the operator or expect to be the operator.

Prospect will be eligible for deep gas royalty relief under current MMS guidelines, which could result in an increased net revenue interest for early production. If the MMS approves the application for royalty relief, each lease may be exempt from paying MMS royalties on up to the initial 25 Bcfe of production.

·	South Timbalier Blocks 97/98. The Korn well is currently drilling below 15,600 feet.