Stranded gas is generally thought of as being in remote locations far from market infrastructure, often in exotic international basins. But a new, and perhaps unlikely, partnership is monetizing stranded gas just 12 miles from the Texas coast, barely north of Mexico. First production just occurred last month. In August, a $100-million investment commitment was made by the oil and gas unit of one of the world's largest companies, GE, in one of the smallest U.S. independents, Houston-based Prime Offshore LLC, formerly F-W Oil Exploration LLC. It's a story of the proverbial two-man, oil and gas shop competing effectively with the big guys-if they have their hands on a compelling and economic E&P project. This is the first offshore deal closed by GE, which has invested in onshore U.S. oil and gas for more than a decade through GE Energy Financial Services. Since 1991, the investment unit has provided $2.2 billion in partnership equity and $300 in senior secured debt for private and public oil and gas companies. Through these partnerships, GE now owns $1.5 billion worth of oil and gas reserves, producing more than 140 million cubic feet of gas and 31,000 barrels of oil per day. Based on potential, GE placed more than $70 million in a limited partnership with Prime Offshore to acquire and produce gas in the shallow Gulf of Mexico. GE also invested about $30 million for the completion of Prime's 48-mile pipeline system that will transport in excess of 30 million cubic feet of gas per day from Prime's fields in the South Padre Island, Texas, area. The reserves lie offshore in an environmentally sensitive area known for tourism and spring break, fishing and shore birds. Although the leases are in federal water, Prime Offshore had to file certain permits with Port Isabel, the closest city. Between the islands and the mainland lies a protected wildlife refuge. For a company with no production and only two employees as recently as 2003, Prime Offshore at year-end 2004 was producing a net of 7 million cubic feet a day and had attracted the likes of GE. Prime's new production on South Padre blocks 1166 and 1145 marks a number of firsts, according to president Jim Brock and chief operating officer Doug Nester. These fields feature the shallowest completions in the Gulf (750 to 1,500 feet in Upper Pleistocene), therefore with the shallowest horizontals attempted in the Gulf. The horizontal legs are about 500 feet. Production goes through the longest flowline on the shelf, some 48 miles, and the production is in the southernmost portion of the Outer Continental Shelf waters of the U.S. These are the first two production platforms installed in the federal portion of the South Padre Island area. Finally, this is GE's first offshore investment. And all this in an area that most others had written off. What attracted GE to Prime Offshore? "The rock is phenomenal," says Nester. "The porosity is above 35% and the permeability is measured in Darcies. Initial well tests are from 1- to more than 10 million cubic feet a day." Investing in offshore reserves significantly increases the opportunities for expanding GE's oil and gas portfolio, says John Schaeffer, managing director of oil and gas at GE's Energy Financial Services unit in Stamford, Connecticut. "This transaction allows us to apply our technical and financial expertise in pipelines to bring more gas to an increasingly supply-constrained market." GE stepped up its investments in pipelines last year, making two pipeline deals. In partnership with Canada's largest institutional investor, it agreed to buy the Southern Star Central gas pipeline system for $362 million. The pipeline spans more than 6,000 miles in Kansas, Oklahoma, Missouri, Wyoming, Nebraska, Colorado and Texas. GE's Energy Financial Services unit also acquired 50% of CrossCountry Energy, a 7,400-mile gas pipeline network spanning most of the region from Florida to California. Prime Offshore, formed in 2001, is a 100%-owned affiliate of Prime Energy (Nasdaq: PNRG), an oil and gas company based in Stamford. Along the way, Prime Offshore revamped itself in 2003 from a conventionally structured E&P company with more than 20 employees, to a "virtual" one with Brock and Nester remaining as the only full-time employees. Contractors and consultants carry out the balance of Prime's work. Prime Offshore owns 28 shallow-water leases and operates 17 of these, along the Texas and Louisiana coasts. It now has interests in a dozen wells in four small fields, one in North Padre, the two in South Padre, one in Matagorda Island and a nonoperated working interest in a large field in the Breton Sound area. Prime Offshore's rise has been accomplished in an area most people had written off. Texaco and Enron's former E&P unit (which became EOG Resources Inc.) drilled deeper structures in the South Padre area in the late 1990s, but gas also exists at shallow depths of 700 to 2,000 feet. By looking at the area in a conventional way, the reserves associated with these depths were difficult to justify developing at gas prices of $1 to $2 per thousand cubic feet (Mcf), Nester says, especially given that pipelines, platforms and flow lines had to be installed. "We effectively twinned an old well drilled by EOG years ago-they never produced it as it didn't make sense to develop the required infrastructure at the time, because gas was selling for less than $2 an Mcf," says Brock. "We acquired the leases in 2002." Prime Offshore has 25 leases between the North and South Padre Island areas offshore Texas. "We focus on this area because that is what we're familiar with. What makes this attractive to us is that the area had low competition-everybody was focusing on the deep shelf or the shelf off Louisiana," says Nester. "We think this area has several small accumulations of 5- to 10 billion cubic feet that lie along the flow line. With no competition from industry so far, we can take our time and build this company and bring these modest reserves online. GE bought into our existing production from three fields and into South Padre, which was not producing at the time of the deal closing. Ultimately we think their investment [with Prime] will total $100- to $120 million." Although horizontal and gravel-pack completions offshore are not unique, it is a nontraditional approach to these very shallow completions, in an area with no prior infrastructure-a situation ripe for the moxie of a small and hungry independent. Prime Offshore built its position quietly during the past four years and intends to drill it in 2006 and 2007. "We think this area has repeatability. If you were there just drilling one or two wells on one or two blocks, it would probably not be economic," says Nester. "But we have now created the infrastructure to allow ourselves or other companies to come here and support this play. There is low reservoir risk and right now, no industry competition, so this has the potential of being a homerun for us." In 2004, Prime shot high-resolution, shallow-hazard 3-D seismic which imaged the reservoirs down to about 6,000 feet. In 2005, it drilled and completed four wells, laid the new 48-mile pipeline and installed two platforms. Production began last month at the rate of more than 25 million cubic feet per day. Located 12 miles offshore South Padre Island, the field represents the most significant asset in the new GE partnership. The field had been shut-in since May, waiting on completion of the pipeline. The financing "allowed us to monetize in the forward market while remaining focused on deploying risk capital in exploration," Brock says. As many as 10 horizontal wells are planned in 2006 at a cost of about $45 million to drill and complete. "We were planning to do this before the big increase in gas prices-as long as gas was above $3 or $4, we were comfortable that this stranded gas was economic. The key to our success was that the initial wells were good enough to support the infrastructure, and then GE provided the capital for us to further develop this," he says. "The other key element is the high repeatability of this play."

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