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Enron Mail |
Travis, please look into this per my voice mail and get back to both me and
Rick. Mark ----- Forwarded by Mark E Haedicke/HOU/ECT on 11/22/2000 12:17 PM ----- Rick Buy 11/21/2000 11:20 AM To: Mark E Haedicke/HOU/ECT@ECT cc: Subject: Cypress Exploration Program - Operator/Cash Call Issue Mark- our fears came true on this. Well got "stuck" and costs will escalate substantially. Now is necessary to sidetrack. Did your guys find anything on this? Rick ---------------------- Forwarded by Rick Buy/HOU/ECT on 11/21/2000 11:17 AM --------------------------- From: Rick Buy 11/01/2000 01:13 PM To: Mark E Haedicke/HOU/ECT@ECT cc: Subject: Cypress Exploration Program - Operator/Cash Call Issue Mark- were you aware of this? Not a huge dollar amount but does indicate a naked risk we didn't know we had (I think). Rick --------------- Forwarded by Rick Buy/HOU/ECT on 11/01/2000 02:11 PM --------------------------- From: Rick L Carson 11/01/2000 11:28 AM To: Rick Buy/HOU/ECT@ECT cc: David Gorte/HOU/ECT@ECT, Bradford Larson/HOU/ECT@ECT, Don Rollins/HOU/ECT@ECT Subject: Cypress Exploration Program - Operator/Cash Call Issue Rick: I wanted to inform you about a situation where a Commercial Team has subjected Enron to some material risk that did not get appropriate approval. Here's the story: On October 30, I received a funding request for my approval of approximately $260,000 representing a cash advance request on the Bernard No. 1 well, a 16,500 exploratory well in the Cypress Program. The request appeared pretty routine but as is our procedure, I had Don Rollins check it out . Don discovered that we had already paid our cash call and this cash call represented our working interest partner, Kelley Oil's share, which is a highly unusual situation. Checking further we discovered that the well is being drilled under a farmout agreement from Kelley, who wanted to be operator. Our guys (Thompson/Josey) wanted Enron (not Kelley) to operate the well during the drilling phase but did not want to be official operator of record so they set up Rozel Onshore, our prospect generator in Lafayette to be our surrogate operator. Kelley was upset about this and would not sign the Joint Venture Agreement unless the cash call provisons were deleted. Thompson/Josey and team agreed and signed the agreement which has no initials from the Legal Department. The effect of this was that Rozel/Enron would have to incur all the costs then bill and collect from Kelley. Rick, as you are aware, the cash call provision in a JOA is the primary credit risk mitigant that an operator has to ensure that his partners pay their share of well costs before costs are incurred. This can be particularly good protection if a well gets in trouble with lots of cost overruns that partners don't want to pay. In this case, our surrogate operator, Rozel has no established credit with oil service companys and no money of his own so all services including the drilling rig are having to be prepaid by Enron 100%. The well is heavily front end loaded with costs with a total drill and complete exposure of over $4.0 million (if thing go ok!) I discussed this with Dave Gorte and Brad Larson and we all agreed that we are forced to fund since the well is drilling and failure to fund would shut down operations. Also, keep in mind that this will be an ongoing obligation (and risk exposure) during this entire drilling phase. Lessons Learned: 1) The E&P merchant finance team has no business operating a deep S. Louisiana exploratory test. 2) Important provisions, like "cash call" should never be given away without appropriate risk assessment and approval. Please call if you have questions.
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