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February 2008

Vol. 13, No. 6 Week of February 10, 2008

Pacific Energy on fast track in Alaska’s Cook Inlet basin

Pacific Energy Resources got some critical paperwork out of the way in the last few weeks, clearing the decks for its ambitious plans for Alaska’s Cook Inlet basin — a strategy that includes buying the Rowan Juneau jack-up rig for Corsair drilling and launching a more aggressive exploitation and development program at Redoubt Shoal.

Unlike Redoubt’s previous owner, Forest Oil, which viewed the offshore unit as a declining property worthy of minimum investment, Pacific Energy considers Redoubt a “huge prize,” a State of Alaska official told Petroleum News Feb. 7, confirming earlier statements made by Pacific Energy officials. Pacific Energy, the official said, has chosen to put a lot of capital into Redoubt, essentially to rejuvenate the field, effectively increasing oil reserves and production.

Pacific Energy closed on Forest’s Alaska assets in late August, but that was just the beginning of the various extensions and approvals the Long Beach independent would need from financial and state agencies to move forward with its plans for the nearly 1 million acres of exploration and production leases it had purchased.

In mid-December, Pacific Energy received what was likely the easiest approval it would get from the Division of Oil and Gas, part of the State of Alaska’s Department of Natural Resources: The company was allowed to take over operatorship of the Corsair and West McArthur River units from Forest Oil.

On Dec. 31, however, the division put the Corsair unit into default because Pacific Energy had not provided “evidence of a rig and drilling commitment that would enable” the company to drill an exploration well in the Corsair unit no later than Dec. 31, 2008.

Both proof of a jack-up, or other offshore drilling unit, by Dec. 31, 2007, and the drilling of an actual well by Dec. 31, 2008, were part of the plan of exploration Forest had entered into with the state in early 2007.

Pacific Energy asked the division for a one-year extension of both deadlines, but was turned down. The division wanted “satisfactory” evidence that Pacific Energy had a jack-up rig before it would consider an extension of the drilling date.

But Pacific Energy said it needed a one-year drilling extension for the exploration well in order to obtain financing to buy the jack-up.

In a Jan. 29 letter that followed hours of meetings between Pacific Energy and division officials, acting division Director Kevin Banks told Pacific Energy that the time to drill the first well would be extended by six months, to June 30, 2009, “subject to Pacific Energy curing the default by April 1, 2008” — meaning the company had to produce a rig contract that proved it could drill the well by June 30, 2009.

Pleased with the news, Pacific Energy sent out a press release in early February announcing Banks’ decision.

Bonding for Redoubt tripled

An expensive component to taking over operatorship of the Redoubt Shoal unit, which was approved by the division for Pacific Energy at the end of January, was the bonding required by the state related to platform abandonment. (It is the division’s responsibility to be sure that platform operators have enough money set aside to dispose of a platform when its useful life is over.)

In 2000, when Forest took over ownership and operatorship of Redoubt’s Osprey platform, the state asked the company to post a $3.8 million cash bond, which Pacific Energy also did a few months after its purchase of the unit’s assets from Forest.

But the division said $3.8 million wasn’t enough money because since 2000 the Osprey had been modified from an easily movable platform to a more permanent structure that would cost more to move; plus the equipment on the platform was older so it had less salvage value; and oil field operations costs, including those for abandonment, had increased dramatically.

The division asked Pacific Energy to put a total of $12 million in a fund for the Osprey, offering a 12-month payment schedule that involved monthly and balloon payments so that the bond obligation would be fully funded by Jan. 31, 2009.

In the meantime, refinancing under way

While Pacific Energy was working with the division, the company was in the process of completing both the restructuring of its Alaska loan repayment agreements and an incentive warrant financing under which it raised almost $21 million.

On Jan. 25, Pacific Energy announced that it had amended its loan agreements for the Alaska acquisition with J. Aron & Co., an affiliate of Goldman, Sachs & Co., and “certain affiliates of Silver Point Capital.”

Under the new structure the lenders agreed to extend the maturity date of the company’s August 2007 second lien credit agreement to Feb. 24, 2012, and to extend the time for a mandatory prepayment of a portion of that loan until March 31, 2009.

“This has minimized dilution and costs to the shareholders and puts in place a more permanent capital structure by which the company has increased flexibility and time to execute its development program,” Pacific Energy President Darren Katic said in a press release.

Going for the gas

Although both Forest officials and Katic have talked about Corsair’s potential 200 million barrels of oil, the five-year exploration plan for the 10,185-acre unit calls for only exploring and developing the lower Sterling and upper Beluga gas sands “that are stratigraphically equivalent to the gas producing interval at the North Cook Inlet field,” Forest said in its initial application to the state.

Forest said it “identified large seismic amplitude anomalies … in the center of the Upper Cook Inlet approximately 12 miles southwest of the North Cook Inlet field” (where Corsair is located), a feature some 2.5 miles wide and nine miles long.

Water depths over the structure range from 80 to 120 feet and average 100 feet.

In 2003, Forest’s emphasis for Corsair was clearly oil. The company said predrill analysis indicated Corsair could contain 137 million barrels of oil — 79 million barrels in the Tyonek formation and 58 million barrels in the Hemlock formation — and was geologically related to the Tyonek Deep prospect, formerly called Sunfish. Today the undeveloped prospect is operated by Renaissance and called Northern Lights.

—Kay Cashman






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