Buccaneer divests jack-up ownership but keeps jack-up involvement

A pair of Buccaneer Energy Ltd. deals involving the Endeavour jack-up rig highlights the intricate nature of the public-private partnership created to bring the rig to Alaska’s Cook Inlet.

The Australian independent is selling its stake in the joint venture that owns the jack-up rig and is also selling its stake in the only offshore prospect in Alaska where the rig has been used since it arrived in the state in August 2012. But Buccaneer remains tied to the rig through contractual obligations, commercial arrangements and technical necessity.

The history of KOV

Buccaneer created Kenai Offshore Ventures in late 2010 to apply for tax-exempt bonds available under the 2009 federal stimulus program. It intended to use the bonds to purchase a jack-up rig for the Cook Inlet basin. As the state agency responsible for the program, AIDEA, the Alaska Industrial Development and Export Authority, was close to approving $60 million in bonds when Buccaneer expanded its business strategy to include the Arctic, which disqualified the project for the bonds.

Instead, AIDEA and Buccaneer decided to buy the rig together. Under the plan, AIDEA would invest up to $30 million in the project, Kenai Offshore Ventures would invest $5 million and the remaining $50 million would come from a private financial investor.

As the deal was coming together, Buccaneer sold a 50 percent interest in Kenai Offshore Ventures to the Singapore-based marine company Ezion Holdings Ltd.

In May 2011, Gov. Sean Parnell signed a bill allowing AIDEA to invest in limited liability corporations, which allowed AIDEA to invest in Kenai Offshore Ventures.

In mid-2011, Kenai Offshore Ventures purchased the Transocean Adriatic XI jack-up rig and renamed it “Endeavour — Spirit of Independence.” Toward the end of the year, the AIDEA board approved a deal to invest as much as $30 million in the Endeavour project.

By contributing some $23.6 million to Endeavour, AIDEA became a preferred member of Kenai Offshore Ventures. Buccaneer and Ezion invested some $30.4 million to the project as common members. Oversea-Chinese Banking Corporation (OCBC) Ltd. invested the remaining $66 million needed to fund the estimated $120 million project.

AIDEA currently owns 82.5 percent of Kenai Offshore Ventures, while Buccaneer and Ezion each own 8.75 percent of the company, according to the state corporation filings.

The business of KOV

The five-year agreement runs through Oct. 29, 2017, and requires Kenai Drilling to pay Kenai Offshore Ventures some $70,000 per day to use the rig. Kenai Drilling earns money by leasing the rig to companies looking to drill offshore wells in Alaska.

While Kenai Drilling is responsible for marketing the rig, Spartan Drilling LLC is the contractor responsible for actual day-to-day operations. Kenai Offshore Ventures originally hired Archer Drilling for the job, but the companies parted ways after disputes over payment and are currently in court, each claiming damages against the other.

To date, the Endeavour rig has drilled one well in Alaska, the Buccaneer-operated Cosmopolitan No. 1. When Buccaneer used the rig, its daily rate was closer to $24,500 because of rebates associated with the Alaska’s Clear and Equitable Share tax credit program, according to the company. Buccaneer currently holds an exclusivity agreement on the rig, but the Kenai Offshore Ventures business model intends for third parties to eventually rent the rig. Those companies would lease the rig from Kenai Drilling.

In February 2013, AIDEA estimated the charter agreement would generate some $27 million each year for Kenai Offshore Ventures, which would flow back to its investors.

After paying for a limited range of operating expenses, revenues to Kenai Offshore Ventures must go first toward paying down the OCBC loan, then toward paying down the AIDEA loan and finally to recoup the investments of the two common members, Buccaneer and Ezion. AIDEA expects to be repaid over six years at 8 percent interest, but the interest rate jumps to 10 percent for any payments made after six years.

AIDEA also added a provision that would give it an overriding royalty interest on a small percentage of all of Buccaneer’s properties should Buccaneer default on the deal.

Ezion takes over

As the preferred member of Kenai Offshore Ventures, AIDEA must approve the sale.

“Buccaneer Energy advised AIDEA that they would be selling their common shares in Kenai Offshore Ventures to Ezion Holdings, the other common owner,” AIDEA spokesman Karsten Rodvik told Petroleum News. “This action requires AIDEA consent as the preferred member in KOV. We are working on our due diligence regarding the transaction. This change in ownership does not impact Buccaneer’s agreement with AIDEA, nor does it impact the KOV operating agreement or the Bare Boat Charter.”

Rodvik continued, “We believe that with this consolidation, Buccaneer will be better positioned to continue its Cook Inlet exploration and development. Ezion is an experienced player in offshore oil and gas support, and we are very pleased to continue our partnership with them in the development of Alaska oil and gas resources.”

How much will it make?

By selling Kenai Offshore Venture but keeping Kenai Drilling, Buccaneer achieved a goal: “to sell ownership in the rig while maintaining control of the asset for its drilling operations in Alaska.” The agreement also involves marketing the rig to third parties.

The actual day rate for the rig is proprietary, but in December 2012 Buccaneer described it as being “comparable” to the rates for the same class of rig in “similar regions,” pointing to the North Sea, where day rates ranged from $138,000 to $162,000 per day between July and December 2012, according to the IHS Petrodata North Sea Rig Report.

In preparing the deal, Kenai Drilling said it had identified between five and 10 wells that could be drilled in Alaska using the rig during the five-year term of the agreement, plus the potential for significant plugging and abandonment work in the Cook Inlet basin.

The AIDEA agreement requires Buccaneer to drill at least four wells using the rig. The deal envisioned Buccaneer drilling two wells each at its offshore Southern Cross and Northwest Cook Inlet units. As the deal was coming down in 2011, Buccaneer suggested it might drill another seven to 10 wells on top of its obligations, pending early success.

Additionally, AIDEA identified 22 wells in the basin that could potentially be drilled using a jack-up rig. The list reflected possibilities, but not necessarily expressed interest.

The partners also discussed the potential for using the rig for offshore drilling in the Beaufort and Chukchi seas, although those plans are hypothetical for the time being.

A separate deal gave Buccaneer exclusive use of the rig for its significant workload in the Cook Inlet. The workload grew after the deal closed. Buccaneer subsequently acquired the Cosmopolitan field and the deep oil rights at the ConocoPhillips-operated North Cook Inlet unit, in addition to its Southern Cross and Northwest Cook Inlet units.

Cosmopolitan delays

The plan half-worked this past year.

Buccaneer drilled the Cosmopolitan No. 1 well in early 2013, but testing went longer than expected, which delayed wells at Southern Cross and Northwest Cook Inlet.

By missing deadlines at Southern Cross and Northwest Cook Inlet, Buccaneer is now facing the possibility of losing both units. The Alaska Department of Natural Resources is currently deciding the fates of the two units, but had made no decision as of Jan. 6.

Buccaneer is now selling its 25 percent stake in Cosmopolitan to its majority partner, the privately held Fort Worth independent BlueCrest Energy Inc., for some $41.25 million.

The deal requires BlueCrest to use the rig for at least 50 working days each winter for the next three winters, at a rate of $175,000 per day. To backstop the deal, BlueCrest must file a $5 million letter of credit that stays in place until it has used the rig for 150 days.

As the deal was coming together, Buccaneer was permitting a Cosmopolitan No. 2 well, which the company had hoped to drill sometime this winter. Those plans hit a snag when Buccaneer asked the Alaska Oil and Gas Conservation Commission to determine whether the proposed 5,685-foot well would avoid oil at the field. The AOGCC recently said it didn't have enough information to make the decision.

Buccaneer believes that the determination requires it to significantly modify its oil spill contingency plan. The changes could add up to four months of studies and additional public comment, which would make it impossible for BlueCrest to start drilling this winter.

The Alaska Division of Oil and Gas must also approve a transfer of the Cosmopolitan leases before BlueCrest could officially take over the field and its plan of operations.

If all the deals go through, BlueCrest would pay Kenai Drilling, which would pay Kenai Offshore Ventures, which would pay OCBC Ltd and its three joint venture partners.

If BlueCrest ultimately uses the rig for 50 days each winter at a rate of $175,000 per day, Kenai Offshore Ventures would stand to make some $8.75 million in annual revenue.

The figure is about one-third of the $27 million per year AIDEA estimated during its due diligence. The remaining revenue would come from additional drilling, such as the wells Buccaneer hopes to drill at Southern Cross, Northwest Cook Inlet and North Cook Inlet.