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Providing coverage of Alaska and northern Canada's oil and gas industry
November 2008

Vol. 13, No. 47 Week of November 23, 2008

The Explorers 2008: A race at Corsair for Pacific Energy

After a year in Alaska, California independent hoping for 2009 exploration season in Cook Inlet

Eric Lidji

Petroleum News

Realists in the oil industry use the word “if,” but so do pessimists, and over the past year no company in the Cook Inlet inspired the word more than Pacific Energy Resources Ltd.

Well into its second year as an operator and explorer in Alaska, the California-based independent is trying to go where many other small explorers have gone before and failed: bringing a jack-up rig to Alaska to drill an exploration well in Cook Inlet.

If Pacific Energy successfully gets the rig north, the impact could ripple through the region. Several independent explorers want time on the rig to test prospects in the area.

But if Pacific Energy fails, that would also have consequences: reports increasingly forecast a regional gas shortage and new exploration is needed to increase supplies.

With a few major hurdles behind the company, and a few still to be crossed, Pacific Energy hopes make an optimistic turn from “if” into “when” in the coming year.

When Pacific Energy bought the Forest assets for around $464 million in August 2007 the company became an operator or partial owner of nine fields in the Cook Inlet, as well as significant un-unitized acreage, several existing platforms and facilities, some expensive pieces of equipment, and 50 percent stake in the Cook Inlet Pipeline Co.

The deal also made Pacific Energy the operator of the Corsair unit, now the core exploration area for the company, which maintains interests in California and Wyoming.

Both gas and oil at Corsair

Corsair sits some 7.5 miles due south of the village of Tyonek in the waters of Cook Inlet along an offshore trend covering the East Kitchen prospect to the south and the Northern Lights prospect and North Cook Inlet unit to the northeast.

From a geologic standpoint, Pacific Energy could use Corsair to explore the shallower Beluga and Sterling formations, which are believed to hold gas, or the deeper Tyonek and Hemlock formations, which are believed to hold oil.

Before forming the unit in 2003, Forest estimated Corsair might contain 137 million barrels of oil, and up to 480 billion cubic feet of gas. Pacific Energy believes recoverable reserves at Corsair might be as high as 500 bcf of gas or 100 million barrels of oil.

Forest originally planned to explore for oil, but in more recent exploration plans filed with the state the company began shifting its focus toward gas.

In February 2008, Pacific Energy Chairman and CEO Vladimir Katic based the decision on timing. If a rig made it to Alaska in early spring or summer, he said, the company would have time to drill a deeper oil well. But if the rig didn’t arrive until early fall, the company would only be able to drill for gas before the end of the drilling season.

A rig, a ship and a waiver

But for Pacific Energy to drill an exploration well at Corsair, or any of the offshore prospects in shallower Cook Inlet waters, means solving a puzzle made of three interconnected pieces: a jack-up rig, a heavy lift vessel and a Jones Act waiver.

A jack-up rig is a mobile drilling unit well suited for shallower offshore prospects, and failed attempts to get one to Alaska in the past have forced other companies to delay drilling projects in the Cook Inlet basin, or abandon them altogether.

The challenge is partly business and partly geography. A shortage of jack-up rigs puts them in high demand, and exploration companies are competing to secure rigs.

Soon after arriving in Alaska, Pacific Energy signed a letter of intent with Rowan for a jack-up rig, but the deal fell apart early in the year. In April, Pacific Energy signed a $156 million deal with Blake Offshore to use the Blake jack-up 151 for three years.

But the rig is currently in the Gulf of Mexico and bringing it to Alaska requires a ship capable of carrying the load and of making the two-month trip around South America, because the cargo is too large to take a short cut through the Panama Canal.

Earlier in the year, Pacific Energy told the state Division of Oil and Gas it had found six shipping companies with “heavy lift vessels” both able to make the trip and available in time needed to meet the drilling deadlines of the Cook Inlet program next year.

In a letter to state officials dated Sept. 23, Pacific Energy outlined ongoing negotiations with Blake Offshore and Dockwise, a Dutch shipper with a Bermuda holding company.

Pacific Energy estimated the contract would be in excess of $10 million.

Between late July and the start of September, the three companies reached a draft contract, which Pacific Energy submitted to the state with a request for confidentiality.

Pacific Energy said mandatory evacuations in New Orleans in advance of Hurricane Gustav and extended power outages in Houston caused by Hurricane Ike delayed the contract negotiations. A key Pacific Energy lawyer is based in New Orleans, as are the offices of Blake Offshore. Dockwise maintains a corporate office in Houston.

In its letter, Pacific Energy said negotiations picked back up on Sept. 18, when the three companies began reviewing the latest draft of the contract. Earlier in September, Pacific Energy and Blake Offshore also hired an engineering firm to test the Dockwise M/V Swan, and another company to review the operations manual for the ship.

But the contract negotiation is not the final hurdle in Pacific Energy’s quest to get a jack-up rig to Alaska. The company still needs a waiver of the Jones Act, the federal law requiring ships docking at U.S. ports to be registered and built in the country.

The Dockwise M/V Swan is not an American ship, and all of the American-built vessels capable of shipping the Blake 151 rig to Alaska are believed to be under contract.

In contact with “various federal agencies” since June 2008, Pacific Energy said it recently submitted a draft application to the U.S. Department of Transportation Maritime Administration and recently received comments for revision. State officials believe Pacific Energy could get the waiver within 60 days of signing the contract.

Only one other independent oil company operating in Alaska, Escopeta Oil, has previously received a Jones Act waiver from the federal government. However, following contract problems in 2006 and 2007, the company did not end up using the waiver.

Deadlines coming and going

Pacific Energy not only acquired Forest Oil’s assets in Cook Inlet, but also a series of pending deadlines for work commitments and expiration dates on free-standing leases.

Pacific Energy failed to meet the first deadline requiring it to secure a jack-up rig by the end of 2007, just 34 days after it officially took over at Corsair. As a result, the state put Corsair into default and denied a request for an extension to the drilling schedule.

The Blake Offshore deal in April pulled the unit out of default, and in turn the state gave Pacific Energy until June 30, 2009, to drill the first of three exploration wells.

But soon Pacific Energy ran up against a July 31 deadline for securing the heavy lift vessel. In late July, the state gave Pacific Energy a 60-day extension to that deadline. In late September, the state gave the company a second, 32-day extension because of delays caused by a pair of late summer hurricanes in the Gulf of Mexico.

During the past year, though, the state and Pacific Energy have been at odds over whether to expand the boundaries of the Corsair unit to cover four adjacent leases.

The company requested the expansion in March, hoping to prevent three of the leases from expiring at the end of April. The expansion would have more than doubled the unit.

Pacific Energy said newly acquired 2-D seismic data of the area and a new evaluation of the prospect indicated that as much as two-thirds of the Corsair structure extended past the existing boundaries of the unit, into the proposed expansion leases.

Pacific Energy first suggested the prospect might not be economic without the expansion acreage. Later the company offered a more detailed explanation, saying the leases in the unit could be used to drill for gas, while the expansion acreage could test for oil.

In an analysis of second-quarter operations released in mid-August, company management wrote, “While we believe that the original Corsair Unit has significant stand-alone economic merit, the decision of the State not to include the additional leases could have a negative impact on the overall economics of the project.”

The state rejected the request to expand the unit in April and Pacific Energy appealed that decision in May. There is no statutory timeline for the state to rule on the appeal, but state oil and gas officials hope to resolve the matter before the May 2009 Cook Inlet lease sale.

Financing 2009 exploration

Concurrent with the effort to secure rig and ship contracts, Pacific Energy has been working over the past year to finance the exploration program at Corsair.

In October 2007, the company completed an equity private placement of some $65 million, with the first $40 million used to repay debt associated with the Forest Oil deal.

The state more than tripled the bonding requirement meant to cover the cost of eventually dismantling the Osprey platform in the Redoubt unit. Forest Oil paid $3.8 million in bonding back in 2000, but the state said because of modifications made to the platform in the years since, in addition to depreciation and increased operations costs, Pacific Energy would have to pay $12 million in bonding by the start of 2009.

Pacific Energy restructured its financing at the beginning of 2008 to free up money for exploration work, but the major step in financing the project came during the spring and summer, when Pacific Energy sold two onshore prospects in California for $135 million.

The company planned to divide the money between paying down debt, and funding exploration work in Alaska and its remaining California prospects.

Hoping to further reduce its leverage ratio, or the relationship of debt to assets used as a gauge of financial solvency, Pacific Energy said in mid-August it was weighing several options for selling down or farming out some of its Alaska assets and operations.

“It is our intention to farm out a large portion of the project to fund the exploration program,” Pacific Energy President Darren Katic said about the Corsair unit in August.

Redoubt and McArthur River

Pacific Energy hopes all that effort from 2008 will pay off in the coming year.

The company expects to hit the June 30, 2009, deadline for the first Corsair well.

In an exploration plan filed in March, the company proposed to drill PAC No. 1 in the southwest corner of ADL 389196. In that plan, Pacific Energy also proposed two other future well locations, but both sit on the expansion acreage currently under appeal.

Through early next year, Pacific Energy expects to spend around $20 million “to perform the necessary topside work and other drill site preparation to drill two wells” from the Osprey platform at the Redoubt unit, either leasing or possibly buying a rig for the work.

Before work begins on either Osprey or Corsair, though, Pacific Energy could start to see benefits from development work under preparation at McArthur River.

According to Darren Katic, Chevron plans to start development drilling from the Steelhead platform in the McArthur River field in the first quarter of 2009. Pacific Energy owns around 50 percent working interest in several leases at the Cook Inlet field, and many of those leases hold existing platforms.

“Top side improvements continue on all five platforms in preparation for an extensive redevelopment and exploitation program, which will span the next three years,” Katic said in August 2008.






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