Turn on the Kitchen Lights? Escopeta asks for unit expansion

Escopeta Oil is asking the state to expand the boundaries of the Kitchen unit to include a neighboring unit and several un-unitized leases in the waters of Upper Cook Inlet.

If the state accepts the proposal, Kitchen would grow to cover the existing Corsair unit, four leases around Corsair and the leases of the proposed Northern Lights unit. At 83,394 acres, the expanded unit, to be called Kitchen Lights, would be the largest in Cook Inlet.

Escopeta, a Houston-based independent oil company, recently signed farm-in agreements with several other independents holding offshore acreage in Upper Cook Inlet.

Pacific Energy Resources Ltd. gave Escopeta 100 percent working and royalty interest in Corsair and its surrounding acreage. Under the agreement, Pacific Energy is entitled to 20 percent of the earnings if Escopeta sells or transfers the acreage to a third party.

Renaissance Alaska and its minority partner Rutter and Wilbanks gave Escopeta 100 percent working interest in the leases at the proposed Northern Lights unit, but each company kept a small overriding royalty interest on the leases totaling around 3.5 percent.

Trying to find compromise

Because the prospects all sit on a single geologic formation, and all require a specialized mobile rig unit, called a jack-up, the state offered to combine the leases into one unit, telling the companies to choose an operator and prepare to drill a well by summer.

The state gave the companies until March 1 to agree to the proposal. At the time, the companies suggested they couldn’t meet summer deadlines, and in fact an exploration plan proposed by Escopeta doesn’t meet the deadlines set out by the state proposal.

Escopeta met with staff from the Division of Oil and Gas on Feb. 25 to discuss its proposal. The two sides are trying to reach a compromise over the next two weeks.

Deadlines and extensions have been the crux of the debate so far. The state put Corsair and Kitchen into default last year for failure to meet work commitment deadlines, and refused to extend the expiration date of many leases in the area for the same reason.

“This conversation is all about performance. It’s all about doing what you promised to do,” said Alan Dennis, with the state Division of Oil and Gas, who added that the state and Escopeta still have room and time to find “some common ground.”

The argument is about the best way to ensure state lands come into production. The state says that happens by strictly upholding the work commitments and taking back expired leases. Escopeta believes it is further along than previous attempts to develop the region, but needs more time to actually drill, and says declining regional supplies add urgency.

Escopeta President Danny Davis said the meeting went well and he is confident his company can reach an agreement with the state in the next two weeks. He said forming the new unit would make it easier for him to get investors and partners to join the project.

“You can’t ask people to move a rig up there unless we get something solid,” Davis said.

In a five-year plan of exploration, listed in state filings as a “working draft,” Escopeta outlined a program to spend this year permitting, and have a rig headed to Alaska by June 30, 2010, to drill a well in the expanded unit by the end of that year. Escopeta also gave a timeline for drilling additional wells across the expanded unit each year through 2013.

The 16,000-foot wells would penetrate all four geologic formations coursing beneath the region, the Sterling and Beluga gas sands and the deeper Tyonek and Hemlock oil sands.

While Escopeta seems geared toward exploring for oil, the company said it might target natural gas prospects first to help stave off supply shortages projected for the region.

All three of the prospects sit along a thin geologic trend running some 24 miles from northeast to southwest beneath the shallow waters of Upper Cook Inlet. Through its farm-in agreements, Escopeta picked up geologic information about the entire area.

Escopeta believes Kitchen Lights is the Holy Grail of Cook Inlet, the “missing giant” predicted by a 2004 U.S. Department of Energy report. If Escopeta is right and if it can bring the region into production, a goal that has eluded companies for years, it would come as utilities in the Southcentral region around Anchorage scramble for new supplies.

Shell and ARCO once drilled in what is now Corsair. Northern Lights used to be called Tyonek Deep and Sunfish when ARCO and Phillips attempted to develop it in the 1990s.

Escopeta came close to exploring Kitchen back in 2006, contracting a jack-up rig and becoming the first independent to get a federal waiver of the Jones Act, the federal law requiring ships docking at U.S. ports to be registered and built in the country.

But the jack-up rig deal fell through. Pacific Energy secured a jack-up last April, and later signed a contract for a “heavy lift vessel,” a ship capable of carrying the giant rig around the tip of South America. The contract only became effective, though, if the state extended the deadlines on 30 leases in the region. The state didn’t approve the contract.

If the state ultimately accepts the proposal to expand the Kitchen unit, Escopeta suggested that Pacific Energy could drop several appeals pending against the state.

In December 2008, Pacific Energy appealed the Division of Oil and Gas decision not to approve the heavy lift vessel contract, a prerequisite for keeping Corsair out of default.

In January, Pacific Energy appealed a Department of Natural Resources decision not to expand the Corsair unit boundaries to include four adjacent leases, upholding a previous decision from the division. That appeal is before the state Superior Court.

—Eric Lidji