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AIDEA revises jack-up agreement Changes aim to give AIDEA more assurances that it won’t lose investment if Buccaneer and Ezion default, could delay drilling Eric Lidji For Petroleum News
The Alaska Industrial Development and Export Authority approved changes to its agreement to purchase a jack-up drilling rig on May 25 that aim to make the public-private project less risky, but will likely delay exploration activities for one year.
The board of the public corporation of the State of Alaska approved the changes unanimously after an hour of public deliberations and another half hour in executive session. In particular, board members wanted to know whether the imminent arrival of another jack-up rig in Cook Inlet impacted the project or made it unnecessary and whether the private partner would be able to raise money for a drilling program.
AIDEA is looking to contribute up to $30 million toward the cost of a jack-up rig, a mobile drilling unit designed for relatively shallow offshore areas, like Cook Inlet.
AIDEA is partnering on the project with Kenai Offshore Ventures LLC, a joint venture between Australian independent Buccaneer Energy Ltd. and the marine company Singapore-based Ezion Holdings Ltd. Using newly granted statutory authority, AIDEA might join that LLC.
The AIDEA board previously approved an agreement with KOV on April 1, allowing staff to execute the deal once the companies in KOV complete a long to-do list.
The primary change to the agreement involves a lien on Buccaneer’s worldwide holdings that AIDEA could use to recoup its investment if the project fell apart in the future.
That lien appeared in the agreement the board approved in April, but AIDEA staff later decided the security on the collateral wasn’t “sufficient,” according to Mark Gardiner of Western Financial Group, the team negotiating the deal for AIDEA, and spent a month renegotiating those details with Buccaneer and Ezion. Gardiner said the revised agreement “represents an improved legal security and financial position for AIDEA.”
Aiming to close June 30 Even with the vote, AIDEA is not yet on the hook for $30 million.
Once AIDEA and KOV sign the agreement, Buccaneer and Ezion must meet 15 conditions before AIDEA cuts its first check. Those include contributing $5 million of their own capital to the project, securing the remaining $50 million needed to fund the purchase of the rig, executing a contract to buy a jack-up rig — likely the Adriatic XI — from Transocean Ltd. and signing contracts to upgrade that rig for use in Alaska.
“We still have a lot to do to get to that point,” Gardiner said, estimating that the deal would close around June 30. If the partners close the deal earlier than that, Gardiner said there remains a slight chance the drilling program could still continue this year.
While the companies are far along on most of the conditions, with AIDEA in some cases already reviewing final documents, none have been finalized, as of yet, Gardiner said.
Asked by board member Gary Wilken if any of the conditions concerned AIDEA, Gardiner pointed to one that required KOV to prove it could pay for a four-well program that is the foundation of the business case for bringing a jack-up rig to Alaska.
“We’ve become more comfortable that the capability is there,” Gardiner said, saying the exploration tax credits offered by ACES make the investment increasingly attractive.
Concerns about workout As AIDEA and KOV move toward closing on a deal, Houston independent Escopeta Oil is close to having its own jack-up rig in place in the inlet. (See related story on page 1).
Because AIDEA and KOV plan to lease the rig out to other operators across Alaska once Buccaneer drills its four wells in Cook Inlet, board member Robert Sheldon asked, “What confidence do we have that there is enough business for both of these rigs?”
Gardiner replied, “Our business premise here is based on Buccaneer drilling their wells, not necessarily on additional business from other parties using the rig.”
He added that both Ezion and OCBC Bank, the Asian financial institution being asked to fund the remaining $50 million needed to purchase the rig after AIDEA’s investment, knew about the possibility of having two rigs in the inlet before entering negotiations, and that having multiple rigs would allow more Alaska waters to be explored faster.
The deal is designed so that if Buccaneer should default, AIDEA would assume an overriding royalty interest on a small percentage of Buccaneer’s properties, allowing AIDEA to recoup its investment as those properties are sold, explored and developed.
Chair Hugh Short worried that AIDEA could lose money, even with that mechanism.
“I’ve been involved in a number of workouts and no one ever wins in a workout. A workout is a pain,” Short said, describing the process of recovering the investment in the case of default as “Healy clean coal light. Very light, but it’s still a mess to clean up.”
An AIDEA lawyer said the various collateral provisions — ranging from the overriding interest on Buccaneer properties, to claims to any ACES tax credits as they come in, to the right to buy the OCBC loan — “give us a real chance of being made whole.”
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