The Alaska Industrial Development and Export Authority could be close to investing up to $30 million to buy a jack-up rig for use in Cook Inlet as soon as this summer.
The public corporation of the State of Alaska posted details of the proposed deal on its website on March 30 in advance of an April 1 board meeting, after Petroleum News went to print.
If the board approves the resolution, it would set the stage for a new public-private partnership in Alaska, but would not automatically commit AIDEA to spend the money.
The deal as written would let AIDEA enter into an agreement with Kenai Offshore Ventures, Buccaneer Energy and Ezion Holdings to jointly own a jack-up rig.
Buccaneer, an Australian independent with onshore and offshore leases across the Cook Inlet basin, created Kenai Offshore Ventures last year to operate a proposed offshore drilling program across Alaska. Ezion Holdings is a marine transportation company.
Under the deal, Buccaneer and Ezion would contribute at least $5 million in return for a stake in KOV. Ezion would also loan KOV about $3.3 million, or enough money to fund three months of debt service on the additional loans needed to fund program. With the entire program estimated to cost between $80 million and $90 million, the companies could be looking to borrow as much as $55 million on top of AIDEA funding.
The proposed agreement requires that AIDEA is repaid with interest within six years and “establishes other conditions to protect (AIDEA’s) investments and interest in the rig.”
Buccaneer would also commit to drill four wells in Cook Inlet with the rig. The company operates two offshore units in Alaska — Southern Cross and North West Cook Inlet.
Buccaneer has said it plans to lease the rig for use in both Cook Inlet and the Arctic Outer Continental Shelf. The proposed agreement requires Buccaneer to keep the rig in Alaska “except only for a period of one year upon the prior written approval” of AIDEA.
The proposed agreement also requires the parties to choose a contractor to upgrade a rig docked in Singapore, a carrier to bring the rig to Cook Inlet, an asset manager and an operator, and to have a drilling program completely permitted by Aug. 31, 2011.
AIDEA began performing due diligence on the project last November and began crafting a business plan and various other financial documents and agreements in February.
If the AIDEA board approves the deal, Buccaneer said it expects the parties to execute the joint operating agreement some time during the first week in April.
Escopeta doesn’t want state-backed competitorIf AIDEA approves the resolution, it could mean two jack-up rigs in Cook Inlet after nearly two decades of companies failing to get one mobile drilling unit to Alaska waters.
Escopeta Oil began shipping the Spartan 151 jack-up rig from the Gulf of Mexico to Alaska on March 18 and hopes to start drilling its offshore Kitchen Lights unit this May.
The rig must travel around South America to get to Cook Inlet.
Like Buccaneer, Escopeta has said it would make its rig available to other operators.
Speaking before the Alaska Support Industry Alliance on March 24, Escopeta contractor Steve Sutherlin said the company still needs verification that its 2006 Jones Act waiver — allowing a foreign flagged vessel to move between domestic ports — will be “honored” by U.S. Customs and Border Protection. He noted that Sen. Mark Begich has “taken the ball and run with it” to get a prompt answer from federal authorities.
Sutherlin told Petroleum News that a negative response wouldn’t keep the rig out of the Cook Inlet, but it might mean Escopeta would be fined by CBP, as happened in the past when a previous operator brought a jack-up into Cook Inlet without the waiver.
Sutherlin is a former Petroleum News writer and minority owner in the company.
“Escopeta does not mind competing with private industry,” he said, but draws the line at competing with the State of Alaska.
“Industrial development authorities at their best sometime retard private investment by creating uncertainty in the marketplace. I can’t prove it, and I can’t actually document what it’s cost us to have the specter of competing with the State of Alaska out there, but it’s put us under a certain amount of pressure in terms of our commercial negotiations,” Sutherlin said.
Escopeta’s current effort to bring a jack-up rig to Alaska comes after previous failed attempts and missed deadlines. The principals behind Buccaneer Alaska also tried unsuccessfully to bring a jack-up rig to Alaska during tenures with other companies.
A jack-up rig is needed to drill in several underexplored offshore oil and gas prospects in Cook Inlet, including four belonging to Escopeta at Kitchen Lights, two belonging to Buccaneer at Southern Cross and North West Cook Inlet and one in the Cosmopolitan prospect, which is up for sale.
Dyson introduces bill that would aid BuccaneerThe mobile unit is designed to drill in the relatively shallow waters of Cook Inlet. In addition to competing for customers, Escopeta and Buccaneer are competing for funds.
Hoping to kick-start investment, the Alaska Legislature passed Senate Bill 309 last year, creating a tax credit that covers 100 percent of the cost, up to $25 million, of the first well drilled to a certain depth in Cook Inlet using a jack-up rig. The one-time program also offers significant tax credits for the second and third wells drilled to the same depth, but only if three different companies all use the same jack-up rig drill to the three wells.
With two jack-ups now possibly headed for Alaska, Sen. Fred Dyson recently introduced Senate Bill 112, which would allow the second jack-up to be eligible for credits.
Escopeta, whose rig is scheduled to arrive first — doesn’t support the new bill.
“It dilutes the incentives in SB 309 to bring a jack-up to Cook Inlet,” Sutherlin told Petroleum News on March 31.
“Legislators recognized the costs of mobilization and demobilization when they passed SB 309 last year, and that’s why they designed the incentives to be used by the same jack-up rig. The financial reality is, there isn’t room for two jack-ups right now, but the involvement of AIDEA suspends economic reality,” he said.
“To paraphrase the words of the former executive director of AIDEA, Ron Miller, ‘there is a difference between vision and hallucination.’”