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Vol. 19, No. 29 Week of July 20, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

Explorers 2014: Buccaneer undergoing major restructuring in Alaska

The ambitious Australian independent has slashed its portfolio to better finance its remaining operations

Eric Lidji

For Petroleum News

Buccaneer Energy Ltd. has been the most ambitious exploration company in Cook Inlet in recent years, but recently its ambitions have surpassed its economic wherewithal.

The Australian independent relinquished flagship prospects, sold key assets and is currently conducting a financial restructuring to help pay bills and fund future work. This restructuring has included management changes at the top ranks of the company.

Buccaneer was founded in 2006, raised $17 million in an initial public offering in late 2007 and began developing a prospect in the Gulf Coast of Texas in early 2008. Using several loans, the company later acquired other prospects in Texas and Louisiana.

In March 2010, Buccaneer acquired 57,600 gross acres in Cook Inlet and a six-man management team from the Texas-based independent Stellar Oil and Gas LLC. The company cited state tax credits and higher commodity prices for its interest in Alaska.

The deal included at least three prospects: the offshore Southern Cross prospect near Middle Ground Shoal, the offshore Northwest Cook Inlet prospect adjacent to the North Cook Inlet unit and the onshore West Eagle prospect in the southern Kenai Peninsula.

After that, Buccaneer acquired at least four additional Cook Inlet prospects: the onshore West Nicolai Creek prospect on the west side of Cook Inlet, the onshore Kenai Loop prospect near the city of Kenai, the offshore Cosmopolitan prospect off the coast of Anchor Point and deep oil rights at the ConocoPhillips-operated North Cook Inlet unit.

Today, after recent divestments, Buccaneer operates existing gas production at Kenai Loop and continues to permit an offshore oil exploration program at North Cook Inlet.

Starting offshore

Exploring offshore prospects in Cook Inlet generally requires a jack-up rig.

The mobile unit allows for drilling in relatively shallow waters. Jack-ups were once a regular sight in Cook Inlet, but with the construction of permanent offshore drilling platforms and a decline in exploration activities, the basin had been without a jack-up rig for almost two decades by the time Buccaneer arrived, leaving prospects unexplored. A state law around that time hoped to create a “stampede” of exploration to the region by offering large incentives for the first company to drill a well in Cook Inlet using a jack-up.

In mid-2010, as the company was considering ways to get a jack-up rig to Alaska - an expensive and intricate undertaking - Buccaneer applied to form two offshore units.

The Southern Cross unit would include five leases covering 10,109 acres in a region where Buccaneer had 180 miles of 2-D seismic and 51 square miles of 3-D seismic.

In a proposed five-year plan of exploration, Buccaneer said it would provide evidence by Sept. 30, 2011, of its intention to drill an exploration well, and would complete the well by Sept. 30, 2012, or risk losing the unit and two leases nearing their expiration dates.

If it was successful in its initial program, Buccaneer said it would determine the commerciality of the prospect by Sept. 30, 2013, drill a second well or acquire more seismic by Sept. 30, 2014, and start permitting development work by Sept. 30, 2015.

A report from Netherland, Sewell and Associates Inc. in early 2011 estimated that the Southern Cross leases could overlie some 27.4 million barrels of oil equivalent.

The Northwest Cook Inlet unit would include six leases covering 10,008 acres in a region where Buccaneer had some 1,000 miles of 2-D seismic and access to earlier well logs.

The plan of exploration proposed a work schedule and potential penalties at Northwest Cook Inlet identical to Southern Cross, starting with an initial well by Sept. 30, 2012.

A Netherland, Sewell and Associates report from late 2010 estimated that Northwest Cook Inlet contained some 46.7 million barrels of oil equivalent in three intervals.

The state approved the units in early 2011.

The approval decisions split both units into two explorations blocks each.

The Southern Cross ruling required Buccaneer to drill one well to pre-Tertiary depths in Block A by Sept. 30, 2012, and a second well in Block B by Sept. 30, 2014. The Northwest Cook Inlet unit required Buccaneer to drill one well into the Beluga formation in Block A by Sept. 30, 2012, and a second well in Block B by Sept. 30, 2014. If Buccaneer missed any of those deadlines, it would risk losing the units and some acreage.

Buying a jack-up

While other operators such as Escopeta Oil Co. had attempted to lease a jack-up rig for their proposed exploration programs in Cook Inlet, Buccaneer took a different approach.

It started in mid-2010, when Buccaneer asked the Alaska Industrial Development and Export Authority to help finance an offshore drilling program using a short-lived tax-exempt private activity bond created through the 2009 federal stimulus program.

The bond financing fell through, but over the following year the two parties negotiated a deal to buy, upgrade and mobilize a jack-up rig for long-term use in Alaska waters.

Buccaneer created a consortium called Kenai Offshore Ventures LLC to own the rig and a separate subsidiary to operate it. The consortium would make money by leasing the rig to the operating company, which would in turn market it to leaseholders. The deal gave Buccaneer priority on the rig, but made it available to other exploration companies, too.

When Buccaneer started discussing the program, in November 2010, it expected to have the rig in Alaska by May 2011, but the actual program took much longer to enact.

By early 2011, Buccaneer said it hoped to have the rig in Alaska by June, but despite the small delay it still expected to beat the state-imposed drilling deadlines by a year.

The AIDEA board approved the $85 million Project Endeavour in April 2011. The project included $24 million to $30 million in AIDEA funding and $5 million from the partners of Kenai Offshore Ventures, but the bulk would come from a private lender.

The deal required Buccaneer to drill at least four wells using the rig.

A “lengthy and tough negotiation process” continued through the summer and AIDEA changed the schedule to give Buccaneer until mid-2012 to start drilling its initial wells.

By July 2011, Buccaneer said it expected to drill one well each at Southern Cross and Northwest Cook Inlet in 2012 and a second well at each in 2013, before releasing the rig.

The deal finally came together toward the end of the year.

In September 2011, Kenai Offshore Ventures purchased the GSF Adriatic XI jack-up rig from Transocean Offshore Resources Ltd. for $68.5 million and renamed it “Endeavour - The Spirit of Independence.” In November, Kenai Offshore Ventures and AIDEA closed on the deal for the state-back portion of the funding. Kenai Offshore Venture negotiated the remaining project financing with the Oversea-Chinese Banking Corp.

Delays and lawsuits

The next step was getting the rig to Alaska.

After undergoing “substantially” more work than Buccaneer had originally expected, the jack-up rig departed from an Asian shipyard in late July 2012 en route to Cook Inlet.

Those delays started a domino effect.

While Buccaneer felt confident it could meet the September deadline for drilling at Northwest Cook Inlet, it asked the state for an extra year to drill at Southern Cross.

In late August 2012, the rig finally pulled into the Port of Homer, where Buccaneer said it would undergo some “very minor” work before heading north to start drilling wells.

The work took longer than expected, though. The rig stayed at the dock for months.

The state placed the Southern Cross and Northwest Cook Inlet units in default in October 2012, when Buccaneer failed to meet its initial deadlines for drilling. The state gave Buccaneer until Oct. 31, 2013, to cure the defaults by completing one well at each unit.

The reason for those delays became public in December 2012.

First, Kenai Offshore Ventures fired its rig operator Archer Drilling LLC “for cause,” accusing the company of dropping work commitments and failing to pay subcontractors.

Archer responded, saying it had fired Buccaneer - not the other way around. Archer sought some $6 million in damages, saying Kenai Offshore Ventures “undermined and underfunded” the project. Buccaneer then sought $30 million in damages from Archer.

The result of the dispute - aside from lawsuits - was that the parties parted ways and Kenai Offshore Ventures hired Spartan Drilling LLC to take over as the rig operator.

The end of the road

After completing work at a different Buccaneer prospect in Cook Inlet, the Endeavour jack-up rig arrived at the Southern Cross unit in late August or early September 2013.

The original drilling location proved untenable, though.

Buccaneer had already installed a 30-inch diverter and well-control equipment on the conductor pipe when it noticed some settling of the rig legs on the seabed. The “scouring” was apparently the result of strong currents, common to shallow drilling.

Buccaneer moved the rig some 450 feet to the southeast, but by early October the company realized it wouldn’t be able to drill by the traditional seasonal deadline - usually the end of October - and cancelled its offshore program for the rest of the year.

The cancellation meant that Buccaneer risked losing the two defaulted units.

Buccaneer blamed its failure to cure the defaults on justifiable delays. The discovery of oil and gas at the Cosmopolitan prospect had required extra time on the rig to conduct flow tests. A complicated farm-out deal had also caused delays, as had the “scouring.”

The delays at Southern Cross had of course made Northwest Cook Inlet drilling impossible. Having spent some $14 million on the units, Buccaneer believed it had made “good faith, diligent efforts” to meet its commitments and should be allowed to keep the units. Ultimately, though, Buccaneer voluntarily relinquished both units in early 2014.

Acquiring Kenai Loop

To help generate cash flow while it pursued those larger offshore projects, Buccaneer began expanding its holdings in the northern Kenai Peninsula over the course of 2010.

The initial acquisition of Stellar assets had included some leases in the so-called North Sterling prospect. Buccaneer later expanded its holdings in this area by leasing acreage from the Alaska Mental Health Trust Land Office and from Cook Inlet Region Inc.

By late 2010, Buccaneer was permitting a three-well program at what it was now calling the Kenai Loop field. The program envisioned drilling an initial well by early 2011.

Buccaneer drilled the 10,680-foot Kenai Loop No. 1 well in April 2011 using the truck-mounted Glacier No. 1 drilling rig. The well tested at 10 million cubic feet per day, which led Buccaneer to launch a development program and permit additional wells.

Various supply contracts

In mid-2011, Buccaneer signed a contract with Enstar Natural Gas Co. to sell 5 million cubic feet per day into the new Cook Inlet Natural Gas Storage Alaska LLC facility, for a total of 12 billion cubic feet. The deal allowed for increased deliveries up to 31.5 bcf.

In late 2011, Buccaneer signed a separate deal with ConocoPhillips. The deal allowed Buccaneer to sell supplies into the aging Kenai liquefied natural gas facility in the months between the start of Kenai Loop production and the launch of the CINGSA facility.

To keep its options open, Buccaneer extended the terms of the ConocoPhillips contract even after it began making regular deliveries to the CINGSA facility in April 2012.

In October 2012, Buccaneer opened the choke on the Kenai Loop No. 1 well to increase production by 1 mmcf per day - to 6 mmcf per day total - to meet a two-month contract with an unnamed third party in the Cook Inlet. Buccaneer increased production to 6.5 mmcf per day in December to accommodate a one-month third-party contract.

After the Kenai Loop No. 4 well came online, Buccaneer and Enstar signed a second deal providing up to 5 mmcf per day through the summer months, when demand shrinks. The two parties signed a third deal in early 2013 to provide supplies into the winter months.

Buccaneer signed two more short-term gas supply agreements in October 2013, one to deliver up to 2 mmcf per day to an unnamed “large commercial end-user” for five months, and the other to provide back-up fuel to an un-named Cook Inlet oil producer “to ensure operation of their oil facilities in the Cook Inlet” during the winter.

The deals highlighted the trouble a smaller producer can face in the Cook Inlet.

Over its short tenure in Alaska thus far, Buccaneer has often claimed that the Cook Inlet natural gas shortage has been solved and that the state must promote programs to expand Cook Inlet supplies into other markets, such as exports and local transportation use.

“We need growth in the market to really allow that additional activity to move forward,” former Buccaneer Alaska President and COO Jim Watt said in September 2013. “Just meeting local demand should not be the goal of development for our industry.”

Buccaneer also joined several small producers in challenging a proposed contract between Enstar and Hilcorp Alaska LLC. The producers worried that the contract would shut them out of the market. “Hilcorp has effectively locked up the utility market,” Buccaneer Vice President of Land and Business Development Mark Landt wrote to the Regulatory Commission of Alaska, “so the RCA and Enstar should not be surprised when the remaining independent producers either choose alternative markets for their gas, seek to provide direct sales to Enstar’s customers or not fund drilling programs targeting natural gas.” Those “alternative markets” could include exports, Landt added.

Kenai Loop development

The Enstar deal required Buccaneer to drill two Kenai Loop wells by November 2013.

Buccaneer drilled the 11,000-foot Kenai Loop No. 3 well - which, despite its name, was actually the second well in the program - in September 2011, but it was a dry hole.

The Kenai Loop field came online in January 2012.

The following month Buccaneer shot a 25-square-mile 3-D seismic campaign to improve its understanding of the field. The program yielded a U.S. Army Corps of Engineers violation when the contractor disposed of shot hole material before getting the necessary Clean Water Act permit, which both shrunk and delayed the program to some degree.

Around the same time, some of the companies Buccaneer had contracted to complete work at Kenai Loop began complaining to local officials about delinquent payment and NANA Construction even filed a $5.1 million lien against Buccaneer for unpaid bills.

In April and May 2012, Buccaneer announced $50 million in financing - a $20 million loan and a $30 million revolving credit facility - that allowed it to pay outstanding bills.

The financing also allowed Buccaneer to secure a three-year lease of the Glacier rig.

With the seismic completed, the rig contracted and the outstanding bills starting to get under control, Buccaneer began planning a third Kenai Loop well - Kenai Loop No. 4.

“The fault previously thought to have separated the Kenai Loop No. 1 and Kenai Loop No. 3 well but which could not be identified on the 1970’s 2-D seismic used to locate that well, is now clearly visible on the new 3-D seismic and has been confirmed as the basis for the unsuccessful Kenai Loop No. 3 well,” the company said in a July 2012 statement.

Buccaneer drilled the Kenai Loop No. 4 well in September 2012, targeting a bottom-hole location slightly deeper and further to the northwest than Kenai Loop No. 1. “Severe weather conditions” delayed the drilling and completion to some degree, but tested at 3 mmcf per day in January 2013 and came online at 2 mmcf per day in February.

Kenai Loop controversy

Over the latter half of 2012, Buccaneer asked the state to form a Kenai Loop unit.

The state rejected the application in March 2013, saying the purpose of the request appeared to be “lease extension and not the efficient development of the unit area.”

The decision also revealed that CIRI had terminated its Kenai Loop lease in January.

In August 2013, Buccaneer spud the Kenai Loop 1-4 well - having renamed its wells by their pad locations - targeting what it said “appears to be a fault separated from the current producing zones in the Kenai Loop No. 1-1 and Kenai Loop No. 1-3 wells,” which had previously been known as the Kenai Loop No. 1 and Kenai Loop No. 4 wells.

The well tested at a rate of 5.9 mmcf per day in October 2013.

The well, though, soon became tangled in a legal dispute.

When Buccaneer applied for an Alaska Oil and Gas Conservation Commission spacing exemption, several parties protested. CIRI and the state of Alaska accused Buccaneer of illegally draining gas from their neighboring properties. The dispute also involves the Mental Health Trust, which owns the land on which Buccaneer has been producing its gas. The battle continues to play out at the AOGCC and the Alaska Superior Court.

Pursuing Cosmopolitan

The initial prospects Buccaneer acquired from Stellar would have been enough to keep it busy for years, but Buccaneer continued to grab opportunities as they became available.

In February 2012, Buccaneer and a subsidiary of the privately held BlueCrest Energy Inc. acquired the Cosmopolitan prospects from Pioneer Natural Resources Alaska Inc.

The deal made Buccaneer the operator and 25 percent working interest owner of the oil and gas prospect off the coast of Anchor Point. The Fort Worth-based BlueCrest held the remaining 75 percent. Cosmopolitan had previously been a unit, but Pioneer terminated the unit and relinquished all but two core leases - ADL 384403 and ADL 18790.

Pennzoil discovered the prospect in 1967, but never developed it. ConocoPhillips took another stab in the early 2000s. Toward the middle of the decade, Pioneer joined the project as a partner before taking over as operator. Pioneer conducted some exploration activities and launched an innovative pilot project before giving up on the prospect.

All those recent activities used directional drilling from an onshore pad, and Buccaneer believed it would have greater success at the prospect by using its jack-up rig to drill offshore. “As a more advanced project with an existing well and some infrastructure already in place, Cosmo provides nearer term oil and gas production potential than our two other Cook Inlet offshore projects, which will still be developed in parallel,” Buccaneer Director Dean Gallegos said in a statement at the time of the acquisition.

Originally, Buccaneer envisioned an exploration campaign using the rig to target shallower natural gas deposits and directional drilling to target deeper oil deposits.

The prospect would also allow Buccaneer to make more efficient use of its jack-up rig, according to the company, because it could drill at Cosmopolitan later in the year. While Southern Cross and Northwest Cook Inlet would become impassible by late October, the more southerly Cosmopolitan prospect could be explored much later into the winter.

Toward the end of 2012, Buccaneer began permitting a two-well program that called for drilling Cosmopolitan No. 1 by early February 2013 and Cosmopolitan No. 2 by April.

The rig remained in Homer through the first quarter of 2013, as upgrades and inspections continued. Buccaneer made progress on its permitting efforts, particularly its spill plan.

Buccaneer finally spud the Cosmopolitan No. 1 well in May 2013, but asked the state for nearly three extra years - until April 2016 - to complete the full two-well program.

The well encountered oil and condensate at 5,600 feet, in the Lower Tyonek, much shallower than expected, which caused Buccaneer to rethink its strategy. Buccaneer drilled the well to 7,599 feet, some 400 feet shallower than it had originally intended.

A pair of flow tests of the natural gas potential produced peak rates 7.2 mmcf and 7.3 mmcf per day from the Tyonek - and an “absolute open flow potential” test of 16 mmcf per day - but technical restraints prevented an oil flow test.

After failing to drill at Southern Cross and Northwest Cook Inlet, Buccaneer started work on a Cosmopolitan No. 2 well to delineate the gas-bearing zones from the first well, but Buccaneer ultimately sold its stake in the prospect before beginning work on the well.

North Cook Inlet oil

Eager for additional Cook Inlet prospects for its jack-up rig, Buccaneer farmed-in the deep oil rights of the ConocoPhillips-operated North Cook Inlet unit in May 2013.

The deal required Buccaneer to drill one well by the end of 2014 and a second well by the end of 2015. North Cook Inlet is a legacy gas field thought to contain deeper oil deposits.

A June 2013 report from Netherland, Sewell & Associates estimated that the deep oil deposits at North Cook Inlet unit contain some 9.8 million oil equivalent barrels in proven reserves. Buccaneer hopes to begin drilling at the offshore field in mid-2014.

The unit is now the only offshore prospect remaining in the Buccaneer portfolio. The company recently revised its request for a federal incidental harassment authorization to focus on the Tyonek Deep No. 1 and Tyonek Deep No. 2 wells at North Cook Inlet.

Disappointment at West Eagle

The southern Kenai Peninsula presented a puzzle when Buccaneer arrived.

The cluster of communities around the city of Homer represented the most-populated area of the Southcentral region without access to natural gas for space heating. While people in Anchorage, the Mat-Su and Kenai had enjoyed low-cost gas for decades, people in Homer, Kachemak City and Anchor Point were forced to rely on heating oil.

To make matters worse, the region contained several known gas prospects, but various companies had either been unable or unwilling to develop those prospects over the years. The general belief was that developing any one of those prospects would improve the commerciality of all the others, but no company could make the case for going first.

By mid-2010, Buccaneer was talking about shooting a 2-D seismic survey over its West Eagle leases in the fall in preparation for an exploration well in late 2011. The company spoke of the potential for a 12-well development program somewhere down the line.

Buccaneer acquired and reprocessed some 233 square miles of 2-D seismic over the region in 2011 and in early 2012 discussed its desire to shoot 3-D seismic, but the program continued to take a backseat to other prospects in the Buccaneer portfolio.

By October 2012, Buccaneer said it was “poised to drill,” but wanted the state to form a unit over its leases in the region that were nearing expiration. “It simply makes no commercial sense to drill the proposed well, prove up the resource, and then watch the surrounding acreage that overlies the prospect expire,” Buccaneer said in its application.

While Buccaneer had originally requested a 46,395-acre unit over nine leases, the state ultimately approved an 8,843-acre unit over three leases, allowing the others to expire.

The unit approval required Buccaneer to post two $600,000 bonds to backstop work commitments. The state agreed to return the first bond if Buccaneer spud a well by September 2013 and return the second if Buccaneer completed a well by the same date.

Buccaneer initially intended to drill the West Eagle No. 1 well in late August, but delays kept the company from meeting its deadlines and the state put the unit into default. The cure the default, Buccaneer needed to spud by Dec. 1 and complete the well by Jan. 31.

Ultimately, Buccaneer missed both deadlines. The company started the well in late January and completed it in February. Adding insult to injury, West Eagle No. 1 proved to be a dry hole and Buccaneer suspended the well without testing deeper formations.

Commercial restructuring

Signs of financial strain increased throughout 2013.

In April 2013, as Buccaneer juggled three offshore projects and two onshore projects with only minimal revenue, the company hired a financial advisor to pursue alternatives.

“Everything’s on the table, including farm-ins, investments at the company level, a dual listing on a North American stock exchange or possibly a change of control transaction,” Buccaneer Director Dean Gallegos recently told the Wall Street Journal about the review.

The news came around the time two institutional shareholders - Pacific Hill International Ltd. and Harbour Sun Enterprises Ltd. - called for shareholder meeting to decide whether to replace the entire Buccaneer board of directors. The two shareholders believed Buccaneer had “lost its way,” citing a growing portfolio and funding problems.

The July 2013 meeting yielded interesting results.

The shareholders elected three outside directors while retaining two of the four existing directors. A subsequent appointment made the board evenly split between the two sides.

Asked whether Buccaneer was unfocused, then CEO Curtis Burton said, “We’ve painted a big vision from the day we (made our Initial Public Offering), and we’ve said we can achieve big results, but we’ve tried to do that systemically.” The only thing Buccaneer had misjudged, according to Burton, was how the market would respond to its activities.

Soon after the shake-up, Buccaneer announced a deal: the California-based independent EOS Petro Inc. would fund two wells each at West Eagle, Southern Cross and the deep oil deposits at North Cook Inlet in return for a 50 percent stake in the prospects. The deal also included an opportunity to extend the farm out to include Northwest Cook Inlet.

The farm-out deal closed in September, but Buccaneer later terminated the deal because of “amongst other things, failure by EOS to fund its obligations under the agreement.”

In August 2013, the three new directors resigned from the board without explanation. The Australian Stock Exchange suspended trading of Buccaneer stock for two days because the company didn’t have enough board members to satisfy Australian corporation law.

Buccaneer filled the vacancies, but the shakeup continued. In December, Buccaneer fired the president and vice president of exploration and development of its Alaska subsidiary.

To streamline its operations and ease its financial burden, Buccaneer went on a selling spree in January 2014. The company sold its stake in the Cosmopolitan field to partner BlueCrest Energy Inc. for $41.25 million; sold its equity stake in Kenai Offshore Ventures LLC to Teras Investments Pte. Ltd. - a subsidiary of partner Ezion Holdings Ltd. - for $23.95 million; and pursed some $116.3 million in financial instruments.

Even with the restructuring, Buccaneer said it “will need to have access to additional working capital in the short term” to pay debts and obligations, and fund its workload.

In March, Buccaneer suspended Burton with pay “allowing for a review to be conducted,” and, after completing the review, “determined that cause exists for terminating Mr. Burton’s employment agreement.” After being suspended, Burton sued the company for breach of contract, but he later also resigned as chief executive officer and managing director. A Texas court recently required to the parties to enter arbitration.

In an open letter to shareholders on May 7, Burton claimed that he and his management team had submitted a plan to the board of directors and to lenders back in January that had aimed “to revitalize the stock and pay off the company debt,” but that new board members had “elected to pursue a different course and removed me from the CEO position. Since that time they have pursued liquidation of assets as an alternative. Since those decisions were made I have not been in a position to alter the course of the company nor contribute in any meaningful way to the ultimate fate of the organization.”

In response, Buccaneer said it “does not authorize this communication in any way.”

As of May 2014, Buccaneer said it intended to continue working with its Chief Restructuring Officer John T. Young Jr., of Conway Mackenzie Inc., to determine how best to restructure the company to meet its financial commitments going forward.

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