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Vol. 15, No. 17 Week of April 25, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Jack-ups headed north

Alaska’s Chukchi, Cook Inlet getting jack-ups, Apache looking at Cook Inlet

Kay Cashman

Petroleum News

In the process of tracking down companies likely to take advantage of the State of Alaska’s new legislation to help cover the cost of bringing a jack-up rig to Cook Inlet, two unreported pieces of news emerged: ConocoPhillips has decided to use a jack-up for its Chukchi drilling and Apache Corp. is considering entering Cook Inlet as a new operator.

Apache’s interest in Alaska likely arose before two separate pro-development Cook Inlet bills passed the state Legislature in mid-April, Senate Bill 309 and House Bill 280 (see Wesley Loy’s article about HB 280 on this page).

The Houston-based independent is on a big acquisition binge, and although Apache’s director of public affairs, Bill Mintz, would not confirm what Petroleum News’ sources say is a strong interest in buying up oil and gas acreage in Cook Inlet, he did say “Apache representatives are attending a conference sponsored by the state government (in Anchorage). Apache is a global company and we look for opportunities in many places.”

Mintz was referring to technical sessions about the geology of the North Slope and Cook Inlet, but Petroleum News sources said Apache’s meetings with state and oil company officials went far beyond the scope of the technical sessions.

ConocoPhillips, a major Cook Inlet producer, does not hold majority interest in any offshore inlet prospects that cannot be drilled from an existing platform, but when asked if the company had decided to use a jack-up for its Chukchi exploration drilling, ConocoPhillips Alaska spokeswoman Natalie Lowman said, “Yes, right now we are planning to use a jack-up rig for drilling a well in 2012.”

When asked if the company would consider bringing a jack-up in early for Cook Inlet drilling, she declined to comment.

PRA’s Van Dyke provides preliminary review of SB 309

SB 309, authored by Sen. Lesil McGuire, R-Anchorage, and not yet signed by Alaska Gov. Sea Parnell, “addresses corporate income tax credits, interest on retroactive adjustments, Cook Inlet tax credits and one item on statewide tax credits,” per a preliminary review of the legislation by former state Division of Oil and Gas Director Bill Van Dyke, who currently is a member of PRA’s professional staff in Anchorage. The sections of the bill that deal with reimbursement on a jack-up rig were written by Sen. Tom Wagoner, R-Kenai, who predicted the incentives for deep level exploration of Cook Inlet would trigger a stampede to bring a jack-up into the area.

In Van Dyke’s draft evaluation he did not predict a stampede, but he did say sections 9 and 10 “create a big new Cook Inlet tax credit related to drilling offshore with a jack-up rig. The first three new wells drilled to the pre-Tertiary formation and drilled by three different companies get tax credits ranging from 80 to 100 percent.”

A maximum credit of $25 million is allowed for the first new jack-up, pre Tertiary well. “Once production starts from the reservoir, 50 percent of the credit must be paid back by the explorer (even if the explorer no longer owns the leases) if the well turns out to be a producer. No repayment required for a dry hole,” Van Dyke said.

Further, an explorer cannot claim any other tax credits if it files for the provisions in section 9 and 10, Van Dyke said.

Same jack-up must be used to drill all three wells

A press release from McGuire and Wagoner following SB 309’s passage by the Legislature said the first explorer would be credited 100 percent of costs, or up to $25 million; the second 90 percent, or up to $22.5 million; the third 80 percent, or up to $20 million.

In each case, per language in the bill, the same jack-up must be used to drill all three wells.

Escopeta at the top of the list

Some of the larger known oil and gas prospects in the Cook Inlet basin lie under the waters of Cook Inlet, in a geologic trend that extends southwest from ConocoPhillips’ venerable North Cook Inlet offshore gas field.

The prospects are Northern Lights, Corsair, Kitchen and East Kitchen.

Northern Lights lies in a down dip extension of the undeveloped Sunfish oil discovery underneath the North Cook Inlet field. Corsair, in the middle of Cook Inlet to the southwest of Northern Lights, consists of a large NNE-SSW trending anticline with both gas and oil possibilities in multiple horizons. Kitchen lies along the same structural trend, southwest of Corsair. East Kitchen lies in an anticline about six miles northeast of Port Nikiski.

The only one of these prospects that has ever been drilled is Corsair, where Shell, Phillips and ARCO drilled a total of five exploration wells between 1962 and 1993. The wells all had gas shows and some also tested small quantities of oil.

For several years, and continuing to today, Houston-based independent Escopeta Oil, under Danny Davis, its president, has been championing the cause of using a jack-up rig to drill exploration wells in Cook Inlet. Escopeta has particularly focused on the Kitchen prospect, where it holds state leases. Davis thinks that there might be 7.5 trillion cubic feet of natural gas and 1.7 billion barrels of oil in the prospect.

In early 2006 Escopeta secured the use of a jack-up rig and subsequently obtained an unprecedented waiver to the Jones Act to enable the company to bring the rig to the Cook Inlet from the Gulf of Mexico on a foreign flagged vessel. The company subsequently ran into problems getting the rig north and postponed its drilling plans.

Subsequently California-based Pacific Energy Resources, having obtained the Corsair unit as part of its purchase of Forest Oil’s Cook Inlet properties in 2007, determined that it would try to bring a jack-up to the inlet for the open-water season of 2008, to conduct a drilling program in conjunction with Escopeta and Renaissance Alaska, the company that by this time had become operator of the leases at Northern Lights.

In May 2008, Renaissance began permitting four exploration wells on its offshore leases in Cook Inlet, one at North Middle Ground Shoal in Trading Bay and three surrounding the ConocoPhillips-operated North Cook Inlet unit east of the village of Tyonek. Those latter three wells would have delineated the Northern Lights prospect.

But all came to naught.

Pacific Energy did not succeed in bringing the jack-up to the inlet. In March 2009 the company filed for bankruptcy and by the summer of 2009 was disposing of its Cook Inlet assets through a Delaware bankruptcy court.

Meantime, frustrated by the lack of progress toward offshore drilling but anxious to encourage exploration of the offshore prospects, Alaska’s Division of Oil and Gas was engineering a deal in which existing units and leases at Northern Lights, Corsair and Kitchen would be combined into an expanded single unit called “Kitchen Lights,” with Escopeta as operator. Escopeta had farmed in Corsair from Pacific Energy, and Northern Lights from Renaissance and Rutter and Wilbanks.

Under the Kitchen Lights plan of exploration, Escopeta must have a jack-up rig en route to Cook Inlet by June 20 of this year, with a Kitchen or East Kitchen well spud by the end of the year. Further wells are required in subsequent years.

Renaissance also held some 10,000 acres in state Cook Inlet offshore leases that covered the company’s North Middle Ground Shoal and Northwest Cook Inlet prospects, as well as nearly 50,000 acres on the Kenai Peninsula. The plan was to drill the offshore prospects if Escopeta brought a jack-up rig to Cook Inlet, Renaissance told Petroleum News Oct. 6.

Renaissance has since sold its Cook Inlet basin leases to Stellar Oil & Gas, owned by Renaissance executives. In late March, Stellar sold that acreage to Sydney, Australia-based Buccaneer Resources.

Buccaneer in the running

Buccaneer immediately began touting two of its Cook Inlet offshore prospects, posting an Alaska video on its website at www.buccaneerresources.com.

Buccaneer, which has said it hopes to commence drilling at least one of its Alaska onshore or offshore prospects in 2010, would also be in the running for a jack-up.

But Cook Inlet Energy LLC is not focusing on the two offshore inlet prospects, Raptor and Sabre, it purchased in bankruptcy court along with Pacific Energy’s other Alaska oil and gas acreage and facilities.

Company president JR Wilcox said Cook Inlet Energy was “very pleased” with HB 280 and SB 309, but the company’s focus remains on its other inlet properties.

Apache, if it goes on a buying spree in the Cook Inlet, would be expected to buy up some of the most promising offshore prospects, which would likely include the Kitchen Lights unit operated by Escopeta.

According to Davis he has obtained all permits except the rig-specific ones, and is currently looking hard for a jack-up rig to bring to Alaska.

Regarding Apache’s buying power, the firm has spent about $10 billion on acquisitions in the last 10 years, the most recent announced April 15 for U.S. oil and natural gas explorer Mariner Energy. That deal carried a price tag of about $4 billion in stock, cash and debt. The transaction, which is subject to regulatory and Mariner shareholder approvals, will allow Apache to extend its deepwater projects in the Gulf of Mexico. The other acquisition, announced a few days earlier, was a $1.05 billion deal to buy Devon Energy’s shallow-water oil and gas assets in the Gulf of Mexico.

Pioneer not in the picture

Pioneer Natural Resources was named as another possible contender for a jack-up in Cook Inlet, but the company has just one Cook Inlet prospect, the offshore Cosmopolitan field, which it is “fully committed to developing from onshore,” per an April 22 statement from Tadd Owens, director of government and public affairs for the company in Alaska.

The company’s current plan of exploration with the state requires it to spud its second appraisal well at Cosmo by April 2012. Owens said permits have been filed to drill from its onshore location, using Rowan land rig 68 which is under contract to Pioneer and stacked at Kenai.

Petroleum News sources at Chevron and Marathon, two major Cook Inlet producers, said neither company would be likely to lead the charge for a jack-up, but that information has not been confirmed by either company.

The rest of SB 309

As for the rest of SB 309, according to Van Dyke, sections 1-7 address corporate income tax credits for gas exploration and development. They raise the tax credit from 10 percent to 25 percent.

“If you take the CIT tax credit you cannot claim any other tax credit on the same spend. The other tax credits are for the most part much larger than the 25 percent CIT tax credit,” he wrote in his preliminary evaluation of the bill.

As you are looking through the bill, this is what you will find, per Van Dyke:

“Section 8 deals with interest on retroactive payments.

“Section 11 is more corporate income tax clean up.

“Section 12 repeals the forward spend requirement associated with cashing in tax credits effective July 1. This is statewide. This is also very good!

“Sections 13-16 are more cleanup.

“Section 17 is the effective date for the forward spend repeal.

“Section 18 is the effective date for the rest of the bill.”



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