The Alaska Industrial Development and Export Authority is inching toward investing $30 million in a jack-up rig for Cook Inlet in partnership with Buccaneer Alaska Drilling, while another company, Escopeta Oil, is winterizing a privately financed jack-up rig in Galveston for its move to the inlet.
If both projects hit their timelines, Cook Inlet could get two jack-up rigs this year.
At a board of directors meeting on Feb. 14, AIDEA, a public corporation of the State of Alaska, agreed to spend up to $200,000 developing a “finance plan” that would include a joint ownership agreement and financing guarantees and would outline drilling commitments.
If the deal ultimately goes through, AIDEA would co-own the rig along with Buccaneer.
Buccaneer, the local subsidiary of an Australian independent, operates two offshore Cook Inlet units, but also intends to lease the rig out to third parties.
Of the estimated $85 million cost of the project, $30 million would come from AIDEA, $50 million would come from a senior debt facility currently being negotiated and the remaining $5 million would come Kenai Offshore Ventures, a Buccaneer subsidiary.
Buccaneer said it is “in the process of negotiating with an Asian based joint venture partner” to become a 50 percent shareholder in Kenai Offshore Ventures.
Under the proposed deal, AIDEA would finance its share of the purchase through a “preferred joint ownership” paid as a fixed dividend of 8 percent per year and would be amortized over a five to six year period using revenue from rig operations.
AIDEA to have second lienThe senior debt facility would have first lien over the jack-up rig and AIDEA would have second lien. Buccaneer expects to repay the senior debt facility in five years using rig revenue.
The $200,000 budget approved by the AIDEA board — following a closed-door discussion of the deal in executive session — includes $25,000 for a technology consultant, $25,000 for a financial advisor and $150,000 for legal services. Buccaneer would be required to repay that money if AIDEA ultimately approves the deal.
The parties will now craft an ownership agreement between AIDEA and Kenai Offshore Ventures, a five year Bearboat Charter Agreement between Buccaneer and the rig operator, financing guarantees for AIDEA and work commitments for Buccaneer to commit to drill at least four wells in the Cook Inlet, starting with a well this summer.
Buccaneer expects those agreements to be ready for a vote in 30 to 45 days.
The companies also still need to decide which jack-up rig they want to buy. The rig must be able to drill in 300 feet of water to depths of 25,000 feet, and must be able to operate in both the Cook Inlet and the Arctic Ocean, where Buccaneer plans to lease-out the rig to other companies.
Buccaneer asked AIDEA to join the project last year, first as a bond-issuing agency and then as a co-owner of the rig. AIDEA conducted a due diligence study in December and January to see if the proposal made good business sense and on Feb. 14 said the study determined that “the rig meets the technical specifications necessary to support the business model and therefore, the revenue estimates,” according to AIDEA management.
Buccaneer also plans to form a company to operate the rig on behalf of Kenai Offshore Venture and AIDEA. That company would contract the rig to producers like Buccaneer and other leaseholders and would handle day-to-day operations on the rig. The company would pay Kenai Offshore Ventures and AIDEA an annual lease amount for the rig.
“Negotiations are under way with drilling rig operators with a strong history of operating jack-up rigs in similar water depths with a focus on safety to provide these contracted operating services to (the operating company),” Buccaneer said in a Feb. 17 press release, adding that it expected to own a “significant interest” in the operating company.
Buccaneer originally planned to hire Houston-based Seahawk Drilling to operate the rig.
The original version of the AIDEA resolution posted online included Seahawk as an equity partner on the jack-up rig project, but a revised resolution posted on Feb. 14 did not. On the same day as the meeting, Seahawk filed for Chapter 11 bankruptcy protection, announcing that it planned to sell its assets to Hercules Offshore Inc.
Buccaneer called the change “a typographical error corrected by AIDEA.”
“Any involvement by a drilling contractor is on a contract basis. There is no assumption of participation in any financing by the drilling contractor in the acquisition or operation of the rig,” Buccaneer spokesman Dean Gallegos wrote in an e-mail on Feb. 15.
At an AIDEA board meeting in November 2010, Buccaneer Alaska President and CEO Jim Watt described Seahawk as one of three “participants” in the project, alongside Buccaneer and AIDEA. However, AIDEA staff told the board in January that the scope of the project continued to change as closed-door negotiations progressed.
AIDEA spokesman Karsten Rodvik told Petroleum News on Feb. 15 that the Seahawk news did not impact the deal.
Escopeta concerned about competing with state-owned rigHouston-based Escopeta is currently winterizing the Spartan 151 jack-up in the Gulf of Mexico and plans move the rig to Cook Inlet in March, in time for a May spud date on its Corsair prospect.
“Wouldn’t it be the thrifty thing to do to hold off until mid-March after the Spartan 151 is headed north, and then AIDEA will know for sure that we have a jack-up rig headed to the Inlet?” Steve Sutherlin, a contractor for Escopeta, said during public comments about AIDEA’s proposal to spend up to $200,000 developing a finance plan that would include a joint ownership of Buccaneer’s jack-up.
Sutherlin is a former Petroleum News writer and minority owner in the company. His Anchorage-based firm, Strategic Action Associates, has two oil company clients in Alaska, Escopeta and Shell. Sutherlin’s project with Shell is unrelated to his work on Escopeta’s Cook Inlet activities.
Following years of false starts, Escopeta is now closer to bringing a jack-up rig to Alaska than any company in nearly two decades, having contracted a rig and a heavy haul vessel to move it, but Escopeta is concerned about having a state-backed competitor.
“How will AIDEA’s rig make a living when Escopeta’s rig is in the inlet?” Sutherlin asked. “Escopeta’s business model makes its rig available to other companies. Will AIDEA subsidize its own rig until it can undercut Escopeta? Escopeta doesn’t want to compete with AIDEA.”
Escopeta is looking to explore Kitchen Lights, a large offshore unit in the upper Cook Inlet with four distinct prospects — Kitchen, East Kitchen, Corsair and Northern Lights — as well as lease the jack-up out to other inlet leaseholders between its own drilling. Under its current lease agreement with Spartan, Escopeta can extend its initial two-year contract to four years. It also negotiating a purchase agreement for the jack-up with Spartan.
The Buccaneer proposal also involves using a jack-up rig to explore its offshore units in Cook Inlet — called Southern Cross and Northwest Cook Inlet — and to also lease the rig out to third parties, both in Cook Inlet and in the Beaufort and Chukchi seas.
Buccaneer intends to drill this summer, but isn’t obligated to drill until September 2012.
The company said it holds air quality permits to drill one well each at its two units.
Tax credits up for grabsGetting a jack-up rig to Alaska has become a public policy issue because underexplored offshore prospects in Cook Inlet could turn around declining production in the basin.
The state created a tax credit last year that pays up to $25 million of the cost of the first offshore well drilled to a certain depth in the Cook Inlet using a jack-up rig, and large credits for the second and third wells drilled by different companies using the same rig.
Sutherlin suggested that AIDEA put the project out for public bidding, rather than fund one company over another. “Maybe AIDEA would find a partner that would bring more of its own cash to the table and/or offer a better deal to the state of Alaska,” he said.
State Sen. Tom Wagoner, R-Kenai, issued a press release Feb. 16, congratulating AIDEA and Buccaneer on their negotiations to develop joint jack-up ownership and drilling agreements.
“This is a significant milestone,” Wagoner said in the release. “The parties have reached important agreements that will allow the project to move forward. I applaud AIDEA for its due diligence and careful negotiations with Buccaneer Energy. Bringing a jack-up rig to the Cook Inlet will reinvigorate oil and gas exploration in the basin. I’ve been working a long time to get a jack-up rig to the Cook Inlet and am pleased to see that the incentives in legislation I introduced last year were instrumental in getting us closer to that goal.”
Wagoner aide Mary Jackson told Petroleum News that the senator has no preference on which company gets a jack-up to the inlet first: “The legislation was designed to create a stampede. … We just want a jack-up in the inlet.”
Wagoner drafted the “Stampede Provision” that created the jack-up rig tax credit, but his amendment requires all credits to be attached to one rig, meaning that Buccaneer and Escopeta won’t both collect the credits.
Escopeta buys big blowout preventerUnder its most recent agreement with the Division of Oil and Gas, Escopeta must have a rig bound for Alaska by March 30 and must drill to a certain depth by Oct. 31.
“Work is almost on schedule. We’ve slipped by a few days, but that’s not too bad,” Sutherlin said about the rig modifications currently under way in Galveston, adding that Escopeta is still on schedule to have the jack-up rig in Cook Inlet by May.
“The heavy haul vessel is scheduled to arrive in Galveston on March 8,” Escopeta President Danny Davis said. “It will take a full day to load.”
The vessel was held up a few days when the Nigerians would not give the vessel fuel, he said. Sutherlin also said that Davis recently returned from Washington, D.C., and was “assured the Jones Act waiver issue will be sorted out soon.”
Escopeta, which has almost all of its permits in hand, recently hired two Alaska-based drilling engineers for its Cook Inlet program, one who will be project manager.
“We’ve already had over 80 roughnecks in Alaska apply with Spartan. This project is going to create hundreds of jobs up there,” Davis said.
“With this jack-up we can, and will, rebuild Cook Inlet’s oil and gas industry.”
Escopeta purchased a 15,000-pound blowout preventer from Allis-Chalmers Energy to use on the Spartan 151 rig, a major step-up in the blowout preventer previously used on the rig in the Gulf of Mexico — and the largest ever employed in Cook Inlet, Sutherlin said.
The blowout preventer and all of its components added an additional $1.5 million to the cost of the program, Davis said. “By the time this rig gets there we will have already spent close to $10 million.”