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Vol. 16, No. 4 Week of January 23, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

CI jack-ups progressing

Buccaneer units approved; Escopeta funded, winterizes rig to move to Cook Inlet

Eric Lidji

For Petroleum News

The two competing efforts to bring a jack-up rig to Alaska are moving toward their separate late spring and summer goals for drilling offshore exploration wells in the Cook Inlet basin.

Escopeta Oil Co., which has private financing and its unit in place, recently moved its rig into dry dock in Galveston to begin winterization upgrades in preparation for its trip north in late February or early March, while Buccaneer Alaska got approval to form two new offshore units and has advanced negotiations with potential public and private financiers. It’s also narrowing down its selection of a jack-up rig.

However, both projects appear to be moving slightly slower than the timelines presented late last year, though not slow enough to jeopardize the drilling schedules of either effort.

A jack-up rig is a mobile offshore drilling unit capable of drilling wells in relatively shallow waters, such as those in the upper Cook Inlet. The rig is seen as crucial for increasing exploration drilling as Cook Inlet production and deliverability declines.

‘Potentially a business case’

Buccaneer is arranging its plans and financing for a four-well drilling program.

The local subsidiary of an Australian independent is seeking some $80 million from public and private sources to buy a jack-up rig and explore two Cook Inlet prospects. If successful, Buccaneer hopes to ultimately lease the rig to other operators in Cook Inlet, and in the Beaufort and Chukchi seas on the Arctic outer continental shelf.

Buccaneer wants the Alaska Industrial Development and Export Authority to co-own the rig, but negotiations between the two parties likely won’t yield a proposal before the end of January, staff of the public corporation of the state told its board at a Jan. 13 meeting.

The direction of those negotiations remains mostly unknown, as the AIDEA staff and AIDEA board conducted most of its discussion on the topic in a non-public, executive session.

In an update released on Jan. 20, Buccaneer wrote that AIDEA was continuing to conduct a due diligence review of the project. “AIDEA has retained consultants and counsel to review Buccaneer’s proposal and has discounted Buccaneer’s key operating assumptions in order to ‘stress test’ the business model,” Buccaneer wrote. “After applying these discounts, AIDEA’s preliminary view is that there is potentially a business case for bringing a rig to the region for use by Buccaneer and third party exploration companies.”

AIDEA confirmed that description on Jan. 20, but declined to go into further detail at this time.

Before going into executive session, AIDEA staff began showing its board a “first draft” of a proposal it made to Buccaneer, according to Jim Hemsath, deputy director of development finance for AIDEA. In open session, Hemsath told the board that Buccaneer responded late on Jan. 12 with a different proposal that AIDEA had yet to evaluate.

Hemsath called the deal “a relatively complicated project” for AIDEA, adding, “There is a fairly long road to haul on this before we get to some place with Buccaneer that’s acceptable to both parties, and then to bring to the board for final discussions.”

AIDEA Executive Director Ted Leonard described the deal as being in its “beginning phases.” While he couldn’t predict when AIDEA staff might have a final proposal ready for its board to consider, he said, “It will not be by the end of this month. I pretty much feel pretty sure about that.”

Buccaneer is looking to buy a jack-up rig capable of drilling 25,000-foot wells through 300 feet of water. The rig would include features and modifications that would allow it to operate under various geologic and environmental conditions present in both the Arctic and Cook Inlet. A rig under consideration is currently cold stacked in Asia.

In addition to its funding request from AIDEA, Buccaneer said it was in “advanced discussions” for securing a $50 million senior debt facility from an unnamed lender.

“Buccaneer believes that this facility, in addition to the proposed investment from AIDEA, will provide sufficient funding for the acquisition and all necessary upgrades before mobilization to the Cook Inlet,” the company wrote in its project update.

Division approves two units

If Buccaneer successfully brings a jack-up rig to Alaska, it would first use it to drill two offshore wells, one each at its new Southern Cross and Northwest Cook Inlet units. (See map of unit boundaries on page 18 of this issue.)

The Alaska Division of Oil and Gas approved the formation of those two units on Jan. 18, setting out drilling deadlines for Buccaneer between now and the third quarter of 2014.

The Southern Cross unit includes four leases covering some 6,298 acres. Buccaneer originally proposed a 10,109-acre unit in July 2010, but reduced the size later in the year.

Southern Cross is northeast of the Chevron-operated Trading Bay unit.

Buccaneer owns 100 percent working interest in all four leases in the unit.

The division split the unit into two exploration blocks. Block A covers a single older lease in the south — ADL 17595-2 — and Block B covers three smaller leases to the north.

Under the terms of the unit agreement, Buccaneer must drill a well in Block A “into the Pre-Tertiary interval stratigraphically equivalent to the Jurassic interval” from 9,042 feet measured depth to the total depth of the Shell MGS SRS Ste. No. 1 well by Sept. 30, 2012. If not, the Southern Cross unit would automatically terminate and two leases in the unit — ADL 17595-2 and ADL 390379 — would terminate on Oct. 1, 2012.

Buccaneer must drill a second well in Block B by Sept. 30, 2014. If not, the block would contract out of the unit and Buccaneer would automatically surrender that acreage.

The Northwest Cook Inlet unit includes six leases covering some 8,728 acres. Buccaneer originally proposed a 10,008-acre unit in July 2010, but reduced the size later in the year.

Northwest Cook Inlet is appropriately located in an arc around the northern and northwestern boundary of the ConocoPhillips-operated North Cook Inlet unit.

Buccaneer owns 100 percent working interest in five of the six leases in the unit. The Texas independent Rutter & Wilbanks owns a 12.5 percent interest in one lease.

Buccaneer picked up one of the leases in the May 2010 Cook Inlet lease sale and, as of yet, the Department of Natural Resources has not officially issued that lease.

Like Southern Cross, the division split the Northwest Cook Inlet unit evenly into two exploration blocks. Block A covers the three leases in the western half of the unit, while Block B covers the remaining three leases in the eastern half of the unit.

Under the terms of the unit agreement, Buccaneer must drill a well in Block A “to the stratigraphic equivalent to the Beluga interval in the Pan American Cook Inlet St 17591 No. 1 well” by Sept. 30, 2012. If not, the Northwest Cook Inlet unit would automatically terminate and one lease — ADL 390384 — would terminate on Oct. 2, 2012.

Buccaneer must drill a second well in Block B by Sept. 30, 2014. If not, the block would contract out of the unit and Buccaneer would automatically surrender that acreage.

Buccaneer planning four wells

Buccaneer expects to beat those deadlines.

In early January, the company filed an exploration plan with the Division of Oil and Gas outlining plans for its offshore Cook Inlet acreage over the next three drilling seasons.

Buccaneer is planning a four-well offshore exploration program starting this summer.

Although Buccaneer does not yet have the rig it wants to use under contract, it is aiming to have funding and contracts in place in time to bring a rig to Alaska by late June.

Buccaneer would drill and test the Southern Cross No. 1 well between July and October and then move the rig north to start drilling the Northwest Cook Inlet No. 1 well between late October and the end of the open water drilling season, usually in mid-November.

Buccaneer would complete the well in April 2012 before moving the rig south again to drill the Southern Cross No. 2 well between July and October. Time permitting, the rig would once again move north to drill the Northwest Cook Inlet No. 2 well.

All four wells would test the Sterling, Beluga, Tyonek and Hemlock formations.

Between April and June 2013, Buccaneer would complete the well and release the rig.

When Buccaneer initially proposed buying a jack-up rig to use in Alaska, the company said that it had identified five years worth of potential drilling work in the Cook Inlet.

While that potential workload includes the four wells Buccaneer hopes to drill at its own prospects, Buccaneer told Petroleum News that doesn’t believe its schedule would push off any third party drilling until late 2013 or 2014. Buccaneer believes approximately three wells can be drilled in each open water season, depending on the depth of each, “so there is plenty of room for other operators,” spokesman Dean Gallegos said in an e-mail.

Buccaneer hopes to have all its permits in place by May 2011. The company will soon apply for an air quality permit, expecting that permit to require the longest lead time.

Buccaneer said that by targeting a jack-up rig based in Asia, rather than in the Gulf of Mexico, it will avoid the need to get a waiver of the federal Jones Act, which requires that goods moving between U.S. ports to be carried on ships flagged and built in the U.S.

Escopeta rig in dry dock

Escopeta Oil is closer to getting a jack-up rig to Alaska than Buccaneer.

Escopeta hoped to start drilling in April, but it now appears the spud date for the first of its five-well program will be in May, per a Jan. 17 Petroleum News interview with Escopeta President Danny Davis. (See related story on page 11 of this issue, in the Alaska Offshore Special Report.)

During a public comment period at the Jan. 13 AIDEA meeting, Steve Sutherlin, a contractor for Escopeta, told the board of directors that the slight delay was the result of getting an oil spill contingency plan approved.

“Our most time critical concern is the spill plan,” Sutherlin said.

Sutherlin is a former Petroleum News contributor and minority owner in the company.

Spartan 151 jack-up

Escopeta signed a contract last year with Spartan Offshore Drilling to lease the Spartan 151 jack-up rig. That contract includes an option to buy the rig. Escopeta previously said that it wants to take advantage of that option. “We think there’s some reasons it would make sense to own the rig. But right now, it’s basically under study,” Sutherlin said.

The Spartan 151 recently completed a well in the Gulf of Mexico and is now at the Gulf Copper Dock in Galveston, Texas, being readied for its trip to Alaska. William Jacob Management and Berry Contracting are overseeing the inspection and winterization of the rig. “Fortunately, there is not a lot that needs to be done,” Davis said.

Escopeta recently executed a heavy lift contract with Coscol NMA Maritime to bring the rig to the Cook Inlet.

Escopeta received a Jones Act waiver in 2006, during a previous attempt to bring a jack-up rig to Alaska. The company is asking the federal government to ratify that waiver.

Because of its size, the ship must travel around the tip of South America, rather than through the Panama Canal. That trip is expected to take 45 to 55 days, arriving in Alaska in late April or early May.

Under its most recent agreement with the Division of Oil and Gas, Escopeta must have a rig bound for Alaska by March 30 and must start drilling its first well by Oct. 31.

Escopeta is looking to drill at Kitchen Lights, a large offshore unit that includes four distinct oil and gas prospects: Kitchen, East Kitchen, Corsair and Northern Lights. (See related story on page 11 of this issue with map on page 18.)

Time is of the essence not only because of declining production in Cook Inlet and short seasons for offshore drilling, but also because the first company to drill an offshore well to a certain depth in Cook Inlet becomes eligible for significant tax credits. Wells drilled by the second jack-up will not be eligible for the credits. (See tax credit information in page 13 guest column by Kevin Banks, director of Alaska’s Division of Oil and Gas.)

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