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Vol. 15, No. 24 Week of June 13, 2010
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More time please

Escopeta requests 180-day extension for Kitchen Lights drill-rig deadline

Alan Bailey

Petroleum News

Faced with the prospect of defaulting on its first year’s work commitments for the Kitchen Lights unit in the state waters of Cook Inlet, Escopeta Oil Co. has asked Alaska’s Division of Oil and Gas to push back by 180 days the deadline for the company to bring a jack-up drilling rig to the inlet and spud a well in the unit.

“This will allow sufficient time to finalize negotiations and contracts with other Cook Inlet explorers, drilling rig companies and the heavy-lift vessel contractor,” said Danny Davis, Escopeta president, in a May 30 letter to Kevin Banks, division director.

“It will also provide the necessary amount of time to modify a warm-climate jack-up rig to be suitable for the colder climates of Alaska,” Davis said.

June 30 deadline

When in June 2009 the division approved the formation of the Kitchen Lights unit, it also approved a five-year work plan that required all necessary permits for drilling to be in place by June 30, 2010, and a contracted jack-up rig to be on its way to Alaska on a heavy-lift vessel by that same date. Escopeta had to spud an initial Kitchen Lights exploration well by Dec. 31, 2010, with a requirement to drill four wells in the period 2010 to 2013.

But, with June 30 fast approaching, Escopeta has not yet landed a contract for the use of a jack-up rig in Cook Inlet.

“Efforts were made to contract rigs from India and Asia with no success,” Davis said. “Negotiations with ENSCO, Transocean and Scorpion were unsuccessful, with those companies not wanting to move a jack-up to Alaska.”

Escopeta is still negotiating with offshore drilling contractor Pride International Inc. over the construction of a jack-up designed for use in the Cook Inlet, Davis said, presumably referring to rig modifications necessary for Alaska operations. The rig cannot be loaded for delivery to Alaska before early 2011, a timeframe that would result in the rig arriving in Cook Inlet in March 2011, he said.

Moreover, negotiations over rig sharing with other companies with offshore interests in the Cook Inlet are still in progress, Davis said. One of those companies would presumably be Buccaneer Resources, the Australian independent that has recently been acquiring Cook Inlet offshore leases.

On the other hand, all necessary permits for the Kitchen Lights drilling that are not rig specific have been issued or are pending issue, Davis said. Those permits include a Jones Act waiver to enable a foreign-flagged heavy-lift vessel to carry the jack-up rig to the Cook Inlet, he said.

Applications for permits that are rig specific, including the Alaska Oil and Gas Conservation Commission drilling permit, the Alaska Department of Environmental Conservation air permit and the U.S. Environmental Protection Agency storm water discharge permit, cannot be submitted until a drilling rig has been obtained, Davis said.

Spud in April

By the time that the jack-up rig is delivered to the Cook Inlet and all negotiations and permit approvals are complete, a realistic spud date for the first Kitchen Lights well would be in April 2011, just four months after the spud date envisaged in the initial Kitchen Lights plan of exploration, Davis said.

So Escopeta now wants the June 30 deadline moved to Feb. 28 and the Dec. 31 commitment changed to a commitment to drill one of a series of specified wells by Sept 30, 2011. The drilled well would extend through the Tertiary strata of the basin to penetrate pre-Tertiary rocks, thus presumably qualifying for a new $25 million tax credit passed in this year’s state legislative session.

Davis said that rising oil prices, natural gas deliverability issues in the Cook Inlet basin, recently passed state legislation supporting Cook Inlet exploration and the current availability of jack-up rigs at reduced rates all favor exploration in the Kitchen Lights unit. On the other hand, the listing of the Cook Inlet beluga whale under the Endangered Species Act and the ramifications of the Gulf of Mexico oil spill have raised question marks over Cook Inlet offshore drilling, he said.

Unanswered questions

Banks told Petroleum News June 8 that the division wants to make a decision on Escopeta’s request by June 30, the deadline date that Escopeta wants deferred. But the division will first send a note to Davis in response to the request, he said.

“There are several unanswered questions,” Banks said.

Those questions include a need for specific accounting of leaseholder expenditure that Davis cited in his May 30 letter. The division also wants Escopeta to clarify why it is citing the listing of the Cook Inlet beluga whale as a new impediment to Cook Inlet drilling, given that the listing was already in place when the Kitchen Lights unit was formed, Banks said.

Davis in his letter had said that, with expenditure of about $32.5 million already having been sunk in lease and exploration expenses associated with the Kitchen Lights prospects, “it would be very unlikely EOC (Escopeta Oil Co.) would not appeal an adverse decision that would put a potential loss of this investment at risk.” And, even without an appeal, the process involved in involuntary termination of the unit would take longer than the 180-day extension that Escopeta was requesting, Davis said.

Encourage drilling

The state originally proposed the formation of the Kitchen Lights unit in late 2008 in a concept designed to trigger new exploration drilling in some of the few remaining Cook Inlet basin exploration prospects in major geologic structures. Most other prospects in major structures have already been explored and developed, although geologists think that significant exploration opportunities remain in more subtle — and more challenging — oil and gas traps.

The Kitchen Lights unit actually encompasses three previously established offshore prospects — Kitchen, Northern Lights and Corsair — all lying along a structural trend that includes the ConocoPhillips-operated North Cook Inlet gas field and all requiring a jack-up rig for exploration drilling. Several different leaseholders separately owned interests in the prospects and the state saw unit formation as a means of aligning exploration efforts under a single operator.

In the event, the various leaseholders enabled the unit to form by selling or farming out their interests to Escopeta, which subsequently became unit operator.

Previous efforts

Escopeta has for several years been pushing for the exploration of Kitchen, a prospect that the company has viewed as offering the promise of a major new Cook Inlet gas find. The company has made previous efforts to bring a jack-up rig to Cook Inlet for drilling in the prospect, but those efforts fell through for various reasons.

In a June 3 information package to Apache Corp., a Houston-based independent that has been considering entering Cook Inlet, Escopeta characterized the Kitchen Lights unit as being about 104,000 acres in extent, with two distinct prospects (these presumably encompass the three original prospects in the unit). The first prospect, referred to as the Kitchen Lights anticline, is thought to hold 400 million barrels of oil and 2 trillion cubic feet of natural gas, while the second prospect, known as the Kitchen thrust fault trap, may hold 800 million barrels of oil and 4 trillion cubic feet of gas, Escopeta said.

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Apache makes offer for Cook Inlet leases

Danny Davis, president of Escopeta Oil Co., has confirmed rumors that Houston-based Apache Corp. has made an offer for some of Escopeta’s Cook Inlet oil and gas leases. Escopeta is operator of the Kitchen Lights unit, a unit formed in 2009 to consolidate several oil and gas prospects along a major offshore geologic trend in the inlet.

“The offer was way low but I think we can work something out,” Davis told Petroleum News June 10. Davis said that another company had also made an offer for some Escopeta leases.

Escopeta has asked Alaska’s Division of Oil and Gas for a 180-day deferral of a commitment to secure a jack-up rig for drilling in Kitchen Lights — the current approved work plan for the unit requires Escopeta to have a jack-up on its way to Alaska by June 30 but the company has not yet contracted a rig. The Apache offer is contingent on the division granting the time extension.

The division expects to make a decision on the extension request by end June.

A Petroleum News source has said that Apache has also made other offers to buy leases in the Cook Inlet basin. The company has international offshore operations, has been seeking new acquisitions and is known to have been investigating Cook Inlet prospects.

—Alan Bailey