Why rent, when you can buy? For nearly two decades, exploration companies have failed in effort after effort to contract a jack-up rig for use in the waters of the Cook Inlet, in Southcentral Alaska. So Buccaneer Energy Ltd. wants to try something new: buy the rig and rent it out locally.
Buccaneer recently created two entities: a consortium called Kenai Offshore Ventures LLC and a new operating company. Kenai Offshore Ventures would own the rig and bring in revenues by leasing it to the operating company. The operating company in turn would bring in revenues by charging a day rate to local operators for drilling services.
Buccaneer said Kenai Offshore Ventures has indentified at least five years worth of work for the rig, “ranging from the mid-sized operators to the majors,” as the company phrased it in a Nov. 10 presentation to the Kenai Chamber of Commerce. The work includes new exploration drilling, infill drilling at existing fields and plug and abandonment projects.
Buccaneer said it is prepared to commit in writing to a one-year or two-well drilling program, using the jack-up rig to drill exploration wells at the two offshore plays it owns in the upper Cook Inlet: the proposed Southern Cross and Northwest Cook Inlet units.
Buccaneer said it has identified a jack-up rig “suitable” for the Cook Inlet, completed an inspection of the rig in Singapore and indentified additional upgrades. Buccaneer also said that Kenai Offshore Ventures and the operating company are currently in talks with Seahawk Drilling Inc., a Houston-based offshore driller, to physically operate the rig.
Under a proposed timeline, Buccaneer wants to have the rig in Alaska by May 2011.
A jack-up is a mobile drilling unit well suited for relatively shallow offshore areas. In the absence of an offshore platform, it is crucial for exploration in an area like the Cook Inlet.
Financing through AIDEABuccaneer’s proposed financing for the project is also a new approach.
On Nov. 8, Kenai Offshore Ventures LLC applied for $60 million in Recovery Zone Facility Bonds from the Alaska Industrial Development and Export Authority.
Recovery Zone Facility Bonds, or RZFBs, are a tax-exempt bond included in the American Recovery and Reinvestment Act of 2009, also known as the stimulus package.
The bonds gave local municipalities, particularly those in economic distress, a way to offer tax-exempt funding to businesses looking to invest within the community. Because some of the most economically distressed areas in Alaska are not within a recognized municipality, though, the state charged AIDEA with allocating and issuing the bonds.
The bond is essentially a roundabout loan, placing AIDEA and its bonding authority in between a private lender and borrower as a way to provide tax-exempt financing.
Loans secured against rigBuccaneer said it has identified a lending institution to underwrite the bonds, that “loans will be secured against the rig” and that Kenai Offshore Venture “will raise the remaining capital in the form of preferred and common equity.”
AIDEA received two applications for Recovery Zone Facility Bonds by the deadline on Nov. 8. In addition to the application from Kenai Offshore Ventures, AIDEA received an application for a company looking to put together a retail project. Around $105 million in bonding remains unallocated, enough so that the two projects are not in competition.
AIDEA will decide on Nov. 15 whether to award the RZFBs to the applicants.
On Nov. 22, the AIDEA board will consider a resolution that would allow those bonds to retroactively reimburse expenses made on each project in the previous 60 days.
Alaska originally received the authority to issue $135 million in RZFB by Jan. 1, 2011.
The city of Kenai and the Kenai Peninsula Borough both passed resolutions in recent weeks that support using RZFB as a way for a company to acquire a jack-up rig. Both resolutions note that “Buccaneer Alaska, and possibly other companies, are submitting a proposal to AIDEA for funds to acquire a jack-up drill rig to bring to the Cook Inlet.”
That support is technical necessary because AIDEA does not issue bonds larger than $6 million without proof of support from the community where the money would be spent.
Possibility for partnersKenai Offshore Venture’s claim to have found five years of work for a rig has merit.
Escopeta Oil has been trying to bring a jack-up rig to Alaska for nearly a decade, even going so far as to get all the major pieces of a drilling program in place back in 2006 before losing a partner on the project. Escopeta currently owns and operates the Kitchen Lights unit, a large offshore unit in an underexplored part of the upper Cook Inlet.
Those efforts are currently in limbo, though. In July, the Department of Natural Resources put the unit into default and in September Escopeta appealed that ruling. The company, though, remains optimistic that it can eventually bring a jack-up to Alaska.
(NOTE: See story this issue about Escopeta)
Other companies with offshore acreage in Cook Inlet include newcomer independent Cook Inlet Energy, majors like ConocoPhillips, Marathon and Chevron (which recently announced plans to sell its Cook Inlet assets) and large independents Apache (which acquired onshore and offshore acreage in Cook Inlet this summer) and Pioneer Natural Resources, which plans to drill its offshore acreage from an onshore pad.
While the quest to bring a jack-up rig to Alaska is not new, it got new momentum earlier this year with the creation of new tax credits. Under Senate Bill 309, the state will pay 100 percent, up to $25 million, of the first offshore well drilled to “the pre-Tertiary zone” in the Cook Inlet basin using a jack-up rig. The state will also pay 90 percent, up to $22.5 million, of the second well, and 80 percent, up to $20 million, of the third well. The wells must be drilled by different companies but all three wells must be drilled using the same rig, a provision that could encourage coordination among the various Cook Inlet leaseholders looking to explore different offshore targets.
The companies must repay 50 percent of the credit if a well produces.
Buccaneer said that even though their second well wouldn’t be covered by SB 309, it would get 65 percent credit under ACES.