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Vol. 16, No. 23 Week of June 05, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Fate rests with Homeland

Work on jack-up rig to be done in Canada, Escopeta waits for news from Napolitano

Kay Cashman

Petroleum News

What was supposed to be a brief layover at Prince Rupert, British Columbia for, a ship delivering a jack-up drilling rig from the Gulf of Mexico to Cook Inlet, Alaska, resulted in a change of destination May 29 to Port Metro Vancouver. And then, because the bridge at the entrance to Canada’s largest and busiest port was four feet too low to accommodate the heavy haul vessel, the Spartan 151 jack-up was taken to a dock at the city of Nanaimo, on the east coast of Vancouver Island.

Escopeta Oil, which has the jack-up under contract from Spartan Offshore Drilling, will have the rigs’ legs inspected and other work done at Nanaimo. But when — and if — the Spartan 151 will turn around and resume its voyage to Alaska is not certain.

“We do not have clearance from Homeland to proceed to Alaska yet,” Escopeta President Danny Davis told Petroleum News by email June 2. Previously, Davis was content with the assurances Escopeta had received from the U.S. Department of Homeland Security, but the owners of the Spartan 151 and the heavy haul vessel were not.

Existing waiver open-ended

Escopeta, which already has a Jones Act waiver from Homeland that was granted in 2006 under the Bush administration, was asked by the department to apply for a new waiver; despite the fact its existing waiver is open-ended. By Coast Guard policy, enforcer of U.S. maritime law, the waiver would not have expired until June 7, more than a week after the Spartan 151 would have been off-loaded in Southcentral Alaska had the vessel carrying it not reversed course May 29.

Davis complied with Homeland’s request, but was turned down in late May on the grounds that a new waiver was not in the interest of national defense, the basis for which the first waiver was issued.

The 1920 Jones Act forbids the transport of goods between U.S. ports by a foreign flagged vessel, but Homeland Secretary Janet Napolitano says she can grant a waiver if “the Maritime Administration at the Department of Transportation determines there is no qualified U.S. flagged vessel available and the waiver is necessary in the interest of national defense.”

In 2006 and again this year, Escopeta was unable to locate a U.S. flagged heavy haul vessel capable of transporting the big jack-up rig around the tip of South America.

In regard to the issue of national defense, Southcentral Alaska is home to two jointly operated military bases and a civilian population that are facing shortfalls in natural gas deliveries for electricity and heat, as well as contending with declining local oil production for use in the making of gasoline and jet fuel — situations that have increased in severity since 2006, with production of gas and oil continuing to decline.

A jack-up is a mobile drilling unit well suited for relatively shallow offshore areas such as Cook Inlet, where there are only a handful of production platforms from which offshore drilling can be done.

There hasn’t been a jack-up in the inlet for more than a decade because of the expense involved in getting one to Alaska, drilling and returning it.

It was that expense that contributed to Escopeta’s partners backing out of the Alaska venture in 2006.

Eighteen months to gas production

Since that time the State of Alaska has added monetary incentives for bringing a jack-up to Cook Inlet: up to $25 million in reimbursements for the first well drilled with a jack-up; up to $22.5 million for the second; and up to $20 million for the third. The three wells have to be drilled by three different companies using the same jack-up, so Escopeta would receive the first $25 million, which would cover the expense of getting the rig to Alaska and part of the expense of drilling its well.

Natural gas from a discovery by Escopeta this summer could be available for delivery to consumers in as little as 18 months, Vladimir Katic, Escopeta’s general manager in Alaska, told Petroleum News.

Oil will take about three years to bring online, he said.

Although the Maritime Administration initially opposed Escopeta’s current jack-up waiver application, Napolitano said the agency recently reversed its determination, saying no U.S. flagged vessels would be available until October.

Under its agreement with the State of Alaska’s Division of Oil and Gas, Escopeta has to have a jack-up rig bound for Alaska by March 31, a deadline it has met, and drill to a certain depth by Oct. 31, a deadline it can’t meet if it waits for a capable U.S. flagged vessel to be available. The consequences of not meeting that deadline are huge for the Houston independent, as they include losing most of its Cook Inlet oil and gas leases.

Feds assurances not enough for Spartan

Davis said assurances in a May 20 letter from Napolitano that the federal government had no intention of confiscating the rig when it was offloaded in Alaska was not enough for jack-up owner Spartan Offshore Drilling, which is demanding Escopeta get a new Jones Act waiver.

On May 25, Spartan sought an injunction in the District Court of Harris County, Texas, which the court denied May 26, although it did set a hearing date for mid-June on the matter.

Spartan’s concern that its jack-up might be confiscated was clearly addressed by Napolitano in her letter to Davis. She also acknowledged the energy needs of Southcentral Alaska.

But the firm’s other concern was that it might be subject to a substantial fine for having the rig offloaded in Alaska, which is when a Jones Act violation would actually occur. Napolitano’s letter did not definitively address this issue, but it was dealt with in a May 26 in an email from Nelson Peacock, Assistant Secretary of the Office of Legislative Affairs, which is part of Homeland Security.

Peacock said he was acknowledging Escopeta’s request for written confirmation that Homeland’s Customs and Border Protection’s Border Security and Trade Compliance division, or CBP, “will not seek any enforcement action against the vessel, the rig, or any other person or entity.”

In his email, Peacock said, “I have talked to officials at CBP and they have confirmed to me that they cannot provide such a letter before a violation occurs. Even if such a letter were to be issued, it would not be legally binding because the violative act justifying penalties or other enforcement has yet to take place. However, I have talked to CBP and they have authorized me to pass along what we have communicated to Mr. Davis’s attorneys — that CBP only intends to take enforcement action for the Jones Act violation against Escopeta. They do not intend to take any legal action against any other parties for the Jones Act violation in this case.”

Coscol, the China-based owner of the heavy lift vessel Kang Sheng Kou that was being used to transport the rig to Alaska, was also looking for more assurances before it would offload the Spartan 151 in Kachemak Bay, Alaska, where it was to be towed by U.S. tugs to OSK dock at Nikiski, its home for as long as four years, and possibly longer if Escopeta purchases the rig from Spartan.

Both Spartan and Coscol wanted the rig to be moved to Vancouver, which Davis reluctantly decided to do, despite the added cost for his company.

Waiting on Homeland

When interviewed on May 29, Davis intended to have work done on the jack-up and its legs inspected in Canada, while he waited for word from Homeland, after which he hoped to have the rig wet towed to Alaska.

Davis was not happy about taking jobs from Alaskans.

“The work on the rig that we were going to do with U.S. companies at the OSK dock at Nikiski, Alaska, is going to have to be done by Canadian workers. … It’s a shame.”

But on June 2, Davis was uncertain what would happen to the rig.

The big question is: Does Escopeta need a Jones Act waiver to transport the Spartan 151 from Nanaimo, a foreign port, to Alaska?

The company is waiting for a determination from Homeland.

There is also a possibility that Napolitano will recognize Escopeta’s existing waiver because the reasons for its issuance have not disappeared.

Even if the company does get the approval it’s seeking from Homeland, the delay will impact Escopeta’s drilling schedule, Davis said. Initially the company hoped to begin drilling its first Cook Inlet well between June 21 and 30.

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