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Vol. 15, No. 30 Week of July 25, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Still in the Kitchen

DO&G gives Escopeta another chance to drill a well at Kitchen Lights

Eric Lidji

For Petroleum News

Alaska officials are giving Escopeta one more chance at the Kitchen Lights unit.

In a decision released July 19, the Division of Oil and Gas chose to put the offshore Cook Inlet unit in default, rather than terminate it. Unit operator Escopeta failed to meet two work commitments it agreed to in 2009 after meeting several previous commitments.

The state gave Escopeta three tasks to complete in order to keep Kitchen Lights.

First, the Houston-based independent must give the state a $4 million security deposit in the next 90 days. The deposit represents the estimated final payment Escopeta would need to make in order to mobilize a jack-up rig on a heavy lift vessel bound for Alaska.

The state would return that deposit in time for Escopeta to make that payment.

Second, Escopeta must have that rig headed to Alaska by the end of February. Third, the company must drill an exploration well at Kitchen Lights by the end of September 2011.

If Escopeta fails any of those tasks, the unit would automatically terminate.

Under a plan of exploration for Kitchen Lights approved in early 2009, Escopeta agreed to have that rig bound for Alaska by June 30, 2010, and have a well drilled by the end of this year. In late May, the company asked for an extension, one of several the company has requested since arriving in Alaska in 2000 and becoming a unit operator in 2007.

Division of Oil and Gas Director Kevin Banks told Petroleum News on July 19 that he chose to put Kitchen Lights in default again, rather than simply terminating it, because, “This will assure more clearly that (Escopeta President Danny Davis has) been given the appropriate due process that perhaps terminating it today perhaps would not do.”

Escopeta previously indicated it would appeal any ruling it found unfavorable.

Prospective acreage

The acreage included in Kitchen Lights has been a conundrum for the state for years.

While it’s considered to be the most prospective underexplored acreage in the Cook Inlet basin, the technical challenges of drilling in shallow, sub-Arctic waters have placed Kitchen Lights in a gap: Larger companies with the financial resources to explore it have not shown an interest in doing so, while smaller companies interested in the large trend have not been able to successfully arrange a drilling program for the offshore acreage.

Earlier this year, the state passed a law, Senate Bill 309, providing significant incentives for the first company to successfully use a jack-up rig to drill in the waters of Cook Inlet.

Banks, in his ruling, said this law had increased interest in Cook Inlet leases. Davis told Petroleum News on July 21 that he welcomed the partnership of companies in the region.

Currently 25 of the 30 leases in the Kitchen Lights unit are past their primary term and two more are set to expire on Sept. 30, accounting for 92 percent of the 83,394 acre unit.

Banks told Petroleum News that the newest extension shouldn’t prevent the state from including that acreage in the May 2011 Cook Inlet areawide lease sale, should Escopeta fail to meet its new work commitments. “I think we’re probably in a good position, if (Davis) does not litigate, to be able to offer the leases in the sale,” Banks said.

Looking for partners

Davis, though, doesn’t think the state will have to worry about the lease sale.

“I think we’ll have the money,” he said.

His confidence comes, in part, from SB 309, which he said gives his partners and contractors the assurance that they’ll get paid, so long as they can get a well drilled.

Davis said drilling companies are not scrambling to bring a jack-up rig, a mobile drilling unit used in shallow waters, to the harsh tides and temperatures of Cook Inlet. He said three rig companies turned him down outright, while Pride International, the company he is working with now, won’t make a firm commitment until it completes an engineering study on its rig, the Pride Hawaii. He expects to have results before the end of July.

“If they fall by the wayside, I’ll find someone else,” Davis said, although it’s far from certain whether Escopeta could find a willing rig contractor in the new 90-day timeline.

On the financial side, Davis said Escopeta is still looking for a partner. “I’m not sure who it’s going to be yet, but I have two or three groups who are interested,” he said, adding that he had not been in contact with two newcomer independents, Apache and Buccaneer.

It’s all about the rig

While Escopeta got more time, it didn’t generate much good will.

For starters, the state questioned Escopeta’s expenses at Kitchen Lights.

Attempting to prove its commitment to Kitchen Lights, Escopeta claimed to have spent “approximately $32.5 million” at the unit, giving the state an itemized, but confidential, list of expenses to back up that claim. In its ruling, though, the state noted that the $32.5 million figure included expenses by Pacific Energy and Renaissance Alaska, companies that owned offshore Cook Inlet leases that eventually were co-opted into Kitchen Lights.

The state said Escopeta has spent less than $2 million since becoming the operator of the Kitchen unit in 2007 and less than $600,000 since becoming operator of Kitchen Lights in early 2009, most of that being spent on lease rentals and not on exploration expenses.

Davis didn’t dispute that assessment, but said the criticism was misplaced.

“It’s not about who spent what. It’s about whether we can get a rig up there,” he said.

Second, while the state is giving Escopeta more time, the ruling suggests the state is skeptical that the extension will lead to drilling. “Escopeta has provided no evidence of any substantive or timely efforts to complete its work obligations under the (Kitchen Lights unit Plan of Exploration). And Escopeta has provided no evidence that another unconditional extension will result in the delivery of a rig to Cook Inlet,” Banks wrote.

Davis said he appreciated the newest extension and accepted both the criticism and the challenge. “Criticism is nothing,” he said. “You’ve got to set timelines. You’ve got to set goals. Now they’ve set the timeline and my goal is to meet that timeline.”

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