Buccaneer Energy Ltd. is relinquishing two offshore Cook Inlet units.
A local affiliate of the Australian independent is no longer asking state officials to extend drilling deadlines at the Southern Cross and North West Cook Inlet units. The decision means the units will terminate and some of the leases will automatically expire.
The decision allows the company to put its limited time, money and equipment toward three other Cook Inlet projects this year, Buccaneer said in a statement on Jan. 28.
Those projects are the onshore Kenai Loop field where Buccaneer is currently producing natural gas, the onshore West Eagle unit where the company recently spud an initial exploration well, and the offshore Tyonek Deep prospect, which is a deep oil target Buccaneer is farming-in at the ConocoPhillips-operated North Cook Inlet unit.
Buccaneer also said it recently closed two major asset sales and reorganized its debt. Even so, the company expects it “will need to have access to additional working capital in the short term” to pay its debts, meet its obligations and fund its drilling program.
Keeping some leasesWhile losing two units, Buccaneer will keep some of its offshore leases.
Of the four leases in the Southern Cross unit, the northernmost — ADL 390379 — will automatically expire. But Buccaneer believes it might be able to keep two of the others.
Buccaneer holds 100 percent interest in ADL 391107 and ADL 391108, which expire Sept. 30, 2014. Buccaneer intended to drill the Southern Cross No. 2 on ADL 391108.
The remaining lease, ADL 391789, is held by production as part of the North Middle Ground Shoal field. Buccaneer holds a 50 percent interest in the lease with Hilcorp Alaska LLC holding the remaining 50 percent interest. Buccaneer is asking the state to transfer its 50 percent stake in the lease to Hilcorp, under the terms of the original lease, ADL 17595. Buccaneer intended to drill the Southern Cross No. 1 on ADL 391789.
Of the six leases in the North West Cook Inlet unit, five will expire automatically. They are ADL 390384, ADL 391268, ADL 391269, ADL 391270 and ADL 390742. The sixth lease — ADL 391611 — expires in February 2018. While losing the proposed location of one well, Buccaneer intended to drill the North West Cook Inlet No. 2 on ADL 391611.
West Eagle under wayBuccaneer is already at work at West Eagle.
The company said that it spud the West Eagle No. 1 exploration well early on the morning of Jan. 22, using its contracted Glacier No. 1 drilling rig. The onshore West Eagle unit is in the southern Kenai Peninsula, some 10 miles northwest of Homer.
Buccaneer plans to drill West Eagle No. 1 to a total depth of some 8,500 feet. The well will target a 150-foot interval of Upper Tyonek sandstones where Standard Oil Company of California encountered gas with the down dip Anchor River No. 1 well in 1961.
The West Eagle No. 1 well is testing an anomaly that Buccaneer discovered after reprocessing a 2-D seismic survey conducted over 233 square miles of the area in 1981.
The Alaska Department of Natural Resources placed the West Eagle unit in default last year, when Buccaneer failed to spud or complete the well by a September deadline.
The original unit agreement required Buccaneer to post two $600,000 bonds to backstop its work commitments, the first of which the state would return if Buccaneer spud a well by Sept. 1, 2013. and the second of which the state would return if Buccaneer completed the well by the same date. The default cure required Buccaneer to spud by Dec. 1, 2013, to get the first bond and complete the well by Jan. 31, 2014, to get the second bond.
Two other projectsThe strategic plan also called for work at two other prospects this year.
At the onshore Kenai Loop field north of the city of Kenai, Buccaneer and Cook Inlet Region Inc. are disputing the status of producing wells, correlative rights and leases.
The sides will meet at an Alaska Oil and Gas Conservation Commission hearing on Jan. 30 to discuss a CIRI claim that Buccaneer wells are draining from CIRI property.
The sides are also engaged in a similar case before the Alaska Superior Court.
Buccaneer initially intended to explore the offshore Tyonek Deep oil prospect as part of a much larger joint venture with the California-based independent EOS Petro Inc., but Buccaneer ended the partnership late last year, citing “amongst other things, failure by EOS to fund its obligations under the agreement.” EOS has yet to respond to that claim.
The prospect will require the use of a jack-up rig.
Buccaneer believes the Tyonek Deep prospect contains 9.8 million barrels of oil equivalent in proved reserves and 38.5 million BOE in proved and probable reserves.
Closed two salesThe smaller drilling program comes as Buccaneer is taking a new financial path.
The company said it has closed on the sale of its 25 percent interest in the Cosmopolitan prospect and its 50 percent interest in the Kenai Offshore Ventures LLC joint venture.
Buccaneer sold its interest in the offshore Cosmopolitan prospect to its majority partner BlueCrest Energy Inc. for some $40.6 million, which included $625,000 toward a $1.25 million bond associated with the project. The privately held BlueCrest will pay down the remainder of the bond in five monthly installations of $125,000, according to Buccaneer.
The deal also allows Buccaneer to keep roughly $10 million in state exploration tax credits expected to come through this year for work at the field, according to Buccaneer.
Until the state transfers lease interests and operatorship of the program, Buccaneer will act as a “contract operator” at a rate of $125,000 each month, according to Buccaneer.
Of the $40.6 million closing cost, $4.1 million is in escrow to cover potential tax withholdings. Of the remaining $36.5 million, some $20 million will pay “pay transaction fees, and current and outstanding accounts,” $10.8 million will pay down existing debts and Buccaneer will use the remaining $5 million for the West Eagle No. 1 well.
The sale requires BlueCrest to use the Endeavour jack-up rig at the Cosmopolitan prospect for at least 50 working days each winter for the next three winters.
Buccaneer sold its interest in the Kenai Offshore Ventures joint venture to Teras Investments Pte. Ltd. for some $23.95 million. Teras Investments is a wholly owned subsidiary of Ezion Holdings Ltd, which owns the other 50 percent of the company.
The sale closed after the Alaska Industrial Development and Export Authority gave its consent. The public corporation AIDEA is a major investor in the joint venture, which was created to buy, transport and refurbish the Endeavour jack-up rig for Alaska use.
The sale will yield no net proceeds because Buccaneer will be using the entire amount to pay down previous loans and unpaid bareboat charter fees for the rig, Buccaneer said.
But Buccaneer continues to control access to the rig through its subsidiary Kenai Drilling LLC, which should create an income stream for the company in the near term.
Under the terms of its deal with AIDEA, Buccaneer must drill four wells using the Endeavour rig. AIDEA told Petroleum News that the termination of the two units does not impact the commitment because the parties have agreed to alternative wells.
Some debt outstandingIn addition to the sales, Buccaneer recently reorganized its debt.
Meridian Capital CIS Fund has taken over a debt facility held by Victory Park Capital “on amended terms that are more favorable to Buccaneer,” according to Buccaneer.
The three transactions brought Buccaneer some $120 million in cash, debt payments and debt reduction, according to the company. Buccaneer also expects to receive state tax exploration tax credits this year on top of those expected for its Cosmopolitan work.
While those deals will likely keep Buccaneer from having to undertake a rights issue this year, Buccaneer is still on the hook for $56.6 million on the Meridian facility, $10.7 million to Kenai Offshore Ventures and $1.3 million in interest due next year, and must pay a $71,800 daily charter rate on the rig at an annually escalating rate through 2017.
For those reasons, Buccaneer still expects to need additional financing for the short term.