SEARCH our ARCHIVE of over 14,000 articles
Vol. 19, No. 5 Week of February 02, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

Buccaneer drops units

Aussie independent relinquishes Southern Cross and North West Cook Inlet

Eric Lidji

For Petroleum News

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 leases

While 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 way

Buccaneer 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 projects

The 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 sales

The 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 outstanding

In 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.

Did you find this article interesting?
Tweet it
Digg it
Print this story | Email it to an associate.

Click here to subscribe to Petroleum News for as low as $69 per year.

Petroleum News - Phone: 1-907 522-9469 - Fax: 1-907 522-9583 --- ---

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©2013 All rights reserved. The content of this article and web site may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.

A long and winding road for two prospects

The acreage at Southern Cross and North West Cook Inlet has been the centerpieces of the Buccaneer portfolio in the Cook Inlet since the company arrived in March 2010.

The Australian company picked up the acreage as part of its initial acquisition of some 57,600 gross onshore and offshore acres from the independent Stellar Oil and Gas LLC.

Buccaneer applied to form the two offshore units in July 2010. Soon after, it asked the Alaska Industrial Development and Export Authority for help in purchasing a jack-up rig, which is a crucial tool for exploratory drilling in the shallow waters of Cook Inlet.

The Alaska Division of Oil and Gas formed the units in January 2011.

The unit agreements required Buccaneer to drill an initial well at each unit by Sept. 30, 2012, and a second well at each unit by Sept. 30, 2014, or risk losing acreage.

In April 2011, the AIDEA board agreed to spend up to $30 million toward the roughly $85 million Project Endeavour — a plan to buy, move and refurbish a jack-up. AIDEA partnered on the project with Kenai Offshore Ventures LLC, a joint venture between Buccaneer and the marine company Ezion Holdings Ltd. Among other provisions, the deal required Buccaneer to use the jack-up rig to drill at least four Cook Inlet wells.

The parties initially expected Buccaneer to drill that summer, but in May 2011 AIDEA pushed the drilling timeline to the following summer. At the time, AIDEA blamed the delay on a “lengthy and tough negotiation process, necessary to ensure that Authority’s interests are protected,” but said the extra time also provided “the side benefit of allowing for a more orderly process for acquisition, refitting and commissioning of the rig.”

Even with the delay, Buccaneer told the state it expected to meet its drilling commitments at both units — drilling two wells in the summer of 2012 and two in the summer of 2013.

Endeavour arrives

In September 2011, Kenai Offshore Ventures bought the Adriatic XI jack-up rig from Transocean Offshore Resources Ltd. for $68.5 million. Kenai Offshore Ventures renamed the rig “Endeavour — Spirit of Independence.” AIDEA and Kenai Offshore Ventures closed their deal in November 2011. The parties said that they expected the rig to set sail from its temporary home in an Asian shipyard in April 2012 and begin drilling in May.

To meet a variety of certifications, Endeavour underwent “substantially” more work in Singapore than originally planned, according to Buccaneer, which set back the timetable. The rig ultimately departed for Alaska in July 2012, which Buccaneer said at the time would still allow for as many as three wells by the end of the year. The program called for drilling at Southern Cross and North West Cook Inlet in the ice-free summer and moving south to drill at the newly acquired Cosmopolitan prospect later in the year.

In late August 2012, Endeavour arrived in Homer, where Buccaneer said it would undergo “very minor” work before proceeding to the North West Cook Inlet unit.

The rig remained in Homer as September gave way to October, though.

In October 2012, the state placed the Southern Cross and North West Cook Inlet units in default because Buccaneer failed to meet its initial drilling commitments. To cure the default, the state gave Buccaneer until Oct. 31, 2013, to drill an initial well at each unit.

With the summer drilling season nearing its end in the northern end of the Cook Inlet, Buccaneer decided to inaugurate the Endeavour rig at the Cosmopolitan prospect.

In December, Kenai Offshore Ventures and its project manager Archer Drilling LLC parted ways. Kenai Offshore Ventures claimed it fired Archer for failing to pay vendors and for “nonperformance of work” while the rig was in Singapore. Archer said it terminated the contract because Kenai Offshore Ventures “undermined and underfunded” the project. The sides each filed court claims, seeking damages against the other.

Kenai Offshore Venture subsequently hired Spartan Drilling LLC to operate the rig. The offshore drilling company was already operating another jack-up rig in Cook Inlet.

Buccaneer spent the winter months finishing upgrades on the rig and permitting an exploration program at Cosmopolitan. The permitting required the company to get an oil spill contingency plan from the Alaska Department of Environmental Conservation.


Buccaneer spud the Cosmopolitan No. 1 well in mid-May 2013, but asked the state for three additional years to complete work commitments at the leases off Anchor Point.

The request came as Buccaneer farmed-in the deep oil rights as the ConocoPhillips-operated North Cook Inlet unit. The delay would have given Buccaneer more flexibility to move the jack-up rig around the Cook Inlet as weather and other factors permitted.

Buccaneer originally scheduled 45 days to complete the 8,000-foot Cosmopolitan No. 1 well, but stopped drilling in mid-July at 7,599 feet, having announced an oil discovery at a shallower depth than expected. The company flow tested the well for natural gas, but postponed a flow text for oil because of the “very limited oil storage capacity” on its rig.

Southern Cross

In early September, Buccaneer moved Endeavour to the Southern Cross unit. It had installed the 30-inch diverter and well-control equipment on the conductor pipe when it noted “some settling of the rig’s legs into the seabed.” With state permission, Buccaneer moved the rig some 450 feet to the southeast, but it never spud Southern Cross No. 1.

With the end of the summer drilling season fast approaching, Buccaneer instead decided in early October to move the rig to Port Graham. By moving the rig, Buccaneer failed to cure the default on Southern Cross and North West Cook Inlet. The state initiated termination proceedings on both units. Buccaneer asked the state for clemency, citing its “good faith, diligent efforts” to drill, including some $14 million spent on the two units.

The issue could have yielded a long appeal, or even a court case, but Buccaneer instead is relinquishing both units. The decision is a setback, but Buccaneer could still pursue its goals at the prospects in the future. While Buccaneer is losing both units, it is retaining some of the leases, including some of the locations where it had initially hoped to drill.

—Eric Lidji