In a continuing effort to pay down its debts, Pacific Energy Resources Ltd. is weighing its options for selling down or farming out some of its assets in Alaska, company directors said during a second quarter conference call on Aug. 19.
More streamlined since bringing in $135 million through a two-part sale of onshore assets in California last month, Pacific Energy now wants to focus on its remaining prospects in California and Alaska. But the company is also looking to further reduce its leverage ratio, or the relationship of debt to assets used as a gauge of financial solvency.
Some reductions will come from new oil production brought online over the past six months, especially from the long shut-in Eureka platform off the coast of California.
But the company sees further opportunities in Alaska, according to Gerry Tywoniuk, who took over as chief financial officer for the company on Aug. 15.
“We’ve also begun the process of evaluating our options of selling down our interest in the Alaska properties in some fashion, whether that is to farm-out some of the new drilling, or by selling our working interest in some specific asset,” Tywoniuk said.
The Long Beach, California-based independent came north nearly a year ago after picking up the Alaska assets of Forest Oil, which include a complete and partial stake in several units and stand-alone leases in the Cook Inlet basin. During the second quarter, Pacific Energy produced 4,300 barrels of oil per day on average from its Alaska operations.
With the price of oil doubling since the sale, Pacific Energy’s Alaska assets could provide the company with a tremendous return on investment, should it decide to go shopping for partners.
“We’ve been very fortunate to experience a substantial increase in our equity value in a short time period,” Tywoniuk said.
One of those wholly owned prospects, the offshore Corsair unit, is the core of Pacific Energy’s exploration efforts, and the company intends “to farm out a large portion of the project to fund the exploration program,” said Darren Katic, president of Pacific Energy.
Corsair and Osprey in 2Q 2009With a year of “planning and integration” under its belt, Pacific Energy offered a firmer timeline for work in Alaska, now expecting to begin exploration drilling at Corsair and development work from the Osprey platform at the Redoubt unit in mid-2009.
Pacific Energy originally hoped to get those projects underway by the end of this year, but “rig-availability and weather-related logistics” cause a six-month delay, Katic said.
While the company is looking at leasing or buying a rig for the Osprey platform, the “availability” problem likely refers to Corsair.
Exploration drilling at Corsair requires a jack-up rig, a mobile drilling unit well suited for shallower offshore prospects. Previous failed attempts to get a jack-up to Alaska have forced other companies to delay or abandon drilling projects in the Cook Inlet basin.
Earlier this year, Pacific Energy signed a three-year lease on a Blake Offshore jack-up rig, but is now working to get the large piece of machinery to Alaska from its current location in the Gulf of Mexico near Louisiana.
Katic estimates that the voyage around the southern tip of South America would take “roughly” two months, but first Pacific Energy needs to contract with a shipping company capable of making the trip. The state recently gave Pacific Energy until Sept. 29 to sign a contract with a heavy lift vessel operator, or face losing the unit.
If Pacific Energy is successful, though, the company will have several new options for partnership, because a jack-up rig is in high demand in the Cook Inlet. The rig could be used to drill the Escopeta-operated Kitchen unit and the Renaissance-owned Northern Lights prospects, which both sit along the same geological formation as Corsair.
Katic said Pacific Energy is “in discussions” with other companies.
“Currently, the rig does have enough work, assuming we all drill our wells for the entire 2009 drilling season,” Katic said, referring to the period from spring to fall when the ice covering the Cook Inlet thaws enough to use a jack-up rig.
Economics still in questionAlthough the timing would be tight, leasing out time on a jack-up rig would improve the economics of Corsair, which Pacific Energy began questioning after the state rejected the company’s request to expand the unit boundaries to include four adjacent leases.
The expansion would have more than doubled the unit. Instead, three of the four leases expired at the end of April, and remaining lease expires at the end of the year. Pacific Energy appealed the decision May, but the state has not responded to the appeal and is under no statutory timeline to do so.
For a time, Pacific Energy suggested Corsair might not be economic without the expansion acreage, but now the company is presenting a more nuanced picture.
“While we believe that the original Corsair Unit has significant stand-alone economic merit, the decision of the State not to include the additional leases could have a negative impact on the overall economics of the project,” company management wrote in an analysis of second quarter operations released Aug. 15.
Offering the first revised estimates in since February, Katic said recoverable reserves at Corsair might prove to be as high as 500 billion cubic feet of gas or 100 million barrels of oil.
Under the terms of exploration plans with the state, the company has until June 30, 2009 to start drilling on the prospect or face losing the unit.
Benefits from McArthur RiverBefore work begins on either Osprey or Corsair, though, Pacific Energy could see the benefits from development work at the McArthur River unit, which the company does not operate.
According to Katic, Chevron plans to start development drilling from the Steelhead platform in the McArthur River field in the first quarter of 2009. Pacific Energy owns just less than a 50 percent working interest in several leases at the Cook Inlet field, and many of those leases hold existing platforms.
“Top side improvements continue on all five platforms in preparation for an extensive redevelopment and exploitation program, which will span the next three years,” Katic said.