Alaska Gov. Sean Parnell signed the Cook Inlet exploration incentives bill May 10, setting off a race to see which three oil and gas companies would go after the $67.5 million in tax credits available to bring a long-needed jack-up rig into the inlet.
Per language in Senate Bill 309, the first company will be credited 100 percent of costs, or up to $25 million; the second 90 percent, or up to $22.5 million; the third 80 percent, or up to $20 million.
The same jack-up must be used to drill all three wells — and each well must drill down to “the pre-Tertiary zone,” depths relatively unexplored in the Cook Inlet basin, which encompasses a body of water with the same name.
Once reservoir production starts, 50 percent of the tax credit must be paid back. No repayment is required for a dry hole.
In addition to helping bring a long-needed jack-up to Cook Inlet, language in SB 309 pumps up gas development in existing on and offshore fields while making changes to the state’s production tax laws.
But calling it a “race” between oil and gas operators is unrealistic, said the State of Alaska’s top oil and gas official, who doesn’t see the companies with inlet prospects working well together without an organizer, a “catalyst.”
“It doesn’t look as though any of the companies with offshore prospects are going to have a jack-up here this year, even companies such as Escopeta, which has a commitment to do so in its Kitchen Lights unit exploration plan with the state — a plan that was in agreed to long before this bill was written,” state Division of Oil and Gas Director Kevin Banks told Petroleum News May 12.
“We, the state, have done our part. … If the operators aren’t going to get together and make something happen, then what we need is a rig contractor looking for a new market to step in and take the reins.
“This is like a race with one horse in it, but the horse has got three riders and the horse may have some say on which rider gets the front seat,” Banks said.
“The horse is the contractor that owns the jack-up rig. … I would like to see a rig owner step up and take the initiative; one that sees the opportunity to drill three wells and maybe more in Alaska. It could be the catalyst that brings everyone together.”
Mobilization carries a $10M price tagIt makes sense for a rig contractor to take the central role for another reason.
The first company qualifies for $2.5 million more than the second company, but unless the first company gets other operators to sign a rig contract with its preferred rig contractor, it has to pay around $10 million to bring the jack-up to Cook Inlet.
Escopeta Oil President Danny Davis, who has worked for several years to raise the funds to bring a jack-up in for his offshore Kitchen prospects, has burned through several jack-up rig owners in the last few months, finally settling on Houston-based Pride International, which has rigs in both the Middle East and the Gulf of Mexico that are capable of working in Cook Inlet.
“I love the bill. … It’s fantastic, but the way SB 309 is written, if you’re first, you lose. I wish I could get in there with a jack-up in the next month or so, but rig contractors understandably want a multi-year contract before they haul a jack-up as far as Alaska … especially since most of the rigs have to be refurbished to work up here, with the cold and the ice. … Chris Young, director of marketing at Pride, is the only rig contractor who’s been willing to work with us,” Davis said.
Young is willing to be the catalyst Banks is looking for.
In a May 13 interview, he said he’d be interested in forming a “rig club with several operators going in together. We have done that before … in other parts of the world.
“It’s a good idea to share mobilization costs. We’ve worked out deals to amortize them, so that whoever uses the rig pays a percentage. As long as we have a long-term commitment, the financial assurance of that, we can put a plan together,” Young said.
Operators looking to be one of the threeSo which companies are working on bringing a jack-up to the inlet?
Buccaneer and Escopeta, working separately, are the most enthusiastic and, with ConocoPhillips, likely have the most promising oil and gas prospects.
The companies with inlet prospects that likely need a jack-up to reach pre-Tertiary depths, such as the Jurassic, include Buccaneer Alaska, ConocoPhillips, Escopeta, Cook Inlet Energy, Chevron and maybe Marathon, which has the fewest offshore leases.
And then there is Apache Corp., which has had people in Alaska for several weeks looking at Cook Inlet prospects and is an offshore player elsewhere in the world.
The Houston-based independent is on a big acquisition binge. As for its buying power, Apache has spent approximately $10 billion on acquisitions in the last 10 years (for more details see the April 25 edition of Petroleum News).
Latest from Buccaneer AlaskaBuccaneer acquired Renaissance Alaska Cook Inlet basin leases from Stellar Oil & Gas, in March.
Buccaneer executives Jim Watt, president and COO, and Mark Landt, vice president of land and administration, told Petroleum News May 13 that Buccaneer hopes to be one of the three operators to take advantage of the tax credits.
“We have been diligently working on what it would take to get a jack-up to Cook Inlet,” Watt said.
“But you can’t just do one well. To bring a rig up here rig contractors would like to have a multi-well, multi-year contract. … We have been looking at the rig market and trying to think out of the box for a structure to make it attractive for all parties.
“One of the issues the larger rig contractors have, is Alaska is a small market,” Landt said.
“They have costs setting up their office and personnel costs and it makes more sense if they have more than one a rig operating in a region,” Watt added.
Watt likes what Banks had to say: “It goes back to the industry players and private investors to really make this happen.”
ConocoPhillips studying legislationWhen asked if ConocoPhillips was looking at bringing a jack-up into Cook Inlet now that SB309 had been signed by the governor, company spokeswoman Amy Burnett said May 12, “We’re still evaluating the legislation and don’t yet know how it might affect our plans.”
Escopeta applying for an extension“I think SB 309 is the best thing to hit the oil industry since canned beans,” Davis said in a May 10 interview with Petroleum News.
“Governor Parnell has guts. … He’s paying people to come to Alaska to drill offshore. He signed SB 309 after the Gulf spill. … I love it when people do what they know is right. I love the governor’s attitude — damn the torpedoes, full speed ahead. He’s getting gas for his people. I’m proud of him,” Davis said.
“I just wish I could get there in the next month or so. But I can’t,” he said, noting Escopeta would be filing for an extension with the state Division of Oil and Gas. (Under the Kitchen Lights unit plan, Escopeta must have a jack-up rig en route to Cook Inlet by June 20 of this year.)
“We’re working hard with Pride to find a suitable jack-up, but it takes 90-120 days to drill down 17,000 feet,” the depth of the wells at Kitchen. “We have all our permits except the rig specific ones; some of them take more than 90 days to get. The timing is just too tough to do it this year,” Davis said.
“But I guarantee we’ll have a jack-up here in April next year.”
Cook Inlet Energy’s focus elsewhereCook Inlet Energy President JR Wilcox said he was “very pleased” with SB 309, but his firm’s focus is currently on its other inlet properties, not its exploration prospects.
Chevron: not at this time
Chevron spokeswoman Linda Good said May 12 that “Chevron currently has no plans to bring a jack up rig into Cook Inlet at this time.
Marathon: no official wordPetroleum News did not seek an official statement from Marathon, but a source at the oil company said Marathon would probably not be interested in a jack-up rig.
Carri Lockhart, Alaska production manager for Marathon, told a legislative committee in April that SB 309 would help make Cook Inlet basin prospects more appealing and help level the playing field with company projects elsewhere in the world that compete with Alaska for finite capital.