$15 million fine

Escopeta fined by US Customs for Jones Act violation in jack-up transport

Kay Cashman

Petroleum News

On Oct. 13, the Anchorage office of U.S. Customs and Border Protection levied a $15 million fine against Escopeta Oil Co. for violating the federal Jones Act, 46 U.S.C. § 55102, when it “caused” the Spartan 151 jack-up rig to be transported “between coastwise points in the United States,” from Freeport, Texas, to Esquimalt, Canada, using a foreign-flagged vessel, after which the rig was towed to Cook Inlet, arriving in Alaska on Aug. 11.

Customs, which is part of the U.S. Department of Homeland Security, or DHS, also said if Escopeta feels “there are extenuating circumstances,” it can object and file a written “petition for relief” within 60 days with Customs fines, penalties and forfeitures officer in Anchorage, Patrick McGownd, who signed both the letter and the accompanying penalty notice.

The $15 million dollar fine is equivalent to the value of the Spartan 151, a determination that was made by Customs, McGownd said.

When Petroleum News emailed Escopeta Oil’s current president, Ed Oliver, for a reaction to the $15 million fine, the company’s Strategic Officer Steve Sutherlin replied by email, “Escopeta is reviewing its options.”

Danny Davis, president of Escopeta when the jack-up left Freeport on March 18, told Petroleum News Oct. 19, “I don’t think we owe any fine whatsoever. I don’t think Escopeta broke any laws taking the rig from Galveston to the Cook Inlet.

“When the facts come out in a court room or in an agency review, they will be able to see we actually broke no laws,” said Davis, who resigned in August, but remains a minority interest owner in the Kitchen Lights unit leases. Davis has been president of the Escopeta group of companies since the first one was founded in 1993, an investor with Stewart Petroleum in the Cosmopolitan play. He was also the driving force behind bringing the jack-up to Alaska, the first jack-up in Cook Inlet since 1994.

In the Oct. 19 interview, Davis pointed out that within two weeks of denying Escopeta a Jones Act waiver, the Obama administration issued 46 waivers to foreign companies.

“I love the United States. I love our industry. If the government is going to start charging us to do business in the United States, then they need to start charging everybody,” Davis said.

“There is a gas shortage in the Cook Inlet basin, even though the Department of Energy denied that fact with DHS,” which needed DOE’s concurrence to issue a waiver.

“I think … (when) we drill down to 12,000-12,500 feet, we’ll find all the gas they need (in Southcentral Alaska) for many years to come. There’s 2-3 tcf of gas there. It’s loaded with gas,” Davis said.

The 83,394-acre Kitchen Lights unit is made up of four main oil and gas prospects: Corsair, which is being drilled first; Northern Lights, identified and then lost by Mark Landt and associates under various company names; and Kitchen and East Kitchen, which were identified by Escopeta under Davis.

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Barron gives Escopeta thumbs-up to drill down

Barron said Escopeta must also remain in compliance with all other state and federal agencies, including continuing to conduct drilling operations based on the plan approved by AOGCC.

AOGCC Commissioner Cathy Foerster told Petroleum News Oct. 20 that weekly blowout preventer tests are required on the offshore Cook Inlet exploratory well, with an agency inspector on hand for each of them.

So far Escopeta’s equipment has passed muster, she said.

“We’re keeping a close eye on them, helping them stay in compliance.”

The KLU No. 1 well is being drilled by the Spartan 151 jack-up rig in the Corsair prospect, which is one of four oil and gas prospects in the Escopeta-operated, 83,394-acre Kitchen Lights unit.

Escopeta Strategic Officer Steve Sutherlin said drillers had reached a depth of 4,933 feet, the approximate depth at which Barron had asked the company in a Sept. 2 letter to temporarily stop work in order to evaluate and determine “the reasonableness and prudence of moving forward with additional drilling.” The request was made at Escopeta’s suggestion.

Factors in Barron’s review included weather and ice formation in the inlet. He could have suspended drilling until spring, which he didn’t do, but he did remind Escopeta that drilling into hydrocarbon formations had to stop Oct. 31, per condition 7 of the company’s Oil Discharge Prevention and Contingency Plan. The C-plan was approved in June by the Alaska Department of Environmental Conservation.

Barron had said in September that the arrival of the Spartan 151 jack-up in Cook Inlet was welcome news, but “a well control incident in Cook Inlet could have devastating consequences for the state and the state’s most vital industry.”

Drilling into gas bearing formations

“We may be drilling down again as early as Sunday.

“Escopeta then will drill on into gas-bearing formations,” he said.

On Oct. 12 Sutherlin said, “The company’s key strategy for 2011 is to learn as much as possible about the natural gas bearing structures in the Corsair prospect, with an eye on expediting gas production. We think that Cook Inlet exploration, in concert with efforts such as Enstar’s new gas storage facility, can avert a crippling gas supply shortage in the region.”

“We’ve been very pleased with our drilling performance so far,” he said Oct. 19. “If recent results are any indication we can expect a rapid rate of penetration going forward.

“Safety and best oil field practices for Cook Inlet will guide any decisions. Escopeta will continue to communicate, coordinate and cooperate with all state and federal agencies to meet its drilling commitments,” Sutherlin said, declining to predict whether or not Escopeta would reach full depth of 16,000 feet, into the Jurassic formation, by Oct. 31.

Oct. 31 is also the deadline for Escopeta to have reached the Jurassic formation in order to comply with a Division of Oil and Gas-approved plan of operations for the Kitchen Lights unit. Failure to meet the deadline could conceivably mean the loss of the unit and most of its leases.

In the event Escopeta does not reach the Jurassic by Oct. 31, Sutherlin said the company was operating on the assumption that it and the division would come to an agreement, “putting safety before economic considerations.”

Editor’s note: Steve Sutherlin is a former Petroleum News reporter and a minority member of the limited liability corporation that owns the newspaper.

—Kay Cashman