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Vol. 15, No. 48 Week of November 28, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Escopeta succeeds

Has cash, jack-up, heavy lift vessel, state’s okay to drill in Cook Inlet

Eric Lidji & KaY Cashman

For Petroleum News

After several years of effort, Escopeta Oil says it has the funds and contracts in place to ship a jack-up rig to Southcentral Alaska in February, in preparation for drilling in upper Cook Inlet in April. The Houston independent has also resolved legal issues with the State of Alaska that are crucial to its drilling plans.

Escopeta plans to use the Spartan 151 jack-up rig currently stationed in the Gulf of Mexico, which it will bring to Alaska on a heavy lift vessel owned by Dockwise, an international firm based in The Netherlands.

“We’re doing it. It’s going,” Escopeta President Danny Davis told Petroleum News on Nov. 23.

“The Spartan rig is currently drilling a well in the Gulf of Mexico. … From there we are moving it to Freeport where Dockwise will load it for Alaska in mid-February. … Our intention is to make the jack-up a Cook Inlet asset, for use by ourselves and others. … We’re using almost all Alaska labor. We’re using the Arness Dock two miles west of Kenai, and we’re opening an office at the dock and possibly in Anchorage,” Davis said

If successful, Escopeta would become the first company to bring a jack-up rig to Alaska in nearly two decades, allowing for drilling of several underexplored offshore Cook Inlet prospects, including its prospects in the Kitchen Lights unit.

Davis said the day-rate on the Spartan rig is low — “much less than $100,000” — and that his contract gives him the option to buy the rig.

State gives Escopeta green light

The status of the Kitchen Lights unit is just as critical to Escopeta’s plans as securing funding and a rig.

The state placed the unit in default in July, a ruling Escopeta appealed in September.

Since Escopeta filed its appeal, the deadline to cure the default passed, and so Escopeta recently asked the Alaska Superior Court for a stay until the matter is resolved.

With its drilling program now funded and contracted, the company asked the state to lift the default and increase by one month the timeline for drilling deadlines approved in July.

According to Kevin Banks, director of the state’s Division of Oil and Gas, the default has been lifted and the new deadlines approved.

Banks told PN Nov. 23, the state “has a signed agreement with Escopeta that basically says we withdraw our default and Escopeta withdraws its litigation.”

The default was withdrawn “as of today.”

The state took the action based on “several representations by Escopeta,” including Escopeta “having a contract with Spartan Offshore Drilling, Escopeta preparing to enter into a heavy life vessel contract, and having $15 million on deposit in a U.S. bank account.”

Banks, who has seen a copy of the Spartan contract, said the state recently “received a letter from a Texas bank saying that Escopeta had the money. He (Davis) says he will be obtaining additional funding if we withdraw the notice of default, which we have.”

Per the agreement, Escopeta “has to have a drilling rig mobilized, under way, by March 30, 2011, … and has until Oct. 31, 2011, to drill its first well,” Banks said.

Escopeta, Davis said, will need help from the state to make sure the company gets the rest of the state and federal permits it needs to drill: “We have everything except the spill plan and rig-specific permits, but once we get the rig to Alaska we don’t want it sitting around waiting.”

A gas bonanza?

The first well Escopeta plans to drill is Kitchen Lights Unit No. 1, located northwest of the SRS No. 1 well that Shell drilled in 1962 to a total depth of 16,375 feet.

The 83,394-acre Kitchen Lights unit includes Kitchen, East Kitchen and two other prospects, Northern Lights and Corsair.

Davis believes the Kitchen and East Kitchen prospects might contain 7.5 trillion cubic feet of natural gas and 1.7 billion barrels of oil.

Those estimates, if correct, would make Kitchen Lights the largest Cook Inlet gas and oil play. The gas estimate alone is similar to the recoverable natural gas reserves that ExxonMobil estimates it has in its Point Thomson field, the second largest known gas deposit on Alaska’s North Slope.

Escopeta plans to drill 16,000-17,000 feet into the Jurassic. The company needs to drill into a pre-Tertiary zone, such as the deep Jurassic, to take advantage of tax credits available from the state. That depth would allow Escopeta to test both the gas and the deeper oil potential of the region.

Jones Act waiver not deal-killer

To use the Dockwise vessel, Escopeta needs a waiver of the federal Jones Act, which requires goods bound for U.S. ports to be carried on ships flagged and built in the U.S.

Without a waiver, Escopeta would be forced to pay a fine, which is what Rowan, the last jack-up rig operator in Cook Inlet, did.

Escopeta received a waiver in 2006, during an earlier attempt to bring a jack-up rig to Alaska, but recently asked the Obama Administration to reaffirm that Bush-era document. The administration asked Escopeta to apply for a new waiver, which the company is doing. Regardless of the outcome of that new application, though, Davis noted that the 2006 waiver has “never been revoked or cancelled.”

Banks sent a letter Nov. 23 to U.S. Immigration and Customs supporting Escopeta’s application for a waiver.

The other jack-up

Escopeta is one of two companies trying to bring a jack-up rig to Cook Inlet.

The other, Buccaneer Alaska, wants the Alaska Industrial Export and Development Authority to issue a mix of bonds and financing to help buy, rather than lease the rig. (See related Buccaneer story on page 5 of this issue.)

There is an incentive for both companies to be the first to drill a well with a jack-up.

Under a new tax credit created this year, the first company to drill an offshore well in Cook Inlet using a jack-up rig would get 100 percent of its costs, up to $25 million, paid for by the state. The state would also pay for 90 percent of the second well, up to $22.5 million, and 80 percent of the third well, up to $20 million. The three wells must be drilled by three different companies, but must also be drilled using the same jack-up rig.

Therefore, if both Escopeta and Buccaneer successfully bring jack-up rigs to the Cook Inlet, only the first company to drill a well would be eligible for the tax credit.

Currently, Escopeta plans to begin drilling in April while Buccaneer plans to drill by July.

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