AIDEA is putting its authority to use

Three recent laws have allowed the public corporation to undertake three big oil and gas projects over the past two years

Eric Lidji

For Petroleum News

In 2009, the Alaska Industrial Development and Export Authority approved a new strategic plan that called for the public corporation to become, in a word, bolder.

The plan suggested that AIDEA become less “passive” by diversifying its assets, asking lawmakers for additional financing tools and promoting itself to more industries.

With the rise of small independents in Alaska over the past decade, the oil and gas sector is increasingly fitting the bill of potential partners for the economic development entity.

Through a series of laws passed in recent years, AIDEA can now invest in corporations and limited liability companies, can directly finance larger infrastructure projects that it does not intend to own or operate and can use the new Sustainable Energy Transmission and Supply fund to help finance distribution projects for local gas and power utilities.

Those changes have allowed AIDEA to pursue three big oil and gas projects since late 2010, the first in what the public corporation expects will be many in the years to come.

AIDEA has “a lot of room to grow,” AIDEA Executive Director Ted Leonard told Petroleum News on May 20. A factor that could limit growth is risk diversification, he said, which is why AIDEA is pursuing projects in mining, energy and infrastructure, and pursuing projects across the state. That said, he noted, “We are a resource development state, so we will have a large share of our project portfolio in resource development.”

For the oil and gas sector, AIDEA hopes to become an important source of capital for infrastructure development. “I think in 10 years we’re going to see half a dozen to 10 oil companies working in Alaska where there had only been traditionally three,” Deputy Director of Project Development and Asset Management James Hemsath said. “And I think they’re all going to be healthy and they’re all going to be producing oil and gas.”

The first ‘Endeavour’

In late 2010, a local subsidiary of the Australian independent Buccaneer Energy Ltd. asked AIDEA to invest in the purchase, refurbishment and mobilization of a jack-up rig.

The mobile offshore drilling unit is a key component for exploring in the shallow waters of Cook Inlet, but at the time there had not been one in the basin for more than a decade. The request came as Escopeta Oil was also trying to bring a jack-up to Alaska.

With the passage of House Bill 119, AIDEA was eventually able to invest in Kenai Offshore Ventures LLC, a joint venture between Buccaneer and the marine company Ezion Holdings Ltd. AIDEA ultimately agreed to invest up to $30 million to buy the GSF Adriatic XI jack-up rig from Transocean Offshore Resources Ltd. The $86.5 million project included buying the rig, refurbishing it and bringing it to Alaska from Malaysia.

The deal required KOV to chip in a small amount toward the total project cost and to secure financing on the private market for the bulk of the project, as much as $56 million.

The AIDEA board of directors unanimously approved the deal and praised the work of their staff, but many also noted the riskiness of investing in oil and gas exploration.

After a trip across the Pacific Ocean, the jack-up rig, since renamed Endeavour-Spirit of Independence, arrived in Alaska in August 2012, but instead of moving quickly to drilling wells, the rig spent months docked in Homer. Over that time, questions mounted about the reason for the delays and some contractors complained about late payments.

Some answers came in December, when Kenai Offshore Ventures fired its project manager Archer Drilling LLC “for nonperformance of work.” Kenai Offshore Ventures subsequently hired Spartan Drilling LLC, the company that had been operating the Spartan 151 jack-up rig on behalf of Furie and its predecessor Escopeta since mid-2011.

In turn, Archer sued Buccaneer and its affiliates for $6 million in damages. Buccaneer countered, saying Archer owed it $30 million in lost revenue from the delays. The case created additional delays as Buccaneer needed to sort out documentation for the rig.

While the legal case remains unresolved, Buccaneer eventually secured the necessary paperwork, certifications and inspections required to use the rig. On May 13, the company spud a well at the Cosmopolitan prospect, located off the coast of Anchor Point.

The hullaballoo shouldn’t overshadow the work, according to Hemsath. “The delays are unfortunate and disappointing, but at the end of the day we have a rig that is out there drilling,” he said. AIDEA expected some obstacles, he added, simply by the nature of operating in Alaska, but crafted its deal to put the “onus” for success onto its partners.

The joint venture found the additional financing it needed to close on the project and now is drilling in Cook Inlet, Hemsath noted. “From our perspective, Buccaneer and Ezion — the partners at (Kenai Offshore Ventures) — have truly lived up to what our requirements and what we anticipated when we created the LLC agreement,” he said.

And with Spartan now operating two jack-ups in Cook Inlet, AIDEA believes the Archer affair is yielding an unexpected synergy. “We have two rigs drilling in the Cook Inlet, which we always said would be a benefit, to have both the rigs there, and hopefully they’re going to both be very successful in finding gas and oil on the Cook Inlet and assist in the renaissance of new development of the (Cook Inlet basin),” Leonard said.

Riding the Mustang

In late 2012, Brooks Range Petroleum Corp. asked AIDEA to help finance basic infrastructure at its Mustang development in the Southern Miluveach unit, adjacent to the southwestern corner of the Kuparuk River unit. The local operating arm of the Kansas-based independent Alaska Venture Capital Group had announced a 40 million barrel discovery at the North Slope field earlier in the year and hoped to bring it online by 2014.

Brooks Range Petroleum is partnering on the project with Ramshorn Investments Inc.

The $24 million project would include a winter ice road, a gravel mine, a 19.3-acre gravel production pad, a 0.7-mile access road from the mine to the pad and a 4.4-mile open access road from the pad to the existing road system at the nearby Kuparuk River unit.

As it had done previously with the Endeavour deal, AIDEA formed a new company for the project, Mustang Road LLC and loaned the joint venture $20 million, or 80 percent of the cost of the infrastructure. The 15-year loan came with an 8 percent rate of return.

Although it followed the much larger Endeavour deal, AIDEA board member Robert Sheldon described the Mustang Road project as breaking new ground for AIDEA.

The reason?

With the passage of Senate Bill 23 this year, AIDEA can now finance infrastructure projects without having to own the facility. Currently, AIDEA is deciding whether to use that new authority to invest some $45 million of an estimated $190 million cost for Brooks Range Petroleum to build a 15,000 barrel per day production facility at Mustang.

AIDEA wants the Mustang project to become a model.

“One could make the case that Brooks Range is not really a very risky project. It’s just that they need the capital. … As these small companies get going and get some cash, they may not need AIDEA at that point either. But if they do, we’re here,” Hemsath said.

Previously, AIDEA said the Mustang facilities might improve the economics of other operators in the region, like Arctic Slope Regional Corp. and Repsol E&P USA Inc.

AIDEA appears to be right. Earlier this year, ASRC Exploration LLC asked the Division of Oil and Gas for more time to explore its Placer unit, saying the nearby Mustang prospect “has the potential to significantly change commercial thresholds at Placer.”

Trucking to the Interior

The Parnell administration proposed the project after years of private sector maneuvering in the Interior failed to produce an energy project capable of bringing down costs in the region. The local distribution company Fairbanks Natural Gas LLC operates a small grid in Fairbanks, holds a contract for North Slope gas supplies and has received early permits for a liquefaction plant, but needed financing and major industrial customers. The local electric cooperative Golden Valley Electric Association also has a supply contract and could anchor the project itself, but also needed help building the liquefaction plant.

AIDEA quickly sought out interest in the project and received 16 responses, ranging from turnkey projects, to single components such as engineering or financing. AIDEA is currently studying the project and considering those proposals to decide how to proceed.

The recently approved package includes $362.5 million in financial incentives to fund a liquefaction plant on the North Slope and an expanded natural gas distribution system in the Interior. The package provides up to $275 million in low-interest financing, a $57.5 million capital appropriation and up to $30 million in pre-existing gas storage tax credits.

The $275 million to finance the plant is coming from the Sustainable Energy Transmission and Supply fund, created last year. The fund allows AIDEA to loan up to a third of the cost of an energy project, or use local banks to create loan guarantees.

The goal is to fund energy infrastructure without using general fund dollars.

The project is requiring AIDEA to conduct due diligence just as it did for the jack-up rig and the Mustang project, but also to work within the confines of other state agencies.

The Regulatory Commission of Alaska is currently considering competing proposals from two local distributions companies interested in serving the City of North Pole, Eielson Air Force Base and some less-densely populated regions of the Fairbanks North Star Borough. Fairbanks Natural Gas wants to expand its existing service area, while the municipal Interior Alaska Natural Gas Utility wants to start a new service area. Each of the entities is currently challenging the credentials of the other in regulatory documents.

The decision is up to the RCA, but AIDEA will be working with whichever entity gets the service area. “We’re looking for some aspect of commitments on who’s buying gas and how much and where they’re serving before we can say, ‘Now we’re ready to execute procurement,’” Leonard said. “But we are hoping and feeling as we talk to all the parties that this will be done in an expedited way and be done before the end of the year.”

Editor’s note: Part 1 of this story ran in the June 2 issue.