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Explorers 2011: Drilling onshore, eyeing offshore Buccaneer completing Kenai Peninsula wells, acquires jack-up for offshore Cook Inlet program Eric Lidji For Petroleum News
Buccaneer Energy Ltd. is using as many mechanisms as it can to fund an offshore drilling program in Cook Inlet: private funding, public funding and revenue from production.
The Australian independent arrived in Alaska in March 2010 by acquiring the assets, and some of the executives, of Stellar Oil & Gas LLC, a sister company to Renaissance Alaska LLC. That and subsequent acquisitions gave the company five potential targets — onshore and offshore, west side and east side — to pursue in the Cook Inlet basin.
The three onshore targets are: Kenai Loop, near the city of Kenai; West Eagle, in the southern Kenai Peninsula just north of Homer; and West Nicolai Creek; on the west side of Cook Inlet. The two offshore targets are: Northwest Cook Inlet, a unit located, fittingly, north and northwest of the North Cook Inlet unit; and Southern Cross, a unit just west of the Kitchen Lights unit and north of the North Middle Ground Shoal field.
The company drilled its first two onshore wells in Alaska in 2011, and is now planning a third for this winter in addition to a four-well offshore program beginning next summer.
Getting the jack-up rig Exploring those offshore units would require a jack-up rig, a mobile offshore drilling unit well suited for the relatively shallow depths of Cook Inlet, but at the time Buccaneer arrived, the Cook Inlet basin had not seen a jack-up in its waters in nearly 20 years.
While most companies looking to bring a jack-up to Alaska over the years tried to rent the rig, Buccaneer decided to buy, arguing that a depressed rig market in late 2010 and the numerous offshore prospects in Alaska that needed a jack-up justified the purchase.
It took a year of negotiations, but Buccaneer could soon achieve its goal.
When Buccaneer originally announced plans to buy a jack-up rig, it wanted to use a mixture of state and federal money. The federal money would come through Recovery Zone Facility Bonds, a one-time opportunity available through the stimulus package for economically troubled areas, while the state money would come from the Alaska Industrial Development and Export Authority, the public corporation of the State of Alaska responsible for issuing loans (and also for administering the RZFB program).
While AIDEA approved Buccaneer for that program, Buccaneer couldn’t place the bonds and ultimately changed its strategy. In addition to Cook Inlet, it decided to expand its business plan to include exploration companies in the Alaska outer continental shelf that might need a jack-up rig, either to drill exploration wells or to drill relief wells.
That made the project ineligible for RZFBs.
Project Endeavour AIDEA continued to show a willingness to invest up to $30 million in the rig, negotiated with Buccaneer for several months, mostly behind closed doors, and in April 2011 the two sides came to terms on a multiyear venture called Project Endeavour.
Through the project, AIDEA agreed to fund up to $30 million toward the cost of a jack-up rig in partnership with Kenai Offshore Ventures LLC, a joint venture between Buccaneer and the Singaporean marine company Ezion Holdings Ltd. Kenai Offshore Ventures would contribute $5 million to the project and would find a financial institution willing to contribute the remaining amount to fund the roughly $85 million operation.
The deal involved numerous conditions, some that Kenai Offshore Ventures must meet before AIDEA spent a penny and some it must meet later to keep from defaulting.
Buccaneer announced in September that it planned to buy the Transocean Adriatic XI jack-up rig, modify it for the sub-Arctic conditions of the Cook Inlet and mobilize it to Alaska for $86.5 million. The rig is currently cold stacked in Malaysia. Buccaneer is still waiting to finalize the sale and a loan for more than $50 million from an Asian bank.
Aiming for April/May 2012 While Buccaneer hoped to begin work in the Cook Inlet this summer, the length of the negotiations made that impossible. Now, Buccaneer plans to have the rig upgraded and moved to the Cook Inlet by April or May 2012 in time for a summer drilling campaign.
That timing was important because the first company to drill an offshore well to a certain depth in the Cook Inlet is eligible for a significant one-time tax credit. While the credit is extended to the second and third companies to drill wells, too, it is connected to a single rig, meaning that the second rig in the Cook Inlet couldn’t claim the credits. Because Escopeta Oil Co. is currently using the Spartan 151 jack-up rig to explore at its Kitchen Lights unit, it appears likely that Buccaneer would be the second company to drill.
While the credit would obviously provide an economic benefit to the project, AIDEA said its business case for the venture did not depend on the credit (although it does depend on the regular exploration credits offered to all companies). AIDEA said that its business case also does not depend on Buccaneer renting out its rig to other companies.
Buccaneer believes it is sitting on big reserves in upper Cook Inlet.
Based on third party assessments, the company believes Northwest Cook Inlet could hold 46.7 million barrels of oil equivalent and Southern Cross could hold 27.4 million barrels of oil equivalent. Buccaneer plans to drill the Southern Cross No. 1 well and the Northwest Cook Inlet No. 1 well in 2012 and the Southern Cross No. 2 well and Northwest Cook Inlet No. 2 well in 2013. That would fulfill the terms of its deal with AIDEA and the terms of its unit agreements with the Alaska Department of Natural Resources, and help the company decide how to proceed toward possible development.
Production at Kenai Loop While that process unfolded, Buccaneer also pursued its first onshore target.
The Kenai Loop prospect consists of nearly 8,000 acres of state, Alaska Mental Health Trust Authority and Cook Inlet Region Inc. leases north of the city of Kenai.
Buccaneer spud the Kenai Loop No. 1 well in April and ultimately tested two zones, at 9,600 feet and 10,000 feet respectively. The company indentified numerous other zones it thought might be candidates for testing, but couldn’t be tested because of rig availability.
Still, Buccaneer said the well tested at 10 million cubic feet per day, enough to support a supply contract with Enstar Natural Gas Co. Through the agreement, Buccaneer will provide 5 million cubic feet per day starting in 2012, with the option to triple the amount after six month if drilling identifies adequate supplies. The contract is for a total of 12 billion cubic feet with an option to increase to as much as 31.5 bcf pending on drilling results, and requires Buccaneer to drill another well. The supply contract would support the Cook Inlet Natural Gas Storage Alaska storage operation that Enstar is currently working to construct.
Buccaneer began drilling Kenai No. 2 in September. The well is a step-out from Kenai Loop No. 1, starting from the existing well pad but extending to a bottom hole location 1,800 feet away to further test the two previously tested zones, as well as a deeper zone.
Uncertainty about gas line The coming year for Buccaneer involves Kenai Loop and its offshore prospects, but the company is also looking toward its other onshore opportunities, as well as some threats.
In particular, there is uncertainty about how an in-state natural gas pipeline from the North Slope to Southcentral would impact independents like Buccaneer. While the project is still far from being sanctioned, a recent report suggested it might be economically viable, and state Sen. Tom Wagoner, R-Kenai, asked policymakers to consider the potential impact the pipeline might have on emerging producers in the Cook Inlet area.
The other onshore ventures could benefit from recent activity in the region.
The West Eagle project is near the North Fork field that Armstrong Cook Inlet recently brought into production. North Fork helped extend the existing infrastructure grid in Southcentral to the southern Kenai Peninsula, improving the economics of all exploration targets in the region. The West Nicolai Creek prospect could benefit from nearby work on the west side of the Cook Inlet proposed by Cook Inlet Energy and by Aurora Gas.
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