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Buccaneer sees options for gas Independent sounds note of skepticism on Hilcorp contracts, but sees possibilities for new natural gas markets across the state Eric Lidji For Petroleum News
After sounding a warning note to regulators about the potential consequences of a pending contract between Enstar Natural Gas Co. and Hilcorp Alaska LLC, Buccaneer Energy Ltd. outlined a much less dire view of the situation to its investors recently.
“It’s a different market than it was six months or a year ago,” Buccaneer CEO Curtis Burton said about the Cook Inlet basin during a conference call for shareholders on Sept. 10, “but it is not by any means an overwhelmingly concerning picture at this point.”
The Regulatory Commission of Alaska is currently considering APL-12, a gas supply contract under which Hilcorp would supply Enstar’s unmet needs between April 1, 2014, and March 31, 2018 — approximately 63.5 billion cubic feet of gas over four years.
In separate comments, Buccaneer Alaska LLC, Cook Inlet Energy LLC and Furie Operating Alaska LLC all said the contract would force small producers — or at the very least their supplies — out of the market. They asked regulators to either force Enstar to diversify its portfolio as new supplies come online, or shorten the term of the contract.
“Hilcorp has effectively locked up the utility market,” Buccaneer Vice President of Land and Business Development Mark Landt wrote in his comments, “so the RCA and Enstar should not be surprised when the remaining independent producers either choose alternative markets for their gas, seek to provide direct sales to Enstar’s customers or not fund drilling programs targeting natural gas.” Such uncertainty about the market could even keep supplies from coming online by scaring away investors, Landt added.
Less long-term concern Asked about the contract during the conference call, Burton played down the concern — at least in the long term. “We’ve always allowed for the fact that at some point you might have more gas coming into the market,” he said. By developing both oil and natural gas, and seeking additional markets in Alaska, Burton said the company would be able to compete. The Buccaneer portfolio is weighted toward oil, he said. As far as gas, the company sees some 300 million cubic feet per day in potential demand across the state.
Among the markets Burton listed were the Agrium fertilizer plant, the Kenai LNG facility, the Interior heating market, mining operations and the Alaska Marine Highway System. All those markets would require leverage to access. The Agrium and Kenai LNG plants both suspended operations for lack of supply. The state is looking to serve the Interior through a North Slope trucking operation. Supplying mines, especially those in remote regions, would take major transportation infrastructure. And the Alaska Marine Highway System would require conversion or replacement of its fleet to run on gas.
A Buccaneer joint venture called LNG Alaska presented a similar proposal to the Senate Resources Committee in October 2011. “It’s going to take several groups coming together to say: We want to do this plan,” Keith Meyer, CEO of LNG Central, the partner in the joint venture, said back then. “If we come together. It’s actually very competitive.”
Tight market before March 2018 While a glut of Cook Inlet gas would stir conversations about new markets in the state, any smaller supplies coming online before March 2018 could still face a tight market.
Even so, Burton tried to alleviate concerns by casting doubt on Hilcorp.
“If you know anything about gas fields, and particularly anything about Alaskan gas fields, a couple of months production history is not a long-term projector of what’s going to happen going forward,” he said, referring to the short time privately held Hilcorp has been operating the assets it acquired from Marathon Oil Co. “So I would be very reluctant, as a public company, to say I know what’s going to happen with those wells.”
While Hilcorp has claimed success from developing its already-producing assets, the company has also brought additional supplies online, and announced discoveries.
Additionally, Burton expects Hilcorp to face some resistance. “I think the State is very focused on opening up the maximum opportunity that they can across the state,” he said.
Some delays ahead After years of juggling many prospects without enough financing to pursue them all, Buccaneer now believes it can pay for its near-term operations, the company said.
Pointing to state tax credits, several financing deals and a recent farm-in covering most of its exploration commitments for the coming years, “from a capital adequacy point of view, we’re pretty comfortable at the moment, but at the end of the day we would like to develop our reserves as quickly as possible,” Executive Chairman Dean Gallegos said.
That said, Buccaneer is facing scheduling problems.
While pleased with its results at the offshore Cosmopolitan prospect, drilling took longer than expected. As such, the Endeavour jack-up rig currently at the offshore Southern Cross unit is unlikely to finish work and proceed to the offshore North West Cook Inlet unit before winter puts a halt to exploration activities in the northern end of the basin.
The commitments at North West Cook Inlet have already been postponed from previous deadlines, but Burton said the company is currently in discussions with the Alaska Department of Natural Resources on the issue and expects to announce a resolution soon.
Resignations mysterious Since Buccaneer last held a conference call for investors, in late June, its shareholders voted three new directors onto the board only to see those directors resign six weeks later.
“Their resignations were a surprise to us,” Gallegos said. “There was no forewarning or discussion regarding that. I came to the office one morning and had three resignations on my desk. So it took us by surprise and no reason was given for those resignations.”
A pair of shareholders — Pacific Hill International Ltd. and Harbour Sun Enterprises Ltd. — nominated the three directors as a way to refocus Buccaneer, claiming that the company had “lost its way” by pursuing too many projects without sufficient funding.
Buccaneer opposed the changed.
The shareholders re-elected two of the four existing board members and added the three new directors. Buccaneer subsequently appointed another director, which split the board.
Despite the potential for animosity, Gallegos said Buccaneer played nice. “What I can say is that those three directors were incorporated into the company as much as possible during their time,” he said. “They had full access to the company’s data room — there are around 800 documents in that data room — and they were circulated on all the various activities which we update on a daily basis in respect to drilling operations.”
On an unrelated note, Buccaneer said its court case against Archer Drilling LLC regarding work on the Endeavour rig is slated for a bench trial in Texas next year.
Buccaneer said it is open to a settlement to avoid a trial.
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