Co-op proposes rig sale to Baker Hughes

Naknek Electric seeks bankruptcy court approval for deal; geothermal rig appears likely to end up in Cook Inlet basin

Wesley Loy

For Petroleum News

A troubled Southwest Alaska electric power cooperative says it has a deal to sell its geothermal drilling rig to oilfield service company Baker Hughes.

The deal could send the rig to work in the Cook Inlet basin. But the transaction is contingent on U.S. Bankruptcy Court approval.

The co-op, Naknek Electric Association, has been operating under Chapter 11 bankruptcy protection from creditors since September 2010. It filed for bankruptcy due to financing difficulties associated with its geothermal exploration effort.

Naknek Electric bought an oil and gas rig, a National 1320 model, to conduct its geothermal drilling. The utility managed to drill only one well, which experienced serious technical problems.

The co-op on July 20 filed a motion seeking the court’s permission to sell the rig and accessories to Baker Hughes.

The sales price would be $1 million cash, far below the $8.5 million Naknek Electric paid for the rig and nowhere close to co-op’s tens of millions of dollars in debts.

But the sale would benefit the co-op well beyond the $1 million sale price, as Baker Hughes would drop nearly $4.5 million in lien claims.

Multiple benefits of deal

A hearing on the sale motion is scheduled for Aug. 10 in the bankruptcy court in Anchorage. Objections to the deal are due by that date.

Naknek Electric is hoping for approval, noting the sale would benefit the co-op as well as its creditors.

As part of the deal, Naknek Electric would use half the $1 million cash payment to plug and abandon the geothermal well before Baker Hughes barges the rig out of the region in October. The co-op would distribute the other half to non-Baker Hughes lien claimants.

Baker Hughes has agreed to advance $500,000 worth of in-kind material and services to the abandonment job. The company would recapture the advance through a resale of the rig.

Naknek Electric and Baker Hughes would agree upon a third party to act as operator on plugging the well, known as G-1.

If the Baker Hughes offer doesn’t go through, the well wouldn’t be plugged for two years, as Naknek Electric would need that time to raise the necessary funds, the sale motion says.

The co-op could save significant plug and abandonment expense by using the rig before it is taken off the wellbore and barged out, the motion says. Further, the co-op could save the $20,000 per month being spent to keep the well site “warm,” as state regulators require.

The court papers say that over the past several months, Naknek Electric had discussions with “several parties” interested in either buying or leasing the rig. None, however, was willing to present a written purchase offer.

Naknek Electric says it talked with NordAq Energy Inc., a small Cook Inlet oil and gas explorer, about selling the rig for $7 million, $3 million of which would have been in cash.

But the NordAq discussions didn’t progress very far, the court papers say.

Naknek Electric believes it is likely that Baker Hughes will sell the rig to NordAq, or “another Cook Inlet oil and gas exploration or development company, and that it is in discussions with one or more of such potential buyers.”

The sale motion says Baker Hughes is in a better financial position than Naknek Electric to deal with an offer that’s not all cash.

Previous court filings said Baker Hughes had obtained an appraisal of the rig of less than $4 million.