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Judge allows payment to Furie Hearing in Aurora Gas bankruptcy case provides insights into complex business relationships between Cook Inlet gas producers ALAN BAILEY Petroleum News
The judge in a chapter 11 bankruptcy case involving Cook Inlet gas producer Aurora Gas has turned down a request by a company creditor to reverse the court’s approval of a payment of $87,000 by Aurora Gas to Furie Operating Alaska. The payment was for gas that Furie had supplied from its Kitchen Lights gas field to Aurora Gas to enable Aurora Gas to meet its gas supply obligations to Tesoro Alaska, operator of an oil refinery at Nikiski on the Kenai Peninsula. A Sept. 9 court hearing to gather testimony over the disputed payment revealed some of the complex business interrelationships involved in the Cook Inlet gas industry.
Aurora Gas operates five small onshore gas fields on the west side of the Cook Inlet. Apparently the company supplies gas to Tesoro but, to fully meet the terms of its gas supply contract, has had to obtain some gas from other gas producers, in particular Furie and AIX Energy, operator of the Kenai Loop gas field.
Involuntary bankruptcy The bankruptcy case began on May 3, when a group of Aurora Gas debtors filed a petition in federal court in Alaska against Aurora Gas for involuntary bankruptcy. Subsequently, in June, Aurora Gas filed for chapter 11 bankruptcy protection. In a declaration to the court filed in May, Edward Jones, president of Aurora Gas, told the court that his company had incurred a net loss in calendar year 2015 because of declining gas production and a well workover which had cost more than $1 million to execute, but which had not resulted in the expected increase in gas production.
Judge Gary Spraker had granted a request by Jones to make the $87,000 payment to Furie, because, Jones said that, without the immediate payment, Furie would terminate its gas supply contract with Aurora Gas, thus causing Aurora Gas to default on its supply contract with Tesoro. Consequently, with the Tesoro contract being Aurora’s only source of revenue, Aurora would be forced to cease operations, Jones said.
Undue influence But Aurora Well Services, one of Aurora’s creditors, objected, claiming that Kay Rieck, a German investor who owns Aurora Gas via a company called Rieck Oil, either controls or has substantial influence over Furie, thus raising questions over the propriety of the payment while the bankruptcy case was in progress. Aurora Well Services also argued that there was no evidence that Tesoro would cancel its contract in the event of a shortfall of gas from Aurora Gas.
Rieck is chairman and CEO of German company Deutsche Oel and Gas, a company that wholly owns Furie via another company called Cornucopia Oil & Gas Co., based in Texas. At question was whether, through a controlling position in both Furie and Aurora, Rieck had engineered the transfer of funds out of Aurora Gas during the bankruptcy proceedings.
In a Sept. 1 court filing David Bundy, attorney for Aurora Gas, said that Aurora Gas’ current assets had sufficient value to pay all creditors but that the Aurora management had requested the Rieck management for additional capitalization to enable Aurora to continue in business without having to liquidate assets.
During the Sept. 9 court hearing Jones told Judge Spraker that AIX had cut off its gas supplies to Aurora on June 10 when AIX had learned about Aurora’s bankruptcy protection case. Jones also said that Helena Energy LLC, a newly formed Southcentral gas marketing and transportation company that purchases gas from Aurora, owes Aurora money sufficient to cover Aurora’s debts to Furie and to Kenai Beluga Pipeline. Aurora has used Kenai Beluga Pipeline for gas transportation services. Jones said that Helena is owned by a Dubai company owned by Rieck.
According to state of Alaska public records, that Dubai company is called Alecto. And according to a bond prospectus published in March on Deutsche Oel and Gas’s website, at that time Alecto also held a major interest in Deutsche Oel and Gas.
During the court hearing Bruce Webb, senior vice president of Furie, said that Rieck was trying to raise funds in Germany for Aurora Gas but that this fundraising had not been going as well as expected. Webb is also president of Helena Energy.
Forced contract cancellation Webb testified that the need to cancel the gas supply contract with Aurora Gas, should Aurora Gas fail to pay the debt of $87,000, arose from a financial instrument that Cornucopia and Furie had obtained from a company called Energy Capital Partners, or ECP. Under the terms of that financial instrument, ECP has a lien on all of Furie’s and Cornucopia’s assets, including all of the contracts that the two companies have entered into. ECP also requires a consent of assignment on those contracts, Webb said.
According to Webb’s testimony, Cornucopia Chief Financial Officer David Elder had told Webb that if Aurora Gas did not make its payment under the gas supply contract, the contract would be in default. And under the terms of the agreement with ECP, Furie and Cornucopia would then have had to terminate the gas sales, Elder had said. Essentially, ECP would have turned off the gas supply to Aurora Gas, Webb said.
Webb said that, given the potential damage to Aurora Gas from the termination of the gas supply, he had contacted Rieck to ask him to talk to Cornucopia about the possibility of delaying the contract termination for a few days while requesting the court to allow the payment to Furie to go through. And that is what ultimately happened.
Ownership interests Webb also commented on Rieck’s ownership interests in Deutsche Oel and Gas, and hence in Cornucopia and Furie. Originally the companies were financed through private equity funds, with Rieck being the majority stockholder and manager, he said. However, over the course of several months the equity funds are being converted to stock, thus diluting Rieck’s interests in the companies. Webb said that, given that this process is still in progress, he did not know exactly what Rieck’s current ownership position is. Rieck continues to be chief executive officer of Deutsche Oel and Gas, Webb said.
At the end of the hearing Judge Spraker said that he had concluded from the testimony that the $87,000 payment to Furie resulted from the demands of a third party company, and not from the relationships between the various companies in which Rieck was involved. Consequently, Spraker said, he was denying the request to cancel his earlier approval of the money transfer.
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