Jones Act issues slow progress of jack-up rig to Cook Inlet

Drill rig on hold

A jack-up drilling rig and a Chinese heavy-lift vessel moving it to Cook Inlet have been moved to Vancouver, B.C. to await resolution of dispute over a waiver of the U.S. Jones Act so the rig, Spartan Drilling Co.’s Blake 151, can be unloaded in Alaska waters, the president of Escopeta Oil and Gas said Tuesday.


The vessel, the Kang Sheng Kou, operated by China’s COSCO Holdings Co. was en route to Cook Inlet the week of May 27 after having brought the Blake 151 rig from the U.S. Gulf of Mexico. Escopeta has leased the rig to drill exploration wells on state offshore leases it owns in Cook Inlet, according to company president Danny Davis.

In a related development, movement of a second jack-up rig to Cook Inlet, this one from Southeast Asia, may be delayed from 2011 until 2012, Ted Leonard, director of the Alaska Industrial Development and Export Authority, told the authority’s board May 25.

AIDEA is negotiating the final terms of an agreement for the state corporation to invest $30 million in a partnership with Buccaneer Energy, an Australian company, to move a jack-up rig to Alaska to drill exploration wells on leases Buccaneer owns.

The negotiations are taking longer than expected, which will most likely result in a delay in moving the rig the Buccaneer group would purchase until the first or second quarter of 2012, Leonard said.

Davis said the diversion of Escopeta’s jack-up rig, first to Prince Rupert B.C. and then to Vancouver over the holiday weekend, was ordered by COSCO, the vessel owner, and Spartan Drilling.

Davis said COSCO and Spartan were concerned about penalities they could be liable to from a Jones Act violation and had wanted a written assurance from the U.S. Department of Homeland Security on the penalty terms before the rig could be unloaded in Alaska waters.

“They had given us verbal assurances but the ship operator and the drilling company wanted it in writing,” Davis said. The issue could not be worked out over the holiday weekend so the vessel and rig were moved to Canadian waters he said.

While in Vancouver modifications to the Blake 151 will be done to prepare the rig for Cook Inlet. “Those modifications had been planned to be done in Kenai, so having the work done in Vancouver rather than Alaska should not delay our plan to start drilling later this year in Cook Inlet. It’s unfortunate that this work will now be done by Canadian workers rather than Alaskan workers,” Davis said.

Davis estimated that it will take about 30 days to do the modifications, which should allow enough time to work out the Jones Act penalty issue with the Department of Homeland Security, he said.

The extended stop in Vancouver for work on the rig may also be a long enough stop that the movement from Canada to Alaska would constitute a separate trip, qualifying the vessel under U.S. law.

The Jones Act requires shipments between U.S. ports to be in American-built vessels. The Kang Sheng Kou is Chinese-built and owned.

Escopeta secured an exemption from the Jones Act in 2006 for another foreign-built heavy-lift vessel to move a jack-up rig but the deal fell through due to financing problems. Since then Davis has worked to get the exemption renewed for the Kang Sheng Kou, but Janet Napolitano. Secretary of the Department of Homeland Security, turned down the request.

Davis said no U.S.-built heavy-lift ships are available that are capable of moving the rig safely around the tip of South America and through rough waters in that region. A barge that had been offered by Crowley Maritime Corp. to move the rig would require modifications would would not be ready until later this summer.

However, Davis said the tug and barge would be not suitable for moving the rig safely around the tip of South America, and the barge and the rig would have been too large to transit the Panama Canal.

Homeland Security director Janet Napolitano told Davis in a May 20 letter that the exemption could not be granted on national defense ground, which was the basis on which the 2006 exemption was granted.

However, “the Department of Homeland Security fully understands the energy needs of Southcentral Alaska and therefore wants to work with you to find an equitable way to allow transportation of your rig to Alaska,” Napolitano wrote in the May 20 letter.

An attorney for Escopeta, Jonathan Waldron, said he has been assured verbally by Glen Vereb, director of the U.S. Customs and Border Protection, that the Kang Sheng Kou can land and offload in Cook Inlet but that Escopeta may be subject to a penalty.

In an emailed statement, Department of Homeland Security spokeswoman Erlinda Byrd wrote, “The DHS will consider requests for penalty mitigation in the event of Jones Act violation on a case by case basis depending on the evidence and facts presented in each instance. No violation has occurred to date,” in the movement of the rig to Alaska.

The issue has caught the attention of U.S. shipping groups who push to have Jones Act provisions vigorously enforced. In a statement issued May 26 “Ship Strong for America,” a group based in Fort Lauderdale, Fla., said Escopeta is being motivated by pending termination of its leases in Cook Inlet. “It seems clear that in a race against time and money, Escopeta disregarded the Jones Act and decided that rolling the dice with the Department of Homeland Security rather than face default with its oil and gas leases in Cook Inlet,” Tony Munoz, director of Ship Strong for America, said in the statement.“If this violation is allowed to pass without repercussions, what’s to stop the next guy? American harbors will be filled with foreign vessels. Is that something we want?”

Meanwhile, on the Buccaneer Energy effort to move a second jack-up rig from Asia to Cook Inlet, changes needed in an agreement being negotiated between the AIDEA, Buccaneer and Ezion Holdings Ltd. to purchase TransOcean Ltd.’s Adriatic XI, now in storage in Malaysia, will delay bringing the rig to Alaska. AIDEA will invest about a third of the money needed for the $90 million deal. The changes in the deal with make the authority’s position more secure, Leonard told the AIDEA board May 25.

Leonard said there were still issues to be resolved in the final negotiations and it’s possible the deal could still fall though.

The delay means the Buccaneer-led group will miss being the first jack-up rig to reach Cook Inlet to claim a state incentive worth several million dollars. That will likely be captured by Escopeta if its Blake 151 rig arrives in Alaska later this year.

“Although we’ll miss that we will still benefit from other investment incentives being offered, which amount to about two-thirds of the costs of the exploration drilling,” Leonard said.

The Adriatic XI being purchased by Buccaneer, Ezion and AIDEA, if the deal finally goes through, is a heavier, larger jack-up rig than the Spartan Drilling Blake 151 jack-up leased by Escopeta, Leonard said. It will be able to drill in parts of Cook Inlet that are too deep for the Blake 151. Escopeta plans to use the Spartan rig on its leases on Cook Inlet.

“The delay is also an advantage because it will allow us more time to negotiate with a shipyard in Singapore on modifications needed to the rig, and to do the engineering on the modifications,” he said.

Under terms of the deal Buccaneer will contract to use the rig for at least four exploration wells on Cook Inlet leases owned by the company. Modifications to the rig will be done in the Keppel FELS shipyard in Singapore, Leonard said. Buccaneer and Ezion are arranging financing for the purchase of the jack-up rig with Overseas Chinese Banking Corp. Ltd., based in Singapore, he said.