Buccaneer Energy, an independent Cook Inlet explorer with high hopes but skimpy resources, saw those hopes come crashing down May 31. The company filed for Chapter 11 bankruptcy protection that day in a U.S. Bankruptcy Court in south Texas.
The company has been fighting a rear-guard action on finances almost since the time it arrived in Cook Inlet, bidding on lease sales and then bringing a jack-up rig to the Inlet from Asia with a Singapore company and the State of Alaska as partners.
Buccaneer had also become embroiled in a dispute with Cook Inlet Region Inc., which owns land adjacent to the state land on which Buccaneer’s producing Kenai Loop gas wells are located.
Buccaneer previously had a lease on the CIRI land but the Anchorage-based Alaska Native corporation for Southcentral terminated the lease. Buccaneer sued, claiming the termination was improper, but lost in court.
Meanwhile, CIRI filed a complaint with the Alaska Oil and Gas Conservation Commission, the state agency that regulates industry production practices, alleging that Buccaneer’s Kenai Loop wells were draining gas from its lands.
After two hearings and months of deliberations, the conservation commission decided May 22 to escrow all revenues from gas sales minus operating expenses at Kenai Loop until it could sort out how the gas should be shared among Buccaneer, CIRI, the State of Alaska and the Mental Health Land Trust. Under the commission order, the escrow account was to be created at an Alaska bank by June 1, and revenues to be deposited on the 10th day of each month beginning in June until an allocation was determined.
Cut off from its only source of cash income amid its restructuring, Buccaneer had no choice but to file for protection, sources familiar with the company said.
In bankruptcy filings for its parent and subsidiary companies, Buccaneer claimed combined assets of $50,000 to $500,000 and liabilities of between $50 million and $100 million.
In a state Superior Court civil dispute between Buccaneer and CIRI paralleling the AOGCC case, the Native corporation sued for compensation over the gas drained from its land.
On April 22, Judge Frank Pfiffner stayed a ruling on CIRI’s drainage claims until a decision is handed down by the commission or an agreement is reached between CIRI, Buccaneer, the Department of Natural Resources and the Mental Health Trust Land Office, which owns the Kenai Loop property adjacent to CIRI’s parcel.
As of June 3, Buccaneer had not set up the escrow account, AOGCC Commissioner Cathy Foerster said. The company asked for clarifications regarding its responsibilities, she said, and a 10-day comment period was issued for the other parties involved to respond.
June 10 is also the deadline set by the commission for the parties to reach an agreement on gas and royalty payments. If an agreement is not reached, the commission will determine gas rights at a future hearing.
“We don’t have an agreement yet; we’ve been close a few times over the last year — certainly the last six months,” DNR Commissioner Joe Balash said June 2. “I would say there’s no good reason we don’t have an agreement, that’s my perspective.”
The “hodgepodge” of subsurface ownership, combined with disputing past and future payments has complicated negotiations, he said.
Trust Land Office Deputy Director John Morrison said there has been “good communication among all four parties” and that he felt they were close to an agreement June 3.
CIRI spokesman Jason Moore said it is unclear whether Buccaneer’s bankruptcy would influence negotiations, but also that the Native corporation could see the bankruptcy coming.
Moore said CIRI pressed for the escrow account to be set up to hold funds in dispute.
Further, he said the Trust Land Office owes CIRI “a lot of money” for royalties it has taken from CIRI gas produced on the Kenai Loop pad. CIRI has a right to 20 percent of production minus expenses, according to Moore.
CIRI Land and Energy Development Vice President Ethan Schutt said at an April 21 AOGCC hearing that the Kenai Loop wells were producing in the neighborhood of 8 million cubic feet of gas per day.
Morrison said the Trust Land Office is “pretty comfortable” that the payments it receives from Buccaneer will be safe from creditors involved in the Chapter 11 bankruptcy action after discussing the issue with counsel.
Foerster said she did not know whether the bankruptcy would affect Buccaneer’s regulatory commitments.
As for the Land Trust Office’s royalties, Balash said there is a memorandum of understanding, or MOU, between the Alaska Mental Health Trust Authority and DNR that gives the department the responsibility to help the authority maximize revenue from its lands. The MOU shifts gas royalty payments that typically go to the Division of Oil and Gas to the Trust Land Office when produced on Trust land, he said.
“At least from where I sit (the MOU) causes all ‘ties’ to go to the trust, and that’s OK because the situation we find ourselves in is that it’s either going to the general fund or the Mental Health Trust account and either way they’re state sources of revenue,” Balash said.
Income from leasing and resource development on the 1 million acres of Mental Health Trust land across the state is part of the roughly $26 million the trust budgets each year for programs and services for Alaskans with disabilities and mental illness, according to the trust.
Overall, Balash said the state has had “a couple rubs” with Buccaneer during the company’s oil and gas work in the state, but he said the issues were nothing out of the ordinary. Buccaneer still holds other Cook Inlet leases that are currently without issue, he said.
“They were an aggressive company and had a lot of enthusiasm; they just didn’t have enough capital,” Balash said.
Plague of problems
Before the May 22 Kenai Loop decision and the May 31 bankruptcy filing, a lot of other things went wrong for Buccaneer, including a dispute and a lawsuit with its first rig operator, delays in getting the jack-up operating, problems siting the rig at an offshore location in the Inlet and an expensive dry-hole on the Peninsula.
The unraveling of the company’s Alaska strategy began in March when the board of directors suspended CEO Curtis Burton with pay pending a review of operations. Burton meanwhile filed a lawsuit in a Texas state court arguing a breach of his employment contract.
On May 14 the board completed its review, terminated Burton and also removed him from the board. Burton’s lawsuit continues, meanwhile.
What really aggravated the financial situation was when an investor that had promised to help fund expensive offshore drilling at Buccaneer’s Southern Cross prospect failed to come through with the money.
One of Buccaneer’s shareholders, Meridian Capital International Fund, stepped in with interim financing, but the company was still left seeking other longer-term capital.
There was a second win, however, with a potentially major gas discovery at Cosmopolitan, near Anchor Point. It was a bittersweet development, though. To raise cash, Buccaneer had to sell its minority interest in the discovery to its partner in Cosmopolitan, BlueCrest Energy of Fort Worth, and also its share of the jack-up rig.
Through all of this, Buccaneer worked on a long-term refinancing strategy.
On April 30 the company’s major creditor, Meridian Capital CIS Fund, an affiliate of Meridian Capital International, sold its debt to Houston-based AIX Energy LLC, a privately-held energy finance group that has been affiliated with Meridian. Meridian itself remained as a major shareholder
Sources familiar with Buccaneer said a major payment to AIX on the debt is due June 30, but that may be delayed due to the bankruptcy.
What made people really take note of Buccaneer initially in Cook Inlet was its discovery of the small Kenai Loop gas field near the city of Kenai and successful production of gas in 18 months from the time the exploration well was drilled, which is light-speed compared with the lengthy permitting and occasional lawsuits that get other companies bogged down.
Ironically, it was Kenai Loop that finally forced the company into bankruptcy after the commission’s decision. The company will now sell most of its assets.
Kenai Loop’s discovery came at a time when the regional utilities were deeply worried about depleted gas fields in Cook Inlet and the possibility that they would have to import gas as liquefied natural gas. Buccaneer showed, with a drill bit, that there was still gas to be found.
Also, the company found new gas just a mile from the long-producing Cannery Loop gas field, formerly owned and operated by a large company, Marathon Oil. This seemed to show that the large companies like Marathon that have long dominated the industry were not aggressively exploring despite the utilities’ worries.
“As part of the Chapter 11 proceedings Buccaneer Energy has also reached an agreement in principle with its secured lender on certain critical elements of a plan of reorganization that would result in the sale of substantially all of the company’s assets,” Buccaneer said in a June 2 press release.
Meanwhile, there are no changes, for now, in production operations. The company has three employees overseeing the Kenai Loop gas wells.
“Buccaneer will continue to operate and oversee its assets during and throughout the restructuring process,” the press release said.
The restructuring should allow Buccaneer to pay off its creditors, but at the expense of its assets.
“The company expects to have sufficient cash on hand throughout the Chapter 11 proceedings to pay all of its post (bankruptcy) petition obligations as they come due,” the press release said.
What next for Endeavor rig?
With the bankruptcy filing of Buccaneer Energy, what happens to the Endeavour jack-up rig that is still parked at Port Graham in lower Cook Inlet and partly owned by the Alaska Industrial Development and Export Authority?
The answer: AIDEA and Ezion Holdings, the remaining partner in the rig, are looking for work for the rig and wells to drill.
Buccaneer had chartered the rig for its exclusive use to drill several wells in the Inlet this summer, including a deep test for oil at the “Tyonek Deep” North Cook Inlet gas field held by ConocoPhillips’.
That well will not be drilled, this summer at least. AIDEA officials expect Buccaneer will be relieved of its charter obligation as a part of the bankruptcy filing.
Assuming the South Texas bankruptcy court approves this, the rig would be placed back under the control of Kenai Offshore Ventures, the AIDEA/Ezion partnership that owns the Endeavour, according to Mike Catsi, business development manager for the authority.
“KOV, through its member-manager Ezion, is already investigating and negotiating with a replacement rig manager,” an entity to take the place of Buccaneer.
The day-to-day management of the rig is through a drilling contractor, Spartan, which is also managing the other jack-up rig in the Inlet, the Spartan 151 that is working for Furie Operating Alaska, another independent working in the Inlet.
Catsi said Buccaneer, through a subsidiary Kenai Drilling, was obligated to make payments and it did so through Dec. 1, 2013.
However there were five monthly payments from the end of 2013 and through the first months of 2013 that were deferred and not yet due, Catsi wrote in an email.
There may yet be business for the rig.
“AIDEA has been approached by another party who has expressed strong interest in using the rig in Cook Inlet. AIDEA has passed this information through to Ezion Holdings,” Catsi wrote.
Buccaneer had promoted the rig being brought to Cook Inlet and persuaded AIDEA and Ezion Holdings to help finance the purchase of the drilling unit and its move to the Inlet.
Buccaneer was originally an investor and a major partner in Kenai Offshore Ventures but had to sell its shares last year when the company encountered financial difficulties.
Although it was no longer an owner, Buccaneer still had its charter of the rig for drilling, however.
In his email, Catsi described AIDEA’s current relationship with the rig: “AIDEA is a Preferred Member in Kenai Offshore Ventures, LLC with a stake of about $23.6 million invested. Ezion Holdings Limited and its affiliate Teras Investments Pte., Ltd. (who bought out Buccaneer’s stake in KOV in January of this year) are the Common Members of KOV; Buccaneer is no longer a member of KOV,” Catsi wrote.
“AIDEA is entitled to receive repurchase payments of its entire investment plus dividends at fixed dates, if KOV’s revenues and cash permit. AIDEA has received one payment against dividends owed to AIDEA of about $4,062,000 in February of this year. All of AIDEA’s investment plus dividends must be repaid by KOV by January 1, 2018 (regardless of KOV’s revenues and cash) or AIDEA may pursue recourse to all its security including the rig.”
The Endeavour is capable of drilling to 20,000 feet and in water depths up to 300 feet. It was originally designed for the North Sea but was in storage in Asia when it was purchased by the Kenai Joint Ventures partners. After modifications it was brought to Cook Inlet.
The other jack-up rig in the Inlet, the Spartan 151, was brought earlier from the U.S. Gulf coast by Escopeta Oil and Gas (now Furie Operating Alaska).
AIDEA made the decision to help Buccaneer get its jack-up to Alaska because at the time it was not clear that Escopeta could get the Spartan rig moved. The authority felt there was an urgent need to have a jack-up rig in Alaska because of the belief then that there could be shortages of natural gas in Southcentral Alaska.
Tim Bradner can be reached at firstname.lastname@example.org. Elwood Brehmer can be reached at email@example.com.