Furie defers 2017 drilling for want of tax credit payment

Cook Inlet gas producer Furie Operating Alaska is blaming its scuttled 2017 drilling season on a technical problem and the Alaska government’s nonpayment of incentive funds Furie expected and relies on.

 

Furie is the second Cook Inlet gas producer this year to blame undrilled wells on the loss of cashable tax credits, which the financially-troubled state government has limited for the past three years and voted to phase out in 2016. BlueCrest Energy experienced similar problems in August.

“Several factors outside of Furie’s control precluded Furie from drilling additional exploration or development wells in 2017,” the company’s representatives wrote in their 2018 plan of development, giving a yearly recap of activity to the Alaska Department of Natural Resources’ Division of Oil and Gas, “The major contributing factor was the lack of any meaningful appropriation to the oil and gas tax credit fund for the purchase of Alaska oil and gas production tax credit certificates.”

Local natural gas generates most of the Cook Inlet region’s heat and electricty. Furie has a contract, set to start in April 2018, to supply 6.2 billion cubic feet of it per year to ENSTAR Natural Gas — about 18.8 percent of regional gas utility’s 33 billion cubic foot annual demand. Furie is also contracted to supply Homer Electric Association’s gas-fired generation plants with fuel until 2018, with an optional contract extension until 2020. Furie Senior Vice President Bruce Webb declined an interview on whether the deferred drilling would affect these contracts.

Furie’s predecessor Escopeta Oil and Gas entered Cook Inlet in the late 1990s with a wave of smaller independent producers arriving as major companies left the aging hydrocarbon basin for more profitable opportunities on the North Slope.

For most its history, the company has been heavily reliant on the refundable tax credits the Alaska Legislature offered to incentivize these independents, particularly after lost drilling and exploration investment threatened Cook Inlet with gas shortages in the late 2000s. In August 2011, when Escopeta became the first company in almost twenty years to bring a jackup rig to the inlet for fresh offshore exploration drilling, it was stimulated by a 100 percent refundable tax credit reimbursement up to $25 million under an incentive program the Alaska Legislature passed in 2010.

Furie’s chief financial officer David Elder — speaking to the Alaska House of Representatives Resource Committee in March 2016 — said the incentives Furie relies on for positive returns include one crediting 20 percent of exploration expenditures, one crediting 25 percent of an annual loss, and another crediting 40 percent of well lease expenditures.

To account for newer producers investing in exploration and drilling while seeing little taxable production, the incentive program allowed companies credited beyond their tax liability to cash the credits for refunds from the state.

Cook Inlet producers have cashed far more credits than they’ve used against tax liabilities, according to a January 2016 Alaska Department of Revenue analysis, which found that between fiscal years 2007 and 2014 non-North Slope producers (the majority in Cook Inlet) used a total of $101 million in credits against tax liability while claiming credit refunds of $504 million.

In 2015 and 2016, when the state ran budget deficits of around $4 billion, Alaska Governor Bill Walker vetoed funds budgeted for these payments. In 2015, Walker cut a $700 million appropriation to $200 million, and in June 2016 cut an appropriated $430 million to the statutory minimum of $30 million to be dispersed among the companies attempting to cash their credits.

“These vetoes essentially gutted Furie’s sourced budgeted funds for 2016,” the company’s development plan states.

With the June 2016 passage of House Bill 247, the legislature stopped issuing refundable tax credits for Cook Inlet, but as of January 2017 the state was still obligated to refund $571 million in existing credits, according to an April 2017 report from former Department of Revenue commissioner Randall Hoffbeck to legislators. Of this amount, companies were then requesting payment for $476 million.

Furie, according to its development plan, had “a very substantial amount of tax credit certificates in the queue awaiting purchase by the state” which “are a key component to funding further exploration and development activities …and were relied on by Furie when putting together its work program and budget.”

Of the $72.6 million the state paid for credits in calendar 2016, Furie’s ownership company Cornucopia Oil and Gas took little more than half — $39.8 million, according to Hoffbeck’s letter.

The state’s present fiscal 2018 budget appropriates $77 million for paying credits. The Department of Revenue is scheduled to report on the credits paid in calendar 2017 in April 2018.

In August 2017, another Cook Inlet gas producer, BlueCrest Operating, also cited deferred payment of about $75 million in tax credit reimbursement as a reason for ending its season after drilling two of the five wells it had planned that year. In a September submission to the Division of Oil and Gas, BlueCrest officials stated the company plans at least one new well in 2018.

Furie extracts gas from the Kitchen Lights gasfield — at 83,394 acres, Cook Inlet’s largest state lease — through its Julius R monopod platform, roughly 10 miles south of Tyonek. Julius R can accommodate six wells, three of which have been drilled. The first started producing in November 2015 and the second in 2016. The third has been drilled but remains incomplete.

According to the 2017 development plan, Furie intended to finish the incomplete well by Novemeber 2017, as well as finishing other drilling to evaluate the possibility of a new production well.

Furie used the jackup rig Randolph Yost, owned by the Dubai-based company Shelf Drilling, for its Cook Inlet work this year, the same as previous year. Though the rig was staffed for drilling in April, the Legislature didn’t authorize funding for the tax credit purchases that would fund Furie’s work until passing the state operating budget in June, ultimately giving $77 million for the purchases.

Shortly afterwards, technical problems complicated the financial ones. The Randolph Yost requires an anchor tender to help secure the extendable legs that hold it on the sea bottom. The tug boat contracted to handle Randolph Yost’s anchor system needed to depart for a dry dock in Singapore in July.

The Randolph Yost remained staffed and prepared to drill through mid-August, the plan states, when Furie’s leaders were told the tug wouldn’t return until October. A prospective substitute tug was in the Gulf of Mexico and couldn’t arrive before the season’s end.

“In sum, the lack of a timely resolution regarding funding for (the Alaska Department of Revenue) to purchase tax credits delayed operations until the anchor handling tug boat was no longer available, and it was not returning to Alaska until the very end of the drilling season,” the plan states.

Although the drilling didn’t take place, the plan states that Furie finished other work in 2017, including using a rig on the Julius R to reach into one of the platform’s wells and pull out a stuck tool that was blocking production, and deploying divers to plant stabilizing sandbags under the 15-mile pipeline that carries gas from the Julius R to shore.

Furie plans to finish completing its third well and do other exploration work in 2018.

Both Furie and the Kitchen Lights lease-holding company Cornucopia are held by the publicly-traded Deutsche Oel &Gas, based in Luxembourg.

Deutsche Oel &Gas’ chairman Kay Rieck — a German citizen living in Dubai, according to a 2015 lawsuit filing from Texas’ Third District Court of Appeals — is also the sole owner of another Cook Inlet oil and gas producer, Aurora Gas, which was forced into involuntary bankruptcy in May 2016.

Reach Ben Boettger at ben.boettger@peninsulaclarion.com.

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