Two firms race to get jack-up rigs to inlet

Posted: Sunday, December 12, 2010

Two independent companies are in a race to get a jack-up rig to Cook Inlet this summer. The winner qualifies for 80 percent to 100 percent of the first three wells being paid for by the state, with a limit of $25 million for the first well.

It's an either/or deal. Whichever gets here first and gets its well down gets the money.

The incentive is offered through a bill the Legislature passed earlier this year, in which the state would pay a major percentage of the cost of the first three wells drilled by the first rig to get to Cook Inlet.

One contender is Escopeta Oil and Gas, a small Houston-based company that holds Cook Inlet offshore leases and has been working to get a jack-up rig to the Inlet for several years. Escopeta has contracted with Spartan Offshore Drilling of Metairie, La., to bring the Spartan Rig 151 north to Alaska.

Also in the race is Buccaneer Alaska, a subsidiary of an Australian company of the same name, which has formed a separate company, Kenai Ventures LLC, to purchase a jack-up rig in Asia and bring it to Cook Inlet, where the rig would be stationed.

Danny Davis, president of Escopeta, also has an option to purchase Spartan's rig, and keep it in Cook Inlet. Spartan, meanwhile, is placing advertisements in Alaska newspapers on job openings for drillers and other rig workers.

The state Division of Oil and Gas also has negotiated an extension of the Cook Inlet leases held by Escopeta, which would have expired, based on the company's contract with Spartan Offshore and verification that Escopeta has the financing to bring the rig north.

A twist in this is that Buccaneer is seeking $60 million in low-cost financing available through a federal stimulus program to help it purchase its rig. Under federal law, the financing must be coordinated by a state development corporation, such as the Alaska Industrial Development and Export Authority. A private bank, in this case, KeyBank, would actually issue revenue bonds, which will be tax-exempt under the federal program.

The clock is ticking on this. AIDEA's board will meet within days to give final approval to the transaction, and the bonds have to be issued by Dec. 31. Separately, the state authority is considering an equity investment in the rig venture with Buccaneer, but no decision has been made on that.

Buccaneer intends for its rig to get to Alaska and quality for the state incentive, which is separate and has no connection with the federal tax-free financing or any equity investment by AIDEA, said Mark Landt, Buccaneer's vice president.

Escopeta's Davis says he has raised private investment for his venture and that it's unfair to have competition that has access to cheap tax-free financing and with a possible equity investment by the state development corporation.

"I'm not asking the state for a penny," beyond the incentive being made available to both companies, "and I don't think it's right for the state to be competing with the private sector."

Buccaneer is welcome to use his rig, Davis said. "Buccaneer is an OK company. I hope they use our rig. We welcome them," he said.

Davis said the Spartan 151 rig is the right size for Cook Inlet and would be open to other companies, including Buccaneer. The rig Buccaneer would purchase in Asia is larger, which means that it could be used in other locations in Alaska than Cook Inlet, but Davis said its rates would also be higher.

The rate for the Spartan rig would be about $60,000 to $70,000 per day, while the larger rig Buccaneer would bring would likely cost more than twice that, Davis said.

Spartan hopes to get its rig ready to move to Alaska in mid-February and to have the unit in Cook Inlet by mid-April, he said.

One problem Davis has that Buccaneer doesn't, however, is a Jones Act restriction on moving a cargo - in this case the jack-up rig - from one U.S. location to another in a foreign-built vessel. Spartan 151 would have to be brought from the U.S. Gulf of Mexico on a special heavy-lift vessel, of which there are none that are American-built.

State oil and gas director Kevin Banks said Davis believes an exemption from the Jones Act secured some years ago by the late Sen. Ted Stevens is still valid, although the exemptions are issued for specific ships and the vessel Davis will charter may be different this time. In any event, the waiver could throw a wrench into Escopeta's plans.

Since Buccaneer would bring its rig from Asia it doesn't have to worry about a Jones Act waiver.

Davis has two prospects on leases held by Escopeta that would be immediate targets. One is an old prospect explored by Arco Alaska in the 1990s named Sunfish that was initially promising but then dropped after further exploration.

Davis says the prospect has gas and at the time, Arco was looking for oil and wasn't interested in gas because of its low value in the 1990s. It didn't help that oil prices plummeted in the late 1990s, he said. Davis said the prospect needs further exploration, and that it could have as much as 400 million barrels of oil and 4 trillion cubic feet of gas.

There is a second prospect on Escopeta's leases that also has good potential.

Landt, of Buccaneer, said his company also has two immediate prospects on its leases, but that Kenai Ventures' rig would be available later for others to use, including Escopeta.

Escopeta and other Cook Inlet leaseholders, including firms that were acquired by Buccaneer, have worked for several years to bring a jack-up rig to the Inlet. The problem has been the hefty costs to move the rig and to give the drilling company assurances there are enough prospects to keep the rig busy, and to pay for moving it back out of Alaska.

Buccaneer's approach to buy a rig and keep it in Alaska is a different approach.

The efforts have also been hobbled by the fact that the companies holding the leases are independents, small in the case of Escopeta, without the large financial reserves of a major company.

The major companies still active in Cook Inlet like Chevron, ConocoPhillips and Marathon Oil, have shown little interest in exploration, preferring to leave the field to independents.

The state's agreement with Escopeta on extending the Kitchen Lights unit, which holds the company's leases, is conditioned on Escopeta providing proof that the drill rig has been mobilized by March 30, 2011, and that an exploration well will have been drilled by Oct. 31.

The agreement was signed Nov. 23 by the state Department of Natural Resources and Escopeta.



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