Homer Alaska - Business

Story last updated at 7:27 PM on Wednesday, February 23, 2011

AIDEA board OKs negotiations for investment in rig

By Tim Bradner

The Alaska Industrial Development and Export Authority's board gave its staff approval Feb. 14 to negotiate final agreements related to a $30 million equity investment by the state of Alaska in a jack-up rig to be purchased by Australia-based Buccaneer Energy and moved to Cook Inlet.

"Our board has given us authority to proceed to a set of definitive agreements regarding the financing and partial ownership of a jack-up rig to be used for the drilling of exploration wells in Cook Inlet," AIDEA spokesman Karsten Rodvik said in an interview.

James Watt, president and CEO or Buccaneer Alaska, said in an interview that the overall cost of acquiring the rig, now in Asia, and moving it to Alaska is in the $90 million range.

The deal being discussed would give the state development authority about a third of the ownership in the rig, he said.

Meanwhile, a small Houston-based independent, Escopeta Oil and Gas, is still working to move a smaller jack-up rig from the U.S. Gulf of Mexico to Cook Inlet. Escopeta has leased a jack-up rig but must secure federal exemption from a U.S. law that requires shipments between U.S. ports to be done with American-built and American-crewed vessels.

The drill rig is U.S.-built, but Escopeta is working to hire a foreign-built heavy-lift vessel to transport the rig to Alaska, and needs the exemption from the U.S. Jones Act.

That exemption has not yet been secured, Steve Sutherlin, who was representing Escopeta, told AIDEA's board Feb. 14.

The state authority has done a study of Buccaneer's business plan with consideration that Escopeta may have a jack-up rig working in the same area and has still found the venture to be attractive, Rodvik said.

Watt said the AIDEA investment is important because Buccaneer has been unable to fund another source of equity capital for the project. AIDEA may wind up investing with Buccaneer in Kenai Offshore Ventures, a company Buccaneer has formed to own the rig, although the final structure of the deal has not been determined. An experienced drilling contractor will be hired to operate the rig, Watt said.

Watt said a drilling unit has been tentatively identified for purchase, but would not give its current location. "We have a preferred choice," he said.

Watt said the rig is capable of drilling in waters up to 300 feet, which is the deepest water of several prospects the rig might drill. It also will be equipped with a blowout preventer capable of handling 15,000 pounds-per-square inch, he said.

The unit also will have capabilities to drill wells on platforms that now operate in the Inlet. Some platforms have drill rigs fixed on the platform but some do not, and having the capability will open several opportunities for the rig.

Buccaneer opted to equip the rig with the heavier blowout preventer because Cook Inlet is known to have high-pressure sands, Watt said. There were several gas blowouts in the early days of Cook Inlet drilling, although no oil spills.

The rig also will be outfitted to withstand Cook Inlet's cold water temperatures.

Watt said his company hopes to get the rig moved to Alaska this summer and to have the first well spudded by fall. The state of Alaska has separately set out a set of generous investment tax credit incentives that will essentially pay 100 percent of the first exploration well.

Rodvik said AIDEA's board approved a $200,000 expenditure to pay legal and other fees related to the negotiations. The authority has already conducted a review of Buccaneer's business plan, he said.