AIDEA close to investing in Cook Inlet rig DRILLING: State agency would provide $30 million of $85 million deal.

The Alaska Industrial Development and Export Authority is inching toward investing $30 million in a jack-up rig for Cook Inlet.

The state business-lending agency would make the investment in partnership with Buccaneer Alaska Drilling.

Separately, another company, Escopeta Oil, is winterizing a privately financed jack-up rig in Galveston, Texas, in advance of its plans to move the rig to the Inlet.

If both projects hit their timelines, Cook Inlet could get two jack-up rigs for oil and gas drilling this year.

At a board meeting Feb. 14, AIDEA agreed to spend up to $200,000 developing a "finance plan" that would include a joint ownership agreement and financing guarantees and would outline drilling commitments.

If the deal ultimately goes through, AIDEA would co-own the rig along with Buccaneer.

Buccaneer, the local subsidiary of an Australian oil company, operates two offshore Cook Inlet units but says it also intends to lease the rig to others.

Of the estimated $85 million cost of the project, $30 million would come from AIDEA, $50 million would be borrowed in a deal currently being negotiated and $5 million would come from Kenai Offshore Ventures, a Buccaneer subsidiary.

Buccaneer said it is "in the process of negotiating with an Asian based joint venture partner" to become a 50 percent shareholder in Kenai Offshore Ventures.

AIDEA WOULD HAVE SECOND LIEN

The lender of the $50 million would have first lien over the jack-up rig, giving it a priority position to take custody of the rig if a loan default occurs. AIDEA would have second lien, a less secure position. Buccaneer expects to repay the loan in five years using rig revenue.

The parties will now craft an ownership agreement between AIDEA and Kenai Offshore Ventures, a five-year Bearboat Charter Agreement between Buccaneer and the rig operator, financing guarantees for AIDEA and work commitments for Buccaneer to commit to drill at least four wells in Cook Inlet, starting with a well this summer.

Buccaneer expects those agreements to be ready for a vote in 30 to 45 days.

The companies also still need to decide which jack-up rig they want to buy. The rig must be able to drill in 300 feet of water to depths of 25,000 feet and must be able to operate in Cook Inlet and the Arctic Ocean, where Buccaneer plans to lease out the rig to other companies.

THIRD PARTNER DROPS OUT

Buccaneer asked AIDEA to join the project last year, first as a bond-issuing agency and then as a co-owner of the rig.

AIDEA studied the proposal in December and January to see if it made good business sense and on Feb. 14 said the study determined that "the rig meets the technical specifications necessary to support the business model and therefore the revenue estimates," according to AIDEA management.

Buccaneer also plans to form a company to operate the rig on behalf of Kenai Offshore Venture and AIDEA. That company would contract the rig to producers like Buccaneer and other leaseholders and would handle day-to-day operations on the rig. The company would pay Kenai Offshore Ventures and AIDEA an annual lease amount for the rig.

Buccaneer originally planned to hire Houston-based Seahawk Drilling to operate the rig.

The original version of the AIDEA resolution posted online included Seahawk as an equity partner on the jack-up rig project, but a revised resolution posted on Feb. 14 did not. On the same day as the meeting, Seahawk filed for Chapter 11 bankruptcy protection.

At an AIDEA board meeting in November, Buccaneer Alaska CEO Jim Watt described Seahawk as one of three "participants" in the project alongside Buccaneer and AIDEA. However, AIDEA staff told the board in January that the scope of the project continued to change as closed-door negotiations progressed.

AIDEA spokesman Karsten Rodvik said the Seahawk news did not affect the deal.

COMPETITION FROM THE STATE

The other rig aimed at Cook Inlet, a Spartan 151 jack-up, is being winterized in the Gulf of Mexico, and Escopeta plans to move it to the Inlet next month, in time to start a well at its Corsair prospect in May.

"Wouldn't it be the thrifty thing to do to hold off until mid-March after the Spartan 151 is headed north, and then AIDEA will know for sure that we have a jack-up rig headed to the Inlet?" Steve Sutherlin, a contractor for Escopeta, said during public comments about AIDEA's proposal to spend up to $200,000 developing a finance plan that would include a joint ownership of Buccaneer's jack-up.

Sutherlin is a former Petroleum News writer and minority owner in the company. His Anchorage-based firm, Strategic Action Associates, has two oil company clients in Alaska, Escopeta and Shell. Sutherlin's project with Shell is unrelated to his work on Escopeta's Cook Inlet activities.

Following years of false starts, Escopeta is now closer to bringing a jack-up rig to Alaska than any company in nearly two decades, having contracted a rig and a heavy haul vessel to move it, but Escopeta is concerned about having a state-backed competitor.

"How will AIDEA's rig make a living when Escopeta's rig is in the inlet?" Sutherlin asked. "Escopeta's business model makes its rig available to other companies. Will AIDEA subsidize its own rig until it can undercut Escopeta? Escopeta doesn't want to compete with AIDEA."

Escopeta is looking to explore Kitchen Lights, a large offshore unit in upper Cook Inlet, as well as lease the jack-up to others.

TAX CREDITS UP FOR GRABS

Getting a jack-up rig to Alaska has become a public policy issue because underexplored offshore prospects in Cook Inlet could turn around declining production of oil and natural gas in the basin.

The state created a tax credit last year that pays up to $25 million of the cost of the first offshore well drilled to a certain depth in Cook Inlet using a jack-up rig and large credits for the second and third wells drilled by different companies using the same rig.

Sutherlin suggested that AIDEA put the project out for public bidding rather than fund one company over another. "Maybe AIDEA would find a partner that would bring more of its own cash to the table and/or offer a better deal to the state of Alaska," he said.

State Sen. Tom Wagoner, R-Kenai, congratulated AIDEA and Buccaneer on their effort.

"Bringing a jack-up rig to the Cook Inlet will reinvigorate oil and gas exploration in the basin," Wagoner said. "I've been working a long time to get a jack-up rig to the Cook Inlet and am pleased to see that the incentives in legislation I introduced last year were instrumental in getting us closer to that goal."

Wagoner aide Mary Jackson said the senator has no preference on which company gets a jack-up to the Inlet first: "The legislation was designed to create a stampede. ... We just want a jack-up in the Inlet."

Wagoner drafted the "Stampede Provision" that created the jack-up rig tax credit, but his amendment requires all credits to be attached to one rig, meaning that Buccaneer and Escopeta won't both collect the credits.