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A tale of two rigs: cook inlet jack-up rig briefing.

Geologists have long believed Cook Inlet to be an underexplored hydrocarbon basin. Alaska's first commercial oil field in modern times was discovered at Swanson River, an onshore oilfield on the Kenai Peninsula that is still producing. That led quickly to a rush of exploration nearby, including in waters of the Inlet offshore.

The discoveries that resulted were to help shape Alaska, including establishment of a major industrial base for the Kenai Peninsula with its natural gas-based manufacturing. But the exploration of Cook Inlet was cut short.

In 1970, just as the first Inlet oil and gas fields were being developed, the discovery of world class oil deposits on the North Slope diverted the industry's attention. Money that ordinarily would have been spent in a second round of Cook Inlet exploration went to the North Slope, and there has not been sustained exploration until recently.

More to be Discovered

State geologists are confident that there are more oil and gas fields to be discovered in the inlet, however. In Cook Inlet there are the handful of larger discoveries and a number of small deposits found recently, but many medium-sized finds that were expected have not been made. They are still out there.

But where? Many believe the larger unfound deposits are in deeper waters of Cook Inlet. Exploration drilling with drillships in the 1960s and 1970s actually found some of these or at least indications of them. But at the time they were not large enough for the companies to pursue. However, the well logs and other data have long been made public, and now, a new generation of oil entrepreneurs, using new exploration tools, have been working to get more exploration done.

Lack of a critical technology--a jackup rig for drilling in deep water--has been a major obstacle, until recently. A jack-up rig is a floating barge that serves as a platform for a drill rig. It has large, vertical steel legs attached. Pulled into position with tugs, the rig lowers the legs to the sea bottom and literally jacks itself up from the water surface, creating a stable platform for drilling. When the well is finished, the drill platform is jacked back down, the legs raised and the unit is pulled away.

There has been recent onshore exploration drilling in the Cook Inlet basin with drill rigs designed to work on land, and many of these have yielded modest discoveries of natural gas. The big prize--more oil--appears to lie offshore, in the deep water.

Unlocking the Prize

Now there are two jack-up rigs, Spartan Drilling Co.'s Spartan 151 rig and the Kenai Offshore Venture's Endeavour rig, that will hopefully unlock this prize.

Kenai Offshore Ventures is owned by Buccaneer Energy, an Australian independent that owns offshore Cook Inlet leases, and Ezion Holdings of Singapore. ]he State of Alaska also has a minority interest in this rig, through an investment made by the Alaska Industrial Development and Export Authority. The Endeavour was in Homer through much of the winter, where modifications and some repairs were being made, and was to be moved to its first drill location off Anchor Point in early spring.

The Endeavour is a heavy rig designed for the rough weather of the North Sea. It can operate in water depths of 300 feet.

The Spartan 151 arrived in Cook Inlet in fall, 2011, and partially drilled its first well for its customer, Furie Operating Alaska (formerly Escopeta Oil) before ceasing operations for the winter and moving to Port Graham, south of Homer, for winter storage. In 2012 it returned to the first well location and drilled a second nearby well. Results of the drilling are still confidential, and the Spartan rig has now been returned to Port Graham for the winter.

Spartan's rig is smaller and can operate in water depths up to 150 feet. However, it is expected to also be less expensive to operate, which means that it can explore prospects of more modest size.

Getting the Rigs to Alaska

The story of how these two rigs got to Alaska is a tale of entrepreneurship, with individuals and small companies promoting the exploration. Things have not been easy for either Furie or Buccaneer.

Furie brought in the first jack-up rig, the Spartan 151. The effort to do that started in 2005 when Escopeta, a small independent, acquired Cook Inlet leases. Its president, Danny Davis, worked with geologists who believed the inlet had potential for very large gas and oil deposits at deeper than had been drilled before.

These were too far offshore to drill with high-angle directional wells from rigs on land, so Davis started working to get a jack-up rig from the Gulf of Mexico brought to Cook Inlet.

U.S. Sen. Ted Stevens helped Davis get an exemption from the U.S. Jones Act to use a foreign "heavy-lift" vessel to carry the jack-up rig, which would have to travel around the tip of South America. The Jones Act requires cargo transported between U.S. ports to be done using American ships. In 2006 there were no U.S. vessels suitable to transport the rig.

Unfortunately, Davis' financing went sour that year and he had to postpone the project. He put the financing back together in 2010, and Davis contracted with Spartan Offshore Drilling for use of the Spartan 151 jack-up rig.

However, the federal administration had changed, and Davis was denied a renewal of the Jones Act exemption. By then there was a U.S. vessel, a barge, that arguably could have carried the rig to Alaska, but Davis judged that the trip around South America too hazardous with the barge. A large heavy-lift ship was safer, although it was foreign.

Davis was meanwhile running out of time on his lease terms and decided to load the rig on a foreign ship and head north in 2011, hoping to meanwhile get the exemption.

That never happened, but the foreign ship dropped off the rig in Vancouver, B.C., Canada, for repairs to damage caused by storms, and U.S. tugs hauled the rig the rest of the way to Cook Inlet. The government, meanwhile, levied a $15 million fine against the company for the Jones Act violation.

Davis lost his job over the issue, and new management took over Escopeta and renamed the company Furie Operating Alaska. Despite the drama, Furie was able to get the rig on its first location in fall 2011 to drill the first well. Furie announced a discovery, but no more information has been released on the well.

Meanwhile Buccaneer Energy had offshore Cook Inlet leases, and in 2011 developed a plan to bring a larger jack-up rig from Asia and had found a suitable rig. The company approached AIDEA, the state development corporation, to help finance the deal.

At the time it seemed doubtful Escopeta would be able to get the exemption and get the Spartan 151 rig north, and state officials were anxious to get at least one rig to the inlet because of the developing shortage of natural gas in the region. AIDEA decided to invest with Buccaneer and its partners in the rig through Kenai Offshore Ventures, the company formed to own the Endeavour.

As it happened, the Spartan 151 rig did get to the inlet in 2011, but the rig was committed to drill wells for Furie. Buccaneer went ahead with its plan, and the Endeavour, with AIDEA's help, came to Cook Inlet in late 2012. Because it was coming from a foreign port there was no Jones Act issue with the use of a foreign heavy-lift vessel.

The Endeavour has had its own set of problems, however. Substantial work needed to be done on the rig before it could go to work, and that had to be done in Homer and took much longer than expected. It was good business for the City of Homer for the moorage fees paid and good wages for local welders and other workers, but it delayed the rig in drilling its intended first well in north Cook Inlet. The plan is now to drill a second target, a gas prospect offshore Anchor Point named Cosmopolitan, once the Endeavour receives its final certifications and approvals from government agencies. Once that well is drilled the plan is for the Endeavour to move to drill other prospects.

Importance of the Two Rigs

Despite all the problems, two things are important about the jack-up rigs: First, whatever the financial fallout on the thinly capitalized independent companies, the rigs are here, and they will be drilling. Second, it is important that there are two rigs. In these days, after the 2010 Gulf of Mexico undersea blowout, it's a good idea to have a back-up rig available for any offshore drilling, just in case.

So far there is no actual requirement for this in Cook Inlet but there could be someday. The Alaska Oil and Gas Conservation Commission, the state's oil and gas well safety regulatory body, briefly considered this after the Gulf of Mexico blowout, but did not make the requirement.

However, the fact that small independents are involved means that the state's regulatory agencies--the AOGCC for well safety and the Department of Environmental Conservation for oil spill prevention--must be vigilant to ensure procedures for oil spill prevention are being followed. An offshore oil blowout in Cook Inlet would be a disaster for the industry.

Mike Bradner is publisher of Alaska Legislative Digest and is a former state legislator and Speaker of the House.
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Title Annotation:OIL & GAS
Comment:A tale of two rigs: cook inlet jack-up rig briefing.(OIL & GAS)
Author:Bradner, Mike
Publication:Alaska Business Monthly
Date:Mar 1, 2013
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