OFFSHORE DRILLING

Swashbuckling independent leads charge to revive Cook Inlet

First in a two-part series.

KENAI, Alaska -- In late September, Buccaneer Energy Ltd. came face to face with one of the perils of oil and gas exploration in the Cook Inlet, a 180-mile-long finger of water that stretches from the Gulf of Alaska to Anchorage.

While installing well control equipment at the company's Southern Cross site, located near the majestic Mount Spurr, workers became aware of sand scouring around the legs of the Endeavour drill rig. The inlet's fast-moving tides were causing the jack-up rig's legs to settle unevenly into the seafloor, creating a slight tilt.

Buccaneer executives considered repositioning the rig but feared they couldn't complete their drill plan before the north inlet drilling season closed Oct. 31. Instead, they moved the 400-foot-tall Endeavour to Port Graham, a small harbor south of Homer, where the rig is being fitted with cold-weather equipment.

Sydney-based Buccaneer is one of a small group of independent energy companies that are searching for the pockets of oil and gas left in the Cook Inlet after international energy giants abandoned the area for more lucrative energy prospects.

Buccaneer, which describes itself as "a small company that dares to do big things operationally," has gained a swashbuckling reputation by aggressively leveraging its resources to gain access to promising leases in the Cook Inlet.

Although the majors pumped oil and gas from the inlet's offshore and onshore lands for more than 50 years, attractive reserves still remain. The U.S. Geological Survey estimates that the region contains 19 trillion cubic feet of undiscovered and technically recoverable natural gas and 599 million barrels of oil.

So far, Buccaneer has identified proved and probable reserves on its leases of 69.9 million barrels of oil equivalent, about 70 percent of which is oil. But company officials say that's just the tip of the iceberg.

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"The basin is so underexplored that there hasn't been a jack-up rig in the Cook Inlet since 1992," Buccaneer Chairman Dean Gallegos said at an Oct. 16 global resources conference held by Canaccord Genuity, an Australian-based securities advisory firm.

"The shale potential of the basin hasn't been explored yet at all," he continued. "There have been none of the modern drilling methods [that are used in] the lower 48 applied to this basin. So you haven't had modern 3-D seismic. You haven't had horizontal drilling. You haven't had fracking."

The independents drawn to the Cook Inlet are resuscitating the region's declining economy, observed Chuck Johnson, lead production operator at Buccaneer Alaska Operations' Kenai facility.

"The Marathons and Conocos came in and picked all the low-lying fruit, the big proven reserves," Johnson said.

"Now the independents are using more technology to find some of the smaller stuff. The smaller independents don't have nearly the overhead that the larger ones do. They're coming in and just changing everything."

Lured by 'free money'

Buccaneer was attracted to Alaska by the promising oil and gas reserves. But the prospect was sweetened by the lucrative energy tax incentives adopted by the state in 2008 and 2010 to lure energy companies to the Cook Inlet.

Those incentives were approved by state lawmakers at a time when natural gas and oil production was waning in the inlet.

Faced with potential shortages, Alaska's natural gas users began making contingency plans. Local utility companies joined forces to study whether they needed to import liquefied natural gas to provide heat and electricity to Alaska's south-central population centers.

To lure new investment to the inlet, the state created a generous rebate program that refunds up to 65 percent of a company's exploration costs associated with drilling at offshore or onshore leases. Alaska also rebates up to 45 percent of the development costs.

Both cash incentives are available regardless of whether the company succeeds in producing oil or gas.

Buccaneer alone has received $31 million in tax rebates under the Alaska drilling incentive program and accrued another $25 million to $30 million of eligible expenses.

"It's about the closest thing you're going to get to free money from a government in the world," Buccaneer's Gallegos said at the conference.

The company launched its Alaska operations in 2010 by acquiring 57,600 acres of onshore and offshore Cook Inlet leases from Stellar Oil & Gas for $2.65 million.

After it acquired the inlet leases, the company's first move was to drill for natural gas at its onshore leases in Kenai. Within 18 months, Buccaneer was selling 10 million cubic feet of natural gas each day to ENSTAR Natural Gas Co., which serves the Anchorage area. Buccaneer used those revenues to help expand its operations.

To tap into the company's deep oil reserves, Buccaneer took the bold move of buying its own jack-up rig. The company acquired a used rig through a partnership with Singapore-based Ezion and the Alaska Industrial Development and Export Authority.

Before hauling the rig to Homer, Buccaneer officials held a naming contest in Alaska. The winner: Endeavour -- Spirit of Independence.

Naming the rig was easy, but bringing it online proved harder than Buccaneer anticipated.

Once the massive rig was in port, the company discovered it still needed serious repairs and upgrades. Lingering construction problems led to a court battle between Buccaneer and its contractor Archer Drilling. That dispute has yet to be settled.

By May, the newly refurbished Endeavour made its debut in the inlet and hit pay dirt. Drilling at the company's offshore Cosmopolitan lease, Buccaneer discovered an estimated 44 million barrels of oil and 96 billion cubic feet of gas.

"We've had a very, very successful first well there," Buccaneer CEO Curtis Burton said last month in a teleconference with investors. "Cosmo has turned out to be substantially nicer than we had ever hoped for."

Meanwhile, Buccaneer negotiated an agreement with ConocoPhillips Co. giving the independent the right to conduct deepwater exploration on ConcoPhillips' leases located in the northern end of the Cook Inlet.

But the company's ambitious offshore exploration plans raised red flags with some shareholders. In July, a small group of investors from Singapore voted three directors off the board and installed their own replacements.

Weeks later, however, the new board members resigned with no public explanation, and Buccaneer executives named a single new replacement director.

In August, the tides turned in Buccaneer's favor. The company secured some much-needed financial help from EOS Petro Inc., a Los Angeles-based oil and gas acquisition and development company.

Under the agreement, EOS will cover the total costs of drilling at three Buccaneer leases in return for 50 percent of the value of the reserves.

The offer covers two initial exploration wells at Buccaneer's onshore West Eagle Unit and its offshore Southern Cross and North West Cook Inlet deep oil sites. EOS also has the option of earning a 50 percent working interest in Buccaneer's North West Cook Inlet Unit.

EOS anticipates spending $150 million to $200 million for exploration, although the company can offset a large chunk of those costs with state rebates. Buccaneer will retain a 50 percent working interest and serve as operator for the projects.

In September, Buccaneer negotiated a deal with Apache Alaska Corp., an independent exploration company, to acquire leases on 14,000 acres of offshore state land adjacent to Buccaneer's promising Cosmopolitan unit.

Gas and the Wal-Mart wells

Although Buccaneer is eager to develop its potential oil resources, the company first got its foot in the door in Alaska by developing natural gas.

The firm's gas operations are anchored at its Kenai Loop facility, located on an unobtrusive gravel pad just down the road from the Kenai Wal-Mart.

There, behind a thick stand of trees, Wal-Mart shoppers this summer could watch Buccaneer's Glacier drill rig spud the company's third natural gas well on the Kenai Loop site. Known locally as the Wal-Mart wells, the complex sits on an acre-sized parcel located two blocks from the 20-inch underground trunk line that carries natural gas from the Kenai Peninsula to the Anchorage region.

In early October, Buccaneer announced the completion of the third well at that site. Company officials hope to begin selling gas from that well in the coming months.

Buccaneer owns a 100 percent working interest in 9,308 acres in the Kenai region. So far, the company has explored 340 acres of the land and discovered 3.7 million barrels of oil equivalent, which is equal to 20.7 billion cubic feet of natural gas.

Company officials assert that the area has another 10 to 20 promising drilling sites. "We've only just touched the surface at this site," Buccaneer's Gallegos said.

In mid-October, Buccaneer telescoped down the Glacier rig like an oversized transformer on wheels. The rig will soon be driven 100 miles south to sink a well on the company's West Eagle unit near Homer.

Buccaneer is one of several independents that have based their early Cook Inlet operations on natural gas. Now, as more companies expect to produce gas, the independents are beginning to worry that Alaska's market could soon be flooded with too much fuel.

Currently, most of the state's gas is purchased by the electric and natural gas utility companies in south-central Alaska. But that market was recently locked up by Hilcorp Energy Co., a Houston-based privately held independent energy firm.

This summer, Hilcorp signed contracts to provide nearly all the natural gas the utilities will need through early 2018. The gas will come from properties Hilcorp bought over the last two years from Chevron Corp. and Marathon Oil Corp.

Hilcorp's market grab triggered protests among other independents that anticipated selling into the utility market. Buccaneer's Burton recently argued that state regulators should require the utilities to buy at least 30 percent of their gas from energy producers other than Hilcorp.

In an op-ed in the Peninsula Clarion, a Kenai newspaper, Burton also joined the chorus of state and industry officials who are looking for ways to expand Alaska's natural gas demand.

State officials recently sent a letter asking ConocoPhillips to reopen its mothballed LNG export plant in Nikiski (EnergyWire, Sept. 11).

ConocoPhillips issued a statement saying it's "working with stakeholders to further evaluate the feasibility of resuming LNG exports from the Kenai facility." Buccaneer officials predict that the export facility could reopen in the spring.

The state is also in talks with Agrium Inc., an agricultural products company based in Calgary, Alberta, which owns a fertilizer plant in Nikiski. A large natural gas user, the Agrium complex was closed in 2007 when fuel supplies tightened.

Now Agrium officials are reassessing whether enough long-term gas supplies are available in the Cook Inlet to reopen the plant.

Burton and other natural gas suppliers are eager to help power the massive gold mining operation planned by Donlin Gold at a site 300 miles west of Anchorage. Donlin is owned by NovaGold Resources and Barrick Gold Corp.

They even envision the day when the Alaska Marine Highway System's ferries switch from imported diesel to domestic natural gas. The ferries carry passengers, cargo and vehicles to nearly 40 coastal communities along southern Alaska.

For the next several years, Buccaneer is likely to pin its future on the Cook Inlet. In the longer term, however, company officials see the possibility of expanding their operations into the lower 48 states as well as to oil and gas fields overseas.

Since coming to Alaska in 2010, Buccaneer has helped the state transition to a new era of oil and gas development in the Cook Inlet. In the process, Alaska is giving Buccaneer the platform to potentially grow from a small independent to an internationally recognized energy player.

Tomorrow: Meet the Texas oilman behind Buccaneer.

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