Buccaneer Makes Headway in Rig Acquisition for Cook Inlet
Buccaneer advised that the Board of the Alaska Industrial Development & Export Authority (AIDEA) has approved the expenditure of additional funds up to $200,000 which will be used to further develop a variety of definitive agreements that would authorize the Authority to invest US $30.0 million for the purpose of acquiring, modifying and mobilizing a jack-up rig to operate in the Cook Inlet, Alaska.
The total cost of the project is anticipated to be approximately US $85.0 million. The funding of this project, subject to final agreements being concluded, would involve AIDEA's contribution of US $30 million in capital for part ownership in the jack-up rig.
AIDEA has completed significant due diligence that supports the business case and the technical feasibility of the jack-up rig. The jack-up rig will be made available to third parties to develop oil and gas resources within the Cook Inlet region for the benefit of Alaska.
This will be the first time since 1994 that a jack-up rig will be available in the Cook Inlet for exploration and development work. The incentives legislated by the State of Alaska in May 2010 that incentive operators to drill with a jack-up rig in the Cook Inlet were a significant factor. See attached overview of the incentive program.
In order to comply with current rules that dictate AIDEA's investment activities, the finance of US $30.0 million would be in the form of a preferred joint ownership of the jack-up rig. The preferred ownership interest owned by AIDEA would be paid as a fixed dividend of 8.0% per annum (non-cumulative) and would be amortized (repurchased) over a 5-6 year period from surplus cash flow generated by the jack-up rig operations within the Cook Inlet.
AIDEA's preferred ownership interest would have a second lien over the jack-up rig.
Definitive agreements which need to be negotiated and presented to the AIDEA Board for final approval are anticipated to include the following:
- Joint Ownership Agreement (“JOA”) between the Company's subsidiary Kenai Offshore Ventures, LLC (“KOV”) and AIDEA;
- A 5 year Bareboat Charter Agreement between Buccaneer Alaska Operations, LLC and OpCo;
- Financing Guarantees to be provided by Buccaneer to AIDEA;
- A commitment by Buccaneer to drill a minimum of 4 wells with this rig in the Cook Inlet.
- A commitment by Buccaneer to spud the first well in the Cook Inlet during the 2011 drilling season.
- A series of related agreements and conditions precedent are expected to be completed prior to AIDEA Board approval, including the anticipated $50 million senior debt facility.
It is anticipated that the above documents could be presented to the AIDEA Board for its consideration in the next 30 - 45 days.
Kenai Offshore Ventures, LLC
Separate to the negotiations and investment by AIDEA, the Company is in the process of negotiating with an Asian based joint venture partner in respect to becoming a 50.0% shareholder in KOV. This joint venture partner is an experienced owner of offshore vessels and brings a high degree of operating and finance experience to KOV.
It is proposed that Buccaneer and the joint venture partner will both contribute US $2.5 million to KOV to supplement AIDEA's ownership interest and the anticipated Senior Debt facility.
This company will be established with the sole purpose of operating the rig on behalf of the joint owners (KOV and AIDEA). It will be responsible for day to day operations and contracting the rig to lease operators that includes Buccaneer and third parties. OpCo will pay a fixed annual lease amount to the joint owners of the rig.
It is anticipated that Buccaneer will own a significant interest in OpCo. Negotiations are underway with drilling rig operators with a strong history of operating jack-up rigs in similar water depths with a focus on safety to provide these contracted operating services to OpCo.
Senior Debt Facility
As previously advised Kenai Offshore will now proceed to finalize a Senior Debt facility of US $50 million. This is the final funding piece for the acquisition and modification of the jack-up rig to be used in the Cook Inlet, Alaska. Senior Debt will have a first lien over the jack-up rig.
Based on the current business model it is anticipated that all Senior Debt will be repaid from cash flows generated by the jack-up rig over 5 years.
Jack-Up Rig Capability
Given some of the prospective oil and gas accumulations within the Cook Inlet are located in waters up to 300’ in depth and high pressure formations occur below 12,000 feet, the jack-up Buccaneer is seeking to acquire has the following features:
- Able to operate in waters up to 300' in depth;
- Capable of drilling wells to 25,000';
- Will have -10 degree rated steel allowing it to work in the wide environmental envelope that exists in the Arctic;
- Has a large deck area so is able to store tubulars (casing) for deep drilling operations;
- Has the capacity to easily upgrade its blow out protectors (BOP's) to 15,000 PSI so as to allow it to drill high pressure locations that exist in the Cook Inlet; and
- Is cold stacked in an Asian location so has no requirement to obtain a Jones Act Waiver to mobilize to the Cook Inlet.
The acquisition of the jack-up rig and mobilization to the Cook Inlet is anticipated to generate up to 400 direct and indirect jobs in the Cook Inlet region. This will create a significant economic boost and increase in tax base at a time when the region is feeling the effects of an economic down turn and announced plant closures.
The jack-up rig will also have the capacity to operate in all areas within the Cook Inlet as well as the Beaufort Sea and Chukchi Sea off the North Slope of Alaska.
Mobilization & Permitting
On the current timeline it is estimated that the rig will arrive in the Cook Inlet in mid 2011 (based on current shipyard and heavy lift vessel schedule) and will be immediately ready to commence operations.
Buccaneer is progressing all drilling permits and anticipates all permits to drill four offshore wells, two at its Southern Cross Unit and two at North West Cook Inlet Unit, it is anticipated that all permits will be in place by the end of May 2011.
The longest lead time permits required to drill in the Cook Inlet are Air Quality Permits, these take a minimum of 180 days to obtain due to the statutory requirement to undertake sophisticated air quality modeling and surveys at the proposed drilling locations.
Buccaneer already holds Air Quality Permits to drill one well at each of its Southern Cross Unit and at North West Cook Inlet. The Company anticipates having permits for an additional well and each project by the end of May 2011.