Curtis Burton spends a lot of his time accomplishing things other folks claim can’t be done. In the early 90’s, much to everyone’s amazement he took a small 10 man executive team and led the entire oil and gas industry in a world class R/D program called DeepSTAR. The DeepSTAR concept was intended to provide the oil/gas industry with a practical way to commercially develop the deepwater basins of the world. Lot’s of folks said a cooperative effort would never work and that deepwater was un-economic – but deepwater is economic and the DeepSTAR approach did work – the rest, as they say, is history. Curtis eventually put all 26 multi-national operators and 65 of the service contractors into DeepSTAR – even managing to sell the program to the US Energy Department and the Minerals Management Service.
For the past few years he has focused his efforts on opening another frontier - the Alaskan land and shallow offshore for small independents. Once again he heads a relatively small team to achieve his objectives, this time it is a small oil/gas independent listed on the Australian stock exchange called Buccaneer Energy (NYSE:BCC). For the past 6 months, Buccaneer has been focused on how to bring a suitable shallow water jack-up to the Cook Inlet – a drilling basin that hasn’t seen a drill rig for 16 + years. We recently caught up with Curtis and had a few questions for him.
World Energy - Having been in the offshore drilling rig business in the past, we were curious to determine why you decided to buy a rig as opposed to taking the more conventional route of leasing one?
Curtis - Initially we looked at working with one of the rig companies based here in Houston to lease a rig. However, the Cook Inlet presents certain challenges that make it un-attractive economically for most rig operators. However, after looking at the numbers it became obvious that not only is a rig needed but it creates an excellent business opportunity as well. Few oil and gas companies are aware of the economic incentives offered by the State of Alaska for drilling and operation in Alaska. Even fewer rig companies are aware of these incentives and even if they were aware only oil/gas operators can take advantage of the financial terms. So, with my background, it was an obvious choice to combine the best of both worlds to make the economics work to get a rig to Alaska.
Governor Parnell has worked the chairmen of the Senate Resource Committee, Senators Paskvan and Wagner, together with the House Chairperson Mia Costello, to put in place a basket of incentives and tax breaks to attract operators to the region. Between the rebates of $25 million, $22.5 million and $20 million and the ACES program that can bring you up to 65% of your drilling costs back the stage is set to bring smaller operators to Alaska. Now all that was required was an equally good plan to bring the right rig.
Our thought was to develop a plan with the State of Alaska to create a JV that could bring the right rig to Alaska; one that was fit for purpose and that any area operator in the region could use. We worked with AIDEA (Alaska Industrial Development and Export Corporation) to attract the right partners. AIDEA is perfect for this type enterprise because its reason for being is to work both public and private sector issues to create jobs, tax bases and opportunities in Alaska. We’ve now been at this for about 6 months with AIDEA and believe we are very close to completing the transaction.
World Energy - What were the main features you were looking for in a rig intended for use in the Cook Inlet?
Curtis - The Cook Inlet is a unique environment - as is most of the Alaskan offshore. In the Cook Inlet we find relatively shallow water depths that range from 18 feet to 300 feet. The wells tend to be fairly highly pressured and may require drilling to depths of 18,000 feet or more. The area is prone to ice flows and heavy currents. The Cook Inlet is also home to a variety of sea life that requires our attention and protection. This unique environment led us to create an outline of capabilities that were required before we would take the risk associated with having a rig drill our prospects.
The rig needed to be safe and versatile. This meant we needed it to be comfortable in 18 feet but be capable of working in 300 feet of water. To meet water depth requirements, we elected to use an industry standard 116C design - that got us well over the 300-foot limit for safe operation. Having a suitably designed blow out prevent system was also a key concern. To this end, although some of the properties to be drilled could have been drilled with a lower rated blow out preventer system, we elected to take a more conservative path and locate a rig that had a blow out preventer system that could operate at the maximum pressures we felt could be encountered – 15,000 psi. The hull also needed to be strong, strong enough to withstand potential ice flows and strong currents so we opted for hulls with -10 degree steel. The rig also needed to be able to drill deep – up to 18,000 feet for some of the target zones, with all of the associated drill pipe and equipment. To avoid having to load and unload the rig it had to have a high variable deck load, something exceeding 8,800,000 pounds. The rig we selected can do all these things, and more, making it easier to attain the permits we are required to have in order to drill.
World Energy - With this in mind, where did you begin looking for the rig?
Curtis – Traditionally 116C class rigs have been used in the Inlet so we started with that as a minimum. However, since this rig needed to be suited to drill any prospect in the inlet our first criteria was that it needed to drill in up to 300 feet of water. This greatly reduced the number of possible rigs. More than just stand in 300 feet of water it needed be able to withstand heavy currents and potential ice flows. A good model for a similarly challenging environment was the North Sea. If a rig has been operated successfully in the North Sea it was generally seen as being able to withstand anything the Cook Inlet could dish out. Of course since we were going to be taking the rig to Alaska we also wanted to avoid any conflicts with the Jones Act, meaning we wanted the rig to be in a foreign port and relatively close to Alaska. This took us to the Pacific Rim. We also wanted a rig that could be used not only to drill exploration wells but could also do workovers and to perform plug and abandon operations. This meant the rig had to be tall enough to be elevated over existing platforms.
World Energy - Why was the North Sea experience so important?
Curtis - When you compare basins around the world it is hard to find one that is as harsh as the North Sea. Sitting in Houston and looking at the rigs in the Gulf of Mexico it is hard to imagine the kind of environment North Sea or Cook Inlet rigs operate in. The North Sea has similar currents and air temperatures as those found in the Cook Inlet and other offshore areas in Alaska. This meant that any rig that operated there would have been built to a more rigorous standard than a rig being deployed elsewhere
World Energy - Explain the importance of – 10 degree rated steel in the hull.
Curtis - Being in Houston where it is warm and the water is calm it might be difficult to imagine, but the Cook Inlet of Alaska has frequent Ice Flows and when steel gets cold it gets brittle. When cold steel meets hard ice it has a tendency to bend, crack and even buckle. This can be particularly bad around some of the best drilling locations in the Inlet. The legs and hull are particularly susceptible and the ABS, the American Bureau of Shipping, requires such steel rating in the North Sea. Some of the best locations in the Cook Inlet are in areas that could potentially have unexpected ice flows earlier or later than normally expected and we want to minimize any risk to our employees, rig and the environment. So, in addition to the cold weather rated steel, strong legs that are designed for 300’ of water depth (the rig we’ve selected actually has 400’ long legs) should withstand any unexpected ice or other floating debris in the inlet without damage. This will also extend our drilling window to take maximum advantage of the limited number of drilling days in the season.
World Energy - How did you end up in Singapore to buy a rig? What are some of the advantages associated with this location?
Curtis - The oil industry is a global industry and the equipment tends to follow the best projects. This rig was moved to the Pacific Rim after years of service in the North Sea. Of course looking at a map it is relatively easy to see that coming from Singapore the rig can be towed in a strait line and avoids being towed around other continents or moved through expensive canals.
World Energy - Are you satisfied that the rig and previous owner have operated successfully? Your rig has two blow out preventers, why?
Curtis - The previous owner of the rig is one of the largest rig operators in the world and we have looked at their maintenance records and safety records and let’s suffice it to say this rig has been well maintained and operated. As for the BOP’s after the disaster in the Gulf of Mexico I think anyone who doesn’t take the need for strong and well certified BOP’s on a rig is taking an unnecessary risk and certainly not one that we as stewards of the environment are willing to take on. When we look at the average pressure in the wells drilled in the Cook Inlet you can see that that it varies from 8k to 13k so having the right piece of equipment to do the job is critical. One of the attractions to this rig was that it had the appropriate safety equipment all ready installed, meaning that their was no need to upgrade, retool, or re-plumb the rig. Having stood on the deck of rigs in the North Sea drilling high pressured reservoirs you really don’t want to skimp on anything that might make the rig safer, taller legs, better steel, stronger BOPs, etc.
World Energy - Your rig can operate in water depths from 18 feet to 300 feet, how much of the inlet is open to you?
Curtis - Well if you look at the prospects being developed in the Cook Inlet I think you will be hard pressed to find one that we couldn’t potentially drill. One of the issues of working with one drilling contractor is that you are limited to only the equipment they have. The Inlet has been without an operating rig for 16+ years. In our case we wouldn’t even consider bringing one into the market that couldn’t drill all or at least the majority of what is out there. Additionally, being an operator in the Inlet, we wouldn’t want to risk using a rig that was not up to par. The environmental risk would just be too great. Knowing that we would be using the rig for our company put us in the unique position of being able to ask, would we use this rig? If the answer was no we moved on.
World Energy - What does bringing a rig to the Cook Inlet mean for the State of Alaska?
Curtis - In three words, Jobs, Revenue, and security. Alaska is facing some real challenges when it comes to maintaining industry, generating revenue and making sure that it has enough gas to power and heat the homes in the area. Stories appear in the Anchorage Daily News, Peninsula Clarion, and the Petroleum News outlining the gravity of the problem. For a very long time the Cook Inlet operated with a surplus of gas and the Alaskan Pipeline has brought high-grade crude oil to the United States. Today the Cook Inlet is facing a shortage of natural gas and is at times paying as much as $9 an mcf and the pipeline has never had such low transport rates. Oil is trading at over $100 per barrel because we are not developing our domestic resources and in the lower 48 natural gas is sub $4. There has not been a rig in the Inlet for over 16 years; this greatly limits the ability of industry to discover new sources of both commodities. Because Buccaneer has drillable prospects identified we are in a unique position to help with these issues. The rig itself will bring jobs, servicing the rig means jobs, finding natural gas will mean jobs for the community. Developing the discoveries left behind by the majors will mean energy security for the United States and needed revenue for the State of Alaska.
World Energy – Another Houston based oil company; Escopeta claims to be taking a rig to Alaska. Are you concerned about competition?
Curtis – Buccaneer makes it a policy NOT to comment on other entities’ corporate undertakings. Our philosophy is that Alaska is a big place with lots of oil and gas opportunity for all. Buccaneer intends to go to Alaska with this rig, a rig that far exceeds the operational capability of any rig taken there or proposed to be taken there. Buccaneer will observe the laws and regulations that are in place and be successful in operating a rig there for the benefit of all.