Drill rig and Alaska at the mercy of the law

Tim Bradner | Alaska Journal of Commerce

If there were an Alaska medal for chutzpah and pluck, we should give it to Texas oil wildcatter Danny Davis. For years Davis' small independent company, Escopeta Oil and Gas, has been working to bring a jack-up drilling rig to Cook Inlet.

Davis believes a lot of oil and gas lies undiscovered below the existing offshore oil fields in Cook Inlet and he's willing to put up the money to look for it.

A jack-up rig is a floating drill vessel that is towed to an offshore drill site. It has vertical steel "legs" that are lowered to the sea bottom so the barge can be jacked up, or raised, on the legs to create a stable platform for drilling. We've had jack-up rigs in Cook Inlet before, but not for about 25 years.

A rig like this is needed because the prospects are too far from shore to be reached by a land-based rig.

We need this drilling. Cook Inlet's oil and gas fields are petering out. We're drilling on the Kenai Peninsula with some success, but not enough new gas is being found to secure the reserves we will need for power generation and heating.

Using modern exploration technology, Davis is among several oil independents who believe they can find deposits of oil and gas in Cook Inlet that larger companies missed in the 1960s and 1970s.

The problem is, we don't have the rigs to do the work. Jack-up rigs are available in the U.S. Gulf of Mexico but getting one here isn't easy. It's too far to tow one behind a tug. A barge can't safely navigate the tip of South America. The only realistic solution is a special "heavy-lift" ship. There are no U.S.-built heavy-lift ships, however, so a foreign-built ship has to be used.

Here's the fly in the ointment: The Jones Act is a federal law, familiar to many Alaskans, that requires shipments between U.S. ports to be carried aboard American-built ships. It was passed to protect American shipping interests engaged in coastal commerce from foreign competition.

This might makes sense for coastal shipping in the Lower 48 but it imposes real burdens on states like Alaska and Hawaii.

Alaskans, for example, have been impeded in shipping gravel to ready markets in California because American-built barges are too costly to operate.

Temporary waivers of the law can be granted for special shipments if no U.S.-built vessel is available and the cargo enhances national security.

In 2006, the federal government granted Danny Davis an exemption allowing him to use a foreign heavy-lift vessel to move a jack-up rig from the Gulf of Mexico to Cook Inlet. Financing problems prevented the deal from moving forward right then. Davis has since put his financing back together and has been trying to renew the exemption.

A waiver decision was slow in coming, however, and Davis' deadline to drill his well, a condition of his Alaska leases, was looming. He rolled the dice, continuing to pursue the exemption while the rig made the long trip around South America. He finally got his answer two weeks ago as the ship was nearing Alaska, and the answer was no. The ship, and rig, had to be diverted to Canada.

The jack-up rig is now in Vancouver, B.C., while it is being prepared for Cook Inlet. Davis had intended for this work to be done in Kenai by Alaskans, but thanks to the Jones Act, Canadian workers got the jobs.

The heavy-lift vessel has had to go on to other assignments but Davis believes he can safely bring the rig to Alaska from Vancouver with a tug. A question remains whether, even with a stop in a foreign port, the shipment will violate the Jones Act.

Let's not blame the Department of Homeland Security for this. The agency must enforce the law. The department's decision on a waiver, however, depends on findings by two other agencies: the U.S. Commerce Department, which must determine that no suitable U.S. vessel is available in the time needed, and the U.S. Department of Energy, which must conclude that our energy security could be imperiled without the waiver.

Here's my question: In 2006, the energy department found that the decline in Southcentral Alaska oil and gas reserves created an energy problem. In 2011, the department has apparently reversed its position, despite the fact that our oil and gas supply situation is worse than it was.

I asked the energy department to explain its change in position. None has been offered so far. In contrast, the state is taking this very seriously, particularly the gas concerns, and has offered generous incentives to get a jack-up rig to the Inlet.

Our military installations use local gas for power generation, as does the rest of Southcentral. If we have to import liquefied natural gas, it will come from overseas. If our oil production declines further and more platforms shut down, the Tesoro refinery in Kenai will be even more dependent on foreign crude oil. Our military installations will also likely have to import jet fuel, as commercial airlines flying through Anchorage do now. Where will that imported jet fuel come from? Not from places that are particularly friendly.

The energy department's decision that oil and gas self-sufficiency in our region has no bearing on our security is ludicrous.

Of course, there is a whiff of politics in this. Four Democratic U.S. senators are pushing vigorously for the Department of Homeland Security to deny the waiver. Our Alaska delegation is working for one but bucking a tide of intense lobbying by the U.S. shipping industry.

Davis hopes to complete moving the rig to Alaska after a month of work in Canada.

Let's hope there are no more glitches. We need the gas and oil.

Tim Bradner writes for an Alaska economic reporting service. He also consults for private clients and writes for business publications. His opinion column appears every month in the Anchorage Daily News.