A steel tower of hope for new oil and gas development in Cook Inlet is, for the moment, sitting forlornly in the Homer harbor, attracting protesters along with crews of welders, plumbers and electricians.
One of the owners of the jack-up drilling rig Endeavour-Spirit of Independence is a state corporation that's never before invested directly in oil infrastructure but sees promise in both Cook Inlet and its partner, Buccaneer Energy Ltd., a 5-year-old independent oil and gas explorer new to Alaska.
Buccaneer, the rig operator, has had a shaky start in Alaska. It missed the deadline for drilling offshore in Cook Inlet this year and risked losing some of its leases. Contractors for an onshore drilling project went unpaid for long stretches. After a contractor conducted a seismic survey in Kenai wetlands without a permit, Buccaneer was found in violation of the federal Clean Water Act.
For the last three months, Buccaneer's rig has been docked in Homer for unexpected repairs as well as retrofitting.
Critics question whether Buccaneer has the financial strength and know-how to operate in Alaska or whether it's being propped up by the state investment as well as generous tax credits.
Buccaneer says it's prepared for Alaska. While the company may be new, key players have track records in the oil industry here and elsewhere, Jim Watt, Buccaneer Alaska president, said in an interview.
"We are here for the long term," said Watt, a petroleum engineer with 35 years experience, including 10 in Alaska. During a stint with another independent, Union Texas Petroleum, he helped develop the Alpine field on the North Slope. "We're looking to build our company in Alaska."
A money squeeze began when Buccaneer's lender pulled out, but then a new one stepped up, Watt said. The company can drill next year the wells it was supposed to drill in 2012. The Clean Water violation involved maybe a coffee can of dirt for each of 800 seismic "shot holes," he said.
Buccaneer's state partner, the Alaska Industrial Development and Export Authority, says small new players often need help to get going. AIDEA is closely watching over Buccaneer's finances, procedures, insurance and operating agreements, said Jim Hemsath, AIDEA deputy director and manager of the group that oversees the rig project.
AIDEA, a self-supporting state corporation, has invested nearly $24 million in the venture that owns the jack-up rig. Buccaneer and Ezion Holdings Ltd., a large Singapore-based offshore development company, are the other partners. The rig is valued at more than $100 million, Watt said.
While this year's setbacks are disappointing, Hemsath said, he has no doubt that Buccaneer will put the rig to work in Cook Inlet.
"This is a risky business. These are large pieces of machinery, and things just didn't work out," Hemsath said. "We're happy to be a partner in this and to be a little bit of this patient capital."
A RIG FOR EXPLORATION
Cook Inlet was Alaska's first big oil and gas find. At the basin's peak four decades ago, more than 225,000 barrels of oil were produced daily, an amount that is all the more remarkable considering that North Slope production is currently about 600,000 barrels a day. With the "easy oil" gone, major oil companies are pulling out of Cook Inlet. Production is now about 10,000 barrels a day.
"They had all but written the obituary for Alaska's Cook Inlet," said a video produced for Apache Corp., a Fortune 500 independent oil company, based in Houston, that is mainly targeting oil on the million acres it is leasing around Cook Inlet.
Watt describes Cook Inlet as "one of the most underdeveloped hydrocarbon basins in North America."
And as Buccaneer and AIDEA see it, the jack-up rig is key to changing that.
With legs 410 feet long, the 30-year-old Endeavour-Spirit of Independence can work in water 300 feet deep, which means just about anywhere in Cook Inlet. Cantilever beams allow it to jut over an existing well, or it can plant itself in unexplored areas. The drilling platform literally jacks up above the water as the rig's long legs are lowered down to the sea floor.
The Endeavor worked previously in the North Sea but had been out of service several years when the Buccaneer group bought it. Crews spent six months retrofitting it in Singapore, where it needed more work than expected. After that work was completed, it was hauled aboard a heavy-lift ship to Homer, where it arrived in late August.
Buccaneer is aiming at natural gas prospects that, if found and developed, could offset predicted shortages of gas to heat and power Southcentral Alaska, Watt said. The company is trying to navigate a maze of government requirements and hopes to begin drilling this winter about five miles from Anchor Point on its offshore Cosmopolitan prospect.
The company doesn't yet have an oil spill contingency plan for winter operations or a permit to drill there. It also has applied for a separate permit from the Department of Natural Resources to park the rig offshore.
A HOMER STORM
Homer hasn't exactly embraced the Endeavour. On Oct. 31, some 125 sign-waving protestors organized by Cook Inletkeeper, a Homer-based environmental group, took to the dock.
"Buccaneer, get out of here!" they chanted.
"They keep stumbling. They keep fumbling. They are not up to it," said Bob Shavelson, advocacy director of Cook Inletkeeper.
One of the protesters, Homer resident Kevin Kreitz, said in an interview the Endeavour became a target in part because drilling rigs aren't supposed to be stored in the Kachemak Bay critical habitat area.
After the rig broke loose of mooring lines in the Homer harbor during a storm in September and hit a fender on the dock, the crew pinned its legs to the bottom of the bay to hold it in place.
In Homer, Buccaneer discovered unexpected issues with the rig. The alarm system, which had passed tests in Singapore, didn't work. A valve in the firefighting system leaked. There was a recall involving its rescue craft.
Beyond that, the rig wasn't ready for winter, state officials and contractors working on it said.
"If a rig isn't adequately winterized then key pieces of equipment that are hydraulically operated, freeze up," said Cathy Foerster, a commissioner with the Alaska Oil and Gas Conservation Commission.
Plumbing had to be modified. Steel frames for wind walls to protect the crew were needed. Corroded grating needed to be replaced. Crew quarters needed winterizing.
It "was not up to standards where it could work in our waters," said Chuck Walkden, owner of Homer Steel Fabricators. For a while, his crew of welders from Homer, Nikiski and Wasilla worked day and night. The rig work is the biggest job his 34-year-old company has ever had, he said.
Bill Barron, director of the state Division of Oil and Gas, said Buccaneer is working hard to start drilling, which is why he agreed to extend its lease terms. On a recent rig tour, he said, he was struck by the construction activity.
"In general, they look like they've got a really good, logically worked out program for ensuring that their water, wastewater, deck drains, fire suppression -- health, life and safety kind of processes -- are being brought completely up to standard and speed as their highest priority," Barron said.
"Then they will start working on the drilling components."
MILLIONS IN TAX INCENTIVES
No jack-up rigs have worked in Cook Inlet for almost 20 years. The Legislature in 2010 zeroed in on their potential. Lawmakers engineered a special tax credit of up to $25 million to the first explorer using a jack-up rig to drill a Cook Inlet well in virtually unexplored geologic zones. A second or third well with the same rig but a different explorer could generate a somewhat smaller credit. In all, a single jack-up rig could qualify for $67.5 million in tax credits, said John Larsen, a state tax audit master.
So far, just two jack-up rigs have shown up: Buccaneer's and a smaller rig operated by Furie Operating Alaska, which made progress drilling two wells this year.
Separately, operators can seek tax credits to recover up to 65 percent of exploration expenses through the 2007 Alaska's Clear and Equitable Share, or ACES, tax measure, though they can't double up and claim both the jack-up rig credit and the general exploration credit, Larsen said.
No one appears to have applied for the first $25 million yet, Barron said.
Buccaneer is using the promise of ACES tax credits as collateral for the millions it needs to move forward in Alaska, Mark Landt, Buccaneer's vice president of land and business development, said at the Resource Development Council's annual conference recently.
Shavelson said Buccaneer is taking on little risk itself, is heavily in debt and is relying on the promise of the state tax credits to keep its operation going. He argued the company's financial plan is a "house of cards."
But Hemsath said AIDEA thoroughly reviewed Buccaneer's use of tax credits as collateral and found it acceptable.
If Buccaneer ends up in financial trouble, AIDEA has built-in protections and ultimately could sell the rig, Hemsath said. AIDEA also is protected by a guaranteed interest in other Buccaneer holdings, he said.
Buccaneer says its financial and operational plans are soundly intertwined. The company is already selling 6 million cubic feet a day of natural gas to Enstar from its first Alaska well, drilled onshore near the Kenai Walmart, which is generating $10 million a year, Watt said.
By the end of 2013, he said, Buccaneer hopes to have seven producing wells from the same field.
Reach Lisa Demer at email@example.com or 257-4390.
By LISA DEMER