Buccaneer seeks state rebates after Homer gas well comes up dry

Zaz Hollander
Buccaneer Alaska LLC

Buccaneer Alaska LLC plans to plug and abandon a closely watched natural gas exploration well near Homer that came up dry despite a drilling program that cost more than $9 million.

Now Buccaneer wants Alaska to help foot the bill.

Buccaneer officials say they halted work at the West Eagle #1 well, 20 miles northeast of Homer, at a depth of 3,700 feet. Analysis indicated no hydrocarbons in area sandstones despite promising seismic data.

Buccaneer, an Australian company with offices in Kenai and Anchorage, says it spent more than $9.4 million drilling West Eagle. It hopes to recoup more than $5 million of that total from the state.

Buccaneer plans to file for nearly $3.1 million in credits under the Alaska's Clear and Equitable Share program, according to a statement released Monday.

The company also seeks the return of $1.2 million from two $600,000 performance bonds paid to the state.

State officials say Buccaneer has already forfeited one bond by missing several drilling deadlines and risks forfeiting the other.

The Alaska Department of Natural Resources in mid-December told Buccaneer the state planned to keep a $600,000 bond because the company had missed a Dec. 1 deadline to start drilling after getting an earlier deadline extended.

The company will forfeit the remaining $600,000 unless it either tested or plugged and abandoned the well by Jan. 31, according to the Dec. 17 letter from Natural Resources Commissioner Joseph Balash. Exploration needed to extend at least 4,965 feet into the ground.

If Buccaneer started the well before that date and "significant progress" had been made but total depth not reached, DNR would consider modifying bond conditions, Balash wrote.

The company started drilling on Jan. 22, according to a corporate announcement.

Buccaneer is appealing the state's decision on the first bond, Houston-based spokesman Richard Loomis said Wednesday. The company hasn't requested the second bond back from the state yet but expects to do so by next week.

"If they deny the bond, we of course would appeal it and see if we can't make our case," Loomis said.

Critics say the company is propping up its debt-ridden Alaska projects with state money.

"That's been their only cash flow," said Bob Shavelson, executive director of Cook Inletkeeper, a Homer-based environmental group. He pointed to a nearly $25 million investment the Alaska Industrial Development and Export Authority made into a jack-up drilling rig operated by Buccaneer.

The Homer well up East End Road caused some residents to worry about the potential for an industrial complex of pipelines and gas wells springing up in the quiet area with panoramic views across Kachemak Bay.

There were concerns about truck traffic on the two-lane road. A 29-year-old Soldotna truck driver hauling mud from the well site died last month after his truck overturned near a curve.

Others looked to the well as a potential job creator with promise for the local economy.

Buccaneer at this point has no plans to drill again at West Eagle, Loomis said. The company built a fence around the drilling pad and put up some temporary buildings that will have to be removed, he said.

The company will instead focus on Kenai Loop and Tyonek Deep offshore drilling projects, officials say.

The Kenai Loop project isn't without controversy either.

Cook Inlet Region Inc. claims Buccaneer is illegally producing gas at the Kenai wells, located on Alaska Mental Health Trust Authority lands not far from the Wal-Mart in Kenai.

A civil court case and administrative proceeding hinge on the contention that Buccaneer wells are draining gas from CIRI wells without a "pooling agreement" on how to split any royalties on gas production between the state, Mental Health Trust and CIRI.

Oral arguments on the CIRI claim were heard this week in Anchorage Superior Court.

The Alaska Oil and Gas Conservation Commission held a hearing in late January. The state Department of Natural Resources is also a party in that administrative process, as is the Mental Health Trust. The parties want Buccaneer to set up an escrow account to cover past and future payments.

Another hearing has been scheduled for April 8.

Given the questions hanging over the Kenai wells, the news about West Eagle was met with grumbling on investor websites, where several disgruntled posters noted the company's falling stock prices, now below a penny a share.

Buccaneer requested and received a halt in trading on its shares this week "pending the finalization of discussions with its secured financier regarding the impact of the unsuccessful drilling of West Eagle #1 on its recapitalization plans," the company's managing director, Curtis Burton, told the Australian Securities Exchange in a letter filed Monday.

Buccaneer must repay a $56.6 million line of credit to Meridian Capital International Fund by the end of June, according to a corporate message to shareholders.

The failure of West Eagle puts the company "back where we started" paying off the credit, Loomis said. If the well had been a success as planned, Buccaneer could have borrowed against the resulting reserves.

"We are working with Meridian," he said. "Really all we're doing is making sure we're on the same page."

Reach Zaz Hollander at zhollander@adn.com or 257-4317.