Buccaneer bets big on Cook Inlet strategy

Alaska wasn’t on Curtis Burton’s radar screen when he helped start Buccaneer Energy in 2007, but it quickly became the centerpiece for the company’s growth strategy.

Buccaneer, based in Houston but listed on the Australian stock exchange, is essentially a U.S. company. Its assets and people are all in the U.S., and the company is arguably now the most aggressive explorer in Cook Inlet.

Burton is a 30-year industry veteran who has helped start several companies focused on offshore oil and gas. His first idea in forming Buccaneer was to concentrate on the U.S. Gulf of Mexico and follow the classic independents playbook of picking up prospects too small for major companies but ripe for small, aggressive firms like Buccaneer.

There were some bumps, however, mainly the meltdown in financial markets in 2008 that hurt Buccaneer’s plan to raise funds. Emerging from that, Burton looked at the industry’s new trends, like shale oil. 

Someone mentioned Alaska.

“I thought they were nuts,” he said in an interview at the Journal office.

“Too cold, too green,” he said, a reference to the state’s reputation for attracting environmental activism.

“Then I spent a couple of months digging into it. I found Alaska, and Cook Inlet, to be exactly what we were looking for. There are issues of course, but we believe they are all manageable,” Burton said.

Basically, Burton became convinced Cook Inlet was underexplored. A few large oil and gas fields were found in the basin in the 1960s and 1970s by “major” companies, but when very large discoveries were made on the North Slope in 1969, all the exploration effort went there and essentially never returned to Cook Inlet.

The fields that were found were developed and are being produced, but are now winding down. Declining gas production led to the closure of the Agrium Corp. fertilizer plant near Kenai in 2007 and, more recently, suspension of operations at the nearby ConocoPhillips liquefied natural gas plant.

More important, the region’s gas and electric utilities became seriously concerned about having adequate supplies of natural gas.

Most geologists believe, however, there are still substantial oil and gas discoveries yet to be made in the inlet and Burton believes that new technology available to industry now, like three-dimensional, or 3-D, seismic, and horizontal drilling, will make that happen.

Independents have come, and gone, from Cook Inlet in previous years, but Buccaneer timed its recent entry just right for the state’s new exploration incentives but ahead of other, larger independents like Apache Corp. and Hilcorp Energy, who also are now active in Cook Inlet.

Buccaneer bid against Hilcorp for Marathon Oil Co.’s Alaska assets when they were put up for sale, but was outbid, Burton said.

However, Burton believes Buccaneer helped stir up industry interest in Alaska because he was out early stumping for investment funds. A lot of other independents had negative impressions at the time, having read all about Shell’s problems in the Arctic offshore in the trade press. Still, Buccaneer’s promotion along with the state’s own marketing efforts by the Department of Natural Resource, opened some eyes in the industry, Burton believes.

What really opened eyes, though, was when Buccaneer purchased onshore leases on the Kenai Peninsula in 2010, permitted and drilled its first well and made a discovery in 18 months. It was an unheard-of pace in Alaska, at least in recent years.

What’s more telling is that the well, Kenai Loop No. 1, is one mile from Marathon Oil Co.’s Cannery Loop gas field that has been producing for decades. The well is so close to the city of Kenai that it became known as the “Wal-Mart well” because it can be seen from the parking lot of the retail store in Kenai.

That a commercial gas discovery on acreage overlooked by a major company could be pulled off by a small company made Burton’s point. At first it was also dismissed by the major company operators as a small gas pocket that would quickly decline but in the two years since the well has been operating its production has been steady, and in fact has increased. A second well was successfully brought on line in what is now called the Kenai Loop gas field.

More drilling is planned in Kenai Loop and on other Kenai Peninsula gas prospects, such as the “West Eagle” well planned to be drilled this fall east of Homer, a region where other independent companies also are working.

However, Buccaneer’s prime prospects are offshore, in Cook Inlet, and involve oil as well as gas.

The company acquired leases in north Cook Inlet with prospects, in the “North West Cook Inlet” and “Southern Cross” units that were identified years ago by drilling but not developed. Another prospect, “Cosmopolitan,” near Anchor Point, was acquired and is now being drilled. Test wells on the two north Cook Inlet prospects are planned for later this year.

Another innovative move by Buccaneer, however, was to get a jack-up rig to Cook Inlet to explore the offshore leases. The company brought in Ezion Holdings of Singapore, an investment company, as a partner in the Endeavor jack-up rig, and convinced the Alaska Industrial Development and Export Authority, the state’s development corporation, to invest in the rig to facilitate it to Alaska.

AIDEA’s share will eventually be purchased by the other partners under the deal.

At the time, Escopeta Oil and Gas was attempting to bring a jack-up rig to Cook Inlet it wasn’t clear it would be able to pull it off. It did make it, but Buccaneer and its partners proceeded with bringing the Endeavour rig from Asia because Escopeta (now Furie Alaska Operating) had its own wells for its contracted rig to drill.

So far Buccaneer is on course with its plan but there have been hiccups. One was the lateness of the Endeavour’s arrival in Cook Inlet and unfinished work on the rig, which had to be done last winter in Homer.

Buccaneer is meanwhile in a lawsuit with the former rig operator over the unfinished work.

More recently, dissident shareholders attempted to take over the company and replace its board, with concerns about the company’s Alaska strategy among their prime criticisms. There were also board changes but so far Burton and other supporters of the Alaska strategy are still in control.

Meanwhile, the Endevaour rig continues drilling on the Cosmo No 1 well offshore Anchor Point. There is a known oil and gas discovery there and Buccaneer is doing tests to see if production can be done economically.

The decision to list what is for all practical purposes a U.S. company on Australia’s stock exchange came about because of the costs and extensive requirements of a listing on U.S. exchanges, Burton said.

“The U.S. exchanges are not well suited to small startups. The Australian exchange is, however, although it is strictly regulated,” he said. “The plan was always to start the company and grow it while listed in Australia, and then eventually move to the Toronto or a U.S. exchange.”

Burton said small independents and particularly new companies are chronically underfinanced if they develop an aggressive strategy like Buccaneer’s, and a shortage of capital has created problems, he acknowledged.

For example, Buccaneer fell behind last year in paying suppliers and contractors for their work on the Kenai Peninsula and Cook Inlet wells, but those payments are now caught up.

“We appreciate peoples’ patience with us,” Burton said.

In total, Buccaneer has spent $100 million in the region since it started work in 2010, he said.

However, Australia’s rule that shareholders with more than 5 percent of shares can call for a special shareholder meeting and replace the entire board created the opportunity recently for the challenge by dissident shareholders.

It is unclear just who the dissidents are. The shares, which total 8.7 percent of Buccaneer’s shares, are held by two companies with offices in Singapore and Hong Kong. The new directors named to the board are people experienced in the industry, although they are not familiar with Alaska. 

However, there is also concern that the money behind the dissidents may be coming from mainland China and that this could represent an attempted takeover of a U.S. energy firm by Chinese interests.

In any event, AIDEA says its investments in the jack-up rig are secure against any attempted change in the company’s plans. Buccaneer is committed by contract to drill the Cook Inlet offshore wells, AIDEA spokesman Karsten Rodvik said.

The board takeover failed and Buccaneer has now reinforced is position by bringing in a new investor, Meridian Capital International Fund, which now owns 19.9 percent of Buccaneer’s shares.

This article appears in the July Issue 2 2013 issue of Alaska Journal of Commerce