AIDEA assistance

$50M loan would improve Kitchen Lights economics; due diligence approved

Alan Bailey

Petroleum News

AIDEA, the Alaska Industrial Development and Export Authority, is considering providing up to $50 million in loan financing for Furie Operating Alaska’s Kitchen Lights gas field development, offshore in Cook Inlet. During its Jan. 14 meeting the AIDEA board passed a resolution authorizing the authority to conduct due diligence work, to evaluate the project financing proposal. Furie will reimburse AIDEA for the cost of up to $100,000 of the due diligence study.

If AIDEA decides to proceed with the Kitchen Lights financing, the authority would take a preferred equity stake in the project, along similar lines to the financial assistance that AIDEA is providing for Brooks Range Petroleum’s Mustang development project on the North Slope. Essentially, the loan would have a five- to eight-year repayment schedule, with a yet-to-be-determined annual dividend.

Bruce Webb, Furie’s vice president for government and regulatory affairs, told Petroleum News on Jan. 15 that the AIDEA loan would improve the economics of Furie’s exploration and development work in Cook Inlet.

Webb has told Petroleum News that the total cost of the Kitchen Lights development project, including the drilling of two development wells after platform installation, is estimated to be in the range of $250 million to $280 million. By the end of 2014 the company had spent about $135 million on the project, Webb said. In addition to equity from Furie’s owner company in Germany and some private German funds, Furie has a $160 million credit facility from private equity firm Energy Capital Partners. Furie has sufficient capital to fund the complete Kitchen Lights development, including $70 million remaining from the Energy Capital Partners funding, Webb said. But the availability of AIDEA financing would lower the cost of capital and would free up some private financing for continued exploration for oil and gas offshore in the inlet.

“Getting the AIDEA financing allows us to shift some of our present equity over to the exploration side,” Webb said.

In 2011 Furie’s predecessor company Escopeta Oil Co. brought its Spartan 151 jack-up drilling rig to Cook Inlet for a multiyear offshore exploration program. And in the fall of 2011 Escopeta announced a major gas find in its Kitchen Lights unit No. 1 well offshore the northern Kenai Peninsula. In 2013 Furie used its nearby Kitchen Lights unit No. 3 well to further delineate that find. The company subsequently announced a major gas field development involving the installation of an offshore platform, centered on the No. 3 well, and an onshore gas processing facility on the Kenai Peninsula, near East Foreland.

In May 2014 Furie started clearing the site for the onshore facility. And the piping for the required gas line arrived in Cook Inlet, ready for installation. Fabrication of the platform in Texas was completed but the platform was delivered to the inlet too late in 2014 for installation prior to the onset of the winter. Furie shipped the platform to Seattle for storage over the winter, in anticipation of bringing it back to Alaska for installation this year.

Webb told media after the AIDEA board meeting that Furie now anticipates the offshore platform being commissioned around August, with the prospect of gas starting to flow from the Kitchen Lights field after that. Webb said that Furie has a multiyear contract with a utility for a gas supply of more than 4 billion cubic feet per year, but that contract does not start until Jan. 1, 2016.

“So we have that period from August to January where we’ll have gas available for any of the utilities that might need an interruptible supply,” Webb said.

Webb told Petroleum News that, in addition to the executed gas sale contract, Furie has negotiated term sheets for two additional contracts. The company hopes to secure sufficient contracts to enable the production of 85 million cubic feet of gas per day from the Kitchen Lights field, Webb said. He commented that a report evaluating the field had indicated that production could continue for 11 to 15 years. That only represents the proven and producible Kitchen Lights reserves, he said, adding that Furie anticipates proving out more reserves in the Kitchen Lights reservoir with the first two wells that the company drills from the Kitchen Lights platform.

For field startup Furie is going to lay a single gas line with a 100 million cubic feet per day capacity. However, the company’s development plan envisions twin 100 million cubic feet per day lines from the platform. Webb said that the Kitchen Lights field is capable of filling both pipelines but that construction of the second line depends on obtaining more contracts for the sale of the gas.

“The cost of the (second) pipeline wasn’t justified because we didn’t have the gas contracts to fill it,” Webb said.

AIDEA’s due diligence should be fairly straightforward, since the platform engineering and fabrication has already been carried out, with just the installation remaining, Webb commented. In addition, Energy Capital Partners has agreed to share the results of its due diligence, he said.

James Hemsath, AIDEA project development and asset management director, told the AIDEA board that the authority’s due diligence will involve confirming the size of the Kitchen Lights field and the production estimates for the field. AIDEA will also review and verify the engineering and construction work, and the business plan for the project, he said.

Hemsath said the majority of the AIDEA funding would be used for the construction and installation of the offshore facility. Although there is some remaining uncertainty regarding the total construction cost, the majority of that cost will be finalized by the time the AIDEA due diligence has been completed, he said.

This is a known field with known drilling results - the field will bring additional gas to the Cook Inlet region, Hemsath said. And the price of gas, a key parameter in the field’s economic viability, will be pinned down through gas sales contracts, he said.

AIDEA has a role of providing financing and investment to promote economic development and diversity in Alaska.