Furie sale advances

2nd order advances Kachemak acquisition deal; Feds eye Jones Act debt

Steve Sutherlin

Petroleum News

U.S. Bankruptcy Judge Laurie Selber Silverstein signed a second order March 6, authorizing Chapter 11 debtor Furie Operating Alaska LLC to enter into an acquisition by foreclosure agreement with acquirer Kachemak Exploration LLC; authorizing the parties to complete their obligations in connection with the agreement; and granting related relief.

Kachemak - a Delaware corporation recently formed by GFR Holdings of Fort Worth, Texas, and Melody Capital Partners L.P. - is seeking to acquire the Cook Inlet Kitchen Lights offshore unit, related infrastructure such as the Julius R offshore natural gas platform, together with an onshore processing facility and related pipelines.

The “second order” constitutes a final order, after notice of the motion and a court hearing to interested parties, the order said, adding that the court held a hearing to consider the relief on March 4, at which time all interested parties were offered an opportunity to be heard.

The order was signed and entered into the record on March 6, in the Chapter 11 bankruptcy case of Furie and its related companies in the U.S. Bankruptcy Court for the District of Delaware.

In comments during the March 4 hearing Selber Silverstein said that Anchorage based HEX LLC was named high bidder after an auction of the debtor’s assets held last year but that the debtor has taken the position that HEX was in default.

At that time, she asked if a representative of HEX was present and determined the company was not represented in the courtroom or on the phone.

“Hex has not filed an objection to the sale going forward,” she said.

“The revised language in the order is clear that I am not making a finding with respect to whether HEX is in default or that that they have no defenses or counterclaims to such an allegation, and nothing will preclude it from seeking return of its deposit,” she said.

Selber Silverstein said she looks at the Kachemak sale as “more of a private sale after the auction,” and she found that buyer not an insider.

“The relationships that do exist have been disclosed to the court and other parties in interest; I find no collusion,” she said.

“The HEX matter has been resolved to my satisfaction,” she said. “We’re in a bit of an unusual posture with this ever-continuing discussion but I’m satisfied based on, frankly, HEX’s failure to object to my approval of this proceeding, and its reservation that in my view is limited to remedies to its deposit, which I will deal with at another point and time, again, if that matter is not resolved.”

AIDEA board approves loan resolution for HEX asset purchase

“The loan to HEX is in support of the company’s bid to acquire the Kitchen Lights offshore unit and related infrastructure out of bankruptcy from Furie Operating Alaska LLC,” AIDEA told Petroleum News in a March 6 email.

The sale would be structured as an acquisition of the limited liability companies (Cornucopia Oil & Gas Co. LLC and Corsair Oil & Gas LLC) that own the natural gas leases and the natural gas production infrastructure of the Kitchen Lights unit located in Cook Inlet, Alaska, AIDEA said in the resolution.

“The proposed loan to HEX would permit the continued production of natural gas from the Kitchen Lights Unit and enable the production of additional natural gas quantities from the unit, with the natural gas be delivered to utilities and other users in the State,” the resolution said.

“For a kid who grew up in Homer and has spent a lifetime working in Alaska oilfields, I believe it is important that Alaskans have the opportunity to compete for this asset,” said HEX President and CEO John Hendrix. “The HEX team is grateful for AIDEA, and thanks them for moving expeditiously to make this happen.”

“Today’s announcement is another sign that Cook Inlet will be able to supply the energy needs of Southcentral Alaska and beyond for many years to come,” said Gov. Mike Dunleavy.

The debtors negotiated the Kachemak agreement after HEX missed deadlines - for subsequent good faith deposits on Dec. 24 and Jan. 10, and to provide proof of financial wherewithal to consummate a transaction by Jan. 10 - each as required under the terms of its bid, the debtors said.

The debtors filed a Feb. 18 motion for approval of a settlement between the debtors, the lender parties, the buyer, and several litigants, including a royalty and working interest owners group.

In a notice of alternative offer filed Feb. 20 by HEX, HEX said it was unable to complete financing for the purchase primarily due to uncertainty created by the pending royalty dispute with the RWIO group, adding that HEX could not forecast its future income and expenses, therefore its lenders were unwilling to commit.

HEX said in its notice that the debtors had “agreed to work with HEX for two weeks to see if a better transaction can be structured.”

$7.1 million still owed on Jones Act fine; Feds reserve rights to tax overpayments

Furie listed its largest unsecured creditor as the U.S. Department of Justice, owed $7.2 million from a 2017 settlement agreement from a lawsuit Furie brought challenging a $15 million fine levied over a U.S. Customs and Border Protection determination that the company - then named Escopeta Oil - violated the Jones Act in 2011 when it brought a jack-up rig to Cook Inlet from Texas.

Ellen Slights, with the U.S. Attorney’s Office, came forward during the Judge’s discussion of language in the acquisition agreement that might unintentionally pre-bind parties regarding assumptions or assignments which would not occur until the effective date of the sale plan.

Slights said she represented the Department of Homeland Security on behalf of Customs and Border Protection.

“The United States has entered onto a prepetition settlement agreement with the debtors, and the debtors under that agreement still owe the United States $7.1 million,” Slights said. “I rise, your honor, because I had not really participated in this sale process, up to this point, but on document number 571 dated February 21, 2020, the United States’ settlement agreement was included in a list of contracts to be assumed and assigned, and in that document that I’m looking at now, I’m not seeing any cure amounts. Perhaps there are things that have set it at some zero cure somewhere in the documents?”

“But I would say, your honor, that the reason I am here is our contract was removed; we were apparently put on inadvertently to this assume/assign list, but I am very concerned about this process and about having the United States’ rights affected by this process,” she said. “My particular concern is set-off, and to the extent I don’t know if the debtors have a federal tax refund, but to the extent that there is a tax overpayment, the United States will almost certainly be due a right of set-off to that overpayment, and the debtors have said that that right won’t be affected at all by this process, because it’s all tied to the plan confirmation.”

Orders signed March 4 re: Furie asset sale to Kachemak

Selber Silverstein signed an order approving the debtors’ motion for approval of settlement between the debtors, the lender parties, the buyer, the Webb litigants and the RWIO parties, filed by Furie.

The judge also signed an order for approval of settlement between the debtors and Alaska Pipeline Co., filed by Furie.

Selber Silverstein also signed an order approving debtors’ motion for entry of an order establishing an administrative bar date and approving the form and manner of notice filed by Furie.

Largest Jones Act penalty levied in history

Customs initially fined the company $15 million, which Justice said was the largest Jones Act penalty levied in history.

How did a small independent oil company end up with such a big fine?

Tiny Escopeta Oil dreams large

In the 1990s, Davis began to assemble an offshore land position in Alaska’s Cook Inlet. Davis believed that previous operators in Cook Inlet fields, in their haste to rush to the North Slope after the massive Prudhoe Bay discovery, had left behind some promising geology which Davis called Cook Inlet’s missing giants.

Davis needed a jack-up rig to test his theories.

But bringing a jack-up rig to Alaska was an expensive and complicated endeavor. It was not until 2005 that Davis found a money partner with the wherewithal to mobilize a rig and drill a well.

Davis found a suitable rig — the Tellus — in the Gulf of Mexico and put it into a Texas shipyard for the modifications and repairs it would need to operate in Cook Inlet conditions.

But Davis faced another complicated and expensive hurdle to his plan. Because he had used an American shipyard to prepare the rig, the transportation was subject to the Jones Act — passed in 1920 — which prohibits a foreign vessel from transporting cargo between U.S. points.

The Jones Act was a hindrance because no U.S. flagged, purpose built self-propelled semi-submersible heavy lift transport ships were available in the U.S. fleet to safely transport the rig on the notoriously treacherous route around the tip of South America to Pacific waters. The Panama Canal was too small to accommodate the load.

Davis hired Hong Kong-based Coscol (HK) Investment & Development Co.’s 520-foot-long Tai an kou heavy lift vessel for the 60 day voyage to Alaska from Port Arthur, Texas.

Meanwhile, Davis hired an experienced Washington, D.C., maritime law firm to shepherd a request for a Jones Act waiver through Congress, a time-consuming and expensive process. Davis also hired an Anchorage-based contractor that met with officials at Elmendorf AFB and Fort Richardson regarding the looming natural gas shortage in the Cook Inlet area and its affect on military readiness at those strategic installations.

Escopeta learned that Jones Act waivers may be obtained in limited circumstances from the secretary of the U.S. Department of Homeland Security in the interest of national defense following a determination that no U.S. vessel is available.

Davis had a chance to execute his plans.

Success!

“Pretty soon Cook Inlet will be out of gas. The two military bases near Anchorage need it, and the people in Southcentral Alaska need it. And we’re hoping to find it — plus a lot of oil,” Davis told Petroleum News at the time.

“The Maritime administration, the Department of Homeland Security, the Department of Defense and the Department of Energy all signed off on this,” he said. “And we had excellent support from our Congressional delegation in Washington, D.C., the governor, and the mayor of the Kenai Peninsula Borough and his liaison, Bill Popp.”

While Jones Act negotiations with the Bush administration went splendidly, nature had dealt a subtle blow that would delay the arrival of a jack-up rig to Alaska for years.

Escopeta was expecting the Tellus to be ready to load in the summer of 2006, but Moduspec USA did a rig inspection on June 23 and told Escopeta that due largely to hurricane damage that had not been readily apparent, Songa needed more time to complete the refurbishment.

Thus began a series of delays that ultimately resulted in the release of the Tellus, and the exit of Escopeta’s money partner.

In late 2008, Escopeta notified Homeland Security by certified mail that it still intended to use the Jones Act waiver to take a jack-up rig to Alaska, and to please advise the company if any further action was needed to extend or preserve the waiver. The department never responded to that letter.

A jack-up rig is bound for Alaska

There had not been a jack-up in the inlet for more than a decade because of the expense involved in getting one to Alaska, drilling and returning it.

The Department of Homeland Security had not publicly said whether Escopeta’s Jones Act waiver was still valid. U.S. Sen. Mark Begich, D-Alaska, had petitioned the Department of Homeland Security to resolve some of those uncertainties.

Although the Maritime Administration initially opposed Escopeta’s current jack-up waiver application, Homeland Security Secretary Janet Napolitano said the agency recently reversed its determination, saying no U.S. flagged vessels would be available until October.

Having had some encouragement on the matter from Alaska’s congressional delegation, Davis bravely set sail without official permission from the Obama administration in order to timely meet his drilling commitments to the state of Alaska.

Southcentral Alaska’s military bases and a civilian population were facing shortfalls in natural gas deliveries for electricity and heat, as well as contending with declining local oil production for use in the making of gasoline and jet fuel — situations that had increased in severity since 2006, with production of gas and oil continuing to decline.

There was a possibility that Napolitano would recognize Escopeta’s existing waiver, or issue a new one, because the reasons for its issuance were now more acute.

Davis said assurances in a May 20 letter from Napolitano that the federal government had no intention of confiscating the rig when it was offloaded in Alaska was not enough for jack-up owner Spartan Offshore Drilling. The heavy lift vessel owners were also unnerved by the ambiguity.

She also acknowledged the energy needs of Southcentral Alaska in the letter.

The Spartan 151 was ultimately offloaded in Vancouver, which Davis reluctantly decided to do, despite the added cost.

Davis had work done on the jack-up and its legs inspected in Canada.

“The work on the rig that we were going to do with U.S. companies at the OSK dock at Nikiski, Alaska, is going to have to be done by Canadian workers. … It’s a shame,” Davis told Petroleum News.

The rig was wet-towed by U.S. flagged tugs from Canada to Alaska, arriving in U.S. waters as a vessel under its own navigation.

On Oct. 13, 2011, the Anchorage office of U.S. Customs and Border Protection levied a $15 million fine against Escopeta Oil Co. for violating the Jones Act.

On Nov. 4, 2011, Escopeta announced a major natural gas discovery, which led to the installation of a production platform which currently supplies gas to Southcentral Alaska.

—STEVE SUTHERLIN