BlueCrest Energy got its $30 million loan with the state reworked days after the rig at the center of the deal began drilling its first oil well.
The Alaska Industrial Development and Export Authority board of directors unanimously approved modifications to the terms of its loan to BlueCrest on Dec. 1, which officials of the Texas-based independent say were necessary after Gov. Bill Walker vetoed most of the funding to pay the state’s 2017 fiscal year oil and gas tax credits.
The loan changes were met with significant opposition coming primarily from residents of the southern Kenai Peninsula, where BlueCrest is developing its oil project.
AIDEA staff received more than two dozen emails and voice messages from Alaskans urging the authority to reject the loan changes after multiple news stories outlined the terms of the proposal in the days leading up to the Dec. 1 meeting.
The resistance stemmed mostly from environmental concerns with the company’s plan to hydraulically fracture the wells at its 38-acre onshore drill pad just north of Anchor Point.
While the above ground portion of BlueCrest’s Cosmopolitan project is onshore, the angled oil wells are aimed at an oil pool that is just offshore and underneath Cook Inlet.
Residents expressed worry that the activity could harm the Inlet’s salmon fisheries, which play a large role in the local economy, and impact the endangered Cook Inlet Beluga whales.
Others testified at the meeting during the normally quiet public comment period that BlueCrest’s trucking of its crude about 70 miles north to the Tesoro refinery poses another unnecessary risk and urged AIDEA to invest in renewable energy projects instead.
Leaders of state oil and gas industry trade associations supported the proposal during the comment period, contending the new development is a positive in the mature oil basin that has provided many well-paying jobs for the area.
BlueCrest Chief Financial Officer John Martinek said in an interview that more than 150 of the 173 individuals employed on the “drilling side” of the operation are local hires.
Martinek also said that BlueCrest would need to frack the producing length of each well only once, with a reach of about 220 feet from the well, as opposed to the repeated fracking common in Lower 48 shale oil and gas production.
Fred Parady, AIDEA director and deputy commissioner of the state Commerce Department, said during a brief board discussion that worries about potential environmental impacts should be directed to the appropriate regulatory agencies instead of the financiers.
“AIDEA’s role as a financing entity is predicated upon the other parts of the process doing their job,” Parady said.
He added that AIDEA is only making “minor modifications” to the loan package to accommodate “certain realities of a project that’s viable and ongoing.”
The initial $30 million loan was approved amid less scrutiny in April 2015. It was intended to fund construction of the drill rig that is now in place. The seven-year loan terms called for a 15-month “line of credit period” during which interest would accrue. When the payment period commenced a fixed 10 percent interest rate was set to kick in. Additionally, BlueCrest was required to fund a reserve account with $15 million by Dec. 31, 2016, to cover a potential default on the loan or the difference between the outstanding loan amount and the price the rig would garner if it were to be up immediately in a “distressed” sale situation.
Delays during rig construction pushed BlueCrest’s production schedule back several months and the veto of the credit money — which the company intended to fund the reserve account — led to the modification request.
AIDEA ultimately agreed to a partial deferral of principal payments with interest-only due Jan. 1 through November 2017, after which the original terms kick in, and a reserve account funded with the greater of $5 million or 120 percent of the difference between the loan amount and the assessed “distress sale value,” according to authority Executive Director John Springsteen.
Martinek said the company would not have asked for changes to the loan without the tax credit veto.
Currently, BlueCrest holds a $19 million credit certificate, essentially a rebate owed by the state, and has received a $2.3 million partial payment, according to Martinek. He said the company has applied for another $30 million in tax credits for its Inlet work and expects to file for another $10 million to $15 million — for a total of nearly $60 million — in credits from its current drilling before the legislation passed earlier this year to pase out the Cook Inlet refundable credits takes full effect.
Had the state paid BlueCrest the full amount up front, the company would have drilled offshore gas wells this summer with the Spartan 151 jack-up rig that has been used by other companies in the Inlet, Martinek added.
Gov. Walker said in June when he vetoed $430 million in tax credit payments that he could not approve the spend that would come out of state savings without the Legislature taking action to resolve the State of Alaska’s $3 billion-plus annual deficits.
BlueCrest started drilling the first of what the company hopes will be many production wells with its brand new rig Nov. 27.
Drilling of the Hansen 16 well will take about 90 days, Martinek said. From then it will take about another 60 days to complete and frack, putting first production sometime in April; and immediately thereafter work will commence on a second production well, he said.
Initial production from Hansen 16, the first well, is projected at between 2,500 and 4,500 barrels of oil per day. The second well will take longer and likely produce more because it will have a lateral offshoot from the initial well, according to Martinek.
BlueCrest is targeting the Cosmopolitan oil field, which sits about three miles offshore and 7,000 feet below Cook Inlet.
At more than 3,000 horsepower and with a reach of more than 30,000 feet, the rig the company had built to extract the Cosmo oil is the largest onshore drilling rig in the state, according to company officials.
BlueCrest has been producing between 175 and 250 barrels per day from a prior well drilled by prior owners of the prospect since early spring.
The current production necessitates one tanker truck about every other day to haul the crude north to the Tesoro refinery in Nikiski, Martinek said. When the two new wells are brought online the transport activity will increase to about one truck per hour.
Increased tanker truck activity, and the associated spill risk it brings, has been a primary concern of Kenai Peninsula residents who oppose the project.
BlueCrest takes the trucking operation very seriously, Martinek said, adding the company has a triple-redundancy built into its loading system to prevent overfilling of the tankers.
However, if and when a pipeline is built to the refinery will depend largely on economics. According to Martinek, the cost of the 72-mile pipeline has been estimated at $1 million to $1.5 million per mile.
“We’ll let the wells tell us when it’s time to the pipeline in place,” he said.
BlueCrest has indicated Cosmopolitan has the capacity to produce upwards of 17,000 barrels of oil per day from 10 production wells — with 10 associated injector wells — but that level of development will depend largely on oil price and state tax policy, according to company executives.
Elwood Brehmer can be reached at email@example.com.