As a Result of Furie's Bankruptcy, the Cook Inlet Natural Gas Assets Are Sold

10/12/2020 5:00 am EST

Focus: COMMODITIES

Shawn Bartholomae

CEO, ProAK, LLC

Sponsored content - During the early to mid-2000’s, Alaska was experiencing a shortage of natural gas that was desperately needed to generate power and heat the homes of its residents. The shortage was serious enough to cause rolling brownouts. The State of Alaska tried to incentivize mid-size companies to explore and produce natural gas by offering tax credits. Furie invested over $700 million in the offshore platform, the onshore processing facility, the 15-mile subsea pipeline, the wells drilled to date, and an extensive 3D seismic shoot. The State promised roughly $300 million in tax credits for the work that had been performed, which would be partially payable each spring. Furie intended to drill up to three exploratory wells in the north block during the 2017 summer drilling season, but the governor vetoed any meaningful payments to the companies as promised. This seriously hampered exploration efforts and drilling had to be postponed. As the 2018 and 2019 drilling seasons came around, once again, no meaningful tax credits were paid. Furie borrowed more money from their lending partner to meet their commitments each summer and eventually were not in control. A considerable amount of time and money was expended to clear up the hydrate freezes in the gas production line in the winter and early spring of 2019. Already deep in debt, Furie elected to do a Chapter 11 reorganization in August of 2019 in the hopes of clearing up the debt and maintaining some equity.

Owned by Texas-based Cornucopia Oil & Gas Co., which in turn is owned by Deutsche Oel and Gas, Furie Operating Alaska LLC is operator of the offshore Cook Inlet Kitchen Lights unit that began producing natural gas in 2015.

In spring 2018, lender Energy Capital Partners started foreclosure proceedings against the owners, scheduling a sale of Furie’s assets, but the sale was canceled by ECP when an agreement was reached with the owners.

As a result of that deal, on March 23, 2018, Ankura Consulting Group LLC was retained to assist Furie and its affiliates with interim management and financial advisory services and Scott M. Pinsonnault, a senior managing director at Ankura, was installed as Furie’s interim chief operating officer.

Delivering on Commitments

Armed with a fresh round of financing from Furie’s lenders, Pinsonnault set about augmenting the independent’s Anchorage staff, adding a new vice president of operations and a health, safety, and environment official, as well as completing the company’s planned 2018 drilling program.

With outstanding commitments, both in terms of gas supplies for a big area utility and in terms of the Kitchen Lights unit plan of development with the state of Alaska, Furie’s focus was to deliver on those commitments, Pinsonnault told Petroleum News in a July 9, 2018, interview.

“It’s been a tremendous effort to get where we are in 90 days, to mobilize, permit, define the operational tempo for the summer,” he said.

The 2017 default, issued by the Alaska Department of Natural Resources’ Division of Oil and Gas, was because Furie had failed to meet drilling and development commitments.

But, in Furie’s new plan approval, issued on Dec. 11, 2018, the division said that Furie had recently complied with its commitments, curing the default.

The terms of Furie’s supply agreement with Enstar Natural Gas and its affiliate Alaska Pipeline Co. had also been met by Furie pushing drilling as hard as it could in the last half of 2018 to get a total of four wells online, which was a contractual requirement with Enstar and APC.

A later communication from Enstar to Furie said that APC had been very accommodating over the previous three years and could have terminated the contract because of Furie’s failure to meet deadlines for the drilling of wells and meeting required gas production capabilities. From the outset, the utility said, Furie had to supplement its Kitchen Lights natural gas production with gas purchased from third parties, or drawn from storage, in order to meet the terms of its APC supply agreement.

Disaster Strikes in January

With a vigorous year-end drilling program that both cured the 2017 default with the state and met the gas supply agreement with Enstar, Furie appeared to be headed for a successful 2019.

But then disaster struck. On Jan. 5, 2019, the company ran into problems with hydrate plugs caused by freezing water combining with gas to form solid hydrates at the unit’s onshore processing facility and in the 15-mile subsea pipeline from its Julius R offshore production platform, which slowed natural gas delivery to a trickle later that month.

On Jan. 23, Furie sent a letter to Enstar affiliate APC declaring force majeure and saying that it could no longer meet its commitments under its gas supply agreement.

At that time Lindsay Hobson, Enstar communications manager, told Petroleum News the utility had not received any gas from Furie since Jan. 25.

Kitchen Lights gas output was a mere 1,886 thousand cubic feet in February.

On March 19, 2019, Pinsonnault said Furie had cleared the obstruction that had been blocking the subsea pipeline.

“We have safely restored utility and communication between our onshore natural gas processing plant and the Julius platform over this past weekend,” Pinsonnault said, referring to the field’s offshore Julius R production platform. He said Furie would spend the next few weeks making sure that the line was completely clear, functional, and safe before restoring gas production.

In April 2019, natural gas output from Furie’s platform rose to 347,919 mcf, according to the Alaska Oil and Gas Conservation Commission, and production continued to rise.

Furie Files Bankruptcy

But financial pressure on the company was rearing its head, and in April 2019, a public notice of a foreclosure sale auction was posted by ECP in the Anchorage Daily News, and in Hart Energy’s Industry Voice.

Although that sale was later postponed, on Aug. 9, 2019, Furie filed a voluntary petition for Chapter 11 bankruptcy relief in the US Bankruptcy Court for the District of Delaware, listing about $450 million in debt. The company said it planned to sell its assets, which it listed on its petition with an estimated value of less than $50 million, by early January 2020.

Furie petitioned the court to approve “super priority senior secured post-petition financing in the form of a multiple-draw term loan credit facility in an aggregate principal amount of up to $15 million.”

Judge Laurie Selber Silverstein granted Furie and its affiliates access to the first $7 million of the interim debtor-in-possession financing Aug. 12, clearing the way for the company to use $3 million for its interim budget needs, according to a report by Law360 and an Aug. 18 article in Petroleum News. Silverstein warned the company that key provisions of the financing remained subject to challenges, particularly provisions directing $4 million of the loan budget to pay fees incurred by prepetition lenders.

According to the petition, “after any administrative expenses are paid, no funds will be available to unsecured creditors.”

Why specifically had Furie filed for bankruptcy protection?

In a first-day declaration filed by Pinsonnault with the court, Furie cited uncertainty with Alaska state tax credit reimbursements that it had historically counted on receiving, years of liquidity issues, and breaches of credit facilities, construction delays, and cost overruns.

In fact, in a plan of development submitted to state officials in October 2017, Furie said its failure to conduct any new development or exploration drilling at the Kitchen Lights unit in 2017 was due to “the lack of any meaningful appropriation to the oil and gas tax credit fund for the purchase of Alaska oil and gas production tax credit certificates.”

“Furie has invested hundreds of millions of dollars in exploring and developing the KLU (Kitchen Lights unit) and has a very substantial amount of tax credit certificates in the queue awaiting purchase by the state,” the company said in the plan. “These certificates are a key component to funding further exploration and development activities in the KLU and were relied on by Furie when putting together its work program and budget.”

Sale of Assets Planned

As this issue of The Producers was being prepared for press in late September, a sale of Furie’s assets was likely in October. Petroleum News will continue to follow the course of the company’s bankruptcy and asset sale.

Furies’ assets as reported over the last few years in Petroleum News include the following:

* Kitchen Lights unit consisting of nine state leases. The 83,394-acre unit contains three previously independent prospects that were administratively divided into four exploration blocks: Corsair, North, Central, and Southwest.

* Julius R offshore platform with six well slots that was installed in 2015, its monopod structure placed on the seafloor about 10 miles northwest of Boulder Point, near Nikiski off the Kenai Peninsula.

* Onshore natural gas processing facility near East Foreland on the Kenai Peninsula that was completed in 2015 and from which Kitchen Lights natural gas is delivered into the Kenai Peninsula gas transmission pipeline network.

* 15-mile subsea pipeline between the Julius R platform and the onshore processing facility that was installed in 2015 and has a throughput capacity of 100 million cubic feet per day.

* The 10 offshore gas wells drilled to date and their status per AOGCC database as of Sept. 22, 2019: KLU A-4, development, permitted as single completion, spud 8-3-2018, completed 10-11-18, total depth 11,315 feet, into Sterling undefined gas pool, Beluga undefined gas pool, and Tyonek undefined gas pool; KLU A-A2, development, permitted as dual completion, spud 7-9-2016, completed 9-8-2016, total depth 8,160 feet, into Sterling undefined gas pool and Beluga undefined gas pool; KLU A-1, development, permitted as single completion, spud 9-27-2016,re-entered and completed 7-30-2018, total depth 8,243, into Sterling undefined gas, into Beluga undefined gas pool; KLU A-2 (plugged and abandoned), development, permitted as single completion, spud date 6-19-2016, completed 7-8-2016, total depth 7,038 feet, into Sterling undefined gas pool; KLU 5 (plugged and abandoned), exploratory, permitted as single completion, spud 9-4-2014, completed 9-28-2014, total depth 11,827 feet, unknown target; KLU 4 (suspended), exploratory, permitted as single completion, spud 7-18-23, completed date not yet reported to AOGCC but the release date was listed as 10/24/2015, total depth 9,163 feet, unknown target; KLU 3, development, permitted as single completion, spud 4-26-2013, completed 7-10-2013, total depth 10,393 feet, into Sterling undefined gas pool and Beluga undefined gas pool; KLU 2A, (suspended), exploratory, permitted as single completion, spud 10-1-2012, completed 11-5-2012, total depth 10,750 feet, unknown target; KLU 2 (plugged and abandoned), exploratory, spud 9-6-2012, completed 9-30-2012, total depth 9,106 feet, unknown target; KLU 1 (suspended), exploratory, permitted as single completion, spud 9-2-2011, completed 8-18-2012, total depth 15,298 feet (TVD the same), target unknown.

* The Kitchen wells that were in production in August 2019 were KLU A-1 (137,814 thousand cubic feet), KLU A-2A (122,566 mcf), KLU 3 (235,802 mcf). All three were producing from the Beluga gas pool.

Read Part 1: Crude Discovery Gets New Life 27 Years Later

Read Part 2: The History of ProAK’s Cook Inlet Energy Fields

Read Part 3: Furie Seeks Permit for New Platform

Read Part 4: The Explorers 2016: Furie Planning Major Exploration Effort

Read Part 5: Furie Takes First Steps Toward Adding Inlet Oil Platform

Read Part 6: The Explorers 2017: Furie Planning Jurassic Well at KLU

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