Violating the Jones Act?

By Tony Munoz 2012-11-21 11:06:00

by Tony Munoz, Editor-in-chief, Maritime Executive Magazine & MarEx eNewsletter

Escopeta Oil and Gas transports jack-up drilling rig from Texas to Alaska via Chinese ship based on a 2006 Jones Act waiver.

In 2006, Escopeta Oil and Gas obtained a Jones Act waiver with the help of Alaskan Governor Frank Murkowski, Senator Ted Stevens and Congressman Don Young. At the time the waiver was granted there were no U.S.-flagged vessels that could transport a jack-up rig from the Gulf to Alaska. Danny Davis, president of Escopeta, petitioned the government to allow the M/V TAI AN KOU, a Chinese-flagged ship owned by Cosco, to transport the rig. Alaskan legislators pushed the government to allow the waiver because of declining oil and gas production in the U.S. and the Cook Inlet Basin. On June 27, 2006, DHS Secretary Chertoff granted Escopeta the Jones Act waiver. However, the deal fell apart because Davis could not obtain a rig, but the precedent was set, particularly from Davis’ point of view.

Fast Forward to 2011

On March 17, 2011, Escopeta loaded the Spartan 151 jack-up rig on the M/V KANG SHENG KOU, a Chinese bulker, which is currently in transit around South America to Cook Inlet. Danny Davis is transporting the rig pursuant to the 2006 waiver issued by DHS. But, is he in violation of U.S. law? Well, on September 1, 2010, Davis wrote a letter to DHS Secretary Janet Napolitano pleading for ratification and reconfirmation of the 2006 ruling. His letter states there are “no U.S.-flagged heavy-lift vessels in the world able to transport the rig.” Napolitano apparently did nothing because on November 5, 2010, Davis emailed U.S. Customs and Border Protection (CBP) asking for its reconfirmation. And, on November 8, CPB made it clear that the 2006 Jones Act waiver was “neither open-ended nor transferable” and advised Davis to get a new waiver. 

The Jones Act Be Damned?

On March 18, 2011 Michael Roberts, Sr. Vice President and General Counsel, Crowley Maritime Corporation, wrote Maritime Administrator David Matsuda concerning the Escopeta-Spartan 151 request for a Jones Act waiver. Roberts states that since 2006 his company has invested tens of millions of dollars to renew and modernize its heavy-lift fleet and, based on the information provided by the owner, Crowley is capable of transporting the rig. Roberts also points out that Crowley reached out to Davis last year and had he cooperated at that time—or anytime last year—the engineering would have been completed and the rig would have been underway to meet the deadlines.

A Race Against Time

Escopeta first bought leases in Cook Inlet in 1999, and Davis named them Kitchen and East Kitchen in the time-honored tradition of organic material being cooked into oil. Soon after the purchase, Davis announced the 2-D seismic data he had reprocessed from older tests revealed his leases held about 12 trillion cubic feet of natural gas and 1.3 billion barrels of crude. When Davis announced he was bringing the Tellus jack-up to begin drilling, Alaskan legislators did the impossible and got him a Jones Act waiver. The deal fell apart when the ship arrived in the Gulf only to find the rig would not be ready for transport for months and that Escopeta’s partner Centurion had dropped out due to lack of capital.

Davis stayed the course and was granted an additional 83,394 acres by the state, which included the Kitchen tract, in 2009. But the clock was ticking as the state stipulated Davis would have to get a jack-up enroute by June 30, 2010 and spud a new well by December 31, 2010. Desperate to get production started in Cook Inlet, the Alaskan legislature offered any company that could drill a well first a $25 million tax credit. By June 30 Davis still did not have a rig to send to Alaska, and by July 19 the state put the Kitchen lease into default and demanded a $4 million deposit from Escopeta.

In September, Davis appealed the default and the deposit requirements, and the appeal was still in place in November when Davis announced he obtained a contract on the Spartan 151. Within weeks the state dropped all proceedings against Escopeta with the caveat that Davis get the rig moving by March 30, 2011 and drilling by October 31.

However, a letter dated March 16 to Davis from the State of Alaska Oil and Gas Conservation Commission stated that two Alaskan inspectors sent to inspect the rig in Texas reported that key well blowout control equipment was missing from the rig and therefore a complete inspection was not possible. Escopeta advised the commission that the missing equipment would be installed on the rig when it arrived in Alaska. The commission formally responded by saying no well operations could commence before the inspection was completed and signed off by the state. Additionally, the letter stated that “given the effort expended in arranging the last-minute inspection of an incomplete rig, the Commission was puzzled to discover no Escopeta representative would attend the inspection (Texas).” The commission did demand a representative at all future inspections and tests.

MarEx conferred with oil industry experts who voiced concerns about the rig working in Alaska. Some pointed out it’s a GOM rig and not suited for Cook Inlet; the rig is too short for the majority of prospects, and it is weak in steel and won’t stand up to the ice and heavy currents. But Davis has been trying to get a rig to the Inlet for years and, if he does, he stands to earn $25 million in incentives by being the first to drill there. Additionally, he’ll earn $23 million and $20 million for the next two wells, respectively.

A Jones Act Violation?

While Davis needed to get the Spartan 151 rig on the water before a certain date or lose his oil leases, the question is; at what cost to the Jones Act? Crowley, a Jones Act operator, told the government that it could have done the job and could have met all of the logistical requirements. But, the question posed to me; is a barge the right mode of transport or is a heavy lift ship the right vessel to get around Cape Horn? Well, Crowley was the primary transporter during the sealift operations for Prudhoe Bay, which is still considered one of the great transportation feats in history. And, while some in the oil industry questioned the ability of the rig to work in Alaskan waters, it was inspected a few weeks ago by inspectors from the state of Alaska and, surely, these experts would not allow an inadequate rig to operate in state waters. (?) Meanwhile, Davis has already spent $10 million to mobilize and demobilize, which must be paid in advance. He will also spend another $30 million getting the rig prepped and put in place. Nobody wants another environmental disaster and Davis is competing against other companies as well. So, our question to our readers: Has there been a violation of the Jones Act?

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Tony can be reached at tonymunoz@maritime-executive.com

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.