Explorers 2014: Caelus Energy takes over Pioneer assets in Alaska
The privately held independent Caelus believes Oooguruk will be the basis for much Alaska exploration
For Petroleum News
As its name implies, Pioneer Natural Resources Inc. has led trends.
The Texas-based independent arrived in Alaska in the early 2000s determined to bring a leaner and more agile approach to resource development in the Arctic. The mid-sized company had recently accomplished as much in the U.S. Gulf of Mexico and saw an opportunity to tackle another tough but rewarding domestic basin: the North Slope.
The move proved to be prescient.
Since Pioneer became the first independent operator on the North Slope in 2008, several other newcomers to the state have joined its ranks and several more promise do the same in the next few years. The North Slope had two operators in 2007, but currently has five.
Now, Pioneer is leaving the state. Its decision includes two factors that could also become trends for Alaska in the near future: the impact of unconventional oil production in the Lower 48 and the emergence of smaller independent companies in the energy industry.
Having seen its Permian Basin assets grow increasingly valuable in recent years, Pioneer has freed up capital by selling its Alaska assets to the privately held Caelus Energy Alaska LLC. After some delays and amendments to sale, the deal closed in April 2014.
Growth and contractionThe 12 years Pioneer spent in Alaska could be graphed as a diamond shape: a focused effort that grew to an expansive search and later shrunk back down to a focused effort.
In 2002, the company acquired a stake in the Armstrong Resources-operated Northwest Kuparuk prospect in the Beaufort Sea. The prospect is currently called Oooguruk.
Over the next five years, Pioneer expanded its holdings through lease sales, acquisitions and joint ventures until it had more than 1.6 million acres across the state. After several disappointing exploration ventures, Pioneer relinquished considerable acreage to focus on the Oooguruk unit on the North Slope and the Cosmopolitan unit in Cook Inlet.
In 2011, Pioneer sold the core Cosmopolitan prospect and dedicated more resources to expanding its operations at Oooguruk into additional intervals and nearby satellites. In late 2013, Pioneer sold the Oooguruk unit and its remaining Alaska assets to Caelus.
Bringing Oooguruk onlineShortly before Pioneer came to Alaska, the company had brought two deepwater Gulf of Mexico fields into production just two-to-four years after making initial discoveries.
Bolstered by that success, Pioneer also believed it could also reduce “cycle times” on the North Slope, which was entering an era of maturity after four decades of development.
As Executive Vice President of Worldwide Exploration Chris Cheatwood told Petroleum News in early 2003, “You see those kinds of cycle times in other parts of the country, and that’s what companies want to see in Alaska. We go in and make substantial investments in wells and leases and we want to be able to bring those prospects into production as soon as possible. … The independent model is to quickly turn investment into cash flow.”
Alaska, though, can be uniquely difficult among domestic basins.
All three wells in a 2003 appraisal program encountered oil in the Kuparuk C sands, but the sands “were too thin to be considered commercial.” While a deeper test “encountered thick sections of oil-bearing Jurassic-aged sands,” lingering concerns about permeability, the size of the resource and recovery rates made a decision to proceed far from certain.
Even after Pioneer fast-tracked development and formed the Oooguruk unit, the company spent two-and-a-half years trying to figure out the most economic way to develop an oil field underlying shallow waters of a remote sea along a coastal edge of the Arctic Ocean.
Ultimately, Pioneer decided to build a six-acre gravel island, which it connected to existing facilities at the Kuparuk River unit using a 5.7-mile subsea bundle of pipelines.
Construction finished in mid-2007, development drilling began toward the end of the year and Pioneer became the first independent operator on the North Slope in June 2008.
Pioneer initially developed two oil pools: the Kuparuk and the Nuiqsut. Using primary and secondary methods, Pioneer expected to recover between 4 million and 8 million barrels from the Kuparuk and 37 million and 90 million barrels from the deeper Nuiqsut, which represented about one third of the original oil in place estimated for the pools.
The resource estimates for those pools increased over the first two years of development, as Pioneer analyzed production rates and conducted a 3-D seismic survey over the unit.
Targeting the TorokEssentially every well drilled at the Oooguruk field passed through a third, shallower interval - the Torok formation. Intrigued by this formation, Pioneer specifically targeted the Torok in early 2010 and proposed the Nuna development project later in the year.
The proposal called for expanding the unit to the south, building as many as two onshore drill sites in the Colville River Delta to access sections of the prospect too far to reach from the gravel island, and potentially building a standalone onshore production facility.
After the state agreed to expand the unit, Pioneer drilled two exploration wells in early 2012: the Sikumi No. 1 from an offshore ice island and the directional Nuna No. 1 from an onshore ice pad. A “deep test” of the Ivishak at Sikumi No. 1 was “basically non-commercial,” but Nuna No. 1 yielded a 50 million barrel discovery from the Torok.
Pioneer drilled the Nuna No. 2 appraisal well in early 2013 and later increased its estimate for the Torok to a range of 75 million to 100 million barrels, up from 50 million.
As an early step toward sanctioning Nuna, Pioneer proposed a project in August 2013 to expand operations, improve seawater-delivery and accommodate future Nuna facilities.
In May 2014, the state approved a third expansion of the Oooguruk unit. The expansion added three small Torok prospective leases surrounded by the existing unit boundaries.
Other exploration venturesOver the decade Pioneer spent acquiring, appraising, developing and expanding the Oooguruk unit, the company also undertook other exploration ventures across Alaska.
The initial three-well program at Oooguruk in 2003 included the 6,900-foot vertical Oooguruk No. 1, the 7,500-foot directional Natchiq No.1 and the 6,943-foot Ivik No. 1.
At the North Slope and Beaufort Sea lease sales that October, Pioneer submitted nearly $3.9 million in high bids, around two-thirds of the $5.8 million in high bids at the sales.
The leases included a large block of acreage south of the Prudhoe Bay and Kuparuk River units. “You’ve got to get established first,” Cheatwood told Petroleum News after the sale, “so we just needed to look at a variety of different opportunities up here and establish a land position.” After acquiring seismic over the area, Pioneer would “put some plans together and see what we can do on those lands,” Cheatwood said.
By mid-2004, Pioneer was touting four prospects: the Storms prospect south of Prudhoe Bay, the Gwydyr Bay prospect north of Kuparuk, the offshore Caribou prospect north of Point McIntyre and Oooguruk. Pioneer also held a stake in the Tuvaaq unit, adjacent to Oooguruk, but later transferred its 40 percent working interest to operator Kerr-McGee.
Around the same time, Pioneer also acquired Evergreen Resources to improve its Midcontinent holdings in the Lower 48. The deal included coalbed methane prospects in Southcentral, but Pioneer dropped the controversial acreage before closing the deal.
Despite some initial plans between 2004 and 2006, the Caribou and Gwydyr Bay wells never came to pass, and Pioneer later relinquished or transferred its leases in both areas.
2006 exploration wellsIn early 2006, though, Pioneer drilled three exploration wells: Hailstorm No. 1 at the Storms prospect, and Cronus No. 1 and Antigua No. 1 south of the Kuparuk River unit.
“We expect to have a very, very active drilling program on the North Slope over the next several winters. … We’re looking forward to a long relationship in Alaska,” Pioneer Chairman and CEO Scott Sheffield told the Meet Alaska conference in January 2006.
To support its plans, Pioneer commissioned the Arctic Fox rig on a four-year term from Doyon Akita J.V., a joint venture between Doyon Drilling Inc. and Akita Drilling Ltd.
With its 50 percent partner ConocoPhillips, Pioneer conducted a 3-D seismic survey over 278 square miles of the Storms prospect in early 2005, formed the 16,500-acre NE Storms unit later in the year and proposed a one-to-two well program for early 2006.
While keeping somewhat vague about its specific locations and plans, Pioneer said the potential targets for the well “may include but are not limited to the Ivishak formation.”
Ultimately, the Hailstorm No. 1 well proved to be unsuccessful.
Cronus was originally part of the ConocoPhillips-operated SE Delta unit in the area southwest of Kuparuk. The state dissolved the unit after ConocoPhillips failed to meet work commitments, but ConocoPhillips applied to form the Cronus unit over a similar area in 2004. ConocoPhillips farmed out the prospect to Pioneer the following year. The target was Albian-aged submarine fan turbidite sands in the Torok formation.
As Pioneer was preparing to drill the Cronus No. 1 well in early 2006, it was also permitting three additional Cronus wells to get a head start on appraisal drilling. The decision proved to be too optimistic. Cronus No. 1 encountered thick oil-bearing sands in the Torok and thin oil-bearing sands in the Kuparuk C, but Pioneer decided that the formation was “too tight to produce” and terminated the unit the following year.
Like the Cronus well, Pioneer also participated in the Antigua well on ConocoPhillips acreage using the Arctic Fox No. 1 rig and also decided that the well was “unsuccessful.”
NPR-A explorationWhile Pioneer pursued those projects on state land, it also pursued opportunities on federal land in the National Petroleum Reserve-Alaska and associated federal waters.
In 2004, Pioneer acquired a 20 percent interest in some 167,000 acres of ConocoPhillips and Anadarko Petroleum leases in the northeastern planning area of the NPR-A. The following year, Pioneer expanded the joint venture by acquiring a 20 percent interest in some 452,000 acres held by the two companies. At a 2004 lease sale in the northwest planning area, Pioneer acquired 20 to 30 percent working interests in some 808,000 acres.
Altogether, the deals gave Pioneer the third-largest land position in Alaska.
The partners drilled two wildcats at the Kokoda prospect in early 2005. The wells were remote even by Alaska standards, requiring a 70-mile ice road, but the companies saw the opportunity for a discovery that would be large enough to support standalone facilities and the partnership allowed all three companies to share the risk of the expensive wells.
The partners kept relatively mum about the results of the Kokoda No. 1 and Kokoda No. 5 wells, but ConocoPhillips and Pioneer teamed up again in early 2007 to drill Noatak No. 1 and Intrepid No. 2. The wells were also remote NPR-A wildcats, each costing some $60 million to drill. ConocoPhillips ultimately called both wells “non-commercial.”
Slowing investmentAfter those disappointing seasons, Pioneer grew skeptical about Alaska exploration.
“Based on the lack of success … we’re definitely slowing down our investments, until we make the next decision on where to go in terms of exploration,” Pioneer President and Chief Operating Officer Tim Dove told Petroleum News in late 2007. To those ends, Pioneer and its partners relinquished some 300,000 acres in the NPR-A in late 2007.
For the next three years, Pioneer focused on two Alaska projects: bringing the Oooguruk unit into production and appraising the Cosmopolitan prospect in Cook Inlet.
In mid-2005, at the height of its optimism about Alaska exploration, Pioneer acquired a 10 percent minority interest in the Cosmopolitan unit off the coast of Anchor Point.
In 1967, Pennzoil drilled the 12,112-foot Starichkof State No. 1 at the prospect and encountered oil at 6,800 feet and 6,900 feet. ConocoPhillips returned to the region in 2001, forming a joint state-federal unit and drilling a well and associated sidetrack.
Those wells “tested at a stabilized rate of 600 to 800 barrels a day over different intervals that lasted three to four months,” Dove said in 2005, as Pioneer was acquiring a greater working interest in the prospect and eventually became its operator. In late 2007, after acquiring seismic, the company drilled the Hansen 1A L1 well from an onshore pad.
The well was a horizontal lateral off the initial ConocoPhillips sidetrack to appraise a different interval. The lateral flowed at 400 to 500 barrels per day, according to Pioneer.
After pausing its appraisal efforts in 2008, to wait out the worst of the financial crisis, Pioneer returned to Cosmopolitan in early 2010 to fracture stimulate the lateral.
The well and the workover yielded a unique pilot project.
Pioneer trucked the flow test production some 75 miles up the Sterling Highway to the Tesoro refinery in Nikiski. The pilot project underpinned a development scenario Pioneer presented to state officials in April 2010: a trucking operation averaging 14 trips per day.
By early 2011, Pioneer was less enthusiastic. While calling its lateral and workover results “encouraging,” the company said “subsequent flow test results and engineering studies indicated that the resource potential was not as large as originally estimated.” So Pioneer cancelled its development plans, terminated the Cosmopolitan unit and surrendered its leases except ADL 384403 and ADL 18790, which had wells certified as capable of paying in paying quantities. Pioneer sold those to Buccaneer Energy Ltd.
Thus, after a decade of active onshore and offshore exploration activities on the North Slope, in the NPR-A and in Cook Inlet, Pioneer was back where it started: Oooguruk.
An unconventional threatDuring that decade, Pioneer also overhauled its portfolio outside Alaska.
When Pioneer arrived in the state in the early 2000s, it talked of four exploration centers in its portfolio: Alaska, the deepwater Gulf of Mexico, north Africa and west Africa.
While the company added and subtracted regions from its portfolio over the years, it signaled a shift in June 2005 when it spent some $177 million acquiring additional properties in the Permian basin of west Texas and the Eagle Ford shale of south Texas.
Those acquisitions came during the early days of the unconventional boom that is still upending the Lower 48 oil market. The financial crisis greatly reduced the cost of drilling in 2009, which allowed Pioneer to act quickly as crude oil prices started to recover.
The west Texas project began to gobble up capital.
Of the $960 million Pioneer budgeted for drilling operations in 2010, $120 million went to Alaska, while $580 million went to west Texas and $100 million went to the Eagle Ford shale. And of the $1.6 billion Pioneer budgeted in 2011, $115 million went to Alaska, $1.1 billion went to west Texas and $110 million went to the Eagle Ford shale.
The budgets kept climbing into 2012 and 2013, as did production. For the first quarter of 2013, Alaska produced some 4,000 barrels per day of the total company rate of 171,000 bpd while the Permian and Eagle Ford accounted for 16.3 percent growth year-over-year.
Speaking at the Meet Alaska conference in January 2011, Pioneer Executive Vice President for Domestic Operations Jay Still made the distinction explicit. Of the nearly one dozen North Slope exploration wells that the company helped drill between 2003 and 2007, “We did not have a dry hole - every well we found the hydrocarbons. We just didn’t find rock that we could make production in commercial quantities,” he said.
While the Lower 48 had “a thousand-times worse rock than what’s on the North Slope,” the prospects were easier to develop. If the Alaska wells could magically be transported to the Lower 48, “we would be all over them,” Still said. “There would be no question that the thing could be developed, with horizontal wells, the fracture technology.”
The Spraberry play of west Texas and the Eagle Ford shale of south Texas more than doubled Pioneer’s resource base, Still said, from proven reserves of about 1 billion barrels of oil equivalent at the end of 2009 to 2.3 billion barrels of oil equivalent in 2011.
Plus, the wells to develop those resources were cheaper than Alaska wells, the cycle times were quicker than Alaska projects and the costs were lower than Alaska, he said.
Those disparities spawned rumors of a sale.
Asked in August 2011 whether Pioneer was still interested in frontier plays like South Africa and Alaska, Sheffield said “it’s always an option in regard to whether or not to look at divesting those two assets,” but also added that the company saw South Africa as “running out” and saw Alaska as “growing significantly over the next several years.”
After Pioneer sold its South Africa holdings in early 2012, analysts continued asking Sheffield whether Alaska was next. In May 2012, he said the decision would be made “down the road,” but he noted that despite the encouraging results of recent completion program at Oooguruk, productions rates had been flat or declining for about a year.
“If the team up there can show us they have huge potential to grow production and frack several more Nuiqsut wells and look at some Torok, then we’ll look at keeping and keep growing it,” Sheffield said. “And so that’s the key: Do we have enough upside on growth to able to reinvest the cash flow and grow the asset. And we love growing assets.”
In August 2012, as Pioneer sought partners for its Wolfcamp program, the analysts asked what the thirst for capital meant for Alaska. “All of our assets are for sale for the right price. So we will continue to look at performance of those assets and make that determination in the future, whether or not we should be selling an asset,” Sheffield said.
Selling to CaelusThe right price came in October 2013, when Pioneer sold its entire Pioneer Natural Resources Alaska Inc. subsidiary to Caelus Energy Alaska LLC for some $550 million.
The two companies amended the terms of the sale in March 2014, down to some $300 million. The revision opened the door for the parties to close the deal in April 2014.
The cash allowed Pioneer to increase its rig count in the Spraberry and Wolfcamp of west Texas in 2014 to better chase the estimated 3 billion barrels of oil equivalent at the plays.
With two principals each hailing from small independents, Caelus currently describes itself as a “privately held diversified international energy group focused on the identification, pursuit and development of unique opportunities across the energy sector.”
The principals specifically tout two previous efforts: first, acquiring the independent Triton Energy, developing a major oil discovery offshore West Africa and selling the company to Amerada Hess; second, founding the independent Kosmos Energy and making a discovery offshore Ghana that propelled the company into a public offering.
A decade ago, Pioneer saw an opportunity to turn investment into cash flow by reducing the cycle time for Alaska development. Caelus wants to avoid cycle times altogether. The acquisition gives the company cash flow and an experienced crew in a prolific basin.
“We think there’s an opportunity, swimming against the stream a little bit, going back to more conventional type stuff,” Caelus President and CEO James Musselman told Petroleum News at the time of the sale. “That’s what brought us here to begin with.”
Caelus would spend $300 million on Oooguruk, Musselman said in October 2013, and hoped to raise more than $1 billion in equity and debt to invest in Alaska, potentially spending $1.5 billion over the next five to six years. In March 2014, the company said it would take on a $300 million second-lien term loan and a $115 million asset based loan facility to fund the purchase and to provide working capital for operations. The money is coming from a partnership with the investment firm Apollo Global Management.
Among the initial investments Caelus is planning for its new Alaska assets is Nuna, which Musselman said the company would start developing “pretty much immediately.”
Shortly after closing the sale, Caelus said it would begin work on the Nuna development in the fall with the goal of bringing the satellite into production by third quarter 2016.
“We’ve got the funds committed and we’re moving forward as quickly as we can,” Musselman told Petroleum News in May, estimating that the development would require some $550 million on new facilities and $800 million to $900 million for drilling wells.
“I don’t have anything I can tell you specifically about where our first exploration well will be,” he said. “I would like to think that we would drill two to three exploration wells per year, starting hopefully this coming winter. … That’s one of the main reasons we’re in Alaska. We do want to explore. We think there are tremendous opportunities remaining.”
The sale largely involves ownership changes. Caelus “extended job offers to and have acceptances back from virtually all of the (Pioneer) employees,” Musselman said.