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Vol. 18, No. 44 Week of November 03, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Passing the baton

Pioneer sells its Alaska assets including Oooguruk field to Caelus Energy

Alan Bailey

Petroleum News

Pioneer Natural Resources has sold all of its Alaska assets, in particular the Oooguruk oil field in the nearshore waters of the Beaufort Sea, to Caelus Energy Alaska, the two companies announced on Oct. 25. The deal, with an effective date of Oct. 1, should close by the end of the year.

Strategic move

Scott D. Sheffield, chairman and CEO of Pioneer, said that the sale represents a strategic move for his company, with the company wanting to focus its investments in shale oil development in Texas.

“The sale of our Alaska asset will allow us to strategically redeploy capital to our core, oil-related Spraberry/Wolfcamp asset,” Sheffield said.

Sheffield told Petroleum News that the Permian basin, where Pioneer is operating its shale oil program, has more than 50 billion barrels of recoverable oil.

“What we have found in the Permian is beyond imagination,” Sheffield said. “Our need for capital is tremendous.”

Alaska opportunities

James Musselman, president and CEO of Caelus, told Petroleum News that his company had discovered the possibility of purchasing Pioneer’s Alaska assets when investigating some oil exploration possibilities in the state. Caelus sees Alaska as “obviously one of the oiliest places in the world” with major opportunities for new oil discoveries, he said. The purchase of Oooguruk, an operational oil field, will give Caelus an entry to the state with an existing asset that is already producing cash flow, Musselman said.

Caelus sees investment in the continuing development of Oooguruk as a priority. And Musselman said that his company plans to start work “pretty much immediately” on the development of Nuna, an as-yet undeveloped oil pool in the Oooguruk unit. Pioneer had been conducting appraisal drilling in the Nuna reservoir, had estimated the reservoir, in the relatively shallow Torok formation, to hold 75 million to 100 million barrels of oil, but had not yet sanctioned development.

Capital investments

Caelus will spend $300 million on its newly acquired Alaska assets, and hopes to raise in excess of $1 billion in equity and debt to invest in Alaska, potentially spending $1.5 billion in the state over the next five to six years, Musselman said.

There is major private equity seeking deals in the energy industry at the moment and much money going into shale plays, he said. But conventional oil in Alaska also offers attractive investment opportunities.

“We think there’s an opportunity, swimming against the stream a little bit, going back to more conventional type stuff,” Musselman said. “That’s what brought us here to begin with.”

He also commented that the recent reform in Alaska’s oil production taxes had attracted his company’s attention to the state and he expressed his concern about the upcoming referendum on the possible repeal of the new tax law.

“It’s a worry, but I think if people will just sit and look at and think about what is going on in the state right now they’ll realize what a positive thing it (the new oil production tax) is,” he said.

Gov. Sean Parnell also referenced the new oil tax when commenting on the Caelus purchase of Pioneer’s Alaska assets.

“This announcement is great news for Alaskans and our economy,” Parnell said in an Oct. 26 statement. “Alaska is no longer an afterthought when companies look at places to invest. We can look forward to continued growth and more companies investing in our state. The More Alaska Production Act is already leading to new jobs and opportunities for Alaskans. Simply put — it’s working.”

Alaska staff

Musselman said that his company anticipates taking on Pioneer’s existing Alaska staff, an arrangement that will provide continuity in the Alaska operations.

“It’s a ready-made staff that’s full of very capable, good people,” Musselman said. “We think it’s a win-win for us and for them.”

Caelus does also have its own cadre of geoscientists who can bring a fresh set of eyes to the Alaska operations, he said.

And the company anticipates continuing its track record of using local people whenever possible in its operations.

“We’re very keen on working with Alaska companies,” Caelus said. “We’ve done that around the world.”

Private company

On its website, Caelus Energy, a privately owned company based in Dallas, Texas, describes itself as “involved in a wide range of energy projects including conventional and unconventional exploration and production, refining and renewable energy.” However, the company declined to comment to Petroleum News on the specifics of any of those energy projects.

Musselman said that, in addition to its new Alaska venture, his company is involved in oil and gas exploration in Southeast Asia.

Track record

He said that his own track record in international oil exploration goes back to the mid-1990s when he became president and CEO of Triton Energy, an independent, international oil and gas exploration company that was in difficulties at the time. After overseeing the recapitalization of the company, he led the company through a period during which it made a huge oil discovery in Colombia, another discovery in Southeast Asia and a major discovery in 2,500 feet of water offshore West Africa.

“We went from discovery to first oil in 18 months and that’s still a world record,” Musselman commented about the West Africa discovery.

And having put that discovery into production, the investors in Triton sold the company to Amerada Hess, making a tidy profit in the process.

On the back of the Triton experience, Musselman and his investor colleagues started another company called Kosmos Energy, with Musselman becoming chairman and CEO. Kosmos explored mainly down the west coast of Africa, eventually making three “outstanding discoveries” offshore Ghana, culminating in the multibillion-barrel Jubilee field, the largest field discovered worldwide in 2007, Musselman said.

Formed in 2011

When the investors in Kosmos took the company public in 2011, Musselman left the company to form Caelus Energy, another company funded by private investors. And, with a proven track record of success for investors in his companies, Musselman anticipates raising the capital that Caelus will need in Alaska.

But Musselman recognizes that operating in Alaska’s remote Arctic territory can be challenging.

“If you’re not nervous and a little bit worried or a bit scared of doing business in hostile places, you’re done,” he said.

On the other hand, he sees working in 5,000 feet of water in the Gulf of Guinea, as he has done in the past, as also very challenging and, in fact, more expensive than operating in Alaska.

Great experience

Sheffield, for his part, reflected on Pioneer’s experience as the first independent oil company to become an oil producer on the North Slope. With oil production starting in 2008, Oooguruk still holds the record for the time taken to move from discovery to first oil, he said.

“It’s been a great experience for us and we thank all our employees,” Sheffield said.

Pioneer officially entered the Alaska oil and gas industry in 2002 when, as one of the companies attracted to the state at that time by Armstrong Resources LLC, Pioneer took a 70 percent working interest in 10 of Armstrong’s state oil and gas leases in northern Alaska. And, with a strategy of shortening the time taken to bring an Alaska field on line, Pioneer moved ahead with exploratory drilling in the offshore Northwest Kuparuk prospect, a prospect that yielded a major oil find later to become the Oooguruk oil field.

Pioneer continued to pursue an Alaska exploration strategy, picking up onshore acreage near the Kuparuk River and Prudhoe Bay fields, and acquiring working interests in leases in the National Petroleum Reserve-Alaska. In Southcentral Alaska, the company purchased an interest in the Cosmopolitan prospect, a known oil pool under Cook Inlet, offshore the southern Kenai Peninsula.

Development focus

But following some disappointing results from onshore exploration drilling on the North Slope, in 2007 Pioneer announced a pause in its Alaska exploration efforts and an intent to focus on oilfield developments at Oooguruk and Cosmopolitan.

Following some drilling and flow testing at Cosmopolitan, Pioneer decided to halt its development plans for the prospect, eventually dropping some Cosmopolitan leases and selling the remaining leases.

Resounding success

But the Oooguruk field, which went into production in 2008 from a manmade gravel island in the Beaufort Sea, proved a resounding success, significantly exceeding Pioneer’s initial expectations for the field — in early 2009 Pioneer increased its resource estimate for the field by 40 percent.

In late 2010 Pioneer started its Nuna project, evaluating a known oil pool in the relatively shallow Torok formation in the Oooguruk unit. Nuna, which Caelus has now said it plans to pursue, will be developed from a new onshore drill site.

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Division of Oil & Gas reviewing Pioneer sale

Alaska’s Division of Oil and Gas, or DO&G, is reviewing the purchase agreement between Pioneer Natural Resources and Caelus Energy for the purchase by Caelus of Pioneer’s Alaska assets, Bill Barron, director of DO&G, confirmed with Petroleum News on Oct. 29. The idea is to ensure that nothing in the agreement would be detrimental to the state’s interests, Barron said.

In response to the purchase, the division will need to transfer Pioneer’s interests in state leases to Caelus. Although DO&G regularly carries out this type of lease title transfer the agency needs to check, for example, that the companies have agreed to transfer the dismantlement and rehabilitation obligations for oilfield facilities from Pioneer to Caelus — a state lease contains an obligation for the leaseholder to restore the land within the lease boundary to its original condition after oilfield equipment is decommissioned.

“That is part of our normal lease assignment language,” Barron said. “The responsibility transfers to the new owner.”

The division also needs to verify that the purchase agreement appropriately accounts for any easement arrangements for pipelines which the leaseholder operates but which traverse land outside the leases and connect to external oil and gas infrastructure, Barron explained.

DO&G is also discussing with the companies royalty relief arrangements which were granted to Pioneer in 2005 for some of the leases in its Beaufort Sea Oooguruk field.

“Royalty modification is not assignable without the (Department of Natural Resources) commissioner’s approval,” Barron said. “We are trying to work through some language with the parties to see if it is transferrable.”

—Alan Bailey