With facilities construction complete at Oooguruk on the North Slope — as well as at its South Coast Gas project off the coast of South Africa — Pioneer Natural Resources 2008 capital budget is $1 billion, down from a 2007 capital budget of $1.1 billion.
Other changes reducing the 2008 budget are the sale of all the company’s Canadian assets and the elimination of higher-risk exploration, the company said Dec. 19. Twenty-five percent of the company’s 2007 capital budget was for development of the South Coast Gas and Oooguruk projects.
Ten percent of the 2008 budget is focused “primarily on Oooguruk and Barnett Shale development drilling.”
The company said production facilities are complete at Oooguruk and development drilling has begun: “A 15-well program is planned for 2008, consisting of disposal, injection and production wells, with first oil sales from Oooguruk expected mid-year.”
Oooguruk, offshore north of the Kuparuk River unit on Alaska’s North Slope, is being developed from a gravel island with crude oil coming to shore in a buried subsea line and then going on to Kuparuk in a line raised on vertical support members.
Pool rules hearingThe Alaska Oil and Gas Conservation Commission held a hearing on Pioneer’s pool rules application Dec. 18. The company is proposing two oil pools, Oooguruk-Nuiqsut and Oooguruk-Kuparuk.
Pat Foley, manager external affairs and land for Pioneer Natural Resources Alaska, told the commission the company expects to submit participating area applications to the Department of Natural Resources by the end of the year. Pool rules define the oil pools which will be producing and address how drilling and production are to be done; participating areas define those portions of leases which are producing, and ultimately, which leases or portions of leases remain in units, extending the terms of the leases beyond the initial term for as long as there is production.
The deeper Nuiqsut reservoir, at about 6,400 feet, is the primary resource at Oooguruk, with 250 million to 300 million barrels of original oil in place. Primary recovery is expected to be 5 million to 20 million barrels, with an additional 30 million to 60 million barrels from incremental waterflood and an additional 2 million to 10 million barrels from under-saturated water-alternating-gas recovery, for a total of 37 million to 90 million barrels of oil recovered.
The shallower Kuparuk reservoir, at 6,100 feet, is smaller, with an estimated 15 million to 25 million barrels of original oil in place. Primary recovery from the Kuparuk reservoir is estimated at 1 million to 2 million barrels with an additional 3 million to 6 million barrels from waterflood, for a total estimated recovery of 4 million to 8 million barrels.
The Kuparuk is analogous to the Kuparuk formation in the Kuparuk River unit. The Nuiqsut has no producing analogue. It is one of several Jurassic-age oil-bearing sandstones encountered in the Colville Delta area, including the Nechelik and Alpine sandstones.
All wells horizontalFoley said the play the company was going after was the Kuparuk, but all of the 2003 exploration wells failed in the Kuparuk, although one was successful in the Nuiqsut. Most of that accumulation was on ConocoPhillips leases, which Pioneer subsequently acquired, he said.
All Nuiqsut wells will be open-hole, barefoot completions parallel to major faults, Foley said. The producers will be long undulating laterals with lengths up to 9,000 feet.
Foley said the issue with the faults is whether they are barriers or conduits. He said Pioneer struggled with this issue from the beginning, and up to a month ago planned to drill the Kuparuk formation with vertical wells.
The plan now, however, is to drill the Kuparuk, as well as the Nuiqsut formation wells, as horizontals, although the Kuparuk formation wells will have slotted liners.
All producers will be completed with electric submersible pumps.
Greg Sanders, a Pioneer petroleum engineer, told Commissioner Dan Seamount that there are risks at Oooguruk, including production of the wells. While a vertical exploration well was tested, Sanders, said, Pioneer doesn’t have production results from a long lateral and all the production wells will be long laterals.
The faults are also a risk. There are a number of faults in the area, but Sanders said there are probably faults that aren’t visible on seismic, which could affect communication between injectors and producers. Good communication, he said, is paramount to long-term value.
Access still in negotiationNegotiations between Pioneer and the Kuparuk River unit owners for facilities access are “private and confidential,” Foley told Commissioner Cathy Foerster in response to a question about the status of a facilities access agreement.
Pioneer needs a facilities sharing agreement because it is not building processing facilities for Oooguruk crude but will pay for use of existing facilities at the Kuparuk River unit. Such use requires an agreement with the facility owners.
Foley said the facilities access negotiations for processing Pioneer’s crude at Kuparuk began well over two years ago. He said he is “shocked” that there isn’t a signed agreement in place today but told the commission only a single issue remains and the parties are “extraordinarily close” to an agreement.
Changes need to be made in the agreement in response to the state’s recent tax changes and Foley said he hopes there will be a signed agreement in the first quarter of next year.
He said the Oooguruk agreement will be similar to published facilities access agreements, but goes into more detail. Those published agreements are between Prudhoe Bay and Kuparuk owners, he said, where there was common ownership; whereas at Oooguruk there is no common ownership between the Oooguruk owners, Pioneer and Eni Petroleum US. Pioneer holds a 70 percent working interest at Oooguruk and is the unit operator; Eni holds the remaining 30 percent.
Back-out cost issueAsked by Foerster if the facilities sharing agreement was workable or onerous Foley characterized it as relatively fair and reasonable and said it is consistent with how units have treated themselves in the last decade.
The largest issue for a new player on the North Slope is back-out costs, he said.
Back-out costs are the result of constraints on water and gas handling capacity on the North Slope. As fields mature, crude oil contains more water and gas and less oil and the facilities which handle the water and gas are at maximum capacity. Current owners charge a back-out fee because they have to cut back on some of their own production to allow new oil to be processed. Foley said the calculation of that is imperfect, but said the agreement does a “fair and reasonable” job.
Foerster noted that Pioneer is the first to request facilities access and then go into production. While other facilities sharing agreements have been reached, none has been implemented. This will be the first time production will occur using such an agreement.
Foley said while it is taking a long time to reach an agreement, the expectation is that the Oooguruk facilities access agreement will be the model for future facilities access agreements on the North Slope, making it quicker and easier to reach subsequent agreements.
Commission Chair John Norman asked Foley to keep the commission informed on the progress of the agreement. He said the commission is asked about facilities access by legislators and noted there is a bill pending which would make the commission the referee for such agreements.
Foley assured Norman that Pioneer would be letting people know when an agreement is reached.
State has increased end-user costsPioneer drilled the Oooguruk discovery wells in the winter of 2003 and the project was sanctioned in January 2006, following state approval of royalty reductions at Oooguruk in late 2005.
DNR dropped royalties from 12.5 percent and 16.67 percent to 5 percent on nine of the 18 Oooguruk leases. Four of the nine leases were net profit share leases and the state converted the other five to net profit share. After exploration and operating costs have been recovered, Pioneer will share 30 percent of its Oooguruk profits from the nine NPS leases with the state.
When the royalty relief was granted in mid-December 2005 DNR said Pioneer demonstrated Oooguruk was “extremely marginal, and has considerable risk of low investor returns” without royalty relief.
Asked by Foerster if there were issues the Legislature needs to address, Foley said the end user ultimately bears all taxes and the increased taxes which the Legislature enacted in November will be borne by the Oooguruk owners. The state has inadvertently increased the cost to end users, Foley said, adding that Pioneer is in discussions with the administration about this.