Pioneer Natural Resources’ costs for its Oooguruk project have gone up by $50 million — but tax credits under Alaska’s new petroleum profits tax have already offset $25 million of that cost and are expected to offset the entire cost increase.
Oooguruk, a development in the shallow waters of Harrison Bay offshore the North Slope, is at the northwest corner of the Kuparuk River unit. Exploration drilling began in 2003 and oil production is expected to start early next year.
Oooguruk is on schedule, with production expected to begin in the first quarter of 2008, Pioneer Natural Resources Chairman and Chief Executive Officer Scott Sheffield said during an Aug. 7 analysts’ call.
But Pioneer’s costs for the offshore North Slope project are up by $50 million.
“We were able to lock in about 60 percent of our cost when we sanctioned this project on Oooguruk on the North Slope,” Sheffield said. “So we had about 40 percent swing with the recent cost increases we have all seen over the last … 18 to 24 months.”
That $50 million cost increase over the past winter, however, has been offset with investment tax credits from the project, of which $50 million are expected to occur in 2007, Sheffield said.
Sheffield said the tax credits “have essentially offset” the increased capital costs at Oooguruk: “With the PPT credits coming in, they’re offsetting the cost increase,” he said.
The $50 million increased facility cost at Oooguruk was part of a $150 million expansion in drilling that Pioneer announced. The other $100 million is for expansion of recent drilling success in Raton, Miss., and Tunisia and drilling associated with the company’s recent Fort Worth Barnett and Raton acquisitions.
$25 million in tax credits receivedPioneer said it expects to realize a full investment recovery for the additional $50 million at Oooguruk in 2007.
Rich Dealy, Pioneer executive vice president and chief financial officer, said that in the second quarter Pioneer applied for “and received a $25 million refund from the state based on our past expenditures” under the state’s new petroleum profits tax. PPT provides credits for investment and while the state’s goal is to have those credits purchased by producers, the state will pick up $25 million per company each year. “The system is designed to encourage oil and gas investments in Alaska … by issuing severance tax credits for qualified investments,” Dealy said. “These credits can be used to offset severance taxes to the extent you’re paying them; they can be sold to third parties; or they can be refunded by the state.”
“Based on our past investments that we haven’t recouped already and our planned investments, we do expect to receive in excess of $100 million of additional credits in future periods related to these investments,” Dealy said.
Pioneer holds 70 percent of the working interest at Oooguruk; Eni Petroleum holds the remaining 30 percent. Pioneer had previously put its share of development costs at $350 million of a total of some $500 million.
In addition to investment credits under PPT, Pioneer also has a royalty reduction for Oooguruk.
Rig installedSheffield said this has been “a very important winter for us” on the North Slope. The rig has been installed at Oooguruk and drilling activity will start in late September or early October. Production is expected to peak in 2010 at between 15,000 and 20,000 barrels per day, he said, with “all-in funding costs of about $8 per boe.”
Pioneer has not booked reserves at Oooguruk yet, Sheffield said, “and we do have several expansion activities in the existing formation that we discovered over and above the 70 to 90 million barrels, in addition to a couple other formations in that area.”
Ken Sheffield, president of Pioneer Natural Resources Alaska, said in May that work completed this winter included installation of subsea and onshore flowlines to tie the producing island back to shore. Modules were also installed on both the island and Pioneer’s onshore facility.
The project’s drilling island in the Beaufort Sea was built and armored in 2006. Materials and equipment were produced and module fabrication and modifications to Nabors rig 19 were also begun in 2006.