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Vol. 12, No. 11 Week of March 18, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

State OKs expansion of Oooguruk unit

Seven leases added to original 12 in Pioneer Natural Resources Alaska-operated unit, acreage increased from 20,394 acres to 50,883

Kristen Nelson

Petroleum News

The Alaska Division of Oil and Gas has approved the first expansion of the Oooguruk unit, the Pioneer Natural Resources Alaska development in the shallow waters of Harrison Bay offshore the North Slope. The unit is expanding from 20,394 acres on 12 state oil and gas leases. With the addition of seven state leases the unit’s size has been increased to 50,883 acres, the division said in the March 7 approval.

Oooguruk, where exploration drilling began in 2003, is at the northwest corner of the Kuparuk River unit.

Six of the seven additional leases are in a block on the southwest corner of the original unit; the seventh is on the eastern edge, between existing unit leases.

Pioneer applied for the expansion in October 2005 and the division found the application complete in November 2006 after Pioneer secured joinder to the unit agreement for Oxy USA Inc.’s interest in the deeper intervals of four of the expansion leases.

Pioneer has also applied for and received royalty modification for nine leases from the Department of Natural Resources.

The company has publicly estimated that peak production for the Oooguruk project is in the range of 18,000 to 20,000 barrels per day from the Kuparuk and Nuiqsut formations combined.

Development drilling this year

Pioneer said Feb. 7, in announcing its 2007 capital budget, that development drilling is expected to begin in late 2007 at Oooguruk after facilities and equipment installation are completed.

Pioneer said in November that 2007 work at Oooguruk would include ice road construction, module installation and subsea flowline installation in the first quarter; drilling rig installation in the second quarter; commissioning of the rig and facilities in the third quarter; and commencement of drilling in the fourth quarter. Work completed in 2006 included construction of a six-acre offshore drill site and a two-acre onshore pad in the winter of 2006; installation of slope protection on the drill site, gravel conditioning, beginning of module fabrication, beginning of drilling rig modifications and support studies spring through fall of 2006.

The company said in its Feb. 7 budget announcement that first production is targeted for 2008, with total investment for Pioneer at Oooguruk estimated at $350 million. Approximately 30 percent of that investment was made in 2006, approximately 45 percent will be made in 2007 and the remainder in 2008-09. Pioneer said the before-tax internal rate of return for Oooguruk, assuming a Nymex equivalent oil price of $60 per barrel, is estimated at 40 percent.

Pioneer told the state in November that total investment by Pioneer and its partner Eni Petroleum is estimated at $500 million.

Pioneer holds 70 percent of the working interest and Eni Petroleum holds 30 percent in tracts 1-12, the original area of the unit and in tracts 17-19, three of the tracts added to the unit.

Four tracts have different lower interval ownership

Four of the added tracts, 13-16, have split ownership, with Pioneer and Eni holding 70 and 30 percent interests respectively in the upper horizons of those leases; 47.06 and 20.17 percent, respectively, in the lower horizon of ADL 355036; and 39.38 and 16.87 percent, respectively, of the working interest in the deeper interval of ADLs 355037, 355038 and AD 355039. The upper interval is from the surface to the stratigraphic equivalent of 8,373 feet in the ARCO Kalubik No. 1 well in section 11, township 13 north, range 7 east, Umiat Meridian.

The Kalubik 1 had a true vertical depth of 8,273 feet. A drill stem test in the Kuparuk C sandstone from 6,085 to 6,120 feet measured depth produced 28.7 degree API oil at a rate of 1,200 barrels per day. Two shallower intervals were also tested, including the Jurassic Nuiqsut at 6,385 to 6,445 feet measured depth; it produced 23 degree API oil at a calculated rate of 336 bpd.

Other working interest owners in the lower interval include OXY USA 28.57 percent and Hunt Petroleum Corp. 4.2 percent in ADL 355036 (tract 13); and in ADLs 355037, 355038 and 355039 (tracts 14-16): Herbaly Exploration 22.5 percent; OXY USA 14.3 percent; George Alan Joyce Jr. 2.5 percent; Anadarko Petroleum Corp. 2.4 percent; and Hunt Petroleum Corp. 2.1 percent.

The three exploration wells Pioneer drilled in the winter of 2003 from ice islands (Ivik, Oooguruk and Natchiq) had true vertical depths of 6,942 feet, 6,900 feet and 6,740 feet respectively. The company reported that the wells did not find commercial oil in the Kuparuk C sandstone, the main objective, but did find two “thick, oil-bearing Jurassic-aged sands, a secondary target.” Those sands, the company said in 2003, were “very similar in geologic age, permeability and porosity to those in the prolific, onshore Alpine field to the southwest” of Oooguruk.

New development, exploration plans

The division said the working interest owners at Oooguruk have provided sufficient technical data to define a prospect, committed lease interests to the proposed unit and submitted an approved initial plan of operation.

The division said it is requiring Pioneer to obtain approval of a revised initial plan of exploration and a first plan of development by June 11.

Pioneer met the requirement of its initial plan of exploration, to drill three wells. That initial plan also requires that on June 1, 2008, ADLs 388570, 388569 and 388576 will contract out of the unit if they are not included in a participating area of approved plan of exploration or development, with a firm commitment to drill. The division said Pioneer “shall reference this requirement” in its revised plan of exploration or first plan of development. Those three leases are at the northern and northeastern edges of the unit.

A first plan of development is due in mid-March; a revised plan of exploration is due in April.

Contraction in 2010

The division is requiring Pioneer to obtain approval of both the Nuiqsut and Kuparuk participating areas by June 1, 2010. “Failure to establish both participating areas by June 1, 2010, will result in the contraction of all of the expansion leases from the Oooguruk Unit,” the division said. “One reason for the proposed expansion is that Pioneer intends to produce at Oooguruk by 2008. Requiring formation of participating areas by 2010 commits Pioneer to the development of the expansion leases,” the division said.

DNR’s December 2005 approval of royalty relief for Oooguruk dropped royalties from 12.5 and 16.6667 percent to 5 percent on nine Oooguruk leases, but converted the five leases of the nine that were not net profit share to NPS leases, which means Pioneer will share 30 percent of its profits from Oooguruk with the state after capital and exploration costs have been recovered. (See story in Dec. 25, 2005, issue of Petroleum News.)

“The state has a greater economic interest in the expanded Oooguruk Unit than in other units because nine of the leases within the expanded unit have received royalty modification,” the division said in its expansion decision. Pioneer’s 2006 development decision was based on the royalty modification. “The development scenario presented in the royalty modification application relied heavily on the leases now considered for expansion,” the division said. Pioneer has accomplished the objectives in its development scenario as scheduled, and the expansion decision ensures the state the opportunity to remain a close participant in the expanded unit.

While Pioneer has not yet finalized an agreement with the Kuparuk River unit owners to use Kuparuk River unit processing facilities, the division said that agreement “will represent the first successful implementation of a facilities sharing agreement on the North Slope for a third party entity outside of a unit and achieves one of the goals set out in the Charter for Development of the Alaskan North Slope.” The division said other lessees who do not own facilities “will benefit greatly from an established method of contracting for processing and pipeline facilities.”

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Oooguruk looks like ‘an anthill’

Tim Dove, Pioneer Natural Resources president and COO, said March 7 that Oooguruk is “on schedule” for 2008 production. Dove, speaking at The Raymond James Investors Conference, called Oooguruk one of two critical projects for the company.

Oooguruk is “the biggest project on the North Slope this year,” Dove said. The island was constructed last year and has “500 people working on it right now, so it’s more like an anthill than it is an island.”

Workers are putting in production modules and getting the facilities in place. The Nabors rig being retrofitted on the North Slope for Oooguruk, “should be brought out in April,” he said, and drilling will start at the end of the year.

Pioneer has not yet booked reserves for Oooguruk. “We’re restricted in doing so, just because of the rules of booking reserves in waterflood projects,” Dove said, indicating it would be 70 million to 90 million barrels of oil equivalent.

He also said there are expansion opportunities which “in some cases could be tapped from the existing field.”

Production is expected to start in late 2008 and to peak at 15,000 to 20,000 barrels per day, “and we have about 70 percent of that at a very strong F&D cost,” Dove said. He said Oooguruk finding and development costs are about $7 per barrel.