Company gambles on oil exploration

Move could spur independent oil drilling in Alaska

Posted: Sunday, October 07, 2007

OOOGURUK ISLAND, Alaska - Drilling in a field capable of yielding as much as 90 million barrels of oil seemed just right for Pioneer Natural Resources Co. - except for one thing. The field sits about three miles offshore in the Arctic Ocean.

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Undaunted, the Irving, Texas, company had a solution. Build a gravel island, equip it with a drilling rig and then ship the oil through eight miles of pipeline to a processing center onshore.

Easier said than done, maybe, but today the 10-year-old company sits poised to begin drilling wells from Oooguruk Island in a few weeks and producing oil by the first half of next year.

Pioneer will be the first independent operator to produce oil on the North Slope, a market cornered primarily by major producers such as BP PLC, Exxon Mobil Corp. and ConocoPhillips for 30 years.

Other independents such as Houston-based Anadarko Petroleum Corp. and London-based BG Group PLC are also exploring the North Slope for oil and natural gas, but haven't announced plans.

While no one is predicting a land grab for the smaller, yet potentially profitable, fields, Pioneer's work is being closely watched, said Michael Rae, analyst with energy consultant WoodMackenzie.

"What this does is, it shows that the independents can go to the North Slope and establish themselves in a high-cost environment," Rae said. "It also provides them a springboard for future development. That's something Alaska needs."

The North Slope accounts for about 14 percent of U.S. domestic output, but its production - which stands at about 740,000 barrels per day - is declining about 6 percent a year.

Oooguruk's projected yield of 20,000 barrels a day won't solve the North Slope's production decline, but analysts and industry executives say Pioneer's work cannot be underestimated as its designed to produce oil for as many as 25 years.

As larger basins of oil and natural gas become harder to find, oil companies are looking to places considered out of reach 10 years ago such as the Arctic Ocean and greater depths in the Gulf of Mexico.

"Ours is a bellwether project," said Pioneer Chief Operating Officer Tim Dove, whose company has 70 percent stake in a project shared with Italian oil and gas giant Eni SpA. "If we do well, make the project work in reasonable time and in a fiscally responsible manner, it could open up some avenues for us and other independents."

Independents focus on one industry segment such as oil and gas exploration and production or refining crude oil into gasoline. The majors - known as integrated companies - string together all components: Production, refining and retail sales.

These smaller, sometimes more nimble, companies often operate under the public's radar compared to the high-profile oil companies going after projects that ultimately lead to billions of dollars of profits.

Pioneer earned $750 million on $1.6 billion in sales last year. Its Irving neighbor Exxon Mobil recorded $39.5 billion net income on $377.6 billion in revenue.

For independents, a lot can rest with a single project, such as Oooguruk, which cost more than $500 million to develop. Pioneer's share is at least $350 million, nearly one-fourth of the company's capital budget for 2007.

Still, the lure of tapping the smaller fields give could independent companies a role could become increasingly more significant on the North Slope, according to industry executives and analysts.

"All of these things we are chasing are things the majors chose not to chase because they were relatively too small for their level of impact," Dove said. "But for a company like us, this is right in our sweet spot."

Reaching this point took almost five years, starting in early 2003 when Pioneer drilled a few exploration wells in the area. That year, oil fetched an average of $31 a barrel. Today, oil prices are hovering around $80.

"We are the beneficiaries of higher oil prices somewhat but, at the same time, costs increased," Dove said.

Oooguruk, named after the Inupiaq word for bearded seal, is the second manmade oil producing island in the Arctic Ocean.

BP, the North Slope's largest operator, in 2001 completed a five-acre island named Northstar about six miles off shore.

Pioneer's island sits about 150 miles southeast of Point Barrow, about three miles from the nearest coastline.

Foundation work began in the winter of 2006 when crews cut out chunks of ice five feet deep to the sea floor to form a six-acre, oval-shaped island. Workers then excavated gravel about 10 miles east of the site and cleared enough land to cover 15 football fields.

Instead, Pioneer gathered 20,000 truckloads - or about 450,000 cubic yards of gravel - and hauled it over manmade ice roads. Workers drove more than 400,000 miles, the equivalent to driving 16 times around the earth.

One load at a time, an island was built. It all had to get done within a few winter months before the ice roads began to melt.

"There were some tense moments," said Joey Hall, Pioneer's project manager. "It was a pretty well orchestrated event, like a ballet act you would see in a dance studio: Big pieces of equipment working in sync to mine the gravel, to move the gravel, and to dump the gravel."

As the island took shape, sections of the oil producing facilities were being built. Also completed was a pipeline system that travels 5.7 miles beneath the ocean floor and another 2.4 miles on land to a ConocoPhillips' facility that separates oil, natural gas and water so it can be shipped to markets.

"This is not just an issue of having one field," Rae said. "The advantage Pioneer has established is that if they find smaller fields farther out, they can tie them to the existing pad. That's what makes this so important."

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