New 'mega-independent' Pioneer looks to exploration for next growth phase

Bill Brocato
Staff Writer

While high-risk exploration is emerging as the newest focus of Pioneer Natural Resources Co.'s growth strategy, development drilling in the Permian basin, as shown, accounted for more than half the wells Pioneer drilled in first half 1998. Photo courtesy of Pioneer.

Pioneer Pres. and CEO, Scott Sheffield - "I had a three-legged strategy to build a world-class company that could compete anywhere in the world. We had the acquisitions and the exploitation. What we lacked was the third leg, exploration." [9,893 bytes]
Pioneed Executive Vice Pres., Mel Fischer - "I realized several years ago that oil and gas companies don't get production growth sumply from development wells. You have to grow (as a company) through exploration." [9,503 bytes]
Pioneer Natural Resources Production, Exploration Areas [463,020 bytes]

Pioneer Natural Resources Co., scarcely a year old and already one of the biggest U.S. independents, has embarked on the third of a three-part strategy for further growth.

The Irving, Tex., company was created through the $4.2 billion merger of Mesa Inc., Dallas, and Parker & Parsley Petroleum Co., Midland, Tex., in August 1997 (OGJ, Apr. 14, 1997, p. 26). Its first noteworthy act soon thereafter was to jump higher in the ranks of big independents and bolster its portfolio with non-U.S. assets by acquiring, for almost $1.7 billion (Canadian), Calgary independent Chauvco Resources Ltd. (OGJ, Sept. 15, 1997, p. 33).

With a substantial base of producing and proven properties in place, Pioneer Pres. and CEO Scott Sheffield then put together a strong exploration team to capitalize on high-risk/high-reward prospects in Africa, South America, Canada, and the U.S.

"I had a three-legged strategy to build a world-class company that could compete anywhere in the world," he said. "We had the acquisitions and the exploitation. What we lacked was the third leg, exploration."

Beginning strategy

The first two legs of Sheffield's strategy called for building a company with substantial proved and producing assets. The initial merger and subsequent acquisition resulted in a company with ownership interests in properties principally in the Midcontinent, Texas, Louisiana, Gulf of Mexico, Canada, and Argentina.

At yearend 1997, Pioneer had combined total proved reserves of 762 million boe that included 384 million bbl of crude oil and natural gas liquids and 2.3 tcf of natural gas. Pioneer's core reserves base, in the Hugoton field of Kansas, Oklahoma, and Texas and Spraberry trend in Texas, has an average life of more than 11 years.

The new company also has two major gas processing facilities: the 240 MMcfd capacity Satanta plant in the Kansas Hugoton area and the 140 MMcfd Fain plant at Amarillo, Tex. Pioneer owns most of the gas processed by these facilities and operates most of the related gas-producing properties.

Sheffield, former Chairman and CEO of Parker & Parsley, compared Pioneer's first quarter operating and financial results with that of Parker & Parsley. From his predecessor company's perspective, on a boe basis, production increased 158% for the first 3 months of 1998 compared with the same period in 1997. Mesa's properties accounted for 90 percentage points of that increase and Chauvco's properties contributed 55 percentage points. The remainder of the increase stemmed from new exploration and exploitation efforts.

Using the same comparison, revenues from oil and gas operations increased 90%, reaching $197.4 million in first quarter 1998 for Pioneer, compared with $103.8 million for Parker & Parsley in first quarter 1997.

Oil price slump

But, as crude prices dropped, so did Pioneer's profits. The company posted a net loss of $26.8 million for the first 3 months of 1998 compared with net income of $18.6 million for Parker & Parsley alone for the same period in 1997. Pioneer also noted one-time reorganization costs that will likely total about $20 million in 1998.

The company reviewed its $600 million capital budget for 1998 and trimmed about $150 million as oil prices continued to fall, Sheffield noted.

"We are okay with $16/bbl," he said. "But, like everyone else, we built our budget around higher (crude) prices and decreased (Pioneer's capital budget) as prices fell. For 1999, we are building our budget based on $16.50/bbl."

Sheffield said Pioneer's capital budget in 1999 will remain relatively flat compared with 1998's final budget of $400-450 million. But he believes crude oil prices will climb in the long term.

The company also plans to bolster its declining revenues by selling some producing properties primarily in the Texas and Oklahoma panhandles. Sheffield said the company has attracted "a lot of interest" in those Hugoton properties and will accept bids for them in September. About 65% of those properties are producing and represent about 10% of Pioneer's total reserves.

If a buyer can be found, Sheffield said Pioneer should be able to raise $375-550 million from the sale. He said the proceeds will be used to reduce debt and fund next year's exploration program. The sale will leave Pioneer with about 25 U.S. fields, which also represent its core producing assets and development and exploration opportunities.

Sheffield said that, of Pioneer's total revised 1998 capital budget, about $265 million has been allocated for exploitation activities, $115 million for exploration, and $60 million for oil and gas property acquisitions. The company's budget has been apportioned along geographic lines to reflect the company's core areas: $85 million in the Permian basin, $145 million in the onshore and offshore Gulf Coast region, $40 million in the Midcontinent region, $70 million in Canada, $75 million in Argentina, and $25 million in Africa and other areas outside North America.

Exploration focus

Sheffield has taken the first steps to implement the third leg of Pioneer's long-term growth strategy: U.S. and non-U.S. high-risk exploration. About 35-40% of the company's total 1999 budget will go for exploration and development drilling in the Gulf of Mexico and Canada. About 15-20% of the total budget will be for high-risk exploration off South Africa and Gabon and in Argentina.

Sheffield focused on building "a world-class exploration team" to undertake this third leg of Pioneer's strategy. To do that, he hired Mel Fischer, a former vice-president of worldwide exploration for Occidental Petroleum Corp., to head up Pioneer's exploration program. "I realized several years ago that oil and gas companies don't get production growth simply from development wells," Sheffield said. "You have to grow (as a company) through exploration."

Sheffield also believed that Fischer could put a team of geoscientists together that could help the company lower its exploration risk. "Pioneer isn't looking to go into frontier basins," he added. "We expect 20-60% success rate where we go, because we're making our decisions based on the (current) expertise of our geoscientists."

As Pioneer's executive vice-president of worldwide exploration, Fischer also believes the company's future success is directly tied to a drilling program that is keyed to the latest 3D seismic imaging technology and data analysis. He pointed out that Pioneer currently has 80 geologists and geophysicists compared with only 35 a year ago. The company has increased its 3D seismic inventory as well-to 7,130 sq miles in 1998 from 4,050 sq miles in 1997. Total acreage held by Pioneer has also significantly grown, to 17 million acres in 1998 from only 1 million acres in 1997.

"We've made considerable pro- gress in a little more than a year," Fischer said. "Our emphasis is on technology. We continue our geologic investigations (worldwide), but the lion's share of our exploration (budget) will be in the Gulf of Mexico deep water."

Pioneer has a 25% interest in deepwater Mississippi Canyon Block 35, where a U.S. unit of French major Elf Aquitaine is operator with 50% interest and Mariner Energy holds the remaining 25% interest.

Sheffield and Fischer also confirmed the company hopes to participate in the Western Gulf of Mexico lease sale in August.

"We're looking to participate in this upcoming sale and subsequent sales," Fischer explained.

"We've hired the geoscientists who have deepwater expertise."

"I'm confident in our team of geoscientists," Sheffield added. "We're hired our deepwater team (away) from several of the majors so we could compete with large independents."

Sheffield said Pioneer will continue to look for partners to participate in "high-impact projects" in the Gulf of Mexico and off South Africa and Gabon.

Fischer added that the company also plans to participate in some new plays in Asia and South America but declined to discuss where or when until preliminary negotiations are completed.

Sheffield added that the company will not be "too aggressive" in the next Gulf of Mexico lease sale but will increase exploration of its undeveloped U.S. and Canadian acreage.

"We need a strong domestic presence and an even stronger presence in North America," he said. "The deep(water) gulf and Canada are the only two places that will supply (significant new volumes of) natural gas (to the U.S. market) in the coming years."

Fischer added that the company has entered into partnership in Argentina with PanAmerican Energy LLC, a joint venture of Amoco Corp. and Bridas Sapic. But, he said, future exploration and exploitation in Pioneer's Argentine Tierra del Fuego concession will slow in the short term because of difficulties marketing the company's natural gas there. "This is a long-term wait-and-see (exploration play)," he explained. "There's no incentive at this time to have an aggressive (drilling) program."

Pioneer produces about 20,000 boed in Argentina, about 50% of which comes from its Tierra del Fuego concession.

Pioneer's exploration plays

During first quarter 1998, Pioneer participated in drilling 236 exploration and development wells, including 144 in the Permian basin, 23 in the Gulf Coast region, 12 in the Midcontinent region, 27 in Argentina, and 30 in Canada. Of this total, 227 were completed successfully, resulting in a 96% success rate.

On its Dorsal block in Argentina's Neuquen basin, where Pioneer is operator with 100% interest, the company has drilled 30 wells. Of those, 22 of the 25 successful wells are producing at a combined rate of 3,300 boed. Pioneer expects that Dorsal block gas sales will increase by 7 MMcfd in early June when new gathering facilities are completed. An additional 30 wells are planned for the remainder of 1998.

Pioneer concluded its winter-access program in Chinchaga gas field in Northeast British Columbia, with the drilling of 19 development wells, 6 delineation wells, and installation of a 50 MMcfd gas processing facility and gathering system.

The gas processing plant started up Apr. 15, with a total of 30 wells tied into the production system. Production is expected to increase by 18 MMcfd and 451 b/d of oil (condensate and NGL) to 25 MMcfd and 632 b/d of oil.

In South Louisiana's Timbalier Bay field, where Pioneer is operator and 100% interest owner, four new wells and one recompletion resulted in incremental production of 1,400 b/d of oil and 1.2 MMcfd of gas. Pioneer continues to evaluate this large oil field with 3D seismic data for additional exploration and development opportunities, Fischer added.

In Lopeno field in South Texas, Pioneer completed six new wells, increasing production to 37 MMcfd from 18 MMcfd of gas. The company plans up to 10 development wells in this field for the rest of the year.

Exploration plays

South Africa and Gabon are Pioneer's latest high-risk exploration plays.

Fischer believes the company's operatorship and 49% interest in a 3 million acre concession on South Africa's Block 9 in the offshore Bredasdorp basin (OGJ, Feb. 23, 1998, p. 41) with Soekor Exploration & Production Pty. Ltd., the country's state-run oil and gas company, will prove "very favorable."

Fischer said Pioneer will also earn 20-40% interest in eight sub-blocks in the area totaling 500,000 acres for joint drilling of one well on each of those sub-blocks. He said Pioneer expects to participate in five or six wells to be drilled by Soekor on several sub-blocks in 1998.

Pioneer also plans to drill one or more exploration tests on the acreage it operates in 1999, he added.

So far, Fischer pointed out, the first well drilled by Soekor on Block 9 flowed on test at a rate of 6,000 b/d of oil. He said the second well found some natural gas but was shut in for lack of market. Although crude oil is the primary target off South Africa, he added, once the country's economy begins to grow and more pipeline infrastructure is in place, Pioneer will be able to market its natural gas finds there.

Fischer also said Pioneer has signed a technical agreement with Soeker for a concession covering the combined Blocks 10/11A/12A/ 13B/14B, off the country's southern coast. The 5 million acre concession is in less than 650 ft of water and lies between Block 9, which produces 25,000 b/d of oil from Oribi field and 190 MMcfd of gas from F-A field, and Pioneer's 13A/14A block off Port Elizabeth.

Pioneer also signed a technical study agreement in November for Block 7, which is adjacent to and west of Block 9 and covers 3 million acres. The company believes the most prospective portion of this block lies in 500 ft or less water depth. Pioneer is currently negotiating one or more exploration contracts on this block with Soekor, he added.

Gabon acreage

Off Gabon, Pioneer has a production-sharing contract covering the 315,000-acre Olowi Block that carries a commitment in the first 3 years of seismic surveys and one exploratory well. The concession lies 3 miles southeast of Gabon's giant Gamba oil field. Fischer said that preliminary seismic analysis shows the concession's geology features the same formation (Dentale sands) as is productive in Gabon's onshore Rabi Kounga field.

The company plans to conduct extensive 3D seismic surveys on the Olowi block in 1999, and to drill its first wildcat in 2000, Fischer said.

"A number of wells were drilled in the past on this block (by previous concession holders)," he said. "Some hit gas, some oil and gas, but there was no development. We completed reprocessing (seismic) data last week. We believe these previous wells may have discovered a field where we can employ horizontal well technology."

Transition Zone, Cotton Valley

Sheffield said Pioneer also has ambitious plans for its U.S. exploration activities. The company plans to spend about $65 million in 1998 on 197,000 acres in the Texas and Louisiana Gulf Coast region, both offshore and in the Transition Zone stretching from Grand Bay, La., to Corpus Christi, Tex.

Pioneer will drill 32 wells, including 12 exploratory wells, in the Gulf Coast region this year. Primarily, exploration and drilling activity will target the company's Eugene Island Block 208, Timbalier Bay, and Grand Bay areas.

Pioneer's Cotton Valley reef play position covers 650,000 gross acres and includes the Plum Creek gas treatment plant and a 24-mile gas gathering system. Pioneer has acquired 300 sq miles of 3D seismic and will invest about $25 million this year to participate in 10 exploratory wells and acquire about 600 sq miles of new 3D seismic data.

Sheffield is confident Pioneer's exploration efforts will pay off in the near term: "We're confident that, with our exploration program, we will find a lot of oil and gas in the next 12-18 months," he said.