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What does Pioneer's flight to Texas say about Alaska oil tax cut?

Alex DeMarban
The first independent oil explorer and producer on Alaska's North Slope is leaving to make more investments in a Texas field. Pioneer Natural Resources on Friday said it had sold its Alaska assets to little-known Caelus Energy of Dallas, Texas. Pictured are wells in North Dakota, which has also been called a competitor of Alaska's for oil investment dollars. Tim Evanson / cc via flickr

Alaska lawmakers from both sides of the political aisle said they were disappointed to see the North Slope's first independent oil producer leave the state to increase its stake in a promising Texas oil field.

Pioneer Natural Resources announced Friday it would sell its Alaska assets at a large loss to a fledgling company few people have ever heard of. Pioneer wants to free up cash to invest in a promising shale-oil field in the Permian Basin in West Texas.

Caelus Energy of Dallas will buy those assets for $550 million, and Pioneer will take a $350 million non-cash loss that will be reported next quarter, it said in a press release. Caelus is acquiring Oooguruk, a small producing field near the mouth of the Colville River, and Nuna, a nearby prospect that might one day produce a bit more oil.

The departure of Pioneer from Alaska seems to cut into a major plank of Senate Bill 21, a huge tax cut for the state's oil producers that was supposed to help Alaska's dwindling oil fields overcome competition from booming shale deposits in Texas and North Dakota.

Pioneer's decision is discouraging because Pioneer decided its money is better spent in Texas than Alaska, said Sen. Kevin Meyer, R-Anchorage, a ConocoPhillips employee who, along with other leading lawmakers with close ties to the industry, supported the tax cut that will go into effect Jan. 1.

"That's discouraging to me because we're trying to compete for those dollars and so that's not good," he said. "It's been rumored for some time that Pioneer wasn't making the return they thought they could or should up here, and they had some good assets in one of the shale plays in Texas, so it's not a surprise."

Success and perspective

Does the move mean SB 21, expected to be worth several hundred million dollars a year for the state's oil producers, isn't working? It could go either way, said Meyer.

"In one way, it didn't do what it was supposed to do for Pioneer," he said.

On the other hand, it lured Caelus north. Caelus founder Jim Musselman, a Dallas oilman with a history of big finds, said in a press release that SB 21's incentives were one reason the company was willing to invest in the Far North.

Pioneer's announcement shows that SB 21 isn't a giveaway, Meyer said. "Some people think it's too generous," he said. "But the reality is that consultants told us, 'You're now in game. But you're still not attractive as some other places, especially in the Lower 48."

Sen. Bill Wielechowski, an Anchorage Democrat and vocal critic of the tax cut, said SB 21 is skewed in favor of Alaska's giant oil producers, BP, ConocoPhillips and Exxon, which together produce nearly all of the 530,000 barrels of oil flowing down the pipeline each day lately.

It wasn't so helpful for smaller producers such as Irving, Texas-based Pioneer, which produced this year about 4,000 barrels daily at Oooguruk, he said. Pioneer has also said the Nuna prospect could potentially produce up to 14,000 barrels a day.  

The outgoing law, a tax hike on oil producers that brought billions of extra dollars to the state after its passage in 2007, offered generous exploration incentives to help small players like Pioneer compete against the large oil companies. The new law will reduce that up-front help, he said.

"I don't think it's surprising to see an independent company leaving Alaska, and taking a $350 million loss to do so," said Wielechowski.

Permian interest no surprise either

Casey Sullivan, an Alaska-based spokesman with Pioneer, said the company felt that SB 21, which boosted state subsidies for production, offered Pioneer a better long-term deal compared to the 2007 tax increase.

But Pioneer wanted to focus on the Spraberry/Wolfcamp asset in the Permian Basin. It's a shale oil field with "mind-boggling" opportunity, with the potential to become the world's second largest oil field, he said.

"It's massive, and Pioneer is one of largest landowners in that region," he said. "We have been developing it very rapidly, but we'd like to develop it more rapidly."

In the last several years, Pioneer has sold other global investments so it can plunk more money into Spraberry and Wolfcamp, including selling its Tunisian oil and gas properties, according to the Oil and Gas Journal.

The company's investment in Alaska amounted to about $1 billion over the years. For 2013, Pioneer had planned to spend less than $200 million in Alaska, compared to more than $2 billion in Texas, according to Pioneer tax documents.

Sen. Cathy Giessel, R-Anchorage, and a supporter of the tax cut, said Pioneer's payoff in Texas will come more quickly than it would have in Alaska.

"It just takes longer to develop up here," she said.

The sale agreement is not a shock, she said. "But what is positive is that Caelus was right there saying, 'Yeah, we'll take over their leases.'" That was in part thanks to SB 21, which is helping create jobs across the state, she said.

Just shy, maybe?

Lawmakers quoted in this article said they knew nothing about the company before Pioneer's announcement on Friday. So who is Caelus?

Privately held Caelus was founded a little more than two years ago, and is involved in a wide range of energy projects," according to its spartan website. Unfortunately, the site fails to mention what those other projects are.

The website says Caelus has offices in Malaysia, as well as Dallas. A woman reached at Caelus' Dallas office said folks at the company had been instructed not to talk to media. She referred all questions to Pioneer or suggested reporters pull information from Pioneer's press release.

The woman would not say how many employees Caelus had, or whether Pioneer's 70 or so Alaska employees would all have jobs. She also would not say who had requested that she and others at Caelus not speak. Sullivan, the Pioneer spokesman, said Alaska employees "at this point have the opportunity to move forward with the new company."

The woman with Caelus did confirm that the company's name is pronounced "KAY-liss." In ancient Roman mythology, Caelus was a "primal god of the sky," but Alaska Dispatch could not determine if the god has anything to do with the company.

One promising omen about Caelus is its founder, Jim Musselman. In addition to having an apparent soft spot for companies named after figures in classical mythology, he's apparently a ringer in the Texas oil and gas biz. He had big discoveries under his belt before launching Caelus in early 2011.

Musselman was a founding partner of independent Kosmos Energy in 2003. When Musselman was chief executive in 2007, Kosmos (the company, not the ancient Greek conception of an ordered universe) discovered the Jubilee field off the Republic of Ghana in West Africa, one of the world's largest discoveries that year, according to the Caelus site.

Before Kosmos, Musselman was chief executive of Triton Energy, an independent that discovered oil offshore of West Africa and gas in the Gulf of Thailand (fitting for the namesake of an ancient Greek sea god) before it was sold to Hess Corp. for $3.2 billion.

Shortly after Musselman founded Caelus, he said he wasn't sure what kind of energy company it would become, according to the Dallas Morning News. Maybe it'd focus on renewable power, or maybe more traditional sources. Musselman said it probably would be something of an investment vehicle.

Whatever Caelus is, Alaskans worried about the prospect of dwindling oil production, and growing budget deficits, might hope Musselman's luck holds up.

Sullivan, the Pioneer spokesman, said Caelus is "very bullish on developing Nuna."

Meyer said he's hopeful Caelus has "plenty of financial backing to fully develop the fields," that Pioneer started, with enough capital left over to look for more oil.

Wielechowski said he's hoping for the best.

Contact Alex Demarban at alex(at)alaskadispatch.com