Pioneer has purchased from Mariner Energy, Inc. a 25% WI in the Falcon field development located in the East Breaks 579, 580 and 623 blocks, in approximately 3,400 feet of water, 100 miles east of Corpus Christi, Texas. Associated with the purchase, Pioneer will become operator of the Falcon project within 30 days. This will be Pioneer's first operated deepwater Gulf of Mexico project. In addition, Pioneer is acquiring an additional 25% WI from Mariner in 11 blocks that surround the Falcon discovery and that were acquired jointly by the companies in August 2001. Pioneer plans to drill exploration prospects that have already been identified on these blocks in an effort to enhance production through the Falcon development system. The Mariner transaction has an effective date of January 1, 2002. Pioneer has also recently acquired a 5% WI in the Falcon field development from another minority owner with an effective date of July 1, 2001.
As a result of these transactions, Pioneer will own a 75% WI and operate the Falcon field development and related exploration blocks. Through the acquisitions, Pioneer expects incremental initial gas production of approximately 50 million cubic feet per day ("MMcfd") commencing in the first quarter of 2003. Pioneer will be assuming approximately $31 million of additional 2002 capital requirements related to the 30% WI it is acquiring in the Falcon transactions. Pioneer has implemented new natural gas hedges for 40 MMcfd for the first three years of production related to the acquisitions at an average price of $3.60 per Mcf.
Pioneer has also signed a definitive purchase and sale agreement with Colorado Interstate Gas Company and CIG Production Company, L.P., subsidiaries of El Paso Corporation, to acquire CIG's working interest and other rights in the gas produced from the West Panhandle gas field and CIG's 100% entitlement to all field fuel. Pioneer is also in final negotiations with Colorado Interstate Gas Company to acquire CIG's wholly-owned gathering system related to the West Panhandle field. In connection with the settlement of a capital cost obligation related to these assets, Pioneer expects to recognize an extraordinary charge of approximately $14 million for the early extinguishment of this obligation in the quarter in which the transaction closes. Annual interest savings of $9 million would be realized as a result of settling the capital cost obligation. In addition, Pioneer is acquiring a 100% WI from El Paso Production GOM Inc. in ten deepwater Gulf of Mexico blocks that surround the Falcon discovery. The CIG transactions are subject to various closing conditions including consents to assign and certain regulatory approvals.
As a result of these transactions, Pioneer will own a 100% WI in the West Panhandle field and gathering system. Pioneer expects incremental production of approximately 20 MMcfd from this transaction. Pioneer anticipates continuing its successful program of horizontal drilling in the field, where it has identified approximately 330 drilling locations.
Scott D. Sheffield, Chairman and CEO, stated, "We are very excited about these acquisitions, as they further our strategy of acquiring assets in our own backyard, high-quality assets that we know best. We are acquiring 137 Bcf of proved reserves at an acquisition cost of $0.93 per Mcf, settling related net obligations and purchasing a gathering system. We are looking forward to operating the Falcon project, a cornerstone asset in our deepwater Gulf of Mexico portfolio. Falcon will significantly enhance our gas production when it comes on stream next year, and as we explore the 24 prospective blocks that we will control in the area after these transactions, we expect to add even more value to the project. The West Panhandle field is a legacy long-lived gas field that has been a foundation asset for Pioneer. Owning and operating 100% of the field will allow us to drill wells more economically and implement significant cost efficiencies. These transactions, in combination with the planned issuance of ten million new common shares to fund them, are anticipated to be accretive to cash flow per share in 2003 and accretive to Pioneer's net asset value per share."
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