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Units may not work for resource plays Shublik, Kingak, Hue shales extend across North Slope; lack of drainage may mean unit formation not needed for shale development Kristen Nelson Petroleum News
Sen. Tom Wagoner, R-Kenai, co-chair of Senate Resources, has a bill in the Alaska Legislature which would provide credits for development costs against the first five years of production tax for new oil and gas produced from leases not in units at the end of 2008. Wagoner is pushing the credits as a way to get more oil in the trans-Alaska oil pipeline.
How would those credits apply to Great Bear Petroleum’s proposal for a resource play development on some 500,000 acres of state leases, an area where the company plans to produce from a nonconventional source, three source rocks or shales which stretch across the North Slope?
Current production in Alaska is from conventional sources, oil and gas in distinct pools. While the state has some production from individual leases, most is from blocks of leases organized into units.
Pools and units may not apply to regional shale trends, the Senate Resources Committee was told Feb. 28.
Conventional field development in Alaska involves, among other things, a unit application to the Division of Oil and Gas and a pool rules application to the Alaska Oil and Gas Conservation Commission. Then, before production begins, there is an application to the division for a participating area — a designation of the portion of the unit that will be producing.
Great Bear is looking at three shales, the Shublik, Kingak and Hue or HRZ, shales which extend in a broad swath across Northern Alaska from the Chukchi Sea, south of producing fields, and in the case of the Hue, into the Arctic National Wildlife Refuge. These shales are the source rocks for conventional producing fields on the North Slope, but the majority of the oil is still contained in the shales, Great Bear has said in recent presentations to legislators.
Shales regional; drainage not an issue Asked by Wagoner about pools as applied to shale production, AOGCC Commissioner Cathy Forester said “these shales tend to just be regional trends that cover large areas.”
She said the commission looks for continuity and contiguity in a reservoir. If a credit under the proposed bill had already been granted to a producer in a regional shale play, it would be up to another producer to demonstrate to the commission that it had a new discovery and is not part of a pool already granted a tax credit, Foerster said. Most likely the commission would “put the burden on the operator to demonstrate to us scientifically that he is in a new pool.”
Something like a big fault could be proof of lack of contiguity, she said, and could establish that there couldn’t be flow from one side to another.
Co-chair Joe Paskvan, D-Fairbanks, asked if the HRZ, Kingak and Shublik shales are individual pools which could each run for hundreds of miles, Foerster said “yes” to both, the shales are individual pools and they run for hundreds of miles.
Foerster said the way the commission would interpret the bill is that “an operator would have to demonstrate to us they were in a new pool (to be eligible for the credit proposed in the bill). It could be those same — HRZ, Kingak and Shublik trends — but they would have to demonstrate to us that they were isolated.”
Department of Natural Resources Division of Oil and Gas Director Kevin Banks said that the way the bill is written, it appears that “if there were no faulting or discontinuities in the shale layer” penetrated by a discovery well “… it would mean that there would be no more credits offered to the other players that may be drilling into the shale prospects.”
Wagoner said his idea with the bill “is to generate activity to fill the pipeline up or put more oil into the pipeline,” and said he didn’t think they needed to be concerned with pool issues, because this is “entirely different than a pool of oil that’s caused by a trap.”
Units and resource plays Banks said DNR wants to see units formed to conserve resources in development and to protect the rights of adjacent leaseholders.
“DNR is particularly interested in the economic development of the resource, so we don’t want to see a lot of duplicative facilities on the surface,” Banks said. The idea with unit development, he said, is to make sure that the lease tracts overlaying the pool “get their fair share of the costs and the … benefits of its development.”
Foerster agreed, saying “the only time that unitization might be warranted in this kind of development is if there are economies that could encourage greater ultimate recovery. In other words, stopping competition between checkerboard small leases and having one set of facilities, one gathering system, rather than everybody going out on their own little patch of land and building the whole shebang.”
Formation of units to protect correlative rights, to prevent drainage, probably isn’t as important as with development of conventional oil and gas resources.
Banks said that with shale drainage isn’t an important issue “because the wells produce from fairly limited distance from the wellbore and do not necessarily drain the oil or gas from another lease nearby.”
Foerster also told the committee that with shale, “the drainage area for one well” may not impact other wells.
Banks said his knowledge of how jurisdictions for the Eagle Ford shale in Texas and the Bakken shale in North Dakota handle shale development is limited, but said “I don’t think that unitization is common at all in some of these shale plays” because “… there isn’t concern about drainage from one lease to another.”
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