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Vol. 12, No. 46 Week of November 18, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

THE EXPLORERS 2007: Shell never really left Alaska

2007 Beaufort drilling plans on hold due to a court order, Odom says will continue to listen, learn, work with local people

Kay Cashman

Petroleum News

When Shell re-entered Alaska in October 2001 with the $2.4 million acquisition of 56,000 acres on the North Slope, Alaskans watched to see what the U.S. E&P arm of Royal Dutch Shell would do next.

Formerly a Cook Inlet basin producer, Shell left Alaska in 1998 after more than 40 years of activity that included exploration drilling in almost all of the state’s offshore basins with oil and gas potential, including the Chukchi Sea, Beaufort Sea, Gulf of Alaska, Bering Sea and Cook Inlet.

But Alaskans were disappointed because a year after Shell’s return the mega-major put its new North Slope leases up for sale.

Land and exploration staff from three oil companies told Petroleum News that Shell had said the Alaska leases, which were south of the Kuparuk River unit, didn’t “stack up against Shell’s deepwater Gulf of Mexico holdings as an investment.”

There were no takers for the leases, so in 2004, Shell surrendered them to the State of Alaska.

Remained AOGA member

“We felt that the potential of the area did not meet our investment criteria,” Shell spokeswoman for EP Americas Kelly op de Weegh told Petroleum News in October 2004. “But I want to stress, our decision to surrender what we consider to be a small, non-material leasehold does not affect our goal to continue evaluating investment opportunities in Alaska.”

“That specific area” of the North Slope does not interest Shell, she said, asking Petroleum News to “stress that we do not view this as an exit from Alaska.”

“Even though Shell sold its last producing asset in 1998, Shell has remained an AOGA member,” she said, which the Alaska Oil and Gas Association confirmed.

Sakhalin, West Siberia, Alaska

Op de Weegh’s assertion that Shell was still interested in Alaska coincided with remarks made a month earlier to Oil Daily by Shell’s global exploration director, Matthias Bichsel.

He said Shell had completed an 18-month, “thorough evaluation” and that the company “wants to develop a bigger exploration position in Alaska,” which it sees — alongside North Africa, the Russian Arctic and the global deepwater — as “one of the key areas of upstream potential for the international oil and gas industry.”

Bichsel also mentioned Shell’s continued interest in Sakhalin and West Siberia.

“You have a bit of a theme there — Sakhalin, West Siberia and Alaska — which is the Arctic, which requires big funds, which requires technology, tenacity, staying power, which I think companies like ours are very well suited to.”

Wins Beaufort leases

In March 2005 Shell won 84 Beaufort Sea leases in a U.S. Minerals Management Service lease sale. (MMS estimates suggest that about 7 billion barrels of oil and 32 trillion cubic feet of gas can be recovered from under the Beaufort Sea.)

Within a few months of winning the outer continental shelf tracts, the company purchased EnCana’s Beaufort leases, opened an office in Anchorage, and hired Tom Homza, formerly with EnCana in Alaska, to manage it.

On a visit to Anchorage in August 2005, Annell Bay, Shell’s vice president of exploration for the Americas, said Shell had done an extensive review that encompassed all aspects of doing business in Alaska, including “geological, technical, environmental, political, social and certainly commercial. We have re-looked at the elements and the opportunities in Alaska and feel like now is the time to come back” and build “another successful venture.”

She described Shell’s Beaufort lease position as “a platform for us to build on.”

Fox, Toohey, Ahmaogak

In January 2006, Shell named three top officials for its Alaska operation in Anchorage: Rick Fox, asset manager; Cam Toohey, government and external affairs manager; and George Ahmaogak Sr., community affairs manager.

At the time of the appointments, Alaska Exploration Manager Chandler Wilhelm said, “Although production is years away business planning and stakeholder engagement work is already under way.”

In 2006, Fox had been with Shell for 30 years. Earlier in his career he worked in Alaska’s Bering, Beaufort and Chukchi seas, and was lead drilling foreman on the Chukchi Sea exploration team led by Shell.

Toohey, a lifelong Alaskan, most recently had been special assistant to the secretary of the U.S. Department of the Interior.

Ahmaogak, a lifelong Alaskan and Barrow whaling captain, had just finished two terms as mayor of the North Slope Borough.

Vision for Bristol Bay

Shell said it was interested in other parts of Alaska, not just the far north.

In October 2005, Anchorage Daily News fisheries and oil reporter Wesley Loy attended a meeting that gave a glimpse of how Shell would communicate with people in areas it was interested in exploring and developing.

“Major oil companies often prefer to hold their cards close to the vest,” Loy reported. “But in the first week of October a land agent from Shell International Exploration and Production in Houston candidly laid out the company’s Bristol Bay vision for commercial fishing representatives meeting at the Hilton Anchorage Hotel.”

Shell’s plan, Loy wrote, would involve two to four “offshore production platforms in the bay’s fish-rich waters — which are now off-limits to drillers — and piping natural gas across the rugged Alaska Peninsula to a new processing plant and tanker port on the Gulf of Alaska.” Gas would be super chilled into liquefied natural gas, or LNG, for shipment to the West Coast via Mexico or Canada.

Shell would face many regulatory, geologic and business hurdles to move forward, a federal official told Loy. “But it does demonstrate rising industry interest in a place that historically has shunned drillers. And it signals a new chance for Alaska to cash in on the great global competition to supply the energy-hungry Lower 48 with gas.”

The Shell land agent, Gregg Nady, said fishermen and oilmen have peacefully coexisted offshore for decades around the world, and the same could hold true in Bristol Bay.

Nady said Shell was among several oil firms that in 1988 spent more than $95 million for Bristol Bay leases, only to see spill-wary fishermen, environmentalists and Alaska politicians persuade the federal government to buy back the leases in 1995.

That lease sale was nearly 20 years ago, Nady noted. “That’s 20 years of track record for the industry operating offshore that we didn’t have back then. We feel it’s a great track record.”

Since 1988 Bristol Bay residents “have warmed to oil and gas, mainly due to salmon prices collapsing in the face of competition from foreign, farm-raised salmon. A harvest that was worth more than $200 million at the docks in 1990 has dwindled to less than half that, causing major job and public revenue losses for local people and governments,” Loy wrote.

Nady said Bristol Bay gas could sustain a liquefaction plant in Balboa Bay, near Sand Point, for 25 years.

What’s more, he offered, oil industry helicopters have been known to save fishermen in distress, and Shell has a “good neighbor policy” — in case of damage to fishing equipment.

Eye on Chukchi

Early on, Shell was telling the Native people, governments and special interest groups of northern Alaska that it was interested in going back into the Chukchi Sea, which stretches west of the Beaufort Sea to Russia.

Following MMS Chukchi lease sales in 1988 and 1991, several companies led by Shell drilled five offshore exploration wells in the Chukchi, all of which encountered hydrocarbons. (The 1988 Chukchi sale was the largest in Alaska’s OCS, topping $478 million.)

Technology key

In a late 2006 speech Wilhelm said the petroleum systems “of the Arctic are truly world class,” but being in the right place doesn’t get you there — state-of-the-art technology is critical.

The short operating season is a challenge, he said, noting Shell uses a real-time operations center with a satellite connection to adjust well execution. The company was also working on research and development: extending the season; cost reduction; systems reliability; and subsea systems.

“We have a long history of innovation and our experience in the deepwater we think can serve as a guide for the possible impact of technology in bringing oil and gas from hostile offshore environments to market,” Wilhelm said.

Building a legacy

In February 2007 Fox said the availability of new oil and gas technologies was one of the things that attracted Shell back to Alaska’s offshore.

He characterized Shell’s current Alaska initiatives as pursuing two fronts — investigations that focus on finding new prospects, including the preparations for future lease sales, and work associated with known prospects.

Work on the first of those fronts involves the acquisition of 3-D seismic data in the Beaufort and Chukchi seas, while work on the second front involves exploration drilling preparations and drilling, primarily for the investigation of known prospects.

Sivulliq in 2008?

On the second front Fox said Shell was focusing initially on the Sivulliq prospect area.

Formerly known as Hammerhead, Sivulliq lies due north of Flaxman Island on the western side of Camden Bay. It contains a known oil pool penetrated by two exploration wells drilled by Unocal in 1985 and 1986.

Shell participated in the original Hammerhead drilling and Fox was on the drillship that tested the oil discovery.

According to information published by MMS, Hammerhead contains an estimated 100-200 million barrels of technically recoverable oil in a Brookian sand reservoir. But the oil pool had not been fully delineated, which was what Shell was planning to start with a three-well program during the 2007 open water season.

In 2008 and 2009 the company hoped to drill another six to eight wells.

Drilling plans included one deep target with a depth approaching 14,000 feet; most of the other wells would likely drill to depths of less than 8,000 feet, Fox said, depending on the results of the 2007 program.

Shell planned to use two drilling vessels, the Kulluk and the Frontier Discoverer, for the program, as well as a fleet of ice-rated vessels for support of the drilling operations.

9th circuit will decide

In February 2007, MMS approved Shell’s Sivulliq drilling plan after determining that the proposed exploration wouldn’t cause significant harm to endangered bowhead whales or the environment.

On July 24, after months of negotiations, Shell signed a conflict avoidance agreement with the Alaska Eskimo Whaling Commission for the company’s 2007 open water exploration program. That agreement included a commitment by Shell to take measures to avoid disturbing the Cross Island hunt for bowhead whales near the drilling area. Under the agreement, Shell would only move one of its drillships, the Frontier Discoverer, into the Sivulliq area prior to the Cross Island hunt. The Discover would cease drilling operations on Aug. 25, move out of the area within two days and return with the Kulluk drillship after the end of the hunt, to continue the drilling program.

Hard on the heels of the signing of the conflict avoidance agreement came a final determination by Tom Irwin, commissioner of the Alaska Department of Natural Resources, that Shell’s exploration plan was consistent with the Alaska Coastal Management Plan. (The North Slope Borough had challenged an initial consistency determination by Alaska’s Office of Project Management and Permitting.)

But anti-development groups, the Alaska Eskimo Whaling Commission and the North Slope Borough were hitting federal agencies with lawsuits and administrative appeals, protesting approval of Shell’s drilling plans. (The borough and whaling commission have long believed that offshore exploration activity threatens subsistence hunting activities, especially the hunting of bowhead whales.)

The groups said regulators failed to adequately consider the potential impacts of industrial noise and spills associated with oil exploration. On Aug. 15 the U.S. Court of Appeals for the 9th Circuit ordered Shell to suspend its operations until the appeals were settled. The court scheduled the case for a Dec. 4 hearing, which nixed any possibility of Shell drilling in 2007.

Shell requested reconsideration by the court, but lost.

Because of the drilling delay, Shell had to release workers, including 150 Alaska Natives.

High on community involvement

From the start Shell made an effort at getting Alaskans involved in its offshore plans, especially the North Slope Native communities, governments, subsistence groups, whalers, and locally owned companies.

Local involvement went way beyond having people say “okay” to what Shell was doing, Fox said. It meant having local people fully involved in Shell’s operations.

Fox described a vision of life in a village home in which “there will be someone sitting at the (dining) table who is involved in our business, telling the truth about what is happening and making their family proud of what they’re accomplishing.”

“We believe that’s essential,” Fox said.

Committed to working it out

In mid-September 2007, Petroleum News published a guest editorial from Marvin Odum, executive vice president of Shell Exploration & Production-Americas, in which he said Shell would “continue to listen and learn from the people and communities of the North Slope and residents across Alaska,” looking for “common ground.”

“Important work and discussions are ongoing with Mayor Itta and we are heartened by the progress being made,” Odum said.

“We will only have a successful program in Alaska if it benefits not only the current residents of the entire state, but the next generation as well.”

MMS

In early October Randall Luthi, whom the Bush administration appointed director of MMS in late July, said the federal government would continue fighting to clear the way for Shell’s Beaufort drilling program.

On Oct. 9, government lawyers filed papers arguing that the court challenges should be thrown out because they were groundless and, in some cases, were lodged after a deadline had passed.

Randall Luthi said his agency would stand behind its decision to let Shell drill. “I’m proud of the environmental work that we’ve done,” he said.

Luthi, who is an attorney, said he couldn’t predict how the court might ultimately rule. However, he and MMS’s Alaska director, John Goll, said they have no plans to back off leasing new Arctic offshore acreage to prospective drillers.

The agency has a sale scheduled for early 2008 in the Chukchi.

A full environmental impact statement already has been done for that sale, Goll said.



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Shell prepared for the worst

Being prepared for oil spill response is like buying insurance — you hope that the worst will never happen but, if it does, you’d better be prepared.

And in the case of Shell’s proposed offshore drilling activities in the Beaufort Sea offshore Alaska those preparations have included the construction of the Nanuq, a 300-foot, ice-strengthened oil spill response vessel, and the chartering of the Arctic Endeavor, a 200-foot oil spill response barge. The company has also chartered a 500,000-barrel double-hulled tanker, to hold and carry away any oil that Shell might have to mop up as a result of an oil spill.

The idea is to have the oil spill response kit on the water, at the drill sites, ready to respond immediately to any emergency, Rick Fox, Shell’s asset manager for Alaska, told Petroleum News.

“Should it be a diesel transfer spill, should it be any kind of accident that we might have, we have a team ready to go,” Fox said. “We can deploy our equipment and begin recovering within 45 minutes.”

“We have a total of 24 vessels in the oil spill response program,” said Susan Moore, Shell’s Alaska operations manager. In addition to the three major vessels, there are 11 smaller boats, including mini-barges and boom towing vessels, mounted on the decks of the Nanuq and the Endeavor, she said.

However, the first line of defense against an oil spill is to prevent one happening. In that regard, an oil explorer’s biggest nightmare is the possibility of a blowout, in which oil under pressure spouts from an out-of-control well. But a blowout is a very rare occurrence nowadays, Fox said.

“There have been no blowouts in an Arctic environment that we have any record of,” Fox said. But Fox emphasized that the rarity of blowouts does not lessen the need to be vigilant.

“We know what’s at stake here to the communities and to our own program,” Fox said.

The first line of defense against a blowout is the use of modern well logging technology that enables conditions at the bottom of the well to be monitored continuously while a well is being drilled, Fox said.

“We actually have the capability of detecting subtle changes in the formation as we go,” Fox said. “You are able to detect things that are indicators of pressure … as well as having the ability to control the direction of the drilling.”

Note: The rest of this story can be found at http://www.petroleumnews.com/pnads/852248489.shtml. It was run in the Sept. 2, 2007, issue of Petroleum News.