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Vol. 16, No. 4 Week of January 23, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Alaska Offshore Special Report: Arctic Alaska offshore, a 40-year recap

The challenges facing oil companies looking to drill in the Beaufort, Chukchi seas got more complicated in the past year

Eric Lidji

For Petroleum News

The state of offshore drilling in Alaska’s Arctic can be summed up in one word: uncertain.

It’s uncertain if the U.S. government will allow oil companies to drill exploration wells in the Beaufort and Chukchi seas, located off the northern and northwestern coasts of Alaska, respectively. If that drilling does go forward, it’s uncertain if it will yield discoveries large enough to justify the high cost of Arctic development. Should that drilling go wrong, it is uncertain if the response systems in place will work as intended.

One thing is certain, though: offshore northern Alaska, particularly the outer continental shelf of the Beaufort and Chukchi seas, is one of the most promising undeveloped oil and gas provinces in the United States.

The complexity of proving and developing those resources is breeding conflicting interests.

Oil companies like Shell, ConocoPhillips and Statoil see a chance to replace reserves, increase domestic production, offset declining throughput in the trans-Alaska oil pipeline and improve the economics of frontier areas like the National Petroleum Reserve-Alaska.

Coalitions of environmental groups and Alaska Native organizations worry about the impact that exploration and development could have on the Arctic environment: lands, air and waters, animals and fish, and local communities.

The federal government shares the concerns of both groups, and so the actions of the executive, legislative and judicial branches are often in conflict when it comes to Arctic drilling.

While this dynamic isn’t new, it came to a head in 2010 largely because of an event far from Alaska, at least geographically: the blowout of BP’s Macondo well in the Gulf of Mexico and the resulting explosion that destroyed the Deepwater Horizon rig in April 2010 led to the largest oil spill in U.S. history, triggering a series of regulatory and legal actions that remain as yet unresolved.

Even before the Gulf spill, though, other unresolved issues delayed drilling, issues like lawsuits over federal leasing programs, the listing of the polar bear as a threatened species, long permitting timelines and the complex logistics of Arctic offshore drilling.

All those issues have kept oil companies from pursuing their exploration plans in state waters and the federal outer continental shelf, or OCS, as federal permitting and authorizations are needed for both.

Decades of Arctic offshore exploration

The current efforts to explore the Arctic offshore follow decades of earlier exploration.

Companies have drilled dozens of Beaufort Sea exploration wells since the 1970s, leading to two producing oil fields. The Endicott field, in state waters, came online in 1987 and the 202-million-barrel Northstar field, which straddles state and federal jurisdictions, came online in 2001. BP, the company that operates Endicott and Northstar, is currently working to develop the Liberty field.

In state waters, Pioneer Natural Resources brought the Oooguruk field online in 2008. Its partner on that project, Eni Petroleum, is expected to bring the neighboring Nikaitchuq unit online this month, January 2011.

Those offshore fields are all relatively close to land, though. Farther out in the Beaufort Sea are at least three known but undeveloped fields: the 100- to 200-million-barrel Sivulliq field (previously known as Hammerhead); the 160- to 300-million-barrel Kuvlum field; and the 12-million-barrel Sandpiper field, according to the federal Bureau of Ocean Energy Management, Regulation and Enforcement, or BOEMRE.

Much of the Beaufort Sea sits just north and east of the established infrastructure system of the central North Slope. By contrast, the Chukchi Sea off the northwestern coast of Alaska is a far more remote basin and therefore exploration efforts are much more recent.

Chukchi exploration is based on five wells drilled between 1989 and 1991. All five wells encountered hydrocarbons to some degree and the most promising finds form the foundation of current attempts to explore. The Burger well encountered a reservoir believed to contain somewhere between 8 trillion and 27 trillion cubic feet of recoverable gas and between 31 million and 1.7 billion barrels of condensate, according to BOEMRE figures. The Klondike well, now known as the Devil’s Paw prospect, found very thick source rock. The Crackerjack, Popcorn and Diamond wells also proved promising.

Unlike the Beaufort Sea, though, there is currently no production from the Chukchi Sea.

The current push to explore the Beaufort and Chukchi seas began with three large federal lease sales in the last decade. As oil and natural gas prices continued rising year by year, companies spent almost $89 million on 207 leases in the Beaufort Sea in 2005 and 2007, and nearly $2.7 billion, a federal record, on 487 leases in the Chukchi Sea in 2008.

Shell leading the pack

Now, those leaseholders want to capitalize on their investments.

Shell is leading the pack. Since returning to Alaska in 2005 after a decade away, Shell has spent some $3.75 billion on its proposed exploration programs in the Beaufort and Chukchi seas, according to Pete Slaiby, Shell’s Alaska vice president.

Shell initially planned to drill in the Beaufort Sea in the summer 2007, but revised and postponed that program several times in the face of various challenges. Its current program, proposed in October 2010, calls for drilling a single well in the Beaufort Sea this summer.

Shell would like to drill in the Chukchi Sea as well, but is targeting the Beaufort Sea in 2010 because of legal issues surrounding the company’s Chukchi Sea leases.

Its 2010 Beaufort Sea exploration program — of which its 2011 program is a near copy — recently withstood an appeal in federal court, whereas the status of all active Chukchi Sea leases remain uncertain until several cases finish working through the court system.

Shell might apply for a second Beaufort well and a Chukchi well this year. The company is interested in three Chukchi prospects: Burger, Crackerjack and Southwest Shoebill.

If Shell gets to drill this summer, it plans to explore its Sivulliq prospect, a relatively shallow subsea target that sits beneath 102 feet of water. In previous Beaufort Sea exploration plans, Shell also planned to explore its Torpedo prospect north of Sivulliq. Both prospects are on the west side of Camden Bay, north of the eastern North Slope.

Shell plans to drill the well using the Noble Discoverer drillship, previously called the Frontier Discoverer. Shell recently spent $25 million to upgrade the exhaust system on the ship. The drillship will be supported by a fleet that includes an onsite spill response unit, and Shell also plans to mobilize the Kulluk, its floating drilling platform, to serve as a backup rig in the event that a blowout on the main well requires drilling a relief well.

The Kulluk would eventually become a second drilling rig in future exploration seasons.

In its most recent oil spill contingency plan, Shell described the Sivulliq reservoir as having high viscosity oil and low reservoir pressure. Based on that geology, Shell estimates that the worst case scenario for a spill would be 860 barrels per day.

BOEMRE believes that estimate should be 1,194 bpd because of the highly permeable nature of the reservoir.

Shell’s plan assumes a 5,500 bpd spill, a standard for Alaska, and its onsite response equipment will be able to handle as much as 12,000 bpd.

In addition, Shell plans to have a tanker capable of holding up to 500,000 barrels of oil stationed within four hours of the exploration site.

Shell would prefer not to need that fleet. In its plan, the company also outlined the measures it is taking to prevent a spill from happening in the first place, including equipment to detect gas kicks, remote monitoring, and multiple barriers and valves in the well like redundant valves in the blowout preventer.

In the wake of the Deepwater Horizon, Shell also said it would test its blowout preventer more frequently, install an extra set of blind shear rams in the blowout preventer, position a remote-operated vehicle on the seafloor for emergency operation of the blowout preventer, have diver capability and a second remote-operated vehicle on a support vessel, and have available an oil containment and collection system for placing over the wellhead, if necessary.

To justify the mobilization of this fleet, Shell wants regulatory approval of its program as soon as possible (preferably last December). With a recent delay over its air quality permit, though, Shell now thinks it might not drill in the Beaufort Sea until 2012, Marvin Odum, director of the upstream Americas for Shell, recently told the Financial Times.

ConocoPhillips waiting on Chukchi

ConocoPhillips is the second largest leaseholder in the Arctic OCS after Shell. While the Houston major once held extensive acreage in both the Beaufort and Chukchi seas, it dropped most of its Beaufort leases in 2009, not seeing the potential for hubs that could make development economic. Following its decades-long strategy of westward expansion across northern Alaska, ConocoPhillips is now focused on exploring its prospects in the Chukchi Sea, but the company doesn’t expect to drill before 2013, at the earliest.

ConocoPhillips holds an interest in the two most promising Chukchi Sea prospects: Devil’s Paw and Burger. Devil’s Paw is the name ConocoPhillips gave to the prospect Shell investigated in 1989 with the Klondike well. ConocoPhillips acquired the acreage in 2008 and in early 2010 brought in the Norwegian company Statoil as a 25 percent partner on 50 leases in the prospect. ConocoPhillips also owns some leases at the edges of the Burger prospect, where Shell hopes to drill once it moves into the Chukchi Sea.

ConocoPhillips recently applied for an air quality permit at Devil’s Paw, believing that it is important to be the first explorer in a frontier region to get the permit, but is holding off on applying for additional permits until BOEMRE finishes crafting new offshore drilling regulations. The company is also nervous because several ongoing lawsuits are challenging the validity of all existing Chukchi Sea leases.

ConocoPhillips believes the first company to make a major discovery in the Chukchi Sea will lead development, but that partnerships will be essential for building the network needed to connect the region to market. Bringing a Chukchi Sea field into production would likely require a new 75-mile subsea pipeline to shore and a new 200-mile pipeline across NPR-A that connects to the existing North Slope infrastructure system, a multibillion dollar effort that promises to present regulatory and legal challenges, and could take 10 to 15 years to complete under agreeable circumstances, according to Geoff Haddad, vice president for exploration and land for ConocoPhillips Alaska.

However, ConocoPhillips remains excited about the Chukchi Sea, not only because of the potential for huge discoveries, but also because developing the Chukchi could reduce the cost of developing NPR-A fields that are marginally economic or uneconomic today.

Statoil shoots 3-D seismic

The third major player offshore Alaska’s Arctic is Statoil. The Norwegian company is no stranger to Arctic offshore development, operating fields in Canada, Greenland and the Barents Sea. In addition to its stake in Devil’s Paw, Statoil operates 16 leases jointly with the Italian major Eni Petroleum, its partner on several other offshore projects around the world.

Statoil spent this past summer treading water, unsure whether a July 2010 court injunction against exploration work in the Chukchi Sea covered its plans to shoot 3-D seismic over a broad swath of the region, including leases held by other companies.

In the end, Statoil got the go-ahead to shoot within days of having to call off its program.

Working while they wait

While preparations, lawsuits and permitting delays have kept companies from drilling wells, they haven’t entirely kept them from exploration work. Shell shot 3-D seismic surveys in both the Beaufort and Chukchi seas, and shot a separate 3-D seismic survey over Beaufort Sea leases jointly held with Eni Petroleum. Shell and ConocoPhillips have both conducted several seasons of environmental baseline work in the Chukchi Sea.

In addition to oil companies, many service companies are interested in the Beaufort and Chukchi seas. Ion Geophysical hoped to shoot an innovative late-season seismic program beneath the ice covering the Beaufort Sea, but cancelled the program because of mechanical problems. Buccaneer Alaska, the local subsidiary of an Australian independent, has floated the idea of buying a jack-up rig to lease to Arctic explorers (as well as operators in Cook Inlet who have been searching for a jack-up for years).

In the wake of delays, the Arctic has also become a hot bed of research and scientific partnerships, like one between Shell and the Barrow Arctic Science Consortium. Those collaborations could become even more common now that the Obama Administration has signaled that it wants to increase research studies on spill response in icy waters.

Unresolved court cases

Before those companies can drill, they must overcome numerous obstacles. The oil spill in the Gulf of Mexico merely compounded the challenges drillers had already been facing for several years. The pre-spill challenges fall into two categories: legal and regulatory.

The major legal challenges are all appeals to federal rulings in favor of drilling.

The first challenge came in April 2009, when the U.S. Court of Appeals for the District of Columbia upheld an appeal against the U.S. Minerals Management Services’ OCS lease sale program for 2007 to 2012.

MMS, and its successor agency BOEMRE, schedules sales in five-year cycles through a process designed to guarantee that leases are offered in accordance with the Outer Continental Shelf Lands Act. The appeal cast uncertainty over several hundred leases sold in the record-breaking February 2008 Chukchi Sea lease sale.

The Native Village of Point Hope, the Center for Biological Diversity, the Alaska Wilderness League and Pacific Environment appealed the program in 2007, saying it didn’t consider the impact of oil and gas leasing on climate change, that it was approved without adequate baseline biological research and without adequate Endangered Species Act consultation, and that it irrationally relied on an insufficient environmental sensitivity assessment by the National Oceanographic and Atmospheric Administration.

The court upheld that final argument and ordered MMS to revise the environmental impact statement it used in the lease sale. In December 2010, BOEMRE filed a new plan that promised to honor existing leases in the Arctic OCS, but to defer all remaining Beaufort and Chukchi sea lease sales for the 2012 to 2017 plan. Public meetings on those plans are under way.

The new plan also addressed the environmental sensitivity assessment issue raised in the appeal. Motions on the plan are due in January 2011.

The second legal issue overlaps the first. In July 2010, the District Court for the District of Alaska put a hold on Chukchi Sea exploration work as the result of an appeal against the 2008 Chukchi Sea lease sale by the Native Village of Point Hope, the Inupiat Community of the Arctic Slope and 12 environmental organizations.

The court upheld three arguments against the MMS environmental impact statement for the sale: that it didn’t specifically consider the potential environmental impact of offshore natural gas development; that it didn’t adequately determine the relevance of environmental information missing from the EIS; and that it failed to adequately assess the cost of getting that missing information. The court required the U.S. Department of the Interior to issue a supplemental EIS to resolve the three issues.

Interior responded in October 2010 in two ways: by appealing the ruling as a procedural move and by filing a draft supplemental EIS. The department is now reviewing comments on that document.

Third legal issue resolved

A third legal issue also caused uncertainty and delays, but is now resolved. In two cases, one in late 2009 and another in early 2010, several Alaska Native and environmental organizations appealed the MMS decision to approve Shell’s 2010 exploration plans for the Beaufort and Chukchi seas. Shell previously cancelled a drilling program following similar appeals, but in May 2010 the 9th Circuit Court of Appeals dismissed both cases, giving Shell an exploration plan it believes can stand up to legal challenges in the future.

Polar bears trigger debate

The regulatory challenges before the spill showcase how the Arctic OCS is becoming a symbol in a much broader debate about the direction of domestic energy production.

While oil companies must get numerous federal, state and local permits before drilling, the regulatory hurdle that most concerns the state of Alaska and oil industry is Interior’s 2008 decision to list the polar bear as threatened under the Endangered Species Act.

The broad scope of that decision created enormous uncertainty.

First, because the main justification for listing the polar bear was the loss of sea ice in connection to global climate change, the listing threatened to make any industrial work anywhere in the world subject to the terms of the Endangered Species Act.

In response, Interior made two rulings. First, it modified its regulations to specify that an activity that generates greenhouse gases can’t be linked to impacts on listed species. Second, it created a special rule saying that the protections of the polar bear included in the Marine Mammal Protection Act and the Convention on International Trade in Endangered Species would suffice to meet the protections required under the terms of the ESA.

Second, to offer the polar bear more concrete protections, the U.S. Fish and Wildlife Service proposed a critical habitat designation for the polar bear. Critical habitats define where a threatened or endangered species lives, and set guidelines for those areas.

In October 2009, Fish and Wildlife proposed a critical habitat covering more than 200,000 square miles of land and sea. The service reduced that designation to some 187,000 square miles in November 2010, removing Air Force bases, manmade structures and two North Slope communities, but keeping a significant portion of the federal acreage under lease in the Beaufort and Chukchi seas.

While the onshore portions of that critical habitat outline protections for specific environmental features, like the steep, stable slopes where bears might den, the offshore portions are essentially designed to protect sea ice.

The listing and the designation triggered many lawsuits that remain unresolved. The Center for Biological Diversity sued to overturn Interior’s special rules. Another lawsuit argued that the polar bear should be listed as “endangered” and not “threatened.” In 2008, the state of Alaska sued to reject the listing, and in 2010 the state sued again over the critical habitat designation, challenging the economic impact of the decision.

The federal government is required to consider the economic impacts of a critical habitat designation. Fish and Wildlife says the designation would only add the cost of additional consultations, about $669,000 over 29 years, but the state, using figures from Arctic Slope Regional Corp., believes the impact is dramatically higher, pegging the cost in the hundreds of millions or even billions of dollars over just the next 15 years alone.

In addition to those lawsuits, uncertainty remains over the actual mitigation measures that Fish and Wildlife will ultimately propose to protect the land and water in the critical habitat.

U.S. Rep. Don Young, R-Alaska, recently filed legislation to delist the polar bear, but even if that bill becomes law, an unlikely occurrence, it wouldn’t resolve the additional Arctic species currently being considered for ESA listing, like the stellar sea lion and the ringed seal.

Waiting for air permits

The second major regulatory issue facing Arctic offshore development is air permits.

In March and April 2010, the Environmental Protection Agency issued Shell an air quality permit for drilling up to five wells in the Chukchi and Beaufort seas. The Native Village of Point Hope and eight other groups appealed that decision to the Environmental Appeals Board. Shell also faced opposition to its air permits for its 2007 drilling program.

In December 2010, the EAB upheld two of the three arguments and told the EPA to address both before re-issuing the permit. The first concerns Shell’s drillship being considered “a stationary source,” an important distinction for determining the allowed emissions.

The second addresses a change in emissions laws that went into effect shortly before EPA issued the permit, setting out a new way of measuring the nitrogen dioxide emissions of the fleet.

The reworked permit will likely require a new cycle of public reviews.

Air quality permits greatly concern the oil industry. Geoff Haddad, vice president for exploration and land for ConocoPhillips Alaska, said the EPA’s existing permitting structure creates a “first-come, first-served” system that makes it increasingly difficult for multiple companies operating in a single basin, like the Chukchi Sea, to get permits.

Is there a moratorium?

On top of all those issues, Alaska is also dealing with more direct fallout from the Gulf oil spill.

In March 2010, a month before the spill, the outlook for Arctic OCS exploration and development was favorable. The Obama Administration announced an energy policy that included the Arctic OCS, as well as several other offshore areas, including some previously off limits to development.

By early May, though, in the immediate wake of the spill, all that changed. Ken Salazar, secretary of the U.S. Department of the Interior, said his department wouldn’t issue any new offshore drilling permits until it completed a 30-day review of offshore safety. The announcement created significant uncertainty for Alaska, not only for OCS projects like Shell’s five-well program in the Beaufort and Chukchi seas, but also for offshore projects in state waters and for Liberty, a BP project that straddles state and federal jurisdictions.

In late May, Interior issued a six-month moratorium on all deepwater drilling and suspended Shell’s proposed drilling campaigns in the Beaufort and Chukchi seas (in addition to imposing limitations on drilling and leasing in other federal OCS regions).

The announcement alleviated some concerns by clarifying that the moratorium did not cover Liberty or state projects, but it created far more uncertainty than it resolved.

That’s because it still remains unclear how Alaska fits into the moratorium.

The official moratorium notice sent to lessees did not mention Alaska, and the criteria for “deepwater” drilling, 500 feet of water or deeper, did not cover Shell’s proposed wells in the Beaufort and Chukchi seas, which like most of Arctic Alaska’s OCS would have been in shallow water — in Shell’s case, 150 feet of water.

Because of this confusion, it was unclear whether various lawsuits against Interior, including one that prompted an injunction of the moratorium, covered Alaska. In July 2010, the department hoped to sidestep that injunction by issuing a new moratorium on drilling from floating facilities that require blowout preventers. That moratorium also did not mention Alaska, but might technically have included the work Shell planned for the Beaufort and Chukchi seas. Interior also said it would be open to further revisions.

The lawsuits continued, though, and so did the confusion. Salazar and BOEMRE Director Michael Bromwich made contradictory statements about whether Interior had imposed an Arctic drilling moratorium.

In September 2010, Salazar refused to offer a timeline for resuming Arctic OCS development, saying Interior wouldn’t make a decision until getting three reports — an offshore drilling report from BOEMRE, a Marine Board investigation, and a report on the Deepwater Horizon incident from the National Academy of Engineers — and addressing three issues — worker safety, spill containment ability and general response issues.

Shortly following that announcement, the state of Alaska sued Interior over the alleged moratorium, saying the federal government violated the Outer Continental Shelf Lands Act and the Administrative Policy Act by not consulting with the state before issuing the moratorium, by not considering the economic impact of issuing such a broad ban on drilling and by not providing a written explanation for the moratorium.

Interior lifted the general moratorium in October 2010.

In late November 2010, the department filed a motion explaining that the original moratorium did not cover Alaska, and that the delays simply represented the normal permitting process, slowed by cautious regulators. Interior said it was continuing to review Shell’s new exploration plan and drilling application.

The legal case remains unresolved. (See article on the state’s lawsuit over the federal moratorium, see page 28 of the enclosed Special Report, Alaska Offshore.)

New regulations ongoing

In the meantime, BOEMRE issued new OCS regulations including new well standards and the mandatory implementation of a safety and environmental management system. Bromwich said his agency was preparing a guidance document to clarify permitting, and reviewing the practice of categorical exclusions. He also said future regulations would go through the standard, rather than emergency rulemaking process.

In addition, BOEMRE is still reorganizing from the ashes of MMS in the wake of the Deepwater Horizon explosion and subsequent oil spill that led to the break-up of that former agency. The new agency will eventually be split into three parts handling offshore leasing, regulation and revenue collecting, respectively.

In January 2011, the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling issued its final report on the spill.

The report included an entire section devoted to Alaska, casting additional uncertainty over Arctic OCS development. The report said that offshore drilling would remain important and could include Alaska, but that the issues at play in the Arctic OCS could not be easily compared to the Gulf of Mexico. The report recommended boosting response, monitoring industry and increasing spill research before continuing with exploration and development in the Arctic OCS.

What exactly that means for Alaska in 2011 remains to be seen.



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Reviews stall Liberty project

When BP discovered Liberty in 1997, it planned to develop the 100 million barrel offshore oil field by building a dedicated drilling island in the Beaufort Sea. That’s how BP developed two other nearshore Beaufort Sea projects: Endicott and Northstar.

Ultimately, though, BP chose a more innovative approach: using ultra-extended-reach drilling to develop Liberty from an extended manmade gravel island at Endicott.

To accomplish that task, BP commissioned one of the most powerful rigs in the world, a $200 million Parker Drilling Co. rig designed to drill eight-mile-long directional wells.

That plan would have significantly reduced the footprint of the Liberty project by avoiding the need for a new offshore island and a pipeline connecting to the mainland.

BP hoped to start drilling at Liberty in 2010.

In the wake of the Deepwater Horizon disaster on a BP-operated project in the Gulf of Mexico, Liberty came under scrutiny because of its complexity and because some accused BP of stepping around a federal moratorium by drilling from state land.

After state and federal officials suggested they would review the project in greater detail, BP pushed off drilling until 2011 to accommodate the uncertain timeline of the U.S. Department of the Interior’s plans to review the environmental assessment for the field.

But in December 2010, with the rig on site at Endicott, BP announced another delay.

The company said it planned to slow down its timeline on the project to examine the design and engineering of its huge rig.

Steve Rinehart, BP’s spokesman in Alaska, described the move as “a decision to move ahead deliberately. We’re going to take a timeout on the physical construction of the rig. We want to review some of the design and engineering elements of the rig, which is the first of its kind. There has never been a rig quite like this, and as we worked to assemble it, since off-loading it in the summer of ’09 … some design and engineering issues have arisen and we have decided the smartest and safest way to deal with those is to take a timeout on engineering and design.”

BP did not offer a new estimated start date for drilling.

Liberty is a major component of BP’s vision for Alaska, accounting for roughly a third of the $800 million capital budget the company planned to spend in Alaska in 2011.

—Eric Lidji