Following tantalizing hints earlier this year about the possibility of a major oil find at Smith Bay, towards the western end of the North Slope, Caelus Energy Alaska has now made an official announcement: The two exploration wells that the company drilled in the bay in early 2016, coupled with the results of earlier seismic surveying, have revealed the presence of a massive resource of light oil.
In an Oct. 4 statement the company said that there could be 6 billion barrels of oil in place in its Smith Bay leases, with the possibility of 10 billion barrels or more across the complete Smith Bay area.
An oil field development at Smith Bay could result in the delivery of 200,000 barrels per day of light crude to the trans-Alaska pipeline system, Caelus said.
“This discovery could be really exciting for the State of Alaska,” said Jim Musselman, Caelus CEO. “It has the size and scale to play a meaningful role in sustaining the Alaskan oil business over the next three or four decades.”
The field as characterized by Caelus would be roughly equivalent in scale to the Kuparuk River field, which together with the Prudhoe Bay field, has been a lynchpin of North Slope oil production.
Musselman told Petroleum News that Caelus has also been interpreting 3-D seismic data obtained from surveying that the company has conducted in its 350,000-acre lease position to the east of Prudhoe Bay, and has identified some promising oil prospects there. There is the eventual possibility to develop perhaps 500 million to 750 million barrels of oil from that region, he said.
Very expensive
Given the remote location of the Smith Bay find, development of the discovery there would be very expensive. And, with an estimated capital cost of $8 billion to $10 billion to bring the Smith Bay field on line, field viability would require a sustained oil price in the mid-$60s, Musselman told Petroleum News. But, also critical to the feasibility of developing the field is the future stability of Alaska’s fiscal system, Musselman emphasized.
Caelus is a limited liability company funded by private investors.
Musselman attributes the successful discovery of major oil resources at Smith Bay both to the state’s latest oil production tax regime, commonly known as SB 21, and to the state’s tax credits.
“Fiscal stability going forward is critical for a project of this magnitude,” Musselman said. “Without the state tax credit programs, none of this would’ve happened, and I’m not sure Caelus would’ve come to explore in Alaska. We’re proof that the credit programs work.”
Delayed drilling
Caelus had hoped to return to Smith Bay in the coming winter to drill a third well and to drill a horizontal lateral from that well to frack and flow test the oil. But given the current uncertainty in the state tax system coupled with the low price of oil, the company decided to postpone that plan, probably to the following winter. The company has also decided not to drill in its eastern North Slope exploration acreage this winter.
“We were hopeful that we could drill a well or two this coming winter. … We were also hopeful that we would be back out on the ice at Smith Bay this winter and we’re not going to do that,” Musselman said. “It’s hard times politically, hard times economically.”
Huge subsurface structure
Caelus says that the Smith Bay discovery lies in an ancient submarine fan structure that spans more than 300 square miles in the Smith Bay area. Apparently the discovery sits at a subsurface depth of some 5,000 feet in the Torok, a rock formation that lies below the Nanushuk formation in the Brookian sequence, the youngest and shallowest rock sequence within the Arctic Alaska petroleum systems. The Nanushuk is the focus of a major oil discovery being pursued by Armstrong Energy and Repsol in the Pikka unit, on the east side of the Colville River delta.
U.S. Geological Survey geologist David Houseknecht, an expert on Alaska petroleum geology, has suggested that the Nanushuk discovery by Repsol represents a major new oil play in the Brookian, extending west along the Beaufort Sea coast from the central North Slope. Oil in this play would be derived from source rocks to the north, deep under the nearshore waters of the Beaufort Sea. The Smith Bay discovery clearly supports this view.
Caelus says that its two Smith Bay wells encountered oil through a vertical interval of 1,000 feet. One well found net pay of 183 feet, while the other well encountered net pay of 223 feet. The company did not have sufficient time to flow test the wells. However, extensive sidewall coring and subsequent laboratory analysis have confirmed the presence of reservoir quality sandstones containing light oil with an API gravity ranging from 40 to 45, Caelus says. The estimates of total oil volumes in place come from using seismic data to trace the extent of the oil reservoir.
Could be larger
Musselman told Petroleum News that, although it will be important to drill a third Smith Bay well to conduct flow testing, his company is confident, based on the core and seismic data, in the overall scale of its oil find. In fact, given that the submarine fans in the Torok continue beyond the area encompassed by the seismic surveying, the discovery will likely turn out larger than Caelus’ current estimate, he said.
In common with other Brookian oil reservoirs on the North Slope, the Torok at Smith Bay tends to contain multiple sand bodies, rather than consisting of a single massive sandstone unit. This feature of the geology can create challenges in accessing the oil from production wells. However, given the quality of the reservoir sands and the fact that the light oil will flow easily, Caelus is confident that the field can be productive, albeit with a need to use drilling and production techniques appropriate to a compartmented reservoir.
“We’re confident that the rocks here are fine,” Musselman said. “It’s going to require horizontal wells. It’s going to require fracking.”
Simulations based on data obtained from the Smith Bay wells suggest potential well production rates of 8,000 to 10,000 barrels per day, with perhaps a total of 8 million or 9 million barrels of oil coming from each well, he said. The field also holds a significant quantity of natural gas that could be recycled for enhanced oil recovery. The use of this gas might enable as much as 60 to 70 percent of the oil in place to be recovered, Musselman said.
Five years for construction
Pat Foley, Caelus senior vice president for Alaska operations, said that, once development of the field starts, first oil is possible within five years. Musselman commented that included in the capital cost of the development would be an $800 million oil pipeline to the central North Slope - there are several potential pipeline routes. The development would probably involve the drilling of about 400 wells from four well pads. With water depths ranging from just 4 inches to 10 feet in Smith Bay, there are several options for the construction of the pads, with the use of large barges for drilling being one possibility.
The need to build onsite oil processing facilities at the remote Smith Bay location is a significant factor in the high development costs. A road past Smith Bay from the Alpine field in the central North Slope to Barrow would knock $1 billion off the Smith Bay development cost, Musselman commented.
A Brookian focus
Caelus has previously stated that the Torok and other Brookian rocks form a focus of the company’s exploration and development efforts in Arctic Alaska. In fact, the Torok at Smith Bay is equivalent to the Torok reservoir that the company wants to develop in its 100 million to 150 million barrel Nuna development in its Oooguruk oil field. Musselman commented that Caelus had planned to have Nuna come on line in early October this year, before the company put the project on hold because of low oil prices and Alaska tax uncertainty. Caelus has already invested $200 million in Nuna and has constructed a pad for the drilling of 40 wells, Musselman said.
Development drilling is also on hold in the currently producing Oooguruk field. Musselman commented that, thanks to favorable geology and improved well completion techniques, the performance of the Oooguruk field has turned out better than expected. Caelus has not just replaced the oil reserves at the field - it has added some new reserves, Musselman said. However, given the continuing low price of oil, the company may throttle back production a bit, to help manage cash flow, he said. Oooguruk probably has some 85 million barrels of oil remaining to be produced, he said.
Caelus’ interest in the Brookian continues in the company’s eastern exploration acreage, where many of the oil prospects that the company has identified so far from its seismic data are in this relatively young rock sequence. However, the company has also found some significant possibilities in an older and deeper sequence known as the Ellesmerian, Musselman said. Musselman commented that there appears to be further scope for finding much as yet undiscovered oil under the eastern North Slope. He also expressed his amazement at the fact that no one has yet shot seismic across some of the acreage to the south of Prudhoe Bay.
In a Nov. 4 press release, Gov. Bill Walker congratulated Caelus on the company’s Smith Bay discovery.
“My administration will continue to work with the industry to identify new development opportunities in Alaska’s oil and gas sector, and provide appropriate investment incentives given our current fiscal climate,” Walker said.
