Narwhal appeals
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Court action against DNR says Shell holding unit 2 years past default
Kay Cashman Petroleum News
On March 4, independent Narwhal LLC filed an appeal in Alaska Superior Court against the state of Alaska, Department of Natural Resources, alleging DNR Commissioner John Boyle "acted in violation of Alaska law by failing to find Shell Offshore Inc. in default of the current Plan of Exploration for the West Harrison Bay unit" and further failed to "demand cure where Shell has been in default of the unit's POE since Dec. 31, 2022."
(See map in the online issue PDF)
Basically, Narwhal claims Shell has strung DNR along with promises to explore West Harrison Bay since getting approval to form the unit in 2020.
Operator and 100% working interest owner of the nearshore West Harrison Bay unit, Shell says it has been "diligently" looking for a partner, or partners, to buy into the unit to share the exploration cost and risk -- and to take over the role of operator.
In 2022 the company told the division that it "had made solid progress toward that objective prior to the Covid-19 pandemic and the resulting collapse in oil prices."
Prime location The Nanushuk formation is the hottest play west of the central North Slope.
The 81,000-acre West Harrison Bay unit lies northwest of Santos' Pikka unit, a 1 billion barrel discovery currently under development, and approximately 7 miles directly north of ConocoPhillips Alaska's Bear Tooth unit, which holds the big Nanushuk Willow discovery in the National Petroleum Reserve-Alaska.
Narwhal's options On Dec. 20, 2022, Anchorage-based Narwhal asked DNR's Division of Oil and Gas to expand Shell's West Harrison Bay unit to include Narwhal's leases. On May 23, 2023, division Director Derek Nottingham denied that request.
Narwhal's proposed West Harrison Bay unit expansion area, which includes Narwhal's leases, is roughly 50,180 acres for a total of 131,311 acres in the shallow state waters.
Because Narwhal had no direct interest in the West Harrison Bay, or WHB, unit, and because the activities proposed by Narwhal in its plan of exploration on its leases can be conducted on a lease-by-lease basis or Narwhal can apply to form a separate unit comprised of its own leases, expansion of the WHB unit is unnecessary, Nottingham said in his decision.
On April 6, 2023, Shell International Exploration & Production, parent of Shell Offshore, emailed comments to the division about Narwhal's proposed expansion.
In Nottingham's words, Shell said that: "Narwhal has not conducted its own seismic survey, but rather appears to rely on the same 2D and 3D seismic survey datasets used by Shell in its application to form the WHB unit. Narwhal is not seeking to voluntarily unitize the leases to aid exploration or production, instead, Narwhal's unprecedented proposal involves the forced creation of a joint venture with Shell, the removal of Shell as the operator of the unit, and a new plan of exploration ... Narwhal has failed to satisfy the criteria of 11 AAC 83.303. ... Involuntary expansion is contrary to the department's statutory scheme ... Although Narwhal has reached out to Shell with multiple commercial proposals, including lease combinations, and proposals to purchase Shell's leases; these proposals were considered in depth by Shell, but Shell declined these offers."
Narwhal's points In a Jan. 23 letter to Boyle, Narwhal asked for reconsideration of a Jan. 3 DNR decision regarding an amendment to the second POE and an extension of the WHB unit agreement that invited further discussions with Shell.
Per Narwhal's letter, on Sept. 22, 2023, Shell submitted a proposed amendment to DNR to the second POE, requesting to extend the unit term. The proposed amendment was not submitted by Shell until eight months and 22 days after Shell defaulted on the contractual obligations in the current POE, which requires it to, among other things, (1) finalize commercial arrangements with other prospective market participants and designate a new unit operator on or before Dec. 31, 2022, and (2) complete the first of two wells during the 2023-2024 winter drilling season.
DNR's elected not to deny Shell's request to amend the POE and extend the unit term, not to issue a notice of default and demand to cure, and not to demand release of the performance bond put in place to secure Shell's commitment to develop the leases, Narwhal wrote.
The decision "violates DNR's statutory and constitutional obligations under Alaska law to develop resources in accordance with the public interest, is not supported by the 11 AAC 83.303 criteria or factors, violates the equal protection clauses of the Alaska Constitution and reflects blatant favoritism of Shell compared to similarly situated smaller oil and gas operators in Alaska," and more, Narwhal wrote.
"As DNR is aware... Narwhal holds leases adjacent to the WHB unit and has made multiple attempts to work cooperatively with Shell to spur development" of the WHB leases. "DNR's refusal to enforce Shell's contractual obligations and stop Shell from warehousing its leases in the WHB unit in violation of the WHB unit agreement and second POE has resulted in... damages to Narwhal by preventing it from bidding on and acquiring the WHB unit leases in a competitive areawide lease sale or pursuing a cooperative and coordinated exploration, appraisal, and development program with a lessee that is actually willing to drill the hydrocarbon accumulations in the WHB that are shared with Narwhal in a manner that maximizes the economic and physical recovery of the natural resources."
DNR's decision affects leases held by Shell in the WHB unit (ADLs 392164, 392165, 392166, 392167, 392168, 392169, 392170, 392171, 392173, 392174, 392175, 392176, 392177, 392178, 392179, 392180, 392181) and adjacent leases held by Narwhal (ADLs 393176, 393177, 393178, 393179, 393180, 393181, 393895, 393896, 393897, 393898, 393899, 393900).
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