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Alaska’s Chukchi Sea: Will its time ever come? Other than a handful of wells drilled more than 10 years ago the oil industry has been reluctant to approach this challenging area Alan Bailey Petroleum News Contributing Writer
Are we close to a time when high oil prices and the possibility of a North Slope gas line can trigger renewed interest in oil and gas exploration in the Chukchi Sea? Or do the daunting technical, economic and environmental issues in this remote region preclude development in the foreseeable future?
With huge geologic structures and an abundance of both source and reservoir rocks, the strata under the Chukchi Sea could yield another field of Prudhoe Bay scale. According to an assessment by the Minerals Management Service the area should hold anywhere between 8.6 and 25 billion barrels of conventionally recoverable oil. MMS estimates gas reserves in the range 13.6 to 154.3 trillion cubic feet. Five exploration wells Following lease sales on the Chukchi Shelf in 1988 and 1991, several companies led by Shell drilled offshore exploration wells in the Chukchi Sea.
“They went out there in the ‘90s and punched five wells ... they all found hydrocarbons,” Kirk Sherwood, a geologist with MMS, told Petroleum News. “They actually sampled gas from three ... and encountered pooled oil in two other sites.”
One well, the Burger well, found a substantial gas reservoir, Sherwood said. However, none of the oil finds proved commercial and there was little interest in gas at that time.
In an attempt to find a really large oil field, the wells targeted similar geology to the oil-bearing structures around Prudhoe Bay. In particular the so-called Klondike well in the southern part of the exploration area drilled through a 1,000-foot section of the Sadlerochit formation that forms the main reservoir in the Prudhoe Bay field.
Unfortunately the Klondike well found that the Sadlerochit under the Chukchi consists mainly of shale rather than the reservoir sandstone at Prudhoe Bay.
Companies lost interest in exploring in the Chukchi and no further exploration activity has taken place in the area. A fresh look Sherwood thinks that companies became discouraged by the drilling results because they were so focused on finding a similar set up to Prudhoe Bay and they tended not to search beyond that possibility.
However, Sherwood suggests that people take a fresh look at the positive geological features of the Chukchi. The drilling did demonstrate the existence of good source and reservoir rocks. The estimated thermal history of the area points to the generation of substantial quantities of oil and gas.
“There’s probably about 20,000 feet of strata below the deepest well in terms of stratigraphic penetration,” Sherwood said. These strata include the bottom half of the Chukchi Lisburne and all the underlying rocks, he said.
And some parts of the stratigraphic sequence include bigger potential reservoirs than their equivalents in the Prudhoe Bay area. For example, the Permian Echooka sandstone is about 70 feet thick across almost the whole of the North Slope. They found about 500 to 600 feet of the Echooka in the Chukchi Diamond well, Jim Craig, a geologist and economic evaluator with MMS, said.
Craig also described some immense, ancient valleys that run north to south under the Chukchi. Hundreds of feet of sand fill these 10-mile wide valleys. It’s a similar geological situation to the sand-filled valleys of the Tabasco satellite field at Kuparuk.
“But these paleo-valleys in the Chukchi just dwarf that ... they’re orders of magnitude thicker,” Craig said. New leasing procedures MMS has been trying to spark renewed interest in the Chukchi by introducing a new leasing procedure and by offering incentives to companies interested in exploring in the area.
Instead of offering leases for sale, MMS is issuing annual calls for interest. This year, for example, MMS published a call for interest in January. Companies need to respond to the call by April. If there’s no interest expressed, MMS will repeat the call for interest next year. This procedure will continue throughout the 2002 to 2007 leasing program.
Nobody responded to last year’s call for interest, Sherwood said.
If a company does express interest, MMS will focus effort on preparing a lease sale in just the area that the company is interested in exploring.
“Then we’d put that (area) into a sale effort that would resemble a standard lease sale, except that it would be restricted to that area,” Sherwood said.
MMS is also asking companies for their views on exploration incentives.
“In recent programs for the Beaufort and Cook Inlet we’ve had various kinds of incentives to try to help out financially with exploration interests in both of those regions,” Sherwood said.
Potential incentives include 10-year lease terms, royalty suspension volumes and lower minimum bid requirements.
We’ve also lowered the rentals, Craig said. “It starts off low on a sliding scale — it mirrors the state (rental arrangements),” he said.
In general, MMS is trying to be more consistent with the terms of state lease sales, Craig said. Cost and risk So, with geological structures big enough to make even the most pessimistic oil geologist salivate, why has there been so little interest in the area? It mainly comes down to the high cost and risk of developing an area that is ice-covered for many months of the year, is subject to severe weather conditions and lies several hundred miles from the nearest oil pipeline.
In the early 1990s Jerry Dees, a then vice president of ARCO, stated that the cost of a Chukchi Sea development would require an oil find approaching 3 billion barrels to be economically viable. It’s worth taking a look at what a 3 billion-barrel figure means in terms of the cost of making a discovery and the probability of finding an economic oil field.
“Companies are spending a dollar a barrel in finding costs in frontier areas,” Craig said. So, finding 3 billion barrels might require $3 billion in exploration expenditure, he said. Probability of finding oil MMS has used seismic data and the drilling results to identify nearly 900 prospects under the Chukchi. This assessment points to the possibility of one or two oil pools of around 3 billion barrels. Of course there’s no guarantee of finding an oil pool of that size and the existence of such a large pool depends on just the right confluence of oilfield-producing factors.
On the other hand, there’s a good possibility of finding several smaller pools that, in aggregate, contain several billion barrels.
When the MMS factored the oilfield development costs into an economic evaluation, the economic model indicated that the lowest possible oil price for the economic extraction of oil in the Chukchi is about $15. But that figure takes an optimistic view of the quantity of recoverable oil reserves.
“So at $15 you might begin to make money out there but there would be a low probability of succeeding,” Sherwood said.
The need for large discoveries also pushes the need for a higher minimum oil price — it’s unlikely that you could find and viably produce 3 billion barrels or more unless the oil price remains somewhat higher than $20 per barrel.
“This $15 (oil price) may not be the driver for the initial standalone field out there — that might be some satellite to the big field,” Craig said. If companies are making their exploration decisions at $20 per barrel, you’re right on the threshold of finding the 2 to 3 billion barrels that you need for viable development, he said.
So, there’s a perception that in the Chukchi you need multi-billion barrel oilfields supported by oil prices of $25 to $30 per barrel, Craig said. “I think that if prices stay that high, sooner or later they’re going to have to come round to look at it again,” he said.
Innovative technology could also improve the economics — the present MMS economic analysis assumes the construction of standalone oil platforms.
“With newer technology like sub-sea (completions) you might be able to connect up a cluster of relatively small fields like those that are in the couple of hundred million barrel size that are clearly uneconomic as standalones,” Craig said. Collectively they might meet that 2 to 3 billion-barrel threshold he said.
Also Craig commented that if the on-land infrastructure moves west into the National Petroleum Reserve-Alaska, the economics of the Chukchi might improve because of the shortened distance between the existing facilities and the Chukchi developments. The gas factor The possibility of exporting gas through a pipeline from the North Slope also effects the economics of the Chukchi — the current MMS economic model for oil development doesn’t take into account the possibility of both oil and gas production.
“There’s quite a bit of gas resource out there,” Sherwood said. “Three of the (exploration) wells did discover ample gas.” Our estimates were 5 to 10 trillion cubic feet at the Burger well, he said.
And the foothills belt of the Brooks Range continues right out under the Chukchi.
“There are huge, simple anticlines out there that are as large or larger than anything onshore right along the same trend,” Craig said.
So, with the current high oil prices and the potential for a gas line from the Slope, is this the time to take another look at the Chukchi?
We are about to undertake another assessment as part of our five-year work program, Sherwood said. The new assessment will use a revised computer model and will take into account the economic impact of a North Slope gas line and the potential for using sub-sea technology.
But even with the existing assessment it’s fairly easy to see the economic issues. So maybe it’s just a matter of time before someone decides that the potential gain outweighs the risks of this challenging area.
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