Providing coverage of Alaska and northern Canada's oil and gas industry
May 2023

Vol. 28, No.22 Week of May 28, 2023

No forcing Shell

Narwhal's request to compel major to combine leasehold in Harrison Bay denied

Kay Cashman

Petroleum News

On Dec. 20 Anchorage-based Narwhal LLC asked the Alaska Department of Natural Resources' Division of Oil and Gas to expand Shell Offshore Inc.'s West Harrison Bay unit to include Narwhal's leases. On May 23, Division Director Derek Nottingham denied that request in a written decision.

The West Harrison Bay unit encompasses roughly 81,131 acres offshore of Alaska's North Slope; approximately 7 miles north of ConocoPhillips' Bear Tooth unit in the National Petroleum Reserve-Alaska where the Willow project is located. 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 has no direct interest in the West Harrison Bay unit, or WHBU, 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 WHBU is unnecessary, Nottingham said in his decision.

Shell agreed.

On April 6, Shell International Exploration & Production, parent of Shell Offshore, WHBU operator and 100% working interest owner of the unit's leases, emailed comments to the division about Narwhal's proposed expansion. "Shell's topics of concern," Nottingham summarized, "related to Narwhal's technical data, State of Alaska regulatory criteria, and the Division's statutory scheme regarding unit expansion."

More specifically, in Nottingham's words, Shell commented 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 WHBU;

"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;

"Narwhal's application is untimely; and

"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."

Alaska law and WHBU Agreement

Alaska law provides that lessees and their representatives "may unite with each other, or jointly or separately with others in adopting or operating under a cooperative or a unit plan of development or operation of the pool, field, or like area, or part of it, when determined and certified by the commissioner to be necessary or advisable in the public interest," Nottingham wrote. (The commissioner refers to the DNR commissioner, who previously authorized the division director to rule in these matters.)

Further, 11 AAC 83.303(a) provides in pertinent part that the commissioner will approve a proposed unit agreement for state oil and gas leases if he makes a written finding that the agreement "is necessary or advisable to protect the public interest considering the provisions of AS 38.05.180(p) and this section."

In this case, Nottingham wrote, Narwhal alone seeks expansion of Shell's WHBU. Both the applicable statute and regulation, however, through use of the words "may unite," and "cooperative" evince the existence of a relationship between parties. As indicated previously, Shell declined all of Narwhal's multiple commercial offers. Further, he wrote, the WHBU Agreement must be considered.

The WHBU Agreement is a contract between the state of Alaska via the division and the lessee Shell Offshore. "Narwhal neither is a party to the WHBU Agreement nor possesses any working interest ownership in the WHBU leases," Nottingham wrote.

Narwhal's having no direct interest in the WHBU alone would oblige the division to deny Narwhal's application, he said.

"A plain reading" of state law "supports the view that Shell and the Director, exclusively, have the discretion to apply for unit expansion," Nottingham wrote.

No compelling reason

"A unit must encompass the minimum area required to include all or part of one or more oil or gas reservoirs, or all or part of one or more potential hydrocarbon accumulations. 11 AAC 83.356(a). Narwhal has submitted confidential geological, geophysical, and engineering data in support of its application for unit expansion," Nottingham wrote.

The division, "upon careful consideration of AS 38.05.180(p) and 11 AAC 83.303, concludes that approval of the application is unnecessary and inadvisable to protect the public interest."

First, he wrote, Narwhal has no direct interest in the WHBU, its exploration and development, or any lack thereof.

Second, Nottingham said, Narwhal has not demonstrated that there exists one or more oil or gas reservoirs.

Finally, any existence of potential hydrocarbon accumulations (PHAs) within the area of Narwhal's leases does not necessitate compelled expansion of the WHBU as the activities proposed by Narwhal in its plan of exploration may be conducted on its own leases on a lease-by-lease basis regardless of whether there may be one or more PHAs that extend across the current WHBU boundaries into the Narwhal leases.

Lightly explored

In regard to exploration, Nottingham noted that the "WHBU area remains lightly explored after initial efforts in the 1970's and 1980's. Exploration activity is much higher onshore to the south of the WHBU. No wells have been drilled in the WHBU acreage or the proposed unit expansion acreage."

Both Shell and Narwhal have said they see Brookian potential in their West Harrison Bay leasehold.

The Nanushuk formation of the Brookian across the North Slope has had a high percentage of successful discoveries and development.

"The Pikka and Willow discoveries are both proceeding to development. Within the Colville River unit, the Qannik sandstone is also being developed. Exploration of the Nanushuk continues. The Torok formation also has had successful discoveries on the North Slope. The Colville River unit Nanuq-Nanuq participating area and the Oooguruk unit Torok participating areas produce from the Torok formation," Nottingham wrote.

In conclusion, "Narwhal has not demonstrated that there exists one or more oil or gas reservoirs in the WHBU area," he said.

More importantly, Narwhal has not demonstrated that there exists one or more oil or gas reservoirs as defined in 11 AAC 83.395(6) extending across the current WHBU boundaries into Narwhal's leases.

None of the activities proposed by Narwhal require unit expansion either to efficiently recover oil and gas or minimize adverse impacts, he said.

Unit expansion also would not promote the conservation of other natural resources, because the proposed plan of exploration involving Narwhal leases will not lead to a more efficient use of gravel, water, and other natural resources than would the same activities conducted on a lease-by-lease basis, Nottingham noted

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