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Vol. 10, No. 14 Week of April 03, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Shell dominates

Spends $44.4 million in $46.7 million Beaufort sale with 86 winning bids

Kristen Nelson

Petroleum News Editor-in-Chief

Shell has said for some time that it is interested in Alaska, and the company put its money on the table March 30 in Anchorage, spending more than $44.4 million on 86 winning bids in the Minerals Management Service’s Beaufort Sea oil and gas lease sale.

MMS garnered 121 bids totaling $46.7 million for some 618,751 acres, the largest sale the agency has had in Alaska outer continental shelf waters since 1988, when a North Aleutian sale brought in more than $95 million and a Chukchi Sea sale more than $478 million.

The most recent Beaufort Sea sale, in 2003, brought in $8.9 million for 34 tracts.

There were 64 active MMS Beaufort Sea leases before the sale and with 127 tracts taken in the 121 bids, Shell will hold more than half the total of 191 once the new leases are issued.

Armstrong Alaska had 20 winning bids totaling $1.24 million; ConocoPhillips Alaska had 13 winning bids for $1.1 million; North American Civil Recoveries Arbitrage Corp. had two winning bids for $1,750.

John Goll, MMS Alaska regional director said the agency was pleased with the sale results. “The Beaufort Sea contains the best near-term potential for offshore petroleum reserves on the Alaska outer continental shelf that can be vital to our nation’s and Alaska’s economy,” he said. (See related geology story on page 17 of this issue.)

Goll also said that while MMS was encouraged by the results of the sale, the agency “is sensitive to the concerns of the subsistence users and will ensure that exploration and development in the Arctic will not adversely impact their subsistence culture.” The agency developed seven lease stipulations designed to minimize environmental effects, including requirements for protection of biological resources, monitoring of bowhead whale, use of pipelines rather than tankers and booming for fuel transfers.

Shell sees potential

“I want to publicly welcome Shell back to Alaska,” said Alaska Gov. Frank Murkowski after the sale. The governor said the sale “demonstrates Alaska’s competitiveness. We are working hard on the state level to ensure that Alaska is no longer an afterthought in the minds of the oil industry.”

The governor said he was “pleased with the good work the (U.S.) Department of the Interior is doing to realize the oil and gas potential of both the National Petroleum Reserve and the Alaska outer continental shelf.”

Shell spokeswoman Kelly op de Weegh told Petroleum News after the sale the company has “been investigating returning to Alaska for some time and this lease sale has allowed us to build a new position there for Shell.” Shell dropped a small group of onshore North Slope leases last year, and op de Weegh told Petroleum News in October that “the potential of the area (south of Kuparuk) did not meet our investment criteria.” She said the company’s “decision to surrender what we consider to be a small, non-material leasehold does not affect our goal to continue evaluating investment opportunities in Alaska.”

In September op de Weegh said Shell had spent the past 18 months reviewing Alaska’s potential. Shell’s global exploration director, Matthias Bichsel, told Oil Daily in September that Shell sees Alaska, along with North Africa, the Russian Arctic and the global deepwater, as an area of key upstream potential.

“Globally we have a commitment to grow through exploration for new material oil and more integrated gas,” op de Weegh said after the sale. “And we certainly believe Alaska, because of its large resource potential, is a wonderful place to find oil and gas. As you know, we have been investigating returning to Alaska for some time and this lease sale has allowed us to build a new position there for Shell.”

Seismic to be discussed

Op de Weegh said that once MMS officially accepts the bids, probably in May, “we will move into an evaluation phase of the leases and that will begin a permitting process during which we will ask for information from stakeholders in the area.”

Shell will also discuss a Beaufort Sea 3-D seismic shoot with stakeholders in the area. She said “protecting the environment and local species, including marine mammals … is part of our overall commitment to sustainable development” around the world, and Shell “will work closely with local stakeholders and take their concerns into consideration with every development decision we make.

“Sustainable development is what we refer to as developing a project in a way that it does not negatively impact the people and environment near it. You want to leave an area in the same or better condition than what you found it. In Alaska that will involve working with stakeholders and understanding how our operations may or may not impact their environment and their livelihood.”

Joint venture possible

Op de Weegh said Shell would consider a joint venture partner to explore and develop its Beaufort Sea acreage. “We don’t have anything to announce in that regard yet,” she said. “We’re taking it one step at a time but it is a definite possibility.” In time Shell will also likely have a presence in Anchorage, she said, but no final decision on a local office has been made yet.

Shell is also interested in other areas of Alaska, she said.

Shell has visited the Bristol Bay basin area, she said, “so we’re definitely evaluating it.” There is, she noted, a moratorium on leasing in the Bristol Bay outer continental shelf. “We certainly support exploration leasing and developing on all public lands with appropriate regulations to ensure industry’s footprint is minimized.

“Any decision about the Bristol Bay basin will be guided by evaluation of the acreage (for geologic potential), what’s available for lease, the local stakeholders and if leasing and development can be done without significant impact on the environment of the region.”

What received bids

Shell had the top 10 bids and 11 bids of more than a million dollars per tract, paying more than $2,140 an acre for the tract at Hammerhead north of Point Thomson, at $12.2 million the highest bid in the sale.

Shell also picked up the tract north of the Arctic National Wildlife Refuge containing the Kuvlum well; in the central Beaufort area Armstrong Alaska picked up a track containing the Phoenix well.

Armstrong bid an average of $13.90 an acre for some 89,500 acres; ConocoPhillips bid an average of $16.61 an acre for some 66,235 acres; North American bid an average of $22.04 an acre for some 80 acres; and Shell bid an average of $95.91 an acre for approximately 462,600 acres.

ConocoPhillips bid in two areas: it had the farthest west bids, nine tracts north of the National Petroleum Reserve-Alaska; these tracts are the farthest from shore, some 60 miles, of any tracts receiving bids in this sale. ConocoPhillips has existing MMS leases closer to shore in this area, and EnCana has a large block of leases seaward of the existing ConocoPhillips leases.

The company also took tracts in the central Beaufort Sea area adjacent to a block of leases it owns in the Cross Island area north of Prudhoe Bay and Endicott.

Armstrong took acreage north and west of positions it holds in partnership with Pioneer Natural Resources at Oooguruk and with Kerr-McGee at Tuvaaq and Nikaitchuq, and a smaller block west of those exploration units near the mouth of the Colville River.

Shell took acreage in several blocks ranging eastward from north of the Armstrong acreage to offshore ANWR.

The largest block, some three dozen leases, arc across the top of Armstrong acreage to and continue across the top of central North Slope fields as far as the Cross Island area acreage picked up by ConocoPhillips.

Oil known as Kuvlum and Hammerhead

Shell’s two highest bids are in a group of eight leases which include the Hammerhead well off of Point Thomson. Twelve leases farther east include ARCO’s Kuvlum well.

The Kuvlum and Hammerhead leases were relinquished in 1999.

Kuvlum is in a remote location in deeper waters of the eastern Beaufort Sea, but was delineated by original owner ARCO Alaska and initially thought to contain more than 1 billion barrels of recoverable oil reserves, a scenario which didn’t pan out. ARCO gave up the leases to other companies, who eventually turned them back to MMS.

MMS’ official reserve estimate for Kuvlum ranges from 100 million to 300 million barrels, but Rance Wall, MMS Alaska regional supervisor of resource evaluation, told Petroleum News before the agency’s 2003 Beaufort Sea sale that the subsurface is so heavily faulted it will require additional drilling and 3-D seismic to figure out the field’s true potential.

“We just don’t know,” Wall said. “There are too many faults … and until you cross every one of those fault blocks there’s no good way to do it.” The resource could range from 50 million to 400 million barrels, he said.

Hammerhead, some 20 miles west of Kuvlum, was delineated with two exploration wells and would also require additional drilling. MMS estimates the field could hold 100 million to 200 million barrels of oil.

In the central portion of the sale area, Armstrong took a track which contains the Phoenix well, which MMS said encountered minor amounts of oil.

Shell: ANWR not the lure

Shell also took a large group of leases off the western edge of the Arctic National Wildlife Refuge, and two smaller groups off the eastern edge of ANWR.

Op de Weegh said the selection of these leases was not related to the recent vote in the U.S. Senate to open the 1002 area of ANWR to exploration. “Our leases north of ANWR were purchased solely on their merits alone without any regard for whether or not ANWR will open in the future. We have been looking at this area for awhile.”

—Kay Cashman contributed to this story.

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