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Vol. 20, No. 40 Week of October 04, 2015
Providing coverage of Alaska and northern Canada's oil and gas industry

End of the road

Shell finally calls a halt to its Alaska Arctic offshore oil exploration campaign


Petroleum News

After completing its Burger J well in the Chukchi Sea to a depth of 6,800 feet and failing to find any significant quantities of oil or gas, Shell is terminating its Chukchi Sea oil exploration program, the company announced late on the evening of Sept. 27, Alaska time. There were indications of oil and gas in the well but insufficient to warrant further exploration of the Burger prospect, the company said.

Shell says that, given the results of the drilling, the high costs associated with the Chukchi exploration and “the challenging and unpredictable federal regulatory environment in offshore Alaska,” the company is ceasing exploration activity in offshore Alaska for the foreseeable future.

“The Shell Alaska team has operated safely and exceptionally well in every aspect of this year's exploration program,” said Marvin Odum, director, Shell Upstream Americas. “Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the U.S. However, this is a clearly disappointing exploration outcome for this part of the basin.”

Shell says that it anticipates writing off the approximately $3 billion balance sheet value and $1.1 billion in future contractual commitments associated with its multiyear Alaska offshore exploration.

Shell spokeswoman Megan Baldino told Petroleum News on Sept. 29 that, with the decision over the company’s Alaska program having only just been announced, no decisions have yet been made regarding what will happen to Shell’s Alaska-based staff. The focus at the moment is on demobilizing the Chukchi Sea drilling fleet.

“Most people are remained really focused on that, to make sure everybody gets home safely. That is very, very important to us,” Baldino said.

Cost and uncertainty

Although the Shell decision has come as a shock to people in Alaska who have seen the company’s Chukchi Sea program as a building block for the long-term future of the state’s Arctic oil industry, the huge cost and a chain of delays in the program, along with a disappointing drilling result, have led to its undoing.

Shell, in common with other oil majors, is seeking regions of the world where new oil and gas resources may be found, to establish future sources of the hydrocarbon reserves that underpin the company’s value. The company had seen the Alaska Arctic offshore, especially the Chukchi Sea, as a strategic exploration play, given the estimated billions of barrels of oil likely to exist undiscovered in the world-class petroleum geology of the region.

And, given the many years that it would take to develop a Chukchi Sea oil field, the current low price of oil would not necessarily factor into a decision on Chukchi Sea exploration. Shell has recently stated that it uses a floor oil price of $70 per barrel when making strategic decisions about future exploration.

But, given the oil price situation and Shell’s current takeover of the BG Group, one of the world’s largest natural gas businesses, the company has been taking aggressive steps to cut capital costs. As part of that cost-cutting program the company has stated its intent to trim back its exploration program.

However, Ben van Beurden, who took over as Shell CEO in January 2014, continued to support Shell’s Chukchi Sea program, as a strategic play.

“In Alaska … we are planning to drill the Burger prospect in the Chukchi Sea in 2015 and ’16 to test what could be a multibillion-barrel oil field for Shell, with further exploration potential in the more general acreage that we hold there,” van Beurden said in August of this year.

In April, Simon Henry, Shell chief financial officer, told the Independent, a British newspaper, that Shell would vigorously pursue its Chukchi program if it finds large volumes of oil in the basin, but that the company could equally well leave the state if exploration fails to yield satisfactory results.

The Burger prospect

Shell had pinned its hopes on the Burger prospect, a huge 25-mile diameter geologic structure about 50 miles offshore the town of Barrow. The discovery of a major oil pool would be needed to justify the huge cost of developing a Chukchi Sea oil field.

A well drilled into the Burger structure and completed by Shell in 1990 during an earlier Chukchi Sea exploration era had found traces of oil and a major natural gas pool, estimated to contain some 14 trillion cubic feet of gas. Intrigued by the possibility of finding a massive oil rim under the gas, Shell conducted a 3-D seismic survey over the prospect as a lead in to its recent exploration efforts. The company became convinced that a major oil find was indeed possible and proceeded along the exploration drilling path that has now come to naught.

Several cost factors

Apart from a disappointing drilling result, the high costs that have factored into Shell’s decision to pull out of the Chukchi result from a combination of the remoteness of the region, a lack of support infrastructure, a difficult regulatory environment, legal challenges and a short annual drilling season. Shell has had to set up its own logistical support arrangements, including the shipment of supplies to its offshore fleet and the transportation of personnel to and from its offshore operations. The company assembled its own oil spill response fleet, including the deployment of new technologies such as a well capping stack and an oil spill containment dome.

Compounding the short drilling season has been a series of delays to Shell’s planned drilling since the company acquired its Chukchi Sea leases in a 2008 lease sale. Those delays have resulted from various factors including litigation by environmental organizations adamantly opposed to Arctic offshore oil exploration. There was regulatory fallout from the Deepwater Horizon disaster in the Gulf of Mexico. The repercussions of problems associated with Shell’s efforts to drill in both the Chukchi and Beaufort Sea in 2012, including the grounding of the floating drilling platform, the Kulluk, also delayed progress.

Regulatory issues

Stringent and changing government regulations for oil drilling on the Arctic outer continental shelf add to the cost and difficulty of exploration in the region. One particular bone of regulatory contention is a requirement that an oil company have a second drilling rig available for the drilling of a relief well, should a well blowout incapacitate the primary rig involved in the drilling operation. Regulations also require the allocation of sufficient time at the end of a drilling season to allow the drilling of a relief well before the encroachment of sea ice precludes further drilling operations.

These relief well regulations both increase the cost of the drilling and shorten the already brief open water drilling season. Shell and others have argued that the drilling of a relief well does not, in itself, provide an immediate means of sealing an out of control well, and that modern well capping technologies coupled with improved well integrity management provide more effective means of mitigating well blowout risks.

A further regulatory issue is a prohibition by the U.S. Fish and Wildlife Service of the concurrent drilling of exploration wells less than 15 miles apart in the Chukchi Sea. This prohibition, designed to minimize the disturbance to walruses that inhabit the region, presumably makes it impossible to simultaneously drill more than one exploration well is a single Chukchi Sea oil prospect. In combination, the relief well requirements, the simultaneous drilling limitations and the fact that the summer open-water drilling season in the Chukchi is already fairly short, mean that the exploration for and delineation of a Chukchi oil field would be a multiyear proposition involving the use of two Arctic-capable drilling vessels.

Alaska officials respond

Members of the Alaska congressional delegation, all Republicans, have particularly homed in on regulatory issues in their responses to Shell’s Chukchi Sea decision.

“In the more than seven years that Shell has held leases in the Chukchi, it has only recently been allowed to complete a single well,” said Sen. Lisa Murkowski. “What we have here is a case in which a company’s commercial efforts could not overcome a burdensome and often contradictory regulatory environment. The Interior Department has made no effort to extend lease terms, as recommended by the National Petroleum Council. Instead, Interior placed significant limits on this season’s activities, which resulted in a drilling rig sitting idle, and is widely expected to issue additional regulations in the coming weeks that will make it even harder to drill.”

“Make no mistake, this decision is the result of the administration’s narrow-minded approach to responsible resource development - putting large areas off limits, while building insurmountable new hurdles to use areas that have been leased,” said Congressman Don Young. “This regulatory uncertainty, damaging to the many Alaskans who depend upon responsible development, plays a significant role in Shell’s departure.”

Gov. Bill Walker said that he had felt optimistic about Shell’s Chukchi Sea program and was disappointed by the company’s decision to pull out. He said he had contacted the White House to set up meetings to discuss the potential impact of Shell’s decision and the need to explore for oil in the coastal plain of the Arctic National Wildlife Refuge.

“I thank the people of Shell for all their hard work on offshore exploration and their strong focus on safety,” Walker said. “While the company’s recent announcement is disappointing, it is a reminder that underscores the need for Alaska to drive its own destiny through development of known gas resources, as well as rich oil reserves in a small area of ANWR.”

In 2014 Arctic Slope Regional Corp, the Native regional corporation for the North Slope, and several North Slope village corporations formed a joint venture with Shell for the oil company’s Chukchi Sea exploration.

“At a time when Alaska is confronting a fiscal crisis, the news from Shell is deeply disappointing,” said Rex Rock Sr., CEO of ASRC, in response to Shell’s announcement. “This is a major blow for Alaska, and leaves into question the viability of our state’s economy. Closer to home on the North Slope, we are looking for solutions on how we continue to sustain our local economies to support our communities.”

Environmentalists celebrate

Environmental organizations, on the other hand, have expressed jubilation that Shell’s Arctic venture has come to an end.

“This is a victory for everyone who has stood up for the Arctic,” said Greenpeace USA Executive Director Annie Leonard. “Whether they took to kayaks or canoes, rappelled from bridges, or spread the news in their own communities, millions of people around the world have taken action against Arctic drilling. Today they have made history.”

“The future of the Arctic Ocean just got a little bit brighter,” said Susan Murray, Oceana’s deputy vice president for the Pacific. “With this pipe dream ended, we can now stop arguing about Shell and focus on moving forward. As President Obama saw first-hand, there are many challenges in the Arctic region, and we can use this opportunity to address changing climate and the need to protect and conserve important ocean resources.”

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