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Alaska's oil production future, while typically described as rapidly declining by many in industry, could receive a substantial kick in the pants from planned and potential offshore developments in the Arctic.
Ranging from a substantial, multiwell exploration program in the Sivulliq offshore prospect planned this year by Shell, to Pioneer's construction of its near-shore Oooguruk project, to continued advancement of BP's Liberty project--all are active offshore projects contributing to advancement of Alaska's offshore potential.
Other offshore exploration prospects include Eni's Tuvaaq and the Kerr-McGee-Eni partnership on Nikaitchuq, both located north of the Kuparuk field.
Current North Slope production from offshore fields includes BP's Endicott and its satellites, Milne Point, Point McIntyre, Niakuk and Northstar, the first Arctic offshore oilfield connected to shore only by a 6-mile pipeline.
"A lot of people are looking at the decline on TAPS and timing out the replacement of production volumes from onshore (development)," said Rick Fox, Shell's asset manager for Alaska. "I think the thing that really helps TAPS is offshore, in particular Beaufort Sea oil and gas."
The recent increased activity in the Arctic offshore projects, while already contributing a substantial amount of work and economic impact to Alaska's North Slope oil and gas industry, could be the tip of the iceberg, if access and environmental concerns can be resolved.
Geological estimates by the U.S. Minerals Management Service for the offshore swath ranging from 3 miles from shoreline out to about 200 nautical miles from shore, place the oil and gas potential as substantial.
According to the 2006 assessment for the Alaska's offshore Outer Continental Shelf, the Arctic subregion that includes the Beaufort Shelf, the Chukchi Shelf and the Hope Basin contains an estimated range of 6 billion to 53 billion barrels of undiscovered, technically recoverable oil, and 27.8 trillion to 247 trillion cubic feet of gas.
Technology and market prices currently support efforts to tap Alaska's offshore natural resources. Environmental objections remain the main force in curtailing advancement in Alaska's developing offshore oil and gas industry, evidenced by Shell's failed attempt to conduct a substantial exploration drilling program in the Beaufort this fall.
MULTI-YEAR EXPLORATION PROGRAM ADVANCED BY SHELL
Shell's planned two to three well-drilling program for its Sivulliq prospect, located about 14 miles offshore in 98 feet of water, was scuttled this year, due to objections from local government, whalers and environmental groups who appealed the company's federally approved exploration permits.
Whether the company will be allowed to resume its work and start drilling on Sivulliq next year now lies in the hands of the 9th Circuit Court of Appeals in San Francisco. Lost in the public debate about Sivulliq exploration is the fact that Shell planned to target a previously drilled, known oil accumulation called Hammerhead.
"In 1985 we drilled and tested Hammerhead. It was a good summer. We produced oil in the tests," said Fox, in a late October interview. He was in the field during that work in the 1980s, working as a drilling foreman on the exploration crew.
"If we had been able to operate this year, with the two to three wells planned, we think we would have had enough information to start moving toward development on Sivulliq," Fox said. "We needed a couple more wells ... we'd be a on a totally different tract with Sivulliq."
Although the previous drilling was successful in identifying oil accumulations, Fox said the prospect wasn't developed in the 1980s, due to the technology available then and the oil market prices at that time. "There were a lot of other, less expensive places to work," he added.
Shell's geological estimates for Sivulliq's potential oil reserves remain confidential, although Fox referred to MMS estimates for the region. "They have more information than we can release," he said. "Clearly, we think it meets enough volume to spend this kind of money."
Shell's spending in 2007 was substantial, despite the company's inability to drill. Shell employed more than 700 workers at one time, spending "hundreds of millions of dollars" on this year's program, Fox said, which included revamping and mobilizing drill rigs and a related fleet of support vessels, conducting a site-clearance study for the targeted drill locations, completing three-dimensional seismic surveys in both the Beaufort and the Chukchi Seas and working on several environmental research and monitoring programs.
In the company's third-quarter report released in late October, Shell wrote off $77 million in exploration costs for its Alaska program.
"We did not get all we wanted, value-wise, for the money spent, although the money spent fixing the rigs up and training people and the seismic was worthwhile," Fox said. "Shell spends $2 billion a year on exploration worldwide, so in perspective, Alaska is an important play for us. We're early in the life of a multiyear program. We're disappointed that we couldn't drill ... we absolutely want to get it right and will continue to work in that direction."
One of the drill rigs, the Shell-owned Kulluk, was revamped for this year's planned exploration season and has been parked in Canadian waters for the winter. The Discoverer, another Arctic ice-class drilling rig, is going back to work for Shell in Australia for the next few months, a logistical move previously scheduled before Shell's planned drilling in the Arctic was scuttled.
"All this equipment needs to work. If we don't see confidence in being able to work here, we have to put it where it can bring oil and gas to the surface," Fox said. "The truth is, people and equipment needed to find oil and gas and produce it are hard to come by. They've got to go where they can work."
The real question, he added, is whether the Discoverer will come back to Alaska next summer. That hinges on whether access issues can be resolved with the North Slope Borough, local whalers and environmental groups, which appealed Shell's authorization to drill this summer.
"We have to compete year-to-year for investment dollars ... it's tough at these oil prices not to be able to move forward," Fox said. "We have to have more confidence in our ability to get out there, to drill and operate."
One concern is that the 9th Circuit could require federal regulators an environmental impact statement for Shell's proposed exploration project, an in-depth review that typically takes about two years to complete. Minerals Management Service already completed an EIS to consider potential environmental effects of exploration, development and production prior to the three lease sales in the Beaufort Sea held from 2002 to 2007.
"It's so rare to require an EIS for exploration--it would set a precedent that could affect all exploration in the United States," Fox said. "Frankly, most people could not afford to do exploration if held to (completing) an environmental impact statement."
The environmental objections and resulting delays have not yet deterred Shell from its Alaska offshore program. "Shell is absolutely committed to a multi-year exploration term. We see Alaska as a heartland, an area that we have an opportunity to invest in long-term," Fox said.
In its exploration plan submitted to federal lease managers, Shell outlined a six-year program that envisioned drilling two to three wells each year. Most of the planned wells would target the Sivulliq prospect that lies due north of Flaxman Island on the western side of Camden Bay, with other wells planned in the Olympia prospect, located on the east side of Camden Bay about 7 miles northwest of Barter Island near Kaktovik.
"If we can get through a successful exploration program, the long-term life of the project has lots of value for the state," Fox said. "Exploration, as dramatic (of spending) as it is, it's not the big spend area. Building to produce in the Beaufort Sea will be much bigger."
The best case scenario for production from Sivulliq, had exploration wells been drilled in 2007, was 2015, Fox said. Now, that's been delayed, indefinitely due to the pending court review. "If you delay OCS (development), it's something Shell could withstand, but it's not best for everyone," Fox said.
PIONEER FIRST INDEPENDENT PRODUCER ON THE NORTH SLOPE
Another Arctic offshore project, one that has not been delayed, is Oooguruk, being developed by operator Pioneer Natural Resources Co. When oil begins to flow from the project next year, Pioneer will achieve several significant goals, according to Tadd Owens, director of government and public affairs.
"It's a precedent-setting project for the company and for the state. It's the largest capital project in Pioneer's history, and Pioneer is poised to be the first independent operator on the North Slope," Owens said.
Pioneer has been negotiating with current North Slope producers in the Kuparuk River unit on a facility-sharing agreement for Oooguruk's production. As of late October, that agreement was not yet finalized, Owens said. The current version does not provide for transportation of sales quality oil beyond Kuparuk, he said. "Pioneer will nominate its oil on the Kuparuk pipeline to Pump Station 1 and possibly beyond," Owens said.
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Negotiations with existing producers have been lengthy, as the final agreement will "likely be a model for future third-party production agreements," Owens said. "It's a fairly complicated agreement being negotiated as a precedent-setting agreement."
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