Success in Alaska could pave way for the Yukon

Mark Prins Special to the News Shell Oil PLC has returned to Alaska after abandoning and selling its lease holdings in the early 1990s.

Shell Oil PLC has returned to Alaska after abandoning and selling its lease holdings in the early 1990s.

The US federal Minerals Management Service has received the application from Shell Oil to drill two wells in the Chukchi Sea on leases purchased in 2005 and 2007.

Another application for a single well in the Chukchi Sea has also been submitted.

Shell Oil was part the team of companies that drilled in the Chukchi Sea in the previous decades. The Camden Bay area is located in eastern Alaska close to the Yukon/Alaska boarder.

Shell Oil has kept its drill platform at Herschel Island while refurbishing it for work in Camden Bay. When the US courts struck down Shell’s previous permits, the company revised its plan and has now submitted a modified proposal.

Back in the Prudhoe Bay area, British Petroleum Exploration (BPX) on the Liberty offshore block has commissioned the largest directional drill rig in the world to access this oil reservoir. Alaska declined BPX’s first application to place an offshore platform at Liberty so, after two years of engineering, BPX came up with a plan to directional drill the 10 to 15 kilometres offshore into the reservoir.

In the North Sea offshore, BPX has pioneered drilling technologies now used to extend production in once unreachable oil reservoirs. Liberty is the largest discovered untapped sweet crude pool in the Prudhoe Bay complex.

The Liberty was the first offshore oil well in the Arctic to be drilled from an engineered ice island. This method reduced costs and permitting requirements while reducing environmental impacts. As a production oil pool, the onshore drilling from Endicott negates many issues raised by offshore oil production. No sub-sea pipelines or new offshore platforms to build and permit.

Alaska accepted the production plan and the drill rig was commissioned by BPX and began to mobilize north during the 2009 sealift.

The rig is the largest directional drilling system in current use.

The unstated importance of this is that Alaska demanded more from the oil company and it complied.

It took 15 years to bring the Liberty into production; technology had to catch up with the discovery of the resources. This is also indicative of the time it will take to bring more of the offshore oil pools online to the current oil infrastructure.

Shell Oil’s current investment focus in Alaska is the offshore basins. Shell continues to purchase lease areas on the north coast of Alaska and in the salmon-rich fishery of Bristol Bay. That fishery is under double threat through the proposed Pebble mine in the headwaters of all the Bristol Bay’s spawning beds. At the same time the moratorium on drilling in the Bay has been lifted.

For the 2010 drilling season, Shell will employ the ice-reinforced drillship MV Frontier Discoverer. The drillship will be serviced with six ships, including an icebreaker and an anchor handler. The ship will be serviced from West Dock part of the Prudhoe Bay complex. Crew change will be conducted by helicopter.

The MV Frontier Discoverer was built in 1967 and converted to a drillship in 1976. Her last dry docking was in 2007.

Currently she is equipped for drilling in water depths of 330 metres and her derrick can reach a depth of 6,096 metres. Shell is installing scrubbers to clean the exhausts from the ship and drill rig engines in accordance with current US Environmental Protection Agency standards.

Planned drilling will start at the Torpedo H, 36 kilometres offshore and then move to the Sivulliq N, 25 kilometres offshore.

Ice conditions will dictate which well is spudded in first. Current plans calls for the drillship to transit the Chukchi Sea around July 1st with the ship setting up on location on July 10th. Operations will be suspended in the fall during the Kaktovik and Nuiqsut subsistence whale hunts. Drilling will resume until the end of October or when the ice becomes too dangerous for safe operation.

Oil spill response is a major part of Shell’s application process. Onsite will be a liquids receiving barge and a specific oil-spill response vessel. The main issue is that there is no spill-response plan for ice-choked water.

The track record for the oil industry in Alaska is very poor, with hundreds of spills a year on the production areas of Alaska’s North Slope oil patch. The Exxon Valdez disaster is still impacting Prince William Sound and oil is easily found all through the region.

Part of a Minerals Management Service application is a worst-case scenario model. Shell’s modeling has a blowout reaching Barrow, AK, in 19 days. As of writing, the blowout in the East Timor Basin off Australia has reached more than 70 days, and, after five failures, containment was finally accomplished on November 4th. It is now considered the largest oil spill in industrial history. It took more than 21 days to get a second rig to this spill to attempt to stem the disaster.

Is there even another drillship available should the worst case scenario happen in the North?

As of October 25, the Minerals Management Service has approved Shell’s permit dependent on all other permits issued by US and state regulatory agencies. There is opposition to the plan to explore Alaska’s Continental Shelf with President Obama receiving many recommendations to decline offshore drilling.

Shell has attempted to keep in contact with the North Slope communities through direct mailings and community meetings. It also spent sponsorship dollars throughout the communities supporting local events. The local demands for marine communications enabled communities to have local liaison to let people know where the support vessels were operating.

In Canada, the Beaufort Sea has seen some extensive lease purchasing in the last few years. Companies have been running 2-D and 3-D seismic programs in the Beaufort. Not quite the boom times of the late ‘70s and early ‘80s but there is a lot of real estate being purchased and held. Work schedules for the 2010 and 2011 season are scheduled to be busy in the Beaufort.

Yet in May, MGM Energy decided to decline further drilling in the Mackenzie Delta after deciding there were better areas to invest their exploration dollars. Currently in Canada’s western Arctic there are two rigs, neither is operating.

Royalty regimes relating to oil and gas offshore have not been settled in the Yukon yet. So far, Ottawa has declined to devolve these resources with the Yukon. Onshore resources are defined with their regimes in the Yukon Act. Currently there’s no production on the Yukon’s North Slope, so there isn’t a lot of incentive to bring the federal government to the resource sharing table.

The Yukon’s offshore oil and gas resources have been staked with at least a third of the offshore currently under lease.

There are a number of significant discovery licences granted in the Yukon’s offshore, though currently there is no way to get these hydrocarbons to markets. There were no expressions of interest for the Canadian side in the Beaufort Sea in January.

Technological advances in the gas industry have allowed the development of once inaccessible gas fields to begin production. Many of these fields are right next to energy markets. These fields use current gas infrastructure to deliver new gas to the markets.

These shale gas plays produce a better rate of return to the gas company, eliminating the need to invest in a multibillion-dollar pipelines, be it the Alaska version or the one in the Mackenzie Valley.

Ottawa has yet to agree to any fiscal support for the Mackenzie Valley pipeline and the environmental report has taken more than four years to complete. The report is due for public release in December 2009.

If Shell is able to define more oil in Camden Bay, the market will expect to see further development in that area.

The Prudhoe Bay pipeline infrastructure continues to extend east and west from the Trans Alaska Pipeline delivery system.

Shell has taken the long-term view by exploring for oil where there currently is no infrastructure to deliver the oil to market. The Liberty project demonstrated a long-term vision to continue building offshore oil reserves.

All this is happening within 50 kilometres of the Yukon/Alaska boundary.

If oil was found in the offshore Yukon, under the current rules the Yukon would receive nothing.

It may be another generation, or two before the Yukon’s offshore lands begins to produce hydrocarbons.

If Shell has a successful season in 2010, expect an increase in offshore drilling and lease sales in this area.

The next lease sale in Alaska will happen in January of 2010.

Expect to see a strong interest in bidding for those leases.

Mark Prins is a Whitehorse-based freelance writer.

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