Where Did Shell Go Wrong in the Arctic?

With Shell abandoning its exploration plans in the Chukchi Sea in September and Statoil following suit in November, many might believe that the North Slope Basin off the northern coast of Alaska has been condemned.

Yet those who have put decades into studying the geology of Alaska’s North Slope and Outer Continental Shelf believe the opposite.

The Bureau of Ocean Energy Management estimates that in terms of undiscovered, technically recoverable conventional resources, the Chukchi Sea contains a mean of 15.4 billion barrels of oil and a mean of 76.8 trillion cubic feet (Tcf) of gas.

And, finding those resources may very well boil down to understanding a geological phenomenon that might have offset past exploration programs in the region.

“The story in the Chukchi is highly compelling, but it’s hard to get anyone to talk about it,” explained David Houseknecht, AAPG member and senior research geologist, and project chief for the Energy Resources Program in Alaska for the U.S. Geological Survey (USGS).

“If you just read the pop literature about Shell and Statoil pulling out, you might think the offshore Arctic has been condemned,” he said. “But in my mind, nothing could be further from the truth.”

Why Shell Left

There are many theories about why Shell scrapped its plans for exploration in the Chukchi Sea after its Burger J well, drilled roughly 80 miles offshore the western end of Alaska’s North Slope, didn’t deliver.

Marvin Odum, director of Shell Upstream Americas, gave only the barest explanation in a press statement last year: “Shell will now cease further exploration activity in offshore Alaska for the foreseeable future. This decision reflects both the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska.”

According to AAPG member Mark Myers, commissioner of Alaska’s Department of Natural Resources (DNR), Shell’s Burger J well – located in the 25-mile diameter Burger structure – was located in a tremendous geological prospect, but it appears it was not associated with an oil leg.

Shell explained that its findings were “not sufficient to warrant further exploration,” as reported in The New York Times.

Some Alaska geologists say Shell ran out of patience. Others say the current price of oil could not sustain its exploration program. Others point toward the federal government’s stringent drilling requirements – the mandate for a second rig to be on site for a relief well – being the most costly.

While no one can speak for Shell besides Shell, Houseknecht, who has studied Alaska’s faults and folds for decades, can speak for the lay of the land – at least his interpretation of it. He believes that, had Shell aligned its exploration plans with a certain geological hypothesis, which purports that a tremendous amount of gas from the foothills of the Brooks Range displaced oil accumulations in the Burger structure, it might have struck oil by drilling farther west.

A Well-Placed Well

In the eyes of Myers, Shell drilled in a location that met the geological checklist for oil. The Burger structure boasts a good source rock, an oil and gas charge and a solid reservoir rock with a seal and a large gas cap estimated at a mean of 14 Tfc in a 2004 U.S. Bureau of Ocean Energy Management’s Minerals Management Service report.

“I believe Shell’s goal was to move downdip of the gas cap to see if there was an oil leg,” Myers said. “But based on their statements, they didn’t.”

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With Shell abandoning its exploration plans in the Chukchi Sea in September and Statoil following suit in November, many might believe that the North Slope Basin off the northern coast of Alaska has been condemned.

Yet those who have put decades into studying the geology of Alaska’s North Slope and Outer Continental Shelf believe the opposite.

The Bureau of Ocean Energy Management estimates that in terms of undiscovered, technically recoverable conventional resources, the Chukchi Sea contains a mean of 15.4 billion barrels of oil and a mean of 76.8 trillion cubic feet (Tcf) of gas.

And, finding those resources may very well boil down to understanding a geological phenomenon that might have offset past exploration programs in the region.

“The story in the Chukchi is highly compelling, but it’s hard to get anyone to talk about it,” explained David Houseknecht, AAPG member and senior research geologist, and project chief for the Energy Resources Program in Alaska for the U.S. Geological Survey (USGS).

“If you just read the pop literature about Shell and Statoil pulling out, you might think the offshore Arctic has been condemned,” he said. “But in my mind, nothing could be further from the truth.”

Why Shell Left

There are many theories about why Shell scrapped its plans for exploration in the Chukchi Sea after its Burger J well, drilled roughly 80 miles offshore the western end of Alaska’s North Slope, didn’t deliver.

Marvin Odum, director of Shell Upstream Americas, gave only the barest explanation in a press statement last year: “Shell will now cease further exploration activity in offshore Alaska for the foreseeable future. This decision reflects both the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska.”

According to AAPG member Mark Myers, commissioner of Alaska’s Department of Natural Resources (DNR), Shell’s Burger J well – located in the 25-mile diameter Burger structure – was located in a tremendous geological prospect, but it appears it was not associated with an oil leg.

Shell explained that its findings were “not sufficient to warrant further exploration,” as reported in The New York Times.

Some Alaska geologists say Shell ran out of patience. Others say the current price of oil could not sustain its exploration program. Others point toward the federal government’s stringent drilling requirements – the mandate for a second rig to be on site for a relief well – being the most costly.

While no one can speak for Shell besides Shell, Houseknecht, who has studied Alaska’s faults and folds for decades, can speak for the lay of the land – at least his interpretation of it. He believes that, had Shell aligned its exploration plans with a certain geological hypothesis, which purports that a tremendous amount of gas from the foothills of the Brooks Range displaced oil accumulations in the Burger structure, it might have struck oil by drilling farther west.

A Well-Placed Well

In the eyes of Myers, Shell drilled in a location that met the geological checklist for oil. The Burger structure boasts a good source rock, an oil and gas charge and a solid reservoir rock with a seal and a large gas cap estimated at a mean of 14 Tfc in a 2004 U.S. Bureau of Ocean Energy Management’s Minerals Management Service report.

“I believe Shell’s goal was to move downdip of the gas cap to see if there was an oil leg,” Myers said. “But based on their statements, they didn’t.”

While it is common to drill near known accumulations of gas, the complex geologic history of the North Slope and offshore Alaska can turn that strategy into a bust.

On a map, Houseknecht pointed to the world-renowned Alpine field, which was discovered in 1994 in the Colville River Delta.

“It remains the largest onshore accumulation discovered in the last 30 years in the United States, and it is almost certain to produce more than 1 billion barrels of oil during its lifetime,” he said.

Yet, to the west, within just 30 miles of the Alpine field, is the Hunter well – drilled by ConocoPhillips in the early 2000s – which surprisingly produced only gas.

“Everyone knew from seismic and other data that the same geology of the Alpine Field extends westward into NPRA (National Petroleum Reserve, Alaska). But over an astoundingly short distance, mostly gas was found,” Houseknecht said.

Following the map westward, Houseknecht pointed to a cluster of gas wells in NPRA at the Walakpa Gas Field, which was discovered by the federal government in 1980. An adjacent well, the Intrepid, was drilled downdip from the gas field by ConocoPhillips in 2007 – presumably to test for presence of an oil leg, Houseknecht said. While the geology in NPRA more than hinted that an oil leg might be present, the Intrepid found no oil and was abandoned.

A study of gas geochemistry published by the USGS in 2003 found that the Walakpa gas field contains the most thermally mature gas on the North Slope based on carbon isotope data, suggesting that the gas migrated from deeper and hotter parts of the basin.

“My interpretation is that most of northern NPRA and the area west of it, which includes the offshore Burger structure, have been affected by a large amount of gas that flooded this region and displaced the oil that had accumulated there,” Houseknecht said.

Specifically, an abundance of gas produced during the Cretaceous Period by deep burial beneath the foothills of the Brooks Range simply flushed northward and displaced oil “that we know had been reservoired in a number of structures in NPRA and is no longer present,” he said.

Oil seeps near the northern coast of NPRA lend strong evidence to this hypothesis.

Where Did the Oil Go?

Taking one of the golden rules of geology – to drill where large gas accumulations are known to exist – Houseknecht is replacing it with a phrase from Manifest Destiny: “Go west, young man.”

While the Burger structure looks as promising as areas in NPRA, its oil likely has been flushed from the structure. In contrast, structures farther west – on the west side of the Hanna Trough rift basin – likely did not experience the same gas flush. Cretaceous and Cenozoic strata there are thinner, so it is unlikely source rocks were buried as deep – or heated as hot – as those onshore. In other words, had Shell drilled west of the Burger structure, it might have had better luck.

Geologists who have spent their careers in Alaska agree that Houseknecht’s hypothesis is viable.

“During the Tertiary Period, the North Slope tilted and as a result, some oil accumulations spilled toward the west,” explained AAPG member Richard Garrard, former exploration manager for Conoco-Phillips and exploration director for NordAq Energy, an Alaskan oil and gas company.

“A sweep in the basin will move oil to the periphery of a basin,” he said. “And, there are some very large structural, stratigraphic and combination trapping opportunities on that basin’s margins.”

“Based on the results of Shell’s exploratory drilling, one concept to look at for future oil accumulations would be using the displaced oil migration theory and looking for traps along a potential migration fairway that is regionally updip of the Burger well location,” added Steve Wright, an AAPG member and a consulting geologist with Alaska Geosciences Unlimited.

“The Hanna Shoal is closer to a source of sands that provide a better opportunity for reservoir development,” said April Parsons, AAPG member, former geologist for Statoil and senior exploration geologist with Cobalt International. “You’ve got to go west to avoid displacement from the tilting as well as erosion of the reservoirs,” she said. “However, based on 3-D seismic data I’ve seen from acreage held by Statoil and Shell, there are pretty good chances of hydrocarbons being discovered, and the west is not the only place with potential.

“The challenge is, there has clearly been multiple episodes of movement with tilting in different directions over time making it much more complex tectonically than the North Slope,” Parsons added.

Unable to discuss proprietary information, Parsons – echoing the words of virtually every Alaskan explorer – said that more exploration must be done to unlock the door to the elusive Chukchi Sea.

“We all know the full puzzle is under there,” said AAPG member Bob Swenson, retired deputy commissioner of the Alaska DNR and former state geologist for the Alaska Division of Geological and Geophysical Surveys. “Nature put the pieces together. We need to find where she did it.”

Well of Knowledge

Since the withdrawal of Shell and Statoil from the Chukchi Sea, negative vibes have been rippling through the industry and chipping away confidence in its potential.

“My company is in the process of raising capital for exploration programs and these things reverberate around the financial communities,” Garrard said. “This is not the end of Alaska by any means.”

“None of us want to see Alaska offshore condemned based on the results of a few wells,” added Wright, referring to the Burger J well and the disastrous Mukluk well drilled by BP in the Beaufort Sea in 1982 – known for being one of the costliest dry holes in history.

But the bottom line is that for every well drilled, the industry gains more knowledge, which locks in a new piece to the Chukchi puzzle.

“We learn by drilling,” Myers said. “You have to test, and there is not sufficient testing in that basin yet.”

Compared to the Lower 48, the North Slope Basin is highly underexplored – even more so offshore. If one were able to move the Chukchi Sea or offshore NPRA to the Lower 48, “there would be so many exploration wells it would be astounding,” Swenson said, explaining that drilling costs and access to infrastructure are substantially lower in the contiguous United States.

So, in the game of exploration in Alaska, no well is really drilled in the wrong place, in Swenson’s eyes, because each provides additional clues to what lies in the subsurface.

“It’s unfortunate that Shell did not encounter what it hoped to find, but that is an inevitable outcome during an exploration program,” he said. “But if nobody took those kinds of chances, we wouldn’t be where we are today.”

“There is potential there. It’s a supercharged system. This is wildcat exploration in a geologically complex basin. Keep moving. Keep drilling.”

Has the industry forgotten what it took to discover Prudhoe Bay?

“Look at the size of Prudhoe Bay,” Swenson said of its 25 billion barrels of oil. “How could you not drill into it?”

Yet, it took nine exploration wells – each roughly 8 inches in diameter – to find North America’s largest oil field.

A Sea of Obstacles

Yet, at a time when the price of oil is sinking lower and federal restrictions and mandates on Arctic drilling are growing tighter, most say it’s nearly impossible for that young man to move west in search of oil.

“When oil was in the $100 a barrel range, it was a challenge to explore in the Arctic economically,” Parsons said. “In today’s prices, it is impossible.”

In today’s economic environment, an enormous accumulation would be required to develop a field and build infrastructure to carry the hydrocarbons to the Trans-Alaska Pipeline System. A huge investment would be needed up front, and the wait time for production would be six to 15 years, Wright surmised.

Until oil prices rebound, some operators are looking at onshore opportunities on the North Slope.

“With the combination of more 3-D seismic data, advancing production technology, and more aggressive explorers who are willing to take risks, we are seeing signs of new resources on the North Slope,” Myers said. “There is more life in state lands than people believed five or 10 years ago.”

While offshore exploration is currently off the table, it has not dropped below the horizon, said AAPG member Sandy Phillips, a former senior geoscience adviser with BP Alaska who considers herself “terminally optimistic” about opportunities in Alaska.

Agreeing that the North Slope Basin is highly complicated and highly underexplored, Phillips said those are the very reasons exploration should continue – albeit at a higher price point.

“In no way, shape or form is the industry in a place to condemn an oil play in offshore Alaska,” she said. “There is simply not enough data for that.”

Although Shell abandoned its Burger J well, it is fighting to extend the duration of its leases in the Chukchi and Beaufort seas. After the federal government denied Shell’s request last October, Shell appealed to the Department of the Interior on Dec. 11.

“They may be stopping activities for now,” Phillips said, “But they would not be trying to extend their leases if there were no reason to revisit them.”

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