Alaskan Arctic OCS and its Development

Alaskan Arctic OCS and its Development

The Chukchi and Beaufort Sea areas of the outer continental shelf (OCS) have been explored for over three decades in hopes to discover and produce oil to add to the Trans Alaska Pipeline System (TAPS) .  The Bureau of Ocean Energy Management (BOEM) estimates the Chukchi contains a mean average of 15.38bbls of conventional oil and 76 tcf of natural gas.  In the Beaufort BOEM estimates it contains 8.22 bbls of oil and 27.64 tcf of gas.  Over the last three decades 13 lease sales have taken place in the arctic OCS resulting in 84 wells and 6 bore hole wells being drilled by numerous companies and yet no production has taken place.

In the 70s and 80s the OCS pioneers were often opposed by the native community due to the fear of an oil spill offshore harming the subsistence hunting of the bowhead whale and seals by the Inuit people along the arctic coast.  The logistical difficulties of operating on or around moving ice far offshore made exploration potentially risky.  In the Canadian arctic just next door dozens of wells were drilled yet no decision to develop was made.  In the US though the debate on oil and gas in the arctic in the 70s 80s and 90s tended towards onshore activities and offshore production only ventured to man made islands near shore in state waters.  Currently Endicott production island and Northstar island are the only two arctic offshore producers.  Both lay in state waters and operate on terra firma.

Part of the issue with drilling offshore vs. onshore is the expense and logistical difficulty in doing so.  Operations are over 140 miles offshore in the case of the Chukchi and 20 plus miles offshore in the case of the Beaufort.  Both are subject to extreme ice flow conditions.  To get oil to shore undersea floor pipelines would have to be built and then land pipelines to connect to facilities at Prudhoe Bay.  Other options proposed would be for mooring dolphins to be used to fill tankers directly from well heads but this idea, although used in the Russian Barrents Sea has been dropped in Alaska.  The only advantage Alaskan waters had was their shallow depths due to the arctic slope stretching far out to sea.  Even 140 miles offshore depths of only 240’ are common making seafloor infrastructure accessible by divers, and in the Beaufort depths of 20-60 are common.  This is in stark contrast to the Gulf of Mexico with its 5000’ depths accessible only with remote unmanned vehicles or submarines.

Gradually however through the late 2000s the arctic oil exploration debate started to change and in 2007 the then Minerals Management Service, now BOEM, submitted an Environmental Impact Statement for a new lease sale.  In 2008 MMS held lease sale 193 which saw Shell Oil, ConocoPhillips and Statoil deliver $2.3billion dollars worth of bids, the largest ever in history, and the race for OCS development was back on.  460 leases ended up being awarded in the sale making it the largest ever for arctic OCS.

In April of 2010 the OCS world was turned upside down by the Macondo disaster in the Gulf of Mexico.  The MMS was broken up into three new agencies the BOEM, the Bureau of Safety and Environmental Enforcement (BSEE) and the Office of Natural Resource Revenue.  All three would monitor and permit any offshore development.  Secretary of Interior Ken Salazar also rescheduled the OCS 5 year lease plans and started a new schedule from 2012-2017.  In this new plan one lease sale in 2016 was granted to the Chukchi and one in 2017 for the Beaufort.  New rules including mandatory relief rigs on site, mandatory spill containment vessels, and support vessels, and mandatory top hole containment domes were required before any go ahead would be granted.  This added tremendous costs to the industry and Shell was thus forced to forfeit its future plans for any drilling whilst it constructed ships and equipment to meet the new requirements.  For the arctic Secretary of Interior Salazar went one step further by allowing only a very short window each year, during open water after bowhead whale migration and before ice over in September and October, for drilling to take place.  Permits would have to be filled and equipment and ships ready and leased at least before February in any year to hope of making the short season allowed later in the fall.  Essentially the build up simply with paperwork permitting, let alone ship and infrastructure construction and leasing, would take 8 to 10 months and longer before exploration plans could be announced.  All this preparation for a short one month or less drilling season allowed under regulation.  That sort of expense in staff time, and equipment blew the costs of exploring in the Arctic into the billions of dollars and negated all but the majors to tackle.  To date Shell has spent $6 billion and yet has not sunk a single complete well. There are perhaps only one or two companies in the world that could make that financial commitment and survive.

The Macondo incident and resulting changes in regulation and requirements is perhaps one reason why Statoil and ConocoPhillips, both “majors” in their own rights have decided not to pursue the leases they have and still do pay for.  The costs to explore in the Arctic by regulatory requirements and the uncertainty of the Administration in its changing rules and regulations has most certainly caused those two bid winners to back down.

During 2011-12 Shell was busy building ships and barges and leasing equipment and getting permits on those vessels to be ready to explore.  In August 2011 the final Arctic OCS Environmental Impact Statement (EIS) was released by BOEM and preparations began by Shell to drill six wells in the arctic.  Three in each sea.  The company hired two rigs, the saucer shaped Kulluk and the rig ship the Discovery.  They also built a specialty ice class support vessel the Aiviq and began modifying a barge the Arctic Challenger as a spill containment vessel.  Over a dozen support vessels were also leased to operate with the two rigs along the way and in the arctic.  After five years and billions of dollars in environmental study, permitting application, construction of ships, barges and retrofitting rigs Shell was nearly ready to proceed.

In the early spring 2012 in the port of Seattle the Arctic Challenger became beset with last minute refit delays and was not able to receive its permit.  The containment dome tipped over in a lift and fell to the sea floor damaging it.  These two situations negated achieving the regulations and thus BOEM reduced the exploration operation to top hole wells only down to 1000’ well above oil bearing rock level.  No oil was to be discovered that year.  As we all know this was just the beginning of Shell’s worries.  Ice moved in just as the rigs arrived in the arctic and a costly delay was imposed on operations.  Only two top holes were drilled, one in each sea making the cost of operations certainly uneconomical for the result achieved.  On the way home after just over 40 days in the north the Kulluk broke its tow ropes and ended up on the rocks in Kodiak Island.  The Discovery ended up in port in Alaska pending Coast Guard inspections and failed many.  The year was not a good one for Shell.

With both rigs out of action and in for repairs 2013 was a loss for Shell.  That year the environmental movement challenged the original Chukchi EIS by BOEM stating an arbitrary 1 billion barrel oil estimate had been used by the BOEM in the discussions about potential spill analysis and not enough analysis was done on near shore impacts. The judge in the case ruled in January 2014 the planning for exploratory work could continue but that the EIS would have to be rewritten before work could actually take place.  No drilling could take place until BOEMs paperwork was done.  Without knowing when this would be Shell cancelled plans to return to the arctic in 2014.

2014 brought on one more surprise for those watching the situation.  In July seven Alaska native village corporations including the regional ASRC joined together to form Arctic Inupiat Offshore LLC and signed a royalty agreement with Shell to share in the development of the arctic OCS.  This was done with the full involvement of the Mayor of the North Slope Borough the regional government of the arctic.  This unprecedented change in views and participation by the native community in offshore development dramatically changed debate.  No longer can the native community be portrayed or perceived to be against development but rather are partners in it.  The agreement gave the native communities of the arctic both a responsibility toward safe development, but also a seat at the table on how that development was done.  Compared to the 70s and 80s this was a sea change in arctic oil and gas politics and business.

In October 2014 the BOEM issued a revised EIS as directed by the Judge and this will allow the results of lease sale 193 to stand and exploration work to continue.  BOEM also reported an increase in the recovery estimates from an overly conservative 1 bbls. to 4.3bbls.  Recovery estimates by federal agencies have been consistently conservative and generally quickly surpassed in most all real life production situations.

The current schedule on the 2012-2017 five year lease sale schedule is for the Beaufort to have a lease sale in 2017 and the Chukchi to have its sale in 2016.  It is uncertain given the negative views of the administration and president to offshore development if those sales will actually take place.  In January 2015 the Secretary of Interior announced plans for the next five year plan on OCS and in it the Chukchi is awarded a sale in 2022 and the Beaufort in 2020.  However both are heavily astrixed with the ability of the Secretary to cancel those sales at any time.  The uncertainly of the schedule is certain to lead to no shows at the bidding table as industry heads to other parts of the world with greater certainty.

With the 114th Congress Alaska will face a new challenge with its OCS in the national OCS revenue sharing debate.  Currently Alaska like all west and east coastal states receives 0% of royalties and revenues from OCS activity whist Gulf states receive 37.5%.  All the tax money in the case of Alaska goes to the national treasury and the state is left footing the bill for all civil infrastructure needed to support operations.  Congress will debate legislation that will allow Alaska to receive 27% royalties and be able to apply for 10.5% additional royalties to use for alternative energy development.  The case Alaska and other coastal states will make is to be allowed to help pay for support infrastructure such as a deep water port, adequate transport hub infrastructure, housing, utility and medical facilities all to support hundreds of oil workers flying out of Pt. Barrow to offshore rigs.  The state argues as Gulf states did, that the state must be able to receive some of the tax benefit to help pay for infrastructure necessary for OCS development to take place.  It will be a hard fight to win but for the Arctic, particularly Pt. Barrow, the lack of roads, docks, and utility infrastructure shows the need and case is clear for revenue sharing to take place.

The US OCS plan is available here:

http://www.boem.gov/Oil-and-Gas-Energy-Program/

The 2011 BOEM EIS on the Chukchi lease sale 193