Arctic Oil On Life Support

By Nick Cunningham for | Posted: Monday, February 2, 2015 2:32 pm

Oil companies have eyed the Arctic for years. With an estimated 90 billion barrels of oil lying north of the Arctic Circle, the circumpolar north is arguably the last corner of the globe that is still almost entirely unexplored.

As drilling technology advances, conventional oil reserves become harder to find, and climate change contributes to melting sea ice, the Arctic has moved up on the list of priorities in oil company board rooms.

That had companies moving north – Royal Dutch Shell off the coast of Alaska, Statoil in the Norwegian Arctic, and ExxonMobil in conjunction with Russia’s Rosneft in the Russian far north.

But achieving the goals of tapping the extensive oil reserves in the Arctic has been much harder than previously thought. Shell’s mishaps have been well-documented. The Anglo-Dutch company failed to achieve permits on time, had its drill ships run aground, and saw its oil spill containment dome “crushed like a beer can” during testing. That delayed drilling for several consecutive years.

However, the first month of 2015 has darkened Arctic dreams even further. Oil companies are scratching their heads trying to figure out how to deal with a collapse in oil prices, now below $50 per barrel. With virtually every upstream company around the world slashing spending, it is the highest-cost and riskiest projects that are getting scrapped first.

Statoil, the semi-state-owned oil company from Norway, has been an offshore leader and Arctic pioneer. After having watched Shell fumble its Arctic campaign, Statoil put its drilling plans off the coast of Alaska on ice. But now with rock-bottom oil prices, Statoil has even shelved Arctic drilling plans in its own backyard. Bloomberg reported on January 29 that Statoil does not plan on drilling in the Barents Sea this year. It also let several Arctic exploration licenses off the coast of Greenland expire.

In December, Chevron suspended its drilling plans in Canada’s Arctic indefinitely.

In Russia, Arctic dreams are also going to disappoint, although for different reasons. Last year, Rosneft – operating in conjunction with ExxonMobil – announced a major discovery in the Kara Sea. Rosneft’s Igor Sechin said that the field could hold as much as 730 million barrels of oil. “This is our united victory, it was achieved thanks to our friends and partners from ExxonMobil, Nord Atlantic Drilling, Schlumberger, Halliburton, Weatherford, Baker, Trendsetter, FMC,” Sechin said in a statement. “We would like to name this field Pobeda,” the Russian word for victory.

But western sanctions may delay the victory. ExxonMobil is prohibited from working with Rosneft, and had to wind down its operations shortly after the discovery was announced. Worse for Rosneft, ExxonMobil was the one that had the drilling rig under contract, apparently the only platform that would work for the well.

Reuters reported on January 30, 2015 that Rosneft would have to delay drilling until 2016 at the earliest. “There will be no drilling in 2015. There is no platform and it is too late to get one. The project was initially created for Exxon’s platform,” a Rosneft source told Reuters. ExxonMobil has already pulled its platform out, and has it under contract until July 2016. Drilling may not begin for another year or two, and production from the world’s most northerly oil field will not begin until sometime in the 2020’s, barring other setbacks.

That leaves Shell, the company with the spottiest Arctic record. Shell announced $4.16 billion in fourth quarter profits, a decline from the previous quarter, but a decent showing relative to its peers. Nevertheless, the company also announced $15 billion in spending cuts over the next several years. “The macro environment has moved against us,” Shell CEO Ben van Beurden said after releasing the quarterly figures.

Curiously, however, amid all the spending reductions, Shell hopes to once again return the Arctic, after a two-year hiatus. Perhaps that is because of the sunk costs – Shell will spend around $1 billion on its Arctic program whether or not it is drilled because of all the ships and other logistics already under contract. Shell still needs to obtain several permits and clear legal hurdles, but if all goes according to plan, the company could begin drilling this summer.

It is up to Shell then to keep the oil industry’s Arctic dreams alive.



Alaska’s New Exploration Incentives Cause North Slope Land Rush

World Energy Reports: Alaska’s New Exploration Incentives Cause North Slope Land Rush: The Dec. 7th Oil & Gas Lease Sales a Big Success, Large Bidders Include Repsol, Shell, Conoco and…Dan Donkel?

HOUSTON — The North Slope has long been the playground for the major oil companies like Shell, ExxonMobil, BP, Conoco and others. The region has produced over 16 billion barrels of oil over the last 35 years making it by far the most prolific oil producing region in the United States. However, the oil production has been declining since 1988 due to a lack of investment from the industry, despite a recent US-DOE study that calculated that the North Slope had 36 billion barrels of undiscovered reserves. This week’s oil and gas lease sale results for the North Slope, Beaufort Sea, and NPRA signal a reversal of that trend and a boom is now developing in Alaska.

“The success of these sales is another positive sign that Alaska’s doing a lot right when it comes to developing our tremendous oil and gas resources”

Immediately after the lease sales, Alaskan Governor Sean Parnell issued a press release stating that the “State of Alaska received more than 300 bids from more than 15 bidders for oil and gas lease tracts on the North Slope and the Beaufort Sea, totaling more than $21 million, signifying one of the most successful sales in recent Alaska history.” It is has been reported that this increase in participation is due to industry’s expectation of legislation that will both reduce production taxes and provide for additional exploration incentives. Looking at the oil companies that entered the lease sales, it is surprising to find that among the most successful bidders were longtime oil and gas investors Dan Donkel and Sam Cade, whose partnership captured more acreage than any other.

Daniel K. Donkel and Samuel H. Cade were the apparent high bidders on 40 tracts covering over 100,000 prime acres in the State of Alaska’s Beaufort Sea and North Slope Area wide 2011 W lease sales. The partnership’s main focus was in the Beaufort Sea sale where their bonus bid total of $1.52 million captured 35 tracts encompassing 93,000 acres, the largest number of high bids in the sale. Shell’s bids of $2.6 million purchased 80,000 acres.

In the North Slope sale, Donkel and Cade won three tracts that lay adjacent to their existing lease position. Prior to Wednesday’s sale results, the partnership already held nearly 200,000 acres of state leases in the North Slope and Beaufort Sea areas making them one of the largest leaseholders before the sale.

Daniel Donkel was pleased with the sale results stating “Last year’s sale had little activity aside from us and Great Bear. This year we expected that we would see more competition so we were not at all surprised to see the increased level of bidding. This makes two years in a row where we picked up about 100,000 acres and I think that we were fortunate to get some great lease positions early, before this North Slope boom really takes off.”

Governor Parnell and state legislators have been very vocal in trying to bring renewed interest to the North Slope and have been pushing the federal government and the industry to work together to increase production and refill the pipeline. Perhaps his message that Alaska is open for business is beginning to resonate; it is safe to say that the partnership of Donkel – Cade certainly believe the message.

“The success of these sales is another positive sign that Alaska’s doing a lot right when it comes to developing our tremendous oil and gas resources,” said House Minority Whip Berta Gardner (D-Anchorage).

Mr. Donkel went on to say that the acreage acquired in the sales would expand holdings in existing prospect areas, as well as position them well in new areas contiguous to Prudhoe Bay, Northstar, Beechy Point, and Milne Point Units.

The partnership has been accumulating a position on the North Slope for several years but has focused on increasing its strategic holdings over the last two years after a successful sale of all of its leases in the Cook Inlet to Apache Oil and Gas in 2010.

The specifics of the sale are interesting in that the partnership re-acquired three leases that had been allowed to expire at their Stinson prospect, bringing the total to five, including the lease that contains the ARCO Stinson #1 discovery well. This well flowed 430 barrels of oil per day from an impaired open-hole test but was never put on production and the project has laid dormant waiting for a time when the economics and infrastructure in the area would justify development. A recent geological report, by former DNR and ex-Arco geologist Don Brizzolara, has indicated potential reserves of 80 million to 420 million barrels of oil. Perhaps that time has come and Dan will finally put this oil discovery into the Trans-Alaska pipeline.

Donkel – Cade expanded their Stinson oil-play concept to the west by adding thirteen more tracts along the north side of the very large Thomson oil and gas discovery, thus linking the Stinson area acreage with their holdings north of the Badami Unit and east of the Liberty Unit.

In the North Slope sale, the Donkel – Cade partnership added a key tract to their lease position along the southwest side of the Badami Unit. This tract lies immediately west of the Arco West Mikkelsen #1 well that flowed 302 barrels of oil per day from the Tertiary Canning Formation in 1978. Further west, just south of the Prudhoe Bay Unit, the partnership captured two tracts that adjoin their 35,000 acres at Hemi Springs. The western tract lies adjacent to the ARCO Hemi Springs #1 well that flowed between 503 and 672 barrels of oil per day from the Lower Cretaceous Kuparuk C Sands in 1984.

In the past, the partnership of Donkel – Cade has been instrumental in bringing petroleum development to the state of Alaska. By amassing and then selling large acreage positions, they provide a beach-head for independents to join the major oil companies that have historically controlled most of the activity in Alaska.

Will the North Slope follow the Cook Inlet and see a resurgence of petroleum exploration, largely driven by the presence of these new independent players? For the sake of the State of Alaska and the Energy Security of the United States, we can only hope that the time has come. Innovation in technology, political unrest globally, the need for domestic supplies of oil, the Governors incentive plans all seem to be indicating that the time is now.