The Burger J exploration well was drilled 150 feet offshore in the Alaska’s Chukchi Sea to a depth of 6,800 feet. With a basin roughly half the size of the Gulf of Mexico, the basin is substantially under-developed and under-explored. Shell is the main developer in the region, currently holding 100% working interest in the remaining 275 Outer Continental Shelf blocks. Initial evaluation of the basin through the Burger J exploratory well showed “indications of oil and gas” but insufficient mobility and proved reserves to “to warrant further exploration”.
The lack of sufficient crude in place forced Shell to abandon their $7 billion dollar investment. Shell’s Alaskan assets have a carrying value of about $3 billion with an additional $1.1 billion committed to existing contracts for rigs, ships and other assets in the area. Dave Pursell, head of securities at Tudor, Pickering, Holt & Co. was quite clear on the the project, stating “The challenge for this [project] was the remote nature and the expense it was going to have to be a massive accumulation to make it work”. The complexities of arctic exploration coupled with crippling crude prices have all but put the project on life support.
Shell still aims to keep their plays in Chukchi and Beaufort seas but has started to reconsider their leases. Shell recently made appeals to the Bureau of Safety and Environment Enforcement to extend the leases set to expire between 2017 and 2020. Not considering the difficulties of the arctic exploration and low crude trading prices, BSEE denied the request to extend lease terms putting even more pressure on the company’s assets. Shell is still steadfast in their decision to suspend exploration however, as a spokesperson stated “the appeal does not change our recent decision to stop exploration offshore Alaska for the foreseeable future.”
Shell’s arctic dreams are also seen as a threat to local environmental groups in the area. Susan Marry, deputy Vice President for the environmental group Oceana discredited Shell’s plans as nothing more than a “pipe dream”, pointing out Shell’s history of early equipment failures in the region. Greenpeace activists have attempted to thwart arctic advances by boarding drilling vessels, protesting in kayaks, and even dangling from bridges to delay drill ship movement.
A compromise plan has now been put forth by Hilcorp Alaska LLC, a subsidiary of Houston-based Hilcorp Energy Co for exploration in the area. The Bureau of Oceanic Management is currently reviewing the Liberty Project by Hilcorp for a 23 acre gravel island in Foggy Island Bay, 15 miles east of Prudhoe Bay. Hilcorp estimates peak production of 70,000 barrels per day and estimated ultimate recovery of 80 to 150 million barrels of oil over 15 to 20 years. The plan is aimed to please environmental concerns while still providing effective drilling space for conventional vertical wells.
The economic conditions are clearly uncertain in the arctic as Shell continues to reassess their exploration role. Alaska Gov. Bill Walker recognized the important of both Shell and the Liberty project for the state in a letter to BOEM urging them to approve further Alaskan development. Shell’s decision may change surrounding the lease agreements and other exploration plans, but it is unlikely given the huge cut backs in capital expenditure.