Sea of uncertainty

With a mean estimate of 23.6 billion bbl of undiscovered, technically recoverable conventional oil in the Beaufort and Chukchi seas, the Arctic could be one of the last big finds. Heather Saucier examines what is at stake on the US side.

Source: US Bureau of Ocean Energy Management

While the melting of Arctic ice poses serious consequences to the planet, it also opens up vast amounts of ocean for exploration in an area believed to contain some of the world’s last remaining large oil fields.

The US Department of the Interior (DOI) announced new lease sales off Alaska’s coast, including areas in the Beaufort and Chukchi seas. However, it also made other areas in those locations off-limits from exploration, and followed with stricter exploratory drilling regulations. As the federal government strives to find a balance between tapping additional energy resources and protecting Alaskan frontiers, its efforts have cast the concept of economical Arctic exploration – during a time of mercurial oil prices, no less – into a sea of uncertainty.

Guessing game

The US Bureau of Ocean Energy Management (BOEM) estimates that in terms of undiscovered, technically recoverable conventional resources, the Beaufort Sea contains anywhere from 0.4-23.2 billion bbl of oil and 0.6 to 72.2 Tcf of gas (95 to 5% probabilities). Its neighbor, the Chukchi Sea, is estimated to contain anywhere from 2.3-40.1 billion bbl of oil and 10.3 to 209.5 Tcf of gas (95 to 5% probabilities).

Source: US Bureau of Ocean Energy Management

If those ranges seem broad, it is due to the lack of understanding about existing Arctic resources, says Bob Swenson, retired deputy commissioner of the Department of Natural Resources in Alaska and former state geologist for the Alaska Division of Geological & Geophysical Surveys.

“We know we have a tremendously active petroleum system. But our understanding of what resources are actually there is fairly limited because there’s been little exploration done in these areas,” says Swenson, of Alaska’s Outer Continental Shelf (OCS) and the Arctic National Wildlife Refuge, which has been subject to tight federal regulations for decades.

“This has always been frustrating to people who want to understand what resources we have,” he adds. “We have a fair understanding of what our reservoir rocks might look like, but they are all based on models, and we have little data to base the models on.”

Until more information can be obtained, the roughly 12 operators, which hold 607 active leases in the Beaufort and Chukchi seas, are there for the respective estimated means of 8.2 billion bbl and 15.4 billion bbl of undiscovered, technically recoverable oil.

Finding a balance

In an effort to expand offshore areas for Arctic exploration, the federal government unveiled in January an offshore lease program for 2017-2022 that includes additional blocks in the Beaufort and Chukchi seas. The acreage has not yet been determined.

Also in January, President Obama designated 9.8 million acres in the Arctic OCS as off-limits to future leasing and exploration. The acreage includes subsistence whaling areas near the Inupiat villages of Barrow and Kaktovik in the Beaufort Sea, a 25mi coastal buffer from Point Hope to just east of Barrow in the Chukchi Sea, and – perhaps most valuable to the oil and gas industry – the Hanna Shoal in the Chukchi Sea.

“Even as we consider new places that may be appropriate to responsibly develop oil and gas, we can take meaningful steps to protect areas that matter most for our environment, our native communities, and our cultural identity,” wrote Mike Boots, leader of the White House Council on Environmental Quality, and Dan Utech, deputy assistant to the president for Energy and Climate Change, in a 27 January issue of the White House blog.

Arctic OCS taken from Svalbard. Photo by David Houseknecht from the USGS.

The DOI is most concerned with protecting areas that are home to endangered whales, in addition to walruses and bearded seals that feed on the biologically-rich Hanna Shoal, as well as the more than 40 species of fish that support Alaska’s fishermen. Also of importance are the bowhead whales, which are essential to the subsistence and customs of native Alaskans.

“There is a perceived dichotomy between resource development and maintaining strict environmental protection. Most Alaskans understand the need to maintain both and appreciate both sides of the debate,” Swenson says. “However, with strict stewardship, both should be maintained.”

As a resource state, Alaska has essentially funded all government activities from resource development, with the oil and gas industry as its biggest taxpayer. And, industry eyes remain focused on the Arctic and its remaining potential for abundant oil and gas resources.

Unlike areas such as the Powder River Basin or the Bakken Formation where a discovery of 5-10 MMbbl of oil in place would be considered “significant,” Swenson says those same numbers would equate to an economic “dry hole” in the Arctic, where it is much more costly to explore and produce in areas lacking infrastructure.

“You need a large field to make oil and gas economically viable to develop,” he says. “Given the petroleum system we are dealing with in the Arctic, it is one of the last places where we have the chance to find very large fields.”

What’s the damage?

Although more than roughly 300,000 acres in the Beaufort Sea are now off-limits to exploration, none overlap with existing leaseholds, and the oil and gas industry has not shown much of an interest in those areas to date, says David Houseknecht, a senior research geologist and project chief for the Energy Resources program in Alaska with the US Geological Survey.

“Speculating about the geology here, there is some potential for prospective areas in the Beaufort Sea to overlap with those areas that have been recently blocked off, but that is dependent on when and if development ever occurs,” Houseknecht says.

The Chukchi Sea is another story. Currently, 10 lease blocks owned by Shell and Repsol in the Hanna Shoal have been removed from exploration activity. While the government will have to reimburse the operators for lease fees, it might face additional backlash for projected loss of revenue, as the Chukchi Sea seems to hold higher promise for operators, as demonstrated by roughly three times the amount of active leases there compared to the Beaufort Sea.

While current areas of interest in the Chukchi Sea are south and west of the Hanna Shoal, the newly blocked off area, which covers roughly 1.5 million acres, is “clearly along the prospective fairway,” Houseknecht says.

Arctic OCS taken from Svalbard. Photo by David Houseknecht from the USGS.

Although teeming with wildlife, the geology of the Hanna Shoal could also mean the area is rich in hydrocarbons.

Many of the 460 active leases in the Chukchi Sea are located above and along the margins of a rift basin called the Hanna Trough where a high concentration of source rocks, specifically the Shublik and the Kingak, occurs, Houseknecht says.

“Like most frontier areas, early wells are drilled on structural highs, and the best source rocks are located in structural lows. In this case, that’s the Hanna Trough,” he explains. “The hope is that when doing exploration, the low areas – the troughs – contain lots of rich source rocks and the high areas contain a lot of good reservoir rocks.”

Yet, with just five exploratory wells drilled (by Shell and Chevron) to date, there is no complete picture of the succession of formations, Houseknecht says.

One well, the Klondike, which was drilled by Shell roughly 25 years ago, penetrated the Shublik Formation, which contains good source rocks on the Arctic OCS as well as on the North Slope. The well also penetrated good source rocks in the Ivishak Formation, which, ironically serves as the main reservoir rock at Prudhoe Bay, Houseknecht says.

As more wells are drilled, it may be revealed that the off-limits Hanna Shoal could hold more promise than ever imagined.

“From an exploration perspective, the greatest concern is the Hanna Shoal leases,” says Paul Decker, acting director of the Alaska Department of Natural Resources’ Division of Oil & Gas. Removing the Hanna Shoal “certainly can’t help exploration,” he adds. “It certainly has provoked strong feelings.”

Demands on drilling

Just as both industry and the state of Alaska were digesting the news of new exploration limits, February brought an additional blow when the DOI proposed for the first time strict federal regulations for exploratory drilling in the Arctic OCS that could increase the cost of exploration by as much as hundreds of millions of dollars.

“The Arctic has substantial oil and gas potential, and the US has a longstanding interest in the orderly development of these resources, which includes establishing high standards for the protection of this critical ecosystem, the surrounding communities, and the subsistence needs and cultural traditions of Alaska natives,” said Sally Jewell, secretary of the Interior, in a DOI press release.

Her words were echoed by BOEM Director Abigail Ross Hopper: “… We have an obligation to provide the American people with confidence that these shared resources can be developed responsibly.”

Perhaps most restrictive is a proposed requirement for operators to have a separate relief rig available to enable a relief well to be drilled in a timely manner should there be a loss of well control. The DOI’s estimated annual cost of a relief rig is US$55 million, which could halt some exploration ventures in their tracks.

Most vocal in the press about the requirement has been the American Petroleum Institute (API). “Other equipment and methods, such as a capping stack, can be used to achieve the same season relief with equal or higher levels of safety and environmental protection,” said Erik Milito, API upstream director, in numerous publications following the announcement. “For this reason, it is unnecessarily burdensome to effectively require two rigs to drill a single well.”

Milito’s statement was addressed by US Bureau of Safety and Environmental Enforcement Director Brian Salerno: “We understand that the same-season relief rig is somewhat controversial. From our perspective, that sets a level of protection for the Arctic that is necessary.”

Other proposed requirements include an integrated operations plan that details all phases of an exploration program for purposes of advance planning and risk assessment; region-specific oil spill response plans; and prompt access to source control and containment equipment, which essentially means all containment systems would need to be stored in the Arctic rather than contracted out.

Furthermore, in the event of a worst-case scenario oil spill, operators would be required to have in place the mechanical oil recovery equipment needed to address such a situation, in addition to dispersants and in-situ burning techniques.

Because such little drilling takes place in the Arctic, operators may find it difficult – if not impossible – to share resources to reduce extra expenditures required by more stringent drilling regulations.

Moving forward

The operator with perhaps most at stake is Shell, which hit the pause button on plans to drill two wells in the Chukchi and Beaufort seas in 2012 following several offshore drilling incidents.

Required by the DOI to fortify its Arctic oil spill prevention and response program, the operator responded by purchasing two custom ice class vessels; securing an oil spill response fleet that could be on site within one hour of an incident; constructing a capping stack similar to the one used to correct the 2010 Macondo blowout in the Gulf of Mexico; and building a custom containment dome and storage barge, among other measures.

In fact, the new drilling regulations proposed by the federal government are largely based on the requirements put on Shell.

Shell Spokesman Curtis Smith responded to the proposed regulations saying, “Our paramount concern in all our operations is safety and environmental protection. We support regulations that further these imperatives in the Arctic, provided they are clear, consistent and well-reasoned. We have and will continue to take unprecedented steps to ensure we can operate safely and responsibly in the Arctic.”

The deadline for public comments on the federal government’s proposed regulations was April 27 (as OE went to press). In early May, Shell won conditional approval from BOEM, enabling the company to move forward with its 2015 Chukchi Sea exploration plan.

A different kind of hurdle

A handful of scientists, including those at the University of California in Los Angeles, predict that by mid-century, ice in the Arctic will be so scarce or thin that vessels will easily be able to sail across the North Pole.

If ice is no longer a barrier to exploration, heftier drilling regulations and off-limit areas may very well take its place.