U.S. Arctic Oil & Gas Exploration: A Sense of Urgency

Guest serious post by David Middleton

I ran across a very lucid and informative article on Real Clear Energy today. The author is Robert Dillon, “a senior adviser on energy security at the American Council for Capital Formation and the former communications director of the Senate Energy and Natural Resources Committee.” The article includes numerous links to supporting information, particularly the National Petroleum Council’s (NPC) 2015 report on U.S. Arctic oil & gas resource potential.

OPINION
A second look at Arctic energy exploration
by Robert Dillon
| March 30, 2019

America’s economy and high standard of living depend on our ability to access abundant and affordable domestic energy. While we are currently enjoying the benefits of cheap natural gas thanks to the shale boom, America’s continued energy dominance depends on our elected officials planning for the future. They must identify the natural resources we’ll need to keep pace with projected demand.

We may not be able to fully anticipate the direction of future advances in technology, but we should plan for continued economic expansion and demand for energy in the power and transportation sectors. To do any less would be defeatist.

That is why Energy Secretary Rick Perry’s decision to have the National Petroleum Council revisit its previous study of the resource potential of the Arctic is timely. Approximately 30 percent of the world’s oil and gas resources are estimated to be in the Arctic, much of it in U.S. waters off the northern coast of Alaska. Exploration of these resource-rich areas would signal to our adversaries who also have interests in the Arctic that the United States is serious about ensuring its long-term energy security.

Perry asked his NPC advisers to ensure federal regulations governing oil and gas activity on the Arctic outer continental shelf reflect the latest advances in technology and industry standards ahead of the release of a new five-year offshore lease plan for 2019-2024.

The original NPC study in 2015 was published shortly after the Obama administration issued a package of rules specifically targeting oil and gas activity along the Arctic frontier. 

[…]

Read the rest of the article at the Washington Examiner

The key findings of the 2015 NPC report were:

1. Arctic oil and gas resources are large and can contribute significantly to meeting future U.S. and global energy needs.
2. The arctic environment poses some different challenges relative to other oil and gas production areas, but is generally well understood.
3. The oil and gas industry has a long history of successful operations in arctic conditions enabled by continuing technology and operational advances.
4. Most of the U.S. Arctic offshore conventional oil and gas potential can be developed using existing field-proven technology.
5. The economic viability of U.S. Arctic development is challenged by operating conditions and the need for updated regulations that reflect arctic conditions.
6. Realizing the promise of Arctic oil and gas requires securing public confidence.
7. There have been substantial recent technology and regulatory advancements to reduce the potential for and consequences of a spill.

Since 2014, 47 offshore exploration wells have been safely drilled in Arctic waters; only 2 of those were drilled on the U.S. OCS (Outer Continental Shelf). In terms of total exploration wells drilled the U.S. has lagged far behind our competitors since the end of the Reagan administration.

Regulatory malfeasance is the primary reason the U.S. is falling behind our Arctic competitors. One of the most pernicious rules imposed by the Obama maladministration was the requirement for offshore Arctic operators to contract a second drilling rig or drill ship…

Operators also must have access to a separate relief rig able to drill a timely relief well under the conditions expected at the site in the event of a loss of well control; have the capability to predict, track, report, and respond to ice conditions and adverse weather events…

BSEE

In the Gulf of Mexico, it’s relatively easy to “have access to a separate relief rig able to drill a timely relief well” because there are almost always dozens of rigs operating in the Gulf. Offshore Alaska is a different story; there’s rarely even one offshore rig operating. Shell’s efforts to drill their prospect portfolio in the Chukchi Sea were ultimately stymied by regulatory malfeasance, including the requirement that they contract a second drill ship to sit by idly while they drilled their “Burger” prospect.

“While we support regulations that enforce high safety and environmental standards, the unpredictable federal regulatory environment for the Alaska Outer Continental Shelf also made it difficult to operate efficiently,” he said.

Shell will retain the lease for the site on which it drilled its exploratory well.

“We are holding onto it because we believe there is value in the data gathered during our exploration efforts there,” Smith said.
The company will separately evaluate its leases in the Beaufort Sea off Alaska’s north coast, Smith said.

Shell spent $2.1 billion on 275 Chukchi Sea leases in 2008 and $7 billion overall on Arctic offshore development. Shell officials had called drilling there “a potential game-changer,” a vast untapped reservoir that could add to America’s energy supply for 50 years. The U.S. Geological Survey estimates 26 billion barrels of conventionally recoverable oil in U.S. Arctic waters.

[…]

Shell faced stiff regulatory oversight, including a requirement for two rigs in a drilling area in case one was damaged in a blowout.

[…]

AP

Despite disappointing results from the initial exploratory well, the Chukchi Sea still holds massive resource potential, only topped by the Central Gulf of Mexico on the U.S. OCS.

The solution is to encourage offshore drilling in the Chuckchi and Beaufort Sea OCS (Outer Continental Shelf) areas, so that multiple rigs are operating during drilling season.

U.S. Arctic resource potential is second only to Russia’s.

Yet we are decades behind Russia and Norway in exploiting our own resources.

The U.S. Arctic areas with the most resource potential (Chukchi Sea OCS, ANWR Area 1002 and Beaufort Sea OCS) are likely to be oil-prone, particularly ANWR.

The Sense of Urgency

Why is there a sense of urgency? I often hear people say things like, “The oil isn’t going anywhere, we don’t need it right now, just leave it in the ground until we need it.” The problem is that the infrastructure will go away unless the U.S. develops a sense of urgency regarding the exploitation of U.S. Arctic oil and gas resources. The Trans Alaska Pipeline System (TAPS) has a minimum operating threshold of about 200,000 barrels of oil per day (bbl/d). Technically, TAPS cannot operate effectively below about 300,000 bb/d. In July 2018, production averaged only 380,000 bbl/d and is currently around 480,000 bbl.d.

When DOE/NETL published Alaska North Slope Oil and Gas A Promising Future or an Area in Decline? in 2009, it appeared that the threshold would be crossed around 2040.

Despite some promising North Slope discoveries over the past ten years, North Slope production has actually fallen below the 2009 forecast.

The resource potential is there… But it takes time to bring prospects to fruition, get them drilled and put on production. At the time DOE/NETL published their 2008 analysis, this was thought to be a reasonable timeline for North Slope exploitation and would have production peaking at about 3 million bbl/d in 2043, with ANWR Area 1002 and the Chukchi Sea OCS being the largest contributors.

This timeline has been lengthened by regulatory malfeasance and eco-terrorist lawfare attacks, usually in the form of junk lawsuits filed against the regulatory agencies in front of Clinton- and Obama-appointed judges. You can’t get to the finish line if you’re constantly tripped at the starting gate.

So… What happens if TAPS drops below 200,000-300,000 bbl/d and is forced to shut down? It has to be dismantled, removed and the land under its right-of-way must be returned to nature. And this would be an unmitigated man-made national disaster. The premature dismantling of TAPS would permanently strand about 30 billion barrels of oil and 137 trillion cubic feet of natural gas under Alaska and its OCS (outer continental shelf).

• The Trans Alaska Pipeline System’s (TAPS) minimum flow rate of about 300,000 barrels of oil per day will be reached in 2025, absent new developments or reserves growth beyond the forecasted technically remaining reserves. An Alaska gas pipeline and gas sales from the Point Thomson field and the associated oil and condensate would provide another boost to oil production and extend the life ofTAPS for about one year to 2026. A shut down of TAPS would potentially strand about 1 billion barrels of oil reserves from the fields analyzed.

Page ix

• For the complete study interval from 2005 to 2050, the forecasts of economically recoverable oil and gas additions, including reserves growth in known fields, is 35 to 36 billion barrels of oil and 137 trillion cubic feet of gas. These optimistic estimates assume continued high oil and gas prices, stable fiscal policies, and all areas open for exploration and development. For this optimistic scenario, the productive life of the Alaska North Slope would be extended well beyond 2050 and could potentially result in the need to refurbish TAPS and add capacity to the gas pipeline.

• The forecasts become increasingly pessimistic if the assumptions are not met as illustrated by the following scenarios.

1. If the ANWR 1002 area is removed from consideration, the estimated economically recoverable oil is 29 to 30 billion barrels of oil and 135 trillion cubic feet of gas.
2. Removal of ANWR 1002 and the Chukchi Sea OCS results in a further reduction to 19 to 20 billion barrels of oil and 85 trillion cubic feet of gas.
3. Removal of ANWR 1002, Chukchi Sea OCS, and the Beaufort Sea OCS results in a reduction to 15 to 16 billion barrels of oil and 65 trillion cubic feet of gas.
4. Scenario 3 and no gas pipeline reduces the estimate to 9 to 10 billion barrels of oil (any gas discovered will likely remain stranded).

Some combination of these hypothetical scenarios is more likely to occur than the optimistic estimates.

Page viii

DOE/NETL, 2009

The 2017 tax reform bill, signed into law by President Trump, directed the Department of the Interior to open up ANWR Area 1002 for leasing.

The USGS estimates that ANWR’s mean technically recoverable oil resource is about 10.4 billion barrels. With its close proximity to Prudhoe Bay, ANWR discoveries could be quickly developed and tied back to existing infrastructure. This would be a big step in keeping oil flowing from the North Slope and TAPS operating for another 50 years. However, the clock is ticking.

Opponents to opening ANWR usually fall into one of three camps:

• 10.4 billion barrels is only about 17 months of U.S. crude oil consumption.
• It will take decades to establish meaningful production from ANWR.
• We don’t need more oil right now.

No single oilfield or even oil play provides for more than a small fraction of U.S. crude oil demand. ANWR is just one, fairly big, piece of the puzzle. Refer to Figure 3 to see how each piece of the North Slope puzzle fits together. Each piece is vital to the whole of the puzzle.

However, if eco-zealots are allowed to take all of the pieces of the puzzle off the table… We freeze in the dark.

It is true that Arctic operations are challenging and that it will take years to go from the first ANWR lease sale to meaningful production rates. However, if there’s never a lease sale, no wells will be drilled and no production established… TAPS will be forced to shut down prematurely… And we’ll most likely have to import the 2-3 million bbl/d that would have been flowing through TAPS in 2040.

About the author: David Middleton has been a geologist/geophysicist in the oil & gas industry since 1981. He is a member of the Society of Exploration Geophysicists (SEG) and American Association of Petroleum Geologists (AAPG).

References

Tillerson, Rex W. and National Petroleum Council Staff. Arctic Potential: Realizing the Promise of U.S. Arctic Oil and Gas Resources. National Petroleum Council, 2015.

Thomas, Charles & B. North, Walter & C. Doughty, Tom & M. Hite, David & Sheets, Brent. (2009). Alaska North Slope Oil and Gas A Promising Future or an Area in Decline?.

United States Geological Survey. Arctic National Wildlife Refuge, 1002 Area, Petroleum Assessment 1998, Including Economic Analysis. USGS Fact Sheet FS-028-01, Apr. 2001