Shell plans to do new Arctic offshore drilling, but looks for a partner

Shell plans to resume its exploration in Alaskan Arctic offshore waters, according to exploration plans submitted to the state.

The company seeks state approval to form an exploration unit covering 86,400 acres and with 18 Alaska Beaufort Sea state offshore leases held by Shell. The company has committed to seismic and exploration drilling over the next five years in west Harrison Bay, which is in offshore the National Petroleum Reserve-Alaska and 34 miles northwest of the Colville River delta where the onshore Alpine field is now producing.

The company was an active Alaska explorer and producer for decades until it withdrew from the state in 2015 after a costly and unsuccessful exploration program in the Chukchi Sea, an area off the northwest Alaskan Arctic coast.

Shell acquired the Harrison Bay leases in a 2012 state offshore lease sale but they are approaching the end of 10-year lease terms allowed by the state. An exploration unit allows the leases to extended as a group for five years in return for a definitive timetable for exploration drilling.

The company is seeking a partner to share expenses and risks, it said in its filing. “Shell had made solid progress toward the partnership objective prior to the COVID-19 pandemic and resulting collapse in oil prices,” the company said in its application to the state.

“While oil projects on the North Slope remain attractive from the standpoint of geologic potential and the fiscal assumptions that are expected to prevail in the coming decades, the economic uncertainty resulting from the collapse of oil prices has negatively impacted Shell’s ability to negotiate a commercial agreement with a potential partner,” Shell said in the application.

Shell has long had a strategic interest in Alaska and the Beaufort Sea and in the western Beaufort holds interests the state-owned nearshore Harrison Bay as well as the federal Outer Continental Shelf leases to the north.

The company has also been active in the eastern Beaufort Sea and the Chukchi Sea and in 2013 drilled an offshore exploration north of the Point Thomson field, a large gas and condensate discovery by ExxonMobil and BP that is now producing.

In the 1980s Shell also explored the central Beaufort Sea and discovered Northstar, a producing oilfield six miles offshore Prudhoe Bay now owned by independent Hilcorp Energy.

The Chukchi Sea program, to the west, was extremely costly for Shell. The company spent over $6 billion to acquire leases and conduct exploration over several years and faced stiff opposition from conservation groups and complications with federal regulatory agencies. After an initial well had disappointing results in 2013 the company shelved its Alaska program, at least for the time being.

In West Harrison Bay Shell has identified possible offshore extensions of the Nanushuck and Torok formations, which are productive onshore, to the south, in the Colville River and northeast NPR-A where ConocoPhillip, Repsol and Oil Search, a company based in Papua, New Guinea, have made discoveries in recent years.

In its Harrison Bay venture Shell has been encouraged by oil finds onshore. Oil was also discovered to the west near the coast by FEX L.P. on NPR-A leases inshore from Shell’s state leases, although the discoveries were not developed. ConocoPhillips also found oil at its “Cassin” exploration well, which is in the area, although the company did not follow up with more exploration.

In its application to the state Shell said it has identified several prospects within the 18-lease group that could hold oil and gas accumulations. The company’s proposal to the state is to update seismic and geological data in 2022 and 2023 and to conduct exploration drilling in 2024 and 2025.

Exploration in the western Harrison Bay area, while remote, is near the shore and in shallow water, and is in a more benign ice environment than the company has faced in other parts of the Beaufort Sea. These factors would reduce environmental challenges of the kind that dogged Shell’s ambitious Chukchi Sea program. However, any project brought into production offshore even in shallow water require construction of an artificial gravel island, which is going to be expensive.