September 28, 2015
Shell today provides an update on the Burger J exploration well, located in the Alaska’s Chukchi Sea. The Burger J well is approximately 150 miles from Barrow, Alaska, in about 150 feet of water. Shell safely drilled the well to a total depth of 6800 feet this summer in a basin that demonstrates many of the key attributes of a major petroleum basin. For an area equivalent to half the size of the Gulf of Mexico, this basin remains substantially under-explored.
The project has been rumored to not be popular with Ben van Beurden, who was appointed as Shell’s CEO as of January 1, 2014. He has openly questioned the project prior to the Summer 2015 drilling season. However in July 2015, van Beurden seems to have warmed to project, stating that the Chukchi Sea prospects had the potential to rival “the largest prospects in the Gulf of Mexico” but also followed with “a very disappointing” result of a discovery well could “condemn the prospect.”
Numerous sources are declaring that Shell has drilled a n-times Billion dollar (the true cost will come out at the end of this quarters earning due to be released on October 29) dry hole and the Arctic has been a black hole on Shell’s balance sheet. I do not believe this to be the case as the results of a singular well test are not data enough to confirm the potential of a reservoir – even Ghawar’s northern section has yielded disappointing results for decades despite being a part of a formation of near mythological magnitude. In this light, it seems that van Beurden and Shell have objectively made the correct decision.
The Chukchi is not unknown exploration territory to Shell despite their lack of stake in the “North Slope Club” (which was Arco, Sohio, Mobil, Exxon, Unocal, Chevron in the 1990’s-ish) and is now BP, ConocoPhillips, ExxonMobil and a few smaller conglomerates. They drilled wildcats that discovered large amounts of natural gas in 1989 and 1990. In fact the Liberty prospect was discovered by Shell in the early 1980’s – the lease was sold off to BPXA and went through a quasi-development phase (meaning 90% paperwork, 10% drilling) - last year the prospect was sold off to Hilcorp Energy and is now under review by BOEM for beginning of production. Liberty is estimated to contain 150 million barrels of producible oil.
The impetus of the Summer 2015 drilling program was to prove that the Chukchi basin contained oil bearing formations the tune of > 2 billion barrels producible. For scale, Prudhoe Bay’s initial reservoir estimate was 9 Billion barrels of oil producible – to date more than 25 billion barrels have been produced. It’s not an overstatement to say that Shell was essentially looking for Prudhoe Bay 2.0 – hence a $7 Billion capital investment and 7 year push.
News of the Burger J well results and Shell’s subsequent cancellation of further exploration only resulted in Shell’s stock dropping by approximately 3%. While a significant drop, it seems that investor faith should have been shaken more – perhaps the venture was viewed as too risky in view of the uncertainty in regulation. As an engineer I’m not prone to giving the financial sector much credit for technical understanding hence I feel that investors were probably happy to be out of what had amounted to a red taped enshrouded, butt freezing exploration project.
I view Shell’s decision to pull out of Alaska’s offshore as not indicative of the potential of Chukchi – but as a result of the current low oil price and uncertainty in regulations on offshore developments.
Perhaps the endeavor is being called a dry hole in part because it has a near infamous cousin that has been one-upped – Mukluk. In the early 1980’s an industry consortium still delirious from the discovery of Prudhoe Bay invested $1 billion (which is approximately $2.4 billion in 2015 dollars) in a wildcat that was said to be the lowest risk well of all time. The wildcat revealed that the reservoir contained nothing but brine and taunting traces of oil that had long ago migrated elsewhere. In the early 2000’s – geologist theorized that the Mukluk oil had actually migrated into one of the onshore traps in Prudhoe Bay’s satellite fields operated by BP – this may be of some consolation to BP executives who glumly furnished 10% of the latter tab.
In another way, the Burger J well is a smarting reminder of the risk and uncertainty of exploration. Outside of the E&P industry, few people understand that the average wildcat success rate onshore is 1 out of 10 and offshore, 1 out of every 3 – though in truth the science of projecting a wildcat’s success rate is similar to projecting when/where your drunken roommate will hurl Red bull and jaegermeister on your futon.
It’s been said that if you like engineering and gambling, petroleum engineering is for you. Shell has walked away from the Alaskan Chukchi’s roulette table.
Yet the table awaits.