Shell exits Alaska

Unable to secure suitable co-owner, operator for West Harrison Bay unit

Kay Cashman

Petroleum News

On May 6 operator and 100% owner Shell Offshore Inc. surrendered its 18 leases in the nearshore West Harrison Bay unit, or WHBU, to the State of Alaska, the notice of which was posted May 14 on the Alaska Department of Natural Resources' Division of Oil and Gas website.

"With the WHBU Agreement nearing its expiration, Shell respectfully requests the approval of the Director of the Division of Oil and Gas to voluntarily terminate the WHBU under Section 14.2 of the Unit Agreement. Concurrent with this request, Shell surrenders the leases underlying the WHBU by filing the attached written surrender under Section 19 of the leases," William 'Bill' Langin, Shell SVP Exploration West & Deepwater, wrote to DNR Commissioner John Boyle and DNR Deputy Commissioner John Crowther.

(See map in the online issue PDF)

As confidentiality does not expire with the unit, Langin included what is likely a polite reminder from Shell's attorneys to DNR's attorneys: "Shell requests the continued confidentiality of the geologic information submitted to the Department of Natural Resources under AS 38.05.035(a)(8).

Since Shell's West Harrison Bay leases were unitized on Dec. 7, 2020, "Shell has worked to analyze the geologic data, design an exploration drilling plan, and bring in a co-owner to commence an exploration campaign. However, despite numerous engagements with potential co-owners and significant interest before, during, and after the Covid-19 pandemic, Shell has been unable to secure a suitable co-owner," Langin wrote.

He also made a point of thanking Boyle and Crowther for the time they have spent meeting with the Shell team as Shell worked to develop its understanding of the resource potential of the WHBU.

DNR's response to Shell

Within the next several days DNR, through the Division of Oil and Gas, will contact Shell to arrange the payment of the bond amount, Boyle said.

"After receipt of payment, the Division will issue two separate decisions: (1) approving voluntary termination of the WHBU, including addressing confidentiality of geologic information; and (2) terminating the WHBU leases," Boyle wrote.

Each of the decision letters will "describe the exact process for each action, along with any rights and obligations of the parties," he said.

"Finally, thank you for advancing the resource potential of West Harrison Bay, and your professionalism and communication throughout the process of managing the unit," Boyle wrote.

The bond Boyle refers to dates from unitization of the leases in 2020.

At that time the state required a performance bond of $3.25 million. In the initial agreement, since amended, Shell was required to drill one well in the unit within 2 years of the date of the agreement or drill two wells within 5 years of the effective date of the agreement. If the wells were not drilled, the performance bond was to be surrendered to DNR and the unit was to be terminated.

Promising geology

It's northwest of Santos' Pikka unit and approximately 7 miles directly north of ConocoPhillips' Bear Tooth unit, which holds the big Willow discovery.

As previously reported in Petroleum News, Shell has been looking for a partner, or partners, to buy into the unit to share the exploration cost and risk -- and to take over the role of operator.

DNR's view

"On May 6th, Shell provided formal notice of its intent to voluntarily terminate the West Harrison Bay Unit (WHBU) and relinquish the underlying oil and gas leases. The Department of Natural Resources (DNR or the Department) Division of Oil and Gas is reviewing and processing the unit termination and lease relinquishment per statute and regulation. This result is the culmination of extensive DNR negotiations and oversight on the WHBU over the last year, building on the continued efforts to actively manage the WHBU going back to its formation in 2020.

"DNR achieved these results a year and a half earlier than otherwise would have occurred under the contractual unit agreement, without litigation or dispute, and with the State set to receive the full $3.25 million performance bond from Shell.

"While the Department's preferred position was to see Shell proceed with exploration and development of the WHBU, DNR views this relinquishment as the next best possible outcome. Litigation or dispute with Shell would likely have delayed the release of these leases beyond 2025 and potentially threatened the State's recovery of the bond. These results also exemplify the diligent oversight DNR applies to all units on the North Slope and the efforts exerted to encourage investment and be a reliable partner in the development of State resources.

"The Department's efforts to bring about this positive resolution have been repeatedly complicated by disputes and administrative challenges by Narwhal LLC -- a commercial entity that holds leases adjacent to the WHBU. Since it entered Alaska, Narwhal has pursued numerous costly administrative and judicial actions to further its own commercial self-interests.

"This included filing an unprecedented administrative request for its leases to be forcibly joined to the WHBU, which if granted, would have threatened Alaska's orderly leasing and unit management process, and destabilized our business environment.

"Despite those demands, the Department took great pains to provide flexibility and optionality for Narwhal as it contemplated an exploration plan for its own leases. Instead of pursuing these options, Narwhal filed an additional appeal and then a lawsuit against the Department earlier this year. Narwhal's litigation with DNR over WHBU management, and the confidentiality of the ongoing negotiations with Shell, precluded any meaningful public discussion of this context by DNR during the recent April 15th House Resources Committee hearing.

"Narwhal's ballyhoo notwithstanding, the Department kept the negotiation with Shell on track, which protected the State's interests and may enable the WHBU leases to be available in the next North Slope lease sale.

"It is the Department's hope to see these leases in the hands of any company with the technical and financial wherewithal to delineate the resource potential of West Harrison Bay and to carry a project forward to development.

"DNR is happy to provide further briefings on this information as necessary and is committed to working with you to keep Alaska open for business."

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