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Official termination appr. issued for Shell's West Harrison Bay unit
Kay Cashman Petroleum News
On Aug. 7 the Alaska Department of Natural Resources' Division of Oil and Gas issued its official approval of Shell E&P's May 6 voluntary termination of the West Harrison Bay unit on behalf of Shell Offshore Inc.
The approval letter was sent via certified mail to William Langin, SVP Exploration West & Deepwater, Shell Exploration and Production Co. in Houston, Texas. In addition to voluntary termination of the West Harrison Bay unit, or WHBU, Shell surrendered all the unit's leases.
Shell Offshore applied for unitization of its West Harrison Bay leases on June 27, 2020. The proposed WHBU encompassed approximately 81,000 acres of leases in the shallow state waters offshore Alaska's North Slope approximately 7 miles north of the ConocoPhillips Alaska Bear Tooth unit and 13 miles northwest of ConocoPhillips Colville River unit.
The WHBU area saw scattered exploration efforts during the 1970s and 1980s and remains lightly explored today. No wells have been drilled in the WHBU acreage.
According to the Aug.7 letter of approval from division Director Derek Nottingham, review of the confidential geological, geophysical, and engineering data and interpretations of that data provided by Shell Offshore "reasonably supported an interpretation that the proposed WHBU encompassed the minimum area required to include all or part of several potential hydrocarbon accumulations in the Nanushuk and Torok formations."
The division determined that the area encompassing the potential hydrocarbon accumulations, although meeting the regulatory requirement for inclusion in a unit, would require extensive drilling, testing, and additional delineation work to determine its commercial viability.
Initial plan of exploration Shell Offshore submitted an initial unit plan of exploration, or POE, as part of the application, and met with the division for technical presentations, the first on April 9, 2020, and then again on Oct. 1, 2020.
In the POE, Shell Offshore committed to several non-drilling activities, including completing a data gap and alternatives analysis to determine what additional studies are required to advance exploration activities at WHBU, initiating an exploration phase project scoping, and finalizing subsurface well design and layout to optimize characterization of the reservoir.
Shell Offshore further committed to acquiring (and providing to the division) additional seismic information that can be interpreted to support the presence of a prospect(s) within the designated "flex wave area" of the unit by no later than the end of September 2022.
If Shell Offshore failed to provide the additional seismic information by the end of September 2022 for review and validation by the division's resource evaluation section, the division retained the option of removing from the unit those areas still unproven to contain a potential hydrocarbon accumulation.
The additional seismic information was provided to the division by Shell on Nov. 19, 2020.
Shell further committed to drilling one well in the WHBU by no later than two years from the effective date of the unit agreement or drilling two wells in the WHBU by no later than five years from the effective date of the WHBU. If the wells were not drilled within the timeframe set forth in the unit agreement, then the $3.25 million performance bond posted by Shell was to be surrendered in full to the Department of Natural Resources, and the WHBU would terminate automatically five years from the effective date of the unit agreement.
The division approved the proposed initial POE on Dec. 7, 2020, and required Shell Offshore to submit a second POE on Oct. 6, 2021.
On Oct. 6, 2021, the division received the 2021 Plan of Exploration Amendment and Second Plan of Exploration (2021 Amendment/Second POE) for the WHBU from Shell Offshore.
Shell's proposed Amendment/Second POE sought extension of the Initial 2021 POE to Dec. 31, 2022, in order to finalize commercial arrangements with other prospective project participants and designate a new unit operator. The proposed Second Plan of Exploration (2nd POE) also would allow: a new unit operator until the end of the 2023-24 winter drilling season to complete the first of the two proposed wells required to be drilled under Section 9.9 of the Aug.19, 2020, unit agreement; a new unit operator to focus on the Nanushuk formation as the primary target of its drilling program instead of the Torok formation as required previously; elimination of the unit agreement section 9.12 requirement that the unit operator acquire additional seismic information over the "flex wave" area by the end of September 2022; and, upon evaluation of the results of the well(s) completed during the 2023-24 and 2024-25 drilling seasons, the submittal of either a further POE for the WHBU or Plan of Development (POD) by no later than Dec. 31, 2025. The division approved the 2021 Amendment/Second POE on Nov. 18, 2021.
Proposed Amendment to second plan Shell Offshore submitted a proposed combined 2nd Amendment to its Plan of Exploration (POE) and Extension of Unit Agreement Term (Amendment to Second POE) on Sept. 22, 2023. This proposed amendment sought to remove the date for Shell to finalize commercial arrangements with other prospective project participants and designate new unit operator, and instead; allow for scheduling of quarterly updates for Shell to inform DNR on market conditions and status of potential opportunities for advancing project; require at least two exploration wells to be drilled by the end of the 2026-27 winter drilling season (according to Shell, a single season plan promotes state's interest in exploring the area quickly and efficiently); extend the deadline to Dec. 31, 2027, for the unit operator to submit the next POD (according to Shell, this allows review and evaluation of well results from proposed 2026-27 winter season drilling); and, extend the term of the unit agreement to Dec. 31, 2027.
Having taken the matter under advisement, Commissioner John C. Boyle III notified Shell Offshore in a Jan. 3, 2024, letter that the "Department has identified several items and considerations that we believe should be reflected in any extension [,"] and that the Department further [is] summarizing these below and would [] welcome the opportunity to discuss the extension request and these concepts with Shell Offshore."
The letter continued: "Specifically, the Department believes any extension should address:
"1. The State of Alaska's desire to see its lands developed in a more expedient manner than outlined in Shell's POE amendment. Particularly that an exploration well or wells should be completed by the end of the winter season in 2025-2026 at the latest and that every possible effort should be made to conduct exploratory drilling or precursor activities in the 2024-2025 season.
"2. Given that no single exploration well will be drilled in the 2023-2024 winter season and Shell has not shared commitments or indicia of plans (either on its own behalf or via a partner or other operator) to complete two exploration wells during the 2024-2025 winter season (as required by the current POE), Shell is functionally out of compliance and in constructive default of the current POE.
"3. These commitments on Shell's current performance bond, including when and under what conditions it will be partially or fully released to the State, and the potential expansion or addition of a new performance bond associated with any extension.
"4. The status of Shell's discussions with potential new operators, other third-parties, and potential partners regarding exploration in the WHBU, and specifically what near-term, firm deadlines can be provided where an operator or partner can be identified or Shell can directly commit to progress necessary preparatory steps for exploration drilling in either the 2024-2025 winter season or the 2025-2026 winter season."
Finally, Commissioner Boyle stated that "the State would welcome novel proposals from Shell that will still meet the Department's intent to accelerate characterization of the State's resources and reflect increasing interest in exploration and development in Alaska," and that "the issues referenced above are points that the Department feels need to be substantially addressed and reflected in any extension."
After subsequent meetings, the department received Shell E&P's May 6, 2024, letter notifying the division of Shell E&P's voluntary termination of the WHBU, and written surrender of all WHBU leases.
Finding and decision Consistent with Article 14.2 of the WHBU Agreement and 11 AAC 83.336(c), the division approved the termination of the WHBU, effective May 6, 2024. The division also approved relinquishment of all WHBU former unit oil and gas leases effective Aug. 5, 2024, 90 days following unit termination pursuant to 11 AAC 83.140.
Because there has been no exploration or development activity within the WHBU, and with Shell E&P's voluntary relinquishment of its leases and request for termination of the WHBU, "Shell E&P bears no further liability, or obligations with respect to the WHBU and the State of Alaska," the division said in its decision.
To satisfy the performance guaranty forfeiture obligation, Shell E&P elected to transmit funds directly to the division and requested a release of the corporate surety bond.
The division confirmed that the funds were received on July 19, 2024. Therefore, the performance guaranty associated with the WHBU Agreement and in the form of surety bond No. 107394341, in the amount of $3,250,000, naming Shell Offshore Inc. as principal, state of Alaska, Department of Natural Resources as beneficiary, and Travelers Casualty and Surety Co. of America as surety, may be released effective immediately.
If you have questions regarding this decision, contact Ken Diemer with the division at 907-269-8784 or via email at [email protected].
--KAY CASHMAN
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