Looking at shale oil issues in Alaska

Great Bear Petroleum and its partner, Halliburton, are now drilling into North Slope shale rocks, extracting core samples and conducting tests to see if oil can be extracted from the shale.

The first test well, Alcor No. 1, about 17 miles south of Deadhorse, at Prudhoe Bay, has now been completed, said Great Bear’s president, Ed Duncan.

A second test, Merak No. 1, is being drilled about one and a half miles south of the Alcor well and is expected to be at the point for its first core to be extracted in mid-September.

Great Bear is a small Alaska-based company formed to explore potential resources in the large shale formations underlying North Slope lands south of large producing fields.

The company holds about half a million acres of state oil and gas leases across a wide area of lands south of the major producing fields on the North Slope.

Halliburton, a major U.S. oil services company with considerable experience in hydraulic fracturing has teamed up with Great Bear on its North Slope project.

Fracturing is the process with which oil is extracted from shale, which is too tight for oil and gas to flow like in conventional, porous reservoir rocks.

Great Bear believes oil from the North Slope shales can be produced with the same drilling and fracturing procedures now used in the large shale oil areas now producing in North Dakota and Texas.

The shales were the source rocks of oil and gas that seeped out over eons to migrate upward, and northward, through porous rocks to accumulate in large reservoir traps that now form the large Prudhoe Bay, Kuparuk River and other producing fields on the Slope.

Chemical “fingerprinting” tests have shown that the oil in many of the large fields originated eons ago in the deeper shale formations that lie to the south.

Duncan believes, as do state geologists, that a great deal of oil is left in the shale source rocks.

Great Bear’s test wells are being drilled at locations adjacent to the Dalton Highway, a gravel road that provides year-around access to the North Slope. Road access allows the drilling to be done in the summer, in contrast to typical exploration wells on the Slope which are off the road system and can be done only in winter.

It’s too early for any results of the testing, Duncan said.

A range of diagnostic tests are now under way on core samples extracted from Alcor No. 1, he said.

“We’re focused at this point on learning about the rock mechanics,” and how efficiently the shale will fracture to allow oil to flow, Duncan said.

The next step will be a diagnostic fracturing test involving injection of a small amount of water into the rock.

“This will help is define a larger fracturing test to be done later this year,” Duncan said.

Great Bear plans to continue drilling until late December.

Regulatory, legal issues

Meanwhile, beyond key technical and economic questions – whether the shale can be efficiently fractured and whether oil can be produced – lie a number of complex regulatory and legal issues for the companies and state land managers.

The state has a multi-agency task force working on the questions but any recommendations for changes to state laws and regulations will likely wait until Great Bear and Halliburton answer the key technical questions.

However, Louisiana Cutler, an attorney with K&L Gates, a law firm, has outlined some of the key challenges in a Sept. 10 talk given to the Alaska chapter of the International Association of Energy Economists.

K&L Gates has done extensive work in legal and regulatory issues in states where shale gas is being produced and is now working with Great Bear in Alaska, but Cutler said her remarks on Sept. 10 offered her own perspective, and not Great Bear’s.

The primary regulatory problem is that Alaska’s land laws and regulations were designed for conventional oil and gas fields where there are defined reservoir traps, or pools, she said.

A primary tool for regulation of the industry to protect various leaseowners’ rights and to prevent physical loss of oil and gas through poor depletion practices is by forming units, or groups of leases, to provide a mechanism for administration.

Shale oil wells are different than ordinary oil wells, though, in that the well taps oil locked in tight rocks in the immediate vicinity of the well, so that there is virtually no “communication” of oil from an area on a nearby lease, which can happen with normal oil wells tapping into a conventional oil-saturated sandstone reservoir.

Units, or groups of leases, can still be established for shale oil leases, but they may have to be different than units now formed for conventional oil.

Changes in regulations, and possible statute changes, will be needed.

The unit is important because it is the primary mechanism under Alaska law where oil and gas leases can be extended beyond their primary terms, which is usually 7 years to 10 years.

“The standard lease term may not be long enough to accommodate rational development of all shale resources,” in an area, Cutler said.

If oil and gas production begins from a lease, it is automatically extended.

But if there is a prolonged period of exploration and testing — as is often the case with conventional oil and will almost certainly be the case for shale oil — the lease may expire before production begins.

Typically, units are formed for an extension of lease terms. This requires the state’s approval and is usually accompanied by a negotiated work program for the leases.

There is no real requirement for units to be formed because the primary motivation – prevention of physical loss of oil and gas through migration or seepage through rocks, doesn’t occur with shale oil because of the tightness of the rock.

However, if units aren’t formed, the state and the companies will have to develop some other mechanism for extension of lease terms if the shale oil resource is to be developed.

Potential shale development in Alaska is different in this respect than with the big shale oil plays in North Dakota and Texas. In those states the lands are privately owned, usually by farmers and ranchers, who have more flexibility in working out lease terms and extensions than in Alaska, where the state is landowner.

11/11/2016 - 12:07pm