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Royale Energy Reprints Article 'Geologist's Alaska Gamble Could Turn Into America's Next Big Shale Play'

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Royale Energy, Inc. (Nasdaq: ROYL) reprints article. Copyright 2013, Environment and Energy Publishing LLC. Reprinted with permission.

ANCHORAGE --Petroleum geologist Ed Duncan believes he's on the precipice of proving America's next monster shale oil play.

Duncan, president and CEO of Great Bear Petroleum LLC, is betting big that Alaska's North Slope geology will yield bountiful untapped resources as vast as the unconventional oil plays at Texas' Eagle Ford and North Dakota's Bakken shale fields.

He shocked the industry in 2010 when he scooped up 500,000 acres of Alaska state land leases in a region that international energy giants had long ago dismissed.

The major oil companies were focused on conventional oil fields, like the lucrative resources at Prudhoe Bay and Kuparuk River along Alaska's northern shores.

But Duncan and the oil industry veterans he's working with have their sights set on the lands just south of those fields. Specifically, they're focused on three layers of source rock that geologists say generated the large volumes of oil and gas that eventually migrated to Prudhoe Bay and Kuparuk. That source rock could contain up to 2 billion barrels of technically recoverable oil and up to 80 trillion cubic feet of natural gas, according to a 2012 U.S. Geological Survey report. The North Slope shales stretch from the Chukchi Sea on the west to the Arctic National Wildlife Refuge on the east. Last year, Great Bear took core samples and drilled two vertical flow test wells to acquire reservoir data on its leases. Duncan had hoped to begin horizontal drilling and fracking at the two sites in December, but the company's rig contract expired before the tests could proceed.

Now Duncan and researchers at Great Bear's labs in Palo Alto, Calif., are poring over drilling data, rock cores and seismic records to determine their next step. Early test results verify that the source rock on their leases contains oil. The company also discovered a modest conventional oil field at the site. "We're not committed to drilling this summer," Duncan said in an interview. "But we have the permits in place if we choose to do so. We'll continue the technical evaluations as we have been doing."

He added: "The rocks are going to tell us what we want to do."

Duncan predicts that the North Slope could see massive new unconventional oil development, beginning with the Great Bear prospect.

"I think a reasonable pace of development for a play like this for our company would be eight development pads per year with perhaps as many as 20 to 24 wells per pad," he explained. "So if everything goes well, 200 wells per year would be a meaningful number."

In 2011 testimony before the Alaska Legislature, Duncan boldly predicted that the unconventional oil fields on his leases could produce 200,000 barrels of crude per day by 2020. He expects production to peak at 600,000 bpd in 2056. If the North Slope shale oil fields are as rich as Duncan anticipates, Alaska could see decades of unconventional oil and gas development.

"Just as we're seeing with the Bakken and the Eagle Ford and the Marcellus in the lower 48, these are plays that will be actively drilled through the next 30 or 40 years," he predicted.

Those rosy forecasts are making state officials bullish on Alaska's unconventional oil and gas future. "We're really just starting to unlock the unconventional plays here," Alaska Department of Natural Resources Commissioner Dan Sullivan said. "The key is the technology and the cost to unlock it."

'Seed kernel' planted in the '80's

Great Bear's Anchorage conference room is dominated by a massive canvas map of Alaska's North Slope, with ownership of the oil leases marked in bright squares of color across the terrain. The company's leases, designated in yellow, stretch across the state's transportation spine -- the Dalton Highway and the Trans-Alaska Pipeline System.

The proximity is no accident. Great Bear officials recognize that the gravel Dalton Highway, the only road that runs from Fairbanks to the North Slope oil fields, would provide year-round access to their drilling sites. The pipeline would be the ideal vehicle to ship crude to market.

Duncan jumped into Alaska's oil race at a dark moment in the state's oil history.

The day before Alaska state regulators opened Great Bear's oil lease bids, USGS dramatically downgraded federal estimates of the resource wealth in the National Petroleum Reserve-Alaska.

USGS calculated that the 23-million-acre reserve holds 896 million barrels of oil -- one-tenth of the 10.6 billion barrels reported by the agency eight years earlier. The agency's findings appeared to justify the major oil companies' declining investment in the region.

The very next day, however, Duncan raised new hope for Alaska's oil future when he bought 105 state oil leases for $8 million.

Duncan's aggressive lease grab was based on North Slope geological studies that he was part of in the 1980s when he worked for SOHIO, which later became part of BP.

"The seed kernel of the idea, if you will, was planted back when I was working on the North Slope on a summerlong field survey," he recalled. "It was specifically geared toward sampling source rocks from the central Brooks Range all the way around to the Canadian border."

Twenty-five years later, when new horizontal drilling and hydraulic fracturing technologies opened shale rock formations in Pennsylvania and Texas to new energy development, Duncan thought again of the northern Alaska rock formations.

"It didn't take long to convince me that the three world-class oil-prone source rock layers on the North Slope would be interesting targets to contemplate deploying the completion technologies that are so well-known now," he said.

Duncan decided to be the first-mover on Alaska's unconventional oil lands. "This was a classic case of being the early entrant and wanting to establish a dominant position early on," he explained. "That's key for a small company, particularly when the scene in north Alaska is dominated by companies that are global supermajors."

After acquiring the leases, Great Bear moved quickly to test its fields. "We didn't take those leases to sit on them and watch them," he said. "We took those leases because we felt very confident and feel very confident that their potential is high when we set out to test those with the drill bit."

Duncan subsequently negotiated a joint venture agreement with Halliburton Co. covering about a quarter of his company's North Slope acreage. Great Bear owns a 75 percent share. Halliburton took 25 percent and is handling the drilling operations.

After acquiring 3-D seismic data on 57 acres of their leases, Duncan and his wife Karen Bryant Duncan went into the field to identify the best drilling sites. They focused on uplands areas that would not be subject to the U.S. Army Corps of Engineers' wetlands regulations.

In 2012, the company drilled its first two wells, Alcor 1 and Merak 1, located off gravel access roads along the Dalton Highway.

"The design is basically laying timber rig mats right off of the existing gravel," explained Patrick Galvin, Great Bear's vice president for external affairs and deputy general counsel. "That will allow year-round drilling, year-round access to any one of these sites."

Water everywhere, but other supplies are lacking

On the road to commercializing their leases, Great Bear officials are enjoying some unexpected benefits of working in Alaska, while at the same time struggling with serious long-term problems.

Unlike unconventional oil developers in the lower 48 states, Great Bear has plenty of water on hand to frack its underground wells. The company's North Slope leases sit on a deep aquifer of brackish water that is unusable for drinking water or agriculture but may be of "ideal quality for hydraulic fracturing operations," Duncan observed. The small Native villages that dot the North Slope rely on surface water, which is separated from the underground aquifer by a permafrost barrier.

Although some local residents and environmentalists have raised concerns that fracking operations could taint drinking water supplies, the issue has not become a major sticking point in Great Bear's development plans.

The Alaska Oil and Gas Conservation Commission is currently taking public comment on draft fracking regulations that would apply to the state's future unconventional oil operations (EnergyWire, Jan. 3.)

Duncan said the North Slope's bountiful water supply "is a huge benefit to us. We're doing an aquifer study to establish rates of deliverability and also to identify bands in the deep subsurface that we can use as sites for injecting our drilling waste."

Alaska also has ample supplies of sand that Duncan predicts will be suitable for fracking.

"We're fairly confident we should be able to find an in-state source," he said. "Something like that would be a huge cost driver for us in terms of being able to find local sources as opposed to having to ship such a large quantity of fairly heavy material."

At the same time, however, the company is facing a serious scarcity of rigs and a lack of trained workers.

"The primary thing that separates the North Slope from the lower 48 right now is a shortfall in rigs and other drilling and completion equipment that will be necessary for full development of these places," Duncan noted. "There simply aren't very many suitable rigs on the North Slope at this time."

That shortage hit Great Bear this winter when the company was in the middle of testing the oil resources at its Alcor and Merak drill sites.

"We did one test, one perk and sampled oil out of one of the unconventional zones that we encountered in Alcor," Duncan recalled. "We also encountered that zone at Merak. But we ran out of time."

The rig that Great Bear was using had already been contracted by another company for the North Slope's winter drilling season. As a result, Duncan was forced to scale back his plans and regroup.

Supply-chain issues are driving the cost of drilling in northern Alaska. "You don't have a lot of materials," Duncan said. "You have companies competing for few rigs. The rig rates are high. Labor costs are high. Material costs are high on the North Slope."

If their initial unconventional oil wells are successful, company officials plan to expand development into leases located farther away from the Dalton Highway. The promise of new oil wealth could also attract other oil operators to the North Slope.

Since Great Bear burst onto the Alaska oil and gas scene in 2010, other companies have bought state leases for unconventional oil development. San Diego oil and gas company Royale Energy Inc. (Nasdaq: ROYL) acquired 100,000 acres near Great Bear's operations. ConocoPhillips secured a smaller block of leases farther west.

Such expansion could help moderate the cost of operating in the region. "We'll see economies of scale as we drill a large number of wells per year to develop this play," Duncan predicted. "Additional rigs will come into the market, costs will come down, efficiencies will be discovered and exploited."

"We believe we can drive the cost on a per-well basis, drilled and completed, down to something that will be reasonably competitive with the lower 48," he said. "That's a big mission for us -- to break the cycle of what we perceive as really unnecessarily high costs in northern Alaska."

For the time being, however, Duncan and Great Bear's oil experts are studying the scientific data collected last year, securing permits and gathering new environmental data it will need to speed future operations.

As the international oil giants continue to dominate Alaska's conventional oil and gas fields, Duncan's small company is staking a dominant position in the North Slope's frontier fields for unconventional energy.

Margaret Kriz Hobson, E&E reporter Published: Wednesday, April 3, 2013.

Posted-In: News

 

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