Great risk, great reward: offshore oil and gas exploration heats up in northern Alaska.

• Author: Liles, Patricia
• Position: OIL & GAS

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Interest in exploring Alaska's offshore oil and gas prospects is heating up--evidenced by the record-setting lease sale in the Chukchi Sea held in early February by the U.S. Minerals Management Service.

Surprising federal offshore managers and companies, interested oil and gas prospectors submitted $2.6 billion in high bids for leases in the Chukchi Sea, a record amount for an Alaska Outer Continental Shelf (OCS) sale.

Limited exploration drilling in the area occurred last in the late 1980s and early 1990s, which included two of the major lease sale bidders in February, Shell and ConocoPhillips.

The two companies were involved in four of the five exploration wells drilled in the Chukchi, with Shell operating those past exploration programs. Although the region is believed to contain large quantifies of gas, federal estimates place significantly large estimates for oil recovery in the Chukchi, nearly double estimates for oil prospects in the Beaufort Sea.

"We're really focused on the offshore ... we have clearly shown our interest in the offshore--it's what we're good at," said Rick Fox, Alaska asset manager for Shell, in an interview in early February, shortly after the company's $2.1 billion spending for leases in the Chukchi Sea offshore sale.

That level of spending, just to acquire leases, in an area that will be costly to operate exploration drilling, sends a strong message to Alaska's oil and gas industry.

"There's a big transition that Alaska will go through in the next three to five years, as you have more and more project spending around the offshore," Fox said. "It will be like Prudhoe Bay was 25 years ago."

Offshore exploration for oil and gas will need support infrastructure, just as Prudhoe Bay and other North Slope prospects required during the early days of development. But the Chukchi prospects are several hundred miles from existing deep-water ports that can support large vessels used in water-based drilling activity.

And exploration in the Beaufort, while closer to existing land-based infrastructure on the North Slope, still requires specialized equipment for exploration in the shallow waters of the northern sea.

"Offshore is coming fast and there will be a transition there, but the people skilled in our business--the engineers and operators--will make the transition," Fox said.

His company continues to deal with the legal and environmental aspects of offshore exploration in Alaska. Shell's planned drilling program on its Sivulliq prospect in the Beaufort in 2007 was shelved late summer, due to court...