Shale Oil: Geologist's Alaska Gamble Could Turn Into America's Next Big Shale Play

Shale Oil: Geologist's Alaska Gamble Could Turn Into America's Next Big Shale
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SAN DIEGO, April 3, 2013 (GLOBE NEWSWIRE) -- 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.

Forward Looking Statements

In addition to historical information contained herein, this news release
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, subject to various risks and
uncertainties that could cause the company's actual results to differ
materially from those in the "forward-looking" statements. While the company
believes its forward looking statements are based upon reasonable assumptions,
there are factors that are difficult to predict and that are influenced by
economic and other conditions beyond the company's control. Investors are
directed to consider such risks and other uncertainties discussed in documents
filed by the company with the Securities and Exchange Commission.

CONTACT: Royale Energy, Inc.
         Chanda Idano, Director of Marketing & PR
         619-881-2800
         chanda@royl.com
         http://www.royl.com
 
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