ast summer, rumors were swirling that oil giant BP planned to sell its Alaska interests and end its presence in the state. It wasn’t the first time industry watchers had speculated that BP’s future in Alaska was drawing to a close.
But it ultimately turned out to be the last.
BP officially put rumors of its exit to rest in August when it announced the $5.6 billion sale of all of its Alaska interests to Hilcorp, the privately owned, Texas-based oil and gas company that first entered the Alaska market in 2012.
At the time, BP’s then-Group Chief Executive Bob Dudley called Hilcorp “a highly-capable operator” whose extensive experience in Alaska made it “ideally-placed to take this important business on into the future, continuing to optimize its performance and maximize its value for the State of Alaska.”
And in March, the Regulatory Commission of Alaska (RCA) issued an order permitting Hilcorp to keep private the financial statements it is required to produce as part of the sale.
A lot of questions remain about how the change will impact North Slope operations and whether Hilcorp will be able to continue its pattern of infusing new life into aging assets like Prudhoe Bay. Here’s what we know so far.
Hilcorp
But while BP is transferring 100 percent of its Alaska interests to Hilcorp, DNR Commissioner Corri Feige said what BP isn’t transferring as part of the sale is important.
“BP is not transferring 100 percent of anything, because it doesn’t hold a 100 percent working interest ownership in any of these assets,” she said in a joint presentation to the Alaska Senate and House Resources Committee in February. “I think that is a key piece for the public to bear in mind when we’re talking about assets like Prudhoe Bay that are so important to the state.”
Hilcorp will, however, walk away from the sale with a 100 percent owner/operator interest in both Milne Point a 50 percent interest in both those fields from BP in 2014.
But it wasn’t the only factor. Bilbao said the decision was part of BP’s larger goal of ensuring that the company’s investments continue to align with its corporate priorities and strategies. One of those priorities is making sure that its Lower 48 business interests, which include the 2018 acquisition of assets in West Texas, remain competitive for its growth investment. Rather than increasing the company’s debt to finance the $10 billion acquisition, Bilbao explained, BP chose to sell off some of its assets. The high cost of production in Alaska, the distance of oil to market, and tax risk all put Alaska out of line with BP’s goals.
“Balanced against the uncertainty of our interest and our knowledge of Hilcorp, it made Alaska a solid divestment candidate,” he said.
Hilcorp has invested $2.5 billion into Alaska since it arrived in 2012, Wilkins said. In Cook Inlet, its $1.7 billion investment helped Hilcorp increase production, maintain an aging infrastructure, and drill eighty-six new wells. Similar results at Milne Point, which Hilcorp acquired a 50 percent interest in from BP in 2014, makes it well-suited to assume operations in Prudhoe Bay, he said.
VP of Commercial Ventures
BP Alaska
“Those are jobs,” Wilkins said. “And what is the $700 million? We’ve drilled sixty wells. We’ve taken production from 18,400 barrels a day and it’s now crossed 34,000 barrels a day. It hasn’t been that high since 2008. By the end of 2020, we’re going to be producing more than 40,000 barrels a day at Milne Point.”
Hilcorp
In its request, Hilcorp argued that it has “developed a business model that has relied on their competitive advantage of being private, while foregoing many of the advantages their peers enjoy by being public [such as increased access to capital markets]. The trade-off… is what allows [Hilcorp] to be purchasers and operators of late-life, mature fields and assets.”
Wilkins compared the request to closed bidding in real estate transactions.
Bill Popp, president and CEO of the Anchorage Economic Development Corporation, says that while Hilcorp’s policy to be less than publicly transparent with its financial statements is different to what Alaskans have become accustomed to when dealing with oil companies, it isn’t necessarily an indication of Hilcorp’s lack of financial fitness or a lack of scrutiny by the state.
Bilbao said Hilcorp’s history of improving Alaska’s oil fields was an important factor in BP’s decision to sell to the company and expressed confidence in its ability to successfully operate in Prudhoe Bay.
“Hilcorp certainly doesn’t need any hand holding,” Bilbao told legislators. “They stepped into Cook Inlet, and we went from having shortages in Southcentral to being in a fundamentally different place. They stepped into Milne Point and showed us not just how they could produce more oil but how they could build pads in a different way. We saw them deliver a new pad faster, more efficiently, and more effectively than, frankly, we would have, or than we did, for many years.”
“You’ve got multiple owners in the Prudhoe Bay field,” Popp says. “ConocoPhillips and ExxonMobil will continue to maintain their level of ownership in that field once the deal is approved. From an operational point of view, Hilcorp is going to have to meet the expectations of their co-owners. I think that’s not going to change.”
But he says he expects that Hilcorp’s business model, which is different from other North Slope oil companies, will have a ripple effect.
“What is it going to do in terms of the business model for the North Slope? I think it’s going to make some improvements in that there’s going to be new investment brought into an old field [that] has not had the investment we’d have liked to see in bringing on the more marginal lines,” Popp says. “It will hopefully bring new barrels into the system.”
VP of Commercial Ventures, BP Alaska
“They’re in there right now doing their final due diligence on the final BP assets, then they’re going to recognize there are areas where they want more information that BP wasn’t able to provide,” Popp explains. “It’s going to be a period of time and transition and analysis on their part, which is my speculation. But I don’t think that’s going to be an extended period, because they did not buy this asset just to sit on it.”
Permit applications Hilcorp filed with the Alaska Division of Oil and Gas shed light on their immediate plans. The division approved a proposal to expand its polymer injection facility at F Pad in the Milne Point Unit and to drill six development wells in the Ugnu Reservoir at Milne Point’s S Pad; Hilcorp amended the proposal in January, seeking approval to drill an additional four wells.
Colors of Alaska | iStockphoto
Uncertainty is part of any transition, and the COVID-19 pandemic, which has drastically reduced the price of oil and caused other oil companies to cut back on their spending, has added another dimension to that uncertainty. But assuming the global oil market settles down after the pandemic has passed, Popp says the sale should be good for Alaska.
“The bottom line is I think that this transaction, in the end, is going to lead to a more robust North Slope for Alaska in terms of barrels produced and jobs,” Popp says. “It’s just not necessarily going to be the same model that we’re used to.”