Hilcorp targets old complicated fields

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Privately held Houston independent drawn to Cook Inlet by exit of majors; will invest heavily to increase oil and gas production

Kristen Nelson

Petroleum News

Aging oil and gas fields in Southcentral Alaska’s Cook Inlet basin may no longer be attractive to major companies, but for a mid-sized Houston independent, Hilcorp Energy, finding ways to produce more oil from big old fields is a way of life.

The privately held company closed on the purchase of Chevron’s Cook Inlet assets at the end of last year and is in the process of buying Marathon’s inlet assets.

That makes Hilcorp the dominant producer in Cook Inlet, the state’s original oil and gas province.

It’s the age of the fields in Cook Inlet that attracted the company to Alaska, Hilcorp President Greg Lalicker told the Anchorage Chamber of Commerce June 18.

The company’s strategy, he said, is to “look for properties to buy, particularly big, old oil fields, typically from the majors,” who have discovered and produced most of the oil and gas. At some point those fields “become, frankly, immaterial to the major oil company’s portfolio,” because “the size of opportunity gets to small, too hard, not worth the effort and they decide, rather than continuing to invest in those fields, they want to just sell them and move on to the next big field to be produced.”

“So when they decide they want to sell, we go out and buy them,” Lalicker said.

Over the last five years Hilcorp has spent $1.992 billion acquiring 162 million barrels of oil equivalent in reserves.

“We buy the fields and then we exploit the properties,” with a focus on reservoir engineering, geology and geophysics and field operations, he said.

Over that same five years Hilcorp has spent about $1.742 billion exploiting properties it owns, and in the process added another 162 million barrels of reserves.

Lalicker said it’s what Hilcorp does — acquires and exploits “big old complicated fields.”

And in the process spends a lot of money. Its Cook Inlet capital budget for 2012 is some $203 million, compared to about $40 million a year Chevron spent in recent years on the same properties, he said.

Lalicker said the spend in Cook Inlet over the next couple of years will probably be about $150 million a year.

What’s going on in Alaska?

Most of the Cook Inlet platforms at McArthur River “have drilling rigs on them or had drilling rigs on them that were built in the 1960s which were basically junk,” Lalicker said.

So those old rigs are being stripped off the platforms and Hilcorp is working on “getting a rig, a platform rig, that we can move up here and move from platform to platform and start drilling and working on some of these wells.”

The rigs are down already on a couple of the platforms, “and we’re plowing through that at a pretty good pace,” he said.

At the onshore Swanson River field a workover rig is already starting to repair old wells and there is a remedial program in place across all the producing assets.

There are a lot of old shut-in wells that need to be fixed and brought back on.

“And that’s what our first priority is, to wind up the people and equipment to just start fixing all the wells and stuff and then we’ll start worrying about the new projects, drilling new wells and all that down the road,” Lalicker said.

Hilcorp’s current focus on spending is “revitalizing and reactivating and modernizing” equipment to allow drilling not just for the next two or three or four years, but for the next 10, 15 and 20 years, he said.

Production was 15,000 boe a day when Hilcorp took over at the end of 2011, and Lalicker said he hopes to be at more than 20,000 boe a day by the end of this year and up to 25,000 boe per day in 2014.

The Marathon purchase is pending regulatory approval, “so there’s not much I can say about when that will happen,” but he said the reason for the Marathon purchase is the same as the Chevron purchase: “They have big old fields that need major work.” Marathon is Hilcorp’s partner in two significant assets, the Grayling gas sands offshore that Hilcorp operates and the Ninilchik field onshore that Marathon operates, Lalicker said, so the Marathon acquisition also has the benefit that Hilcorp gain operatorship at Ninilchik.

The Cook Inlet challenge

“And with that the service industry had been decimated,” he said.

Hilcorp can’t find the rigs, equipment, people and services that it can find in the Lower 48.

“They just don’t exist or if they do they’re very, very thin on the ground and they’re usually committed to some project already up on the North Slope.”

He said “a big part of the challenge” for Hilcorp in Cook Inlet is “rebuilding that pipeline of suppliers to the industry” and Hilcorp has been “enticing some of the people that are in the oilfield service in the Lower 48 that we have good relationships with to come up here and work.”

Lalicker said Hilcorp has been lining up more equipment, but he said the small size of the service industry “has been the biggest drag.”

And the reason for that, he said, is that “no one has been spending a couple hundred million dollars a year in the Cook Inlet for quite a while.” Hilcorp is “working like mad to solve this and we will solve it — but that has been the biggest deterrent to getting things done,” Lalicker said.

Alaska second

Lalicker said about half of the company’s reserve base is oil and about half gas.

The split of its reserves is about one-third (32 percent) those in production; about one-third reserves where wells have been drilled and facilities are in place but some additional work is required to put them into production (30 percent); and about one-third proved undeveloped reserves, those which need more wells drilled and more money invested to get them into production (38 percent), he said.

Hilcorp operates 97 percent of its production.

“We like being in control of our own destiny, so ... we tend to be focused on those areas where we can actually come in as a company and operate ourselves as opposed to being a non operator, waiting for someone else to get something done,” Lalicker said.

Company growth

He commented on a big jump in reserves when Hilcorp acquired Chevron’s Cook Inlet assets. The chart Lalicker used in his chamber presentation showed a jump from 233.2 million boe to 323.5 million boe, indicating that Hilcorp added some 90 million barrels of oil equivalent to its reserves in its Cook Inlet acquisition.

Fiscal discipline is required, he said. If we want money, “we’re not a public company so we don’t have the option of issuing equity; we have to do it out of our own cash flow or through debt.” Hilcorp tries to keep debt in the neighborhood of $4 a barrel, he said, although it’s now at about $2 a barrel due to a divestiture last year.

Hilcorp’s goal is to continue to grow at about 15 percent a year.

Between 2006 and 2010 the company had a program called “Double Drive” with the goal of doubling the company in rate of reserves and value over a five-year period.

The program was backed by an incentive: Everyone who was in the company the whole five years, “if we doubled the company, got a new car” or money toward the purchase of a new car.

The new program, “Dream 2015,” isn’t a car, he said, it’s a cash bonus so employees can pursue their own dreams.

This alignment is a big part of Hilcorp’s success, Lalicker said.

The company’s bonus program is the same percentage for everyone in the company, not a tiered structure.

“We share the rewards ... evenly and equitably,” he said.

“Anyone can go buy an oil field. It’s how well you can exploit it and the differentiation there is how good are your people,” he said. “And having good people, you have to have a model that makes them want to stay with you and work harder for you than they would for the next guy.

“And that’s really what Hilcorp is all about,” Lalicker said.