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Vol. 15, No. 46 Week of November 14, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

BP sale more than rumor?

TNK-BP strong candidate for Alaska assets, but cost-cutting might not be about sale

Kay Cashman

Petroleum News

Is BP selling its oil and gas assets in Alaska? That’s the billion dollar question.

The company’s recent behavior suggests BP is marketing some or all of its Alaska assets, the largest of which is BP Exploration Alaska, or BPXA, in order to cover liabilities from its Gulf of Mexico Macondo well disaster.

Which company is top contender for an acquisition of some of BP’s Alaska assets? Petroleum News’ analysis puts TNK-BP, Russia’s third largest oil producer, at the top of the list.

What does BP have to say about that? The compny is not talking, but TNK-BP, a 50 percent BP-owned joint venture with aspirations to grow internationally, had something to say Oct. 11 in response to a PN query about the significance of TNK-BP officials who have made recent trips to Alaska to reportedly study BP assets for a possible purchase. TNK-BP’s Press Secretary Dmitry Sergeev was asked to verify his company’s interest in acquiring BP’s Alaska assets or complete subsidiaries.

Here is what he had to say: “TNK-BP’s goal is to become a global leader amongst private oil and gas companies and a Russian industry leader, with a clear focus on stability and renewal of resources, as well as operating efficiency. International expansion will play a key role in TNK-BP’s growth strategy. In its drive to diversify, the company needs to pay particular attention to regions where it has strengths from both the political and business points of view. TNK-BP is considering opportunities for buying assets which could support TNK-BP’s strategic growth opportunities and added value creation for the company. Any further comments would be premature at this stage.”

So, maybe? BP certainly has political strength in Alaska. Both companies have business strength. TNK-BP, which makes up more than a quarter of BP's reserves, placed 17 in Platts Top 250 Global Energy Company Rankings for 2009, a designation that recognizes outstanding financial performance based on asset worth, revenues, profits and return on investment.

A good match for Alaska

At a glance TNK-BP, which in mid-October purchased BP fields in Vietnam and Venezuela for $1.9 billion, appears to be a good match for Alaska.

For one, the company wants to transform from a major oil group to a major oil and gas group. Alaska has world-class reserves of natural gas.

For another, a significant part of TNK-BP’s crude is now produced from fields which were long considered either uneconomic or unrecoverable, including heavy oil accumulations. Since its formation in September 2003, TNK-BP has established a track record of successfully applying technology to develop hard-to-recover and mature reserves.

BPXA has upwards of 20 billion untapped barrels of heavy oil close to infrastructure in northern Alaska and the largest Alaska fields it has an interest in all can be classified as mature.

Plus, TNK-BP spends a lot of money on mature fields, heavy oil development and exploration for new accumulations, something the State of Alaska would welcome.

Finally, the Russian oil giant has already been working with BP in Alaska for several years, sending employees to the state to study the techniques BP and ConocoPhillips are using and developing to extract heavy oil and to increase production at mature fields such as Prudhoe and Kuparuk.

Remember Francis Sommer?

TNK-BP’s top technology executive is none other than Francis Sommer, who began his career with BP in 1986 working at the Prudhoe Bay oil field. Sommer held several engineering positions in Alaska, specializing in new field appraisal and development, enhanced oil recovery, reservoir modeling and performance forecasting.

Sommer left Alaska in 1992 for three years, returning to lead subsurface teams at the Point Thomson and Northstar fields.

In 2003, he became asset manager for Prudhoe Bay. In this role, according to TNK-BP’s bio on Sommer, he “led efforts in novel technology applications such as gas cap water injection, LoSal water injection and viscous oil developments.”

In late 2005 Sommer joined TNK-BP as vice president of production technology. Today he is executive vice president of technology.

Aside from all the rumors of a sale….

Aside from rumors of a possible sale of Alaska assets, putting BP’s share of Prudhoe supposedly on the market for $5-$7 billion (not verified), BP has recently done things that gives those rumors credence.

The company is cutting specific costs that would allow it to squeeze more cash out of a sale. The latest example occurred in early November, when BP handed approximately 30 former ARCO Alaska employees, who work for BP in the Greater Prudhoe Bay Area, retirement packages that give them a limited number of days to accept or lose the retirement provisos that former ARCO President Mike Bowlin negotiated for them before BP took over full operatorship of Prudhoe in 2000.

Prior to that time, ARCO Alaska operated half the field and BP operated the other. In the assumption of sole operatorship, BP retained some of ARCO Alaska’s Prudhoe employees.

ARCO’s retirement package was considered the Cadillac of the industry and, as such, the terms were very costly for BP to fulfill. According to PN sources close to the divesture of ARCO Alaska to Phillips Petroleum in 2000, BP’s top executive, John Browne, agreed to honor the ARCO package for people who retired within 20 years. But BP had the option to renege on the agreement, providing, among other things, that BP gave written notice to all affected former ARCO employees, offering them a last chance at the munificent retirement plan terms.

This information came from three solid PN sources, including one of the 30 people who received a package. In response to a request for confirmation of the 30 or so former ARCO employees receiving packages, BP’s Alaska spokesman Steve Rinehart told PN, “Persons retiring would need to speak for themselves about their financial arrangements.”

Another recent action by BP was an initiative it presented at a town hall-style meeting several weeks ago in which the company asked employees and contractors to work as a team to cut “incidents” by 50 percent and make sure that BPXA was profitable at $50 per barrel oil.

How much cash does BP need?

To cover liabilities stemming from the Macondo well blowout and oil spill in the Gulf of Mexico, BP said in July it would raise between $25 billion and $30 billion over 18 months from selling oil and gas assets outside its key growth regions.

The Sunday Times reported in September, and BP later confirmed, that the company had increased its cash target for covering the Gulf disaster to $40 billion, up from BP’s previously stated $30 billion maximum goal.

As of the end of October BP had raised more than $12 billion from asset sales.

The company’s market value has fallen by more than a third since April 20, the day of the Gulf blowout.

But all is not gloom and doom. BP had a profitable third quarter — $1.79 billion in net income as compared to a $17.2 billion loss in the second quarter.

Three challenges in selling Prudhoe interest

BP has three challenges in selling its interest in Prudhoe, its most valuable asset in Alaska.

• One, if its sells its interest in the field without selling its shares in the subsidiary that holds its Prudhoe interest (BPXA), it has to contend with the preferential rights of at least its two major partners in the field, ExxonMobil and ConocoPhillips.

Those companies could make a sale and the transference of operatorship to a new working interest owner difficult. Exxon showed its willingness to do exactly that in 2000 when it filed a lawsuit to block the purchase of ARCO’s Alaska assets by Phillips Petroleum, predecessor to ConocoPhillips, contending that it had contractual rights to first refusal on some of the assets and concerns over operatorship.

• Two, BP has committed a 16.4 percent royalty to the BP Prudhoe Bay Royalty Trust on essentially the first 90,000 barrels of daily net production of crude and condensate from the working interest of BPXA over the life of the Prudhoe Bay field, which would be a definite detriment to a potential buyer.

In its 2009 annual report to the U.S. Securities and Exchange Commission, BP said its net share of production from Prudhoe Bay was 69,000 barrels per day in 2009.

• Three, since its North Slope gas reserves, the bulk of which are at Prudhoe Bay, are stranded — unmarketable without a pipeline — it will be tough to set a value on BP’s share of the gas for a purchase.

None of these challenges make a sale of individual BP oil and gas properties in the state — or a sale of BPXA and BP’s pipeline subsidiaries — impossible. It just makes things more complicated, especially for Prudhoe Bay.

Or maybe BP is cutting

Alaska spending?

Of course, another explanation for BP’s actions is that it could be cutting discretionary spending in Alaska in 2011, a “classic BP” move when oil prices are down or, per the current situation, the UK-based company needs cash.

In support of this notion is the fact that local BP officials have been warning oil field partners not to count on BP investment in a number of Alaska projects, even those with a relatively short payback, such as seismic and drilling. None of PN’s sources, however, have said funding has definitely been nixed and indications are the partners will pick up what BP is not willing to invest.

BP’s 2011 Alaska capital budget has not yet been set, but in a Nov. 2 press release from BP’s UK headquarters the company said, “Given the strength of our underlying cash flows and the investment opportunities available to us, our 2011 capital expenditure is currently under review and is expected to exceed the $18 billion previously indicated,” which is more than the company allocated for 2009 or 2010 capital spending.

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