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Vol. 15, No. 30 Week of July 25, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

BP retains Prudhoe Bay

Company’s $7B deal with Apache Corp. doesn’t include any Alaska properties

Wesley Loy

For Petroleum News

A purported deal whereby troubled BP would sell perhaps half its stake in Alaska’s huge Prudhoe Bay oil field to Apache Corp. apparently has crumbled.

The two firms did announce a major transaction on July 20, but none of the properties involved are in Alaska.

The idea that BP would sell part of Prudhoe had been the subject of more than a week of trans-Atlantic media hype, starting with a July 11 article in the Sunday Times of London, where BP is based.

According to news reports based on unnamed sources, BP was to sell Alaska assets for up to $12 billion, with the proceeds to cover the huge liabilities BP faces for the Deepwater Horizon catastrophe in the Gulf of Mexico.

In the end, BP and Apache announced a $7 billion deal in which Houston-based Apache will pick up BP’s Permian basin assets in west Texas and southeastern New Mexico, its western Canada upstream gas assets, and business and exploration concessions in Egypt.

Company statements

The deal followed BP’s announcement in June that it planned up to $10 billion in divestments to raise cash for the company.

“Over the last two months the Board has considered BP’s options for generating the cash necessary to meet the obligations likely to arise from the Gulf of Mexico oil spill,” BP Chairman Carl-Henric Svanberg said in a July 20 press release announcing the Apache deal. “BP has an extremely strong asset base which is diversified geographically as well as by asset class. The Board believes that there are opportunities to divest assets which are strategically more valuable to other parties than they are to BP. Today’s announcement is the first such transaction and meets the value and strategic criteria of both parties.”

BP Chief Executive Tony Hayward added: “We have achieved an excellent price for a set of properties that are worth more to others than to BP. This is a good first step which underlines our ability and determination to get maximum value for everything we sell.”

“This is a rare opportunity to acquire legacy positions from a major oil company, with oil and gas production, acreage, infrastructure, seismic data, field studies, exploration prospects and other essential aspects of our business,” said G. Steven Farris, Apache’s chairman and chief executive. “We seldom have an opportunity like this in one of our core areas let alone three. This is a step change that will add muscle, enabling Apache to add value for decades to come through our demonstrated exploitation capabilities and exploration drilling.”

The companies said the deal is subject to regulatory approvals in the various countries, with the sale of the Permian and Canadian assets requiring antitrust clearance.

Apache said it would advance $5 billion of the purchase price to BP on July 30, ahead of the anticipated closing.

Alaska reaction

That BP didn’t sell part of Prudhoe seemed no surprise to observers in Alaska, who have heard years of speculation that BP might be planning to exit the state. The company has taken pains to refute such talk, often talking about the 50 years of remaining business it sees in the North Slope oil and gas fields.

Though in decline for years, Prudhoe Bay remains the nation’s largest oil field, with BP acting as operator. BP holds a 26.36 percent working interest in the Prudhoe Bay unit, ExxonMobil owns 36.40 percent, ConocoPhillips owns 36.08 percent, and Chevron holds 1.16 percent.

BP, in its most recent annual report filed March 5 with the U.S. Securities and Exchange Commission, reported its net share of production from Prudhoe Bay at 69,000 barrels per day in 2009, down slightly from 72,000 barrels in 2008.

Had Apache worked the Prudhoe deal as reported, it presumably would have taken a position of about 13 percent in the field.

In the face of persistent media reports out of London and New York, spokesmen for BP and Apache consistently declined to comment on what they termed “market speculation.”

An energy adviser to Gov. Sean Parnell told Petroleum News that BP, prior to the July 20 announcement, gave no advance notice to the governor’s office of any deal affecting Alaska assets.

Ken Boyd, a former Alaska oil and gas director now consulting privately for clients including Statoil, said he wasn’t surprised Apache didn’t work a deal for Prudhoe.

“I never believed it for a minute, because of the complexity of it, really,” Boyd told Petroleum News on July 21.

A relatively small company like Apache buying into Prudhoe “just didn’t feel right,” he said.

It would have been a complex transaction with lots of considerations, such as how Apache would get its share of Prudhoe oil to market, Boyd said. For example, would it need to own a share of the trans-Alaska oil pipeline? And how about tankers?

“There’s more pieces than, oh, I have a piece of Prudhoe,” he said.

It’s also possible, under the Prudhoe Bay unit agreement, that the other owners have a right of first refusal when a partner wants to sell, Boyd added.

Media reports made much of Apache’s talents in buying mature fields and massaging them for extra production. This would be helpful in a declining field such as Prudhoe, the stories went. But Apache likely wouldn’t have become the operator at Prudhoe, and as a small minority owner wouldn’t have been in a position to call the shots on field investments.

What now?

So, is Prudhoe Bay now off the sale block?

As BP’s chairman noted, the Apache sale is only the first transaction toward raising $10 billion. Selling Prudhoe at this point presumably would far overshoot that goal. And BP indicated separately July 20 that it’s selling assets in Vietnam.

Asked on July 21 whether Prudhoe is, or ever was, up for sale, BP spokesman Steve Rinehart replied: “We do not comment on market speculation. We said in June we planned to sell some assets to raise some cash. We did not specify which assets.”

The assets Apache is buying from BP seem to match up well with the company’s existing portfolio. Apache already has exploration and production interests in the Permian basin, Canada and Egypt.

Apache said it’s acquiring “all of BP’s oil and gas operations, acreage and infrastructure in the Permian Basin of West Texas and New Mexico and Egypt’s Western Desert. Apache also will acquire substantially all of BP’s upstream natural gas business in western Alberta and British Columbia. Apache will pay $7 billion for the assets, which include estimated proved reserves of 385 million barrels of oil equivalent.”

Net production from the properties in the first half of 2010 was 28,000 barrels of liquid hydrocarbons and 331 million cubic feet of gas per day, or a total of approximately 83,000 boe per day, Apache said.

By comparison, in the second quarter of 2010, Apache said it produced 646,866 boe per day.

BP said the $5 billion cash advance due from Apache on July 30 breaks down this way: $3.25 billion for Canada, $1.5 billion for the Permian and $0.25 billion for Egypt.

In Canada, said Apache’s Farris, “We are buying a substantial production base and 1.3 million net acres that include significant positions in several emerging unconventional plays including the Montney, Cadomin, Doig and coalbed methane.”

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