An expensive regionHilcorp president comments on the high cost of doing business in Alaska ALAN BAILEY Petroleum News
Saying that statements made to the House and Senate Resources committee meeting in June by Hilcorp Alaska Senior Vice President John Barnes had been misinterpreted, Greg Lalicker, president of Hilcorp Energy, told a lunch and learn session at the Alaska Legislature on Feb. 23 that the cost of doing business in Alaska is much higher than in the Lower 48.
Barnes had told House and Senate Resources that Hilcorp was very cost conscious, had made its Cook Inlet operating costs competitive with costs in the Lower 48, and was endeavoring to achieve the same cost alignment target in its North Slope operations.
That does not mean that Hilcorp’s operating costs in Alaska are the same as those in the company’s Lower 48 activities, Lalicker told legislators attending the lunch and learn session. What Barnes meant was that costs in Alaska were comparable on a price-equivalent basis, thus enabling Alaska to compete for investment dollars, Lalicker explained. In other words, costs are higher in Alaska, but so is the price of the natural gas that the company sells from its Alaska operations.
“Alaska’s always going to be way more expensive,” Lalicker said. “If we manufacture something and take it out to the field in Texas that’s way different from manufacturing it in Texas and having to ship it all the way up here.”
Cost premiums There is a 20 percent premium on the cost of labor in Alaska and everything is more expensive in the state, he said. In addition, places like Texas have a much more extensive infrastructure and many more service companies, Lalicker said.
The current oil price situation is particularly challenging. For example, the offshore Cook Inlet Middle Ground Shoal field, which Hilcorp purchased from XTO/ExxonMobil in 2015, is currently losing money, driving a need to make its cost structure better, Lalicker said.
“Their operating cost is higher than the price of oil,” he said, referencing the Middle Ground Shoal offshore platforms.
The McArthur River field, the largest of the oil fields in the Cook Inlet basin, is currently producing 4,000 to 5,000 barrels per day of oil but is also producing 125,000 barrels of water along with the oil, Lalicker said.
Major investment Since entering the Alaska oil and gas industry in 2011, Hilcorp has invested $2 billion in acquisitions and spent more than $2 billion in drilling, field maintenance and field operating costs, Lalicker said. The consequence has been a climb in the company’s Alaska oil and gas production to almost 60,000 barrels of oil equivalent per day, he said. Lalicker also commented that he is a firm believer that, while the issuance of bonds can be justified to support the purchase of new acquisitions, organic growth in those acquisitions must be funded from the company’s free cash flow, and not from borrowed money. Companies that use borrowed money to bet on future oil and gas production go bankrupt if the market turns against them, he said.
In Cook Inlet, Hilcorp’s strategy of ferreting away at a myriad of small projects aimed at improving field performance has resulted in a doubling of oil production from the company’s Cook Inlet assets from 6,000 barrels per day to 12,000 to 13,000 barrels per day. At the end of 2014 the company acquired from BP the Northstar and Endicott fields, and a 50 percent interest in the Milne Point and Liberty fields, on the North Slope and in the Beaufort Sea. Since that acquisition, the company has been very active in its new Arctic properties, although the company has yet to do much new drilling there.
“It’s certainly our intent, over time, to grow our rate and reserves from those fields as well,” Lalicker said.
Limited gas market From a natural gas perspective, Hilcorp has kept Cook Inlet production fairly flat since acquiring Marathon’s Cook Inlet assets in early 2013.
“There’s only a finite market for gas in Alaska,” Lalicker said. “We focus our energies on continuing to serve that market.”
Hilcorp continuously talks to its customers about gas supply requirements and has signed agreements for supplies as far out as 2022 to 2024, Lalicker said. The approach is to find out what gas people want to buy and then spend money to make sure that the reserves and deliverability are available to meet those customer needs.
He commented that his company is about to drill another well offshore in Cook Inlet, from the monopod platform, and that the company had been drilling wells at Milne Point on the North Slope.
“It isn’t one big project that makes this happen,” Lalicker said. “It’s lots of little things all the time. That’s what you do with properties late in their life.”
Moreover, he commented, Hilcorp’s investments in Alaska translate to employment for people, with the company growing its Alaska workforce and desiring to have a stable workforce perhaps 20 to 30 years into the future.
Lalicker also said that his company has been conducting some exploration in the Cook Inlet region, in the interests of finding new resources for the future, but so far has experienced “underwhelming” results.
Further investment Hilcorp plans to invest between $200 million and $225 million in Alaska in 2016. Capital projects and drilling account for a little more than half of that expenditure, while about 40 percent will go on field expenses such as maintaining facilities and equipment. But with expenditure in 2017 and beyond an unknown at this point, Hilcorp’s message to the Legislature is that the company has been growing rate and reserves by spending money, and that the current fiscal debate is a big concern. When looking at a 10- to 20-year investment time horizon, the one thing that really matters is stability in the fiscal system, Lalicker said.
“When it chops and changes we lose confidence in our ability to make investments, because we don’t know what the deal is going to be down the road,” he said. “If you want to undermine my willingness to invest in Alaska, keep trying to change the fiscal system every year or two.”
While he is not aware of any changes in the Texas tax regime for many years, there have been debates over Alaska’s tax system three or four times in the four years since Hilcorp entered the state, Lalicker said.
Complete fiscal package And it is not just a question of tax incentives: It is about the complete fiscal package, including corporate income tax and property taxes. With every state having its own mix of tax provisions, depending on its policy priorities, Alaska must decide what behaviors it wants to incentivize through its tax system, Lalicker said.
Lalicker also commented that, just as Hilcorp’s business model revolves around the need to continuously conduct many small tasks and delegating much day-to-day decision making to the shop floor, to keep aging fields alive, the state of Alaska might want to adopt a similar mindset, as the state’s oil and gas provinces mature and more smaller companies work around the edges of the massive legacy discoveries. The fiscal system, the regulatory regime, the services sector all need to be geared around this paradigm of quickly and efficiently conducting many small projects, rather than chasing single massive prizes, he suggested. Taking months to obtain a permit does not work when you are trying to do many little things, he said.
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