Incremental gainsLalicker describes Hilcorp’s approach to rejuvenating Cook Inlet fields Alan Bailey Petroleum News
A key to Hilcorp Alaska’s success in upping production from the oil and gas fields of Alaska’s Cook Inlet is the empowerment of the company’s employees and contractors to find improved ways of teasing more hydrocarbons from field reservoirs, Greg Lalicker, president of Hilcorp Energy, told a breakfast meeting of the Alaska Support Industry Alliance on Oct. 9.
“It’s actually that incremental effort and dedication at the margin that makes a much bigger difference than any clever, brilliant idea that we could drop down from above,” Lalicker said. “The empowerment happens when you get the foreman and the whole team of operators, mechanics and everyone out there with that mentality of wanting to hit their targets.”
Hilcorp specializes in the purchase and rejuvenation of old oil and gas fields, while also seeking new development opportunities close to its purchased assets, Lalicker said. And to encourage its employees’ creative juices, Hilcorp offers an incentive scheme, paying out large bonuses at the end of a five-year planning cycle if the company meets its growth targets for that cycle.
Cook Inlet assets In early 2012 Hilcorp purchased Chevron’s Cook Inlet assets, mainly oil fields, while about a year later the purchase of Marathon’s assets brought mostly gas fields into Hilcorp’s Cook Inlet portfolio. Since taking over the Chevron fields oil production has increased from about 6,000 barrels per day to about 13,000 barrels per day - a recent well drilled from one of the Cook Inlet platforms could bring that production figure up to 14,000 barrels per day, Lalicker said.
Hilcorp has also achieved success in pushing up gas production from the old Chevron and Marathon fields, turning what had been a pending crisis over Southcentral utility gas supplies into a much more comfortable situation.
“Our game is to always stay a year or two ahead of everybody’s (gas) needs,” Lalicker said. Hilcorp continues to put money into drilling new wells but, at the same time, is anxious not to develop gas that does not have a market outlet, he said.
Fluid handling On the oil side of the business the big challenge is the scale of the fluid handling needed, given the large volumes of water that now comes out of the field reservoirs along with the oil, Lalicker said. In the McArthur River field, for example, only 4 or 5 percent of some 90,000 barrels of daily fluid production actually consists of oil.
And critical to maintaining and pushing up the production is the remediation of old wells and the drilling of new wells.
“We’re going to drill over 20 wells this year,” Lalicker said, in addition to ramping up the recompletion of old wells.
“There are a number of old well bores that we think still have opportunities left in them, either to be re-activated in their current zones or recompleted in other zones,” he said.
Still in the red But his work does not come cheap - Hilcorp has yet to recover the costs of its Cook Inlet assets, with the company seeing that cost recovery as a six- or seven-year project. The company spent $900 million on acquiring the assets and subsequently invested another $900 million into the assets in terms of capital projects such as the drilling of new wells, well workovers and the repairing of field facilities, Lalicker said. Then, with $360 million in operating costs and overheads offset by $1.5 billion in revenues, Hilcorp is still $600 million in the red in its Cook Inlet venture, some three years after entering the region.
The question is whether the projects that the company knows can make a difference to the production and revenue figures can be executed quickly enough, especially as world oil prices decline, Lalicker said.
“So far it’s turning out pretty good, but there’s still a long way to go before I’m saying it’s really good,” he said.
Increase field value Lalicker explained that Hilcorp’s business model is based on the concept of purchasing old oil and gas fields at prices that reflect field performance at the time of acquisition. To then make money out of the acquisitions it is essential to come up with better ways of developing and operating the fields, to elevate field value above purchase price.
Typically, Hilcorp gains about 10 percent of its new value from acquired properties from cost reduction - the use of fewer people and more efficient services, and the better bundling of contracts, Lalicker said. And in the past about 25 percent of the value creation has come from the rising prices of oil and gas. But the remaining two-thirds, “the big needle mover,” comes from production rate increases, coupled presumably to the drilling and remediation of wells, leveraging those creative efforts of employees and contractors, to come up with new ideas and new ways of doing things.
Asked for his views on Alaska fiscal policies and the potential impact of those policies on his company’s Alaska ventures, Lalicker said that the most important factor is fiscal predictability, to enable long-term business planning. The idea of making investments with payoff periods of five to 10 years or more when the fiscal regime is changing every two to three years “is just untenable,” he said.
“If Alaska ever gets to the point where we feel like we cannot predict the fiscal regime we stop investing,” Lalicker said. “It’s just that simple because that’s foolish, putting your money out there and not knowing under what terms you’re going to be producing the oil and gas.”
Lalicker commented on the way in which the Alaska Oil and Gas Commission and the Alaska Department of Natural Resources have been working with his company, to try to make the permitting of field developments as simple and predictable as possible. Given the company’s strategy of doing many little things to improve field performance, the simpler the permitting process the more efficient the field development can become, he said.
BP assets In the fourth quarter of this year Hilcorp anticipates closing on the purchase of some of BP’s North Slope assets, acquiring 100 percent interests in the Endicott and Northstar fields, and a 50 percent interest in the Milne Point field. Hilcorp also has an option to take a 50 percent stake in the undeveloped Liberty oil field, offshore in the Beaufort Sea.
Lalicker said that Hilcorp’s immediate priority upon taking over the BP assets would be to increase field production rates.
“Our goal is to start moving rate up as quickly as possible,” he said.
He said that a decision on the Liberty acquisition would follow an investigation into whether the development is viable and is likely to make money in a reasonable timeframe. In 2012 BP abandoned a plan to develop Liberty using ultra-extended-reach drilling from an expanded production island at the Endicott field, favoring instead an earlier concept of building an artificial production island at the Liberty location.
Heavy oil Asked about Hilcorp’s views on potential heavy oil development in the Milne Point field, Lalicker said his company’s short-term priorities revolve around relatively small-scale projects that deal with conventional oil resources, with consideration of heavy oil and other bigger and more technically challenging projects coming later. In 2011 BP activated a heavy oil test facility in Milne Point. But, after some success in heavy oil test production, in 2013 the company suspended the project, presumably having encountered difficulties in overcoming the technical and economic challenges of developing this massive but difficult resource.
Questioned about the challenges for North Slope employees involved in the transition to Hilcorp employment, Lalicker commented that, given Hilcorp’s policy of pushing decision making and accountability down the chain of command, people at the foreman level tend to experience the biggest disruption. Hilcorp expects individuals at that level to figure out how best to run their assets, making their own decisions based on their own fund of experience. It can take a while for people to get their feet under the idea of deciding what to do, rather than being told what to do, Lalicker said.
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