Vol. 25, No.27 Week of July 05, 2020
Providing coverage of Alaska and northern Canada's oil and gas industry

Upstream done

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With state approval, BP’s North Slope assets now belong to Hilcorp

Kristen Nelson

Petroleum News

It’s a done deal - or at least a partially done deal.

The upstream portion of the Alaska oil and gas asset sale between BP and Hilcorp announced last August closed June 30.

BP, which has been a major Alaska player for more than 60 years, confirmed July 1 the completion of the sale of the upstream portion of its Alaska assets to Hilcorp, with Prudhoe Bay operations transferring to Hilcorp at midnight June 30. BP said the upstream assets comprise the vast majority of the value of the $5.6 billion deal.

BP, an international major, was a crucial driver of North Slope development, working in Alaska for more than six decades. The torch now passes to Hilcorp, an independent U.S. based company specializing in working mature oil fields.

A crucial step in the asset transfer happened June 29, when the Alaska Department of Natural Resources and the Alaska Department of Environmental Conservation approved transfer of BP’s Alaska upstream assets to Hilcorp.

Terms of the deal between the companies were renegotiated earlier this year due to market volatility and the fall of oil prices. In an April 27 statement BP said it had worked with Hilcorp to reconfirm its commitment to completing the deal. The sale price remained at $5.6 billion, with a $500 million deposit from Hilcorp made at the signing, but the revised agreement between the companies adjusted the structure and payment to provide for lower payments from Hilcorp in 2020, “new cash flow sharing arrangements over the near-term, interest bearing vendor financing and, potentially, an increase in the proportion of the consideration subject to earnout arrangements,” BP said in April.

Upstream assets include oil and gas leases and facilities associated with producing oil and gas on the North Slope.

Closing on the midstream - BP’s interests in the trans-Alaska oil pipeline, the Valdez Marine Terminal and pipelines on the North Slope - is still a work in progress, with the Regulatory Commission of Alaska looking at a late September date for its final decision.

BP said it and Hilcorp are continuing to work with regulators to complete the midstream portion of the sale.

Working interest in leases

DNR must approve transfer of working interest in oil and gas leases - in this case, BP’s interest in 176 leases at the Prudhoe Bay, Point Thomson and Milne Point units on the North Slope. Two hundred and fifty-six surface use permits also required amending.

The approvals required “significant due diligence, evaluating Hilcorp’s financial standing and obtaining financial assurances for the substantial in lease, permit, easement, and right-of-way obligations this deal represents,” DNR and DEC said in a June 29 release.

The state also secured a guarantee of secondary liability for dismantlement, removal and restoration of existing facilities and contaminated sites from BP Corporation North America.

Ten months of work

“After ten months of in-depth analysis, stress-testing of Hilcorp’s financial capacity to hold and operate these assets, and successfully securing secondary liability guarantees from BP, I am confident that the transfer of these leases and facilities both protects and advances Alaska’s interests,” said DNR Commissioner Corri Feige.

DEC’s role included transition of environmental permits and plan approvals, ensuring Hilcorp’s financial responsibility for facilities and establishing responsibility for existing contaminated sites, the departments said.

In a due diligence memorandum to Gov. Mike Dunleavy from the Governor’s Oversight Committee, which Feige chairs, the committee summarized the work of DNR, DEC, and other executive branch agencies involved in approval of the asset transfers.

Leases, employees

The 176 state oil and gas leases in the transfer include 115 at Prudhoe Bay, 37 and Point Thomson and 24 at Milne Point.

BP Exploration (Alaska), BPXA, owns the upstream assets and those assets now belong to Hilcorp North Slope LLC.

Hilcorp Alaska is currently 50% working interest owner at Milne Point, and the 50% working interest BPXA has at Milne will be assigned to Hilcorp Alaska.

The Department of Labor and Workforce Development provided employment information: 1,567 BP employees are affected by the transaction; 806 received offers from Hilcorp and 749 accepted; 342 employees volunteered for severance and 294 employees (237 of whom are Alaska residents) received involuntary severance. Some 153 employees will move outside of Alaska and continue as BP employees.

For the first 90 days, BP and Hilcorp will overlap experienced personnel at Prudhoe Bay facilities to ensure a seamless and safe transition, the committee said.

Hilcorp in Alaska

Hilcorp has a demonstrated record of operation in Cook Inlet, on the North Slope and in the Lower 48 and “has demonstrated an ability to increase production and ultimate recovery while reducing operating expenses. Further, a review of Hilcorp’s safety record reveals that with an increase in contact hours as its business has grown, reportable incidents have been in steady decline,” the committee said.

Hilcorp came to Alaska in 2011, acquiring existing production in Cook Inlet from Chevron and acquiring Marathon’s Cook Inlet assets in 2012.

Hilcorp began working on the North Slope in 2014 when it acquired all of BP’s interests in the Endicott and Northstar oil fields and a 50% interest in Liberty and Milne Point, taking over as operator at all four fields.

Financial assurances

Adequate financial protection for the state is a key component in approving lease transfers, the committee said.

DNR’s commercial analysts revisited, with assistance from outside experts at National Economic Research Associates and international law firm Morrison & Foerster, the financial assurance agreements held by Hilcorp for its existing business in the state, both upstream and midstream assets, the committee said. Hilcorp was on its sixth iteration of its FAA for existing upstream assets and a condition of approving the lease transfers was Hilcorp executing an updated seventh iteration of its FAA.

The FAA includes a formula-based financial assurance amount refreshed every third year; submission of third-party estimates of costs to fulfill Hilcorp’s dismantlement, removal and restoration liabilities; quarterly and yearly submission of financial data; opportunity to review insurance coverages; and pre-defined financial metrics to periodically reassess Hilcorp’s financial strength.

The FAA requires a modification of the financial assurances formula if there is a material change in Hilcorp’s financial health.

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