Vol. 24, No.36 Week of September 08, 2019
Providing coverage of Alaska and northern Canada's oil and gas industry

Prudhoe operator?

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ConocoPhillips, 36% owner, and Hilcorp, 26%, in talks about operatorship

Kay Cashman

Petroleum News

It’s official: ConocoPhillips, with a 36% interest in the Prudhoe Bay unit, and Hilcorp, in the process of buying BP’s 26%, are in talks about operatorship.

When asked whether Conoco will operate any part of the Prudhoe Bay unit, Conoco spokeswoman Patty Sullivan told Petroleum News Aug. 30: “BP is the operator until the transaction closes. In the meantime, we will be having conversations with Hilcorp regarding operatorship.”

Not surprising since the company press releases announcing Hilcorp’s acquisition of all of BP’s Alaska assets did not say Hilcorp was taking over operatorship of the North Slope Prudhoe Bay oil field; only that Hilcorp was acquiring BP’s interest in it.

Before the Aug. 27 sale announcement, it was rumored ConocoPhillips would be operating the western half of Prudhoe and Hilcorp the eastern half.

Hilcorp was asked on Aug. 30 whether it will be the sole operator of Prudhoe Bay, but had not replied as of close of business Sept. 4.

Elephant rumor

In its Aug. 11 edition, Petroleum News, or PN, carried an article about the rumor, piecing together the possible story behind it from a combination of public information previously confirmed by BP, as well as unnamed sources.

The story began in April 2014 when BP announced the sale of three smaller producing North Slope oil fields to Hilcorp: Milne Point, Endicott and NorthStar, as well as the undeveloped Liberty prospect. The deal included all of BP’s working interest in the Endicott and Northstar oil fields and a 50% interest in Liberty and Milne Point. BP’s interest in pipelines associated with those fields were also included.

The two oil fields that are key in the Aug. 27 sale announcements by BP and Hilcorp are the mature Milne Point and Endicott fields where oil production had been steadily declining.

Hilcorp, which by 2014 had established itself in the Cook Inlet basin and elsewhere as technically skilled at teasing more oil out of mature fields, as well as finding and developing additional reserves, was rumored to be auditioning for a much bigger role; that of Prudhoe Bay operator.

According to PN sources close to the 2014 deal, “on a moment’s notice” BP could have stepped in at any time and “for any reason and taken back either Milne or Endicott.”

Instead, Hilcorp proved itself a capable operator.

All three partners in agreement?

At the time of the 2014 (unconfirmed) agreement to eventually sell Hilcorp a piece of Prudhoe Bay and enable it to ultimately take over as operator, the other two major owners in Prudhoe Bay would have had to agree with BP.

Per the rumor ExxonMobil, with a 36% working interest, did agree, but according to unnamed sources, ConocoPhillips’ agreement came with a caveat: the long-time North Slope operator wanted to operate the west side of Prudhoe, allowing Hilcorp to take over the east side of the field, which until 2000 had been operated by ARCO Alaska (predecessor to ConocoPhillips) with BP operating the western half.

Since then BP has operated the entire unit.

Again, none of the Prudhoe partners ever confirmed the rumor about a 2014 agreement.

Hilcorp likely to grow oil output

Regardless of what was or wasn’t decided in 2014, Hilcorp has fewer layers of management than BP, Conoco or Exxon, and has a reputation for operating efficiently while maintaining or increasing oil and gas production.

For example, when Hilcorp took over operatorship of Milne Point, it was able to run with field with less than half the employees BP had used. (It did replace some employees by hiring contractors.)

What’s more, Hilcorp increased investment in the mature oil field, which had gone online in 1985, and bumped up production.

On Aug. 5, Ed King of King Economics Group reported impressive fiscal year 2019 output numbers from the Hilcorp-operated Milne Point oil field, his data taken from the Alaska Oil and Gas Conservation Commission.

At the Milne Point unit, King said Hilcorp had been doing a “tremendous job squeezing additional life out of this mature asset since purchasing it from BP.”

All told, 8.3 million barrels were produced from Milne in FY19 - a million barrels more than in FY18. (In April, total oil production averaged 25,260 barrels per day, up 17.7% from April 2018.)

Milne produces mainly from the Kuparuk (light oil) and Schrader Bluff (viscous oil) reservoirs and will soon also be producing from the Ugnu and Sag River (both viscous) reservoirs, per Hilcorp’ s 37th plan of development filed with the state.

Hilcorp has invested in a new drilling pad in the field - Moose Pad - which came online in June 2018.

Following on the heels of Moose Pad, which was the first new Milne pad since 2002, Hilcorp is planning to build another new pad in the unit, R-Pad.

Furthermore, the company recently received authorization to install the third polymer injection facility at Milne Point, a technology Hilcorp first brought to the North Slope.

Injecting polymer and water into the field has been more successful in coaxing the viscous crude - oil with the consistency of syrup - from the reservoir than conventional waterflood, David Wilkins, Hilcorp senior vice president for Alaska, said in November.

Using polymer, Hilcorp expects to increase crude recovery from 10 to 15% of the oil in place at Milne to as much as 50%, per slides Wilkins used in his presentation at the Resource Development Council of Alaska’s annual conference.

In short, Hilcorp has the potential of increasing profits at Prudhoe Bay for all its owners, as well as boosting the state of Alaska’s take with a production increase.

The question is, will Conoco and Exxon allow Hilcorp to operate the entire Prudhoe unit or will one of them operate part of it?

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