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Goal 2nd quarter
BP, Hilcorp, DNR brief legislators on transaction, status of approvals Kristen Nelson Petroleum News
BP and Hilcorp plan on a second quarter finalization of Hilcorp’s purchase of BP’s Alaska assets. State approvals are needed.
The Department of Natural Resources says it is moving forward with required approvals for upstream assets. Midstream approvals will come from the Regulatory Commission of Alaska which is still wrestling with issues of confidentiality for Hilcorp’s financial data.
In a Feb. 26 joint meeting of the House and Senate Resources committees, DNR, BP and Hilcorp provided background and updates on the status of Hilcorp’s purchase of BP’s Alaska assets, a deal which will see a 50-year player in Alaska’s oil and gas industry exit the state, handing off to a relative newcomer which specializes in working mature assets.
BP: Investment constraints Damian Bilbao, vice president of commercial ventures for BP in Alaska, told committee members that BP was leaving Alaska because this is a time of limited capital investment in the oil and gas industry. He said the company believes that for every two barrels of oil in the ground, only one of those barrels will be produced over the next 50 years.
With competition for investment, investment dollars will go where they attract the greatest return.
BP made a $10 billion acquisition of BHP assets in the Lower 48 and chose to finance that purchase by selling assets rather than by increasing debt. In deciding which assets to sell, Bilbao said, BP looked at whether an asset competed for growth capital within the company’s portfolio. The short list of assets considered for sale included Alaska because of its high cost of production, distance from market and tax uncertainty. The oil tax debate and oil tax uncertainty influenced the way Alaska was evaluated, Bilbao said, despite the fact that there is no shortage of resource opportunity in the state.
Uncertainty is an important word in the industry because decisions are made which require huge investments with no revenue until years later, he said, raising the issue of whether the economics of a project will change in the future as costs change or as taxes increase.
Bilbao said BP was pleased when Hilcorp expressed an interest in buying BP’s Alaska assets, making Alaska a solid divestment candidate.
BP has worked with Hilcorp at Milne Point for several years, Bilbao said. In 2014 Hilcorp took a 50% interest in the field and became field operator. He said BP has seen Hilcorp double production at Milne, deliver a new pad faster, more efficiently and effectively than BP would have. Because of what Hilcorp has done at Milne, he said, BP expects to see that field producing for decades and is looking forward to “passing the torch” and seeing Hilcorp produce at Milne for another 40 to 50 years.
Bilbao said BP is cooperating with Hilcorp in preparation for day one - when the official handover happens. He said Hilcorp is taking a large portion of BP’s workforce and the institutional knowledge those people have. BP has been working on training for any new staff joining with BP now and working toward day one. There are also shadowing plans, so Hilcorp staff are already participating and after the announcement Hilcorp moved quickly to put their top experts in place to learn.
One thing that will be part of the purchase is more than 40 years of data - subsurface, surface and commercial - owned by BP Exploration (Alaska). When Hilcorp buys BPXA, they’ll buy that data, Bilbao said, including warehouses with thousands of boxes of cores. Prudhoe is a world class asset, and the data goes with that.
He said Hilcorp had shown BP what they could do, both in Cook Inlet and at Milne Point.
And for Prudhoe Bay, there are two other well qualified owners at Prudhoe, ExxonMobil and ConocoPhillips. Bilbao said BP is a better operator because the other owners seconded people into BP’s operations and that practice will continue under Hilcorp.
Investment opportunity David Wilkins, senior vice president of Hilcorp Alaska, said the parent company, Hilcorp Energy, was founded in 1989 with the goal to be the premier independent, and today is the largest privately held company in the nation. In Alaska, he said, the company has 581 employees, 90% of whom are Alaskans, and thousands of contractors that support the company every day.
Hilcorp Energy operates in eight states with 450,000 barrels of oil equivalent gross production per day, about 20% of that from Alaska.
The company’s success is built on taking over mature assets and investing capital, Wilkins said.
Since 2012 Hilcorp has invested $2.5 billion in Alaska, not including acquisition costs. It took over Cook Inlet assets in 2012 and over 8 years invested $1.7 billion in the basin, increasing production and maintaining aging infrastructure. Hilcorp has drilled 86 wells in Cook Inlet, worked itself out of royalty relief on three platforms and extended the life of the basin by at least 20 years through projects like the cross inlet pipeline, completed last year.
Hilcorp decommissioned the Drift River Terminal last year, Wilkins said, and is advancing DR&R, dismantlement, removal and recovery, for the Christie Lee platform, the first Cook Inlet platform to be retired.
In 2012 Cook Inlet was running out of natural gas and brownouts were discussed. Hilcorp stabilized that, he said.
Milne Point In 2014 the company brought the same commitment - energy, investment and innovation - to the North Slope, Wilkins said. Milne Point has been the hub of the company’s activity there. In November 2014, when Hilcorp took over as operator at Milne (it acquired a 50% interest from BP), the field was declining at 8% per year and had 90 employees.
Five years and $700 million later, Milne is housing between 300 and 400 a night; 60 wells have been drilled; production has gone from 18,400 bpd to 34,000 bpd - a level it hadn’t seen since 2008 - with production expected to hit 40,000 bpd by the end of the year.
Wilkins said Moose Pad at Milne was a big accomplishment. Hilcorp brought that project in under budget, in less than 2 years, without incident, and currently has 10 producing wells and a drilling rig at the pad.
Moose Pad is Milne’s first new pad since 2002, he said, and was built in half the time pads were being built and for a third of the cost. More pads are coming at Milne Point, Wilkins said.
Hilcorp was the first to bring polymer flooding to Milne and to the North Slope, he said, with two polymer flood operations at Milne and two more to be added, doubling heavy oil production at the field.
And last year, he said, Hilcorp drilled the first conventional Ugnu well at Milne Point, unlocking the potential for a billion barrels of recovery.
Hilcorp will nearly triple its workforce with the BP acquisition. Wilkins said they made offers to 80% of the BP employees who applied - out of 1,000 applications, 800 offers were made and 750 were accepted. Of those 650 are field employees, he said. An additional 150-200 positions will be filled over the next few months.
Specific teams will see increases: the integrity team charged with inspecting aging infrastructure will add 51 positions to the 14 existing; the safety group which assists operations will add 29 position to an existing 14; and the environmental group sill add 16 to an existing 11 positions.
Questions for Hilcorp Wilkins got a number of questions from legislators, beginning with what would happen to the BP building.
He said Hilcorp will stay in its current Midtown location, expanding its space there, and will retain the lease on the BP building, which BP sold several years ago.
Hilcorp is proposing a smaller workforce and Wilkins was asked how the company proposes to do more with less. He said Hilcorp pushes responsibility down as far as possible: It’s not a bureaucratic company and has just five levels from the lowest to the president. He said the company looks at tasks and maps them out and hires smart, with efficiencies in overhead and in accounting.
Asked about a death at the company’s North Slope operations in 2018, Wilkins said that December day was a tragic one which hit the Hilcorp family hard. It was one of our contractors, he said. There’s nothing that can make that right, he said.
The company looked at what happened with the contractor and with OSHA, and implemented changes, recommitting to doing work safely, Wilkins said.
DNR progress report DNR Commissioner Corri Feige told the committees that she thinks the state’s due diligence is progressing at a good pace and said there is a good exchange of information with the companies.
She related she told the committees when asked in December how far along the state was in review and vetting of the transaction that they were about in the third inning. Now, she said, we’re in the bottom of the fifth, headed for the sixth inning, with no extra innings anticipated.
Feige chairs the governor’s oversight committee, formed by the governor to oversee transaction due diligence, and including the commissioners of DNR, the departments of Environmental Conservation, Fish and Game, Labor, Commerce and Revenue, along with a representative of the Attorney General’s office and a senior staff member from the governor’s office. Feige said this was not a deliberative body but was meant for information sharing. The committee will have a public meeting in the second half of March.
She reviewed the assets that are part of the transaction and the agencies which have to approve various parts of the transaction.
Two big parts of the turnover are leases and pipelines.
As DNR commissioner, Feige said, she must approve turnover of leases to a new owner. The Regulatory Commission of Alaska is responsible for approving the turnover of BP’s midstream interests: North Slope pipelines and its interest in the Trans Alaska Pipeline System.
The Alaska Oil and Gas Conservation Commission, the Attorney General’s office and the Department of Environmental Conservation also have roles in approving the transfer.
Feige noted that AOGCC increased its bonding levels for plugging and abandoning wells significantly in May 2019. Both BP and Hilcorp carry the necessary bonding to cover the AOGCC requirements, she said, and also carry DR&R bonding with DNR. Since the DR&R bonding includes P&A, she said that’s something that’s being worked on.
In a March 2 letter to the committee chairs, AOGCC Chair Jeremy Price said both companies are currently compliant with updated bonding regulations, BP as operator of some 1,776 wells, which requires $30 million in bonding, and Hilcorp as operator of some 1,042 wells, also requiring $30 million in bonding.
BP has a surety bond in place for $7,650,000, with the next installment of $7,450,000 due in August. Hilcorp also has a surety bond in place for $7,650,000 with the next installment of $7,450,000 also due in August.
When the commission increased its bonding requirements - previously $200,000 covered all an operator’s wells in the state - it made provisions for companies to come up to the new required bonding level with installment payments.
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