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Vol. 25, No.41 Week of October 11, 2020
Providing coverage of Alaska and northern Canada's oil and gas industry

That new dog won’t hunt

Prudhoe doing better, but Ballot Measure 1 zaps AK jobs, puts back in decline

Kay Cashman

Petroleum News

The Prudhoe Bay oil field is doing a little better than expected three months after Hilcorp Alaska took over operatorship, company executive David Wilkins told the Alaska State Chamber Fall Forum on Sept. 24.

After completing its acquisition of BP Exploration (Alaska)’s upstream assets, including 26.36% of the Prudhoe Bay unit, Hilcorp is delivering 260,000 barrels of oil per day - 10,000-20,000 more barrels daily than it was two years ago.

In talking about how promising 2020 started out, Wilkins’ fellow presenter, ConocoPhillips Alaska President Joe Marushack, also sounded pleased about Hilcorp’s performance at Prudhoe Bay: “We had Hilcorp coming on as a new owner and operator to see what they could do to reduce costs and increase production. I can tell you that in just a short period of time that’s gone pretty well.”

ConocoPhillips Alaska holds a 36.08% interest in the Prudhoe Bay unit, while ExxonMobil Alaska Production holds the other major chunk with 36.4%.

Wilkins said Hilcorp is developing a long list of things to do at the oil field.

“We have started to think about … how we invest in Prudhoe Bay,” including drilling wells, he said.

But “if Ballot Measure 1 passes … we’ll have to cut capital. We will not be able to execute on those drill wells. … It will be devastating to the future of Prudhoe Bay.”

The message Wilkins and Marushack delivered in their virtual presentation to the chamber was if Alaskans are looking for permanent dividends into the future, voting for the huge oil tax increase in Ballot Measure 1 will not work. It will do the exact opposite because Alaska’s economy depends on a healthy oil industry to fund the Permanent Fund and jobs, noting the industry provides about 78,000 direct jobs in the state.

If passed by Alaska voters on Nov. 3 the measure with its 150-300% increase in oil severance tax “takes away all our free cash flow. Therefore, there is a very limited number of investments we are going to be able to make,” Marushack said.

“So, if that happens, we start back on decline again and when you start back on decline, it’s hard to catch up. One of the great things that happened under SB21 (the current state tax regime) is we were able to stop the decline a few years ago,” he said.

“The ballot measure would put the brakes on the North Slope recovery,” Marushack said.

“The Yes group make great sounds, but it ignores the facts and the truth.” Ballot Measure 1 “is targeted specifically at Prudhoe, Kuparuk and Colville. It is targeted at the backbone of industry. If those three fields aren’t healthy nothing is going to work very well,” Marushack said.

Modern tech in toolbox

In its purchase of BP upstream assets in Alaska, Hilcorp also acquired the remaining balance of Milne Point and a tiny piece of the Point Thomson unit.

BP, an international major, was a crucial driver of North Slope development for more than six decades in Alaska.

Hilcorp, a U.S. based independent with producing assets in the Cook Inlet basin and on the North Slope, is best known for employing modern tools to increase output from mature oil and gas fields, giving fields past their prime the attention they need to continue producing at optimum levels.

A lean operator, Hilcorp cuts layers of costs while also investing in infrastructure upgrades and putting capital into drilling new wells - including the seismic and studies needed to best locate them.

‘Right up our alley’

A mature asset, Prudhoe Bay “is right up our alley,” Wilkins said. “It is just like Cook Inlet, just like Milne Point.”

Hilcorp entered Cook Inlet eight years ago and has since invested three-quarters of a billion dollars, drilled 126 wells, paid $360 million directly to the State of Alaska in royalty and taxes and drastically increased oil and gas production in southcentral Alaska.

“The Cook Inlet basically had a going out of business sign on it”; all that has changed with the investments made by Hilcorp, Wilkins said. “And to boot we feel that there are 20-plus years of productivity, of royalty and taxes, left in the Cook Inlet basin.”

Success at Milne Point

Hilcorp first acquired some of BP’s assets in 2014, including a 50% interest in, and operatorship of, Milne Point where it has invested more than $700 million and doubled production, reaching 36,000 barrels per day in April. Hilcorp expects to reach 40,000 bpd by the end of the year.

The company has nearly tripled its Alaska workforce as a result of the recent transaction with BP, growing from some 550 employees to more than 1,450, with more employees expected to be added in the coming months.

Wilkins said 76% of its workforce are Alaskans.

“Now that number did come down with the recent acquisition of BP in Alaska We were 89.9% Alaskans , but we hired 741 outstanding new employees from BP that have done a remarkable job of transitioning Alaska’s biggest oil field over and I am proud to say operations are stable and running well environmentally, responsibly, safely, and without incident,” he said.

Since taking over at Prudhoe Bay, “we have also hired … 141 additional folks in addition to the BP employees and we continue to recruit and fill positions that are open so we are hiring in Alaska and our focus going forward will be to hire Alaskans,” Wilkins said.

Tax stability needed

But Wilkins is concerned about Ballot Measure 1 and its potential impact.

“In the boardroom Alaska’s propensity to always be changing the tax rules … causes caution on committing to long-term projects.”

Hilcorp’s capital “doesn’t need to come to Alaska. The money will go to the best project within our company,” he said.

“I still believe that Alaska’s got some great projects. The best thing that Alaska can do is make the playing field for investment stable. … And in my view SB21 was a reasonable way of doing that,” Wilkins said.

The increase in severance taxes by 150-300% proposed in Ballot Measure 1 “is in addition to the income taxes we pay, the royalty we pay, the operating costs we pay,” Marushack pointed out.

“It really will affect our investment. It is a pretty simple formula: If you increase taxes you increase costs. When you increase costs the cash flow goes down. When your cash flow goes down you have less money to invest. And that trickles down … to the whole economy. It trickles down to our contractors, to their suppliers, to the small businesses and ultimately trickles down to have an impact on the state, to all the people in the state,” Marushack said, noting it takes new cash flow to fund projects like ConocoPhillips’ big North Slope Willow oil discovery.

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