BP hands off keys for Prudhoe Bay to Hilcorp

Hilcorp won’t officially take over the driver’s seat at Prudhoe Bay for at least a few months, but BP Alaska President Janet Weiss offered up the keys to the iconic oil field last week.

Weiss and Hilcorp Alaska Senior Vice President David Wilkins spoke together at the Resource Development Council for Alaska annual conference Nov. 20 in Anchorage.

It marked some of the first public statements Hilcorp executives in Alaska have made since the Aug. 27 announcement that the large Houston-based independent producer had agreed to purchase all of BP’s assets in the state for $5.6 billion.

Weiss stressed a message of gratitude from BP to Alaskans, noting that she and her husband plan to stay in Alaska when the deal is finalized, likely in the middle of next year.

BP opened its first office in Anchorage 60 years ago and just a couple months after statehood, according to company executives. The London-based oil and gas giant has operated the Prudhoe Bay field since 2000.

“Alaska has helped make BP, big BP and BP Alaska. We would not be the company we are today without Alaska,” Weiss said.

“Truly, thank you, Alaska. You made us far better and you made our lives far richer.”

[State: BP sale of Alaska assets to Hilcorp clears federal hurdle]

Having regularly talked about “40 more” since the 40th anniversary of the start of oil production at Prudhoe Bay in 2017, she said the sale to Hilcorp as proof BP leaders “deeply believe in (the) 40 more” mantra.

“Hilcorp is an expert in mature fields; it’s what they do. They’re fantastic at adding decades to mature fields. They unleash the ideas of their people and bring creativity to the fore,” Weiss said.

Cumulatively, more than 13 billion barrels of oil have been pulled out of Prudhoe with about 2 billion more available for the taking, making it the most prolific oilfield in the country’s history, according to BP.

“It’s one of the great fields across the planet. With Hilcorp at the reins I believe there’s far more than 2 billion left to go and far, far more than 40 more (years),” Weiss said.

Hilcorp has been credited with stabilizing natural gas production in Cook Inlet since it purchased Marathon’s and Chevron’s assets there in 2012.

At the time, some Southcentral utility managers were discussing the viability of importing natural gas from Canada to prevent power shortages in the region. Since then, utilities have been able to secure long-term gas supply contracts, mostly with Hilcorp.

The company has also had similar success in its oil work on the North Slope, but the production turnarounds have also come with a string of regulatory violations and other operating incidents.

Most notable among those was a prolonged early 2017 natural gas pipeline leak beneath the waters of central Cook Inlet. The leak drew widespread criticism for how the company handles the often aging assets it buys, but did not result in significant regulatory action.

On the flipside, Hilcorp was lauded last year when the company completed a $90 million project to transform a cross-Inlet gas pipeline to an oil carrier, which ultimately reduced Cook Inlet tanker traffic and allowed the company to close the Drift River oil tank farm on the western shores of Cook Inlet.

The pipeline project was long-sought by environmental observers who worried the tank farm’s location near the base of Mount Redoubt, an active volcano, could eventually lead to a spill during an eruption.

Hilcorp and BP made their first Alaska deal in 2014 for $1.25 billion when Hilcorp purchased BP’s offshore Endicott and Northstar oil fields.

That deal also gave Hilcorp its 50 percent operator roles in the Milne Point field and the prospective Liberty project, which had been solely owned by BP.

Hilcorp’s Wilkins noted that Nov. 25 marked the fifth anniversary of the company taking over at Milne Point, where it has turned oil production around. When BP handed Hilcorp the keys to Milne Point the Prudhoe Bay satellite field was producing about 19,900 barrels of oil per day. Today, after $640 million of investment, Milne Point is producing about 33,000 barrels of oil per day.

That investment included drilling 50 wells and adding the first drilling pad — dubbed Moose Pad — to the Milne Point field since 2002, according to Wilkins.

“We did it in half the time of pads built on the North Slope and for about one-third of the cost,” he said of Moose Pad.

The company is also working on projects testing polymer flooding of reservoirs to recover viscous heavy oil that is prominent across much of the Slope but historically has been difficult to produce economically.

Wilkins attributed the success at Milne Point to some of Hilcorp’s core business principles.

“We drove responsibility down to the lowest level. Everybody contributed. Everybody owned it,” Wilkins said. “We found ways to get over obstacles and get it done.”

[Hilcorp wants finances kept private in Alaska deal with BP, leading to calls for transparency]

He added that the company’s success is largely dependent upon its partnerships with “smart organizations,” such as the University of Alaska. Hilcorp is currently spending about $3 million on university grants and research to advance environmental studies and industrial technologies, according to Wilkins.

And while Hilcorp is often credited for rejuvenating tired oil and gas fields, BP has been lauded since the deal was announced for its decades of philanthropic work across Alaska.

BP Alaska Vice President Damian Bilbao told Alaska Chamber members in late October that the company would continue to honor its charitable commitments in the state through 2020.

Wilkins also emphasized Hilcorp’s giving plan, which starts with the company giving each employee up to $2,500 to donate to 501(c) charities. The company then matches each donation up to $2,000 for a total contribution of up to $4,500 per employee. He said the total giving so far in 2019 is about $2.4 million.

“Our philosophy is we bring people and money back to our communities,” he said.

Hilcorp currently has more than 500 employees in Alaska, with approximately 90 percent residents. The company’s immediate focus has been figuring out the future for each of BP’s roughly 1,600 Alaska employees, according to Wilkins.

Company officials have conducted almost 2,000 interviews over the past month and are close to extending offers to the BP employees that want to make the transition to Hilcorp.

In the 2014 deal, Hilcorp added about 200 of the 475 BP employees that had been working on the related fields and projects, BP said at the time.

“BP’s excellent, qualified workforce will be key to the operation of Prudhoe Bay into the future and we will look forward to onboarding the vast majority of the folks that are interested in coming onboard,” Wilkins said.

Bilbao said that impacted employees will know their future by Dec. 20 and BP will likely begin any necessary layoffs on Feb. 20.

“One of our biggest challenges in this process is that most of them don’t want to go anywhere else,” Bilbao said of BP Alaska employees, a development that has surprised corporate leaders in Houston and London. “As much as we’ve tried to find jobs for them elsewhere (in the company), they don’t want to go.”

Sale details

Despite going all-in on Alaska, Hilcorp executives — led by founder and CEO Jeffrey Hildebrand — did not spend as much time examining what they bought as some outside observers might expect.

According to Bilbao, the $5.6 billion deal was negotiated over six to seven weeks and Hilcorp officials received about four hours of briefings specifically on Prudhoe Bay.

Last winter, BP conducted the first 3-D seismic shoot of the entire Prudhoe Bay field, which was seen by some industry observers as a sort of sales pitch to potential buyers. However, seeing the seismic data was not a part of Hilcorp’s deliberations, Bilbao said.

“(The deal) was centered around cash flow modeling and cash flow risk. That’s typically how you do a deal like this. You don’t really get into the details,” Bilbao said. “I can tell you that Hilcorp was incredibly excited about the opportunity that Prudhoe Bay still represents.”

As for BP, selling off its portion of Alaska is a means to pay for other new assets after spending upwards of $67 billion over the past decade on cleanup and settlements related to the Deepwater Horizon oil spill.

Last year BP bought roughly $10 billion of Lower 48 oil assets from Australian resources giant BHP. Company leaders held a desire to pay for those acquisitions with cash, not debt, leading them to evaluate which assets were best suited to sell off, Bilbao explained.

Fortuitously for BP, it already had an existing partner with the requisite cash and expertise to put a deal together.

“They’ve shown at Milne Point that they can take a field we operate, reduce the complexity and bring new pads online for lower dollars per barrel that we would’ve,” he said.

Alaska accounts for about 3 percent of BP’s global portfolio and is outside of the areas where it holds most of its upstream assets — the Gulf of Mexico, the North and Caspian Sea regions and Angola. Some of Alaska’s unavoidable costs, combined with the state’s continued debates over oil tax policy, led BP to sell Alaska, according to Bilbao.

“It’s an expensive place to operate and that’s not just the field, it’s also the cost of moving (oil) to market across the pipe and the ships and it’s an unstable fiscal environment, which factors into the way you look at your growth capital investment options,” he said.

He further acknowledged that Alaska operations have had a hard time attracting internal investment capital for several years and getting the $2 billion or so needed for a new drill site within Prudhoe would have been a struggle as well, he said.

One of the few Alaska-centric things BP is not yet selling to Hilcorp, at least at this point, is Alaska Tanker Co. The fleet of four, 1.3 million barrel-capacity, double-hulled tankers operate almost exclusively between Valdez and West Coast refinery markets.

“What I’ve told people is we will soon have four tankers and no crude and they’ll have a lot of crude and no tankers. So I’m guessing we’re going to have to figure out a way to resolve that, but that is not part of this deal,” Bilbao quipped.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.