Hilcorp Energy’s purchase of BP’s Alaska holdings is getting good marks, generally. The company will aggressively tackle Prudhoe Bay field development after it takes over as field operator from BP in 2020. If the Houston-based independent producing company can repeat at Prudhoe what it did after taking over mature Cook Inlet oil fields in 2012, North Slope production will grow, a plus for Alaska, independent Alaska analysts and state officials said.
“This is a big positive. Hilcorp will be much more aggressive than BP in pursuing new development opportunities,” Dudley Platt, an analyst and oil and gas consultant, said in an interview. “Hilcorp has a reputation for cutting costs, investing and increasing production in mature fields,” Platt said.
Hilcorp’s purchase of BP’s Alaska assets include the company’s shares of the large Prudhoe Bay oil field on the North Slope, where it will become the operating company, and the Point Thomson gas and condensate field east of Prudhoe, where ExxonMobil is operator. Also included is BP’s ownership share in the Trans Alaska Pipeline System and the company’s interest in undeveloped oil and gas leases on private inholding in the Arctic National Wildlife Refuge, which is shared with Chevron Corp.
BP and Chevron drilled an exploration well on the ANWR leases in the early 1980s and have held the results tight since then. A federal oil and gas lease sale is planned in ANWR later this year that will offer acreage near the BP and Chevron holdings.
Kara Moriarty, president of the Alaska Oil and Gas Association, said BP is one of Alaska’s legacy oil producers and will be missed. “But Hilcorp has proved its ability to turn around mature Alaska fields by bringing new innovation and ideas into a basin.”
“Hilcorp first arrived in Alaska in 2012. Since that time it has invested more than $4 billion in Alaska, and become the state’s largest producer of natural gas,” she said, while also increasing Cook Inlet oil production by about two thirds, from 10,000 b/d in 2012 to 16,000 b/d in 2019. Hilcorp also purchased BP’s North Star and Endicott fields on the North Slope in 2014 along with 50 percent shares of the Milne Point and undeveloped Liberty offshore fields, where Hilcorp also became operator.
Operation of those fields showed that Hilcorp, which is better known as a U.S. gulf coast operator, could successfully make the transition to the more challenging environment of the North Slope, and particularly the Alaskan Beaufort Sea where the offshore North Star and Endicott fields, are located.
Platt said Hilcorp has also demonstrated its willingness to apply advanced technology on the slope, for example a polymer flood that was installed at two locations in the Shrader Bluff heavy oil deposit in the Milne Point field. Hilcorp has also undertaken a major new conventional oil project, Moose Pad, at Milne Point.
Alaska’s Gov. Mike Dunleavy was upbeat about the BP-Hilcorp deal, but also cautious:
“Today’s announcement — a passing of the torch within the Alaska oil and gas sector — is significant news for our state. While we are only just reading of this announcement, we look forward to learning more and seeing operational details. We welcome Hilcorp to their next phase in Alaska operations and thank BP for their decades long commitment in bringing Alaska’s mineral wealth to market,” Dunleavy said in a statement.
State Senate President Cathy Giessel, a Republican from Anchorage, said she is worried that the state’s fiscal difficulties and political fighting over oil and gas taxation, which may resume in the Legislature next year, may have encouraged BP’s exit.
“I am excited to see Hilcorp expand its investment in Alaska. At the same time, BP’s exit raises significant concerns and questions, in my mind, about the impact of Alaska’s political instability on BP’s business decision. BP has been a ‘legacy’ investor in Alaska, shaping communities and job opportunities for a couple generations,” Giessel said in a statement.
Alaska legislators are expected to review state oil tax changes made in 2013 when they convene in January but an aspect of the BP-Hilcorp deal is expected to add a push for that, said state Rep. Gary Knopp, Republican from Kenai, south of Anchorage.
“Hilcorp’s corporate structure as a privately-owned limited-liability ‘subchapter S’ corporation makes it exempt from state corporate income tax that BP pays as a regular corporation. We’ll want to take a look a that, and it could greatly complicate what will already be complex, our review of a per-barrel tax credit,” given producers under the tax changes made in 2013, Knopp said in an interview.
As a subchapter S corporation Hilcorp pays no state income tax on its Alaska income, with any tax liability passed to its shareholders. But because Alaska has no personal income tax, there is no tax paid on income earned from Hilcorp’s Alaska production profits, although the company pays state production and property taxes. Legislators pushing for changes to taxes will fasten on that as a new argument, Knopp said.
Industry officials say the 2013 changes in stimulated new investment and drilling that increased North Slope production enough to offset long-term decline of the mature large producing fields. If taxes are changed investment may flag and the decline will return, they say. Alaska now produces about 500,000 barrels per day, one fourth of 2 million b/d it produced in the 1980s and 1980s.
The long-term decline has averaged about 5 percent a year but in recent years production has stabilized at about 500,000 b/d due to investment in new fields and in the large mature fields.