Sep 3, 2019 | By Bob Downing, Editor, Kallanish Energy
In divesting its Alaska upstream and midstream assets for $5.6 billion, BP has chosen to pursue crude oil production from U.S. shale, the Gulf of Mexico and elsewhere.
The sale reflects the growing attractiveness of U.S. shale and the dimming in recent years of Alaska’s once-dominant oil resources.
The Permian Basin in West Texas and New Mexico is more attractive to BP than declining production from giant Prudhoe Bay on Alaska’s North Slope, Kallanish Energy reports.
Prudhoe Bay production has dropped from 1.6 million barrels per day (Mmbpd) in 1988, to about 280,000 Bpd in recent years.
BP refocused on US shale
BP is now refocused on U.S. shale and its bigger growth opportunities after acquiring Permian, Eagle Ford and Haynesville assets in Texas and Louisiana from Bhp for $10.5 billion in 2018.
Rystad Energy noted the deal was “part of a strategic shift by BP to focus further on U.S. tight oil assets.”
“In departing Alaska, BP is choosing to focus on higher growth opportunities elsewhere including U.S. unconventionals,” Andrew Dittmar, a senior analyst at Enverus, told Bloomberg.
Part of major divestitute plan
The Alaska sale was part of London-based BP’s plans to divest $10 billion in 2019 and 2020 as part of its corporate reshaping.
The company is saying goodbye to Alaska after 60 years. It has long dominated Alaskan production along with North Slope partners ConocoPhillips and ExxonMobil.
Part of larger pattern
BP’s departure is part of a larger pattern in the industry. Other companies including ExxonMobil could also be selling out of Alaska in the future, Wood Mackenzie analyst Rowena Gunn told Axiom News.
Legacy energy companies are selling mature assets and new players are coming in to Alaska, observers noted. That may be the bottom line to the deal, according to some. For those reasons, that’s why the deal announced last week was a surprise that really shouldn’t have surprised anyone.
Hilcorp and its subsidiary, Hilcorp Alaska, are acquiring all of BP’s Alaskan assets. “Hilcorp is somewhat uniquely following a counter-cyclical strategy, really going after these legacy assets that public companies are selling at pretty attractive price points. They will generate cash flow for decades,” Dittmar said.
Hilcorp acquires mature assets
Hilcorp, founded in 1990, is known for acquiring mature assets in existing fields and then maximizing profit by boosting production and reducing overhead. It operates more wells than any other company in the Lower 48 states with 28,000 wells.
It has operations in nine states: Alaska, Alabama, Colorado, Louisiana, New Mexico, Ohio, Pennsylvania, Texas and Wyoming. Its founder, billionaire oilman Jeffrey Hildebrand, was never a major booster of shale because of its steep production declines. Instead, he focuses on conventional assets.
It is a strategy that made Houston-based Hilcorp the largest private producer in the U.S. Its gross operated production was 610,00 barrels oil-equivalent per day (Boe/d) at July 31.
Hilcorp traills only Cop in Alaskan production
It is already the No. 2 producer in Alaska, at 75,000 Bpd, behind only ConocoPhillips (Cop). “Hilcorp has a proven track record of bringing new life to mature basins, including Alaska’s Cook Inlet and the North Slope, and we have a clear understanding that an experienced local workforce is critical to success,” said president Jason Rebrook, in a statement last week.
Bp and Hilcorp have worked together on North Slope projects for the last five years. That connection made the deal more likely. The sale also comes as the two companies were expected to make a strategic decision this year on whether to proceed with a $1.5 billion joint offshore project.
The Liberty Project
The Liberty Project calls for building the first man-made drilling island in federal waters off Alaska, in the Beaufort Sea. The island would be built in 20 feet of water six miles offshore, east of Prudhoe Bay.
Eight to 10 wells would be drilled to produce up to 70,000 barrels per day. The island would be similar to four other drilling islands built in state waters in Alaska.
Hilcorp now owns the entire project, which could tap the largest undeveloped light oil reservoir on the North Slope. The company has not addressed any future plans.
BP’s entire upstream & midstream assets sold
The $5.6 billion BP transaction includes the giant Prudhoe Bay field on Alaska’s North Slope and the 800-mile Trans Alaska Pipeline. BP owns 26% of Prudhoe Bay and has been the oilfield’s operator.
The sale will include BP’s entire upstream and midstream business in the state, including BP Exploration (Alaska) Inc., which owns all of BP’s upstream oil and gas interests in the state, and BP Pipelines (Alaska) Inc.’s interest in the Trans Alaska Pipeline System. BP owns 49% of the pipeline. That stake will go to Harvest Alaska, Hilcorp’s midstream subsidiary.
The assets being sold also include BP’s stakes in the Point Thomson gas field and Milne Point fields and exploratory leases in the Arctic National Wildlife Refuge. The deal is expected to close in 2020, pending regulatory approvals.
BP in Alaska since 1959
BP began working in Alaska in 1959, and began production at Prudhoe Bay in 1977. Prudhoe Bay has produced more than 13 billion barrels of oil and may be able to produce an additional 1 billion barrels in the future.
BP’s Alaska oil production in 2019 is expected to be roughly 74,000 Bpd. BP has scaled back its Alaska operations in recent years. In 2014, it sold four North Slope fields to Hilcorp for $1.5 billion. That included 100% stakes in the producing Northstar and Endicott fields, a 50% stake in the producing Milne Point field and a 50% stake in the undeveloped Liberty Project.
It also sold its stake in the large Kuparuk field to ConocoPhillips in 2018.
“As a highly capable operator with extensive Alaskan experience, Hilcorp is ideally placed to take this important business on into the future, continuing to optimize its performance and maximize its value for the state of Alaska,” said BP Group CEO Bob Dudley, in a statement.
Unclear what BP’s departure will have on lease sale
It’s unclear what impact BP’s departure will have on the upcoming federal lease sale in the Arctic National Wildlife Refuge (Anwr). The industry fear is that BP’s move could dampen interest in Anwr drilling.
Neither BP nor Hilcorp would comment on bidding plans. That’s not something drillers reveal in advance.
The U.S. Department of the Interior is expected to release any day an environmental assessment on allowing drilling on the refuge’s Coastal Plain, a move strongly opposed by environmental groups and Democrats. A major legal fight is expected.
First Anwr lease sale possibly this year
The agency would like to conduct the first Anwr lease sale later this year. The first drilling is not expected for 10 to 15 years.
The deal marks Hilcorp’s fourth major acquisition in Alaska since 2012. It has been in Alaska since 2011 and has become the dominant producer on Cook Inlet and in south-central Alaska. It acquired the Cook Inlet assets from Chevron and Marathon Oil.
It has invested about $4 billion in Alaska in the last seven years. It produces more than 75,000 Boe/d in gross production in Alaska. It has 500 workers in Alaska, while BP has roughly 1,600 workers.
Hilcorp took a hit in 2017 after state regulators highlighted a long list of operational infractions. It also had a subsea pipeline leaking natural gas into Cook Inlet for months until repairs could be made.