BP’s decision to sell its Alaska assets to Houston-based independent Hilcorp Energy was motivated by continued uncertainty over state taxes along with high costs of operating the aging Prudhoe Bay field.
“There’s no question that the ongoing debate over (oil production) taxes in Alaska influenced our decision,” Damian Bilbao, BP’s Alaska vice president for commercial ventures, told state legislators in Juneau in a briefing.
The $5.6 billion transaction was announced last fall and is now being reviewed by state agencies and regulators. It is expected to close mid-2020.
Bilbao said that when BP made a $10.5 billion acquisition last year of producing assets in the Permian and Eagle Ford basins in Texas the company decided to finance the deal through a sale of assets rather than taking on more debt.
“We looked what assets we could sell and Alaska was put on the short-list for sale because of the region’s high costs, distance from markets and the uncertainty created by tax risks,” Bilbao said, in a joint meeting of the House and Senate Resources committees in Juneau.
“There’s no doubt the resources are there but it’s how Prudhoe Bay compares with other opportunities, and the uncertainties (over taxes) is important,” Bilbao said.
The briefing provided the first explanation by the company for its decision to depart Alaska after 60 years, although BP’s interest in selling its maturing producing assets in the state has been known for years. Several years ago BP discussed a sale to Apache Corp. several years ago.
BP has meanwhile been selling off pieces of its Alaska portfolio. In 2014 the company sold several small fields on the North Slope to Hilcorp and in 2018 sold its minority share of the Kuparuk River field to ConocoPhilllips, the majority owner and operator.
BP retained its share of its core asset, the large Prudhoe Bay field where it is operator, mainly in hopes that it could commercialize large natural gas resources in the field, company officials have said.
However, continued low energy prices and a surplus of liquefied natural gas on world markets has put the proposed $43 billion Alaska LNG Project, which was to transport stranded North Slope gas, on the shelf.
Bilbao also said Hilcorp is better positioned to exploit Prudhoe Bay’s remaining resources than is BP mainly because of the company’s leaner commercial structure allows it to develop remaining oil at lower costs. Hilcorp specializes in acquiring mature assets, investing aggressively to increase production.
“BP was very pleased when Hilcorp brought this opportunity to us (to sell). We have watched Hilcorp perform in other fields. “Hilcorp has doubled production at Milne Point (purchased from BP in 2014) and developed a new production pad in that field much faster than we would have been able to do,” Bilbao said.
In other remarks to legislators in the briefing, Hilcorp Alaska vice president Dave Wilkins said he believes his company can similarly boost Prudhoe production. One project at Prudhoe the company hopes to tackle is I-pad, a large project in the western part of Prudhoe that BP has looked at for several years.
Wilkins also pointed to Hilcorp’s success with the North Slope’s first polymer flood project to produce viscous, or heavy, oil at Milne Point, gaining experience that can be applied to undeveloped viscous oil resources in the Prudhoe Bay field.
Meanwhile, the industry’s concern over new tax uncertainties has ramped up after state officials confirmed recently that a citizen initiative to raise oil and gas taxes has sufficient signatures from qualified voters to be placed on the ballot in state elections later this year.
Alaska has long been known for its frequent changes in tax policy but things appeared t stabilized after 2013 after the Legislature enacted a major reform of petroleum taxes.
The change narrowly survived a citizen initiative and ballot proposition to repeal the changes and producers credit several years of tax stability for unleashing a new wave of Alaska investment that has led to several significant new discoveries.
The new citizen tax initiative would approximately double the state’s current taxes on large producing fields on the North Slope.
Supporters of the tax change say producers are still making good profits even at current oil prices and that the industry should pay more tax to make up for oil revenues Alaska lost after crude oil prices, and state revenues, dropped sharply in 2015.
The state has since made budget adjustments and also now draws on earnings from its $60 billion-plus Permanent Fund to help fund the budget, but still faces large deficits.