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State approval needed
DNR describes due diligence process, says it will take as long as it takes
Kristen Nelson Petroleum News
There is no timeline for the state’s evaluation of the proposed purchase by Hilcorp of BP’s Alaska assets, announced Aug. 27, Department of Natural Resources Commissioner Corri Feige told a joint meeting of the House and Senate Resource committees Dec. 16.
The companies have said they hope to see closure in the second quarter, she said, but the state is doing a thorough review and due diligence and it will take the time it takes.
If this were a baseball game, Feige told legislators, we’re in about the third inning, so it’s early in the game, with the state still getting information in the door. DNR’s Division of Oil and Gas only received the confidential purchase and sale agreement Oct. 11, Feige said, noting that is a 400 page document.
DNR has the responsibility to approve transfer of leases, one major part of the sale of BP’s Alaska assets to Hilcorp, while the Regulatory Commission of Alaska must approve transfer of BP’s share of the Trans Alaska Pipeline System. The Alaska Oil and Gas Conservation Commission and the Department of Environmental Conservation have their own approvals.
Sale overview The $5.6 billion sale covers both upstream and midstream interests.
Upstream, BP Exploration (Alaska) owns a 26.36% working interest in the Prudhoe Bay unit (and is the operator), some 32% of Point Thomson, 50% of Milne Point, 50% of Liberty (a federal unit) and 50% of the 19 Arctic Slope Regional Corp. leases in the Arctic National Wildlife Refuge.
After closure of the sale, Hilcorp will hold 26.3% of Prudhoe (and be unit operator), 100% of Milne (it currently holds 50%), 100% of Liberty (it already holds 50%), 50% of the ANWR leases (the other 50% are held by Chevron USA Inc.) and some 37% of Point Thomson.
Feige said the difference in Point Thomson between BP’s 32% and the 37% Hilcorp will hold is ConocoPhillips’ 5% interest. DNR recently received transfer notice of ConocoPhillips’ 5% working interest ownership in Point Thomson to Hilcorp, a transfer unrelated to the BP-Hilcorp transaction, she said.
ConocoPhillips announced its intention to drop its Point Thomson acreage in 2017 and said at the time that the acreage was being relinquished to the other unit owners per the unit operating agreement.
In the midstream, Hilcorp subsidiary Harvest will acquire the 50% interest held by BP in the Milne Point Pipeline (Harvest currently holds the other 50%) and 32% of the outstanding membership interests of Point Thomson Export Pipeline.
Harvest will acquire BP’s interest in TAPS, some 48.4% and a 47.6% interest in TAPS terminal tankage in Valdez, along with some 49.1069% of issued and outstanding shares of Alyeska Pipeline Service Co. and some 25% of the Prince William Sound Spill Response Corp.
Comparison to BP-ARCO merger Peter Caltagirone, senior policy and legal advisor in the DNR commissioner’s office, contrasted the current sale to the BP-ARCO transaction in 2000.
They are completely different deals, he told legislators, with BP-ARCO being a merger between two publicly traded companies while the proposed Hilcorp acquisition is a sale.
The BP-ARCO proposed merger was subject to Federal Securities and Exchange Commission and Federal Trade Commission oversight with anticompetitive and antitrust issues at stake in a merger which would have combined some 70% of Alaska production in one company.
SEC didn’t have concerns, but FTC filed a complaint in February 2000 seeking to enjoin the deal and eventually ARCO’s Alaska assets were spun off to Phillips Petroleum. The main concern, Caltagirone said, was price manipulation at West Coast refineries.
As for share of Alaska production, Hilcorp now has some 12% and will increase that share to 28% with the acquisition.
The proposed Hilcorp acquisition was looked at by the FTC but it found no antitrust or competitiveness concerns, Caltagirone said, putting the issue in the state’s hands.
Role of DNR Feige noted that no transfer of an interest in a lease is binding unless approved by the DNR commissioner. And that approval is not a rubberstamp process, she said, with the Division of Oil and Gas doing the bulk of work around due diligence
Matt Snodgrass, the division’s commercial section head, said the state has contracted with a third party to help further the analysis on the financial health of Hilcorp. The division uses that information to inform financial assurance arrangements, which provide assurance that public interest will be protected, now and into the future. The goal, Snodgrass said, is to assure that Hilcorp has the ability to deliver on its commitments.
The division has been dealing with Hilcorp on financial assurance agreements since the company entered the state in 2011, he said, and has an extensive record of successful negotiations with Hilcorp, with the sixth amended and restated financial assurances agreement executed earlier in December.
The type of significant highly confidential financial information DNR has access to is akin to that required for a 10K filing with the SEC, Snodgrass said.
In addition to audited annual financial statements and unaudited quarterly financial statements, DNR requires a third party estimate of DR&R (dismantlement removal and restoration) costs every three years.
The state doesn’t just require reporting, Snodgrass said, it has the inbuilt ability to take action: automatic triggers protect the state should there be a material change in a company’s financial health, with increased surety required.
Feige said a key takeaway on the transaction is that BP has represented to the state that it will remain secondarily liable for the upstream DR&R obligations of BP Exploration (Alaska) as they existed at the time of the transfer.
BP is also retaining obligations related to DR&R for TAPS with all parent company guarantees from BP Corporation North America Inc. remaining in place regarding that obligation.
Role of Attorney General John Ptacin, chief assistant Attorney General, chief of the Oil and Gas section, legal advisor to the division, told legislators that like the Regulatory Commission of Alaska, the state wants to know if Harvest is fit. The AG’s office is part of the team along with outside counsel Morrison & Foerster, he said.
RCA makes the decision on TAPS changing hands, Ptacin said, noting that RCA is a quasi-judicial body that will hear from the parties, including the state.
RCA has been reviewing filings on the transfer for completeness, and earlier in December opened a docket, requiring documents by Dec. 23.
What RCA will be considering, Ptacin said, is whether Harvest is fit and able to take over 48% ownership and whether the transaction in the public interest.
He noted that Hilcorp won’t run TAPS - they are buying 48% of Alyeska Pipeline Service Co., which runs TAPS, and will become a voting member along with other owners.
There are a lot of broad questions for RCA, Ptacin said, and that process is just getting started.
RCA does not have a deadline for this process - they’ll take a hard look, he said.
AOGCC, DEC Caltagirone reviewed the role the Alaska Oil and Gas Conservation Commission will take, which includes approving a new operator at Prudhoe.
The Department of Environmental Conservation oversees oil discharge prevention and response requirements, Feige said, and will either file a change of owner amendment for the Prudhoe oil discharge prevention and contingency plan or file a new plan, which requires a pre-application meeting at least 60 days before an application is submitted. That meeting was held Nov. 20, Feige said. An application is due at least 180 days before the start of operations, she said.
Prudhoe has been in operation for 40 years and for contamination existing at the time of the sale, both BP and Hilcorp are responsible, with BP a responsible party and Hilcorp conducting activities related to cleanup activities, long term monitoring and implementation of institutional controls, required for contamination which remains in place.
After the sale, Hilcorp will be responsible for contamination it causes or contributes to.
What next Feige said that in determining what is in the public interest DNR looks at a broad suite including the capability of Hilcorp and its history in the state.
She said the state has seen their history in taking mature assets and what they’ve done to streamline operations, lower operating costs, so that informs the state’s thinking.
For DNR, she said, protecting the public interest goes directly to royalty income which feeds the Permanent Fund and production.
Issues of philanthropy and local hire are not part of DNR’s oversight, Feige said, but noted Hilcorp has said they have a philanthropy plan and on the local hire issue, which is important to the administration, Hilcorp has interviewed more than a thousand people to date and is putting together a plan.
No aspect of the BP transaction was considered in putting together this year’s revenue forecast she said. The decline going forward reflects the fact that BP has worked to reduce operating costs and debottleneck production and has flattened the decline curve without drilling additional wells and we are now seeing a return to the natural decline at Prudhoe, which has been about 4%.
If you put Prudhoe Bay into the hands of someone who is a late stage mature asset specialist, Feige said, the expectation is that they’ll be able to reduce costs and drive the decline flat again.
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