Alaska's long relationship with the oil industry is undergoing a sea change with the departure of a firm that pioneered North Slope extraction at Prudhoe Bay.
Alaskans are weighing whether Hilcorp Energy Company’s purchase of BP Plc’s oil interests in a $5.6 billion deal will be positive for the state.
The state is suffering through a three-and-half-year recession brought on by a drop in oil prices while the rest of the country has benefited from the longest economic expansion in the country's history. It has been through a bruising budget process that pitted the state's weakening revenue position against a governor who wanted to increase Permanent Fund handouts to state residents, resulting in major budget cuts.
The purchase is expected to nearly double Hilcorp’s output in Alaska. It currently produces more than 75,000 barrels a day and BP’s net oil production in Alaska is expected to average 74,000 barrels a day, according to the release announcing the deal.
BP was one of Alaska's big three, along with ConocoPhillips and ExxonMobil, but has become a passive investor in Alaska while Hilcorp has continued oil exploration since its entry into Alaska’s oil industry in 2012, said Matt Berman, an economics professor with the Institute of Social and Economic Research at the University of Alaska Anchorage.
The deal will result in the defeasance of private activity bonds issued for BP.
BP has $375 million in revenue refunding bonds issued through the City of Valdez that helped pay for the 800-mile Trans Alaska Pipeline System Marine Terminal, which includes 12 pumping stations and the Valdez Marine Terminal. The two remaining series of bonds from the three originally issued are the $265 million Series 2003B and the $113.6 million Series 2003 C. Both mature on Jan. 1, 2021.
Upon consummation of the sale, or shortly thereafter, the company expects to set aside funds in an irrevocable trust fund for the benefit of the holders of the bonds in amounts sufficient to pay, when due, principal and interest on the bonds through the maturity date and to discharge the lien of the indenture of trust securing the bonds, according to a disclosure filing posted Aug. 30 on the Municipal Securities Rulemaking Board’s EMMA website.
Hilcorp is purchasing the BP interests in the Prudhoe Bay oil field and the Trans Alaska pipeline. The sale, which must be approved by state and federal regulators, represents part of BP’s plan to divest $10 billion in assets by 2020, according to the company.
Under terms of the agreement, Hilcorp will pay $4 billion in the near-term and $1.6 billion later.
“I think it’s both a sign that BP is not interested in Alaska, and that smaller, more aggressive companies like Hilcorp are interested in Alaska,” Berman said.
It is also a signal that Alaska’s oil patch is maturing from a place where big companies look to spend $1 billion searching for the largest fields to a place where smaller companies with more entrepreneurial, wildcat ideas are looking to make some money, Berman said.
"We don’t expect BP’s decision to have a near-term impact on local government ratings in Alaska," said Andrew Ward, a Fitch Ratings director.
"While the sale highlights the significant changes occurring in Alaska’s energy sector amid a period of relatively low oil prices and declining production, the transfer of assets between producers is unlikely to impact ratings unless the sale leads to weaker investment in oil infrastructure, a hastening of production declines, and significant further job losses in the already hard-hit industry," Ward said.
"The sale of BP’s Alaska assets to a company that specializes in exploiting mature fields highlights the fact that these are aging assets in gradual decline," Ward said.
Oil production has fallen more than 75%, hitting 405,432 barrels per day on Tuesday compared to the 2 million barrels per day produced at the peak in 1988, according to figures from the Alaska Gas and Oil Association and the state’s Department of Revenue and Tax Division.
The lifespan of the North Slope’s fields has been extended repeatedly, Ward said, but while the sale may signal changes in the industry, Fitch analysts assume that some degree of investment will continue so long as the economic fundamentals support it.
The history of Alaska is intertwined with that of the London-headquartered multinational.
BP’s entry into Alaska dates back to 1959, the year it earned statehood. Then in 1968, BP drilled the Prudhoe Bay field, one that has produced more than 13 billion barrels of oil, earning it the distinction of the most prolific in U.S. history. The field has experienced a decline in production since the 1980s, but BP says it has the potential to produce another one billion barrels.
In a statement, Alaska Gov. Mike Dunleavy called the BP-Hilcorp deal “a passing of the torch within the Alaska oil and gas sector.”
Dunleavy, who took office in December, used line-item vetoes during the budget process in July to make $440 million in cuts to higher education, health care and other major social programs to increase the full annual Permanent Fund dividend that Alaska pays to nearly every state resident. The Permanent Fund was created by the state investing oil revenues. Residents pay virtually no personal taxes to the state government as a result of the fund.
The resulting budget tumult led Moody's Investors Service to assign a negative outlook to the state's Aa3 rating in July. The state carries AA ratings from both Fitch and S&P Global Ratings.
With cuts targeting the University of Alaska, Moody's downgraded $270 million in university debt to Baa1. It also dropped $23 million of lease-revenue bonds issued through Community Properties Alaska, Inc. to Baa3 from A2.
After the Legislature re-introduced the budget restoring the governor’s cuts last month, and with a recall effort launched targeting the governor, he backed off somewhat, agreeing to 25% in cuts to the university over a three-year period, which gives university leaders more time and
Hilcorp President Jason Rebrook alluded to a commitment to retaining positions in a joint statement with BP Chief Executive Bob Dudley in which Rebrook called energy a cornerstone of the Alaskan economy.
"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,” Rebrook said.
BP said it is committed to providing clarity about the future of the 1,600 workers it employs in Alaska as part of the transition process with Hilcorp.
Hilcorp has speculative-grade corporate debt ratings of Ba1 from Moody's and BB-plus from S&P Global Ratings; Moody’s has Hilcorp on review for downgrade, and S&P assigns a stable outlook. BP, in contrast, has investment-grade ratings of A1 from Moody's and A-minus from S&P, with stable outlooks.
Though oil production has fallen, the industry remains a significant employer in the state. The Alaska Gas and Oil Association claims the industry supports one-third of the state’s jobs directly or indirectly.
“I think having one of the big three producers pull out due to concerns about the profitability of long-term investments in Alaska is a negative signal about the growth potential of oil in the state,” said one finance professional, who asked to not be named.
“I am cautiously optimistic,” said Gretchen Fauske, associate director at the Center for Economic Development at the University of Alaska Anchorage. “I hope the people who work there will be well cared for.”
The company has such a large footprint that nearly everyone knows someone who works there and many people will be holding their breath until the deal closes, Fauske said. BP also has been a good corporate partner helping to support many of the state’s nonprofits, she said.
BP learned from the notoriety it gained after being responsible for the largest oil spill in the industry's history when 4.9 million barrels of oil spewed into the Gulf of Mexico from the Deepwater Horizon disaster in 2010, Berman said. The company now works closely with state and federal regulators, he said.
Hilcorp is privately held, meaning it faces fewer disclosure requirements than publicly traded BP, and has pushed back against regulators, raising concerns with environmentalists, he said.
State Senate President Cathy Giessel, a Republican from Anchorage, said she was 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," Giessel said in a statement.
"BP has been a 'legacy' investor in Alaska, shaping communities and job opportunities for a couple of generations," she said.
