Legislature(2019 - 2020)SENATE FINANCE 532
02/26/2020 05:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Overview(s): Bp/hilcorp Transaction | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE RESOURCES STANDING COMMITTEE
SENATE RESOURCES STANDING COMMITTEE
February 26, 2020
5:03 p.m.
MEMBERS PRESENT
HOUSE RESOURCES STANDING COMMITTEE
Representative Geran Tarr, Co-Chair
Representative Grier Hopkins, Vice Chair
Representative Sara Hannan
Representative Chris Tuck
Representative Ivy Spohnholz
Representative Dave Talerico
Representative George Rauscher
Representative Sara Rasmussen
SENATE RESOURCES STANDING COMMITTEE
Senator Peter Micciche, Chair
Senator John Coghill, Vice Chair
Senator Click Bishop
Senator Cathy Giessel
Senator Joshua Revak
Senator Jesse Kiehl
MEMBERS ABSENT
HOUSE RESOURCES STANDING COMMITTEE
Representative John Lincoln, Co-Chair
SENATE RESOURCES STANDING COMMITTEE
Senator Scott Kawasaki
COMMITTEE CALENDAR
OVERVIEW(S): BP/HILCORP TRANSACTION
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
CORRI FEIGE, Commissioner
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint overview, entitled
"BP and Hilcorp Transaction" and answered questions.
DAMIEN BILBAO, Vice President, Commercial Ventures
BP Alaska
Anchorage, Alaska
POSITION STATEMENT: Provided comments during the BP/Hilcorp
Transaction overview.
DAVID WILKINS, Senior Vice President
Hilcorp Alaska
Anchorage, Alaska
POSITION STATEMENT: Provided comments during the BP/Hilcorp
Transaction overview.
DENALI KEMPPEL, General Counsel
Hilcorp Alaska
Anchorage, Alaska
POSITION STATEMENT: Provided comments during the BP/Hilcorp
Transaction overview.
ACTION NARRATIVE
5:03:31 PM
CHAIR PETER MICCICHE called the joint meeting of the House and
Senate Resources Standing Committees to order at 5:03 p.m.
Representatives Rauscher, Tuck, Spohnholz, Hannan, Hopkins,
Talerico, and Tarr and Senators Coghill, Bishop, Giessel, Revak,
Kiehl, and Micciche were present at the call to order.
Representative Rasmussen arrived as the meeting was in progress.
^OVERVIEW(S): BP/HILCORP TRANSACTION
OVERVIEW(S): BP/HILCORP TRANSACTION
5:04:23 PM
CHAIR MICCICHE announced the only order of business would be an
overview of the BP/Hilcorp Transaction.
5:05:31 PM
CORRI FEIGE, Commissioner, Department of Natural Resources
(DNR), informed the committee she would provide a brief overview
of the details surrounding the BP/Hilcorp transaction and
present an update of activities subsequent to the committees'
last review on 12/16/19. She directed attention to a PowerPoint
presentation, entitled "BP and Hilcorp Transaction," dated
2/26/20, and reviewed the agenda for the overview on slide 2,
which was structured in five primary categories: The proposed
sale; assets and liabilities that are changing hands; how the
state reviews and approves this deal; an update on due diligence
since December; and the governor's oversight committee. She
provided an overview of the sale on slide 3, which read as
follows [original punctuation provided]:
? August 27, 2019 - Sale Publicly announced.
? $5.6 Billion of upstream and midstream interests.
? Purported stock sale of the upstream companies.
? Combined stock and asset sale of the midstream
companies and TAPS assets.
? October 11, 2019 Division of Oil & Gas provided
with confidential purchase and sale agreement to
assist with its due diligence.
COMMISSIONER FEIGE directed attention to slide 4 and reviewed
the transfer of upstream assets. She noted that upstream assets
represent wells, gathering lines, and processing facilities,
while midstream assets are common carrier pipelines,
transportation, infrastructure, storage tankers, and so forth.
Per upstream assets, she explained that BP Exploration Alaska
Inc. (BPXA) holds working interests in a variety of oil and gas
leases and operating units on the North Slope, including:
Prudhoe Bay Unit, 26.36 percent; Point Thompson Unit, 32
percent; Milne Point Unit, 50 percent; Liberty Unit, 50 percent;
and Arctic National Wildlife Refuge, 50 percent. She noted that
upon closure of this sale, Hilcorp will assume operatorship of
the Prudhoe Bay Unit and will become 100 percent owner and
operator of both Liberty Unit and Milne Point Unit, as Hilcorp
already owns 50 percent of both units. Additionally,
transferring 50 percent of Arctic National Wildlife Refuge
(ANWR) leases requires Arctic Slope Regional Corporation (ASRC)
approval, as they are not owned by the state of Alaska.
5:10:20 PM
COMMISSIONER FEIGE reviewed slides 5 and 6, which summarized the
transfer of midstream assets as follows [original punctuation
provided]:
BPTA holds 50% of the outstanding limited liability
company interests of Milne Point Pipeline, LLC. (of
which Harvest currently holds the other 50%)
? 32% of the outstanding membership interests of Point
Thomson Export Pipeline
? Acquiring from BP Pipelines (Alaska) Inc. ("BPPA"):
o BPPA's approximately 48.4% interest in the
Trans Alaskan Pipeline System ("TAPS") and approximate
47.6% interest in TAPS terminal tankage in Valdez.
o Approximately 49.1069% of issued and
outstanding shares of Alyeska Pipeline Service
Company.
o Approximately 25% share in Prince William Sound
Spill Response Corporation.
COMMISSIONER FEIGE noted that midstream assets for both BP
Transportation (BPTA) and BP Pipelines Alaska (BPPA) will
transfer to Harvest Alaska, Hilcorp's midstream entity. She
continued to slide 7 and explained that the remainder of BP's
asset transfers includes one-third of the membership interest in
the Alaska Liquified Natural Gas (LNG) Project, owned by BP
Alaska LNG LLC (BPALL), which will transfer to Hilcorp upon
closure of the sale. She turned to slide 8, which summarized
DNR's role in the BP/Hilcorp transaction. She reminded the
committee that according to Alaska law, no transfer of the
interest in oil and gas lease shall be binding on the state
until it is approved by the DNR commissioner. That authority
places DNR in a primary oversight role through which a
comprehensive due diligence and review of the transaction is
undertaken by the department, specifically within the Division
of Oil and Gas (DOG). Slide 8 read as follows [original
punctuation provided]:
• State Pipeline Coordinator Office:
o Fit, willing and able test.
o AS 38.35.100(a).
• Leasing:
o Administer and approve change in control of
leases.
o 11 AAC 82.605.
• Units:
o Administer change in control of operator of
Prudhoe Bay Unit.
o 11 AAC 83.331.
• Commercial:
o Examine existing financial assurances and
determine what amendments will be required.
o Analyze financials of Hilcorp and Harvest.
• Permitting:
o Administer change in control of permits.
o 11 AAC 83.158(e).
o 11 AAC 83.346(e).
o 11 AAC 96.040(c).
• 11 AAC 82.605 (b):
o Paraphrase: No transfer of an interest in a
lease is binding upon the state unless approved by the
Commissioner.
COMMISSIONER FEIGE explained that the commercial section within
DOG is involved in examining existing financial assurances with
Hilcorp and BP and determining what amendments are required.
Additionally, DOG is working with the Department of Law (DOL)
and a third party expert, Northern Economic Research Associates
(NERA), to perform financial stress testing on Hilcorp and
Harvest, which ensures that both entities could keep oil flowing
and restore throughput and TAPS should there be a major upset.
5:14:51 PM
COMMISSIONER FEIGE reviewed other agency oversight on slide 9,
which read as follows [original punctuation provided]:
AOGCC
? Designation of Operator & Ownership filings
? Bonding Both BP & HC compliant with increased
level of bonding implemented by AOGCC in May 2019.
ATTORNEY GENERAL'S OFFICE
? Oil and Gas Section's role
o Represent decision makers through various
regulatory processes.
o Represent the State of Alaska before the
Regulatory Commission of Alaska.
DEC
? Oil Discharge Prevention & Contingency Plan approval
? BPX Greater Prudhoe Bay is current
? Financial Responsibility for Spills or Possible
Spills
? HC must apply for DEC approval to include newly
acquired facilities prior of sale closing.
? Contaminated sites liability & clean-up
? BP remains responsible for all contamination
existing before sale
COMMISSIONER FEIGE directed attention to slide 10 and addressed
the Regulatory Commission of Alaska (RCA) process. She
explained that the RCA process is unique from DNR and other
agencies. The RCA resides underneath the Department of
Commerce, Community & Economic Development (DCCED); however, the
RCA is a quasi-judicial body and, therefore, independent. The
RCA has five commissioners charged with answering questions
regarding the BP/Hilcorp midstream asset transfers, in
particular Trans-Alaska Pipeline System (TAPS) asset transfers.
One such question presented to the RCA is whether the proposed
acquisition of midstream assets is in the public interest.
COMMISSIONER FEIGE reviewed slide 11, which highlighted
significant activities subsequent to the committees' last review
on 12/16/19. Slide 11 read as follows [original punctuation
provided]:
? January 9th Governor's Oversight Committee held
its first meeting.
? January 17th Hilcorp/Harvest pipeline transfers
completed in preparation for working the BP/Harvest
transfer applications.
? January 21st "Change in control" form for oil &
gas leases provided to Hilcorp.
? Still finalizing what entities will hold
secondary liability.
? BP represents to the State that it will remain
secondarily liable for the upstream DR&R obligations
of BPXA as they exist at the time of the transfer.
? February 4th RCA held Public hearing on TAPS
transfer application.
? Still awaiting decision on petition for
confidentiality of financial documents. Decision due
March 12th.
? February 25th - DNR & 3rd Party experts in Houston
at Hilcorp's office to advance financial stress
testing.
? Companies have remained very forthcoming in
this & other due diligence.
? DNR has established the "FAQ" webpage for keeping
the public informed.
? DNR Home Page banner -- Can register to get
email alerts as new information is posted.
5:22:05 PM
COMMISSIONER FEIGE addressed the Governor's Oversight Committee
(GOC) on slide 12. She explained that the GOC was formed at the
end of December 2019 by Governor Mike Dunleavy to oversee the
transaction due diligence and ensure that the interests of
Alaskans are thoroughly discussed and protected. The body is
comprised of commissioners from DNR, the Department of
Environmental Conservation (DEC), the Alaska Department of Fish
& Game (ADF&G), the Department of Labor & Workforce Development
(DLWD), DCCED, and the Department of Revenue (DOR),
representatives from the Office of the Attorney General and
DOL's Oil & Gas Section, and a senior staff member from the
Office of the Governor. She said the GOC was intended for the
exchange of information. She added that the GOC ensures that
all agencies are receiving requested information and discusses
all aspects of the deal as it pertains to each agency's
oversight and areas of interest. She noted that the GOC has no
bearing on the function of DNR's oversight role. She announced
that the GOC will have a public meeting in the second half of
March to update the public on the transaction review and due
diligence and share any new information that becomes available.
In closing, Commissioner Feige said since the committees' last
review in December, progress has been made on the review and
vetting of the transaction. She applauded the progress made by
DNR at this point.
5:25:17 PM
SENATOR BISHOP questioned whether Commissioner Feige anticipates
any "extra innings."
COMMISSIONER FEIGE answered no.
CO-CHAIR TARR asked about the terminal assets factor of
dismantlement, removal, and restoration (DR&R), in terms of
responsibility.
COMMISSIONER FEIGE asked whether Co-chair Tarr was referring to
the Valdez Marine Terminal.
CO-CHAIR TARR said yes.
COMMISSIONER FEIGE explained that the portion of the Valdez
Marine Terminal included in the deal includes only the storage
tanks that BPTA currently holds and will be covered by the
midstream liability. She added that DR&R responsibility for
ownership in Alyeska Pipeline Service Company will follow the
transfer of assets to Harvest Alaska.
REPRESENTATIVE RASMUSSEN returned attention to slide 9 and asked
whether the other agencies' determinations regarding the
transaction would be reconciled in the final approval.
COMMISSIONER FEIGE answered no. She explained that each agency
undertakes its jurisdictional reviews independently; however,
Hilcorp will need approval from each agency individually, prior
to or at an appropriate time after closing.
5:28:24 PM
CHAIR MICCICHE questioned whether there is adequate capacity and
talent within the commercial team. He also asked whether DNR is
transparently receiving the required financial information to
complete the financial stress testing and allow the transaction
to proceed.
COMMISSIONER FEIGE offered her belief that the expert capability
needed to successfully complete the due diligence review is
inhouse. She relayed that the internal commercial team is
headed by Dr. Matt Snodgrass and supported by DOG's commercial
team, many of whom have decades of experience working with the
division. Additionally, there are several PhD-level petroleum
economists working on the project. Externally, she explained
that NERA, which specializes in financial analysis and stress
testing, has been brought in as a third-party expert in addition
to support from John Ptacin, the head of DOL's Oil & Gas
Section, who has extensive experience with the TAPS tariff
litigation. She later added that the commercial team will
continue to ask questions and negotiate to settle any discomfort
that may arise. She commended Hilcorp for being forthcoming
about sensitive information.
5:31:18 PM
REPRESENTATIVE SPOHNHOLZ remarked that one of the big concerns
is regarding DR&R of liabilities on the North Slope. She
reflected that Commissioner Feige had described that BP is going
to maintain a secondary liability. She asked Commissioner Feige
to describe what the structures are for guaranteeing that and
for a guaranteeing that a company like Hilcorp assumes its
responsibility. She further asked Commissioner Feige to
describe the transition and existing options.
COMMISSIONER FEIGE responded that both entities [BP and Hilcorp]
have existing financial assurance agreements in place with the
state. She explained that where this particular transaction is
concerned, the secondary liability will be a binding contractual
arrangement with a BP entity, such that if Hilcorp should falter
on the satisfaction of DR&R for Prudhoe Bay, that BP entity
would be responsible to step in and cover DR&R on all the assets
as they existed at the time of the transfer. She added that
each DR&R contract and financial assurance agreement varies and
is specific to the nature of the transaction and to the facility
and assets being covered. She said she is not at liberty to
discuss the commercial details because they are currently being
negotiated; however, a broader framework would be provided once
they are in place.
REPRESENTATIVE SPOHNHOLZ asked when that information will be
available.
COMMISSIONER FEIGE answered there is no set timeline. She said,
"We will get there when the state is satisfied that we have the
financial assurances that we need to protect the interest of the
state and the interest of Alaskans."
5:34:26 PM
DAMIEN BILBAO, Vice President, Commercial Ventures, BP Alaska,
noted that BP opened its first office in Anchorage in 1959 and
has been a member of the Alaska community for over 60 years.
Consequently, he related the personal difficulties that
accompany BP's departure from Alaska. Additionally, he
addressed the reason for the company's departure. He explained
that this is a time of limited capital investment in the oil and
gas industry; therefore, BP made a $10 billion acquisition of
oil producing assets from a company named BHP that will allow
BP's Lower 48 business to be more competitive for growth
investment. He said BP decided to pay for that acquisition
through the sale of its assets in Alaska because the state's
high cost of production, distance from market, and tax risk have
made investing for growth a challenge. Furthermore, he conveyed
that the uncertainty surrounding the ongoing oil tax debate
influenced the evaluation of BP Alaska within the company's
portfolio. He stated that there is no shortage of resource
opportunity in Alaska; however, he questioned how the cost and
uncertainty of development compares to other global options. He
further explained that Alaska became a solid divestment
candidate once Hilcorp expressed interest in acquiring BP's
business in the state. He praised Hilcorp's performance and
production at Milne Point and said BP looks forward to "passing
the torch" and watching Hilcorp produce for the next 50-plus
years.
5:39:21 PM
MR. BILBAO turned attention to the transition process. The
process of transferring BP's business to Hilcorp began September
2019 and is expected to continue until the late second quarter
of 2020. He listed four primary aspects of the transition:
operate Prudhoe Bay safely and responsibly; treat employees with
respect; support federal and state regulatory processes; and
prepare to position Hilcorp for success on day one. He said as
the transition process advances, BP has informed the other
owners of Prudhoe Bay and TAPS, Exxon Mobile and ConocoPhillips
Alaska, as well as the Alyeska Pipeline Service Company, of key
decisions that affect them. He said the aforementioned
companies have offered their experience and support, as
necessary. Mr. Bilbao continued by addressing how BP will
remain responsible for future DR&R of upstream facilities and
TAPS. He explained that Hilcorp will provide primary
accountability for future DR&R in the upstream, while BP will
hold secondary liability. Additionally, BP will retain DR&R
accountability for TAPS. He noted that the cost of future DR&R
is difficult to estimate given the requirements are still to be
defined by regulators. Further, DR&R activity is planned years
in advance, which allows for the financial, regulatory, and
operational preparation by various parties. Last, he pointed
out that BP is not the only owner of Prudhoe Bay and TAPS. In
closing, he extended BP's appreciation to the people of Alaska
for supporting the company's efforts. He also thanked the
Native people of Alaska for welcoming and partnering with BP and
thanked the Alaska State Legislature for remaining committed to
doing what's right for the state.
5:44:29 PM
REPRESENTATIVE RAUSCHER asked how long BP would be doing its
"handholding" with Hilcorp.
MR. BILBAO said he would characterize it as a cooperation in
preparation for day one. He clarified that Hilcorp does not
need any handholding, as they have done a phenomenal job of
showing they can operate on the North Slope. He explained that
regarding day one readiness, the workstreams are focused on the
frontline operations and ensuring that Hilcorp is prepared. He
said Hilcorp would be taking a large percentage of BP's
workforce and with that, the knowhow, experience, history, and
institutional knowledge that it possesses. Furthermore, BP is
instituting training plans for any new staff that will be
joining Hilcorp, as well as shadowing plans for Hilcorp staff
that will have roles post day one, so that Hilcorp will
experience participating in activity conversations and have a
better understanding of key decisions and risks that need to be
mitigated. He noted that the preparation for day one readiness
extends to other things, such as IT decisions and accounting
responsibilities.
5:46:39 PM
MR. BILBAO, in response to a question from Senator Coghill,
stated that BP's greatest asset is its people, later adding that
the knowledge, experience, and technical expertise that it will
bring to Hilcorp is invaluable. He explained that BPXA owns
over 40 years of data surface, subsurface and commercial
which Hilcorp will acquire with its purchase of BPXA.
Additionally, Hilcorp will obtain the keys to warehouses that
contain thousands of rocks and cores. He said Prudhoe Bay has
been a pearl in BP's portfolio and an area where the company
has developed technology and exported it elsewhere. He added
that data is critical to operations in Prudhoe Bay. He noted
that Hilcorp immediately placed top experts at the frontline of
Prudhoe Bay to learn about BP's operations and to ensure that it
has the necessary data to be ready on day one. He offered his
understanding that BP is on track to provided Hilcorp with
everything it needs to operate Prudhoe Bay.
5:48:48 PM
REPRESENTATIVE RASMUSSEN inquired as to the plan for the BP
building in Anchorage.
MR. BILBAO directed the question to David Wilkins.
5:49:11 PM
REPRESENTATIVE SPOHNHOLZ pointed out that Alaskans have a long
track record with BP and have confidence in BP as a corporation.
She offered her understanding that BP doesn't take action
without engaging in homework, research, and planning. She
further opined that BP would not undertake the responsibility of
assuming the second liability for DR&R without the knowledge
that Hilcorp could fulfill its obligation. She asked Mr. Bilbao
to discuss the due diligence that took place between the
corporate partners to give Alaskans more confidence in Hilcorp's
ability to assume the responsibilities its undertaking.
MR. BILBAO replied that BP was pleased when Hilcorp expressed
interest in Prudhoe Bay. He recounted Hilcorp's positive impact
in Cook Inlet and Milne Point, where it produced more oil and
built new pads with a different approach. He further noted that
over 90 percent of Hilcorp's employees live in Alaska, which
spurs Hilcorp's desire to succeed in the state. He conveyed the
importance of selecting the right company to ensure that Hilcorp
won't need to continue to provide oversight in the future.
Further, the owners of Prudhoe Bay, including ConocoPhillips
Alaska and ExxonMobil Corporation, will continue to help each
other better their operations. Additionally, the operating
agreement at Prudhoe Bay will continue to provide safeguards
around payments, obligations, and honoring financial
responsibilities. He said all of that will be available to
Hilcorp in the transfer from BPXA.
5:52:36 PM
REPRESENTATIVE HANNAN pointed out that BP has had a long and
positive history with organized labor. She sought clarification
on the extension of contracts in the organized labor units.
MR. BILBAO said Hilcorp will inherit all obligations and
contracts in which BPXA is engaged, including labor agreements.
He noted that last year, BP extended its labor agreements for
three years. Furthermore, Hilcorp has access to the labor
agreements and participated in conversations with leadership
from the labor groups. He deferred any further questions
regarding future actions on this matter to Hilcorp.
5:53:51 PM
SENATOR KIEHL asked what entity of BP will maintain the
secondary liability for the upstream DR&R.
MR. BILBAO offered his belief that BP has not formally filed
which specific entity will take on that liability. He said it
will be an entity with sufficient financial backing to fulfill
its responsibilities. He offered to return with an update when
it's finalized.
5:55:27 PM
CO-CHAIR TARR indicated that ConocoPhillips Alaska is also in
the process of selling some of its assets. She asked how that
will affect the current owner/operator relationship on the North
Slope.
MR. BILBAO declined to speak for ConocoPhillips Alaska. He
stated that growing uncertainty informs the way corporations
make decisions about their portfolios. Further, the ongoing
uncertainty in Alaska around the direction that the oil tax
debate will take is factoring into how corporations are making
investment and long-term decisions in the state.
5:57:19 PM
REPRESENTATIVE TUCK sought clarification on how DR&R liabilities
are accounted.
MR. BILBAO responded that DR&R is accounted as an obligation.
He explained that years of litigation between the owners of
TAPS, the state, and the federal government has resulted in the
current DR&R structure regarding approach and inclusion in
tariffs. He said BP has assured that it will remain financially
accountable for DR&R; furthermore, it is in the other owners'
best interest to ensure that those costs are covered at the
right time and financial obligations are honored.
REPRESENTATIVE TUCK expressed interest in following up on the
financial assurances regarding DR&R.
6:01:15 PM
CHAIR MICCICHE offered his understanding that the responsibility
might fall to BP Corporation North America Inc. He requested a
follow-up response with the requested information on DR&R
liability.
MR. BILBAO clarified that BP will be retaining primary liability
of TAPS and the secondary liability at Prudhoe Bay.
6:03:33 PM
DAVID WILKINS, Senior Vice President, Hilcorp Alaska, said he is
testifying on behalf of Hilcorp's 581 employees, of which 90
percent are Alaskans. He informed the committee that Hilcorp
Energy Company was founded in 1989 and is currently the largest
privately held oil and gas production and exploration company in
the U.S. Hilcorp Energy is entirely based in the U.S. and
operates in eight states: Texas, Colorado, New Mexico, Ohio,
Pennsylvania, Alabama, Wyoming, and Alaska. Hilcorp Energy
operates 450 thousand barrels of oil equivalent per day, of
which 20 percent comes from Alaska. Since 2012, Hilcorp Energy
has been creating efficiencies, extending field life, and
increasing production safely and responsibly. He addressed
Hilcorp's commitment to safety, later sharing that in 2019, the
Hilcorp employee OSHA [Occupational Safety and Health
Administration] total recordable incident rate (TRIR) was .35,
which is lower than the Alaska industry average of .9.
6:07:23 PM
MR. WILKINS stated creating efficiencies does not require
cutting corners. Efficiencies, he said, produce longer field
life, more reserves, more production, and more money for the
state. He addressed Hilcorp's record in revitalizing fields in
the Lower 48 and Alaska and noted that since 2012, Hilcorp has
invested $2.5 billion in the state, which includes $1.7 billion
in the Cook Inlet Basin, investments in production-increasing
products, and investments in maintaining aging infrastructure.
Hilcorp has drilled 86 wells in the Cook Inlet Basin and
extended the life of the offshore basin by 20 years through
projects like the cross-inlet pipeline, which allows for daily
shipments of oil to the refinery in Nikiski. Mr. Wilkins
related that in 2019, Hilcorp safely and responsibly
decommissioned the Drift River Terminal and is currently
advancing the DR&R for the Christy Lee Platform in the Cook
Inlet. He further touted Hilcorp's ability to stabilize the
brownouts occurring in Southcentral Alaska due to a lack of gas
in 2012. In 2014, Hilcorp brought its energy, investment, and
innovation to the North Slope. He reported that 5 years and
$700 million dollars later, Hilcorp has drilled 60 wells and
taken production from 18,400 barrels per day to 34,000 barrels
per day at Milne Point. By the end of 2020, forecasts suggest
that Hilcorp will produce over 40,000 barrels per day at the
same location.
6:12:14 PM
MR. WILKINS continued to highlight Hilcorp's achievements at
Milne Point, including Moose Pad, polymer flood operations, and
a conventional Ugnu well, which unlocked the potential for one
billion barrels of recovery on the North Slope. He stated that
Hilcorp aspires to continue its success at Prudhoe Bay and hopes
to triple its Alaska workforce by late 2020 through the BP
acquisition. He reported that Hilcorp extended a job offer to
800 of the 1,000 BP employees that applied for a position. He
said Hilcorp will honor all union agreements and has been in
communication with the joint crafts council and other labor
organizations on the North Slope, adding that their experience
and expertise is critical to continuing safe and responsible
operations at Prudhoe Bay. Hilcorp is also expanding its
service technical teams, integrity team, safety group, and
environmental group, which assist in maintaining accountability.
He stated that Hilcorp will be a great operator at Prudhoe Bay
and will continue to be a community partner with the Giving
Program. He reported that with the company's match, Hilcorp
employees have given more than $2.8 million to over 375 Alaska-
based charities. Furthermore, Hilcorp's newfound partnership
with the Alaska Community Foundation will infuse an additional
$5,000 into the program. In closing, Mr. Wilkins pledged that
Hilcorp will safely lead the charge towards more investment,
jobs, and production.
6:17:39 PM
DENALI KEMPPEL, General Counsel, Hilcorp Alaska, provided a
short description of her educational background and her work
experience at Hilcorp beginning in early 2019, later noting that
she is a member of Hilcorp's "BP transaction team." She
recalled that in August 2019, Hilcorp announced it would buy all
of BP's upstream and midstream assets in Alaska for $5.5
billion, which includes approximately 20 percent of BP's
interest in and operatorship of the Prudhoe Bay Unit, BP's 48
percent ownership share in TAPS, BP's 49 percent share of the
Alyeska Pipeline Service Company, and 25 percent of the Prince
William Sound Response Corporation. Hilcorp will also take 33
percent interest in the Alaska LNG Project and buy BP's
remaining interest in the Milne Point, Point Thompson, and
Liberty Fields. She noted that Hilcorp is not buying all of
Prudhoe Bay Unit, as ConocoPhillips and ExxonMobil remain
partners for their respective ownership interest, which is
approximately 37 percent of each. Since the announcement,
Hilcorp has worked diligently with the state to procure the
required approvals to close the transaction, including upstream
components with DNR and midstream components with the RCA.
Pending all regulatory approvals, Hilcorp expects to close the
transaction in the second quarter of 2020.
MS. WILKINS turned attention to DR&R and explained that Hilcorp
worked with DNR to find the right solution that ensures
sufficient coverage for the state. Hilcorp entered into a
financial assurance agreement, which enables the state to have
up-to-date bonding information for any future abandonment risk
at the end of an asset's life. Since 2012, she said, DNR has
received Hilcorp's annual audited financial statements,
quarterly unaudited financial statements, and reserve
information, allowing the department to judge the company's
financial strength. Additionally, every three years, an
independent third party prepares a DR&R report that analyzes
Hilcorp and Harvest Alaska's oil and gas properties, assets, and
infrastructure, and provides an abandonment cost estimate. The
estimate is subsequently incorporated into the financial
assurance agreement and sets the new bonding requirement. She
noted that Hilcorp's bonding amount has increased with the
company's growth, later adding that Hilcorp is currently the
"most heavily bonded oil and gas company in Alaska." She said
Hilcorp will take over BP's share of DR&R responsibility for all
upstream components and non-TAPS midstream assets, while BP will
remain liable for its approximately 49 percent of TAPS DR&R.
Furthermore, BP will leave its parent company guarantees in
place for those obligations. She opined that this transaction
puts Alaska in a better position, as another large oil and gas
company will be partially responsible for TAPS at the end of the
asset life. She noted that Fortune magazine placed Hilcorp on
its "one of the best places to work in America" list for the
seventh time. She said Hilcorp is proud of its accomplishments
in Alaska and looks forward to sharing more successes in the
future.
6:23:01 PM
REPRESENTATIVE RASMUSSEN inquired as to the plan for the BP
building in Anchorage.
MR. WILKINS said Hilcorp plans to retain the lease of the
building.
6:23:37 PM
SENATOR GIESSEL referenced a report submitted by Hilcorp to the
RCA claiming that the disclosure of confidential documents would
be harmful to the company. She asked Mr. Wilkins to elaborate.
MS. KEMPPEL acknowledged that Hilcorp submitted a filing with
the RCA. The filing emphasized the competitive harm that would
result to Hilcorp by publicly disclosing financial statements.
She specified that the financial statements would reveal
Hilcorp's cost structure, which could allow for effective
competition; further, she argued that the financial statements
include a level of specificity, such as customer names and
contract details, which doesn't exist in a public company's
financial statements. She also noted that the RCA has granted
Hilcorp confidentiality on its financial statements 19 times in
the last 9 years.
MR. WILKINS remarked:
It would be like you were bidding on a home and that
bid ... [was] made public so that everybody bidding
against you could see what you were bidding, and I
don't think that's fair.
6:26:05 PM
REPRESENTATIVE HOPKINS inquired as to Hilcorp's future plans for
existing union contracts on the North Slope. Additionally, he
asked about plans to increase the number of Alaskans employed
through Hilcorp's contractors.
MR. WILKINS said he welcomes unions, later adding that Hilcorp
will engage them at the proper time and is "pro-work and pro-
project" with all its workers and contracts.
6:27:25 PM
REPRESENTATIVE HANNAN asked how much of Hilcorp's management and
technical staff is based in Alaska versus Houston and how much
authority that management staff would have over the Alaska
operations.
MR. WILKINS replied that day-to-day decisions are run locally.
6:28:24 PM
SENATOR REVAK inquired as to Hilcorp's goals for production and
how the legislature can support Hilcorp's future in Alaska.
MR. WILKINS answered that Hilcorp is currently in a "seek to
understand" mode at Prudhoe Bay. He explained that Hilcorp is
engaging with its partners at Prudhoe Bay to understand their
ideas and how things work. He added that Hilcorp looks forward
to a long time in Alaska; however, he expressed his concern
about the uncertainty regarding the tax structure, which takes
away from Hilcorp's capital and increased production.
6:31:01 PM
CO-CHAIR TARR asked how Hilcorp plans to upscale with fewer
employees without cutting corners.
MR. WILKINS stated that Hilcorp has a five-level employee
structure and pushes responsibilities down to the lowest level.
Additionally, he said, Hilcorp maps out tasks, hires smart, and
trains its employees to make decisions. He added that regarding
the current transition, Hilcorp plans to upscale with fewer
employees by targeting efficiencies.
6:34:35 PM
REPRESENTATIVE SPOHNHOLZ expressed her appreciation for
Hilcorp's hire of Alaskans, specifically into its leadership
team, as well as the company's commitment to philanthropy. She
acknowledged that Milne Point is a "shining example" of
increasing production; nonetheless, she opined that there are
risks associated with Hilcorp's "lean" model of work. She noted
the loss of a Hilcorp employee at Milne Point in December 2018
and asked what the organization has learned from that experience
and what it plans to do ensure that Hilcorp employees are safe
on the job.
MR. WILKINS said the experience was tragic and motivated Hilcorp
to reflect and recommit to work safety. Additionally, he shared
that Hilcorp worked with OSHA on implementing changes to ensure
the incident doesn't happen again.
6:36:05 PM
SENATOR KIEHL sought clarification on how Hilcorp is financing
the BP purchase.
MS. KEMPPEL indicated that Hilcorp is still evaluating all
options for financing the transaction. She noted that two $250
million payments have already been made to BP.
SENATOR KIEHL asked whether Hilcorp is borrowing money to
finance the acquisition.
MS. KEMPPEL said Hilcorp works with a sophisticated group of
banks and is currently in discussion with a number of those
banks on the best path forward.
6:38:04 PM
REPRESENTATIVE RASMUSSEN offered her belief that putting a $500
million down payment on an investment of $5 billion demonstrates
financial competence.
6:38:58 PM
CHAIR MICCICHE asked for Hilcorp's position on paying corporate
income tax.
MR. WILKINS stated Hilcorp has no opinion on corporate income
tax as it is a policy decision for the legislature. He said if
there were a corporate income tax, Hilcorp would pay it.
6:40:25 PM
REPRESENTATIVE HANNAN questioned whether Hilcorp has corporate
tax exclusions in any other states where the company operates.
MR. WILKINS said he does not know.
CHAIR MICCICHE asked Mr. Wilkins to follow up with the requested
information.
6:41:08 PM
CO-CHAIR TARR sought clarification on the relationship between
the parent company and the Harvest Alaska subsidiary.
MS. KEMPPEL said she would provide a corporate organizational
chart.
CHAIR MICCICHE shared several personal anecdotes about his
positive experiences with Hilcorp. He added that Alaskans are
concerned and interested about the BP/Hilcorp transaction. He
said keeping Alaskans informed throughout the process would be
welcome.
6:43:27 PM
SENATOR KIEHL asked Commissioner Feige which entity provides
corporate assurances for future DR&R.
COMMISSIONER FEIGE said the state will seek an entity with the
greatest durability, wherewithal, and security to satisfy the
state's requirements. She added DNR will continue to work with
BP to select the appropriate entity. She further noted that the
DR&R agreements are updated every three years to ensure that the
appropriate bonding and "financial instruments" are in place.
6:46:02 PM
REPRESENTATIVE TUCK questioned whether it's necessary for BP to
be the secondary liability if Hilcorp "[is] able to bond for the
full value of ... any DR&R activities that need to take place in
the future."
COMMISSIONER FEIGE answered yes. She explained that secondary
liability is important to protect the state's interest if the
entity responsible for the primary liability were to default in
the future.
REPRESENTATIVE TUCK posited that the bonding company would
assume responsibility if Hilcorp were to default.
COMMISSIONER FEIGE confirmed that. She noted that bonding
covers what is on the ground at the time. She added that
bonding is a place holder and does not cover 100 percent of the
value. She continued:
But at this point, where we stand today, we don't
actually understand what - at the end of the, for
example, Prudhoe Bay field life - the state or other
entities may want to have removed and what we may want
to retain. So, when we're doing our estimates for
DR&R, they contemplate removal of roads, removal of
pads, removal of all facilities. When we get to that
point in time, it's entirely possible that road
infrastructure the state or the North Slope Borough
or some other entity - may want to stay in place. So,
that's why I point back to the fact that these are
living documents. We put a bonded amount in place to
cover those initial stages or percentage, and then we
have other financial vehicles that further go to
support that to make sure that the full DR&R
obligation can be accounted for.
REPRESENTATIVE TUCK questioned whether entities that are
responsible for secondary liabilities are required to have
bonding abilities.
COMMISSIONER FEIGE said that will be considered in the
contractual agreements with BP. She noted that secondary
liability is typically a durable, corporate or parent guarantee.
She offered to follow up with a primer on how DR&R, bonding, and
insurance are consolidated into a financial assurance agreement.
6:50:33 PM
SENATOR GIESSEL posited that DNR isn't the only entity that
levies bonding requirements. She asked whether Alaska Oil and
Gas Conservation Commission (AOGCC) has more bonding
requirements.
COMMISSIONER FEIGE confirmed that is correct. She explained
that AOGCC has its own bonding provisions and requirements for
all wells that are drilled. She added that every well drilled
in the state must be bonded for plugging and abandonment
responsibility. Furthermore, in May 2019, AOGCC increased those
bonding levels significantly. Currently, BP and Hilcorp carry
all the necessary bonding to cover AOGCC's requirements as well
as financial assurance agreements for DR&R. She noted that in
the DR&R, plugging and abandonment is also considered;
therefore, the avoidance of "double dipping" and "double
charging" for the plugging and abandonment of wells is being
considered during the preparation of the financial assurance
agreements to transfer the assets included in the BP/Hilcorp
transaction.
SENATOR GIESSEL requested that AOGCC provide a summary of the
bonds it is requiring of the companies.
6:53:40 PM
ADJOURNMENT
There being no further business before the committees, the joint
meeting of the House Resources Standing Committee and the Senate
Resources Standing Committee was adjourned at 6:54 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DNR Update to Joint Resources 2.26.2020.pdf |
HRES 2/26/2020 5:00:00 PM |
Presentation DNR on BP-Hilcorp Transaction 2.26.20 |