Legislature(2019 - 2020)Anch LIO Lg Conf Rm
12/16/2019 02:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Overview: Bp/hilcorp Transaction | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
ANCHORAGE LIO
December 16, 2019
1:59 p.m.
MEMBERS PRESENT
SENATE RESOURCES STANDING COMMITTEE
Senator John Coghill, Vice Chair
Senator Cathy Giessel
Senator Lora Reinbold
Senator Click Bishop
Senator Scott Kawasaki
Senator Jesse Kiehl
HOUSE RESOURCES STANDING COMMITTEE
Representative Geran Tarr, Co-Chair
Representative Grier Hopkins, Vice Chair (online)
Representative Sara Hannan
Representative Sara Rasmussen
Representative George Rauscher (online)
Representative Ivy Spohnholz
Representative Dave Talerico
Representative Chris Tuck
MEMBERS ABSENT
HOUSE RESOURCES STANDING COMMITTEE
Representative John Lincoln, Co-Chair
OTHER LEGISLATORS PRESENT
Senator Elvi Gray-Jackson
Senator Josh Revak
Representative Bryce Edgmon (online)
Representative Zack Fields (online)
Representative Mel Gillis
Representative Jennifer Johnston
Representative Andy Josephson (online)
COMMITTEE CALENDAR
OVERVIEW: BP/HILCORP TRANSACTION
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
CORRI FEIGE, Commissioner
Alaska Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Provided an overview of the BP/Hilcorp
transaction.
PETER CALTAGIRONE, Senior and Legal Policy Advisor,
Commissioner's Office
Alaska Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Provided a sale structure overview of the
BP/Hilcorp transaction.
MATT SNODGRASS, Commercial Analyst
Division of Oil and Gas
Alaska Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Provided a financial analysis overview of
the BP/Hilcorp transaction.
JOHN PTACIN, Chief Assistant Attorney General
Oil and Gas Section
Alaska Department of Law
Anchorage, Alaska
POSITION STATEMENT: Explained the role of the Department of Law
in the BP/Hilcorp transaction.
ACTION NARRATIVE
1:59:44 PM
VICE CHAIR COGHILL called the joint meeting of the Senate and
House Resources Standing Committees to order at 1:59 p.m.
Present at the call to order from the Senate Resources Standing
Committee were Senators Giessel, Bishop, Reinbold, Kiehl,
Kawasaki, and Vice Chair Coghill. Also in attendance were
Senators Gray-Jackson and Revak.
CO-CHAIR TARR announced that present at the call to order from
the House Resources Standing Committee were Representatives
Talerico, Rasmussen, Tuck, Hannan, and Co-Chair Tarr. She noted
that Representative Lincoln is excused for a medical reason.
Also in attendance were Representatives Edgmon (online), Fields
(online), Gillis, Johnston, and Josephson (online).
VICE CHAIR COGHILL noted that Senator Revak as well as
Representatives Johnston and Gillis are present at the meeting.
^Overview: BP/Hilcorp Transaction
Overview: BP/Hilcorp Transaction
2:02:30 PM
VICE CHAIR COGHILL announced that the joint committee will
discuss the BP Alaska and Hilcorp role as they played out to
Alaska's various agencies. Leading the conversation is
Commissioner Corri Feige from the Alaska Department of Natural
Resources and her team members.
He announced that Senator Gray-Jackson is present at the
meeting.
CO-CHAIR TARR announced that Representative Spohnholz has joined
the committee meeting and Representative Rauscher is online.
VICE CHAIR COGHILL noted that Representative Hopkins has joined
the meeting online.
2:03:30 PM
CORRI FEIGE, Commissioner, Alaska Department of Natural
Resources, Anchorage, Alaska, said experts from within DNR and
the Alaska Department of Law (DOL) have joined her for the joint
committee overview. She said she is joined by experts within DNR
and DOL who are actively engaged in the due diligence and review
of the BP/Hilcorp transaction. All the experts are part of the
department's internal review team for the BP/Hilcorp
transaction.
She introduced the department's expert team for the BP/Hilcorp
transaction as follows:
• Dr. Matt Snodgrass, Commercial Analyst with the Division of
Oil and Gas, Alaska Department of Natural Resources (DNR).
• John Ptacin, Chief Assistant Attorney General, Oil and Gas
Section, Alaska Department of Law (DOL).
• Peter Caltagirone, Senior and Legal Policy Advisor,
Commissioner's Office, Alaska Department of Natural
Resources (DNR).
2:04:26 PM
COMMISSIONER FEIGE stated that she and the aforementioned
presenters would share presentation of the DNR overview, BP &
Hilcorp Transaction, and The Deal and the State's Oversight
Role. She said Alaska law is clear, no transfer of the interest
in an 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 to ensure that the deal is in the best interest of
the State of Alaska and that the state's interests are
protected.
She noted that transactions like the BP/Hilcorp transaction are
not new to the State of Alaska. The state's agencies are
studying the deal with the same level of detail and granularity
as those that have come before, namely the BP and Arco
transaction. The DNR will talk about how the BP and Arco
transaction differs from the BP/Hilcorp transaction.
She said the BP/Hilcorp deal is a complex transaction in that
there are numerous subsidiaries and affiliates of the primary
entities involved as well as a mix of both upstream and
midstream assets changing hands.
She specified that upstream assets mean wells and production
facilities associated with production in the fields. She pointed
out that midstream assets mean assets like the Trans-Alaska
Pipeline System (TAPS) and the shares in the pipeline as well.
She added that assets like the storage tank at the Valdez Marine
Terminal are identified as midstream as well.
She noted that an acronym listing for the different entities and
nomenclatures used by the oil industry will be posted on the
Alaska Legislature's Bill Action and Status Inquiry System
(BASIS) for reference.
VICE CHAIR COGHILL confirmed that the acronym listing will be
posted on BASIS.
2:06:27 PM
COMMISSIONER FEIGE explained that deals like the BP/Hilcorp
transaction are a normal part of the natural evolution within
the oil and gas industry all around the world. As an oil field
matures it is not uncommon for the original developers to sell
their assets to operators who specialize in mature asset
management and production, the type of deal that is before
committee members.
She reviewed the agenda for the department's overview, slide 2,
and noted that the presentation will be structured in four
primary categories:
• Who are the parties to this deal?
• What assets and liabilities are changing hands?
• How does the State of Alaska review and approve this deal?
• When might this deal close?
She said the state agencies talked about during the presentation
have either an immediate or a direct role in approving the
BP/Hilcorp transaction. If an agency does not have an immediate
or direct role, the agency will not be discussed during the
presentation. The presentation has been structured for brevity
with the recognition that there will be several public meetings
on the BP/Hilcorp transaction.
2:08:11 PM
She reviewed the following Sale Overview on slide 3:
• August 27, 2019:
o 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:
o Division of Oil & Gas provided with confidential
purchase and sale agreement to assist with its due
diligence.
COMMISSIONER FEIGE summarized that in the upstream is a
purported stock sale of companies and in the midstream is a
combined stock and asset sale of midstream companies and assets.
The DNR has been working its due diligence since the Division of
Oil & Gas received the confidential copy of the purchase and
sales agreement on October 11, 2019.
She said DNR has been working closely with both BP and Hilcorp
and to date the companies have been very forthcoming with
additional information that DNR has requested. Both BP and
Hilcorp have been very transparent in answering any questions or
providing clarity regarding certain aspects in the deal.
2:09:30 PM
PETER CALTAGIRONE, Senior and Legal Policy Advisor,
Commissioner's Office, Alaska Department of Natural Resources,
Anchorage, Alaska, reviewed the following from slide 4, BP &
Hilcorp - Sale Structure:
• [Upstream] The Standard Oil Company, Share Sales to Hilcorp
Alaska, LLC [Upstream]:
o BP Exploration (Alaska) Inc. (BPXA):
square4 Holds Upstream Interests
• Prudhoe Bay
• Pt. Thomson
• Milne Point
• Liberty
• ANWR.
o BP Alaska LNG LLC
square4 One third interest Alaska LNG Project, LLC
• [Midstream] BP Pipelines Alaska Inc. (BPPA), Share and
Asset Sale to Harvest Alaska, LLC
o Share Sale
square4 Alyeska Pipeline Service Company
• Approximately 49.1069 percent
square4 Prince William Sound Oil Response Corporation
square4 BP Transportation Alaska Inc.
• Owns 32 percent PTE Pipeline, LLC
• Owns 50 percent Milne Point Pipeline, LLC
o Asset Sale
square4 TAPS Assets
MR. CALTAGIRONE explained that the graphic presented to
committee members in slide 4 shows the overall sale structure of
the transaction and the entity names that are going to be
involved, divided by the upstream and midstream categories.
He said the reference to the Standard Oil Company shown in the
upstream is a remnant of the oil trusts from back in the
Rockefeller days in the 1800s through a series of iterations and
sales over the years; that is the actual entity that holds the
ownership of shares in some of the interests that are changing
hands in the BP/Hilcorp deal.
He explained that the DNR overview will address the upstream
interest on the North Slope for BP Exploration (Alaska) that
includes exactly where the interests are located with the
percentages. Also, the third-party interest for the Alaska LNG
Project, BP Alaska LNG, will be addressed in greater detail
regarding exact entity holdings and what will be transferred.
He said BP Pipeline Alaska is the entity that holds the
midstream assets: TAPS, shares in Alyeska, and a 25-percent
share in Prince William Sound Oil Response Corporation. The
midstream interest for BP Pipeline Alaska will be transferring
to Harvest Alaska, Hilcorp's midstream entity.
2:11:37 PM
COMMISSIONER FEIGE addressed slide 5, Upstream Assets, as
follows:
• All issued and outstanding shares of stock of BP
Exploration (Alaska) Inc. (BPXA).
• BPXA owns working interests in oil and gas leases in the
following areas:
o Prudhoe Bay Unit: 26.36 percent
o Pt. Thomson Unit: 32 percent
o Milne Point Unit: 50 percent
o Liberty Unit (Federal unit): 50 percent
o Arctic National Wildlife Refuge (ANWR) (ASRC leases):
50 percent:
square4 ANWR leases are from the Arctic Slope Regional
Corporation (ASRC), not the State of Alaska.
She said the upstream assets changing hands have important
percentages to bear in mind. First, BPXA owns working interest
ownerships in oil and gas leases. The Liberty Unit is often
federal waters and will produce a bit from state and federal.
There are 19 leases in ANWR that date back to the 1980s, 50
percent working interest ownership in the leases will change
hands. However, the leases were issued by ASRC and not by the
State of Alaska.
COMMISSIONER FEIGE reviewed the following on slide 6, North
Slope Upstream Assets Before, As of December 2019:
• Milne Point
o Hilcorp Alaska LLC: 50 percent
square4 Unit operator
o BP Exploration (Alaska) Inc: 50 percent
• Prudhoe Bay Unit
o ExxonMobil Alaska Production Inc: 36.4027 percent
o ConocoPhillips Alaska Inc: 36.0767 percent
o BP Exploration (Alaska) Inc: 26.3606 percent
square4 Unit operator
o Chevron USA Inc: 1.1600 percent
• Liberty Unit
o Hilcorp Alaska LLC: 50 percent
square4 Unit operator
o BP Exploration (Alaska) Inc: 50 percent
• Point Thomson Unit
o ExxonMobil Alaska Production Inc: 61.1845 percent
square4 Unit operator
o BP Exploration (Alaska) Inc: 31.9321 percent
o ConocoPhillips Alaska Inc: 4.9345 percent
o Jade Energy LLC: 1.6103 percent
• ANWR Leases
o BP Exploration (Alaska) Inc: 50 percent
o Chevron USA Inc: 50 percent
She noted that Hilcorp Alaska currently owns 50 percent of the
Milne Point and Liberty units. Hilcorp will be acquiring the
other 50 percent from both the Milne Point and Liberty units.
2:13:39 PM
She addressed slide 7, North Slope Upstream Assets Post Closure,
If Approved, as follows:
• Milne Point:
o Hilcorp Alaska LLC: 50 percent
square4 Unit operator
o Hilcorp (BPXA): 50 percent
• Prudhoe Bay Unit
o ExxonMobil Alaska Production Inc: 36.4027 percent
o ConocoPhillips Alaska Inc: 36.0767 percent
o Hilcorp (BPXA): 26.3606 percent
square4 Unit operator
o Chevron USA Inc: 1.1600 percent
• Liberty Unit
o Hilcorp Alaska LLC: 50 percent
square4 Unit operator
o Hilcorp (BPXA): 50 percent
• Point Thomson Unit
o ExxonMobil Alaska Production Inc: approximately 61
percent
square4 Unit operator
o Hilcorp (BPXA): approximately 37 percent
o Jade Energy LLC: approximately 2 percent
• ANWR Leases:
o BP Exploration (Alaska) Inc: 50 percent
o Chevron USA Inc: 50 percent
COMMISSIONER FEIGE explained that post closure for the upstream
units is the same math, but the percentages have changed.
Hilcorp will still hold the minority percentage of 26 percent
for the Prudhoe Bay Unit that is currently held by BPXA.
She pointed out that with the upstream assets, especially the
large legacy fields like Prudhoe Bay, no one company goes it
alone and acts unilaterally. The Prudhoe Bay field is managed
through a technical operating working group. Both ConocoPhillips
and ExxonMobil have technical professionals that are secundant
to the operating team, they work side by side at present with BP
and they will continue to work side by side with Hilcorp if the
transaction closes and Hilcorp assumes unit operator role.
She detailed that post closure for the upstream units shows
Hilcorp at 37 percent versus 32 percent for the Point Thomson
Unit. The reason for Hilcorp's 37 percent interest is due to a
transfer that DNR received the previous week where
ConocoPhillips is transferring its 5 percent of the Point
Thomson Unit to Hilcorp Alaska. The ConocoPhillips transfer is
unrelated to the BP/Hilcorp transaction of 32 percent for Point
Thomson.
COMMISSIONER FEIGE reviewed the following on slide 8, Additional
Asset Transfers:
• All issued and outstanding limited liability company
membership interests of BP Alaska LNG LLC (BPALL).
• BPALL owns one-third of outstanding limited liability
company interest in Alaska LNG Project, LLC (AKLNG).
She noted that additional assets that are being transferred
would be all the issued and outstanding limited liability
company membership shares or interest of BP Alaska LNG. BP
Alaska LNG, LLC (BPALL) is the entity that was created by the
producer group as a part of the AKLNG Project. BPALL is the
entity that holds the rights to the land at Nikiski which would
be the home of the liquefaction units associated with AKLNG.
BPALL is also the operating company of record under any federal
export permit associated with an AKLNG Project. BPALL is also
the entity where Hilcorp would be stepping in to the more recent
$10 million pledge by BP, AGDC, and ExxonMobil for advancing due
diligence on the economics of the large AKLNG line and export
project.
2:16:55 PM
She reviewed Harvest Alaska, LLC Midstream on slide 9:
• BPTA holds 50 percent of the outstanding limited liability
company interests of Milne Point Pipeline, LLC. (of which
Harvest currently holds the other 50 percent).
• Thirty-two percent of the outstanding membership interests
of Point Thomson Export Pipeline.
She detailed that the noted midstream interests from BP
Transportation (BPTA) would transfer to Harvest Alaska, which is
Hilcorp's midstream entity. BPTA currently holds 50 percent of
the Milne Point Pipeline. She recalled that Hilcorp currently
owns the other 50 percent of Milne Point and they also hold the
other 50 percent of Milne Point Pipeline. Post closure, Harvest
would own the other 50 percent of the Milne Point Pipeline from
BPTA. The result would place the total of both midstream and
upstream, Milne Point and Hilcorp, in subsidiary hands. BPTA
would also transfer 32 percent of its outstanding interest in
the Point Thomson export pipeline and that goes hand and hand
with the working interest ownership transfer.
COMMISSIONER FEIGE addressed slide 10, Harvest Alaska, LLC
Midstream, as follows:
• Acquiring from BP Pipelines (Alaska) Inc. (BPPA):
o BPPA's approximately 48.4 percent interest in TAPS and
approximate 47.6 interest in TAPS terminal tankage in
Valdez.
o Approximately 49.1069 percent of issued and
outstanding shares of Alyeska Pipeline Service
Company.
o Approximately 25 percent share in Prince William Sound
Spill Response Corporation.
2:18:39 PM
REPRESENTATIVE HANNAN opined that Hilcorp appears to become the
unit operator for all of Alaska's North Slope assets except for
Point Thomson and their minority shareholder position in the
Prudhoe Bay Unit. She asked if being the unit operator with a
minority position is common and are there concerns for Hilcorp
being the primary unit operator for all of Alaska's North Slope
assets.
COMMISSIONER FEIGE clarified that the North Slope map shown to
committee members does not show all the North Slope assets, just
the assets that are changing hands. Having an operator with a
minority position is not uncommon. Nobody goes it alone; the
Prudhoe Bay Unit is operated as a team by the other working
interest owners.
2:20:46 PM
REPRESENTATIVE HANNAN asked if DNR has any questions or concerns
about Hilcorp's ability. She opined that Hilcorp appears to be
taking a big step-up by becoming the unit operator for a
longstanding unit that shifts from multinationals to a small
independent. She asked if DNR has heard from the other partners
involved in unit operations.
COMMISSIONER FEIGE replied that there have not been any specific
concerns from the other working interest owners. However, the
point Representative Hannan raises is very much central to the
due diligence that DNR and other agencies are undertaking.
Combing through Hilcorp's capability to undertake operatorship,
to have the financial wherewithal to manage any kind of upset or
event that might happen on that unit, that's all part of the
financial analysis that DNR and other agencies are in the
process of undertaking as due diligence. The DNR wants to see an
orderly and smooth transaction so that there is no hiccup or
production disruption as the BP/Hilcorp transaction takes place.
2:22:19 PM
SENATOR KIEHL ask if a post-closure prospective of operators for
the North Slope can be provided to show what the ownership stake
looks like across the North Slope.
COMMISSIONER FEIGE noted that the website for the Division of
Oil and Gas shows a working interest ownership map for the North
Slope and Cook Inlet. The division's online map shows exactly
who owns the working interest in all of Alaska's fields in
addition to acreage across the North Slope and Cook Inlet. The
information from the division shows a very competitive array of
investors and working interest ownership across the North Slope,
primarily due to the vigorous response to recent discoveries.
VICE CHAIR COGHILL opined that the last lease sale was
indicative of the broad array that Commissioner Feige noted for
the North Slope.
COMMISSIONER FEIGE concurred with Vice Chair Coghill.
REPRESENTATIVE SPOHNHOLZ referenced the sales structure for the
BP/Hilcorp transaction that included share and asset sales. She
asked if there were distinct regulatory obligations that are
different for share and asset sales.
2:24:28 PM
MR. CALTAGIRONE answered that there are different obligations
and oversite that occurs based on how the assets are changing
hands. Committee members will hear greater detail on the due
diligence that DNR undertakes with the help of DOL and outside
consultants.
VICE CHAIR COGHILL asked Commissioner Feige to address the
additional asset transfers and confirm that there are no new
dollars or new authority that transferred, and the transaction
is just a straight transfer.
COMMISSIONER FEIGE answered yes, the transaction would be just a
straight across transfer.
VICE CHAIR COGHILL commented that if there are new agreements
that those will percolate to the top.
COMMISSIONER FEIGE replied that Vice Chair Coghill's query is
part of the due diligence and is one of the areas that DNR is
tracking very closely.
CO-CHAIR TARR asked Commissioner Feige to readdress the North
Slope upstream asset, post closure, specifically the two
situations regarding the Milne Point and Liberty units where
Hilcorp currently has 50 percent and post closure they will
become the sole operator. She asked if the two different colors
shown in slide displayed to committee members indicates that
there are going to be two different Hilcorp subsidiaries.
COMMISSIONER FEIGE answered that the green color in the
overview's slide is meant to note that the Liberty Unit is
technically a federal unit, not a state unit. The sand color in
the slide represents state units and the green color represents
a federal unit. She asked Co-Chair Tarr if she answered her
question.
CO-CHAIR TARR answered no. She specified that she was referring
to the green and blue colors that shows the ownership percentage
and if the separate colors showed that a different Hilcorp
subsidiary is going to come in at 50 percent.
COMMISSIONER FEIGE explained that the different colors are
simply meant to note the portions that Hilcorp would be taking
in.
2:27:17 PM
MR. CALTAGIRONE reviewed the following on slide 12, Contrast to
BP-ARCO Transaction Merger vs. Straight Purchase:
• BP/Arco Merger (2000):
o Federal Securities and Exchange Commission Oversight.
o Anticompetitive / antitrust issues to consider.
o Merger of two major producers in Alaska.
o Approximately 70 percent of combined production at
time.
He explained that the overview will transition to how the state
agencies involved in an oversight role in the BP/Hilcorp
transaction will perform their due diligence. A comparison will
be made to the BP and Arco merger of 2000, a completely
different deal that will be used to compare with and contrast
with the BP/Hilcorp transaction.
MR. CALTAGIRONE explained that the BP and Arco merger of 2000
was between BP Amoco and the Atlantic Richfield Company (ARCO),
a global $27 billion to $30 billion merger of both companies.
Because the merger involved two publicly traded companies, there
was both a U.S. Securities and Exchange Commission (SEC) and a
Federal Trade Commission (FTC) oversight role on the federal
level. The SEC is the entity that protects investors of publicly
traded securities and the FTC is the federal government's
independent agency that protects consumers. The SEC did not have
concerns with the merger, but the FTC sought to unjoin the deal
that eventually led to an agreement where the Alaska assets of
Arco Alaska were spun off to Phillips Petroleum, currently known
as ConocoPhillips.
He noted that the merger of BP and Arco accounted for
approximately 70 to 74 percent of the combined Alaska oil and
gas production. The BP and Arco merger came on the heels of some
other very large and notable oil mergers at the time: Shell and
Texaco joint venture in 1997, BP acquisition of Amoco in 1998,
and the Exxon and Mobil merger that was occurring at the same
time. The concerns were much different at the time of the BP and
Arco merger. The main concern with the BP and Arco deal was
price manipulation at West Coast refineries.
2:29:59 PM
He continued reviewed the following on slide 12, Contrast to BP-
ARCO Transaction Merger vs. Straight Purchase:
• Proposed Hilcorp Acquisition (2020):
o Federal Trade Commission conclusions:
square4 Hart-Scott-Rodino Act analysis.
square4 No antitrust or competitiveness concerns.
o Hilcorp increasing barrel of oil equivalent production
share in the State from 12 percent pre-deal to 28
percent post-deal.
He said contrasting to today's BP/Hilcorp transaction, Hilcorp
currently accounts for 12 percent of the combined oil and gas
production in Alaska, post-deal the combined oil and gas
production in Alaska increases to 28 percent. By contrast,
ConocoPhillips will have 42 percent of Alaska-wide production
post-deal, ExxonMobil will still have 19 percent. The numbers
for the BP/Hilcorp transaction are not anywhere near what the
numbers are for the BP and Arco merger of 2000.
MR. CALTAGIRONE noted that the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 required the FTC to have an oversight
role in the BP/Hilcorp transaction. The parties in the
transaction had to file paperwork with the FTC, analysis and a
30-day waiting period has occurred. The FTC did not issue
anything, ergo the FTC does not necessarily have any antitrust
or anticompetitive concerns with the deal. The BP/Hilcorp
transaction is currently in the state's lap.
2:31:08 PM
COMMISSIONER FEIGE reviewed the following on slide 13, DNR:
Division of Oil and Gas:
• 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.
She explained that in Alaska the state wears two hats, one as
the landowner or lessor, the other as a regulatory authority.
The State of Alaska owns and leases its resources to industry
for development and production, a relationship that shields the
state from the risk associated with exploration uncertainty and
the significant capital requirements associated with
development.
COMMISSIONER FEIGE detailed that the State of Alaska generates
through its lessor and lessee relationship the rents, royalties,
and taxes. The most significant portion of the state's revenue
comes through the royalties and royalty income, 50 percent of
which goes to the Permanent Fund and the other 50 percent is
then used for state government and state government services.
She emphasized that approving the change of control in its
resource leases is by no means a rubber-stamped process. Alaska
law is clear that no transfer of interest in a lease is binding
upon the state unless approved by the DNR commissioner. Within
DNR, the Commercial Section for the Division of Oil and Gas is
charged with spearheading and doing the bulk of the due
diligence associated with resource leases. Matt Snodgrass
oversees the due diligence effort to examine the existing
financial assurances of Hilcorp and its subsidiaries to
determine what amendments are required.
2:34:00 PM
MATT SNODGRASS, Commercial Analyst, Division of Oil and Gas,
Alaska Department of Natural Resources, Anchorage, Alaska,
reviewed the following on slide 14, Financial Analysis, for the
BP/Hilcorp transaction:
• Independent third-party review of the financial risk
associated with the transaction:
o National Economic Research Associates, Inc. (NERA).
o NERA's energy practice has:
square4 Over half a century of energy sector practice.
square4 Prior experience assisting the State of Alaska in
complex economic matters.
square4 Proprietary modeling and analytic techniques.
square4 Multiple Ph.D.-level economists with extensive
experience modeling and analyzing risk in the
energy sector.
He said the Commercial Section of the Division of Oil and Gas is
largely responsible for conducting the inhouse financial and
economic review of Hilcorp as well as the BP/Hilcorp
transaction. The State of Alaska has contracted with a third-
party consulting firm, National Economic Research Associates
(NERA), to assist with its rigorous and robust analysis. NERA
has been an economic consulting firm for over 50 years and one
of their areas of specialty practice is doing complex economic
and financial analysis inside of the energy sector. NERA has
past aided the State of Alaska and other public sector
organizations in trying to understand complex commercial
transactions.
MR. SNODGRASS opined that NERA offers different opportunities to
increase value and rigor inside the BP/Hilcorp transaction
analysis. NERA has a suite of proprietary modeling and analytic
techniques that adds value in assisting with understanding and
working the problems. NERA also has a stable of well trained and
experienced economics staff including several PhD level
economists that can help work with issues and make sure
everything is fully pursued.
2:35:47 PM
He reviewed the following on slide 15, Financial Assurances:
• Ensure that the Hilcorp corporate family has the financial
capacity to fulfill its obligations to the state, including
those not realized for many years.
• Existing financial assurances framework:
o Initial financial assurance agreement entered into in
2011.
o Sixth Amended and Restated Financial Assurances
Agreement in 2019.
• Regular reporting of highly confidential information:
o Annual audited financial statements.
o Quarterly unaudited financial statements.
o Third party estimate of upstream dismantling,
removing, and restoring (DR&R) obligation submitted
every three years.
o Reserve reporting requirements.
o Insurance covering assets.
He said NERA's analysis will be supported with information
around Alaska's statutes, rules, contracts, and leases.
Informing NERA on Alaska's unique opportunities will help NERA
frame questions that are of importance to the state in
furthering its analysis. Having the analysis and information in
place will inform the state on its financial assurance
arrangement with Hilcorp. The intent for financial assurance
agreements is to assure that the public interest will be
protected today and long into the future.
MR. SNODGRASS emphasized that financial assurance discussions
are not new conversations that the Division of Oil and Gas is
having with the lessee. Conversations around structuring
financial assurance arrangements in a way that protects the
state's interests are conversations that the division has on
almost a daily basis with different lessees.
He said the Division of Oil and Gas has an extensive and
successful record of engaging in negotiations with Hilcorp to
create the financial assurance arrangements that offers the
state sufficient protection to ensure obligations are going to
be satisfied. The Division of Oil and Gas began working and
developing the financial assurance agreements with Hilcorp when
they first entered Alaska in 2011. In December 2019, DNR and the
division executed the Sixth Amended and Restated Financial
Assurances Agreement, so the state is now in its seventh round
with Hilcorp ensuring that a framework is in place to protect
the state's interests.
2:38:08 PM
He referenced the characteristics of the existing financial
assurance arrangements, noting that DNR has had and continues to
have access to significant and highly confidential financial
information from Hilcorp. The agreements in place since 2011
have required Hilcorp to provide annual audited financial
information to the state. The DNR will be receiving annual
audited financial information from: Hilcorp Energy One, the
parent; Hilcorp Alaska, its Alaska subsidiary; and Harvest
Midstream One, the midstream parent for Harvest Alaska, its
Alaska subsidiary.
He detailed that in addition to the yearly audited financial
statements, similar to a 10-K SEC filing for a publicly traded
organization, DNR receives quarterly unaudited financials from
Hilcorp that provides quarter by quarter oversight of the
financial health of the Alaska subsidiary, Hilcorp Alaska. The
DNR has a significant time series data set in observing the
financial health of Hilcorp quarter by quarter.
He said in addition to the audited and unaudited financials that
DNR receives from Hilcorp, the department also receives
proprietary oil and gas information, including reserve reporting
requirements. When asked, Hilcorp must deliver information about
their oil and gas reserves inside the State of Alaska so that
the state can more robustly manage its risk. The DNR also has
the ability to request and evaluate the insurance coverages that
are in place to cover any assets in Alaska that are on state
lands.
MR. SNODGRASS said another important requirement obligates
Hilcorp to go out to the market and secure an independent third
party to estimate how much it will cost Hilcorp to remove its
working interest infrastructure on state lands and to return the
lands to a condition that is acceptable to the DNR commissioner.
The agreement allows DNR to understand the size of the
obligations that Hilcorp carries on state lands.
2:40:49 PM
He addressed slide 16, Financial Assurances, as follows:
• Periodic reassessment of financial position.
o Net worth ratio test and Altman's Z-score tests.
o Automatic triggers to protect the State of Alaska
should there be material change in financial health.
o Surety bonding requirements that shift with the
lessee's financial health.
• Financial assurances framework will be renegotiated using
the results from the financial analysis to protect the
State of Alaska's interests.
He noted that within the financial assurance arrangements with
Hilcorp is an inbuilt mechanism that allows DNR to take action
if a material change occurs to agreed upon financial metrics.
The assurance structure provided to the state is automatically
triggered to change when the financial health of the lessee
deteriorates, requiring increased assurances.
He summarized that the previously noted analysis will allow DNR
to negotiate the new updated financial assurances arrangements
and make sure public interest remains protected.
2:42:05 PM
COMMISSIONER FEIGE reviewed the following on slide 17, Financial
Assurances:
• 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.
• BPPA retaining obligations related to the DR&R of TAPS and
is leaving all parent company guarantees from BP
Corporation North America Inc. in place regarding that
obligation.
COMMISSIONER FEIGE explained that BP remaining secondarily
liable means should Hilcorp be incapable of executing on their
obligations, BP steps in as the secondary liability.
Additionally, BP Pipelines is retaining obligations related to
the DR&R of TAPS and is leaving all parent company guarantees
from BP Corporation North America in place regarding that
obligation.
2:43:18 PM
JOHN PTACIN, Chief Assistant Attorney General, Oil and Gas
Section, Alaska Department of Law (DOL), Anchorage, Alaska,
provided background information and explained the department's
role in the BP/Hilcorp transaction.
He reviewed the following on slide 18, Attorney General's Office
Role:
• John Ptacin, Chief Assistant Attorney General, Oil and Gas
Section. Former Chief of the Regulatory Affairs and Public
Advocacy Section.
• Morrison & Foerster LLP and National Economic Research
Associates.
• Department of Law 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 (RCA).
He noted that he has been the legal advisor to the Division of
Oil and Gas for the past six years and has represented the State
of Alaska in all matters related to TAPS.
He explained that he is mainly before the committee to address
TAPS, an important component of the proposed BP/Hilcorp
transaction. The DNR and DOL has a team in place to get to the
bottom of the legal and factual issues related to the proposed
transfer of 48 percent of TAPS to Harvest. The DOL is taking the
BP/Hilcorp transfer very seriously because the state, just like
RCA, wants to know whether Harvest is fit and whether it is in
the public interest to transfer 48 percent of TAPS to a new
company.
MR. PTACIN said part of the team that is going to help the State
of Alaska in its analysis includes the use of outside counsel
from Morrison & Foerster, a law firm that has acted as the
state's lawyer on TAPS matters for the last 40 years. Morrison &
Foerster will help DOL on both TAPS and upstream issues.
He noted that not just lawyers are going to be looking at the
BP/Hilcorp transfer. NERA will also be helping DOL on the
midstream issues. If DOL feels that other expert assistance is
needed, DOL will go and get it during the RCA proceedings as
well.
He summarized that DOL and DNR are doing its legal and factual
analysis because the State of Alaska, importantly, is not the
entity that is going to make the decision whether TAPS, or at
least the percentage thereof, is going to change hands.
2:45:47 PM
He addressed slide 19, RCA Process (Alaska Statute 48.06.305),
as follows:
• RCA proceedings in general:
o Quasi-judicial;
o Five commissioners;
o Resides under Department of Commerce (DCCED).
• RCA pipeline acquisition dockets:
o Administrative process;
o Court-like discovery;
o Likely hearing.
• Questions answered in an RCA pipeline docket:
o Is the acquiring pipeline operator fit and able?
o Is the proposed acquisition in the public interest?
He remarked that letting committee members and the citizens of
Alaska know about what the RCA is about to do will be helpful as
well as what their role is as opposed to what the executive
branch's role is.
He explained that RCA is a quasi-judicial body, a body that is
essentially court-like when they make determinations like the
BP/Hilcorp transaction. The RCA has five commissioners that
essentially act like judges when a question like the BP/Hilcorp
transaction is presented to them. The RCA is going to open a
docket and parties like the state and the parties that are
looking to do the transaction are going to go before the RCA,
which is essentially why the RCA is not at the joint committee
meeting to answer questions. Having the RCA attend the joint
committee meeting is essentially like asking a judge to come in
and opine about a decision that he or she is about to make
decisions on.
MR. PTACIN summarized that he is trying to do his best to
explain what is about to happen. He emphasized that he does not
represent the RCA but will likely represent the State of Alaska
in proceedings related to the acquisition before the RCA.
2:47:11 PM
He explained that the RCA is important because the commission
serves as the entity in the state that makes sure things like
utilities are charging just and reasonable rates, and the
utilities are running safe and efficiently. The commission's
oversight includes the state's pipelines because there are
barrels of oil that stay within the state and that confers to
them their jurisdiction, TAPS is one of those assets as well.
He said the reason why pipeline entities end up before the RCA
is because like local utilities and natural gas companies, the
pipelines are essentially like monopolies and must go to an
entity like the RCA to get a certification in order to operate.
TAPS is one of several pipelines that are under RCA regulation.
He explained that part of his job every year is to look at the
pipeline rates to make sure they are just and reasonable. TAPS
and the other pipelines at issue with the BP/Hilcorp transaction
come under the RCA's jurisdiction. The court-like case that is
about to be entered with the RCA will decide two things: the
public interest and is Harvest fit to run 48 percent of TAPS.
The nice thing about the hearings before the RCA is that
interested parties can intervene, information may be requested,
and information gets shared. If there are discovery disputes, if
there is information that is being withheld, parties can go to
the five-member commission and get the materials that are
needed. The RCA hearing is coming and that is a result of BP and
Hilcorp filing their transfer proposal on September 27, 2019.
2:49:24 PM
He explained that for the last two month the RCA, as is normal
in proceedings like the BP/Hilcorp transaction, has been
reviewing the filing for completeness. Filings like the
BP/Hilcorp transaction are very complex and sometimes parties
miss things and the RCA will point out filing errors. During the
filing review process, entities and the public, including the
State of Alaska, have been filing comments to the RCA explaining
what they would like to see done before the RCA. Everybody has
been in a holding pattern waiting to see where the RCA
essentially wants to go with the question of how the Hilcorp
acquisition relates to TAPS.
MR. PTACIN said last week the RCA made it very clear that their
intention is to take a hard look at the proposed transfer. The
RCA has assigned an administrative law judge to the case which
means they have opened a docket. On December 13, 2019, the RCA
sent an order requiring BP and Hilcorp to provide substantial
amounts of documents to the commission by December 23, 2019.
Included in the documents request by the RCA is the afore
mentioned purchase and sale agreement, audited financial
statement for both BP North America and Hilcorp, and various
documents explaining the corporate organization of all entities
involved.
He emphasized that the case before the RCA is not going to be a
garden-variety rate case that addresses the cost to ship a
barrel of oil. The bigger question for the case is the Harvest
fit and the ability to take over 48 percent of the company that
essentially runs TAPS and is such a transaction in the public's
interest. The decision will be made by the five-member
commission board and not by the state, DNR, or DOL. The DNR and
DOL will be a party in front of the RCA and that is why the
departments are currently doing its homework on the audited and
unaudited financials along with other data of Harvest and BP to
answer the previously noted fundamental questions.
2:51:51 PM
He pointed out that Hilcorp is buying 48 percent of Alyeska
Pipeline Services, the entity that runs TAPS. Hilcorp is not
coming in to run TAPS. Hilcorp will become a voting member
amongst several other companies in a consortium that all own a
piece of TAPS: BP, ExxonMobil, and Unocal.
He said the state, as a party before the RCA, will look at
whether Harvest can fund running TAPS. Every year the TAPS
carriers get to make their money back for running TAPS plus a
small profit. However, over time there is a necessity for cash
calls that are anywhere from $2 million to $20 million a year
depending on operating expenses and capital costs for operating
an 800-mile pipeline that is 40 years old. There are times that
the TAPS consortium must put forth cash.
MR. PTACIN noted that the DNR and DOL will do the testing and
the analysis necessary to understand whether Harvest can take on
unforeseen disturbance in TAPS. The RCA does not have a deadline
and they are going to take a hard look due to the magnitude of
the TAPS transfer.
2:54:10 PM
MR. CALTAGIRONE reviewed the following on slide 20, AOGCC Role:
• Designation of Operator:
o Owner submits for approval a designation of new
operator form:
square4 New operator agrees to accept obligations.
square4 Furnish surety or personal bond, amount depends
on number of wells.
square4 BPXA expected to remain operator of record as
wholly owned subsidiary of Hilcorp.
square4 Bonding from both Hilcorp and BPXA expected to
remain in place.
square4 20 AAC 25.020.
• Designation of Ownership:
o Within 15 days of new ownership of a property, Notice
of Ownership must be filed with AOGCC.
o 20 AAC 25.022.
• Bonding:
o New requirements took effect May 2019, with optional
phase-in over 4 years:
square4 Both BP and Hilcorp are currently compliant with
level of bonding and the commission will work
with the applicants to determine if a variance is
required post deal closure.
square4 20 AAC 25.025.
He explained that the Alaska Oil and Gas Conservation Commission
(AOGCC) is an independent, quasi-judicial agency of the state
that also resides under DCCED. The AOGCC has a regulation role
with well regulation and the prevention of waste of the
resource.
He said there are two functions that AOGCC performs as it
relates to the BP/Hilcorp deal. The first is ministerial in
nature which involves the designation of ownership, changeover
of ownership and operator, and designated operator of well.
Under Alaska law, the new operator must accept the obligations
of the old operator.
MR. CALTAGIRONE noted that within the slide 20 the bullet point
that reads, "BPXA expected to remain operator of record as
wholly owned subsidiary of Hilcorp," recently received
information indicates that there will be a name change to
Hilcorp.
He said the second of the two functions that AOGCC performs
relates to bonding. New requirements went into effect in May
2019 as it relates to the amount of bonding that companies are
required to carry for plugging abandonment obligations. Both BP
and Hilcorp are currently compliant with the level of bonding
and AOGCC will work with the applicants to determine if the
variance is required after post-deal closure. Bonding
requirements are found in Alaska regulation, 20 AAC 25.025.
2:56:01 PM
COMMISSIONER FEIGE reviewed the following on slide 21, DEC: Oil
Discharge Prevention and Response (AS 46.04.030, 18 AAC 75.400-
496):
• Facilities that produce, store, or transport oil must have
an oil discharge prevention and contingency plan approved
by DEC.
• Hilcorp has two options:
o Change of Owner Amendment:
square4 As a major amendment there is a 30-day public
comment period.
square4 Potential for quicker approval since it builds
off previously approved BP plan.
o New Plan:
square4 Pre-application meeting required at least 60 days
before submitting an application (held November
20, 2019).
square4 Application due at least 180 days before start of
operations.
square4 30 to 45-day public comment period.
o Current BP Plans:
square4 BPX Greater Prudhoe Bay, North Slope.
She said the Department of Environmental Conservation (DEC) also
has a significant oversight role in the BP/Hilcorp transaction.
It is charged with oil spill prevention and response, and as it
pertains to the BP/Hilcorp deal and operations across Alaska,
generally. Any facility that produces, stores, or transports oil
must have an oil discharge prevention and contingency plan that
has been approved by DEC.
COMMISSIONER FEIGE explained that Hilcorp as two options. First,
do a change of owner amendment which is as a major amendment
there would be a 30-day public comment period associated with
the filing and that would be a comment period opened by DEC. The
change of owner amendment could be a quicker path for Hilcorp
because the amendment builds from a previously approved BP plan.
She said the second option for Hilcorp is to apply for a new
plan. A new plan requires a preapplication meeting at least 60
days before application submission. A preapplication meeting
took place November 20, 2019; that application will be due to
DEC at least 180 days before operations start at any facility
under the discharge plan. The application also comes with a 30
to 45-day public comment period.
She noted that BP Alaska currently has an approved oil and spill
contingency and response plan at the Greater Prudhoe Bay Unit.
2:57:51 PM
She reviewed the following on slide 22, DEC: Financial
Responsibility Spills and Threatened Spills (AS 46.04.040, 18
AAC 75.205-290):
• Operators that produce, store, or transport oil must
demonstrate proof of financial responsibility to respond to
events and spills.
• Requires annual DEC approval.
• Amount is based on the company's single facility with the
highest financial responsibility requirement (each facility
is not required to have separate financial responsibility).
• Maximum proof required for any facility except tankers is
$93.5 million.
She said also under DEC's purview and attached to the
responsibility for spills or potential spills is a financial
responsibility component that every facility and operator must
have. Operators that produce, store, or transport oil must
demonstrate the proof of financial responsibility to respond to
events and spills. The financial component responsibility
requires annual DEC approval.
COMMISSIONER FEIGE explained that the amount of financial
component is based upon the company's single facility that has
the highest financial responsibility requirement. Every
individual facility is not required to post the financial
assurance, but the single highest financial responsibility
requirement is required for the company's single facility.
She noted that the maximum proof of requirement for any facility
is $93.5 million. While there is financial assurance cap for any
given facility or for each company's primary facility of $93.5
million, there is no cap on liability. Every company is 100
percent responsible for any spill or event that occurs on their
leases or their units, the $93.5 million is simply a cap on the
financial assurance for DEC.
She reviewed the following on slide 23, DEC: Financial
Responsibility Spills and Threatened Spills (AS 46.04.040, 18
AAC 75.205-290):
• BP proof of financial responsibility cannot be transferred.
• Hilcorp already has demonstrated proof of financial
responsibility for the maximum $93.5 million for its
current assets, using commercial insurance policies.
• Hilcorp must apply for DEC approval to include the newly
acquired facilities, prior to sale closing.
3:00:11 PM
She reviewed the following on slide 24, DEC: Contaminated Sites
Liability and Cleanup:
• For contamination existing at the time of sale, Alaska law
holds both BP and Hilcorp responsible for contamination
after the sale (joint and several liability).
• While BP is a responsible party and will continue to be
responsible for contamination existing prior to sale,
Hilcorp will conduct activities relating to cleanup
actions, long term monitoring, and implementation of
institutional controls.
• There are both:
o Active contaminated sites (actions still necessary).
o "Cleanup Complete with Institutional Controls"
contaminated sites (contamination remains in place).
• Moving forward from the sale, Hilcorp will be liable for
contamination it causes or contributes to.
COMMISSIONER FEIGE said contaminated sites is under DEC's
oversight. The Prudhoe Bay Unit has been in production for 40-
plus years and there are areas across in the unit where there
could have been or have been spills previously occurring or past
drill cutting pits that may have not been closed out to the
satisfaction of the state. For contamination that is existing at
the time of the sale, Alaska law holds that both BP and Hilcorp
are responsible for that contamination, Hilcorp becomes
responsible for contamination that occurs after the sale, that
is the joint and several liability. While BP is the responsible
party for any contamination that existed prior to the
transaction, Hilcorp will probably be undertaking the conduct of
activities to continue to cleanup or do the long-term monitoring
or implementation of institutional controls.
She explained that on the Greater Prudhoe Bay Unit there are
currently both types of contaminated sites. Contaminated sites
are characterized as either sites where actions are still
necessary or sites where cleanup is complete with institutional
controls; these are sites which could have contamination that
remains in place for natural attenuation over time due to the
potential to cause more environmental harm from removal. Cleanup
with institutional controls means getting the site to a standard
of cleanup approved by the state and to the satisfaction of DEC.
She summarized that after the BP/Hilcorp transaction, Hilcorp
will be liable for any contamination that it causes or
contributes to.
3:02:19 PM
SENATOR BISHOP asked if the legislature could see the line of
questioning matrix that DNR will use for the due diligence on
the financials.
MR. SNODGRASS answered that committee members will receive
information as DNR progresses through the analysis.
SENATOR BISHOP responded that he looked at Hilcorp's producing
wells in the Lower 48 and he'd like to know how many are
horizontal and how many are vertical when he looks at the return
for a ten-year run. He asked if that is one of the things that
DNR will use in its financial modeling.
MR. SNODGRASS answered no. He explained that DNR will do
financial modeling with forward-looking expectations around
development plans, production changes, and associated cash
flows.
3:04:24 PM
SENATOR BISHOP responded that he does not have to look at the
numbers because he knows Mr. Snodgrass understands them, but he
wants to make sure the right questions are being asked.
VICE CHAIR COGHILL inquired if the modeling used by NERA is the
type that DNR is familiar with.
MR. SNODGRASS answered that modeling will be driven by the sorts
of questions that DNR ultimately asks. NERA's modeling is
proprietary and the relationships that exist are not known. He
said he expects extensive exposure to several different types of
models.
SENATOR KAWASAKI asked the extent to which DNR will have access
to confidential information and how important DNR believes the
confidential information is for understanding the financial
fitness of Hilcorp.
MR. SNODGRASS replied DNR has access to the audited financial
statements, the associated risks, forward-looking expectations,
and market exposures. Hilcorp has been put on notice that
through the NERA process the DNR will request additional
information on an as needed basis.
3:06:52 PM
SENATOR KAWASAKI noted that the transfer of interest in the
lease is binding upon the state unless the commissioner approves
the transfer. He asked what circumstances the commissioner would
deny the lease transfer.
COMMISSIONER FEIGE replied that approval is based on a level of
comfort that the lease can be operated by the entity in
maintaining the state's interest in the lease.
SENATOR KAWASAKI asked at what point does the commissioner or
department say they do not feel comfortable. He inquired if a
commercial lease has ever been denied by the department.
3:08:27 PM
COMMISSIONER FEIGE answered that DNR will speak out during the
due diligence process when seeking additional information. Both
companies have been very forthcoming in providing information
when asked. However, if the state is not comfortable that the
transaction is not in the state's interest, then the state will
not approve the transaction. She said to her knowledge she does
not know that a commercial lease has ever been disallowed.
REPRESENTATIVE TUCK asked who decides on the auditors for third-
party audits.
MR. SNODGRASS answered that the auditors are selected by
Hilcorp, the lessee.
REPRESENTATIVE TUCK pointed out that DNR has described its role
as, in the public's interest, but the RCA role in statute
states, "in the best interest of the public." He asked if there
is a different standard between the DNR and RCA.
3:10:36 PM
COMMISSIONER FEIGE answered no. She opined that the verbiage is
an art of language. If the transaction is in the state's
interest, the transaction absolutely is in the public's
interest.
REPRESENTATIVE TUCK asked what happens if there is a greenlight
from DNR but not from RCA. He inquired if a conflict between DNR
and RCA would be adjudicated.
COMMISSIONER FEIGE replied that DNR probably wouldn't greenlight
something that RCA wouldn't also greenlight. She noted that the
state pipeline coordinator section has a role with the, "Fit,
willing, and able" test that is also part of what RCA
undertakes. The DNR is working in parallel with the RCA
regarding information sharing.
REPRESENTATIVE TUCK pointed out that local hire is in the best
interest of the public. He opined that one question that the
committee may want asked is how much local hire there will be.
3:12:57 PM
COMMISSIONER FEIGE answered that local hire is not part of DNR's
process. However, Hilcorp has noted that they have interviewed
well over a thousand people. Hilcorp will be putting together an
employment plan. Future hearings will allow committee members to
directly ask the companies about local hire.
VICE CHAIR COGHILL opined that committee members will hear from
the legislature on a regular basis about hiring Alaskans. It is
a topic that the legislature is not going to be quiet about.
SENATOR KIEHL noted that Mr. Snodgrass and Mr. Ptacin commented
that they have audited financial statements from Hilcorp, and
that the RCA has insisted on audited financial statements. He
said he read that Hilcorp has asked to be excused from filing
audited financial statements because they don't do audited
financial statements. He asked Mr. Ptacin to comment.
MR. PTACIN answered that his recollection is that as of Friday,
December 13, the RCA asked for Hilcorp's audited financial
statements. He surmised that Senator Kiehl may be referencing
when Hilcorp asked at present that any sort of financial
information remain confidential once filed with the RCA. The RCA
has not ruled on whether confidentiality will be granted to
Harvest and BP.
MR. SNODGRASS explained that DNR has inhouse audited financials.
He said regarding Representative Tuck's question, the lessee
does select the auditor that it uses for the audited financial
statement submissions. However, when DNR does audits by its
inhouse auditors inside the Division of Oil and Gas, included
within the audits are things like royalty audits.
3:15:56 PM
SENATOR KIEHL noted that Mr. Snodgrass talked about the
information and the analysis with the intent being so that DNR
could, "more robustly manage our risks. He asked what tools DNR
has to process or more robustly manage the state's risks.
MR. SNODGRASS explained that one of the ways DNR manages risk in
an ongoing way is through the development of agreements at the
onset to assist with measuring, managing, and then mitigating
risk in an ongoing way. There are different financial metrics
that DNR can track through time as well as pre-agreed upon
inbuilt mechanisms that should the risk profile of the state
change, the financial assurances change in response.
SENATOR GIESSEL referenced bonding and TAPS, noting that BP will
remain secondarily liable for the dismantling, removing, and
restoring (DR&R). She asked if bonding is done for DR&R and
where the money would come from if BP were to go bankrupt.
3:17:45 PM
MR. PTACIN answered that BP and its predecessors that have owned
part of Alyeska Pipeline have raised significant money through
tariff rates to do the DR&R for TAPS. He said Senator Giessel is
not wrong in her conclusion that BP is talking about a corporate
guarantee to pay the DR&R for TAPS. However, the requirement to
do the DR&R for TAPS is not just beholden to one company, the
DR&R requirement is essentially whomever else has a percent of
the pipeline also must agree to take the TAPS assets out of the
ground. He said if the Hilcorp acquisition goes through,
ConocoPhillips, ExxonMobil, and BP are the three companies that
are joining for the DR&R obligation.
SENATOR GIESSEL asked what happens to BP's DR&R obligation 40
years in the future if they go bankrupt in 10 years.
MR. PTACIN explained that through the TAPS tariff rates for the
last 40 years, the companies have not been required to set aside
money for DR&R. One reason the decision was made not to require
money to be set aside is that the sequestration of stagnate
capital would have raised TAPS tariff rates quite a bit,
resulting in a substantial deduction in the state's royalties
and taxes. The companies have collected the money for DR&R and
will do the DR&R as a corporate guarantee.
3:20:40 PM
SENATOR GIESSEL noted that TAPS is run by a consortium. She
asked who oversees the consortium and if there is a chairman.
MR. PTACIN answered that there is a side agreement called the
TAPS Agreement amongst the carriers. The agreement sets out a
series of bylaws on consortium interaction and decision making.
Part of the decision making for the RCA and the state will be to
determine if Harvest fits into the TAPS Agreement.
REPRESENTATIVE RASMUSSEN noted that the committee members have
heard a lot about public interest. She asked how DNR defines
public interest. She said one of the things that the state will
consider is Hilcorp's expertise in aging fields and higher
production levels that will bring in more royalties and tax
money to the state.
REPRESENTATIVE RASMUSSEN said she has heard a lot from the
public about philanthropy because BP is known as a community
pillar for their giving. She asked Commissioner Feige to expand
on philanthropy.
3:22:42 PM
COMMISSIONER FEIGE answered that in determining what is in the
public interest as part of the department's due diligence
process, DNR is looking at a broad suite of factors including
the capability of Hilcorp and their history in the state since
2011. The DNR has seen Hilcorp's history in taking mature
assets, raising production, and lowering operating costs.
She said the protection of the public interest and the state's
interest goes directly to royalty income which feeds the
Permanent Fund and state government services. The DNR looks at
production and future production potential for production taxes,
property potential for future property income taxes, financial
analysis, and financial assurance agreements for the DR&R of
upstream assets. All the previously noted factors are considered
through the department's due diligence process.
She reiterated that DNR is in its seventh iteration with
Hilcorp. Hilcorp has DR&R financial assurance agreements in
place with the state. The due diligence process gets rolled up
into a broader picture of whether DNR believes Hilcorp is an
entity that can perform at a level that can replace BP.
She explained that philanthropy is not part of DNR's oversite.
She disclosed that Hilcorp has clearly expressed to the
department their philanthropy plan and expects that Hilcorp will
share with the public their philanthropy plan.
3:25:35 PM
CO-CHAIR TARR asked Mr. Snodgrass to readdress his previous
overview of financial assurances. She said what concerns her,
even though DNR has access to financial statements, is whether
Hilcorp's additional subsidiaries have the financial resources
for the piece they are taking on, especially for companies that
have not been in existence before. She asked what kind of asset
transfer must happen for the subsidiaries.
MR. SNODGRASS answered that with respect to the audited
financials that DNR receives yearly, the department received
financials for Hilcorp Energy One and Harvest Midstream One. The
DNR is currently receiving financials for Harvest Midstream One,
the parent entities of Harvest Alaska. HMI is the parent of
Harvest Alaska, and HE1 is the parent of Hilcorp Alaska; those
subsidiaries will be consolidated into the audited financials of
the parents.
MR. SNODGRASS said for Hilcorp Alaska, DNR also receives yearly
audited financials for just a subsidiary entity as well.
Harvest Alaska is itself a consolidated entity of a wholly owned
subsidiary of Hilcorp, so its financial information is
consolidated inside of the yearly audited financials from
Hilcorp Alaska.
3:27:25 PM
CO-CHAIR TARR said with these annual evaluations that
you're doing or the three-year true up on the DR&R
obligations, then as these branches mature and different
responsibilities are taken on, that kind of regress
evaluation will continue to happen so that there's not a
circumstance - and where I'm going with this is thinking to
the AOGCC and what happened with their recent regs to
increase the bonding capacity and also the request for us
to do legislation that would allow them to go back on prior
operators - so just those conversations have sort of
highlighted what can happen through the evolution of
ownership and that's why I'm asking in this context.
CO-CHAIR TARR asked if DNR's annual evaluations and three-
year true-up on the DR&R obligations will continue as these
branches mature and different responsibilities are taken on
so that there's not a circumstance like what happened with
the AOGCC's recent regulations to increase the bonding
capacity and request for legislation to allow them to go
back on prior operators.
MR. SNODGRASS answered that the underlying idea is that should
additional subsidiaries be created or additional assets that DNR
needs to authorize be picked by Hilcorp or Hilcorp subsidiary,
that is going to automatically be rolled into the future
assurance agreement. The hope is to avoid the situation she
described by providing a durable and predictable lessee
framework that defines their expectations. He added that it is
hard to visualize a situation in which there could be such a
hole, but the recommendations to pay attention in DNR's analysis
is beneficial in making sure the concern is reflected during the
renegotiations for financial assurances.
CO-CHAIR TARR recognized that Representative Fields was in
attendance and Representative Josephson was online.
3:29:36 PM
REPRESENTATIVE HANNAN commented that the interest in Alaska that
BP is transferring is a minority of their worldwide oil and gas
interests. She asked for a parallel for Hilcorp; how much of
Hilcorp's total oil and gas investment has been in Alaska and
how much will it be after the transaction.
MR. SNODGRASS said he question should be directed to Hilcorp but
his understanding is that Hilcorp will substantially be an
Alaska company after the transaction.
REPRESENTATIVE HANNAN asked if the RCA has scheduled its quasi-
judicial hearing or if the schedule is pending receipt of more
information.
MR. PTACIN answered that scheduling by the RCA is pending more
information. He said there are a number of matters that will
have to be taken up, the first of which will be on
confidentiality.
3:31:30 PM
CO-CHAIR TARR noted that she spoke with the RCA and the next
decision point will be on January 10, 2020 when a decision on
the confidentiality request is issued. The RCA will decide about
whether the application is complete to move forward. The most
recent order from the RCA noted that the commission is not
statutorily required to make its decision under any timeline.
This is different than the requirement for a utility.
MR. PTACIN answered correct. He said there is not a six-month
clock on a pipeline matter.
VICE CHAIR COGHILL opined that the RCA does have the public
interest in mind, and it is not in the best public interest to
drag the process out.
REPRESENTATIVE SPOHNHOLZ asked if the state has a working DR&R
estimate for TAPS. She inquired what safeguards are in place to
ensure that if the DR&R is not set aside in a distinct fund that
the actual value for the DR&R is preserved in case of a
bankruptcy.
MR. PTACIN answered that the last DR&R estimate of $2.631
billion was done in 2005. To date, the major owners of TAPS have
collected upwards of $5.164 billion with interest, which is
substantially more than the estimate. Corporate guarantees are
currently in place from three very large oil companies to
perform the DR&R of TAPS. He conceded that corporate guarantees
are not the greatest assurances, but the DR&R is something that
DNR is going to look into as part of the BP/Hilcorp deal. He
opined that with rising costs, the over collection may be closer
than the 2005 estimate indicates.
3:34:23 PM
REPRESENTATIVE SPOHNHOLZ opined that the delta between $2.6
billion and $5.1 billion is significant, particularly when
considering that the state gets royalty money on profits that
are being avoided. She asked if there is a distinction in the
way DR&R is handled on the North Slope versus TAPS.
MR. PTACIN asked if the question is in respect to the upstream
versus TAPS.
REPRESENTATIVE SPOHNHOLZ answered yes.
MR. PTACIN explained that one big distinction is that because
TAPS is a regulated pipeline, part of the rate structure has
been to allow for the companies to collect their rates for DR&R.
That is not the reality for the upstream.
REPRESENTATIVE SPOHNHOLZ asked if there is no obligation to set
aside the DR&R funds for North Slope upstream assets.
MR. PTACIN answered that upstream is mostly done through bonding
and corporate guarantee.
MR. SNODGRASS explained that DNR has engaged in a series of
discussions with its upstream lessees to try and develop
financial assurance agreements to secure against the outstanding
obligation that differs between companies.
3:36:24 PM
REPRESENTATIVE SPOHNHOLZ asked if the negotiations are primarily
handled by AOGCC or DEC.
MR. SNODGRASS answered that the negotiations and the financial
assurance agreements are almost exclusively run through DNR.
VICE CHAIR COGHILL noted that there was quite an issue some
years ago on corrosion and replacement for gathering lines. He
said the issue was troubling, but it was handled.
SENATOR REINBOLD asked how many people are getting laid off. She
noted that for every oil and gas job there are roughly ten other
jobs that are created in a community.
She opined that BP has done an excellent job being an operator
and she is in awe of what they have been able to achieve. BP did
have an issue in the Gulf of Mexico, but their deep pockets
allowed them to dig deep and reconcile the best they could.
Hilcorp had a spill in 2015 that took a couple of years rectify,
so one should always look at past performance, she said.
SENATOR REINBOLD noted that Commissioner Feige said stress tests
were done to ensure that Hilcorp was able to run the field as
well as having liability and insurance coverage. She opined that
Hilcorp looks like a great company to take over a declining
field due to their creativity and innovation in other declining
fields. She asked how DNR can ensure that there is the $93
million from a new operator for insurance and liability and if
the qualification is based on assets or potential liability.
3:38:51 PM
COMMISSIONER FEIGE explained that the $93.5 million is the
financial responsibility required by DEC and by no means is the
amount meant to be the only financial responsibility required of
the operator. Liability always remains 100 percent with the
entity or consortium that is the operator and owner. The $93.5
million cap is based upon the single largest facility
responsibility under DEC's regulations. If the state responds
and is involved in helping with cleanup, DEC has the authority
to recover all costs. She added that DNR has financial assurance
agreements going into place for the DR&R.
SENATOR REINBOLD asked if the committee is going to hear from
BP, ConocoPhillips, Exxon, and Hilcorp or will the discussion be
left to the regulatory agencies.
3:40:31 PM
VICE CHAIR COGHILL replied that the committee will have more
hearings on the BP/Hilcorp transaction. He said the current
meeting is the first overview to discover what the BP/Hilcorp
deal looks like and their financial assurances. The committee
will talk about taxes and other topics; for example, TAPS was
built for a much larger volume than what currently runs through
the pipeline, an issue that will have to be addressed. The
committee meetings will be handled differently in the House and
Senate, but the current meeting is for committee members to hear
how the state sees the transaction in its best interest, the
legal challenges, where the economic studies need to fall, and
how the commissioner gets to make a decision at the go or no-go
point. The RCA is going to be looking at TAPS in depth.
He reiterated that he is chairing the current meeting to help
with discovery, but each chairman in each body is going to bring
their specific issues to light. He said he committed to the
House that the current meeting would be kept at as high a level
as possible because whether the issue is Alaska hire, financial
assurances, or the importance of DR&R when no one knows when it
will occur, those are big deals. However, the main thing is to
keep the oil flowing.
3:42:35 PM
REPRESENTATIVE TUCK noted that there was a presentation on DNR's
Resource Source Book that recently came out that shows a steep
decline in production for 2020. DNR was not at the presentation
but it alluded to the uncertainty, risk factors, and unknowns
associated with the BP/Hilcorp transaction. He asked what the
big cause is in the sudden drop in production if Hilcorp is very
good at getting the last drop of oil in any find or field.
COMMISSIONER FEIGE replied there was no aspect of the BP/Hilcorp
transaction that was considered in the production forecast for
the year going forward. The decline primarily reflects the
natural decline curve of the Prudhoe Bay Unit, which is
approximately four percent per year.
3:45:39 PM
VICE CHAIR COGHILL asked Commissioner Feige to complete the
BP/Hilcorp transaction overview.
COMMISSIONER FEIGE reviewed the timeline depicted on slide 26.
• The goal of BP and Hilcorp:
o Closure in the second quarter of 2020.
• Under Alaska law the State of Alaska does not have a
timeline for review.
She emphasized that the State of Alaska will take the time to
undertake its due diligence to either say the transaction is in
the state's and the public's best interest or it is not.
She said if the BP/Hilcorp transaction were a baseball game, the
DNR review and due diligence process is in the third inning. The
DNR and RCA review is early in the game with new information
being received. The BP/Hilcorp purchase and sale agreement is
400 pages long, so the review by DNR and RCA will be a long,
thorough, and methodical process.
3:47:53 PM
CO-CHAIR TARR explained that one of the things that has been
publicly discussed is the idea of another public charter or
document that addresses some of the concerns that were
previously addressed.
COMMISSIONER FEIGE replied that looking back at the Arco and BP
merger, the charter was a document designed to compel a certain
level of corporate behavior or corporate responsibility. Looking
at how the merger played out with ConocoPhillips and then
Phillips Petroleum, the charter never served any purpose
whatsoever. First, the charter was not legally binding or
enforceable. The charter was an available tool at the disposal
of the department's many tools that could be used to attain a
comfort point that the public interest and the state interest is
protected.
She opined that the document was legally unenforceable. None of
the activities in the charter were done or undertaken. If there
was a point in the BP/Hilcorp transaction where a tool like a
charter was necessary, DNR would have something with teeth in it
that is legally binding.
She summarized that DNR is in the early stage in the due
diligence process and there is no need at this point for a tool
like a public charter. However, a charter is at the department's
disposal should it be needed.
3:49:56 PM
SENATOR BISHOP commented that going forward with the hearings
prospectively, the Alaska Department of Labor and Workforce
Development should be consulted in the BP/Hilcorp transaction.
He noted that workplace safety concerns have been brought to his
attention and the department should come and explain to the
committee how Hilcorp executes facilities, inspections,
workplace safety, etcetera. Having the department involved will
assure the working public that there will be no gaps in
workplace safety.
VICE CHAIR COGHILL said Senator Bishop's comments will be taken
into consideration.
REPRESENTATIVE TUCK referenced Chair Tarr's comment on charters
and the discussion about enforceability. He noted that BP has
given an assurance to the State of Alaska on secondary liability
of assets. He asked how enforceable BP's assurance is. He
inquired if BP's assurance agreement is an agreement between BP
and Hilcorp, or between BP and the State of Alaska.
MR. PTACIN explained that BP is stepping in to be secondarily
liable. This will require a legal document that both DOL and
Morrison & Foerster will write in a way that will be
enforceable.
REPRESENTATIVE TUCK asked if the agreement would be between the
State of Alaska and BP, or if the state just watching what
transpires between BP and Hilcorp.
MR. PTACIN replied that he imagined that the State of Alaska
would want to be part to the liability agreement.
3:52:36 PM
REPRESENTATIVE SPOHNHOLZ commented that she respectfully
disagrees with Commissioner Feige's statement regarding the
value of the public charter. She said her two decades of
experience in the nonprofit sector showed her that the public
charter is important in guaranteeing and putting in the public
sphere both BP and ConocoPhillips' commitment to philanthropy.
She opined that the oil industry has been the backbone of
philanthropy in the State of Alaska for a very long time. When
considering the possible elimination of a key philanthropic
partner in the State of Alaska, the public charter was very
important to providing some assurances to the community that
there would still be a lot of philanthropy.
She said one of the first things that many in the nonprofit
sector thought of when learning about the BP/Hilcorp transaction
was a deep concern for the health of the nonprofit sector which
has already been challenged by budget cuts over the last year.
BP has been an incredible philanthropic investor in the State of
Alaska and has done so much for the community.
She remarked that one of her biggest concerns about the
BP/Hilcorp transaction is about the lack of transparency for the
public with regards to whether Hilcorp has the assets to back up
its responsibility to the State of Alaska. She said she has a
lot of respect in DNR's ability to do stress tests and internal
evaluations. However, she asked how information can be made
available to the public in a digested format to create more
confidence in the community. She opined that public confidence
is just as important as the expert professional doing their due
diligence.
3:55:06 PM
MR. PTACIN answered that regarding TAPS and the midstream
issues, the RCA will decide on whether the release of
information will create a competitive or financial disadvantage.
The RCA will also look at the need of the public in whether the
public interest in knowing the released information outweighs
any sort of proprietary value claim. He noted that the RCA has
denied confidentiality requests in recent cases. He opined that
the public would find the information from the RCA case to be
incredibly illustrative due to the massive sale of 48 percent of
a 700-mile pipeline. He added that the amount of data that gets
put into an RCA case is remarkable.
He said going forward he imagined that there will be an
opportunity for DNR to provide answers to questions regarding
work being done upstream, how far the department is going, the
type of testing, and what the data is showing.
He opined that there is a way to relay information to the
legislature and the public without betraying the confidence of a
company that is trying to keep proprietary information away from
competitors.
REPRESENTATIVE SPOHNHOLZ reiterated that buoying public
confidence via transparent information is important. She
remarked that when an accountant says, "I've done the work,
trust me," she trusts and respects the professional to do their
work, but some transparency is needed.
3:58:00 PM
VICE CHAIR COGHILL opined that committee members received a good
and credible look at the confidence level of the people and
departments who will be looking out for the best interest of
Alaska.
He said the departments' broad overview looked at what portion
of the field is going to be impacted, how big the pipeline
question is on everything from how to roll TAPS up to how to
keep it afloat. He emphasized that Alaska wants to be in the
production mode while also requiring environmental credibility
to be very high.
VICE CHAIR COGHILL said he personally has a lot of confidence in
Hilcorp, but the transaction is a big undertaking that requires
the state to go through its due diligence. The next questions
are going to be on fitness and finance, how will Alaska benefit
from the Hilcorp transaction, and what are some of the economic
challenges.
He opined that the fitness question is still under scrutiny and
the committee's overview provided members information about how
the departments are looking at fitness economically,
regulatorily, and within the fields.
He said the departmental overview gave the committee a good
place to do its own due diligence, but also to provide a way for
members to ask questions as credibly as possible. Committee
members have a lot of people asking them questions that are
difficult to answer, but the departments provided a good base to
work from.
CO-CHAIR TARR stated that she looked forward to the ongoing
conversations.
VICE CHAIR COGHILL said it was a pleasure working with the House
on the start-up discussion for the BP/Hilcorp transition. How
the House and Senate take on the different issues is unknown,
but he expects that the two bodies will work closely together.
4:00:48 PM
There being no further business to come before the joint
committee, Vice Chair Coghill adjourned the joint meeting of the
Senate and House Resources Standing Committees at 4:00 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DNR Presentation- BP HC Transaction Dec 16 Legis Hearing.pdf |
HRES 12/16/2019 2:00:00 PM |
BP/Hilcorp Transaction |
| BP Hilcorp Transaction Acronym List.pdf |
HRES 12/16/2019 2:00:00 PM |
BP and Hilcorp Transaction |