Amid growing uncertainty for oil, BP says it’s still committed to Hilcorp sale on new terms

With collapsed oil prices, a crunch on the financial market and cuts to production both real and rumored, BP says it’s still committed to selling its Alaska business to private oil company Hilcorp in June but will be doing so under new terms.

According to an announcement Sunday, the $5.6 billion deal is still underway but with revisions to the deal’s structure and payment plan, reflecting the expectation of what will likely be a very ugly future for oil production.

Along with the financial troubles, the deal has also run into challenges with the state’s regulatory agency, which has sought to get additional information on the deal, credit rating agencies and legal issues over Hilcorp’s bid to keep its finances private.

In a prepared statement, BP Alaska President Janet Weiss said they could ultimately bifurcate the transfer of the BP’s assets to Hilcorp to deal because of the regulators’ concerns.

“These are incredibly challenging times,” she said. “We will continue to work with regulators to answer their questions and demonstrate that BP remains committed to completing the sale, even in these volatile and difficult market conditions. If necessary due to timing of approvals, we will complete part of the deal in June, transferring the upstream business to Hilcorp, while continuing to work with regulators for approval of the sale of the midstream.”

The coronavirus pandemic has put pressure on the oil industry from just about every angle as an early price war between Russia and Saudi Arabia drove down prices before running into new problems due to lower demand for oil and near-capacity storage. Some benchmarks for oil traded in the negative territory last week before oil “surged” back to the $10 per barrel range.

According to a legislative presentation last week, companies operating on the North Slope are almost assuredly losing money in this price range. The cost to transport oil is about $10 per barrel.

The market downturn has been particularly difficult for high-cost producers like Lower 48 shale producers, which make up a large portion of Lower 48 oil production. It’s resulted in the largest one-month production decline in the Permian basin—an area that covers western Texas and eastern New Mexico—just as the region was expected to hit record-high production.

In the face of uncertainty and grave losses, Lower 48 producers have opted to shut down wells and it could likely force smaller producers to declare bankruptcy or merge with other companies.

On the North Slope, companies have announced cutbacks to investments and new drilling. ConocoPhillips announced in early April that it had demobilized its drilling rig fleet, delaying long-term oil production and bringing some short-term production into question.

On Friday, the company that operates the trans-Alaska pipeline system on behalf of the North Slope majors announced it had imposed a 10 percent cut to North Slope oil production as storage capacity is coming into question.

“With all the information we have about oil coming in and the movement of tankers visiting the terminal in Valdez, this is the pro-ration needed to manage through the month of May,” Alyeska Pipeline Service Co. spokeswoman Michell Egan told Alaska’s Energy Desk. “If information changes, the pro-ration rate might change.”

The announcement came days after Soldotna Republican Rep. Ben Carpenter said at a Wednesday House hearing that he had it on “very good authority that we are days away from a slowdown in production” and warned that it’ll get worse if the economy doesn’t reopen.

“I have it on very good authority that we are days away from slowdown in production. If the economy doesn’t pick up nationwide to grow demand for fuel products then we’re looking at somewhere of a complete shutdown within the next 90 days, probably as soon as June,” said. “June-July timeline.”

Why it matters

Though investment earnings from the Alaska Permanent Fund have taken over oil revenue as the primary foundation for Alaska’s budget, any downturn will have a significant impact in the state’s financial outlook. But just what’s in store for Alaska is impossible to accurately predict, the Legislature’s financial analysts told them last week.

“The predictions of how the economy is going to recover and how the oil market is going to recover from this shock just makes looking out four and five and six years kind of an academic exercise,” said Legislative Finance Division Director Pat Pitney told them.

Pitney noted that under the Legislative Finance Division’s estimates, Alaska is looking at a nearly $1 billion deficit in the financial year starting on July 1. The state’s limited savings could likely cover that, she said, but it would nearly deplete the account and leave the state on the edge of having significant cashflow problems.

Even the elimination of the dividend would still leave the state with a deficit, she said. Pitney said it’ll likely take changes to state law, both in its spending and revenue, to balance the budget moving forward.