Hilcorp on a mission to rebuild Cook Inlet production

Michael Dinneen/AJOC

Some large U.S. oil operators have now moved back into Cook Inlet, bringing financial muscle and expertise into the rebuilding of this once major oil-producing region.

The most recent arrival is Houston-based Hilcorp Energy Corp., which acquired Chevron Corp.’s assets in Cook Inlet last January, and has launched an aggressive program to revitalize the aged producing platforms built mainly in the 1960s and 1970s.

Hilcorp specializes in the redevelopment of old oil fields, and in Cook Inlet it has recruited a team of Inlet veterans, mostly former Chevron Corp. and Unocal Corp. workers now headed by John Barnes. Barnes was Marathon Oil’s Alaska manager for several years.

Another relative newcomer, Apache Corp., which also specializes in breathing new life into mature producing areas, is pursuing a different Cook Inlet strategy. Rather than acquire producing assets as Hilcorp did, Apache has compiled a large position of undeveloped leases, launching an extensive seismic program, and plans its first Cook Inlet exploration well later this year.

Other newcomers are now on the scene: small independents like Armstrong Oil and Gas, which is producing gas from new wells on the lower Kenai Peninsula; Cook Inlet Energy, which has restarted oil production at the Osprey platform on the Inlet’s west side; Furie Operating Alaska, which is now drilling with a jack-up rig in the middle of the Inlet; Buccaneer Energy, which has one new onshore gas well producing on the Kenai Peninsula and plans to develop others.

There is also NordAq Energy, an Alaska-based firm that has made a gas discovery in the Kenai National Wildlife Refuge on subsurface lands owned by Cook Inlet Region Inc.

Hilcorp, the new name in the Inlet, is already spending major dollars. The company has a $206 million 2012 budget and plans to spend $150 million per year in both 2013 and 2014. The goal is increasing production from the 14,000 barrels per day produced by Chevron in 2011 to 25,000 barrels per day by 2015.

It’s an ambitious goal but Hilcorp’s track record with mature oil fields in Texas and Louisiana makes it achievable. The company has made a significant commitment to Alaska, which even at the present production level is Hilcorp’s second-largest production area in the U.S. behind Louisiana, company president Greg Lalicker, told Anchorage business leaders in a presentation.

Alaska now constitutes 20 percent of the company’s oil production.

Hilcorp is hiring new people in addition to the 250 former Chevron employees now working for the company.

“We’ve got 10 or 12 positions now open,” Lalicker said.

The company’s workforce will increase further when the planned acquisition of Marathon Oil’s Cook Inlet assets is finalized. That is expected later this year.

A major problem that concerns Hilcorp, however, is the state of the Cook Inlet region’s oil and gas service industry, Lalicker said.

“The activity levels have been so low in the Inlet over the last five to 10 years that the service industry has been decimated,” he said.

This is across-the-board, from drilling rigs to people. Many of the service companies still based in Kenai are doing most of their work for North Slope customers.

“We’re working hard to solve this problem, to rebuild a pipeline of suppliers. We’re talking to people in the Lower 48, encouraging them to come up here,” and do business, Lalicker said.

Another goal for Hilcorp is to get the Drift River terminal on the west side of Cook Inlet back into normal operation, Hilcorp spokeswoman Lori Nelson said. All but one of the crude oil storage tanks at the terminal are out of service after the facility was damaged by flooding several years ago.

Hilcorp plans to add to the height of a protective berm around the terminal as a safeguard against future flooding, and then to begin using four of the seven tanks at Drift River. Three of the seven tanks have been decommissioned. Each of the tanks still in service can hold up to 270,000 barrels.

Construction on the berm is expected to be underway by August and the company’s goal is to have the work finished by October and the tanks being used for oil storage again soon after, Nelson said.

Oil from west Cook Inlet wells is now stored in smaller tanks near the platforms, which means shipments must be made every 10 to 12 days, she said. The oil is still loaded from a pipeline at Drift River but tankers can only be partially loaded because of the small storage capacity.

Being able to store more oil at Drift River will cut the number of tanker trips and also allow the ships to be fully loaded, which will reduce costs.

More efficient transportation will not only help Hilcorp but also Cook Inlet Energy, which is producing oil from the Osprey platform as well as several onshore wells.

Who is Hilcorp?

Hilcorp is the second largest privately-held oil and gas company in the U.S. The company has achieved steady growth, averaging 15 percent yearly, through a strategy of revitalizing old producing fields.

“We buy big, old oilfields. At some point the major companies owning these fields decide to sell, and we buy. It’s what we do for a living,” Lalicker told the Anchorage Chamber of Commerce.

It has been successful, too. From 2005 to 2012 the company has increased its production from 30,000 barrels per day to 90,000 barrels per day and has grown its reserves from 89 million barrels to 324 million barrels.

Hilcorp produces oil and gas in Louisiana, Texas and the shallow Gulf of Mexico. Most of its production is in Louisiana, where it is the state’s largest producer. About half of Hilcorp’s production is oil and about half is gas (gas is measured in barrels-of-oil-equivalent).

“That is a mix that just happened, and wasn’t part of any particular strategy,” Lalicker said.

The company is now trying to emphasize oil, however, because oil is worth so much more than natural gas, he said.

Hilcorp is also financially disciplined, reducing its debt from about $6 per barrel of production in 2003 to about $2 per barrel of production in 2011.

“It’s a very conservative business strategy. It helps us keep our options open for acquisitions,” Lalicker said.

Hilcorp’s goal is to double its size in the next five years, he said.

Hilcorp also likes to operate its own oilfields, preferring to avoid partnerships and be in charge of its own destiny. That helps the company move quickly, another key part of its strategy.

“One of our values is urgency. We like to get things done, and without partners that we have to convince,” that Hilcorp’s judgment is correct, Lalicker said. “We don’t have the luxury of studying things for two to four years. We like to get things done today, doing a lot of little things fast.”

One of Hilcorp’s key strengths is the expertise of its people, and hanging onto skilled people is important.

“When you buy old oilfields the important question is how to exploit them and how good your people are,” he said.

To retain good people Hilcorp has adopted an employee bonus system that is unusual. An extra percentage of an employee’s annual compensation is based roughly on the company’s financial performance. The percentage of added compensation is the same for everyone.

“It doesn’t matter whether you’re a receptionist or a supervisor in the field, or even a CEO, everyone gets the same percentage,” Lalicker said. “A lot of companies have a tiered bonus system, but we share equally.”

06/28/2012 - 5:18pm