After over 60 years of operating in the frigid but productive wilderness of Alaska, oil supermajor BP has decided to call it quits. The entirety of its Alaskan assets and operations have been sold to Hilcorp Energy for US$5.6 billion. Why Alaska and why now? Well, that’s just a natural consequence of looking for the next big thing. Once home to the largest crude oil field in America, BP’s departure from Alaska is not a surprise but a trend of things to come.
What Hilcorp purchases from BP includes the Prudhoe Bay oil field, which produced 1.5 mmb/d per day in the late 1980s as well as BP’s stake in the Trans-Alaskan Pipeline, which moves oil from the North Slope to the Port of Valdez for export. These were once crown jewels of American upstream, but are now tarnished after years of consistent production have dwindled resources. From peak production of over 2 mmb/d in the late 1980s, Alaskan crude output is now under 500,000 b/d. What oil is left is getting harder to extract, and what new oil is being found isn’t nearly enough to justify long-term investment. Particularly when cheaper alternatives that bring quicker returns – ie. shale
BP isn’t the only firm to exit Alaska, but it certainly is the largest so far. In fact, it had already halted exploration in Alaska years ago, maintaining its portfolio of existing assets only. Marathon Oil and Anadarko have already fled southwards to the shale fields in Texas and Mexico. But BP’s history with Alaska is deep, and therefore its departure is a psychological blow. Following the news, there is now already talk that ExxonMobil might be the next to leave. If it did, it would be a disappointment to the state but certainly not a surprise; oil production in the Last Frontier is projected to hit a 42-year low this year. What is BP’s loss is Houston-based Hilcorp’s gain – Hilcorp’s Alaskan operation will double in size after the deal, placing it just behind ConocoPhillips as the largest operators in the state.
Of course, this phenomenon isn’t just limited to Alaska. The North Sea, once crucial to the global crude supply chain has seen similar declines. And, consequently, the departure of once major players. Taking their place are smaller, more nimble players with a bigger risk appetite, seeking to eke out the last few drops of oil available in these maturing areas.
So where does BP and the other majors considering moving out go? The answer is predictable: shale. BP already has a toehold in US shale, purchasing BHP’s shale operations in July 2018 for US$10.5 billion its largest deal in 19 years. With assets in the Permian through the deal, BP returns once again to the US shale frontier, after being forced to leave the then-promising Permian in 2010 in the wake of the Deepwater Horizon disaster. BP CEO Bob Dudley called the Alaska deal a move to ‘steadily reshaping BP with opportunities that are more closely aligned with our long-term strategy and more competitive for our investment.’ In other words, once precious strongholds like Alaska, the North Sea and even Alberta oil sands are old hat. The cool new kid on the block is shale and, despite the challenges it faces in long term sustainability of production, all the majors and supermajors want to get into club. Well, maybe except Total and (to a lesser extent) Shell.
For all the talk of individual strategies and characteristics, the industry is still governed by a herd mentality. And the herds are migrating away from drying old pastures in search for fresh new grass elsewhere. Where they will go once the new grass dries up will be anyone’s guess.
BP’s main upstream assets in Alaska
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Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
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