How America’s Biggest Privately Owned Oil Company Takes A Divergent Approach To The Energy Transition
David Blackmon, Forbes, November 29, 2021
Contrary to popular belief, extraction of oil and natural gas from shale formations has not been the focal point for all U.S. producers over the last 20 years. While it is true that production from older, mature basins and formations has dropped in the U.S. as shale production has so dramatically risen, conventional drilling has remained a profitable enterprise and tens of thousands of older wells remain in operation.
A Company With a Divergent View
As the better part of the upstream herd rushed to get a piece of the Shale revolution in the 21st century, some companies saw remaining opportunity and profits in these mature plays and late-life assets. One company, Houston-based Hilcorp, has stood out among that crowd. Founded in 1989 by Houston billionaire Jeffery Hildebrand, Hilcorp has grown to become the largest privately-held upstream company in the country, ranking among the biggest operators in Texas, Louisiana, New Mexico, Pennsylvania, Ohio, Wyoming and Alaska.
The company’s divergent strategy has been to focus on the acquisition of large positions in mature basins – like the San Juan Basin in New Mexico and the North Slope of Alaska – and optimize their operations and production as they go through their remaining years of life. Or, as Hilcorp CEO Greg Lalicker put it when we sat down for a recent interview, “We want to be the best late-life operator of mature, complicated oil and gas assets in the United States.”
Pushing Accountability Down
Lalicker said one of the main drivers behind choosing that business model was to ensure the company was well-positioned for the energy transition that has begun to manifest itself in more recent years. “When any industry is growing, the ability to install new capacity efficiently is how you win,” Lalicker said. “But in any industry when demand stops growing and starts shrinking, that ability to install new capacity efficiently starts to become marginally less important, and the ability to manage existing capacity well starts becoming marginally more important.”
In contrast to majors that seek to execute a relatively small number of big projects globally, Hilcorp’s model involves taking over assets late in their lives and making hundreds of small decisions needed to wring more life and production from them. “That’s how you’re going to make your money,” Lalicker said.
Lalicker said that, unlike many larger producers, Hilcorp’s model envisions continuing to operate these assets until they reach the end of their productive life, at which time the company invests the money required to properly plug and abandon wells and retire the surface assets. This is an important consideration in states like Texas, where the industry pays fees to fund a $20 million annual Orphan Well Fund that pays to plug wells abandoned by operators who have gone out of business.
“It’s better to have someone with a Hilcorp balance sheet owning these assets because we spend $50-$100 million a year plugging wells because we can afford it. We can do it and we stand behind that,” Lalicker pointed out. “People know that when they sell assets to us, we’re going to take care of them and do it right, because when we buy something, we do not expect to sell it to someone else.”
Operating in Alaska
The focus on doing things in a safe and responsible way also has produced significant environmental benefits, not just in the company’s Lower 48 operations, but also in Alaska, where Hilcorp has operated since 2012, and acquired BP’s Prudhoe Bay operations and other Alaska assets in a major transaction in 2019. There, the company has taken steps to reduce its methane intensity in the state by 12% across its operations on the North Slope, and by 24% in its operations in the Cook Inlet and Kenai Peninsula.
“We primarily entered Alaska because of what we chose to do for a living all those years ago,” he said. “Some of the biggest, most complex mature assets in the country are in Alaska, so we needed to figure out if our model could work up there. It doesn’t matter whether you’re in Texas, New Mexico, Louisiana or Alaska, you still have to get everything right. It’s just done at a different scale and logistics around it in Alaska, although it’s certainly a different operating environment.”
So, how much more life does Lalicker believe the Hilcorp model can wring out of Prudhoe Bay, where production has been on the downward side of the curve for decades now? “The limit to most good oilfields comes when someone runs out of good ideas, not when the field runs out of oil,” he told me. “It won’t be one big thing: It won’t be all of a sudden we’ve had this one great idea that’s made Prudhoe Bay different than what it was before. It will be the accumulation of lots and lots of little things driven both at the field level and at the office level that will really make that difference.
“I think there’s a lifetime’s worth of them.”
Whether it’s in Alaska or anywhere else, ESG-related concerns have been at the top of the news and top of mind for oil and gas companies in recent years. One misperception many have about that part of the business is that it does not impact privately held companies like Hilcorp as much as it does public companies. Lalicker would contend otherwise.
“We have to operate to the same high standards as anyone else,” he said. “We may be private, but we have capital providers, we have partners, we have lots of other people involved in business with us. They’re feeling those pressures, and we have to be responsive to those as well.
“If there’s any advantage that being private gives you in this regard, it’s that we can take a much longer-term view on this problem than some others do. When someone sells us an asset, that may remove some emissions from their books, but we just picked them up, and when we pick them up we have to get the emissions intensity down. That’s what we do for a living, by making the assets run more efficiently late in life. By the very nature of doing that, and our track record shows this, you have less emissions.”
The results bear out Lalicker’s contention there. Here are some examples from the company’s sustainability report:
- Hilcorp has achieved a reduction of 30.8 tons of annual emissions just through use of emissions control technology at older facilities;
- The company’s Petra Nova project sequestering CO2 is the largest project of its kind and is capturing CO2 from what was one of the highest emitting coal plants in the country [Note: This project was shut down in reserve in mid-2020, with plans to restart it when economic conditions justify it, per NRG];
- In the San Juan Basin, Hilcorp spent over $4 million to consolidate and right-size compression resulting in 25,000 hp reduction and 92,500 metric tons of annual CO2 emissions reductions;
- The company has seen a reduction of 30.8 tons of annual emissions just through use of emissions control technology at older facilities.
There are plenty of other examples, but the point is that the model that creates more production from late-life assets through improvements to equipment and operations inevitably leads to improvements in their ESG-related performance as well. Lalicker said that “I always tell people when it comes to these things that I’m much more concerned that we are making things better as opposed to being seen to be making things better.”
It seems a minor distinction, but it really isn’t. At the end of the day, it is in fact what Hilcorp has always focused on doing, and Lalicker plans for the company to keep doing it for decades to come.