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Alaska newcomer Hilcorp makes big strides in Cook Inlet

Lisa Demer

The newest player in Cook Inlet oil and gas production could soon be the biggest one, too.

If the company succeeds in a second big acquisition, newcomer Hilcorp Alaska will become the dominant producer of oil and gas in and around the Inlet -- establishing itself as a major supplier of the natural gas that heats Anchorage homes.

In an almost evangelical speech this week to the Anchorage Chamber of Commerce, the president of Houston-based Hilcorp Energy Co. revealed the company's business approach, its Alaska agenda and its biggest hurdle.

Hilcorp jumped into Alaska just six months ago when it began operating wells bought from Chevron. Already it has hired more than 250 people, almost all of them Alaskans. It expects to invest $200 million in its new assets here this year -- mainly on retooling old wells -- plus $150 million in each of the next two years, said Greg Lalicker, Hilcorp president.

Those old Chevron platforms need work, Lalicker said.

"Most of them had drilling rigs on them which were built in the 1960s, which were basically junk," he told the Chamber crowd at the Dena'ina Civic and Convention Center. "The first thing we've been doing is stripping the old rigs off there and working on getting a platform-based rig that we can move up here and move from platform to platform to start drilling and working on some of these wells."

He called Hilcorp's investment strategy a "quick hit, remedial program." Hilcorp was the biggest bidder in a recent Cook Inlet oil and gas lease sale, spending $3.1 million to lease another 82,560 acres on top of the almost 165,000 acres it acquired from Chevron. But for now the independent producer is reworking and repairing what it has, not exploring new acreage, he said.

"That is the big focus now, spending this money revitalizing, reactivating, modernizing, whatever you want to call it, all the equipment out there to allow you to grow not for the next two, three, four years, but for the next 10, 15, 20 years."

On Jan. 1, Hilcorp began operating 10 offshore platforms and two onshore fields it acquired from a Chevron subsidiary. It also bought Chevron's interests in two pipeline companies and two gas storage facilities. Hilcorp also has reached terms with Marathon Oil Corp. to buy its Cook Inlet assets. The company is maneuvering through the regulatory process to complete that deal.

If it succeeds in acquiring the Marathon leases, Hilcorp will be responsible for about 60 percent of oil and gas production in and around Cook Inlet, said Lori Nelson, Hilcorp Alaska's manager of external affairs. Already it produces the equivalent -- of oil and gas -- of 16,000 barrels of oil a day, and it is increasing that production.

The company's Alaska hire numbers are strong partly because of week-on, week-off schedules that would be a challenge for someone based Outside, she said.

Kara Moriarty, executive director of the Alaska Oil and Gas Association, said the Hilcorp team includes many familiar hands.

"They may be new but they have retained several Alaskans who have worked in the Cook Inlet, in the industry, for 25 to 30 years," she said.

As oil and gas fields age and become less profitable, it's common for major operators to sell assets to independents like Hilcorp, which usually have less overhead.

Hilcorp was started in 1989 and is one of the biggest independent oil and gas producers and explorers in the country. It has more than 1,000 employees working in 11 different areas.

CONFIDENT IN THE INLET

Lalicker was nothing if not enthusiastic about his company's ability to make money in Cook Inlet.

Asked if he would rethink his investment should a small diameter pipeline be built to bring the North Slope's vast reserves of natural gas to Southcentral Alaska, Lalicker didn't hesitate.

"If I can't beat the bullet line price, then I should be out of business," he said. "I don't care whether it's the bullet line or (liquefied natural gas) imports or whatever, anyone can compete with me and if I can't do a better job, put me out of business and send me on my way."

The most contentious issue before the state Legislature this year was a proposal to give major tax breaks to the North Slope oil industry, to encourage new investment and stem declining production. The proposal died.

Someone in the audience wanted to know whether he thought Alaska's oil tax regime needed to be reformed.

Lalicker, as a Cook Inlet producer, said no.

"I don't really care what the rules of the game are as long as I know the rules and the rules are consistent," he said.

Cook Inlet already is lucrative. The production tax rate on oil is set at zero, and the rate on natural gas is low, just under 18 cents per thousand cubic feet for production since April 2006, according to state revenue officials. Producers can also get breaks on royalties, the state share of oil and gas production; Hilcorp does get some royalty relief, Nelson said. The state also tries to spur more investment with tax credits for capital expenditures or to offset operating losses, which a player like Hilcorp could qualify for, revenue officials said.

For years, Cook Inlet oil and gas production has declined.

"With that, the service industry has been decimated," Lalicker said. "In terms of finding rigs, equipment, people, services that are on par with what you can find in the Lower 48, they just don't exist or if they do, they are very, very thin on the ground. And they usually are committed to some project already up on the North Slope."

Rebuilding an industry of suppliers and contractors has been a huge challenge, he said.

"We are working like mad to solve it, and we will solve it, but that has been the biggest deterrent to getting things done."

The company had to bring from Outside what's known as a pulling rig, which pulls out old pipe so it can be replaced, Nelson said.

Hilcorp typically doesn't team up on projects and operates its own leases, Lalicker said.

"We like to get things done fast and it's much faster if you don't have partners you have to convince every step of the way," he said. That fits in with one of its core values: urgency, he said.

EMPLOYEES AS OWNERS

Hilcorp has won a number of awards for being a good place to work. It made headlines a couple of years ago when it gave all employees who had been there at least five years a new car, or cash equivalent, for meeting goals to double production and reserves. Some sent their kids to college, or made down payments on a house, Lalicker said.

"I ended up getting three Honda Civics," he said, for himself, his wife and their son.

Now the company is trying to double its size once again, and plans to give employees $100,000 each to spend as they wish if goals are met by 2015, he said. The Alaskans hired early this year will be eligible for the full prize even though they won't have been on board the whole five years, Nelson said.

Hilcorp essentially gives every employee an interest in the fields it buys and allows employees to buy in for a greater share, Lalicker said.

"We expect them to work and act like they own the company because in fact they in some ways do," he said.

Still Alaskans shouldn't expect to see Hilcorp emerge as a visible charitable donor, he said. Its philanthropy is done quietly. It funds scholarships. It provides each employee $2,500 to give away and matches individual charitable giving beyond that.

As his talk wrapped up, a man in the audience had one last question.

"Are you hiring?"

The company may have a few openings, Lalicker said.

"As long as I'm succeeding, I'm growing. As long as I'm growing, I'm hiring," he said.

Reach Lisa Demer at ldemer@adn.com or 257-4390.


By LISA DEMER
Anchorage Daily News