Environmental organizations and pipeline experts continue expressing concerns about a secretive Texas petroleum company with a spotty safety record that acquired the largest share of the Trans-Alaska Pipeline last year as thawing permafrost and flooding linked to climate change threatened the massive oil conduit.
The Regulatory Commission of Alaska voted 4-1 in December 2020 to allow Hilcorp Energy Co. to acquire BP’s Alaska oil and gas assets for $5.6 billion, a transaction described as the biggest Alaskan business deal in a generation. It involved one of the state’s most important pieces of economic infrastructure.
The acquisition, which included the oil giant’s 49 percent share of the Trans-Alaska Pipeline System (TAPS), received approval despite hundreds of comments from opponents who said they did not believe Hilcorp had either the expertise or the resources to protect the pipeline from intensifying climate change.
Much of the opposition centered on Hilcorp’s refusal to publicly reveal internal financial documents, which the commission permitted through issuance of a disclosure waiver in the runup to the sale. The decision followed a pattern of protection afforded Hilcorp by the commission, which had ruled in favor of keeping the company’s finances secret on 19 occasions since it began operations in Alaska in 2012.
The approval provoked a strongly worded dissent from Commissioner Stephen McAlpine, a two-term lieutenant governor of Alaska whose time on the commission ended earlier this year.
“I believe that airing these documents publicly and subjecting the entire transaction to intense debate far outweighs the petitioners’ interest in keeping them confidential,” McAlpine said in his written opposition.
McAlpine said in an interview that his qualms about Hilcorp’s ability to maintain the pipeline are tempered somewhat because of the deep pockets of the pipeline’s other owners, Exxon and ConocoPhillips. He said he is confident those petroleum giants would step in to protect the pipeline—and consequently their investments in the pipeline—if Hilcorp faltered.
“Will they step up to the plate? I don’t know the answer to that question; nobody does,” McAlpine said of Hilcorp executives. “It’s a legitimate question to ask and it begs answers that we just don’t have.”
Hilcorp, a private corporation, has argued that “potential competitive harm” to its business model outweighed “the public interest in disclosure.”
Justin Furnace, Hilcorp’s vice president for government and public affairs, reiterated in a statement that the company and its Alaska subsidiary, Harvest Alaska, are committed to developing Alaska’s natural resources safely and in an environmentally responsible and sustainable manner.
“Since entering Alaska, we have invested approximately $1 billion dollars to improve the integrity, safety, and environmental safeguards of assets throughout the state,” he said. “For instance, we recently decommissioned an ageing terminal in a high-risk location, eliminating both a safety risk and air emissions in the Cook Inlet. Safety is our highest priority and this is reflected in our robust inspection and safety program throughout our Alaskan operations.”
But Lois Epstein, who served 12 years on the Pipeline and Hazardous Material Safety Administration’s (PHMSA) oil pipeline technical advisory committee, said it was impossible for the public to know precisely how Hilcorp would perform as a steward of the 44-year-old pipeline, which carries nearly 20 million gallons of oil a day 800 miles from the Prudhoe Bay oil fields south to the Valdez Marine Terminal on Prince William Sound.
“We don’t know their financial situation,” said Epstein, who is president of LNE Engineering and Policy, an Anchorage environmental consulting firm. “That is critical to understanding how they are positioned to address climate change and its effects on the pipeline and other infrastructure.”
Alyssa Sappenfield, an energy analyst for the Alaska Public Interest Research Group and the Fairbanks Climate Action Coalition, said in an interview that climate change “is not a future threat to TAPS—it is an escalating operational reality complicated by Hilcorp’s diminutive, opaque nature.
“It is impossible for everyday people, legislators or subject matter experts to know if prudent decisions are being made because no public oversight is permitted,” she said. “Alaskans can’t afford disaster to tell us to do better.”
Officials of Valdez, the port city where in 1989 the Exxon Valdez oil tanker ruptured and spilled 11 million gallons of crude oil into Prince William Sound, know something about disaster.
They were so outraged by the regulatory commission’s decision allowing Hilcorp to keep its finances secret that they have turned to the Alaska Supreme Court seeking an order so that they can pursue legal remedies.
The commission’s secrecy ruling, they argue, amounts to a violation of rights under the Alaska and United States constitutions, “thereby impeding transparency and the right to question, investigate and monitor the discharge of RCA’s duties.”
“The Public’s Limited View of Hilcorp Is Striking“
Unlike BP, which had been in operation in Alaska since 1959, and the other current owners of the pipeline, all of which must make their finances transparent in order to sell stock on public markets, Hilcorp has no obligation to publicly disclose audited financial statements.
“The public’s limited view of Hilcorp is striking,” Philip Wight, a former policy analyst for the Alaska Public Interest Research Group, wrote to the commission.
When Hilcorp reached its initial agreement to buy BP’s Alaskan assets, it set off alarms in the financial world because the company offered few details explaining how it planned to pay for the acquisition.
Moody’s Investor Service and Standard & Poors considered downgrading Hilcorp’s credit rating because of the doubt created by Hilcorp’s vague financing explanation. Moody’s cited “uncertainty created by the lack of any funding details” as the primary reason.
Hilcorp eased those fears by creating a new subsidiary that was legally separated from the parent company. What that meant is that if things didn’t work out and Hilcorp couldn’t pay the money it owed, BP couldn’t go after Hilcorp as a whole, only this separate subsidiary, said Andrew Logan, senior director for oil and gas for Ceres, a Boston-based sustainability advocacy group.
“It’s reasonable to expect questions coming up about Hilcorp’s finances and its wherewithal to deal with an aging asset affected by the stress of climate change and the physical ramifications of that stress,” Logan said.
To moderate public concerns about its financial health and stability, Hilcorp said it has provided all relevant financial information to the appropriate regulatory agencies on a confidential basis so that those agencies could make informed decisions on the company’s request.
“The fact that this information has not been made public does not mean that Harvest Alaska is attempting to evade responsibility to prove that it is sufficiently well-capitalized,” Hilcorp attorney Michael McLaughlin wrote to the commission in the company’s 2019 petition for confidentiality.
The company stressed it has embraced a unique business approach to succeed in the highly competitive sale of petroleum products and the business of oil and gas leasing.
McLaughlin, in an ongoing bid to keep the company’s financial books a secret, told the commission earlier this year that Harvest Alaska was adept at maintaining growth through acquisitions and a lower cost-structure “while remaining a safe pair of hands for the future ownership and operations of the assets.”
A History of Cost-Cutting and Pipeline Maintenance Issues
Until its acquisition of TAPS, Hilcorp and its Alaskan subsidiaries were small-time players in the oil pipeline business.
The company operated fewer than 200 miles of oil pipelines; all in Alaska except for seven miles in Louisiana. It reported just three spills in the last 10 years from its Alaskan pipelines, totaling about 350 gallons, according to records from the Pipeline and Hazardous Material Safety Administration.
But while Hilcorp’s small holdings in oil pipelines have had few incidents, the company’s gas transmission pipelines in Alaska have experienced significant problems. There have been multiple breaches of Hilcorp’s gas pipelines reported to PHMSA in the past five years, and 17 federal enforcement actions against them since 2015.
PHMSA data shows that when compared to the other operators with less than 100 miles of gas pipelines, Hilcorp would rank sixth worst out of about 1,700 gas pipeline operators based on the number of incidents per mile of pipe in the last five years.
Hilcorp gas pipelines have been the source of a number of significant incidents in the past five years, including a 2017 leak in an underwater pipeline that allowed an estimated 200,000 cubic feet a day of almost pure methane to bubble into Alaska’s Cook Inlet for months. The leak, caused by an undersea boulder, prompted federal regulators to require Hilcorp to undertake comprehensive safety inspections of its pipelines.
Earlier this year, federal regulators, fed up by numerous leaks on another section of the pipeline, ordered Hilcorp to replace the seven miles of pipe that carries fuel gas from the East Cook Inlet community of Nikiski to power two of its offshore platforms. PHMSA determined it was too dangerous to allow continued operation of the pipeline because of its history of leaks and its age, and its threat to the habitat for endangered species, including the Cook Inlet beluga.
“I find that continued operation of the affected segment. . . .without corrective measures is or would be hazardous to life, property or the environment, and that failure to issue this amended order expeditiously would result in the likelihood of serious harm,” Alan K. Mayberry, PHMSA’s associate administrator for pipeline safety, told Hilcorp’s top brass.
The Alaska Supreme Court also recently ordered the Alaska Oil and Gas Conservation Commission, one of the industry regulators in the state, to conduct hearings into Hilcorp and its operation of that pipeline after the agency declined to open an investigation in 2019 following one of the five leaks since 2014.
Hilcorp’s history of regulatory noncompliance and safety and environmental incidents, once characterized “inexcusable” by an Alaska regulator, drew the ire of critics during the regulatory hearings.
“Hillcorp has a track record of accidents and of ignoring environmental and safety regulations,” Scott Miller wrote the regulatory commission. “Simply put, I do not trust them to behave responsibly with Alaska’s resources.”
The oil and gas commission has documented 50 instances in which Hilcorp violated its rules, prompting reprimands to shut down orders. The commission, which does not oversee pipelines, ordered a month-long halt in 2015 to Hilcorp’s core operations revitalizing old wells until the company could come into compliance with “good oilfield practices.”
In that same order, the commission upbraided Hilcorp, saying “The disregard for regulatory compliance is endemic to Hilcorp’s approach to its Alaska operations.”
Most recently the company faced a violation notice last month over a deliberately disabling a safety valve designed to prevent the uncontrolled release of gas from one of its Prudhoe Bay wells.
That incident wasn’t the first time. Faulty safety values and the absence of safety valves have been noted by the commission on Hilcorp’s wells almost since the company began operating in Alaska, including a violation earlier this year for failing to equip a gas well with a required safety value on a site located within 660 feet of residential buildings and public roads.
Meanwhile, records on file with the Alaska Department of Environmental Conservation disclose Hilcorp has been responsible for more than 90 crude oil spills from its drilling and production operations, ranging from a few gallons to 10,000 gallons. At the same time, company operations have been the source of hundreds of other spills, including produced water, drilling mud, glycol and diesel, the records show.
Hilcorp entered the Alaskan arena with a track record of adding years to the life of aging oil fields showing signs of declining production. It was a strategy for success that seemed perfectly suited to the North Slope where there has been a steady 30-year decline in production since the gusher days of the late 1980s.
Hilcorp touts itself as a leader in taking on dying oil and gas operations across the United States and reinvigorating production with “innovation and integrity.”
“We thrive on efficiency,” the company says.
Yet Hilcorp’s history of cost-cutting and regulatory non-compliance raises the specter that the Trans-Alaska Pipeline will suffer from a reduction in maintenance that could leave it vulnerable to climate assaults, commission members were warned.
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A one-year analysis of Hilcorp’s spending on operations and maintenance showed the company spent 20 percent less on those components in 2018 compared to other oil and gas producers in the state. The conclusion submitted to the commission by the Alaska Petroleum Joint Crafts Council was based on its examination of annual operations reports submitted to the regulatory commission.
Although the crafts council, which was generally supportive of the sale of BP’s assets to Hilcorp, acknowledged its analysis was just a one-year “snapshot,” the organization maintained it nevertheless provided an insight into how Hilcorp prioritizes investments in maintenance.
“In our experience, deferred maintenance (or inadequate levels of maintenance spending) can put both front line workers and the general public at risk,” council President A.J. “Joey” Merrick told the commission. “Future pipeline maintenance spending is crucial—the longevity of TAPS, a critical infrastructure asset, depends on it.”
Carl Weimer, special projects advisor for the Pipeline Safety Trust, a non-profit watchdog organization, says it’s a “head scratcher” to try to predict how Hilcorp will perform now that it is the principal owner of TAPS because it has no track record of administering oil pipelines of significant size.
“Since they have so few miles of pipelines, there isn’t much data to help us understand their safety record with (oil) pipelines,” he said. “Hopefully they inherited, and are paying good attention to, experienced personnel on TAPS.”
Hilcorp Says it Will Rely on Alyeska to Maintain the Pipeline
As a corporation with operations in eight states beside Alaska, including Texas, Pennsylvania and Louisiana, Hilcorp holds itself out as “responsible stewards and partners of the environment.”
The company has put itself at arm’s length from the pipeline’s operation, saying it will rely heavily on Alyeska Pipeline Service Co., the syndicate it owns with Exxon and ConocoPhillips, to safely manage the Trans-Alaska Pipeline. Alyeska is directly responsible for all pipeline maintenance and operations.
Alyeska spokeswoman Michelle Egan said the pipeline would be operated securely under the new ownership arrangement, referring to Hilcorp by the name of its subsidiary, Harvest Alaska.
“Alyeska’s commitment to safe and environmentally responsible operations has remained steadfast and fully supported by all of its owners,” she said. “Harvest, like each of the TAPS owners, brings unique experience and expertise to further our collective goals and we appreciate their partnership and commitment to safe, efficient and environmentally responsible operations.”
The makeup of Alyeska means Hilcorp exerts more power and oversight of the pipeline than it purports, including sway over management, budgeting, planning and operation decisions, critics say.
“It is a fiction that Hilcorp can own 49 percent of the pipeline and its operating company without exerting a similar lion’s share of Alyeska’s governance,” Veri di Suvero, executive director at Alaska Public Interest Research Group, told the commission in a written statement.
“The history of TAPS demonstrates that the dominant owner (historically, BP) exerts a disproportionate share of control over Alyeska,” they said. “Because major capital decisions for maintaining TAPS require a two-thirds majority (historically BP and one other major owner), Hilcorp will have a de facto veto over major capital decisions.”
McLaughlin, the Hilcorp attorney, told the commission that Harvest Alaska and its affiliates were “a very substantial multi-billion dollar group of companies” that could “respond to and remediate an environmental event here in Alaska.”
To which di Suvero responded: “That kind of thinking displays a profound hubris and ignorance of the power of Alaska’s environment. Alaska does not treat kindly those who underestimate the force of her nature.”
Can Hilcorp Protect the Pipeline From Climate Change?
While Hilcorp is only about 3 percent of the size of BP, according to one estimate given the commission, its purchase of BP’s Alaska assets gives it a larger share of the Alyeska Pipeline Service Company, the syndicate that owns and operates the Trans-Alaska Pipeline System, than either Exxon and ConocoPhillips.
Hilcorp’s corporate footprint is built on its oil and gas production operations, including significant holdings in Alaska’s Cook Inlet and North Slope. It has no record of owning and operating facilities anywhere near the size and complexity of TAPS. It lists just 320 miles of oil and gas pipelines under its direct control, according to PHMSA records.
An analysis by the Alaska State Department of Natural Resources determined that Hilcorp would be responsible for 28 percent of the state’s oil production following the BP acquisition, up from 12 percent before the deal.
As the new centerpiece of Hilcorp’s Alaska holdings, the Trans-Alaska Pipeline faces increasing threats from floods and thawing permafrost that has left Ayleska scrambling to defend it against catastrophic failures. In the last two years the company has mounted frantic day and night emergency responses to raging rivers engorged by flood waters. It has worked to shore up pipeline support structures wreaked by thawing permafrost.
It’s a costly and increasingly relentless battle that took center stage when the commission was confronted by questions of whether Hilcorp is up to the task of keeping the pipeline secure against these climate change-driven threats.
Pam Miller, executive director of Alaska Community Action on Toxics, told the commission in written comments that it needed to analyze the impacts of rapid permafrost melt, erosion, river flooding and boreal forest fire on the pipeline, all of which were occurring at rates even greater than scientists predicted a decade ago.
“Hilcorp may be getting into operations that are an order of magnitude different, larger, and more risky than it ever has before,” she wrote.
Experts, environmental advocates and residents worry the aging pipeline, which went into operation in 1977, will likely become even more vulnerable to disasters in the years ahead, as the financial stability of the pipeline grows more uncertain. Hilcorp and the other partners in TAPS face an uncertain future brought about by dwindling revenue from nosediving oil production that could mean a reluctance to invest in safety upgrades.
“We now have a significant portion of the infrastructure that is aging and needs increased attention to maintenance, repairs and replacement to assure safety and environmental protection,” Francis Mauer, a long time Alaska resident, told the commission in a letter. “Does Hilcorp have the financial resources and commitment to responsibly operate the former BP facilities in Alaska at a level to assure safety and environmental protection in our State?”
The commission was presented with scenarios of climate’s destructive forces on the pipeline and succinctly summarized fears.
“The effects of climate change are occurring rapidly in Alaska and nowhere more than in the Arctic and areas with permafrost,” Mike Byerly, a resident of Homer, told the commission. “This is and will be wreaking havoc on oil and gas infrastructure. Hilcorp must have the resources to maintain the infrastructure in an increasingly challenging environment.”