(Bloomberg Opinion) -- There goes the other pipeline. Back in the day, BP Plc was sometimes dismissed as a “two-pipelines company.” This referred to two of its biggest positions: The Forties field and pipeline system in the North Sea and the Trans Alaska Pipeline bringing oil south from the Prudhoe Bay wells in Alaska. Forties was sold off in 2003 (the field) and 2017 (the pipes). Now, BP is leaving Alaska.
In some respects, the $5.6 billion sale of the company’s Alaska portfolio is par for the course. BP has been selling assets for much of this decade in order to fund compensation and reshape the business after 2010’s Macondo blowout. More generally, selling mature oil and gas fields to smaller, independent companies planning to squeeze out more is a standard part of the development cycle. In 2003, Apache Corp. took Forties; the Alaska sale is to privately held Hilcorp Energy Co. To be an oil major is to be constantly ranking projects in terms of potential and deciding if you’re better off keeping them or flogging them.
Yet the symbolism is inescapable. Alaska is embedded deeply in BP’s history and identity. Former CEO Lord John Browne, who led the late 20th-century mega-mergers that transformed BP from a two-pipeline company, kicked off his career there in 1969, just after BP struck oil. One of those big deals he ended up doing, the $33 billion acquisition of Atlantic Richfield Co. in 2000, was predicated in part on consolidating BP’s position in Alaska – only for antitrust regulators to force the sale of those particular assets to Phillips Petroleum Co. (now ConocoPhillips).
Back then, BP was on the hunt for “elephants,” or giant oil and gas fields that typically took many years – and country-sized balance sheets – to develop. Hence Browne’s acquisition spree.
The world has moved on. While producers still relish big discoveries, the intervening boom and bust in oil prices has made investors leery of big-ticket investments and more demanding in terms of payouts. Apart from, by and large, holding capex budgets in check, oil majors have been retreating from traditional strongholds, with Royal Dutch Shell Plc virtually leaving the Canadian oil sands, Chevron Corp. recently exiting the U.K. North Sea and Exxon Mobil Corp. putting its Norwegian assets up for sale. BP put its own Norwegian business into a joint venture in 2016.
Meanwhile, they have been diverting cash to dividends and buybacks in order to keep investors onside – BP’s stock yields almost 7% – as well as directing more of their capex to shorter-cycle shale development.
BP paid BHP Group Plc $10.5 billion in cash for its shale assets last year. Besides reducing BP’s leverage at a dicey time for oil prices, the Alaska deal can be seen as swapping out of an old, conventional position to help fund expansion in unconventional oil and gas. In that sense, selling Alaska throws the spotlight on these new assets where, like several of its peers, BP is trying to prove that the majors’ scale – which worked in such places as Alaska – can also be an advantage in shale.
Alaska is viewed by some as a growth area, particularly – with grim irony – as climate change and the energy-dominance aspirations of the current U.S. administration open up more of it for potential development. However, as a sensitive, remote and challenging environment, it carries extra risks and costs for producers, including the potential for future administrations to restrict activity there again. The state’s oil boom truly began when the panic of the 1973 oil shock swept aside opposition to the construction of the Trans Alaska Pipeline. Its future from here will be shaped at least in part by the challenges of excess oil and associated emissions.
Faced with this much change and the need to adapt, there really can be no sacred cash cows.
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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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