As Hilcorp Plans To Drill In Arctic Waters, A Troubling Trail Of Violations Surfaces

Print Friendly

Above Photo: By John Zangas

An Alaska regulator described the oil and gas company’s ‘disregard for regulatory compliance’ as ‘inexcusable.’

ANCHORAGE, AlaskaIn the energy industry, Hilcorp has built a reputation for fast growth, big profits and making people rich. This 28-year-old Houston-based company has kept a low public profile while becoming one of the top five privately held oil and gas producers in the United States. Founder Jeffery Hildebrand has become a billionaire, rising up the ranks of the hundred richest Americans. Employees, who got six-figure bonuses for meeting output goals, rave online about their employer, which Fortune magazine has lauded as one of the 100 best companies to work for five years in a row.

In regulatory circles, however, and among environmentalists, Hilcorp has become known for different reasons. As the company has bought up older oil and gas fields from bigger companies, a business strategy known as “acquire and exploit,” it has amassed a troubling safety and environmental track record in Alaska and several other states.

As soon as the company started working in Alaska in April 2012, it began to accumulate violations. By October 2015, the Alaska Oil and Gas Conservation Commission (AOGCC), the main industry regulator in the state, had documented 25 instances in which Hilcorp violated its regulations, prompting a reprimand that had little of the bureaucratic blandness typical of regulatory notices. “The disregard for regulatory compliance is endemic to Hilcorp’s approach to its Alaska operations and virtually assured the occurrence of this violation,” the chair of the commission wrote to the company in November 2015. “Hilcorp’s conduct is inexcusable.”

Whether Hilcorp is a model for its industry or a business with an endemic disregard for rules is a question that will only grow in importance. The company is already the biggest producer in Cook Inlet, where it bought up some of Alaska’s oldest oil and gas facilities. Next it plans to drill new wells in pristine Arctic waters, pursuing a technically challenging project acquired from BP in 2014. This undertaking would expand North Slope production into the federal waters of Alaska’s Outer Continental Shelf for the first time, just as the Trump administration tries to open more of the Arctic, including the nearby Arctic National Wildlife Refuge, to petroleum development.

A review by InsideClimate News of thousands of pages of government documents, along with interviews of people who work in, regulate and watchdog the industry, reveals a string of Hilcorp incidents that harmed the environment or put workers in danger. The regulatory record portrays a company that critics say prioritizes an aggressive expansion in Alaska while repeatedly falling short on compliance.

In Hilcorp’s worst episode, in 2015, three North Slope workers were nearly killed when they were overcome by nitrogen that had leaked during a well clean-out process. More recently, a methane leak from an aging pipeline on the seafloor in Cook Inlet was not stopped for months. The company said it was unable to fix the leak as long as winter ice was on the water, but some allege Hilcorp was unwilling to shut the pipeline because it would also curtail some oil production.

Bob Shavelson, who has monitored those waters for more than two decades as head of Cook Inletkeeper, a local environmental group, argues that Hilcorp could have shut the line to stop the leak until a repair was possible, but decided not to. “They were just going to drive forward and continue production, and continue reaping profits, rather than shut down,” he said recently. “It was a reflection of their corporate philosophy.”

Hilcorp did not respond to written questions and phone calls. In a submission to the state regulator in January 2016, Hilcorp’s senior vice president for Alaska operations, David Wilkins, and operations manager Bo York wrote that “Hilcorp works diligently and in good faith to comply with all applicable laws and regulations, and has swiftly implemented corrective actions where it has fallen short.”

Hilcorp’s record of violations and incidents extends beyond Alaska. In Louisiana, the company has been accused of using illegal dredging practices that rip up oyster beds and violate the Clean Water Act. And Hilcorp’s natural gas drilling methods have been blamed for causing 77 earthquakes in Ohio.

NorthSlopeLibertyIslandAlaska529pxBut it’s in Alaska that Hilcorp’s ambitions raise the biggest issues. The Arctic drilling plan, known as the Liberty Project, would include construction of a gravel island five miles off the coast for the drilling rigs and production facilities, and it could result in one of the biggest boosts in North Slope output in decades.

All this would be occurring in a brutal, frozen environment where oil and gas operations are a challenge, and in a fragile ecosystem where the effects of a spill or other accident could be catastrophic. What’s more, Hilcorp would be developing Arctic reserves that climate scientists say must remain in the ground if carbon emissions are to be kept low enough to limit human-induced global warming to 2 degrees Celsius.

As Hilcorp’s plans wind their way through the federal permitting process, critics say its aggressive program of employee bonuses, and the fact it’s privately held, also raise red flags.

Hilcorp in 2010 gave every worker $50,000 toward a new car, and then it upped the ante with an incentive plan that paid $100,000 to every employee in 2015. The company’s description of the bonuses in public presentations has included operational goals, such as increasing output, but has made no mention of environmental benchmarks or worker safety requirements that must be met for the incentives to be paid.

That’s unusual, says Lamar Pierce, a business professor at Washington University in St. Louis who studies incentive programs and corporate ethics. He said the message this could send to employees is: “Financial performance is paramount for this company. That’s what you need to focus on.”

Being a private company, without the scrutiny of shareholders or public reporting requirements, may also affect behavior. “It’s a lot easier to hide things,” Pierce said. “We believe that private companies can get away with a lot of things that public companies can’t.”

Building a Company—and a Fortune

Hildebrand founded Hilcorp in 1989, when he was about 30 years old. He had a bit of experience working at Exxon, a recent master’s degree in petroleum engineering from the University of Texas at Austin—and a plan. The company would buy older oil and gas fields with declining output and squeeze more out of them using the latest drilling methods. This strategy is not unique to Hilcorp, but it paid off quickly as the company picked up properties in Louisiana, Texas and Mississippi.

HildebrandBiobox310pxIn 2003, Hildebrand bought out his co-founder, Thomas Hook, for $500 million, and by 2006, the company he owned and ran had made him a billionaire. Hilcorp became an early buyer in the Eagle Ford shale, a South Texas geologic formation where new fracking techniques were about to unleash a drilling frenzy. Having invested a reported $100 million in 2010, just a year later Hilcorp sold its Eagle Ford holdings to Marathon Oil for $1.8 billion, right as the boom there was taking off.

Hildebrand, who lives in Houston’s tony River Oaksneighborhood, where he and his wife have opened their own donut shop, is today worth some $7.5 billion, according to the Bloomberg Billionaires Index.

Around the time of the Eagle Ford exit, Hildebrand began looking for new territory and set his sights on Alaska. The petroleum industry has worked Cook Inlet, which runs from the Gulf of Alaska nearly 200 miles inland to Anchorage, and the North Slope, on the edge of the Arctic Ocean, since the 1960s. The world’s largest public oil companies, including ExxonMobil, BP and ConocoPhillips, explored and developed these fields, but with production decades past its peak, the big companies were mostly ready to move on.

In other words, Alaska fit Hilcorp’s business model. The company made its first acquisition in Cook Inlet in 2011, from Chevron. It bought additional assets, mostly gas wells, from Marathon Oil in 2013, giving it some 70 percent of the basin’s gas production. Even more purchases, from ConocoPhillips and a unit of ExxonMobil, followed.

Greeted as a Savior for Boosting Gas Output

For Alaskans who depend on Cook Inlet gas to heat their homes and run their power plants, Hilcorp’s arrival was welcome. With the oil majors reluctant to commit new money to old fields, output had been declining for years. By the winter of 2013, people were worried about the very real possibility of running out of gas.

AlaskaGasChart529px“Hilcorp, when they got here, was sort of the savior,” said Larry Persily, who from 2010 to 2015 ran a federal office coordinating an as-yet-unsuccessful effort to develop a pipeline to bring North Slope natural gas to market. “They spent a few hundred million dollars a year for those first few years,” he explained. “And they relieved the fear, at least for the next decade, of gas shortages.”

In Alaska, everyone has a stake in petroleum production. Oil revenue supports the state budget and feeds a special fund that pays annual dividends to all permanent residents. Dwindling output on the North Slope hasn’t just been a problem for industry—the entire state has taken a hit.

NorthSlopeOilChart529pxThe North Slope’s oil output, which dwarfs Cook Inlet’s, must travel 800 miles south via the Trans Alaska Pipeline to tankers on Prince William Sound and then to global markets. The North Slope produced 474,000 barrels a day last year, down nearly three-quarters from its peak in 1988. And the decline has raised the fear that, if it continues, there may not be enough oil to operate the pipeline.

When Hilcorp announced in 2014 that it was buying interests in four North Slope properties from BP for $1.5 billion, the company was again greeted as a potential rescuer. The deal made Hilcorp the operator of three fields, with facilities both onshore and on manmade gravel islands in state waters near the coast. The fourth property, the Liberty Project, is still in the planning and permitting phase. If it proceeds, it’s expected to eventually produce some 70,000 barrels of oil a day, enough to at least temporarily stanch the region’s decline.

Struggling with Extreme Environments—and Alaska’s Rules

But Alaska introduced more than just opportunity for Hilcorp. The state presented different challenges than the company had known in the Lower 48. Tides in Cook Inlet are among the world’s most extreme, rising and falling by as much as 35 feet. The resulting currents sweep through with great force, rolling boulders along the seafloor and pushing chunks of ice on the surface in winter. The North Slope is remote and isolated, limiting the availability of equipment, supplies and people. Facilities are built on permafrost, and crews work in extreme cold and nearly round-the-clock darkness in winter.

As soon as Hilcorp began working in Alaska, regulators saw signs the company might be struggling to adjust. From April to December 2012—Hilcorp’s first eight months in Cook Inlet—the AOGCC brought 13 enforcement actions. The agency’s inspectors, according to an April 2013 order, observed missing equipment, crews that were not trained in the use of well-control equipment, and crews that were unable to perform required tests on blowout preventers.

“Many of these actions were due to a failure to understand regulatory requirements,” the commissioners wrote in the order. “Strong evidence indicates that Hilcorp has not adequately prepared its personnel for operations in compliance with AOGCC regulatory requirements.”

There was a steep learning curve for Hilcorp, said Lou Grimaldi, who retired in April after decades as an AOGCC inspector. Hilcorp had to get used to Alaska’s rules, and Alaska regulators had to get used to Hilcorp. The publicly traded oil giants that have long dominated in the state are subject to pressure any time their reputations might be at stake, according to Grimaldi. “When you’re dealing with a larger company whose exposure is so much larger, it’s a little easier to have them bend to your will, so to speak,” he said. Hilcorp was “a meaner, leaner company,” and its actions were less predictable.

Hilcorp continued to rack up violations in Alaska. Regulatory documents reveal safety lapses, environmental incidents, and one accident where workers could have died:

  • In 2013 and 2014, inspectors cited multiple instances at different locations in which safety procedure weren’t followed, including more lapses related to blow-out prevention equipment, which is vital to the safe operation of a well. It was a failed blowout preventer that left oil spewing into the Gulf of Mexico after the explosion on the Deepwater Horizon in 2010.
  • On Feb. 28, 2015, a pipeline at Milne Point, a North Slope facility that Hilcorp took over from BP, spilled onto the tundra nearly 10,000 gallons of crude oil and so-called produced water, which comes out of a well along with the oil and can be highly contaminated. This resulted in a $100,000 fine under the Clean Water Act.
  • In September 2015, also at Milne Point, three Hilcorp subcontractors were overcome by leaking nitrogen, which can suffocate a person. They were only rescued because one of the workers reached fresh air before passing out and was able to recover sufficiently to shut the well. Investigators found that Hilcorp did not have permission to use nitrogen on the site. A fine of $720,000 was proposed, though it was ultimately lowered to $200,000.

Correspondence between the company and regulators show that Hilcorp was in regular contact with the state, articulating its efforts to comply with state rules—and that regulators found its actions didn’t always match the words.

“Hilcorp’s history of noncompliance and its failure to take the rudimentary measure of entering AOGCC’s requirements in its regulatory tracking system preclude any claim that Hilcorp has acted in good faith,” the commissioners wrote in a 2016 notice of a $30,000 fine for failing to submit required reports.

The regulators noted that they had often avoided formal enforcement actions in the past to give Hilcorp a chance to get up to speed on state rules. “This approach has had little discernible impact on Hilcorp’s behavior. Hilcorp’s previous commitments to train its personnel have been insufficient to avoid recurrences of regulatory violations,” they wrote. “Hilcorp’s lack of good faith in its attempts to comply with the imposed conditions, its history of regulatory noncompliance and [the] need to deter similar behavior are the factors which most heavily influence this decision.”

Cook Inlet Leak Puts Hilcorp in the Public Eye

What had been a mostly private back-and-forth between Hilcorp and its regulators became a much more public controversy this year, when the methane leak in Cook Inlet occurred.

The company realized it might have a problem in late January, when operations records showed a sudden jump in the amount of natural gas flowing through a 52-year-old pipeline that runs along the sea bottom from the shore to one of its oil platforms—likely a sign of a leak.

The company began helicopter flights along the 7-mile path of the pipeline looking for gas bubbling up among the ice floes that choke the inlet that time of year. On February 7, according to the company’s later account to regulators, someone on the helicopter spotted a torrent of bubbles roiling the water’s surface, marking the location of the leak.

Shavelson heard about the issue right away. As Cook Inletkeeper, he has a network of people around the region who help him spot spills and monitor the health of the watershed. “I started seeing some emails where Hilcorp is saying it’s a small leak, and we’re on it.”

Soon enough, Shavelson, who lives in Homer, about 100 miles south of the leak, heard about a video showing how gas was bubbling up among the ice floes in Cook Inlet, and a whistleblower slipped it to him. “We looked at it, and we said: Oh, that’s not a small leak.”

Shavelson’s group posted the video on YouTube, bringing attention to the leak, and when Hilcorp announced they couldn’t shut down or fix the pipeline, the controversy intensified. While the line now supplies almost pure methane to run the generators and pumps on the platform, it once transported crude oil. Hilcorp said if it were shut and depressurized, oil remaining in the system could leak out. The company also said it would be too dangerous to send divers down for a repair until the ice on Cook Inlet melted in the spring. And they conceded that the leak had been going on since at least late December.

The news that the leak would continue unabated for weeks or months prompted environmentalists to cry foul. Shavelson, a gravelly-voiced surfer with a background in biology and law, believes Hilcorp kept the leaking gas pipeline in service for so long because it didn’t want to shut the facility, known as Platform A, and forgo the crude oil output.

Kristin Ryan, director of the Alaska Department of Environmental Conservation’s spill response and prevention division, said later that the idea there might be a “burp of oil” from this line after so many years of carrying gas seemed far-fetched.

Although there may have been some oil left in the line, the amount was likely so small that it would not have had a significant impact, said Richard Kuprewicz, president of Accufacts, Inc., a consulting firm that advises government agencies, industry and other parties on pipeline safety. “It’s one of those things where there’s a little bit of truth but not enough to make it fact,” he said.

In the end, the leak was drastically diminished in late March, three months after it began, when Hilcorp curtailed operations on Platform A and lowered the pressure in the pipe. Repairs were made in mid-April, after the ice on the inlet cleared. What environmental damage the leak might have caused is difficult to gauge. Cook Inlet is rich with wildlife, including a population of endangered beluga whales. But few studies have looked at the effects of methane on sea life, and none have looked at what happens with gas trapped under ice.

Liberty Project Raises the Stakes

Hilcorp’s Liberty Project on the North Slope, if it gets built, will be just a few miles away from a stretch of coastal water known as the Boulder Patch that supports a remarkable diversity of sea life. In most Arctic waters, only a few specialized species are found. But here, where the seabed is rocky rather than clay and silt, scientists have cataloged hundreds of different kinds of organisms—kelps and corals, sponges, sea anemones, mollusks and much more. The Boulder Patch is bursting with life that helps support a food chain all the way up to the bowhead whales that migrate through.

By the time BP sold a 50 percent stake in the Liberty Project to Hilcorp in 2014, it had spent nearly two decades trying to get production going on the field. Because thick pack ice in winter would destroy the kind of oil platforms used in the Gulf of Mexico, BP planned to build a gravel island protected by a giant concrete apron to deflect the force of the ice. Drilling and production would be done from there. But technical challenges and opposition from environmentalists led it to abandon that approach and propose to drill a directional well of unprecedented length from an existing facility. As costs came in higher than expected and scrutiny for the project increased after the Deepwater Horizon disaster in 2010, that plan went nowhere, too.

BoulderPatchAlaska529pxHilcorp’s new plan for the Liberty field is similar to BP’s initial proposal. Hilcorp wants to build a 24-acre island in 19 feet of water, using 833,000 cubic yards of gravel, and then drill up to 16 wells. Five to eight wells would be needed to tap the reservoir; others to reinject gas and water, or for disposal. An undersea pipeline would carry the oil back to shore.

The Liberty Development and Production Plan, initially submitted to the Bureau of Ocean Energy Management in December 2014 and revised in September 2015, includes a dire assessment of how things could go wrong. A worst-case accident could spill 91,219 barrels a day initially. How long it might take to stop the flow depends on unknowns such as the time of year, the weather and the state of the sea ice. If it continues for 30 days, an estimated 2 million barrels could spill; if it goes on for 90 days, the amount reaches 4.6 million barrels—almost as much as from the Deepwater Horizon well blowout.

BP’s Gulf of Mexico disaster serves as a cautionary tale about what can go wrong with a state-of-the-art drilling project. It should also serve to highlight how difficult a spill response could be on the North Slope. There would be no ready access to the Gulf Coast’s vast collection of oil industry personnel and equipment. The response would be mustered in an isolated outpost hundreds of miles north of the Arctic Circle, accessible primarily by airplane, with limited infrastructure and housing. Depending on the time of year, the waters could be covered by ice and the entire scene shrouded in nearly 24-hour darkness.

“I’m definitely concerned about the activities in the Arctic Ocean,” said Robert Thompson, an Inupiaq Eskimo who lives in Kaktovik, a village on the northern edge of Barter Island, just east of where the Liberty Project would be built. “Ask anyone in the world: Can they clean up oil in the Arctic Ocean?” The answer, he believes, is pretty clearly no. “No one will say they can clean it up.”

In the Arctic summer, the ice is gone, but the seas are often roiled by storms. “We saw during Deepwater Horizon, whenever the seas are over four feet, our ability to mechanically remove oil was virtually impossible,” Coast Guard Commandant Paul Zukunft said at a Washington symposium recently. “Four-foot seas up there [in the Arctic] would probably be a pretty darned good day, so certainly environmental conditions weigh heavily, in addition to just the remoteness.”

The Bureau of Ocean Energy Management is expected to release a draft Environmental Impact Statement for the Liberty Project this summer, which will be followed by a comment period and time for further analysis. If all goes according to Hilcorp’s plan, the company could have the green light for the project before Thanksgiving.

Hilcorp Versus Landowners in Pennsylvania, Oystermen in Louisiana

Until the Cook Inlet gas leak this year, Hilcorp rarely made national news, but it has occasionally stirred local headlines. In Ohio, the company’s fracking operations have been blamed for causing 77 earthquakes. In Pennsylvania, the company was fined for five federal Clean Air Act violations in 2014 and 2015 alone.

Hilcorp courted controversy in western Pennsylvania when it tried to use “forced pooling,” a legal move that would have allowed the company to access gas from the Utica Shale beneath properties where the owners hadn’t signed contracts. “It’s almost like Hilcorp is bullying me and targeting me and other landowners,” homeowner Suzanne Matteo told the Tribune-Review in 2013. The company dropped its application in the face of public opposition.

In Louisiana, Hilcorp is in a fight with the Louisiana Oystermen Association that’s currently unfolding in federal court. The oysterman have accused Hilcorp of using a dredging practice called prop-washing to get drilling equipment through shallow canals, which is illegal without the proper permit. They say Hilcorp has ripped up the oyster beds and violated the Clean Water Act. The company, while fighting the lawsuit, has sought an after-the-fact permit to allow the contested dredging method.

“Hilcorp is a bad operator in coastal Louisiana,” Michael Roberts, president of the Association of Family Fishermen, said at a public hearing in March, according to The Lens. “They’ve done hundreds of thousands of dollars of damage to these people’s [oyster] leases, if not more. It’s time that every future permit for Hilcorp is done with the utmost scrutiny so that they start obeying the law.”

The view across Cook Inlet, Alaska, where Hilcorp's gas leaks this year drew national attention. Credit: Sabrina Shankman/InsideClimate News

The view across Cook Inlet, Alaska, where Hilcorp’s gas leaks this year drew national attention. Credit: Sabrina Shankman/InsideClimate News

Climate Concerns Close to Home on the North Slope

In Alaska, concern about Hilcorp’s practices and its environmental and regulatory record get amplified by the issue of whether more Arctic petroleum should be developed at all.

When Robert Thompson looks out the window of his home on the edge of the Arctic Ocean, he can see where the ground is slumping as a result of the permafrost thawing. In recent years, Thompson says Kaktovik has lost 100 feet of beach to erosion. The bodies of ancestors buried generations ago have started to surface in the cemetery as the ground thaws and pushes them upward.

Thompson and others in his small community live a largely subsistence lifestyle. They eat what they catch, including whales, seals, geese and other birds. “My people have been here for more than 10,000 years and have used the ocean. The marine mammals are probably why we’re here. If it weren’t for them, there are nicer places we could have lived.”

Thompson can easily cite local evidence of global warming that goes beyond the obvious collapsing shoreline. He notes the musk-ox that have disappeared from the area. And the saffron cod that are new to Kaktovik and are displacing other fish. “I don’t like them. They don’t taste good to me,” he said. Or the polar bears that are showing up in larger numbers onshore as the sea ice breaks up earlier each year.

In a public comment on Hilcorp’s plan, filed in March 2016, a group of 12 environmental organizations argued that sinking funds into the Liberty Project would help to lock in carbon emissions beyond the limits that are needed to keep global warming to 2 degrees Celsius or less.

“The Liberty Project will affect whether or how that carbon budget is met or exceeded, because meeting the budget—and avoiding the worst effects of climate change—will require forgoing other fossil fuel development projects if the Liberty Project is developed,” the groups wrote in their comments.

Erik Grafe, an Anchorage-based lawyer for the environmental nonprofit Earthjustice, helped draft the comments. “It’s not even a policy consideration—it’s science,” he said recently. “The science says that it will be harder, if you lock in fossil fuel development, to reach a place where you’re going to avoid the worst of climate change.”

While the project winds its way through the approval process, Thompson doesn’t have much hope that the project will be stopped. And he worries about what that means.

“We might not be able to turn this around, but what are future generations going to think?” he said. “For a while, we didn’t know, and that was one thing. But now we know. Now we should do something.”