What happens when an oil giant walks away

The chief executive officer of BP Plc had ­something ­exciting to tell investors in September 2019. The fifth-­largest multinational oil producer in the West had just inked a deal to sell everything it owned in Alaska, marking a sudden exit from a region the company had prized since the birth of the state 60 years earlier. The $5.6 billion sale would help reduce corporate debt, but that wasn't the only boon. BP would be proudly shedding unwanted greenhouse gases, paving the way toward what would soon become its signature goal: zeroing out emissions by midcentury.

"There are going to be projects that we don't do, things that we might have done in the past—certain kinds of oil, for example, that have a different carbon footprint," then-CEO Bob Dudley said on the conference call. The divestiture would help the British supermajor meet its climate targets while it gradually reinvented itself as a clean energy leader backed by sustainability-minded investors. It's one of two recent moves that allows BP to wipe at least a sixth of its 2019 emissions from future reports, alongside a third divestment that lets the company avoid claiming potential future emissions.

Although the first portion of the Alaska deal didn't close until the middle of last year, the impact is already showing up. At the end of March, BP announced it had lowered its Scope 1 and 2 emissions—those associated mostly with production—by 16% in 2020. It credited both a pandemic-driven drop in oil demand and the benefits of the Alaska sale.

Under New Management: Alaska's North Slope

Not all crude is created equal, particularly as measured in planet-warming emissions. Some is trapped within sludgy sands that require energy-heavy refining. Other reserves are entombed alongside excesses of carbon dioxide and methane. On Alaska's North Slope, each barrel of oil that BP extracted had double the average emissions from its portfolio, according to one third-party estimate. That made it an affront to the company's celebrated push to zero-out its emissions. BP is one of just eight oil and gas companies tracked by Bloomberg Intelligence with such a goal.

Nothing about BP's altruistic Alaska exit made much sense to Hollis French, a 62-year-old former oilfield worker on the North Slope who went on to serve as a top state regulator until 2019. To him the deal looked less like a happy ending than the start of a different, darker story.

"It's a net negative for the world when majors move out of major oil fields," French says. If anything, he expects emissions will rise—not fall—after BP's departure. The only difference: No one will know about it. That's because a semivisible corporate citizen is being swapped out for an almost invisible operator named Hilcorp Energy Co.

For a fossil fuel behemoth such as BP to undergo a sustainable transformation, smaller entities like Hilcorp must sit on the other side of the transaction. Owned by Houston billionaire Jeff Hildebrand, the privately held company has made a name buying oil and gas assets no one else wants. At times the practice has helped give it a heroic profile. By boosting production at fields acquired from Chevron Corp. a decade ago, Hilcorp staved off a natural gas shortage that had threatened Alaskans with sky-high bills.

Compared with a stately supermajor, though, Hilcorp has a reputation among some Alaskans as a ­risk-taking vulture compelled to squeeze every last drop from oil fields that have seen better days. Sometimes these salvage efforts come with costs. Alaska state records show Hilcorp had three times more violations and other incidents than BP from 2015 through the middle of last year, with 30% more spills attributable to human error by Hilcorp and its pipeline affiliate.

In a statement, Hilcorp said it's decreased those incidents by 60% over that time frame and reduced spills attributable to human error by more than half. "Hilcorp's business model focuses on bringing new life to legacy assets that are often decades old," spokesman Nick Piatek said in the statement. "These assets often present greater initial challenges than newly built infrastructure."

The Ousted Regulator: Hollis French

French, a trim, gray-haired former Democratic politician who had a flair for theatrical floor speeches as a state legislator, wears his ouster from the Alaska Oil and Gas Conservation Commission as a badge of honor. Unlike the other two commissioners picked for their expertise in oil and gas, French was specifically tasked with defending the public interest. When a Hilcorp gas pipeline leaked methane into the biologically sensitive Cook Inlet over four months in 2017, he made it clear he disagreed with the commission's hands-off response.

Two years later, French was fired from the agency for cause, the only way the governor can get rid of a commissioner. A private attorney the state hired to investigate found French had been chronically absent. But he and other local Democratic leaders say that was a cover story to distract from intense internal disagreement over the state response to the Hilcorp leak.

Hilcorp's spills and leaks are well-documented; its emissions are another matter. Unlike a ­shareholder-­owned energy conglomerate, Hilcorp doesn't make routine public disclosures about companywide greenhouse gas output. In fact, none of the three buyers on the other side of BP's recent divestment deals discloses overall carbon data or has meaningful climate plans. Their pollution can be glimpsed only through a patchwork of partial government data and third-party modeling.

A Bloomberg Green investigation into last year's deals by BP reveals what happens when a supermajor walks away as it moves down the path toward net-zero. An examination of state data found that production from the Hilcorp unit that took over BP's Alaska business has already increased from 2019 levels, even as total U.S. crude output plunged in the middle of the Covid-19 pandemic. These emissions will be erased from BP's ledgers without vanishing from the atmosphere.

BP says selling fossil fuel assets allows it to expand its lower-carbon businesses more quickly. Even if the total carbon in the atmosphere isn't reduced, the company sees these transactions as an indispensable way to achieve its own climate goals. "Divestments are, and continue to be, an important part of BP's strategy," spokesman David Nicholas said in a statement. "Going forward, divestments will help BP to create a resilient, lower cost and lower carbon oil, gas and refining portfolio that is smaller but high quality."

BP's sale to Hilcorp is a harbinger of what's coming to the wider world of divested fossil fuel assets. By the end of this decade, Royal Dutch Shell, Total, Chevron, Exxon Mobil, and the rest of the top eight oil and gas companies will sell a combined $111 billion worth of assets "to adjust to the energy transition," Oslo-based consultant Rystad Energy predicted last year. BP alone plans to cut oil and gas output by 40% in the next 10 years.

Those assets won't be mothballed. This investigation found overall emissions from former BP facilities will likely be unchanged or even rise under new owners. In a just-released annual sustainability report, divestments alone accounted for a drop of 5.4 million tons of carbon dioxide equivalent from BP's direct emissions, more than five times the reduction the company achieved through operational improvements.

For the world, though, those emissions don't stop.

The Emissions Detectives

To traverse the private roads leading to BP's ­former operations in Prudhoe Bay, Alaska, you need permission from an oil company. Jutting steel pipes, looming cylindrical tanks, and the occasional spread of "man camps" for itinerant workers punctuate mile after mile of flat earth. Just to reach the North Slope, the ancient seabed that boasts one of the oldest oil fields in North America, requires an $800 flight from Anchorage. Oil produced here must take an 800-mile trip on the Trans-Alaska Pipeline System to get from the top of Alaska to the Valdez Marine Terminal.

Cody Floerchinger, an atmospheric scientist from Harvard, discovered that a hotel attached to an airport hangar in Prudhoe Bay is practically the only local accommodation that isn't owned by an oil company. He spent a month there in the summer of 2016 as part of a team that included one mechanic, two pilots, and three scientists from the National Oceanic and Atmospheric Administration's Global Monitoring Laboratory, which led the project.

An Aging Legacy: The Trans-Alaska Pipeline

The scientists were there to measure methane escaping from Arctic permafrost that's been rapidly melting in the fastest-warming part of the U.S. For a two-day stretch, when conditions were just right, the group turned its equipment on the oil field itself.

Floerchinger and the NOAA team found Prudhoe Bay's methane levels were as much as five times higher than what's reported to the U.S. Environmental Protection Agency. These elevated readings match scientific studies from oil fields in the lower 48 states, where methane is notoriously underreported. That's in large part because the industry data reported to the EPA are "by no means a comprehensive inventory," Floerchinger says.

Alaska recently bought its own infrared camera in an effort to better track methane. But the special equipment has yet to be used, since Covid threw a wrench in the state's plans, according to a spokeswoman with the Alaska Department of Environmental Conservation. For now, the EPA data will be the only way to track those emissions. "You don't know about leaks you don't know about," Floerchinger says. "This is something that the entire scientific community is on board with—more data."

Floerchinger's work with NOAA helps set a sort of pre-Hilcorp baseline for methane, a greenhouse gas that's more than 80 times more potent than CO₂ in the short term. From this point on, though, keeping tabs on emission levels will be almost impossible. Methane monitoring is expensive, and images from satellites that can detect the leaking gas from space don't always have the resolution to distinguish between methane from the melting permafrost and that which escapes from oil operations. The EPA requires companies to report emissions from larger facilities, but critics say those disclosures are based on outdated engineering estimates and don't fully account for all the processes that release methane.

The methane itself doesn't care who counts it, as it ultimately gathers miles above Earth's surface and lingers for about a decade while trapping far more heat in that time than a similar amount of carbon dioxide.

Major public oil companies like BP disclose, at a minimum, cumulative greenhouse gas data in annual filings to investors. Private companies such as Hilcorp aren't held to that requirement. "These emissions and these assets really go dark if they're sold to a private operator," says Andrew Logan, senior director of oil and gas at Ceres, a Boston-based nonprofit network of institutional investors who focus on climate risk and manage more than $29 trillion in assets. "What incentive is there to really reduce emissions if no one knows about them?"

Hilcorp at Work: Prudhoe Bay

This mystery pulled in Deborah Gordon back in 2013, when she was with the Carnegie Endowment for International Peace. She and her team tracked characteristics that make different types of crude distinct from one another: density, sulfur content, and depth of the resource, to name a few. Then they built a model. If Gordon couldn't measure greenhouse gas directly, she would use deduction and inference to form calculations.

This was the birth of the Oil-Climate Index, the collective work of more than two dozen academic and research groups. "You're really left with very few tools to deal with this," says Gordon, now a senior fellow at both Brown University and the Rocky Mountain Institute. "Especially in Alaska," she says. "You're in a remote area. It's harder to have eyes on this infrastructure. It's cold. It's a harsh environment."

Alaska's North Slope is unusual as far as oil fields go. While methane measurements from Floerchinger and NOAA had been higher than what's reported to the EPA, the scientists determined the oil complex in Prudhoe Bay produced significantly less methane than fields ­elsewhere. That's because in this part of the state, much of it is buried back in the earth. In the shale fields of Pennsylvania or Texas, that fuel would be worth something. But the enormous cost and low return associated with building a long gas pipeline from the North Slope made such a project unpalatable.

With no place to go, North Slope methane gets put to use as an underground injection that squeezes ever-shrinking quantities of oil to the surface. That's an energy-intensive process. Gordon estimates each barrel of North Slope oil emits double the greenhouse gases than the average produced across BP's portfolio.

It makes sense, then, that BP saw a climate justification for ditching a chunk of its portfolio—less than 10% of its average daily oil production in 2019—to shrink emissions while slashing debt. Reports to the EPA show emissions of 6.6 million tons of CO₂-equivalent pollution in 2019. An analysis by the Oil-Climate Index on behalf of Bloomberg Green estimates overall emissions from BP's Prudhoe Bay activities at about 8 million tons.

What happens now that Hilcorp has taken over? Estimating future emissions is far more difficult. The company told the state it was unable to establish a drilling program with its partners for 2021, citing economic challenges from the pandemic. But in one filing, Hilcorp said it "continues to evaluate future drilling opportunities and plans to continue to evaluate potential undeveloped resources." That's a sign of change: BP was pretty much done looking for any new sources of crude; Hilcorp intends to explore for more.

Overcoming natural production declines from an aging oil field will be difficult, even for a company credited with notching significant output increases where others couldn't. Oil from the North Slope has been dwindling since it peaked in the late 1980s at 2 million barrels a day.

So far, Hilcorp seems to have found success. From June 2020 through this February, production from BP's former assets has climbed 4.7% from the same period the year before. It's the first time oil output from those wells has increased since 2015 and the biggest uptick since 2007. The North Slope saw production gains at a time when overall output in the U.S. dropped as the pandemic sent crude prices into a free fall.

The jump in production corresponds with an 8.2% rise in emissions, according to analysis by the Oil-Climate Index. In absolute numbers that's an extra 500,000 tons of CO₂ equivalent compared with the year before, about as much as 108,000 internal combustion cars in the U.S. produce in a year.

The more lasting impact will occur if Hilcorp keeps operating on the North Slope well beyond when BP would've stopped. "For most of these assets, it's safe to say it extends the tail end rather than bringing a big change in the near-term emissions," says Will Hares, an analyst at Bloomberg Intelligence. That puts the ambitions of global climate accords at risk. "It's a huge concern for the achievement of Paris if these carbon-intense assets are just changing hands."

A New Breed of Vultures

Just two days before closing the first half of its Hilcorp deal, BP announced another one: the sale of its global petrochemical business to Ineos Ltd., another private company led by another billionaire. The sale would give BP's emissions profile a further boost, allowing the company to delete from future reports as much as 2.8 million tons of greenhouse gases that appeared in its 2019 disclosure.

When it comes to sustainability, Ineos's reputation is also spotty. The company, owned by Jim Ratcliffe, one of the richest people in the U.K., ranks in the lowest category for environmental, social, and governance criteria, according to a compilation of ratings by CSRHub LLC. Ineos in 2017 released a 70-page sustainability book with commitments to meet "strict targets for CO₂ emissions." But nowhere did the company say what those targets actually were or how much its operations were responsible for emitting, perhaps one of the reasons it scores in the 20th percentile on environmental factors.

In a statement, Ineos said it's "taking concrete actions to create meaningful and measurable near and long-term reductions in our climate footprint, whilst at the same time positioning ourselves to take advantage of new opportunities." The company named recycling improvements, carbon capture, and embracing renewable energy as part of its efforts to "transition to a net-zero economy," which will likely be covered in an updated sustainability report later this spring.

U.S. plants operated by Ineos released 3 million tons of greenhouse gas in 2019, averaging 378,000 tons per facility, according to EPA data compiled by nonprofit Air Alliance Houston. BP's average was about a third of that, though differences in chemicals produced by the two companies mean direct comparison isn't possible. In Galveston County, outside Houston, facilities from both companies sat next door to each other. At the Ineos plant, emissions from making a styrene monomer that goes into plastics and synthetic rubbers have jumped 50% since 2013. The adjacent BP facility, which turns out ingredients for X-ray film and soda bottles, managed to cut emissions in that period by 29%.

Gulf Coast Neighbors: Former BP Petrochemical Plant

The Ineos example is from one of its facilities that reports public emissions data to the EPA, but many of its almost 200 sites are located in countries without such requirements. It's impossible to determine whether the rise in emissions at its Galveston County facility reflects a broader trend or simply a blip from increased production at a single plant.

For climate and sustainability experts, that's precisely the problem. "The level of transparency in emissions is not uniform," says David Rabley, a managing director at Accenture Plc who's worked on net-zero targets. He points to the mashup of modeled data and extrapolations needed to assess operators that fail to disclose a companywide number. "The integrity of emissions reporting today has a long way to go to catch up to be truly efficient."

Some companies may seek to take advantage of that obscurity: If they want to offload some of their dirtiest assets, Rabley says, now's the time to do it—before the data catch up and reveal the true scope of the emissions.

BP's third asset sale from 2020 saves the company from recognizing future emissions. In November it moved to sell stakes in two deep-water discoveries off the coast of Brazil, after determining that wells there weren't as rich as initially thought. The buyer, a Brazilian company named Petro Rio SA, is—like Hilcorp and Ineos—smaller, specialized, and hoping to squeeze out more than BP would have.

Brazil doesn't have a public reporting requirement for emissions, and Petro Rio, which trades on Brazil's B3 stock exchange, chooses not to disclose climate data in annual filings. The company has said it expects to produce 140 million barrels of crude from the BP discoveries, known as Wahoo and Itaipu. When factoring in qualities such as density and depth for the crude Petro Rio plans to produce, those assets are estimated to emit a total of 5 million tons of CO₂ and other greenhouse gases, according to the Oil-Climate Index.

Like Ineos, Petro Rio scores at the bottom of ESG rankings compiled by CSRHub. The broader financial community doesn't really care how Petro Rio ranks: The company has ESG scores from just five active sources, compared with BP's 52. That's a sign of disinterest, says CSRHub co-founder Bahar Gidwani.

Petro Rio touts a 5.4% drop in emissions per barrel from 2018 to 2020, even while it doesn't disclose absolute measures. "PetroRio places the highest priority on the health and safety of its workforce and the protection of the environment and its operating assets," the company said in a statement.

Health and safety concerns became the focus of Alaskan opponents to the BP-Hilcorp deal, who sought to withhold regulatory approval for the only part of the transaction that fell under state review: the stake in the pipeline. They pointed to the same four-month leak that created turmoil for French, the former regulator, as proof Hilcorp couldn't be trusted, as well as a letter from the Alaska Oil and Gas Conservation Commission that said rule-breaking was "endemic" to the way Hilcorp operated.

Hilcorp is responsible for the only fatality of an oil and gas worker in Alaska in the past five years. In a 2015 incident reported to the state, three Hilcorp contractors nearly suffocated to death from nitrogen gas poisoning. A former physician's assistant for ConocoPhillips, which also operates on the North Slope, appeared at a public meeting to describe treating Hilcorp employees with injuries she attributed to poor safety measures. Hilcorp says the safety of its employees is its "top priority, and no shortfall in this regard is ever acceptable."

As part of the Hilcorp transaction, BP had agreed to hang on to the liability associated with decommissioning the state's biggest pipeline, the Trans-Alaska Pipeline System, but those assurances weren't enough to ease some residents' fears that they'd be the ones left holding the bag. "The fact that this is going to Hilcorp, this vastly smaller independent with a limited track record in Alaska—it's like, wow, this is remarkable," says Philip Wight, a policy analyst for the Alaska Public Interest Research Group.

Alaska hired NERA, an economic consulting firm, to perform financial stress tests on Hilcorp and its pipeline affiliate. It warned of "material financial risk to the state." To get the pipeline sale approved, BP committed to additional financial assurances and closed the final portion of the deal in December.

"The risk is still great—probably greater, having gone to a smaller company—that the state is going to end up having to pay for some of these costs," says Lisa Weissler, a consultant hired by Alaska's Legislative Budget and Audit Committee to review parts of the BP-Hilcorp agreement. Only state staff and consultants saw the information that was reviewed before the state deemed the sale satisfactory, she says. "So we have to take their word for it."

'Pushing the Barrel Down the Road'

Among Alaskans there's a real sense that BP's ­departure marks the beginning of the end of a generations-old identity as an energy hub. The British company was among the first to launch serious oil explorations on the North Slope, and its entry into the region in the 1950s has become the subject of local lore. Some industry veterans believe the decision arose from an executive's flight from London to Japan, according to Tim Bradner, who worked at BP in those early days. The company was embarking on a worldwide reconnaissance after Iran nationalized oil, Bradner says, and the sight of the North Slope's surface geology was enough to pique deeper curiosity.

BP went on to establish itself as a fixture of Alaskan industry, helping to build the pipeline that transformed the economy in the '70s. That intertwined the company with life in a remote state. Its outsize role in Alaskan philanthropy led the Anchorage Daily News to cover the nonprofit community's reaction to news of the Hilcorp deal when it was first announced. "It's a major turning point in the state's history when you lose a company as historically linked to Alaska as BP," French says.

End of an Era: BP's Regional Headquarters in Anchorage

For all the risks Hilcorp brings, there are many who cheer the smaller company's intention to sustain production for as long as possible. That every Alaskan gets a direct annual payment from the state's oil royalties helps explain this enthusiasm, not to mention the industry's contribution to the state budget.

BP's shareholders also stand to benefit, at least in theory. Under pressure to divest from fossil fuel companies, major investment firms such as BlackRock Inc. and Legal & General Group Plc can point to BP's falling oil and gas production over the next 10 years and claim they forced a change on one of the world's biggest energy giants. And they did. It's just that much of that oil and gas is now being produced by someone else.

BP isn't the only oil major reaping ESG benefits by selling assets. European rival Royal Dutch Shell Plc explicitly attributed a reduction in greenhouse gas emissions in 2019 and 2020 to divestments.

One of the few fossil fuel executives to publicly ­question asset sales as a means of saving the planet is, of all things, a mining company boss. "How does that help the world to reach the Paris accord?" Glencore Plc CEO Ivan Glasenberg asked at a public event in October. "Those mines are going into the hands of other players who have no intention of" mitigating the consequences of burning coal. "If anything," he warned, such transactions give smaller operators "a free hand to start producing more."

Investors have been quietly grappling with a similar puzzle for years. The pressure for major pension funds and endowments to divest fossil fuel holdings has sparked conversations about who steps in to fill the void. "Do you divest from a company and then just shift your portfolio emissions somewhere else, like a hedge fund that doesn't care about emissions?" asks Conor Constable, a researcher at Pensions & Investment Research Consultants Ltd. in London. "Or do you engage with a company and force them to adopt more sustainable practices?" If a company responds to pressure by selling the dirtiest assets to a less responsible entity, you run into the same problem. "One way or the other," Constable continues, "are you just pushing the barrel down the road?"

BlackRock's Larry Fink spoke to this conundrum earlier this year when he told a climate summit that he didn't want to see companies fully divest from hydrocarbons to achieve environmental targets. "To me that's greenwashing," he said.

Canadian oil sands are a vivid case in point. Pressure from shareholders and disdain from the general public have led to a mass exodus by some of the biggest oil giants from a particularly carbon-intensive extraction process. Yet production from those assets has generally gone up over the past five years. And in most cases so have emissions, even when adjusted for the increase in output, according to analysis by Rystad Energy on behalf of Bloomberg Green.

"There's no straightforward answer to this," says Dan Gardiner, a technical adviser at the London School of Economics' Grantham Research Institute on Climate Change and the Environment, who also serves as a researcher at the Transition Pathway Initiative, an investor-backed group that helps companies plan for a low-carbon economy. "Selling assets to less scrupulous operators, you're not going to get overall emissions reductions," he says. "But equally, if BP or Shell would wind down their production, that production gets filled by less scrupulous operators anyway."

That dilemma could bring a business opportunity. "We anticipate the rise of the so-called decarbonization­specialist operator," says Accenture's Rabley. A company that's built out carbon-capture technology at scale could buy assets traditional oil companies no longer want. It could be a small outfit just like Hilcorp, only with an expertise in safely storing the carbon and methane from older wells.

"That would help greatly the narrative the supermajors are putting out," Rabley says. "They can say they're divesting them to a company that will steward them."

No such company currently exists, at least not in a meaningful way. And huge challenges remain to bring down the tremendous costs of capturing, transporting, and then storing billions of tons of carbon. Even with recent changes to the U.S. tax code, there's little profit motive for companies to invest the sums required. It's still cheaper just to vent unwanted gases, and the smaller outfits in particular go for the least expensive option.

Moves by BP and its peers to shrink their own carbon footprints, including through asset sales, can still have an overall positive effect, says Jason Bordoff, who heads an energy policy group at Columbia University. That's because they help free these companies to invest in renewable energy. "We're so far away from where we need to be that we need pressure on everything," he says. "The things that are going to move the needle the most are the activism to decrease demand."

For all the focus on Big Oil, Bordoff says, the majors have typically contributed only 15% of the world's production of oil and gas. The vast majority comes from national oil companies and smaller independent producers like Hilcorp. Environmentalists, research groups, and non­profits are racing to send satellites into space that can better monitor emissions from operators that disclose less data.

For now, however, tracking the fate of BP's divested assets in the U.S. means relying on Hilcorp's limited reports to the EPA. The figures for 2020 are expected to be made public in the fall. By that point, BP and its investors will have moved on. "You go from having an A+ field, where everything's done to A+ standards, to a B+ field, where everything's done to B+ standards," French says. "The threat goes up, the maintenance goes up, and yet no one's as excited. You're not making as much money as you were. And everyone just looks away."

Disclaimer: This article first appeared on bloomberg.com, and is published by special syndication arrangement.