Legislature(1995 - 1996)
04/10/1996 03:16 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE April 10, 1996 3:16 p.m. MEMBERS PRESENT Representative Pete Kott, Chairman Representative Norman Rokeberg, Vice Chairman Representative Kim Elton Representative Jerry Sanders Representative Brian Porter Representative Beverly Masek MEMBERS ABSENT Representative Gene Kubina OTHER HOUSE MEMBERS PRESENT Representative Joe Green Representative Jeannette James COMMITTEE CALENDAR Presentation by British Petroleum Out-Sourcing PREVIOUS ACTION No previous action to record WITNESS REGISTER JOHN MORGAN, President BP Exploration (Alaska), Inc. P.O. Box 196612 Anchorage, Alaska 99519-6612 POSITION STATEMENT: Gave Presentation on Out-Sourcing by BP ACTION NARRATIVE TAPE 96-34, SIDE A Number 001 The House Labor and Commerce Standing Committee was called to order by CHAIRMAN PETE KOTT at 3:16 p.m. Members present at the call to order were Representatives Kott, Elton, Porter, Sanders, Rokeberg and Masek. Members absent were Representative Gene Kubina. A quorum was present to conduct business. CHAIRMAN KOTT announced the calendar for the meeting was a presentation by British Petroleum on out-sourcing. He said there have been a number of concerns expressed regarding some of the problems perceived by the public on out-sourcing. In an effort to clarify some of the issues, Chairman Kott felt it would be helpful to get the information directly from the source. Number 112 MR. MORGAN thanked the committee for giving him the opportunity to talk on the topic of out-sourcing. He, too was aware of the concerns and perceptions of difficulties regarding this issue. He prefaced his remarks by saying he was prepared to discuss what he means by out-sourcing which is the way in which BP organizes their work in order to be as effective and efficient as possible in their relationships with parties to provide them with services and manpower. In his mind, there are two other topics that are separate, but related. Those two are not what he primarily intended to address; however, if the committee had issues that overlapped in those areas, he was prepared to answer questions. The first of the two additional areas goes under the general heading of Alaska hire which is clearly related to the number of people working for British Petroleum and their contractors, who are resident in the state of Alaska. British Petroleum and ARCO, together with a number of contracting companies, have been addressing this issue recently and had presented a set of recommendations to the Administration. He didn't intend to directly address that issue unless the committee had questions. Mr. Morgan said the other area was generally under the heading of the purchasing of goods and the proportion of their spend in purchasing goods that come into Alaska. This again is an area where he thought there had been some difficulty or concern expressed recently. In his mind, it is separate from the issue of out-sourcing; however, he knew there were some overlaps in people's minds so he was prepared to answer questions from the committee. Number 309 MR. MORGAN remarked he would like to spend a few minutes discussing the background in the sense of the way he perceived the economic and commercial challenges that the people in the oil industry were trying to deal with to remain competitive in Alaska. This, in a sense, is certainly background to all three of the areas he had mentioned. The Prudhoe Bay field has been in decline since about 1988 or 1989. Despite that decline, Prudhoe Bay clearly still dominates production from the North Slope and it's likely to continue to do that for a long time to come. At the same time, the other large fields on the North Slope, fields like Kaparuk and Endicott, are struggling to hold off decline at this stage in their life cycle. In the longer term, they obviously hope to see major new developments able to take place in the Alaska National Wildlife Refuge (ANWR) and through the development of the gas project. At best, those kinds of developments are 10 years away and remain, at this stage, somewhat uncertain. In the meantime, in BP's view there is a great deal of potential on the North Slope. British Petroleum has estimated there is as much as five billion barrels of potential new production available. It is made up of a whole range of different opportunities of satellites to existing fields, extensions to existing fields, enhanced oil recovery in existing fields, heavy oil and new smaller fields like Northstar; fields probably in the 100 to 200 million barrel range that so far have not been able to be produced economically in Alaska. All of that potential - that in existing fields and that in new opportunities like smaller fields - of course requires investment to make it come to fruition. Many of those opportunities may well be attractive investment opportunities in their own right while others will be relatively marginal opportunities. MR. MORGAN felt it was important to understand that in making those investment decisions, it isn't just the individual project that matters, but it's the overall business context that exists in Alaska. There may be attractive investment opportunities, but if they sit within an overall context that is looking increasingly unprofitable, then it will make it more difficult to attract those investment funds here into the state. That's why in his view it was so important to maintain the health of the base business in Alaska which is a tough challenge. Prudhoe Bay does dominate that base activity and Prudhoe Bay is currently declining at about 15 percent a year. He said if they can continue to invest in Prudhoe, then by the end of the decade he believed that decline would level off and a new plateau on Prudhoe would emerge perhaps around 500,000 barrels a day which is capable of being sustained for some considerable time. But clearly in moving down that decline curve, they obviously have the challenge of adjusting their costs to try to retain profitability in Prudhoe and in the underlying base business and by doing that, to keep an attractive climate to attract new investment funds for new opportunities. Therefore, in his discussion on out-sourcing, he would be mostly focusing on the way in which they are trying to manage that base business; the way in which they are trying to keep it efficient and keep it competitive over time. MR. MORGAN stated out-sourcing or contracting with third parties to provide them with services and manpower skills is nothing new in the oil industry either in Alaska or elsewhere. Traditionally, oil companies have relied on contractors to provide a wide range of special skills and to help them accommodate variations in workload over time. The kinds of services that are really very conventionally handled in this way are catering services, security services, seismic, drilling and well services, project engineering, construction, et cetera. Here in Alaska over the years, the two operators, BP and ARCO relied on a number of Alaskan contractors; well known companies like VECO, APC, Doyon, NANA, Lynden and others to provide a whole range of maintenance general services including maintenance support, project design and construction, support for operational activity, drilling activity, housekeeping, catering and general administration. Of course, over time the market moves. The existing contractors themselves develop new skills in their organizations, new contractors emerge in new areas of activity and new technology develops which creates new opportunities both for existing contractors and for new companies. Examples of areas where new companies or new skills have been emerging and where a person would be led to look at those organizations in terms of taking on activities that have conventionally been carried out inside their own company, include computing, telecommunications and accounting services. In all these cases, the companies that specialize in providing these kinds of services which for them represent their core business, can offer a number of particular advantages to a company like BP: They can offer economies of scale because they are providing that service not just to a single business, but to a whole range of other companies; they can provide specific management expertise in that area of their specialization at the level which is beyond that that's available inside the oil company; they have ready access to technology; they find it easier to maintain links perhaps with smaller companies who are at the forefront of developing technology improvements in their area; they are able to provide a flexible response to changing workloads as projects come and go; and they can offer to their own staff greater development opportunities within that core business of their own, than a company like BP could offer to them working in what is simply one peripheral component of BP's overall business activity. He noted those are some of the key benefits that can exist in terms of having a company provide an oil company a set of services on a specialist basis. Number 781 MR. MORGAN further stated that here in Alaska and elsewhere in BP's business, when they have contracted out an area in this way, quite often they have formed what has become known as an "alliance" between themselves and that contractor which carries with it the sense of a long term relationship. A relationship in which the business goals of the two companies are aligned together where the outside company is operating to help BP achieve their objectives and are measured on that performance and where their reward is actually aligned to the delivery of that performance and the delivery of BP's own objectives. Usually in those cases, although the intent is to have a long term relationship, there will be regular performance reviews or approaches to bench marking to ensure the competitive performance continues to be delivered. He thought that was a fairly general statement about the nature of BP's view of out-sourcing. Number 837 MR. MORGAN went on to discuss some of the activity currently going on in relation to out-sourcing inside British Petroleum. He thought that some of this activity may have been the cause of some of the concern. There were two broad areas that he would discuss. Firstly, in relation to activity on the North Slope itself and then a second area in relation to their accounting activities and the out-sourcing of those which has been going on in the recent past. Number 866 MR. MORGAN said firstly, on the North Slope they are currently looking at out-sourcing four broad areas which would together include some 23 BP employees. The first of those areas is telecoms which is by far the largest. There are 15 BP employees involved in a potential out-sourcing of telecoms; however, they have not taken a position at this point to out-source telecoms. BP has a study currently going on to examine whether this would be the right approach to developing a new out-sourcing relationship and he believed that study would be concluded around the middle of May. He said in the event they do go forward with out-sourcing in this area, probably either GCI or AT&T Alascom would be the company they would likely contract with. He reiterated there is no decision at this time, but there is a study going forward at this stage. Number 934 MR. MORGAN continued that the next three areas are areas where BP has basically taken a decision to out-source, but it is still subject to the conclusion of a satisfactory contractual relationship with the out-sourcing company. The first is the tool room area in which there are two BP employees involved and the out- source company would be a company called Fairmont. Fairmont is a company that BP has recently brought in to take over their warehouse activities on the Slope. Fairmont has a lot of experience and skills in managing warehousing and materials activities and to expand their warehouse activity to include the tool room seems to be a natural outgrowth which offers particular elements of efficiency by putting those two areas together. Number 980 MR. MORGAN noted the other two areas are the welding shop where there are four BP employees involved and the painting and carpentry shop where there are two BP employees involved. British Petroleum is looking to out-source both of those areas to VECO. He said BP believes the benefit of out-sourcing to VECO is that they can provide a more efficient operation by centralizing those activities in their own pre-existing workshop that exists in Deadhorse. That is the current extent of BP's out-sourcing consideration and activity on the North Slope. Number 1053 MR. MORGAN said he would now discuss what may be behind some of the concern expressed by constituents of committee members. He said to some extent this is speculation on his part, but it is clear that we are now working within a union environment in Prudhoe Bay. The Oil, Chemical and Atomic Workers union gained a bargaining unit at Prudhoe Bay at the beginning of 1995. During the summer of 1995, BP was in a long process of negotiating the contract with the bargaining unit at Prudhoe Bay. A contractual agreement was reached during the fall of last year and in the course of pursuing that agreement, it was important to BP to maintain the flexibility to manage their business at Prudhoe Bay. A contract was achieved whereby BP was allowed to maintain that basic flexibility. In a sense, these out-sourcing activities he described are the first such activities to develop since the conclusion of that contract and they do, in fact, involve people who are part of the Prudhoe Bay bargaining unit. He believed that may explain some of the sensitivity of the union members in Prudhoe Bay and may account for some of the correspondence directed to the committee. Number 1127 MR. MORGAN said the other current area is the out-sourcing of BP's accounting activity to Anderson. Anderson is perhaps not very well known to a lot of people, but it is one of the largest accounting firms in the world. He wasn't sure if it was a big four or a big six these days, but certainly Anderson is one of the very top companies. An off-shoot of Anderson Accounting is Anderson Consulting and BP has recently entered into an out-sourcing arrangement with them. The history to this is that some years ago, BP entered into an arrangement with the same company in the North Sea for their North Sea operations accounting activities. That has three or four years of history and has actually been a very successful operation. He thought it was viewed as quite a high risk in the first instance when BP made that decision in Aberdeen, but it has worked very well. What happened earlier last year, was there was a move on the part of the BP group to out-source the accounting activities of all the BP businesses in North America; primarily those in Alaska, an exploration activity based in Houston for the Gulf of Mexico and downstream oil and chemicals business activities centered in Cleveland but with a number of operating areas around the Lower 48. It was fairly clear there was a significant potential price to BP in doing this. There were discussions with a number of companies and Anderson Consulting emerged as the front runner for this activity. He was a little alarmed when he first became involved in this process because it became clear to him that Anderson envisioned setting up a single processing center in Houston to deal with all of this activity. There were a number of meetings with Anderson and with BP's colleagues in the Lower 48 to explain the needs of BP's operation in Alaska. As a result of that, instead of seeing all that activity disappear to the Lower 48, Anderson agreed to set up a branch of their activity here in Alaska which preserved about 60 percent of the jobs previously providing this service for BP here. He thought this was an extremely valuable thing to do rather than see those jobs disappear into the Lower 48. The transition process is underway currently and he thought there were about 59 people involved overall, both in BP and NANA Corporate Services, who contracted their services to BP in this area, and about 35 of those people will continue to have jobs in Alaska serving BP through the Anderson organization. Of the balance, more than half have decided to accept jobs with Anderson in Houston and the balance either redeployed to other jobs in BP or in a very few cases, elected to leave the company at this stage. He remarked that's a living example of where BP is on that particular issue. He said there is no doubt the savings to the BP Group from that out-sourcing activity will be really quite considerable. Number 1347 MR. MORGAN explained that BP has no other specific plans for out- sourcing on their books but as he said earlier, this is an issue that revolves around movement in the market and the opportunities that contracting companies create to do business with them. Therefore, BP will continue to examine all areas of their business because they are clearly concerned about reducing their costs and to increase their activity, to remain competitive, to keep that base of their business competitive so they can continue to attract investment funds here. He believed it is likely that in the course of time, BP will see other areas they will want to contract out. He thought it would be a constant process as other organizations seek to develop further core skills which they could sell and persuade BP they could perform more effectively than what BP could perform within their own organization. In the first instance, BP would always aim to use an Alaskan company when contracting out these activities. The vast amount of the activity that is out- sourced is out-sourced to an Alaskan company. But where that isn't the case and as was the case in the Anderson arrangement, BP would work very hard to ensure that the contractor became established in Alaska and operated to the same standards as BP themselves wish to in terms of the hiring of Alaskan residents. He didn't actually think there was any direct overlap between the issue of Alaska hire and the issue of out-sourcing. There is no reason why out-sourcing their activities should not continue to provide at least as high a proportion of jobs in Alaska as the industry has currently. Mr. Morgan invited questions from the committee. Number 1448 CHAIRMAN KOTT referred to the half dozen areas that BP is currently either proposing or has already out-sourced and asked Mr. Morgan what the time line was and what kind of considerations are entered into the equation as to whether or not out-sourcing was going to become a reality. MR. MORGAN said it's all the things that would be looked at in terms of a normal commercial business decision. Obviously, cost is a key factor and what they look at is whether the third party company can provide that service over a period of time in a way that will provide cost savings to BP over continuing to provide the service within their own organization. He believed that was the essential driving element. He had stated earlier, what's driving BP overall is the need to reduce costs and retain efficiency in order to remain competitive in attracting new investment into the state. He said they clearly have to be very conscious of the personal implications of these kinds of decisions; the implications for the people who are involved. He thought there had been times in the past when BP had probably managed some of these activities less professionally in terms of managing the people issues than they would have liked, but believed BP has become much more conscious of that. For example, while most of the people involved in the accounting out-sourcing may not be very comfortable with what happened, Mr. Morgan thought they would believe they'd been treated with fairness and respect in the course of the implementation of that decision. Clearly, that is one of the concerns that has to be taken into account. But underneath that, clearly the decision is primarily a commercial cost based decision. Number 1557 CHAIRMAN KOTT asked about the time line involved from the initial idea to the time it's actually put into action. MR. MORGAN said it varies. If you think of something like transferring welding shop activities on the North Slope into VECO's existing activities in Deadhorse, that ought to be something that could be handled in a very short time frame. On the other hand, something like the Anderson out-sourcing arrangement which is on a much bigger scale, probably has taken 12 months from inception to implementation and perhaps longer than 12 months by the time it's finally implemented. Number 1596 CHAIRMAN KOTT said even though there's only a half dozen areas being looked at by BP to out-source, theoretically there could be another area identified next week. MR. MORGAN said that was correct because it is a constant process and analysis of these kinds of issues is ongoing. Number 1613 CHAIRMAN KOTT recalled a newspaper article regarding out-sourcing to a company in Utah and asked if BP Exploration (Alaska), Inc. was involved with that. MR. MORGAN thought this was one of the areas of overlap and confusion he had alluded to earlier. He wasn't quite sure of the relationship with Price Utah, but he thought it dealt with an area that concerns BP's policy in relation to the procurement of goods and the spending of their funds to buy the goods needed for their operations in Alaska. He stated this was a whole different policy area in a sense. Some activity has been out-sourced to a very successful out-of-state company called Fairmont who is a major procurement contractor in the Lower 48. They provide to BP a range of procurement services including the information technology services to support BP's procurement activity and a range of information services that go along with that. Also, Fairmont supplies BP with goods for a specific area of their purchasing requirements and those goods are largely being sourced from Fairmont's existing supply sources in the Lower 48. He thought the company referred to by Chairman Kott was probably one of those existing supply sources. Number 1700 CHAIRMAN KOTT asked what BP does with employees that lose their positions due to out-sourcing? MR. MORGAN said whenever they see a redundancy situation arise, they have a range of policies in place to support the people who are involved. They have out placement services, general counseling services and rather generous redundancy terms that are available. For those people who are members of a union, obviously the arrangements are governed by BP's contractual relationship with the union. Number 1732 REPRESENTATIVE BRIAN PORTER said the first time he was told that BP was out-sourcing, it struck him as a natural conclusion that a company that size would be able to out-source other companies; however, at that time he didn't know what out-sourcing meant. After reading a few articles he now understood it and suggested that for general public appreciation, the term "contracting out" might be better understood. MR. MORGAN responded that "out-sourcing" was a word that had become current in the business vocabulary; however, it is effectively contracting out. Because it does impact people in the way it does, there is an emotional level of involvement surrounding it. Number 1780 REPRESENTATIVE PORTER commented that having been on both sides of the table, the discussions that go on about contracting are interesting at the very least. He presumed that BP Exploration had a contract in place that allows contracting out within that union's work. MR. MORGAN replied yes, and added that was what he was referring to when he had stated it is a key priority for them to retain management flexibility to make those kinds of changes as part of their contract arrangements with the union. Number 1810 REPRESENTATIVE PORTER said generally for a whole lot of reasons, not the least of which is good company policy, it seems to him that the kinds of things BP did in the process of out-sourcing the accounting activities provides about as much protection as employees can expect. With the exception of three or four employees, they all either stayed in Alaska doing the same job for another employer, stayed within the company or got an opportunity to relocate. He asked if it was a fair assumption that the other 23 people who may be out-sourced would have the same kinds of opportunities? MR. MORGAN believed that was right. It is their hope those people would be prepared to transfer to the contractual organization and use their skills within the more efficient context of that organization. It is clear that one of the issues here is that the contractual organization's pay rates are lower than BP's pay rates. He didn't believe that in the vast majority of cases the motivation for a contracting out decision of that kind can and should be driven purely by lower wage rates. It needs to be driven by a broader business logic of efficiency. In the cases previously discussed, that efficiency would come from centralizing activities within a pre-existing single work shop rather than having duplicated work shops. In the case of telecoms for example, it would come from the development of a much more specialized body of knowledge around this area and the fact that this is now the core skill for some third party organization. In a world of fast moving technology, it makes sense to use that third party organization to manage that activity because they have access to a much broader skill base. Number 1915 REPRESENTATIVE NORMAN ROKEBERG said he would like to further delve into the relationship between BP and the Fairmont Company to gain a better understanding. Some of the major concerns expressed by many of the vendors in the state is they are fearful of BP's relationship with Fairmont in that it will have a negative impact on their ability to do business in the state. Also, the concern is that the relationships they've had with BP and other members of the petroleum industry will be jeopardized because of that particular contract. He asked Mr. Morgan to describe the scope of services covered in BP's contract with Fairmont. MR. MORGAN commented he would like to take a moment to discuss their policy for the procurement of goods. He felt it was only by explaining it that the committee could understand fully what the nature of their relationship is with Fairmont. Number 1965 REPRESENTATIVE ROKEBERG interjected that he wanted committee members to understand the distinction between contractors and vendors. MR. MORGAN said what had been discussed in relation to out-sourcing was contracting with third parties for the provision of services; the provision of a welding shop, provision of the service of managing their telecommunications, managing their accounting activity and the provision of skilled manpower to go with that service. That is what he had been discussing under the general heading of "out-sourcing." Essentially, what he's talking about now is the way in which BP goes about acquiring the goods actually needed as inputs for their business in Alaska. He noted that BP would establish a direct relationship with a Lower 48 supplier for items like valves and things of that nature because those items are not directly available to them in Alaska. However, in looking at the goods that are essentially available in Alaska through Alaskan suppliers, we're talking about an overall group of goods with a value of about $32 million. In their minds, BP has divided those goods into two categories. One is the category referred to as general industrial goods which is sometimes called "rope, soap and dope." That group of goods has a value of about $5 million to $5.5 million. The balance of approximately $26 million is a group of 8 or 10 broad categories of goods that are more homogenous groups than the general industrial goods group. The contract entered into with Fairmont about 15 months ago, had really two parts to it. One was Fairmont was going to provide BP with general support services for their procurement activities including information technology support services; actually managing BP's transactions through electronic data management across all their procurement activities. Also, BP agreed that Fairmont could provide to them, as the prime supplier, the general industrial goods area. The reason for that decision was that BP's analysis suggested that Fairmont had a competitive advantage over that range of goods of about 22 percent over the suppliers that exist in Alaska. He said that is actually a range that runs from probably minus 6 percent up to plus 70 percent in terms of the value differential. It's a significantly wide range but averages about 22 percent. Number 2112 MR. MORGAN said in reality in 1995, roughly $3 million of that business transferred from Alaskan vendors to go through Fairmont and clearly that represented a loss of business to a number of small vendors in Alaska. In that general area of BP's business, it was costing them about 75 cents to administer their procurement for every dollar spent; clearly this arrangement very substantially reduces that overhead burden. Number 2139 MR. MORGAN stated that BP's overall policy in terms of this procurement is very clearly to increase the level of their spend in Alaska and what they are very close to doing and will be moving towards in the course of the next couple of weeks, is going out to bid for the 8 or 10 bundles of goods beyond this general industrial goods group. They will be going out to bid purely to Alaskan suppliers on that group of goods which means they expect to bring about $6 million to $7 million worth of value that is currently spent in the Lower 48 to Alaska as a result of those contract awards. That should be fully in effect before the end of this year. Mr. Morgan stated, "What we have said to the suppliers at the smaller end of the spectrum, the general industrial goods end of the spectrum, is that having examined that bundle -- when we took our decision with Fairmont, we simply looked at that overall bundle of goods and could see that 22 percent differential and that was why we put that package through to Fairmont. Having looked at it more carefully, we have seen there is one area within there that actually may have a competitive benefit or certainly be competitive in Alaska and that is the area of electrical goods. What we have told those suppliers is that providing we can agree to a contractual amendment with Fairmont - and I believe we will be able to - we will be prepared to offer those electrical goods for bidding purely to Alaskan contractors, so that piece of it should come back into the state. We've also told those suppliers that if they can approach us and convince us that in some way they can create a structural change to overcome that competitive disadvantage that exists in the other areas, then we would again be prepared to approach Fairmont within the terms of our existing contract with them and seek another contract variation in order to bid that particular area again to Alaskan suppliers. But we would need to be convinced that there was a genuine ability to be competitive in Alaska in order to do that." Number 2242 REPRESENTATIVE ROKEBERG asked if there was a provision in the contract with Fairmont that they locate any premises in the state of Alaska? MR. MORGAN didn't believe so. REPRESENTATIVE ROKEBERG asked if they were located in Price, Utah or somewhere in Utah? MR. MORGAN believed that was correct. REPRESENTATIVE ROKEBERG commented that Fairmont was actually conducting a good deal of this business in accumulating the general commodity merchandise... MR. MORGAN said this has been their business for many years in the Lower 48 and they are one of the two or three leading operators in the general procurement and supply area. Number 2279 REPRESENTATIVE ROKEBERG asked, "Did your accounting department or administrative people make an analysis of the number of vendors that you were able to delete off the 75 percent high overhead costs to go to one vendor versus how many other vendors?" MR. MORGAN responded he was absolutely sure they did, but he couldn't give the exact number. He added it was a very significant reduction in the size of the overhead. REPRESENTATIVE ROKEBERG asked if BP had re-openers in their contract with Fairmont? MR. MORGAN said no, they didn't but the contract with Fairmont had another three years to run. He thought Fairmont was sensitive to wanting to achieve the same outcomes as BP. He thought that BP has indicated that in a couple of areas they have found a better way to put into effect the policy they've always had. Their policy is clearly to balance on the one hand the achievement of the possible cost for these materials and efficiency in delivering them with properly looking to do the maximum amount of that business they can legally do in Alaska. And by looking inside that bundle rather than treating it as a whole, at this stage BP has said there is one area - the electrical group area - which they believe could be competitive in Alaska and they are prepared, subject to Fairmont agreeing to modify the contract, to put that out to bid to Alaskan vendors. Number 2350 REPRESENTATIVE ROKEBERG questioned if at the time BP entered into the contract with Fairmont, there were any Alaskan vendors that could meet the specifications of the scope of work that BP contracted Fairmont to do. MR. MORGAN responded no. REPRESENTATIVE ROKEBERG commented that basically they were limited in the choice of people who provide that service. Number 2363 REPRESENTATIVE JERRY SANDERS expressed his appreciation to BP for their existence in Alaska and all the things they've have done cooperatively. MR. MORGAN said they intended to be in the state for a long time to come. REPRESENTATIVE SANDERS commented that the Governor in support of concessions on Northstar made the statement that if we're going to share in the rewards, we have to share in the risks. When the Governor talked of sharing the rewards, in Representative Sanders' mind, one of the biggest rewards that could be shared in is good paying, meaningful jobs for Alaskan people. To him, jobs are as important or more important than profits and dollars that go into the state coffers that can be spent for welfare, unemployment or government jobs. He likes good private sector jobs, which BP can supply. He asked Mr. Morgan what percentage of BP employees were Alaskans? MR. MORGAN said the definition of Alaskans is tricky, but by BP's calculation 85 percent of BP employees are resident in Alaska. He admitted there is an issue regarding measurement in this area. He believed the state's official measurement numbers are geared to people who are recipients of the permanent fund dividend check and of course, there is a significant residency permit for that and some of his colleagues who come from abroad and live in Alaska for three or four years may never qualify for the dividend, as he may never qualify. Yet he is here in Alaska, spending his money in Alaska and thinks of himself clearly as an Alaskan resident while he's here, which he hopes will be for a long time. Number 2459 REPRESENTATIVE SANDERS asked if the 23 people who will be displaced with the current out-sourcing program are Alaskan employees? MR. MORGAN didn't have the answer to that question, but added he could get the answer for Representative Sanders. TAPE 96-34, SIDE B Number 008 REPRESENTATIVE SANDERS... 5 percent like yours is? MR. MORGAN said he hesitated to use the word "control" for all sorts of reasons; however, he thought BP could have lots of discussions and influence in their relationships with their contracting companies. He said he liked to preface these kinds of comments by saying, "The oil and gas industry has by far the best record of any industry in Alaska in terms of the employment of Alaskan residents." Having said that, it is clear the proportion has been falling for not just the operators, but the contractors in the course of the last couple of years. As a result of that, BP and ARCO as the two operating companies came together with about 20 of their contracting companies earlier this year to work a set of issues between them as to how the level of Alaskan employment could be enhanced and produced a report with a set of recommendations which has been presented to the Administration and which they intend to follow through very carefully. The recommendations in that report are under three broad headings. First, in relation to training, having some good forecasts about what their labor requirements will be, looking at what is available in the state and making sure training programs are available to have Alaskans available for those jobs in the future. The second set of recommendations are under the general heading of hire. Here there are some really quite simple issues. Sometimes, the jobs have not been widely advertised in Alaska. The third area is that of measurement and he personally believes that if these areas of focus are properly measured, then things will be done to change them. He thought all companies involved in those discussions have agreed individually to set themselves a goal for improvement and to measure their performance against that goal and to make that information available. He thought there were some very good signs out of that activity including individual commitments from the main contractual organizations and he believed that genuinely would have an effect. He added that it's not something that happens in five minutes but he thought that over a period of 18-24 months, a positive effect will be seen from those actions. Number 121 REPRESENTATIVE BEVERLY MASEK said during the course of Mr. Morgan's testimony she had been of thinking about what's been going on with Alaska's economy and the oil companies and noted that ARCO had done some downsizing in the past. She thought that according to ARCO's testimony before the Joint House/Senate meeting on April 2, 1996, they had asked each of their departments to meet or beat bids from outside companies for functions like accounting and maintenance. She asked Mr. Morgan if BP Exploration (Alaska), Inc., planned to do that also or what their plans were for the future relating to downsizing. MR. MORGAN said there are no specific plans beyond those that he spoke about in his earlier testimony for the out-sourcing of further work from BP. However, there is a constant evaluation process going on so there is no great master plan of any kind that he could tell committee members about. He could say that all the areas of their organization, both on the North Slope and in Anchorage, understand the context of their business activity. He believed that only if all their employees understand the business context they operate within, can they properly make their maximum contribution to the enterprise. Therefore, BP takes a lot of time and a lot of trouble to try to keep all their employees involved and fully informed on that context. That means that in all those areas, people are engaged in looking for ways to reduce costs. They are looking at ways to do that in terms of internal spending in the organization, the way overheads are set up internally; looking at it in terms of how they manage their external spending, their relationship with all their contractors, which includes the possibility of changing the boundaries of those relationships and putting some more activities into the contractual (indisc.- coughing) that are currently in BP; it involves looking at transportation costs, both through the work that Alyeska is doing and the work that BP's shipping organization based in Cleveland is doing to try to ensure they are operating effectively while obviously maintaining the safety and environmental standards. He said that all of these areas of focus exist in their organization and they will be constant changing. However, it's not organized in some totally controlling way from the top or a small group of managers; it's one where the whole organization is engaged in trying to create that greater efficiency needed to maintain the competitive position. He commented that people do understand there is a real opportunity to new investment. There are some really good opportunities that exist on the North Slope today, but if BP is going to compete inside the organization for the investment funds to do that, they must keep the whole organization competitive. Number 266 REPRESENTATIVE MASEK asked Mr. Morgan what BP's plans were for getting more Alaskan hire on the North Slope? She didn't think that Representative Sanders' question had been completely answered regarding the percentage of Alaska hire versus BP's total North Slope employees. She asked if BP had any plans to implement a tracking system to determine exactly how many of those employees were truly Alaskan residents? Also, she thought the Department of Labor should look at the criteria for determining residency for individuals working on the North Slope. Many of her constituents have expressed concern about individuals working on the North Slope and although they actually live in the Lower 48, they still collect the permanent fund dividend. Number 373 MR. MORGAN commented the questions raised by Representative Masek were certainly broad. With respect to what may amount to potential fraud in relation to the dividend checks, that goes beyond what he is prepared to address. He is conscious that a number of the addresses that BP and their contractors have for employees are post office boxes and perhaps they need to be a little more careful in understanding whether those really do represent residential addresses in Alaska or not. That is one of the things they have identified as needing to get a better understanding of. With regard to setting targets and objectives, Mr. Morgan said the work that BP, ARCO and their contractors have just done, does include a recommendation that all of the companies involved should set targets themselves individually. He thought it was likely illegal for BP to seek to set targets for its contractual organizations. It is absolutely fine if those organizations wish to set targets for themselves. He didn't think it would be sensible to try to set a single target that all companies should aspire to; they do have different situations. Some of the contractors are really quite low, perhaps even 50 percent in terms of Alaska residents employed while others are 75 percent and above. He said, "One might look to those at the lower end, perhaps not to achieve 75 percent in six months, but certainly to see some earlier and fairly rapid improvement. Those at 75 percent clearly are not going to be able to see enormous gains on where they are now. So, a different target would be appropriate for them." He commented that BP has not yet themselves set their target against the 85 percent number but there is a group working on these issues and what actions should be taken internally to try to improve their position. He was very confident that some improvement would be seen, but hastened to add the oil and gas industry is very, very substantially the best performer in this area and other Alaskan industries should no doubt be receiving some attention on this issue, also. Number 496 MR. MORGAN said in response to the issue of timing of tours on the North Slope, there has been increasing flexibility in timing between the one/one schedule and the two/two schedule for BP employees and they have a fair degree of choice available. He noted that one thing they could do is try to move all their staff on a one/one schedule which would make it much more difficult to live in the Lower 48. He thought that might raise some significant difficulties with the union and it certainly would be a negotiable item as far as the union was concerned. Also, he had been told it would be a difficult issue as far as some of the Native staff with respect to travel to and from the villages. He remarked these were not simple issues. To some extent, they also have an aging work force and as some of those people have gotten older and have to begun to think about their retirement possibilities, surprising as it may be, some of them obviously don't anticipate spending all their declining years in Alaska and have decided to set up a home out of state. Therefore, some of those things are structural issues that are difficult to deal with and maintain a real sense of fairness in the way BP treats their people. Number 569 REPRESENTATIVE MASEK asked what the future was as far as BP working with Alaskan companies that could provide contract work? Also, she asked if Mr. Morgan had a listing of all the companies BP deals with and what was involved in the decision making process to bring in out-of-state companies for services such as maintenance, welding, etc. MR. MORGAN said the vast majority of the companies that BP deals with providing those kinds of services are Alaskan companies. He thought perhaps the issue more properly is how does a company like VECO or APC go about recruitment when it needs additional skilled staff. As he stated earlier, if BP does find themselves wanting to contract with a company from outside the state because they offer the quality of service that BP feels they need for that particular activity, BP would then strongly encourage them to move their operating base into Alaska and to operate to the standards of Alaska hire as BP themselves do. He thought that is broadly what happened in the Anderson arrangement. He commented that in the last few weeks, he had talked to a number of legislators about Northstar and he believed this is a terrific opportunity to start moving on a new generation of smaller oil fields which do represent part of the future in Alaska and indeed move into the offshore area, which introduces its own set of issues and problems particularly for the residents of the North Slope. It will create real jobs throughout the state for Alaskans and it will create real new business opportunities, particularly in building some of the larger modules for Sealift up to the North Slope that have always been built in the Lower 48 previously. He knew there was a lot of interest and discussion around the agreement between BP and the Department of Natural Resources on Northstar. He urged committee members to familiarize themselves with the agreement and to use their judgment as to whether this is a good and favorable deal for the state of Alaska. He truly believed it is and will help create the future discussed. Number 718 REPRESENTATIVE KOTT noted that if an individual is living out of state and receiving a dividend check, it is in fact a violation and it's fraudulent activity. He asked Mr. Morgan if his assessment was correct in that 85 percent of the work force is made up of Alaskan residents and the other 15 percent are those individuals on the two-week rotation. MR. MORGAN said some employees may manage to do this on a one-week rotation if they live in Seattle for example, but he thought most of them would be on the two-week rotation. He commended the report produced by BP, ARCO and their contractors on this issue and offered to make it available to the committee. Number 792 REPRESENTATIVE KOTT said that committee members had received the report the previous week at the joint hearing. He thought it was difficult to address out-sourcing without addressing Alaska hire and believed what Representative Masek was getting at was the Department of Labor's annual report which indicated that about $106 million was earned by non-Alaskans within the oil and gas industry. Thus, while the oil and gas industry has the highest employment rate of residents, there's also the highest amount of dollars leaving the state from nonresidents. Number 820 REPRESENTATIVE KIM ELTON asked what the scope was in terms of vendors? He could understand electrical supplies, but what about office supplies? Did BP go down the street and buy office supplies or was that part of the vendor contract? MR. MORGAN replied he couldn't answer that specifically, but he thought that was precisely the kind of supplies - it is very much the small end of things. Protective gloves and those types of things would be included in the general industrial goods group that he discussed earlier. Number 884 REPRESENTATIVE ELTON surmised that some of the concerns that had been expressed were from smaller suppliers who would like to have an opportunity to provide some of the smaller items. He commented that the scope then does go down quite far; in other words it's not just major procurement but general office procurement, also. MR. MORGAN responded yes, and added this area of general industrial goods is the area in which BP was paying literally 75 cents in overhead for every dollar they spent. Not only did they have that overhead, but overall they could see there was a 22 percent average competitive disadvantage to buying those goods in Alaska versus what they were available through the Fairmont supply arrangement. Those two components together make that a very attractive proposition. What is does, of course, is have a relatively disproportionate impact on quite a number of Alaskan suppliers, which he understood. As he indicated earlier, BP is always trying to strike a balance between managing themselves in a cost effective and efficient way and doing all they can to properly maximize the amount of their spend in Alaska. With regard to the other $26 million worth of goods, it is clear that BP will do everything they can to do that business in Alaska. They will bid it only to Alaskan companies; however, they do expect to have a conversation on competitive performance within that framework, but he thought they would be bringing roughly $6 million worth of business into the state which has previously been in the Lower 48. In doing that, there will be a consolidation, so there will undoubtedly be some winners and some losers in the process. He thought that was the nature of trying to do this work more efficiently; it's tough to do that and keep everybody happy. Number 995 REPRESENTATIVE ELTON agreed with Mr. Morgan and said oftentimes some of the concern is that a company may not have the contract to supply a certain item, but if they have the notion they won't have an opportunity to get it in the future, it's obviously going to create concern. Representative Elton mentioned the fishing and tourism industry as specific examples of industries that don't have the Alaska hire record that the oil and gas industry has. Alaskans don't want a lot of those jobs either, but they probably covet the jobs in the oil and gas industry. He thought one of the ways the oil and gas industry could help would be to suggest what the state needs to do in some of these cases. For example, with the construction of the modules in Alaska, if that's possible and if Northstar is developed, they may need to know what infrastructure the state or the city of Anchorage for example, is needed to make that possible. It may even be down to the level of what university programs are needed or what the vocational education programs need to be. He hoped the dialogue could continue between the state and the oil and gas industry. MR. MORGAN said he appreciated Representative Elton's comments and added there are some real practical issues. For example, he was aware that conversations had taken place with the Department of Transportation in terms of weight limits on roads for transporting modules. Those limits can be varied to make it possible to do more in the state. Number 1141 REPRESENTATIVE JOE GREEN said that Mr. Morgan had indicated in the Resources Committee hearing earlier in the day there was some $380 million to be spent of which all but about $140 million would be spent in state and of the $140 million roughly $100 million would be on materials that weren't available within the state. If that's the case, he wondered if BP planned to use in-state suppliers of equipment like truck tires for example, that aren't made in Alaska but could be procured through vendors in the state and would that be considered part of the in-state or part of the $100 million? MR. MORGAN said, "Well, I think what I would say is that the policy that I've just been describing for procurement which is for most of those areas and I would imagine -- I can't -- I'd have to confirm this, but that things like tires and transport materials would be one of those 8 or 10 categories that I'm talking about being bid out, that that would basically play by the same rules that our chosen supplier under those bidding arrangements to Alaskan companies would be the supply source that the project would use." Number 1226 REPRESENTATIVE GREEN asked if Fairmont would be considered the procurement decider or would it be done within BP? MR. MORGAN responded all of those areas that will be bid out, including the electrical goods area subject to the contract change that he discussed earlier, will be bid out by BP; the contracts will be directly with BP; and the business relationship will be managed by BP. Fairmont would still provide the underlying information and technology services to support BP's supply management systems, but the business relationship would be with BP. Number 1273 REPRESENTATIVE GREEN asked in the categorization of in-state versus out-of-state, would a company like Fairmont be considered in-state or out-of-state. MR. MORGAN said he thought a company needed an office address in the state and an Alaskan business license to be an in-state company legally. He was sure that Fairmont and any other Lower 48 company could achieve that. One of the things BP is considering internally is whether, within the framework of the law, they can try to define a somewhat more substantial Alaskan presence in terms of what they mean by an Alaskan contractor. He didn't know what would be legally possible, but clearly it would be quite helpful if they were able to create some broader definition that required a more substantial presence in the state. Number 1391 REPRESENTATIVE GREEN said he was thinking in terms of more than the legal requirement or a post office box; he surmised that it would be regulated by whether or not they meet the requirement legally. MR. MORGAN remarked what he was saying was he thought that would be the legal definition of an Alaskan company. What he had indicated earlier is when BP enters into a relationship with a company from outside the state, they would encourage the company to have that direct presence in the state and to apply the same standards in relation to hiring employees as BP themselves would apply. He further stated that BP was investigating whether it's possible, within a legal sense, to have some tighter specification regarding an Alaskan company than the minimal legal requirement and he didn't know the answer at this point. Number 1410 REPRESENTATIVE ROKEBERG asked how committed BP is at this time to construction of the largest modules in the Port of Anchorage? MR. MORGAN asked if that question was in relation to Northstar? REPRESENTATIVE ROKEBERG affirmed that. MR. MORGAN reiterated that BP has said for the Northstar project, they are committed to hiring Alaskans, committed to work with Alaskan contractors, and committed to build modules in Alaska including the largest modules for Sealift provided the facilities are available. He said they aren't in the business of investing in those facilities; this is an issue that must fall therefore with the main fabrication contractors that exist like APC and VECO, both of whom are alliance partners with BP on the Northstar project. He further stated that BP will do everything possible to work with those contractors to figure out how to make those facilities available. Also, there was testimony in the House Resources Committee earlier that there is likely to be some premium involved in building those modules here at this time and that's something BP has accepted in going forward with that proposal. He is increasingly confident from conversations he's had that it will be possible to build those modules here, find a way to assemble them and load them out in the port of Anchorage area. Number 1513 REPRESENTATIVE ROKEBERG asked if Mr. Morgan knew how many foreigners or non-United Kingdom residents worked for BP in the North Sea? MR. MORGAN said there was quite a lot. He didn't have the exact number, but offered to furnish the information to the committee at a later date. He added the North Sea work force is a pretty cosmopolitan work force. REPRESENTATIVE ROKEBERG said his point was that BP has this type of issue; e.g., local hire, in other parts of the World. MR. MORGAN thought it was a natural and proper conversation and added BP's policy is to hire Alaskans and to do business in Alaska to the maximum extent possible, clearly always respecting the law. He noted that when he was working in Aberdeen, they had many similar conversations about, in particular, support of local business in the area. He thought the difference was that there's a deeper infrastructure supporting the oil industry around Aberdeen as there is in Houston. He thought the problem in Alaska is that many of the companies who operate in Alaska actually still have their head offices somewhere in the Lower 48. There are not that many Alaskan companies that have grown up, so it's a much thinner group of companies in Alaska than the deeper infrastructure that exists in other major oil operating centers. Number 1651 REPRESENTATIVE PORTER thanked Mr. Morgan for addressing the committee. He thought Mr. Morgan had adequately addressed the concerns he had heard. Number 1679 REPRESENTATIVE GREEN commented that BP probably hadn't come to a selection site but once the Northstar project was sanctioned and had been given the go-ahead, he wondered how long it would take BP to determine that large modules could be built in Anchorage so the port could prepare for that eventuality. MR. MORGAN thought it was the other way around. He said BP would need to know with a pretty high degree of confidence by the middle of summer this year, that the appropriate facilities can be provided of the right quality, at the right time in order to decide how to fully implement the design of the project and begin to contemplate where to place the orders for the modules. He noted this would be a very intensive piece of activity for the project team in the course of the next couple of months. REPRESENTATIVE GREEN asked if the port of Anchorage was involved in that loop? MR. MORGAN thought the port of Anchorage as well as the city of Anchorage was involved. Number 1777 CHAIRMAN KOTT asked if there were additional questions for Mr. Morgan. Hearing none, on behalf of the House Labor and Commerce Committee he thanked Mr. Morgan for his testimony and for clarifying the confusing term known as "out-sourcing." ADJOURNMENT Number 1832 There being no further business to come before the House Labor and Commerce Committee, CHAIRMAN KOTT adjourned the meeting at 4:40 p.m.