Legislature(1995 - 1996)

04/10/1996 08:07 AM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
               HOUSE RESOURCES STANDING COMMITTEE                              
                         April 10, 1996                                        
                           8:07 a.m.                                           
 MEMBERS PRESENT                                                               
 Representative Joe Green, Co-Chairman                                         
 Representative William K. "Bill" Williams, Co-Chairman                        
 Representative Scott Ogan, Vice Chairman                                      
 Representative Alan Austerman                                                 
 Representative Ramona Barnes                                                  
 Representative John Davies                                                    
 Representative Pete Kott                                                      
 Representative Don Long                                                       
 MEMBERS ABSENT                                                                
 Representative Irene Nicholia                                                 
 COMMITTEE CALENDAR                                                            
 HOUSE BILL NO. 344                                                            
 "An Act authorizing the commissioner of the Department of Natural             
 Resources to negotiate and enter into timber sale contracts that              
 provide for local manufacture of high value-added wood products;              
 and establishing an Alaska Forest Products Research and Marketing             
 Program within the Department of Commerce and Economic                        
      - MOVED CSHB 344 (RES) OUT OF COMMITTEE                                  
 HOUSE BILL NO. 548                                                            
 "An Act authorizing, approving, and ratifying the amendment of                
 Northstar Unit oil and gas leases between the State of Alaska and             
 BP Exploration (Alaska) Inc.; and providing for an effective date."           
      - HEARD AND HELD                                                         
 PREVIOUS ACTION                                                               
 BILL:  HB 344                                                               
 SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR                                  
 JRN-DATE     JRN-PG            ACTION                                         
 05/10/95      2085    (H)   READ THE FIRST TIME - REFERRAL(S)                 
 05/10/95      2085    (H)   RESOURCES, FINANCE                                
 05/10/95      2085    (H)   FISCAL NOTE (DNR)                                 
 05/10/95      2085    (H)   3 ZERO FNS (DCED, CRA, UA)                        
 05/10/95      2085    (H)   GOVERNOR'S TRANSMITTAL LETTER                     
 09/19/95              (H)   RES AT  9:00 AM                                   
 02/21/96              (H)   RES AT  8:00 AM CAPITOL 124                       
 02/21/96              (H)   MINUTE(RES)                                       
 02/28/96              (H)   RES AT  8:00 AM CAPITOL 124                       
 02/28/96              (H)   MINUTE(RES)                                       
 04/10/96      3673    (H)   RES RPT  CS(RES) NT 7DP                           
 BILL:  HB 548                                                               
 SHORT TITLE: NORTH STAR OIL & GAS LEASE PAYMENT                               
 SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR                                  
 JRN-DATE     JRN-PG            ACTION                                         
 03/28/96      3434    (H)   READ THE FIRST TIME - REFERRAL(S)                 
 03/28/96      3434    (H)   RESOURCES, FINANCE                                
 03/28/96      3434    (H)   FISCAL NOTE (DNR)                                 
 03/28/96      3435    (H)   GOVERNOR'S TRANSMITTAL LETTER                     
 03/28/96      3436    (H)   ATTACHMENT                                        
 04/03/96              (H)   RES AT  8:00 AM CAPITOL 124                       
 04/03/96              (H)   RES(MINUTE)                                       
 04/10/96              (H)   RES AT  8:00 AM CAPITOL 124                       
 WITNESS REGISTER                                                              
 JOHN T. SHIVELY, Commissioner                                                 
 Office of the Commissioner                                                    
 Department of Natural Resources                                               
 400 Willoughby Avenue                                                         
 Juneau, Alaska  99801-1724                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 JOHN MORGAN, President                                                        
 BP Exploration (Alaska), Incorporated                                         
 P.O. Box 196612                                                               
 Anchorage, Alaska  99519                                                      
 Telephone:  (907) 564-5429                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 BILL CHEEK, Vice-President and General Manager                                
 Alaska Petroleum Contractors, Incorporated (APC)                              
 6700 Arctic Spur Road                                                         
 Anchorage, Alaska 99518-1550                                                  
 Telephone:  (907) 344-6400                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 RANDY RUEDRICH, General Manager                                               
 Doyon Drilling, Incorporated                                                  
 101 West Benson Road, Suite 503                                               
 Anchorage, Alaska  99501                                                      
 Telephone:  (907) 563-5530                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 DAVID GINNETT, President                                                      
 Quality Fabrication, Incorporated                                             
 360 East 100th Street                                                         
 Anchorage, Alaska  99515                                                      
 Telephone:  (907) 344-4526                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 JAMES UDELHOVEN, President and Chairman                                       
 Board Udelhoven Oilfield Systems Services;                                    
 Board Member, Alliance Board Member                                           
 11401 Olive Lane                                                              
 Anchorage, Alaska  99515                                                      
 Telephone:  (907) 344-1577                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 SMOKEY NORTON, Equipment Manager                                              
 Peak Oilfield Service                                                         
 5061 Buckingham Way                                                           
 Anchorage, Alaska  99501                                                      
 Telephone:  (907) 561-8844                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 TOM REDMOND, Human Resources Manager                                          
 Camco Products and Services Company                                           
 4831 Old Seward Highway                                                       
 Anchorage, Alaska 99503                                                       
 Telephone:  (907) 562-2132                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 JED WHITTAKER                                                                 
 P.O. Box 1093                                                                 
 Unalaska, Alaska  99685                                                       
 POSITION STATEMENT:  Testified against HB 548                                 
 CHUCK SULLIVAN, General Manager                                               
 Parker Drilling                                                               
 Member of the Alliance                                                        
 10560 Old Seward Highway                                                      
 Anchorage, Alaska 99503                                                       
 Telephone:  (907) 563-2226                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 DAVE HAUGEN, Vice-President                                                   
 Lynden, Incorporated                                                          
 1029 West 3rd Avenue, Suite 150                                               
 Anchorage, Alaska  99501-1981                                                 
 Telephone:  (907) 279-7501                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 BILL ALLEN, Chairman of the Board                                             
 VECO Corporation                                                              
 813 Northern Lights Boulevard                                                 
 Anchorage, Alaska  99501                                                      
 Telephone:  (907) 277-5309                                                    
 POSITION STATEMENT:  Testified in support of HB 548                           
 ACTION NARRATIVE                                                              
 TAPE 96-52, SIDE A                                                            
 Number 000                                                                    
 CO-CHAIR BILL WILLIAMS called the House Resources Committee meeting           
 to order at 8:07 a.m.  Members present at the call to order were              
 Representatives Green, Williams, Ogan, Austerman, Davies, Kott and            
 Long.  This meeting was teleconferenced to Anchorage and Fairbanks            
 on an observation basis only.  A quorum was present.                          
 CO-CHAIR WILLIAMS said the agenda included CSHB 344 (RES) and HB
 HB 344 - VALUE-ADDED TIMBER SALES; MARKETING                                
 Number 0049                                                                   
 CO-CHAIR WILLIAMS announced the agenda was CSHB 344 (RES), dated              
 February 19, 1996.  He said CSHB 344 (RES) was supported by                   
 industry in the interior as well as in other parts of the state.              
 Number 0115                                                                   
 REPRESENTATIVE SCOTT OGAN made a motion to move CSHB 344 (RES) from           
 the committee with individual recommendations and the attached                
 fiscal note.  Hearing no objection CSHB 344 (RES) was moved from              
 the House Standing Committee on Resources.                                    
 HB 548 - NORTH STAR OIL & GAS LEASE PAYMENT                                 
 Number 0236                                                                   
 CO-CHAIR GREEN announced that the next item on the agenda was HB
 548, an act authorizing, approving, and ratifying the amendment of            
 Northstar Unit oil and gas leases between the State of Alaska and             
 BP Exploration (Alaska) Inc.; and providing for an effective date.            
 JOHN T. SHIVELY, Commissioner, Office of the Commissioner,                    
 Department of Natural Resources (DNR), was first to testify on HB
 548.  He said he would give a brief overview, explain the history             
 behind the leases, some rational for why the Administration is                
 making the changes in the royalty and answer questions.  He                   
 mentioned the other people who wished to testify and said he could            
 be available for questions at a later date.                                   
 Number 0299                                                                   
 COMMISSIONER SHIVELY said Northstar is an oil field located                   
 offshore in Northern Alaska.  He said the original state leases               
 were leased in 1979, along with two federal leases in a federal               
 offshore lease sale.  He said the provisions in the four leases, in           
 1979, provided for a 20 percent base royalty with a bid variable              
 listed as net profits.  He said the average net profits on those              
 leases were 89 percent net profit.  In addition, in 1983, another             
 lease was issued at a 12.5 percent base royalty with a 40 percent             
 set net profit with a bonus bid of 72,000 for the state.  He                  
 clarified that there are five leases being discussed in conjunction           
 with the Northstar Unit.                                                      
 Number 0364                                                                   
 COMMISSIONER SHIVELY said, in 1979, everyone was predicting that              
 oil prices would continue to increase from $30 per barrel, in 1979,           
 to $60 to $100 per barrel in 1996.  He said the leases were bought            
 by a consortium headed by Amerada Hess.  He said the prospect for             
 these leases initially looked good and it was believed that there             
 might be over a billion barrels of oil, but Amerada Hess found                
 there was less than 130 million to 160 million recoverable barrels            
 of oil.                                                                       
 Number 0422                                                                   
 COMMISSIONER SHIVELY said in 1993, the Department of Energy did a             
 study which included Northstar.  The study's conclusion was that              
 Northstar was uneconomic largely due to the net profit provision.             
 He said Amerada Hess, ultimately, came to the same conclusion                 
 because of the amount of oil and the fact that they were projecting           
 a development cost of $1.4 billion.  He said, close to the end of             
 the lease term, Amerada Hess offered the leases up for public sale            
 and had two bidders at the sale.  He said BP Exploration bought the           
 leases and in January of 1995 the leases were transferred.  In                
 April of 1995, BP began a three year development plan which was               
 approved by the DNR.                                                          
 Number 0474                                                                   
 COMMISSIONER SHIVELY said BP began discussing the net profits issue           
 with DNR last spring when HB 207 was being debated.  He said, at              
 that time, BP suggested that the net profits be included as part of           
 HB 207.  He said, because of the contention surrounding HB 207, the           
 Administration did not feel that it was a good thing to add yet one           
 more thing to the bill.  He said DNR was sympathetic to the fact              
 that there was a very high net profit take on the leases and said             
 he would talk with BP as the company developed their economics.               
 From the beginning of these discussions, he indicated to BP that he           
 did not have the authority to do this, as commissioner, and that              
 any agreement would have to come before the legislature for                   
 approval.  He said he believed this interpretation of this decision           
 was correct and pointed to the Attorney General's opinion regarding           
 this issue.  He said, because of the ramifications of this                    
 agreement, it is important to give the agreement public review                
 through the legislative hearings.                                             
 Number 0559                                                                   
 COMMISSIONER SHIVELY said that one of the reasons the discussions             
 began so late, in October and November, was the time it took to               
 develop the economic model and agreeing to its assumptions.  He               
 said the state does not have the resources that BP has, but that              
 there was, ultimately, an agreement which provides a 20 percent               
 base royalty for all five leases.  He said this 20 percent remains            
 on the four leases and is raised on the lease that was at 12.5                
 percent.  He said another part of the agreement is that BP cannot             
 come in and ask for changes in the future.  He said the                       
 Administration substituted, what is being termed, a supplemental              
 royalty for the net profit provision.  He said the supplemental               
 royalty is based on oil prices which starts at a floor of $17.35              
 Arctic North Slope (ANS) price and is adjusted upward for inflation           
 at half the producer price index and caps out at an additional 7.5            
 percent.  He said if prices go up considerably the state could be             
 taking a 27.5 percent royalty from these leases.                              
 Number 0650                                                                   
 COMMISSIONER SHIVELY said two other things are important to discuss           
 which are outside the economics of the situation, one is that this            
 is a "use it or lose deal."  If the project is not sanctioned by              
 the BP Board a year from now, the state gets the leases back and              
 can offer them out for bid.  He said the other thing to consider is           
 that net profit leases are a declining asset for the state because            
 these leases contain a development account.  He said all of the               
 costs that an oil company expends while exploring and developing              
 the lease goes into this development account.  He said this account           
 earns interest at prime over time.  He said as a result of the                
 lawsuit, which the state lost, the development account goes to the            
 company which currently has the lease, rather than to the company             
 which spent the money.  He said BP inherited a sizeable development           
 account of over $200 million when they bought these leases and is             
 currently earning interest at prime.  He said the longer it takes             
 to develop these leases, the less net profits the state will                  
 Number 0720                                                                   
 COMMISSIONER SHIVELY said BP is currently in a three year                     
 development plan which the state has approved.  The earliest the              
 state could order BP into production would be April of 1998, if the           
 state chooses to do so and added that this has never been done.  He           
 said, if this happens, BP could agree and go ahead, BP could drop             
 the leases and they could go out for rebid or BP could sue the                
 state.  He said all three of those scenarios could cause economic             
 problems for the state.  He said the "use it or lose it" provision            
 in the agreement increases the certainty of what is going to happen           
 on those leases.                                                              
 Number 0780                                                                   
 COMMISSIONER SHIVELY said the Administration has strengthened the             
 local hire and contracting language and added that there is a                 
 difference between what can be done legally and what BP will commit           
 to morally.  He said the moral commitment is more important because           
 constitutional constraints do not allow DNR to say that all                   
 Alaskans are going to be hired.  He said the Administration can put           
 pressure on BP to do so with the assistance of the legislative                
 Number 0813                                                                   
 COMMISSIONER SHIVELY said DNR has developed a fairly complex                  
 economic model which can be run in a variety of schemes such as               
 money of the day, 1996 dollars or net present value.  He said he              
 choose to look at 1996 dollars as it was easiest to understand, but           
 said other analysis could be provided.  He said, based on the                 
 Department of Revenue (DOR) mid-case price scenario, the                      
 supplemental royalty will net the state about $37 million over the            
 life of the project.  He said the total state take, with taxes and            
 royalties, is about $435 million.  He said, using the same                    
 assumptions, if the leases were to be developed today, under net              
 profits, the state would net about $85 million which is a                     
 significant difference if you believe that the leases would be                
 developed today.  He said, in order for the state to develop HB
 548, the state had to believe that BP would not develop today.                
 Number 0924                                                                   
 COMMISSIONER SHIVELY said looking at the net profit royalty over              
 time assuming that the state got through the development plan and             
 ordered BP into production, BP would come into production around              
 the year 2002.  He said the net profits would provide $41 million             
 for the state if development began in 2002.  He said this shows how           
 the net profits decline over time due to the development account.             
 Number 0973                                                                   
 CO-CHAIR GREEN asked if the $4 million difference was on a                    
 discounted basis.                                                             
 Number 0981                                                                   
 COMMISSIONER SHIVELY said all the numbers are on 1996 dollars and             
 said if you use discounted dollars it would be less.  He said there           
 are other positive things that can be presented regarding this                
 agreement, but said he could not give any economic details.  He               
 said developing Northstar and putting more oil into the pipeline              
 drives down the tariff for all of the North Slope oil.  He said               
 there are additional (indiscernible) taxes for the North Slope                
 Borough, some of which comes to the state.  He referred to an                 
 offshore oil lease sale occurring in a couple of years and said if            
 development could occur with an undersea buried pipeline it would             
 increase the lease sale bid.                                                  
 Number 1038                                                                   
 COMMISSIONER SHIVELY said HB 548 is in the state's best interest,             
 but it is a subject worthy of discussion as it is the first time              
 the state has considered changing a bid variable.  He said                    
 royalties were changed before, but not the bid variable.  He said             
 there are short term and long term ramifications for the state and            
 that public review is important.  He said the Administration will             
 provide information, but added that certain pieces will have to be            
 given under confidentiality.  He said DNR will try to minimize                
 those aspects and the time needed to be spent in executive session            
 will be very short.                                                           
 Number 1107                                                                   
 REPRESENTATIVE JOHN DAVIES said he would like an opportunity, at              
 some point, to have a longer session in a working group or an                 
 executive session to look at the economic model, the sensitivities            
 and the various assumptions.                                                  
 Number 1127                                                                   
 COMMISSIONER SHIVELY said the Administration is prepared to run the           
 model publicly, but there are certain assumptions that DNR uses               
 that are confidential.  He added that there are comparable                    
 assumptions that could be used in the model which are publicly                
 Number 1152                                                                   
 CO-CHAIR GREEN said future meetings would be held on HB 548,                  
 probably in the evening.                                                      
 Number 1154                                                                   
 REPRESENTATIVE DAVIES asked that those future meetings focus on the           
 public model.                                                                 
 Number 1216                                                                   
 JOHN MORGAN, President, BP Exploration (Alaska), Incorporated, was            
 next to testify.  He said the original leases were awarded to                 
 Amerada Hess and Shell, who discovered 130 million barrels of                 
 recoverable oil.  He said, in 1991, Amerada Hess and Shell made an            
 evaluation of the likely development costs in conjunction with a              
 major engineering contractor and determined that the cost would be            
 $1.5 billion and decided that this was not an economic development            
 proposition for them.  He said those companies put the leases on              
 the market in 1994, with the eventual sale to BP in 1995.  He said            
 this was an open bid sale for the leases which means that there was           
 a market test in relation to these leases.                                    
 Number 1278                                                                   
 MR. MORGAN said when BP acquired these leases they understood the             
 nature of the net profit interest, that it would be a barrier to              
 developing the leases.  He said BP felt there would be an                     
 opportunity to have discussions with the state to try and find an             
 alternative arrangement.                                                      
 Number 1297                                                                   
 MR. MORGAN said BP was interested in acquiring those leases                   
 because, over a period of time, BP has been looking at ways to                
 reduce the costs of some of the smaller scale developments, an                
 important part of the economic future of oil development in Alaska.           
 He said, as a result of those studies, BP felt there was a                    
 possibility of developing Northstar at the cost, in the range, of             
 $350 million to $400 million.  He said, at that cost, there was               
 value in developing Northstar, this was the basis for BP's belief             
 that they would be able to enter into an negotiation with the                 
 Number 1335                                                                   
 MR. MORGAN discussed the problem of the high net profit, averaging            
 89 percent, over these leases.  He said BP has never said that                
 developing these leases would be uneconomic under the current                 
 arrangement.  He said, in terms of the kind of value or rate or               
 return that would be available, developing these leases would be              
 economic.  He said the basic problem, with the net profit interest            
 arrangement, is that it creates a fundamental misalignment between            
 the oil companies and the state.  He said the most obvious evidence           
 of this is that when, eventually, the net profit interest cuts in.            
 He said the net profit begins after the recovery of the accumulated           
 development costs plus accumulated interest.  He said, when the net           
 profit interest cuts in, the income available to the producer                 
 disappears to almost nothing.  He said the profit would be less               
 than 50 cents per barrel.                                                     
 MR. MORGAN said net income per barrel is one of the key competitive           
 indicators in the oil and gas industry and BP would not, as a                 
 matter of policy, enter into a situation and go on producing when             
 BP was obtaining a net profit at that level.  He said, at that net            
 profit, a company would contemplate an oil field shut down on an              
 oil field that was still capable of producing.                                
 Number 1423                                                                   
 MR. MORGAN said other ways that a net profit arrangement creates a            
 misalignment is that the lower BP is able to drive the development            
 costs, through staff creativity and technological development, the            
 greater the penalty as the development account is decreased.  He              
 added that it also speeds the time the field reaches the point                
 where the net profit interest would cut in.                                   
 Number 1450                                                                   
 MR. MORGAN said in almost all cases when you develop an oil field,            
 you keep working on it after the development has taken place.                 
 You're looking for ways to bring further technology to bear in it             
 to try to increase the level of recovery from the reservoir.  He              
 said when all the benefit of an expansion is going to go to the               
 state, there is very little incentive to put resources to work to             
 improve the recovery level.  He said this is another way that net             
 profit creates a misalignment.                                                
 Number 1489                                                                   
 MR. MORGAN said there are some 40 odd leases that exist with net              
 profit interest terms some of which are producing, some of which              
 are partially explored, but Northstar is the only one that has a              
 development prospect.  He said the reason why those other oil                 
 leases do not create a misalignment is that the cost of development           
 is so high that the prospect of the net profit interest cutting in            
 is pushed way out into the future.  He said, if the net profit                
 interest cuts in as it might do, these examples are isolated leases           
 within a whole set of leases that make up the field.  He said all             
 the leases are going to be combined and a dramatic economic affect            
 is not going to be felt as it would with the Northstar project.               
 Number 1551                                                                   
 MR. MORGAN said BP has accepted the "use it or lose it" provision             
 which basically says that the Board of BP must fully approve the              
 financing of this development a year from the time it is approved             
 by the state.  He added that he hopes the board will approve it               
 ahead of this time, perhaps in the fall of 1996.  He said BP is               
 currently in the process of an environmental impact statement as              
 well as doing the detailed engineering work.  He said HB 548 is not           
 any type of concession or give away on the part of the state, but             
 was a carefully and professionally negotiated arrangement to remove           
 a barrier to the early development of an oil field for the benefit            
 of the state.                                                                 
 Number 1551                                                                   
 MR. MORGAN said the field has about 130 million barrels of                    
 recoverable reserves and a development cost at approximately $380             
 million.  It will gear production toward the beginning of 1999 with           
 the plateau production of 50,000 barrels of oil per day.  He said             
 the benefit to the state would be made up of revenue, BP's expended           
 capital and the BP operating costs.  He said this amounts to a                
 benefit of $1 billion.  He said BP believes that there are a great            
 deal of resources to be developed on the North Slope which are                
 known and available.  He said the estimated amount is about 5                 
 billion barrels thorough heavy oil prospects, through developed               
 satellites around existing fields, enhanced oil recovery in                   
 existing fields and through these smaller oil fields which have               
 between 100 million to 200 million barrels of reserves.  He said              
 Northstar would be the first of these developed smaller fields and            
 the first developed offshore fields utilizing new technology, for             
 Alaska, regarding a buried subsea pipeline.                                   
 Number 1715                                                                   
 MR. MORGAN said BP is committed to hiring Alaskans to work on the             
 project, to use Alaskan contractors and to build the facilities to            
 the maximum extent in Alaska.  He said the oil industry has the               
 best history of hiring Alaskans in Alaska by a long way.  He said             
 there has been a downward trend in the number of Alaskan residents            
 hired by operators and contracting companies.  He said BP, ARCO and           
 a number of contractors have been working to put together a set of            
 plans addressing the issue of Alaska hire to improve this record.             
 He said the industry is committed to working on those issues and              
 plans have been presented, quite recently, to the Administration.             
 Number 1740                                                                   
 MR. MORGAN said, over the peak construction period, Northstar would           
 directly employ some 450 to 520 people.  In the operating mode,               
 Northstar would have some 50 permanent jobs.  He mentioned the                
 multiplier effect which is for each direct job created one                    
 additional job is created in the community.  He said Alaskan                  
 contractors will do the vast majority of the work on Northstar and            
 BP has been working, since the beginning, on an alliance contract.            
 This contract has the contractors working alongside BP in                     
 developing their approach.  He said the alliance includes AIC a               
 subsidiary of Cook Inlet Region, Incorporated(CIRI) who will work             
 on Gravel Island, Houston Contracting a subsidiary of Natchiq,                
 Incorporated who will be involved with pipeline installation, VECO            
 Corporation and Alaska Petroleum Company (APC) who will be involved           
 with facilities, fabrication and installation.  He said contracts             
 would be awarded in the areas of trucking and pipeline fabrication,           
 et cetera.                                                                    
 Number 1763                                                                   
 MR. MORGAN said the overall cost is around $380 million, $140                 
 million of which is likely to be spent out of state.  He said $100            
 million of that is for equipment which cannot be acquired in the              
 state such as valves and tubulars.  He said BP will spend between             
 $200 million and $250 million in the state, assuming that BP will             
 be able to purchase things in the state such as fabrication.                  
 Number 1810                                                                   
 MR. MORGAN said the cost of fabrication would be about $60 million            
 of the $380 million overall development cost.  He said if you look            
 at that based on what can be done in the state and on a commercial            
 decision process, probably $10 million would be spent in the state.           
 He said the contractors in the state have become competitive with             
 in the manufacture of smaller, truckable modules used in Niakuk and           
 Milne Point.  He said the contractors have not ever been able to              
 tackle the larger, more complex modules.  He said BP will seek to             
 put an additional $30 million to $40 million of fabrication work              
 into Alaska.                                                                  
 MR. MORGAN said BP is willing to accept some additional cost,                 
 compared to buying from the Lower 48 states, to try to bring these            
 larger, more complex modules here in the state.  He said BP is also           
 trying to build the modules in a way that allows them to be                   
 preassembled, put on to barges, and then sea lifted up to the North           
 Slope.  He said this is business, in the past, that has always gone           
 to the Lower 48 states.  He said BP is committed to work with VECO            
 and APC to create a new business opportunity for the state.                   
 Number 1892                                                                   
 MR. MORGAN said HB 548 involves other things besides the economics            
 of replacing net profit interest with a new approach.  He said the            
 state has been very flexible and innovative in going forward with             
 that notion.  He said this notion is quite profit related, if you             
 think of the oil prices as a proxy for profit, when prices are up             
 and profits are higher the state would then take a higher share.              
 He said it also creates a strongly aligned interest between BP and            
 the state with an arrangement that would share the benefits of any            
 improvements.  He said this, plus the smaller offshore oil                    
 possibilities, created jobs, revenues and business opportunities              
 which makes HB 548 an exciting deal for BP and the for the state of           
 Number 1949                                                                   
 REPRESENTATIVE DAVIES expressed concern regarding hiring local                
 people and asked what is being done to promote jobs for Alaskans              
 across the state.                                                             
 Number 2004                                                                   
 MR. MORGAN mentioned a number of contractors that have been working           
 with BP on the Northstar project including AIC and Houston                    
 Contracting Company Alaska Limited (HCC) which have strong records            
 of Alaska hire and strong records of Fairbanks hire.  He said                 
 Fairbanks companies will be in contention for the upcoming                    
 Number 2030                                                                   
 MR. MORGAN said on the more general issue of jobs, BP and ARCO                
 brought together a large number, roughly 20, contractor companies             
 into a conversation to see what could be done about this situation.           
 The contractors got engaged, a number of work groups were held and            
 a number of recommendations were made.  He said these                         
 recommendations fall under three broad headings including:                    
 Training, to understand what the demand for labor in the state is             
 going to be and insuring that an Alaskan work force is being                  
 adequately trained to meet that demand; hire, where the industry              
 acknowledges that they have not done everything they could to                 
 insure that jobs are being advertised properly to hire Alaskans as            
 a first priority; and the third area was on measurement, if things            
 are measured and data is created it promotes a route to                       
 improvement.  He said all the involved companies have agreed to               
 measure and make available their individual data and most companies           
 have agreed to set targets, make them available and measure                   
 performance against those targets.  He said there is a detailed               
 report available and said it would be made available to the                   
 Number 2136                                                                   
 REPRESENTATIVE DAVIES asked if project labor agreements were                  
 considered and added that these type of agreements achieve the                
 highest possible Alaska labor hire and assist with the training               
 Number 2158                                                                   
 MR. MORGAN said he would like to see the unions come in alongside             
 the contractors and accept the same kind of program that the                  
 contractors are now talking about.  He said there is no simple                
 Alaska hire definition or issue because it depends on where you               
 stand.  He said you can talk about the numbers of hire at the level           
 of the state, but said if he goes and stand in Barrow then it                 
 sounds more like an issue of Native hire or if he stood in                    
 Fairbanks it could sound like union hire or skilled non-union                 
 people.  He said he did not see how a project labor agreement would           
 be the solution to this issue, but said he would like to see the              
 unions adopt the same type of program.  He said the challenge is to           
 find the right skills in the work place to deliver the quality of             
 work that is needed and balance that within the community.                    
 Number 2222                                                                   
 CO-CHAIR GREEN referred to the outsourcing issue in the paper where           
 contracts were awarded to companies in Denver and clarified that              
 60, 65 to 70 percent of development costs might be spent in Alaska.           
 He asked what sort of local program is being developed which would            
 help local contractors, both labor and fabricators, to know what              
 sort of things are going to need to be built.                                 
 Number 2256                                                                   
 MR. MORGAN said BP has been talking with the contracting community            
 to discuss the needs of this project.  He said the biggest area of            
 change is in module fabrication.  He said the other aspects of the            
 project are not unusual or difficult in terms of the capabilities             
 of existing companies within the state.  He said the two                      
 fabrication companies, in Anchorage, would be full with the                   
 Northstar modules if the larger modules can be brought into the               
 state.  He said if there is any other business to be done, then               
 those companies would need to be increased, either in Anchorage or            
 in some other part of the state.                                              
 Number 2301                                                                   
 MR. MORGAN said the more challenging piece is a need for a facility           
 which would allow the assembly of those modules in a way which                
 allowed them to be put on a barge with an eventual sea lift up to             
 the North Slope.  He said BP knows that there will be some premium            
 in having that construction in the state due to productivity                  
 issues, partly because of wage rates.  He said BP is willing to               
 cover these additional costs, but added some offset would occur if            
 the modules could be barged to the North Slope from Alaska.                   
 Number 2294                                                                   
 MR. MORGAN said BP is willing to work with contractors and anyone             
 else that might be appropriate such as the municipality of                    
 Anchorage, the state, to see if, by the summer of 1996, those                 
 facilities are made available on the right time scale and the right           
 quality.  He said he is optimistic that this can occur.                       
 Number 2352                                                                   
 CO-CHAIR GREEN asked if sanctioning had begun.                                
 Number 2355                                                                   
 MR. MORGAN said, no, at this stage there is only a conceptual                 
 engineering plan.  He said to go to sanctioning would require a               
 detailed engineering process which BP is beginning.  He said BP has           
 probably spent around $25 million, since acquiring these leases, on           
 this engineering work.                                                        
 Number 2374                                                                   
 MR. MORGAN said the other issue involves the environmental impact             
 assessment with the Core of Engineers.  He said, because this is an           
 offshore development, it raises a number of environmentally and               
 culture challenges.  He said these challenges are being taken                 
 seriously and if they can be addressed cooperatively, especially              
 with the residents of the North Slope, BP will overcome them.                 
 Number 2397                                                                   
 MR. MORGAN said BP is confident about the technology and the                  
 ability to deal with ice scouring.  He said BP hopes, by the fall,            
 to understand any major issue which might arise from that                     
 environmental assessment.  He said major uncertainties would delay            
 the sanctioning of the project.  He said the Board would want to              
 know if the key risks were manageable and under control.                      
 Number 2419                                                                   
 CO-CHAIR GREEN said BP is working with VECO, ACI and HCC and asked            
 if contracts were going to be bid among local contractors such as             
 labor suppliers and fabricators or whether BP was limited to the              
 point where those were the only ones available.                               
 Number 2434                                                                   
 MR. MORGAN said the alliance concept limits the choices.  He said             
 the nature of the concept is to allow the contractors to work                 
 alongside BP from the beginning of the project, working as a team             
 to develop a contract which will "incentivize" the contractors to             
 work together to deliver the best possible outcome for this                   
 TAPE 96-52, SIDE B                                                            
 Number 0000                                                                   
 MR. MORGAN said the contractors will have to decide whether it is             
 better to bid or whether they feel one of the existing alliance               
 partners has the right qualities and skills to come into the                  
 Number 0021                                                                   
 REPRESENTATIVE DON LONG expressed concern regarding ice scouring,             
 and said Nuiqsut is also concerned.  He said HB 548 was described             
 as not being a giveaway, but a carefully orchestrated agreement               
 between BP and the state of Alaska and asked if BP would provide a            
 model to allow the Legislators to show their constituents that HB
 548 is not a give away.                                                       
 Number 0046                                                                   
 MR. MORGAN said Commissioner Shively talked about the economic                
 model earlier and said this is part of the answer.  He said the               
 other part of the answer is somewhat less quantifiable, the answer            
 is around the issue of development opportunities for the state                
 regarding creating employment and business opportunities.   He said           
 there would be some approaches to valuation regarding the creation            
 of jobs, but it would be more difficult to quantify this type of              
 situation.  He said if Alaska can move ahead and develop a business           
 opportunity regarding the modules, not only will Alaska businesses            
 develop modules for work done in Alaska, but they might be able to            
 provide modules for the Far East markets.                                     
 Number 0105                                                                   
 REPRESENTATIVE OGAN asked if a precedent was being set that a lease           
 could be renegotiated that would compromise the established bidding           
 Number 0153                                                                   
 MR. MORGAN said HB 548 does not set a precedent as there are prior            
 precedents.  He referred to a situation in 1991, the Thetis Island            
 leases, where a net profit lease was amended to delete the net                
 profit interest and insert a modification in royalty.                         
 Number 0179                                                                   
 MR. MORGAN said Northstar was the only lease around which had net             
 profit interest was used as the bid variable.  He said there were             
 other bid rounds where net profit interests were incorporated, but            
 the state pre-set the level of net profit interest, normally                  
 between 30 percent and 40 percent.  He said the state no longer               
 used this approach to leasing after 1984 and he said he believed              
 the reason for this was because net profit lease creates                      
 misalignments between the state and the industry.  He said the                
 agreement also had to do with the fact that oil prices have not               
 increased as was predicted.  He added that HB 207 allows DNR to               
 make amendments to lease terms surrounding the royalty arrangements           
 which would allow marginal fields to be developed.  He said there             
 would be changes made to taxes and regulations over the years.                
 Number 0240                                                                   
 MR. MORGAN said the judgement regarding the changes made to the               
 lease seems to be a proper one and asked the committee if it made             
 sense to not change it and delay the development of this field.  He           
 said this open legislative process allows for concerns to be                  
 brought forth, and that a determination will be made that the                 
 benefits and the scrutiny have been proper.                                   
 Number 0277                                                                   
 REPRESENTATIVE DAVIES said some concern has been expressed by the             
 legislature that HB 548 will either pass or fail without allowing             
 any changes to be made in the agreement.  He said he could                    
 understand the difficulty of negotiating with 61 people, but said             
 that the Legislature is being asked to look at a complicated                  
 arrangement and it is conceivable that some facet has been                    
 overlooked in the discussions.  He said if this arises, then there            
 is no mechanism for a member of the legislature to affect a change            
 and asked if there could be a mechanism for dealing with this                 
 Number 0336                                                                   
 MR. MORGAN said DNR made it clear to BP that any agreement would              
 need to come before the legislature for approval.  He said it was             
 understood that HB 548 would be treated like some of the royalty              
 sale arrangements, as a lease amendment to be voted on.  He said              
 negotiating with the entire legislative body would not be                     
 practical, but added that BP would want an open agreement to show             
 that it was fair and satisfactory to everyone.                                
 Number 0418                                                                   
 REPRESENTATIVE ALAN AUSTERMAN referred to the net profit interest             
 and asked if HB 548 leaves the net profit interest in the lease               
 agreement or if it is eliminated totally.                                     
 Number 0438                                                                   
 MR. MORGAN said it eliminates it totally, so that the development             
 fund has no relevance anymore.  He said the over $200 million of              
 accumulated cost in the development funds is eliminated.  He said             
 it is a complex structure, like the tax framework, requiring                  
 detailed accounting as there are specified rules about the                    
 definition of net profit.  He said all of the net profit is removed           
 and now the lease term would have the basic 20 percent royalty and            
 a supplemental royalty which goes up to a maximum of 27.5  percent.           
 Number 0486                                                                   
 REPRESENTATIVE AUSTERMAN asked if there was discussions of lowering           
 the net profit percentage, rather than just eliminating it.                   
 Number 0495                                                                   
 MR. MORGAN said he did not conduct the negotiations, but said his             
 sense was that the discussions were around the misalignment concept           
 and the elimination of the net profit concept with the idea that              
 something could be found to replace it.  He said there might have             
 been some discussion regarding a lowering of the net profit                   
 Number 0528                                                                   
 CO-CHAIR GREEN said there was an estimate of recoverable reserves             
 based on a few wells and asked a hypothetical question regarding              
 additional oil reserves.                                                      
 Number 0550                                                                   
 MR. MORGAN said BP could answer that hypothetical questions, but              
 said that it involved the economic modeling issues and the                    
 assumptions surrounding it.  He said this assumption certainly                
 includes the 130 million barrels of recoverable reserves, which has           
 a range around it as does the $380 million development cost.  He              
 said BP has assumed some additional recovery mechanisms, included             
 in the development scheme, which would get to the 130 million                 
 number.  He said other options could increase that number.                    
 MR. MORGAN said, aside from the discovery well, five other                    
 appraisal wells were drilled on this reservoir.  He said there is             
 a pretty good understanding of the reservoir and the sense is that            
 there is not a vast range of uncertainty.  He said the oil quality            
 is exceptionally good in these wells, the highest quality of oil on           
 the North Slope.  He said other assumptions could be made, but it             
 would result in two models and create additional confusion.                   
 Number 0612                                                                   
 CO-CHAIR GREEN asked if these hypothetical scenarios had been run             
 through the model.                                                            
 Number 0621                                                                   
 MR. MORGAN said the DNR has run a number of sensitivities in the              
 course of the negotiation, as did BP.                                         
 Number 0627                                                                   
 CO-CHAIR GREEN, "the question was more of directionally do you have           
 a view as to what would happen if one of those cases were to ...you           
 have come through with a ...some sort of a super duper terciary               
 recovery and you increase recovery and set a course with 42 gravity           
 oil, that's a..."                                                             
 Number 0642                                                                   
 MR. MORGAN said it is nice to concentrate on the up side of a                 
 situation, but declined to answer the question.  He mentioned the             
 possible down side of a situation.                                            
 Number 0658                                                                   
 CO-CHAIR GREEN said the Attorney General's opinion, of how you                
 handle net profits compared to conventional royalty, indicated that           
 net profits can be considered as a royalty and asked if HB 548 was            
 considered as a part of HB 207.                                               
 Number 0692                                                                   
 MR. MORGAN said he could not answer this question, and added that             
 there is a range of opinion on what the commissioner's authority              
 is.  He said there has been some discussion on what that authority            
 might be, but BP has never been uncomfortable that HB 548 should              
 come to the legislature rather than just being signed off by the              
 Number 0748                                                                   
 BILL CHEEK, Vice-President and General Manager, Alaska Petroleum              
 Contractors (APC), was next to testify.  He said APC is the largest           
 subsidiary of Arctic Slope Regional Corporation (ASRC).  He said he           
 is showing support of Northstar from a contractors point of view              
 and added that APC is one of the largest alliance partners in this            
 development from the construction, engineering point of view.  He             
 said APC is excited about the possibilities that this project                 
 brings for the whole Alaskan community such as increasing Alaskan             
 employment and gives Alaska the opportunity to compete in an                  
 international market with mega module fabrication.                            
 Number 0792                                                                   
 MR. CHEEK said in 1988, APC began fabrication of mini-modules in              
 Alaska.  He said APC was able to competitively bid to build mini-             
 modules and was able to be successful in competing with contractors           
 outside Alaska.                                                               
 Number 0814                                                                   
 MR. CHEEK said, in 1996, all mini-modules are built in the state of           
 Alaska.  He said the industry views these mega-modules as the same            
 type of opportunity.  He said to build mega modules in the state              
 requires some type of premium and said perhaps it is true in the up           
 front planning portion.  He said given time and ways to improve the           
 way business is conducted in Alaska, these costs will be reduced to           
 allow for competitiveness in the same manner that the mini-modules            
 are competitive.                                                              
 Number 0843                                                                   
 MR. CHEEK said the Northstar project is important in terms of                 
 smoothing out upcoming construction projects for 1997 as it is                
 forecasted to be a down year in the oil patch, in terms of                    
 projects.  He said if Northstar will not be developed in 1997 there           
 is a strong possibility that a later development will interfere               
 with other projects slated for the North Slope such as ARCO's                 
 Coleville project.  He said if both of those projects hit in the              
 same year, there will be problems for the construction industry to            
 handle that type of fabrication and construction work in Alaska.              
 Number 0875                                                                   
 MR. CHEEK said BP is sincere regarding the promises they have made            
 regarding the utilization of local contractors and local hire.  He            
 said, in working with the project development team on the Northstar           
 project, the alliance is actively pursuing the identification of              
 skills needed to do this project.  He said the alliance is also               
 identifying their data bases of local skills and matching those               
 with the identified skills.  He said BP has made a commitment to              
 utilize local contractors to perform the mega-module fabrication              
 and overall industry is excited about the possibilities that this             
 project will bring and are proud to be an alliance partner with BP.           
 Number 0925                                                                   
 REPRESENTATIVE DAVIES asked him to list the possibilities and the             
 considerations that are being considered to improve the rate of               
 Alaska hire such as the amount of subcontracting that will be made            
 available for Alaskans.                                                       
 Number 0966                                                                   
 MR. CHEEK said the subcontracting for the Northstar project has not           
 been identified yet and will be a function of the overall                     
 management team.  He said this team will identify the types of                
 things which can't be performed by the alliance partners.  He said            
 APC was one of the companies that participated in the competitive             
 Alaska hire workshops in developing a plan to improve overall                 
 Alaska hire.                                                                  
 Number 1020                                                                   
 MR. CHEEK said APC, looking at the Department of Labor 1994                   
 numbers, averaged about 1,500 employees with an Alaska hire                   
 percentage of 74 percent.  He said this was as good as, or better             
 than, any other contractor in the state.  He said APC is interested           
 in improving this number by doing more recruitment in the interior,           
 such as non-union personnel in Fairbanks.  He said, in 1995, APC              
 averaged about 1,800 employees and maintained the 75 percent Alaska           
 hire rate.  He said there are some skilled workers, such as                   
 electricians and pipe welders, which are more difficult to retain             
 in this state.  He said APC would be interested in developing                 
 training opportunities in this state or developing opportunities              
 for people with those types of skills to relocate to this state.              
 Number 1049                                                                   
 REPRESENTATIVE DAVIES asked if the hiring of non-union people was             
 because there were already avenues to hire union people or whether            
 APC did not want to hire union people.                                        
 Number 1062                                                                   
 MR. CHEEK said APC's sister company, Houston Contracting Company              
 Alaska Limited (HCC), is a union contractor and they employee                 
 everyone that can provided out of Fairbanks local.  He said APC,              
 being non-union, does not recruit union personnel out of Fairbanks.           
 Number 1081                                                                   
 REPRESENTATIVE RAMONA BARNES asked what the ratio of Natives to               
 Non-Natives is since APC is a wholly owned subsidiary of the North            
 Slope Borough.                                                                
 Number 1093                                                                   
 MR. CHEEK said, last year, APC employed an average of 110 North               
 Slope Borough resident Natives with a peak of 135 employees which             
 is a little under 10 percent of the total number of employees.  He            
 said APC is working closely with the Arctic Sivunmum Ilisagvik                
 College in Barrow for vocational technical training programs to               
 increase the skill levels of the shareholders in Barrow.  He said,            
 being owned by Arctic Slope Regional Corporation, APC is monitored            
 very closely in terms of Native hire from the North Slope Borough.            
 He said when skilled local Natives are not available, other skilled           
 Alaskan Natives are hired and then lastly skilled Alaskans.                   
 REPRESENTATIVE BARNES asked the overall ratio of Native to Non-               
 Natives employees.                                                            
 MR. CHEEK said he did not have that overall ratio with him and said           
 he could send it.                                                             
 Number 1130                                                                   
 REPRESENTATIVE BARNES said she was troubled by the fact that APC              
 does not hire union personnel and then asked him about his comment            
 there was a lack of trained electrical workers.  She said she did             
 not believe that there was this lack as there is a school operated            
 by the International Brotherhood of Electrical Workers (IBEW).  She           
 said there needs to be a way to utilize people trained in Alaska in           
 the field of electrical work.                                                 
 REPRESENTATIVE BARNES asked if APC was utilizing skilled workers              
 from the Kotzebue Technical Center.                                           
 Number 1187                                                                   
 MR. CHEEK said he was not familiar with the Kotzebue Technical                
 Number 1193                                                                   
 CO-CHAIR GREEN referred to the technical school in Seward and asked           
 if there was a shortage of vocational technical training which                
 would prevent APC from moving the employment rate up to 85 percent            
 Alaska hire.                                                                  
 Number 1208                                                                   
 MR. CHEEK said a subcommittee was formed from the Alaska Hire                 
 Group, comprised of the 20 contractors, which visited several                 
 training facilities.  He said this group evaluated each training              
 center to determine the availability of the skills, what is working           
 and not working, in order to develop an action plan on training in            
 Number 1234                                                                   
 REPRESENTATIVE BARNES asked how the working group was chosen.                 
 Number 1245                                                                   
 MR. CHEEK said, a few months ago, BP and ARCO sponsored a workshop            
 for Alaska contractors on how to improve Alaska hire.  He said                
 volunteers were taken from these workshops to form committees which           
 would present the plan, complete with action items, to the Governor           
 and to the state.  He said this group is comprised of union, non-             
 union and oil company personnel.                                              
 Number 1296                                                                   
 REPRESENTATIVE BARNES asked, in that group, how many are Non-Native           
 owned companies.                                                              
 Number 1302                                                                   
 MR. CHEEK said he did not know, but would provide a list of the               
 REPRESENTATIVE BARNES said she would also like to know the                    
 ownership of those companies.                                                 
 Number 1310                                                                   
 RANDY RUEDRICH, General Manager, Doyon Drilling, Incorporated, was            
 next to testify.  He said he is president of the Alaska Chapter of            
 the Independent Association of Drilling Contractors and had been              
 chairman of the Alaska Section of the Society of Petroleum                    
 Engineers.  He said Doyon has grown from one oil rig to five oil              
 rigs on the North Slope.  He said 88 percent of Doyon employees               
 live in Alaska and 41 percent of them are Alaska Natives.  He said            
 an internal training program has occurred consisting of 13 classes.           
 He said the people who graduated from those classes have been                 
 offered jobs by Doyon.  He said a few of those graduates have gone            
 on to work for produces, in other service companies, on the North             
 Slope, but the vast majority have stayed with Doyon.  He said six             
 employees are drillers on Doyon rigs, responsible for the crew for            
 12 hours per day on an approximate $15 million to $25 million                 
 asset.  He said he sees this as an issue of Alaskan long term                 
 employment rather than an issue of Alaska hire.                               
 MR. RUEDRICH said this scenario can only continue if there is work            
 and said Northstar provides the drilling industry and the service             
 industry several years worth of work for a single rig.  He said               
 this, in combination with existing work such as new well drilling,            
 side tracks and work overs, will provide for a long term stable               
 employment which will benefit employees and shareholders who are              
 MR. RUEDRICH said a rig generates a payroll of about $4 million in            
 direct labor of approximately 50 people with another 50 jobs to               
 keep a rig operating.  He said the drilling business is a large               
 industry and done at a cost between 20 percent and 40 percent of              
 the total project budget.                                                     
 Number 1510                                                                   
 MR. RUEDRICH said the majority of the employees of Doyon live in              
 interior Alaska.  He said Doyon is a for profit enterprise and the            
 profits go to Doyon Unlimited which has a history of paying half of           
 its annual profits to the shareholders, so that money is also going           
 to interior Alaska.                                                           
 Number 1552                                                                   
 MR. RUEDRICH said Doyon Universal provides jobs, direct payroll               
 income, and dividends to Alaska and to the people of the interior.            
 He said Alaska's drilling operators and related service providers             
 fully support the continuing orderly development of the North                 
 Slope, including projects such as Northstar.  He said it is good              
 business for the drilling industry and for many individuals in                
 Anchorage and the interior.                                                   
 Number 1586                                                                   
 REPRESENTATIVE DAVIES said he understood that the aspects regarding           
 the drilling contracts were not determined and asked if Doyon was             
 hoping to receive those contracts.                                            
 Number 1611                                                                   
 MR. RUEDRICH said there are a limited number of rigs on the North             
 Slope and any type of work is good for the industry.                          
 Number 1623                                                                   
 REPRESENTATIVE BARNES asked if Doyon was the only drilling company            
 with rigs presently on the North Slope.                                       
 Number 1633                                                                   
 MR. RUEDRICH said there are five contracting companies on the North           
 Slope today.  These contractors include Doyon and Nabors.  He said            
 the membership of the International Association of Drilling                   
 Contractors (IADC) has decreased.                                             
 REPRESENTATIVE BARNES asked if the contractors were presently                 
 drilling anywhere.                                                            
 Number 1654                                                                   
 MR. RUEDRICH said Doyon has five rigs on the North Slope, three of            
 which are presently active.  Nabors Drilling has six rigs that are            
 active on the North Slope, Parker Drilling has a rig active on the            
 North Slope, Rubicon Drilling does not have any rigs presently                
 active on the North Slope and Nordic Calista Services Number 1 has            
 one rig running on the North Slope today.                                     
 Number 1715                                                                   
 DAVID GINNETT, President, Quality Fabrication, Incorporated (QFI),            
 was next to testify.  He passed around a handout titled, "Steel               
 Fabrication in Alaska."  He said QFI is a steel fabricator which              
 builds structural frameworks for commercial buildings to oil field            
 modules.  He said, over the past several years, QFI has done                  
 signature projects including the structural framework for the                 
 Alyeska Prince Hotel, the Bradley Lake Power Plant as well as many            
 of the frameworks for truckable modules used on the North Slope.              
 He said the work for the North Slope also includes the construction           
 of above ground pipeline support members, pipe saddles, various               
 types of platforms and a multiple of structural components which              
 are required.                                                                 
 Number 1817                                                                   
 MR. GINNETT said QFI was started 13 years ago at a point in time              
 where there was a downturn in the state's economy.  He said the               
 company where he had previously worked, a steel fabricator in the             
 state, had closed.  He said, at that time, several other steel                
 fabricators had gone into insolvency and closed.  He said the QFI             
 concept was to tap some of the fabricating market, which at the               
 time was a $30 million to $70 million per year market.  He said it            
 was felt that fabricating work should be done in Alaska.  He said             
 in 1983 there were two people employed and currently there is                 
 almost 100 Alaskan employees.                                                 
 Number 1941                                                                   
 MR. GINNETT said the market which the business is built on is a               
 highly competitive market which competes against companies from the           
 Lower 48 states.  He said, his vision for the future, is to see               
 construction work begin again on the North Slope on a smaller                 
 scale, as compared to the Prudhoe Bay work.  He said QFI began to             
 do this when they did a majority of the work on the Niakuk project,           
 the Milne Point, the large scale enhanced oil recovery project for            
 ARCO and are currently completing the BP Cascade development.                 
 Number 2030                                                                   
 MR. GINNETT said the potential in enhanced oil recovery or marginal           
 field projects is great as they have components which have been               
 labeled as a "new era of design."  He said this is an era of                  
 building industry in Alaska which previously did not exist.  He               
 said these are smaller scale projects which are funded to the level           
 of $50 million to $400 million.  He said a significant amount of              
 that development cost can and will be spent in Alaska.                        
 Number 2126                                                                   
 MR. GINNETT said, in a busy year, QFI does $10 million worth of               
 work.  He found QFI does work with 269 Alaskan companies throughout           
 Alaska.  He said small businesses have benefits from smaller field            
 development.  He said over the past few years the work force has              
 increased, skills have improved, as well as improvements to the               
 facility and the machinery.                                                   
 Number 2204                                                                   
 MR. GINNETT said the Northstar project is critical to this momentum           
 and without it the same economic situation would happen as occurred           
 in 1981 with the decreased stability in business.  He said the                
 current projects are technically related projects and take                    
 advantage of the program and skills available in Alaska.  He said             
 working closely with the producers and developers in the state is             
 helpful.  He concluded that QFI, from a small business standpoint,            
 supports the Northstar project and sees it as an important step to            
 maintaining momentum.                                                         
 Number 2309                                                                   
 REPRESENTATIVE DAVIES asked what the mix of skills the employees of           
 QFI have and asked what considerations QFI had in terms of finding            
 trained personnel.                                                            
 Number 2344                                                                   
 MR. GINNETT said QFI has some internal training programs.  He said            
 the skill level runs from general laborer to certified and                    
 journeyman type of welders, painting personnel, blasting cleaning             
 personnel, the fitters which read the blue print to construct the             
 components, project management personnel, purchasing personnel,               
 accounting, and quality control, safety and monitoring personnel.             
 He said QFI will look for personnel in any agency in Alaska from              
 the vocational technical school in Seward, the Testing Institute of           
 Alaska and the labor departments.                                             
 Number 2455                                                                   
 JAMES UDELHOVEN, President and Chairman of the Board, Udelhoven               
 Oilfield Systems Services, Incorporated, Alliance Board Member,               
 Arctic Power Board Member, Washington Institute for Public Policy             
 Board Member, Board of Regent Member for Charter College, was next            
 to testify.                                                                   
 TAPE 96-53, SIDE A                                                            
 Number 0000                                                                   
 MR. UDELHOVEN said his company has put together a federally                   
 approved apprenticeship program for the plumbing and the electrical           
 trade.  He said his company works closely with the apprenticeship             
 program which is occurring in the Kenai School District.  He said             
 his company works in the area of skilled trades.  In the oil                  
 industry the company provides inspection and does start up services           
 for the large facilities before they go into production.  He said             
 other work has been done in other industries such as Trident                  
 Number 0241                                                                   
 MR. UDELHOVEN said the Northstar project will change the curve of             
 the decline.  He said if we continue to do business with the oil              
 companies, as the state did in the 1980s, the state will drive the            
 oil industry away.  He referred to the time line, cost factors                
 presented by BP and said BP is taking a substantial risk as the               
 cost is never determined until the project is completed.  He said             
 there are many factors in a project such as material and labor                
 cost, delays caused by environment, weather and scheduling.  He               
 urged the committee to consider HB 548 in terms of the future                 
 rather on than the details of the bill.                                       
 Number 0368                                                                   
 SMOKEY NORTON, Equipment Manager, Peak Oilfield Service, was next             
 to testify.  He said his company believes that Northstar is a good            
 deal.  He said his company employs many truck drivers, mechanics              
 and said HB 548 is a jobs issue.  He said HB 548 is a deal that is            
 good enough.                                                                  
 Number 0469                                                                   
 REPRESENTATIVE BARNES asked if Peak Oilfield Service was a totally            
 owned subsidiary of CIRI.                                                     
 MR. NORTON said the ownership of Peak is 50 percent CIRI and 50               
 percent by Nabors Drilling.                                                   
 Number 0534                                                                   
 TOM REDMOND, Human Resources Manager, Camco Products and Services,            
 was next to testify.  He said Camco provides wire line and coiled             
 tubing services in Prudhoe Bay for BP as well as other oilfield               
 products.  He said Camco employs about 140 people, 86 percent of              
 which are Alaskan residents who live in the Anchorage, Eagle River,           
 Palmer and Wasilla area.                                                      
 Number 0621                                                                   
 MR. REDMOND said businesses are trying to deal with the health,               
 safety and the environment and maintaining jobs.  He said                     
 encouraging these peripheral wells, such as Northstar, is to the              
 benefit of everyone.                                                          
 Number 0675                                                                   
 REPRESENTATIVE BARNES asked if outsourcing has affected his                   
 MR. REDMOND said it had not affected his company yet.                         
 Number 0697                                                                   
 JED WHITTAKER said he was representing himself and others, whom he            
 did not specify.  He said profitability was not mentioned, but said           
 the existing net profit sharing agreement in the lease provides a             
 profitable development for BP.  He said because that lease is                 
 profitable, it is inappropriate to change the rules of the game.              
 He said the oil companies have spent a lot of time telling the                
 state they should not change the rules of the game.  Mr. Whittaker            
 said HB 548 is changing the rules of the game.                                
 Number 0813                                                                   
 MR. WHITTAKER said the oil companies tell everyone what they want             
 to hear.  In Fairbanks the oil companies talk about local hire, but           
 said Alaska hire provisions are unconstitutional.  He said the                
 public is not getting the whole picture, there have been some                 
 omissions.  He said integrity dictates that a deal is a deal and              
 when BP bought that lease from Amerada Hess they knew the deal.               
 Number 0872                                                                   
 MR. WHITTAKER said he strongly objected to bringing this type of              
 special interest legislation half way through the session and doing           
 a rush job on it.  He said HB 548 may be unconstitutional because             
 of that special interest and said there are ethical considerations            
 regarding the speed of the legislation.                                       
 Number 0947                                                                   
 MR. WHITTAKER said the price of oil is going to go up as the demand           
 increases.  He said it is important to get the maximum benefit for            
 the welfare of the people for the natural resources as is stated in           
 the constitution.  He said he was a litigant in the last Supreme              
 Court case, which opened up the Alaska primary, and said his faith            
 was renewed in the Alaska court system.  He said, if the                      
 Legislature or the Governor will not uphold the constitution, he              
 would consider taking this matter to court on the constitutional              
 Number 0979                                                                   
 MR. WHITTAKER said he is opposed to HB 548 and told the committee             
 that they took an oath to uphold the constitution and reject this             
 inside deal.                                                                  
 Number 0994                                                                   
 REPRESENTATIVE LONG said under the lease agreement, signed by                 
 Amerada Hess, it states that the lease or any undivided interest              
 may be approved by the state be a signed sublet or otherwise                  
 transfer of the entire lease area.  He said this is all HB 548 is             
 trying to do, asking the state to approve the assignment of this              
 Number 1021                                                                   
 MR. WHITTAKER said this would be true if it was an agreement on the           
 existing lease, but BP is asking for modifications of that lease              
 including a reduction in the amount of money that the state of                
 Alaska will get.  He corrected a statement that Mr. Morgan had made           
 in the Senate Resources Committee and said it should be 93 percent            
 net profit sharing, not 89 percent.                                           
 CO-CHAIR GREEN said the 89 percent figure was an based on an                  
 Number 1048                                                                   
 REPRESENTATIVE DAVIES asked him to define the constitutional issue            
 that he was referring to.                                                     
 Number 1057                                                                   
 MR. WHITTAKER said there are two issues that he was aware of and              
 there may be others.  The first being special interest legislation            
 and the second is that the state of Alaska shall get maximum                  
 benefit for the welfare of the people from the natural resources.             
 Number 1096                                                                   
 REPRESENTATIVE DAVIES said those are two important issues and that            
 the committee will consider those concerns.                                   
 Number 1108                                                                   
 MR. WHITTAKER said the committee should also consider the                     
 litigation of this issue and that development would not occur                 
 before the year 2002, given our court system.                                 
 Number 1120                                                                   
 REPRESENTATIVE BARNES said she has always upheld her constitutional           
 oath of office.  She said the correct reading of the constitution             
 is, "the legislature has the right to control every resource                  
 belonging to the state be it land, water, fish, game, whatever and            
 we also have the right to vote on contracts, it has happened time             
 and time again."                                                              
 Number 1216                                                                   
 CHUCK SULLIVAN, General Manager, Parker Drilling, but said he was             
 representing the Alliance.  He referred to a letter from the                  
 Alliance dated April 8, 1996, and read it into the record, "Dear              
 Representative Green, The Alaska Support Industry Alliance would              
 like to convey their support of the recently negotiated agreement             
 with BP Exploration (Alaska) regarding the Northstar oil field in             
 the Beaufort Sea.                                                             
 "The development of the North Slope oil field will create 500                 
 construction jobs and more than $4000 million in revenue into the             
 state treasure along with extending the life of the Trans-Alaska              
 Pipeline System.                                                              
 "An Important part of this development is the expansion of oil                
 fields module assembly operations in Alaska.  BP has agreed to hire           
 Alaskans, to fabricate facilities such as modules in Alaska and               
 work to develop a new industry in Alaska, the manufacture of sea              
 lift modules.                                                                 
 "Once Northstar is brought into production, and its pipeline is               
 delivering oil to the Trans-Alaska Pipeline System, other known oil           
 fields and prospects in the area will become more attractive.  With           
 the expansion of Infrastructure, it is possible that the                      
 development of Northstar will lead to other development                       
 "With the 19th legislative session rapidly coming to a close, it is           
 important that lawmakers take appropriate steps to consider and               
 vote on the Northstar proposal.                                               
 "A positive vote on the Northstar proposal is strongly encouraged             
 by the members of the Alaska Support Industry Alliance.                       
 Sincerely, Keith D. Burke"                                                    
 Number 1336                                                                   
 MR. SULLIVAN said HB 548 is a nice piece of business and said the             
 alliance thinks this is good for Alaska and for Alaska business.              
 He said BP has left the deal open for scrutiny.                               
 Number 1405                                                                   
 DAVE HAUGEN, Vice-President, Lynden, Incorporated, was next to                
 testify.  He read a letter written by the chief executive officer             
 of Lynden, Jim Jansen, dated April 5, 1996, into the record,                  
 "Lynden Incorporated and its operating companies are firmly                   
 committed to BP's efforts to develop the Northstar project.  With             
 the potential recovery of 130 million barrels of oil, the Northstar           
 project has a potential of being very beneficial for the state of             
 Alaska and its citizens.                                                      
 The Northstar development will provide many positive benefits for             
 Alaskans and Alaskan companies.  The project capital spending                 
 estimate is over $250 million, most of which will be spent in                 
 Alaska.  BP is also committing to launching a new Alaskan industry,           
 fabrication and assembling of large oil field modules in-state.               
 The oil and gas industry has always been an important part of                 
 Lynden's business going back to the days of the development of the            
 Swanson River field on the Kenai Peninsula.  Lynden Transport,                
 Lynden Air Freight, Alaska West Express/Frontier Transportation,              
 Bering Marine and Lynden Logistics are just some of the Lynden                
 companies that have been and continue to be directly involved in              
 the oil and gas industry.                                                     
 Please consider Lynden to be unequivocally in support of BP's                 
 efforts to develop the Northstar project."                                    
 MR. HAUGEN said he would be available to answer any questions.                
 Number 1497                                                                   
 BILL ALLEN, Chairman and Chairman of the Board, VECO Corporation,             
 was next to testify.  He said VECO was started in 1969 and is one             
 of the largest service companies doing engineering, construction,             
 and maintenance.  He said he supports Northstar and said the                  
 development was attempted in 1984.  He said BP is committed to                
 building the sea lift modules if the facilities can be provided and           
 a new industry will be created in Alaska which can possibly lead to           
 an international industry.                                                    
 Number 1609                                                                   
 MR. ALLEN said the truckable modules have been produced in Alaska             
 and said VECO was the first to compete with the Lower 48 states.              
 He said Northstar will help keep oil coming down the pipeline.  He            
 said the longer the pipeline can be kept, the better it will be for           
 the state.  He concluded that he is in support of Northstar.                  
 Number 1702                                                                   
 REPRESENTATIVE BARNES asked how many VECO employees there were.               
 MR. ALLEN said there were about 3,000.                                        
 Number 1709                                                                   
 REPRESENTATIVE BARNES asked if VECO was still the largest                     
 contractor in the state.                                                      
 Number 1712                                                                   
 MR. ALLEN said Arctic Slope is probably bigger than VECO as far as            
 work in Alaska.                                                               
 REPRESENTATIVE BARNES said VECO was the largest, wholly owned                 
 industry in Alaska and the only international company.  She said              
 they should be commended for the work they have provided to the               
 Number 1754                                                                   
 CO-CHAIR GREEN thanked everyone for testifying.  He said if the               
 state can get going on Northstar, Alaska will become a staging area           
 of Asia.  He said there is a bright future for oil, fabrication,              
 labor forces, engineering which is the whole gamut in the Asian               
 There being no further business to come before the House Standing             
 Committee on Resources, the meeting was adjourned at 10:12 a.m.               

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