Legislature(1999 - 2000)
04/15/1999 05:08 PM House WTR
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON WORLD TRADE
AND STATE/FEDERAL RELATIONS
April 15, 1999
5:08 p.m.
MEMBERS PRESENT
Representative Ramona Barnes, Chair
Representative Beverly Masek
Representative Gail Phillips
Representative Ethan Berkowitz
Representative Reggie Joule
MEMBERS ABSENT
Representative John Cowdery, Vice Chair
Representative Joe Green
OTHER HOUSE MEMBERS PRESENT
Representative Scott Ogan
Representative Sharon Cissna
Representative John Harris
COMMITTEE CALENDAR
OVERSIGHT HEARING: PROPOSED PURCHASE OF ARCO, Inc. by BP-AMOCO
(* First public hearing)
PREVIOUS ACTION
See the House Special Committee on World Trade & State/Federal
Relations minutes dated 4/13/99.
WITNESS REGISTER
WALTER HICKEL, Ex-Governor of the State of Alaska
No address or telephone provided.
POSITION STATEMENT: Commented on the proposed merger.
CHARLIE COLE, Former Attorney General of the State of Alaska
406 Cushman Street
Fairbanks, Alaska 99701
Telephone: (907) 452-1124
POSITION STATEMENT: Commented on the proposed merger.
JIM PLAQUEK
Fairbanks Operating Engineers, Local 302
1444 2nd Avenue
Fairbanks, Alaska 99701
Telephone: (907) 456-4423
POSITION STATEMENT: Supported the merger.
JERRY McCUTCHEON
PO Box 241623
Anchorage, Alaska 99524
Telephone: (907) 277-3076
POSITION STATEMENT: Stated that Alaska should buy ARCO.
KAREN COWART, General Manager
Alaska Support Industry Alliance
4220 B Street, Number 200
Anchorage, Alaska 99504
Telephone: (907) 563-2276
POSITION STATEMENT: Viewed the merger as a business decision
responding to a changing global environment.
RICHARD FINEBERG
PO Box 416
Ester, Alaska 99725
Telephone: (907) 479-7778
POSITION STATEMENT: Discussed how the state could acquire and
manage the pipeline.
RANDY RUEDRICH, Arctic E&P Advisors
1210 E 16th Avenue, Number 21
Anchorage, Alaska 99501
Telephone: (907) 277-3031
POSITION STATEMENT: Discussed the merger and the oil and gas
industry in general.
KEITH HAND, CFO
Fairbanks Natural Gas
3408 International Way
Fairbanks, Alaska 99701
Telephone: (907) 452-7111
POSITION STATEMENT: Testified on behalf of Ray Latchem,
President of Fairbanks Natural Gas.
ACTION NARRATIVE
TAPE 99-11, SIDE A
Number 0001
CHAIR RAMONA BARNES called the House Special Committee on World
Trade and State/Federal Relations meeting to order at 5:08 p.m.
Members present at the call to order were Representatives Barnes,
Masek and Phillips. Representatives Joule and Berkowitz arrived at
5:10 p.m. and 6:04 p.m. respectively. Representatives Ogan,
Cissna, and Harris were also present. Representatives Cowdery and
Green were not present.
[Tape begins mid-speech]
Number 0128
WALTER HICKEL, Ex-Governor of the State of Alaska, said, "... had
to happen, but we both feel that this issue may be so big that you
might have to call a special session to deal with this topic." He
noted that the merger must be approved by the federal government.
He indicated that the first responsibility is to ensure that the
lands of Alaska that Alaska decided to produce are produced. There
are two ways to profit from North Slope production; first is
produce it and sell it, second is to transport it. If one is both
a producer and a transporter, he/she may have an advantage over
someone else who just wants to produce. That point should be
reviewed and there should be assurances that the new people on the
North Slope can be competitive. He compared the merger to the
Safeway and Carr's buy out during which, "They finally said you had
to sell some of the stores so it could remain competitive, and
that's one of the big things." He mentioned the North Slope
natural gas and his dealings with BP officials who have indicated
that they do not believe that Alaska's O&G would be competitive,
maybe for the next 20 years, against reserves that BP has in China,
the Northwest Shelf Australia, Indonesia and other places.
Perhaps, those claims are correct. Mr. Hickel indicated the need
to review those claims and suggested that an independent effort to
market and transport this gas may possibly happen. Representative
Whitaker's proposal is probably worth review.
MR. HICKEL discussed a ruling that occurred during the
constitutional convention before statehood from Alaska's then
delegate to Congress, U.S. Senator Bartlett. Senator Bartlett knew
Alaska was going to become an owner-state and he warned the
convention that Alaska may face two types of exploitation. One
type of exploitation would be taking everything and leaving
nothing, and another, worse, type of exploitation would be
promising to take and not taking. This warning is applicable to
gas in that Alaska must ensure that production does not occur
simply because producers may have conflicting interests elsewhere.
He offered the services of himself, Ex-Governor Hammond, and others
such as Commonwealth North. In conclusion, Mr. Hickel noted that
he had faxed most of the concerns to members of the legislature.
REPRESENTATIVE MASEK mentioned that she had read Mr. Hickel's
April 4th article in the Anchorage Daily News. She commented that
she would like to see his continued involvement in this issue. Any
plan proposed has to be one that Alaskans can support.
Number 0762
CHARLIE COLE, Former Attorney General for the State of Alaska,
testified via teleconference from Fairbanks. He said that the BP
ARCO merger is a "cataclysmic event" for Alaska which will have
consequences far into the future. Therefore, the legislature
should fully investigate the consequences of this merger, spending
whatever time and funds necessary to investigate and evaluate all
of those consequences. In this situation, Mr. Cole believed that
the legislature may have greater weapons than the executive branch.
REPRESENTATIVE PHILLIPS inquired as to what Mr. Cole would view as
the key components to be concerned about and working on.
MR. COLE said that he would investigate what affect this merger
would have on "chilling the opportunity of other oil companies to
expend funds to explore, to investigate, to acquire leases,
properties on the North Slope." Perhaps, it may be necessary to
inquire of the thoughts of other oil companies and other experts in
the field. He noted that the merger, as he has been told, could
result in BP holding 70 percent interest in the Trans-Alaska Oil
Line which would mean that BP would control Alyeska. He reiterated
the need to review the consequences. When a good sense of the
potential consequences is acquired, then decisions could be made as
to what the legislature and the executive branch can do to
alleviate the perceived adverse consequences of this merger.
Number 1054
JIM PLAQUEK, Fairbanks Operating Engineers, Local 302, testified
via teleconference from Fairbanks. "The merger between BP, Amoco,
and ARCO, we feel will be good for the State of Alaska and for
organized labor in the State of Alaska." He noted that organized
labor has had many Prudhoe Bay projects with BP, including the 200
plus workers from Fairbanks who constructed the 28-mile ice road
pipeline from Endicott to Bodami last year. He informed the
committee that this winter 50 workers from Fairbanks spent the
entire winter building the ice road to the North Star Island only
to have U.S. Fish and Wildlife deny the permit to construct the
gravel island. That resulted in the loss of work for 120 workers
which amounted to a loss of $10,000 per worker in lost wages. Mr.
Plaquek pointed out that oil industry jobs have provided needed
employment for Fairbanks workers to support their families which in
turn, through tax dollars, sustain local businesses, schools,
hospitals, and other essential community services. Many Fairbanks
families have enjoyed the benefits provided by the oil industry
over the years. He said, "BP-Amoco has committed to invest $5
billion in North Slope development over the next five years.
Economically, Alaska and its residents need this continued
investment from the oil industry. BP-Amoco has committed to use
Alaskan contractors and suppliers and build modules in Alaska. And
most important to hire Alaskans first on their pipeline projects."
Alaskan workers appreciate and applaud BP-Amoco's commitments
because it means jobs to support our families. He indicated that
this merger will result in BP-Amoco having the expertise and
financial resources to ensure a long and successful future for
Alaskan oil industry workers. In conclusion, Mr. Plaquek thanked
BP-Amoco for being such a good corporate citizen and for hiring
Alaskan workers whom he indicated would continue to foster good
relations with BP-Amoco.
CHAIR BARNES clarified that the Alaska House of Representatives
working with the Department of Natural Resources secured the
commitment that Alaska contractors and workers would be used on
these North Slope projects that Mr. Plaquek identified.
REPRESENTATIVE HARRIS asked if Mr. Plaquek has had any assurances,
especially from organized labor, that after the merger there would
continue to be such jobs. He noted that in the past ARCO and BP
have worked against each other and, at times, with each other.
MR. PLAQUEK stated that BP-Amoco has made a commitment to hire
Alaskans first. "It only makes sense and they understand when they
hire organized laborers, they're hiring Alaskans, so that's their
commitment to us, to hire Alaskans first."
Number 1295
REPRESENTATIVE JOULE asked if Local 302 has been able to consider
anything else other than jobs. Representative Joule said that he
was looking at the longer term, beyond the $5 billion over five
years, that this takeover may result in other companies feeling
that they might not be able to participate in Alaska's development.
If that participation does not occur, then there are potential jobs
that are also gone.
MR. PLAQUEK asked if Representative Joule was referring to other
oil companies coming into the state.
REPRESENTATIVE JOULE replied, partially. He understood Mr.
Plaquek's testimony to be in favor of the merger because of the
jobs that this proposed merger would provide through capital
investments. He asked if Mr. Plaquek had looked at anything else
in this merger other than jobs.
MR. PLAQUEK clarified that he represents workers, for which jobs
are the top priority. He stated that he was looking at jobs and
the investment in the state.
REPRESENTATIVE JOULE commented that he would hope that it would
mean jobs for Alaskans regardless of location.
REPRESENTATIVE OGAN informed everyone that he has received some
letters from various people who assert that a week-on-week-off
schedule is more conducive to Alaskan residents whereas there tend
to be more non-resident Alaskans working when there is a
two-weeks-on-two-weeks-off schedule. He asked if Mr. Plaquek would
concur with that assessment.
MR. PLAQUEK said that he was not familiar with those schedules, but
noted that work on the Trans-Alaska Pipeline at Prudhoe Bay is on
a four and two week schedule.
REPRESENTATIVE OGAN commented that was "probably the non-union
folks up there." However, that should be reviewed.
CHAIR BARNES commented that the legislators have received much
correspondence regarding the use of out-of-state workers,
especially when there are fewer jobs on the slope and in the oil
industry. She reiterated Representative Ogan's comments regarding
the correspondence that says a two-and-two week schedule is more
conducive for out-of-state workers, allowing them to be able to fly
out of state while Alaskans go without jobs. Chair Barnes asked
when Mr. Plaquek had the conversations with BP-Amoco regarding the
$5 billion enhancement.
MR. PLAQUEK specified, "That's your commitment that I've read
several places."
CHAIR BARNES asked if Mr. Plaquek meant he had read that in the
newspaper.
MR. PLAQUEK answered that was correct.
CHAIR BARNES surmised then that Mr. Plaquek had no one-on-one
conversations with BP-Amoco.
MR. PLAQUEK replied, no.
Number 1550
JERRY McCUTCHEON, testifying via teleconference from Anchorage,
informed the committee that he has fought the gas line for almost
25 years. Mr. McCutcheon believed the BP ARCO merger will result
in a "colossal screwing of Alaskans." He said, "The shotgun
wedding of Amoco and BP moved BP up into a class with Roy Dutch
Shell and Exxon." Shell and Exxon have lost interest in and have
withdrawn from Alaska because Alaska has matured and no longer fits
the corporate resources and political power of Exxon and Shell.
Minimal Exxon personnel are maintained in Alaska in order to keep
ARCO honest in overseeing ARCO's production of the Exxon/ARCO
leases.
MR. McCUTCHEON stated that Alaska has been BP's cash cow which has
allowed BP to envelope Amoco and others and now ARCO. ARCO is a
company which fits Alaska and a company which needs Alaska's oil
for ARCO's West Coast refineries for the present and the future.
ARCO used Alaska as a cash cow, but ARCO got into trouble on the
world stage and lost it's ability to handle small prospects. He
commented that ARCO has learned its lessons and would have survived
nicely had the prolonged depression of the oil price not been more
than it apparently wanted to withstand. "The State of Alaska
should buy ARCO. ARCO is almost a perfect fit with Alaska's need
for an oil company large enough to undertake Alaska's projects and
small enough to pursue Alaska's smaller prospects, but not its
smallest projects." Mr. McCutcheon said the ARCO sale is not a
done deal. He suggested that Alaska would not have to manage ARCO
like the Alaska Railroad or the Alaska Ferry System. The state
could function as a shareholder, and he felt it best if Alaska did
not own all of ARCO. Furthermore, it would be far better to own a
profitable oil company that is strapped for cash such as ARCO, than
become an owner in a gas line "whose prospects for profitability
are so bleak that the owners of the gas do not want to construct
the gas line." He continued, "Even with the state giving up the
state's royalty gas and severance taxes; forcing the cities along
the proposed route to forego their taxes which the cities will need
to pay for the increased cost of government due to the construction
of the gas pipeline. Cash for an ARCO acquisition has never been
cheaper." He said that buying ARCO is a far simpler acquisition
than an unprofitable gas line. He predicted that BP will leave
Alaska and, using a decision tree and Monte Carlo analysis, milk
Alaska for all its worth. He likened this to the last days of the
canned salmon industry, only much worse. Mr. McCutcheon said,
"BP's oil pipeline screwing of Alaska cost Alaska $5 billion by
1987 and will cost Alaska $40 billion by the year 2010. BP, et al.
gut and run tactics almost wrecked Prudhoe Bay in the late '70s
except for the fact they got caught, recover would have dropped to
5 billion barrels. BP did wreck Badami. I don't know what role BP
played in the Lisburne formation. BP staged the construction of
the North Star modules, which they never intended to complete, to
fool the public. It was very successful at it and it was with the
help of the press and a phony baloney lawsuit. BP lied to Alaskans
about the producibility of Prudhoe Bay, BP told Alaskans it would
produce 9.6 billion barrels without a gas line, but told Congress
15 billion barrels without a gas line. Public Document 95-73, page
570. With the cooperation of the press and the legislature BP
continues to fool, maybe not now, the only too willing public.
That producibility has risen to 17 billion barrels by 1989, and
with 1970's technology. And if the current rumors are correct
about the OOIP, producibility is now 20 billion barrels."
MR. MCCUTCHEON commented that one must come in with the same kind
of expertise. He informed the committee that in 1977 Chancy Croft
put up the money for a three-dimensional model of Prudhoe Bay. He
said, "... -- once the state got it, never turned it on to find out
how much Prudhoe Bay would produce, never bothered to find out how
best to purchase Prudhoe Bay. A half a million bucks right down
the drain."
Number 1993
KAREN COWART, General Manager, Alaska Support Industry Alliance,
testified via teleconference from Anchorage. She informed the
committee that the Alliance membership includes nearly 350
businesses which contract directly with producer companies to
provide products and services in support of oil and gas activity.
The Alliance's mission is to advocate safe and environmentally
sound petroleum exploration, development and production for the
benefit of all Alaskans. She noted that she was present at the
request of the committee in order to provide the oil and gas
contractor community's perspective on the BP-Amoco/ARCO merger.
She said that she would not comment on royalties and taxes which
would best be addressed by the state. She explained that she would
discuss the concerns of the support industry with regard to
competitive downsizing to one major operator/producer and what that
means in terms of contracts and jobs.
MS. COWART stated, "The Alliance does not have an opinion on the
specifics of the merger." The Alliance believes it is prudent to
gather facts and therefore, the Alliance applauds the Governor's
initiative to form a team to gather critical information regarding
impacts to Alaskan hire, Alaskan buy, investor competition,
environmental protection and state revenues. Furthermore, the
Alliance appreciates these committee hearings which provide
citizens an opportunity to voice their questions. "The Alliance
does not view the proposed merger as a crisis. We do, however,
recognize it as a profound turning point, changing the landscape of
Alaska's oil and gas industry." She pointed out that the notion of
one main operator on the North Slope is not new. However, the
biggest surprise of the merger announcement is that it would leave
the state with not only one operator, but also one main producer on
the North Slope. She commented that the Alliance is waiting to
hear what the merger would mean to operations in Cook Inlet since
BP does not currently have a presence in this area. There is also
concern that the number of support industry contracts will shrink
with one major operator. She predicted that initially, there will
be further job losses in the support sector due to the
consolidation of administrative functions. "Support industry
businesses will likely respond to demand changes by streamlining
their own operations, and perhaps negotiating their own mergers and
consolidations."
MS. COWART said, "Competition is critical to successful leasing
programs in the National Petroleum Reserve-Alaska, the Outer
Continental Shelf and possibilities in ANWR." The Alliance agrees
with the Governor; it is time to aggressively market Alaska. She
noted that the image of instability created by Alaska's $1.2
billion fiscal gap is a weakness for the state. "Closing the gap
remains our top priority. We cannot stress enough the importance
of closing the gap this year." She acknowledged that the Alliance
has questions regarding the merger, but it believes there is room
for optimism in the long term. "If the merger makes the resulting
company more competitive under increasingly difficult business
conditions, as BP and ARCO say it will, then the Alliance believes
this bodes well for Alaska's future in petroleum development.
Weakened companies simply cannot afford to operate in remote,
expensive locations like the North Slope, especially when oil
prices are low."
MS. COWART indicated that as BP-Amoco and ARCO consolidate their
operations, efficiencies will undoubtedly be realized. Such
savings may be spent on exploration and production activity which
would result in jobs and contracts for support industry businesses.
"We also believe that BP-Amoco will make full use of the assets it
acquires from ARCO. A company would not sensibly spend $25 billion
to acquire facilities, land and assets and then allow them to sit
idle. BP-Amoco's commitment to spend $5 billion on North Slope
development over the next five years indicates that Alaska's
potential is viewed as long-term." She said that the Alliance is
encouraged by other commitments BP-Amoco has made, both to the
public and in direct conversations with Alliance members. The
Alliance believes those commitments will eventually result in
dollars for the state and work for the support sector. She
informed the committee, "BP-Amoco has said it will pursue ways to
commercialize Alaska's vast natural gas reserves. We welcome the
pledge to continue the ARCO's natural gas sponsor group, and we're
encouraged by initial plans to fund a gas-to-liquids plant on the
North Slope. These projects will give contractors an opportunity
to use the skills, tools and facilities that came with the advent
of module fabrication in Alaska. Without such projects, this new
module industry may fade." With regard to the merger's impact on
environmental protection, the Alliance is confident that the
industry will continue to excel. BP's worldwide corporate
philosophy is focused on development that does not compromise
environmental protection or employee safety. "As contractors, we
have been witness to, and players in, upholding this commitment."
MS. COWART said the oil and gas industry has proven its resiliency
by surviving lean times with ingenuity and sound decisions. She
pointed out that both producers and support businesses have lowered
production costs through advanced technologies and the elimination
of redundant services while consolidating resources and assets to
remain competitive. If the industry had maintained the status quo,
it would have failed. The Alliance views the merger as a business
decision that is responding to a changing global environment. "The
status quo will not work now to the benefit of Alaska's oil, and
gas industry, nor will 'business as usual' in state government work
to the benefit of Alaska's people."
Number 2283
RICHARD FINEBERG, testifying from Fairbanks, informed the committee
that he was speaking on his own behalf. He noted that he has
submitted a paper on behalf of the Alaska Public Interest Research
Group, Oilwatch Alaska, and the Alaska Forum for Environmental
Responsibility.
CHAIR BARNES confirmed that the committee has Mr. Fineberg's paper.
MR. FINEBERG recalled Commissioner Shively's testimony regarding
the history of the North Slope. There seemed to be a persistent
pattern in the changes on the North Slope as described by
Commissioner Shively. Between 1991 and 1997 six major oil
companies left ... [tape ends mid-speech]
TAPE 99-11, SIDE B
MR. FINEBERG continued "[tape begins mid-speech] ... might be using
the pipeline to drive out their competitors. There was only one
exception to the pattern and that was a producer [indisc.] North
Slope production to a smaller company [indisc.]." Since 1997 there
has been a trend toward consolidation. He indicated that Alaska
has the opportunity to buy the pipeline and the paper he submitted
to the committee specifies the way the numbers would work in broad
terms. Mr. Fineberg did not believe that virtual divestiture of
the pipeline is likely to work because that results in the status
quo which created the current situation. He reiterated that Alaska
could acquire the pipeline as laid out in Table 4, page 15, of his
paper. The pipeline could be acquired without an outlay of state
revenue and the pipeline could operate on a nonprofit basis which
would reduce tariffs, and thereby significantly increase state
revenue in royalties and severance. He suggested that some of the
pre-collected DR&R funds could be utilized to fulfill the capital
repayment, as necessary, and specific environmental tasks. The
lower tariffs and state management could ensure that the pipeline
does not stifle other competition. He said the pipeline revenue
could be guaranteed for the pipeline communities without the annual
fight to preserve the property taxes in the Fairbanks, the North
Slope, and the Valdez Boroughs. He noted that "we" could escrow
which would remove the state from the policy straight jacket it
faces in the long run. The pipeline would be operated on a
nonprofit basis which would provide the lower count. The paper
before the committee lays out the numbers, the background, and
history that led Mr. Fineberg to this proposal submitted on behalf
of the aforementioned organizations. Mr. Fineberg hoped that this
proposal would receive serious consideration.
REPRESENTATIVE OGAN inquired as to Mr. Fineberg's background.
MR. FINEBERG informed the committee that he is an independent
consultant. He noted that he was a journalist during the pipeline.
Mr. Fineberg has been in Fairbanks for probably 30 years now, in
Juneau for 12 years, in the Governor's Office for about six years,
and in Oil and Gas [indisc.] for Governor Cowper for three years.
He said that he did a number of reports to the state legislature in
the early 1990s. He has been an independent consultants for the
government and nonprofit groups, primarily. In 1997, Mr. Fineberg
did a report for Oilwatch Alaska which was entitled, "The Big
Squeeze: Trans-Alaska Pipeline and the Departure from the North
Slope of Oil Companies Who Found Oil There." In 1996, he did a
report for the Alaska Forum entitled "Pipeline in Peril," and in
1998, he did a report for Oilwatch Alaska "How much is Enough?",
which he believed "is the first independent analysis and broad,
comprehensive public analysis of North Slope profitability since
one was done for the Department of Revenue in 1989 that had the
misfortune to come out one week before the Exxon Valdez spill, and
it was quickly forgotten."
Number 0735
RANDY RUEDRICH, Arctic E&P Advisors, testified via teleconference
from Anchorage. He informed the committee that he has been
associated with the Alaskan petroleum industry for approximately 30
years. He has worked and managed aspects of drilling, production,
transportation and research organizations in the United Sates,
Europe, and the Middle East. He began his testimony with regard to
operations. He characterized the petroleum industry as ever
changing. "The exploration, discovery, development, depletion and
abandonment phases are required changes in a successful operation."
The classic commodity business no longer exists and low cost
operations are mandatory in a competitive world oil market. "The
successful commodity producer must only have one mission throughout
the life of the field, and that is to maximize production while
minimizing cost at each step of the way." He pointed out that
petroleum law encourages efficient business practices in the
formation of a unit to blend together all interests. The unit
operator is responsible for the design, construction, drilling and
production of the asset. In large fields, there have been several
in Alaska, the working interest owners have agreed to have multiple
unit operators. As the fields have matured, multiple operations or
unit operators in the early days of Cook Inlet have changed to a
single operator in a field or in an area as did Mobil, Amoco, ARCO,
Marathon and Unocal when they turned over platforms and related
facilities to remaining operators in the Cook Inlet.
MR. RUEDRICH pointed out that Prudhoe began as a similar
consolidation drive when the work declined. In 1992, drilling,
construction and aviation services were shared, but no operator
left. As mentioned earlier, the Alaska oil field service community
adjusted to those changes as it had to the Cook Inlet changes.
"Shared services and related ARCO and BP operational changes
reduced total production costs and gave us a very favorable event,
a very high level of growing capital investment from 1994 to 1998."
That resulted in a higher production rate from Prudhoe than had
been previously anticipated which was good for the service
community, individual Alaskans, and the state. He said that a
single operator for Prudhoe or shared services would historically
have followed as field production declined. The timing would be
dependent upon the marketplace and the field decline rate.
Therefore, the current combination of the two simply accelerates
that consolidation. He suggested that if savings are realized
through the reduction of operating costs, that should result in
increased oil production. Therefore, Mr. Ruedrich viewed this as
a positive event for Alaska and the North Slope oil fields.
Number 0900
MR. RUEDRICH turned to the ownership side. He pointed out that,
realistically, everyone who owns something will attempt to maximize
their rate of return. He believed that the elimination of ARCO's
interest may be a positive impact, "because our fields are more
profitable to produce, BP will invest more capital, that will be a
plus to us here in Alaska." He turned to the exploitation of
additional reserves in existing units which produces oil quickly at
a reasonably low cost. He stressed that this work must continue at
its current rate or at an accelerated rate, which he advocated.
One way to close Alaska's financial gap, is to improve the
production rate from the Arctic. He recalled Ken Thompson's, the
previous ARCO Alaska President, comment that there were 50 or more
prospects in the existing units which is a tremendous workload for
BP to follow up on. With regard to what the state should do, Mr.
Ruedrich advocated review of some type of exploitation well tax
credit; a tax credit for significant increases in exploitational
wells drilled to look for reserves. He posed a situation in which
a well cost $3 to $5 million and 25 million barrels of reserve were
added, as reported a couple weeks ago; that would be significant to
the state's tax revenue.
MR. RUEDRICH continued with discussion of the exploitation of the
new fields: North Star, Liberty, Sourdough, and the continuing
exploitation of Alpine. He believed it important for the state to
simplify its permitting process. He informed the committee that he
has participated in projects down south where the cost of the well
may be only slightly greater than the cost of permitting an
exploratory well in Alaska. He offered to work on this issue.
Alaska is pricing itself out of the marketplace. Helping operators
get permitted places more oil in the pipeline sooner, and makes
Alaska a place that is truly friendly for capital investment. "And
this will make our future open Alaska acreage sales more valuable
to the state." With regard to exploration plans for new reserves,
Mr. Ruedrich commented that BP should be allowed ample time to sell
the balance of its onshore acreage as defined by state law. "The
benefits to Alaska are very simple." He explained that new
exploration efforts with different concepts would be applied on
BPA's lowest priority acreage which would be a very big plus. He
reiterated the need for the state to provide BP with ample time to
market this large acreage so that new concepts, independent
financial resources, and more importantly independent dry hole
budgets will be attracted. Therefore, if anyone is successful, one
or more significant companies may be added to the Alaskan economy.
Number 1157
MR. RUEDRICH turned his discussion to gas development. He informed
the committee that he has served on the Alaska Petroleum
Engineering Advisory Committee for several years, and has advocated
for Alaska to become a leader in the new Gas to Liquid (GTL)
technology. He believed it imperative to pursue this. A
well-defined tax regime should be constructed and GTL production
started. The GTL plants could be built in Anchorage or Kenai and
shipped to the Slope over a multi-year construction period. This
would be a win-win plan for Alaska providing active Alaskan
construction contractors and Alaskan jobs in construction and field
operations. There would also be several tankers of white crude
leaving Valdez each week. All of this would be great for Alaska's
economy and the state's treasury. He pointed out that white crude
will keep the TAPS pipeline operational for many extra years in
order to ship billions of extra barrels of crude oil from
discovered and undiscovered North Slope oil fields.
REPRESENTATIVE PHILLIPS referred to Mr. Ruedrich's statement
regarding the trend of shared services and a single operator. She
asked if he meant that scenario would have been likely in the
foreseeable future anyway just in an attempt to bring down costs.
Number 1255
MR. RUEDRICH replied yes. He noted that shared services was
already implemented in 1992 as part of the business plan on the
Slope. Therefore, shared services would have continued or a
complete integration would have occurred. He indicated that the
merger, in one step, combines Prudhoe, Endicott, Milne Point,
Kuparak, Badami, and Alpine, all at one time. He acknowledged that
it probably creates a little more stress, as mentioned by Ms.
Cowart. However, in the long run, it provides a very stable
operating environment for our contractors and hopefully will reduce
the cost of business enough that those in business in 2001 to 2005
will be substantially more prosperous than if we went through this
in a piece-meal process. He reiterated that this one major step
would result in an incredibly positive event.
REPRESENTATIVE PHILLIPS inquired as to Mr. Ruedrich's
recommendation regarding marketing the reserve leases that would be
put on the market.
MR. RUEDRICH said that BP ranks their most desirable places in
their portfolio as well as in the acquired ARCO portfolio. Then it
would be determined if there is a lot of acreage that does not have
anything very appealing on it, and most likely the bottom end of
that portfolio would be marketed. He pointed out that a different
scenario could result if a couple of dry holes are drilled. This
is a very subjective business and until one drills, nothing is
definite. Therefore, having more people review the acreage would
be beneficial to BP and would create incremental exploration
drilling for Alaska on prospects that BPA might not conceptually
fantasize for a number of years.
REPRESENTATIVE PHILLIPS inquired as to Mr. Ruedrich's reaction to
the earlier statement that one ownership controlling the majority
of the properties on the Slope would keep other companies from
becoming interested.
MR. RUEDRICH said that from the standpoint of field ownership he
did not see any impact at all.
Number 1480
CHAIR BARNES asked Mr. Ruedrich to repeat his comment regarding the
need to work for the profitability of the companies.
MR. RUEDRICH noted that comment was in conjunction with his comment
about exportation. He clarified that if the state, as proposed in
his handout, would consider a tax credit for incremental
exportation wells drilled, the production rate could potentially
increase by tens of thousands of barrels a day from several of
these fields which is a lot of oil. He posed the scenario in which
there is a tax credit for a significant increase, such as more than
eight wells and the state may pay a portion of the ninth and tenth
wells in terms of tax credit. If the number of discoveries could
be increased by one per year, and if those discoveries are 25,000
barrels a day, over time that would create a very significant asset
for Alaska that BP would be producing.
CHAIR BARNES commented that she would not be inclined to consider
tax breaks for anybody.
MR. RUEDRICH said that he did not view this as a tax break.
Number 1611
KEITH HAND, CFO, Fairbanks Natural Gas, testified via
teleconference from Fairbanks. He informed the committee that he
was speaking on behalf of Ray Latchem, President of Fairbanks
Natural Gas. He expressed concern regarding the BP-Amoco purchase
of ARCO with respect to the effect on the current and future gas
supply contracts Fairbanks Natural Gas has with ARCO, as well as
the impact this buy-out will have on the development of the North
Slope Gas. Fairbanks Natural Gas has developed relationships with
ARCO which has led to the acquisition of a desirable gas supply
agreement for Cook Inlet gas which is liquefied, transported, and
distributed to the residents of Fairbanks. "Prior to this
acquisition, BP-Amoco did not have a presence in natural gas
development in Cook Inlet. Therefore, it is undetermined what the
new combined company's interest in Cook Inlet gas will be and the
willingness of future Cook Inlet gas development and production."
He stressed that there is a more immediate impact regarding the
effect this purchase may have on the current gas supply contract of
Fairbanks Natural Gas. He realized that currently, the Interior
residents are a small consumer of the overall gas demand in the
state. However, the future of the Fairbanks Natural Gas project
depends on this contract. "This contract was and remains a
critical component of our utility permit as issued by the Alaska
Public Utilities Commission."
MR. HAND commented that the merger would also reduce the natural
gas producers by one major entity, resulting in future competition
being more weighted to the producer's side of the table. "Less
suppliers equates to less bargaining power for consumers, whether
it is us acting as the gas utility or when it is passed through to
our customers." Fairbanks Natural Gas, a small entity, without the
benefit of the ARCO relationship may find it difficult to negotiate
a renewal to it's existing contract on such favorable terms,
especially with one less supplier in the marketplace.
MR. HAND addressed the future of North Slope gas. He pointed out
that construction of the natural gas pipeline would create a
substantial reduction of energy bills for Fairbanks residents. It
is estimated that current home heating prices will be reduced by
one-half of the current price. Mr. Hand noted that ARCO, BP, and
Exxon are majority owners of the gas on the North Slope and ARCO is
one of the key members of the Alaska North Slope Gas project
sponsor group which is researching the feasibility of a natural gas
pipeline feeding a LNG plant. Although ARCO has been very active
in the development of a natural gas pipeline, BP has been silent
and has focused on a natural gas to liquids process which would
utilize the existing oil pipeline. Both companies previously
agreed that there is enough North Slope gas for both projects,
BP-Amoco has already announced an alternative that it is pursuing,
the GTL plant. "Once combined, one must wonder if the BP-Amoco
will stay committed to its statement in the papers claiming to
continue the dedication of resources to the gas pipeline and LNG
support group it has rebuffed up to this point. If history speaks,
BP-Amoco will probably not promote the deliver of cheap gas
supplies to the residents of the Interior."
CHAIR BARNES asked if anyone either via teleconference or in the
room wanted to testify. There being no one, she announced that
next Tuesday members of the support industries will be testifying.
On Friday, the president of BP, the president of ARCO, and other
oil companies of a much smaller nature will be present. She
indicated that Exxon has been asked to join that hearing as well.
Chair Barnes commented that there is nothing more important in
Alaska, other than balancing our budget, than what is going on with
the North Slope which is the lifeblood of this state. Chair Barnes
believed any amount of resources and time necessary must be devoted
to this issue in order to ensure that the interests of the state
and its people are protected.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on World Trade & State/Federal Relations meeting
was adjourned at 5:00 p.m.
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