Legislature(1999 - 2000)

09/25/1999 03:30 PM Senate MER

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
         JOINT SPECIAL COMMITTEE ON MERGERS                                                                                     
                 September 25, 1999                                                                                             
                     3:30 p.m.                                                                                                  
                                                                                                                                
MEMBERS PRESENT                                                                                                                 
                                                                                                                                
Senator Rick Halford, Chair                                                                                                     
Senator Drue Pearce                                                                                                             
Senator Johnny Ellis                                                                                                            
Representative Joe Green, Vice-Chair                                                                                            
Representative Brian Porter                                                                                                     
Representative Beth Kerttula                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                  
                                                                                                                                
Representative Jim Whitaker                                                                                                     
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                       
                                                                                                                                
Senator Mike Miller                                                                                                             
Senator Loren Leman                                                                                                             
Senator Kim Elton                                                                                                               
Senator Lyda Green                                                                                                              
Senator Robin Taylor                                                                                                            
Senator John Torgerson                                                                                                          
Senator Lyman Hoffman                                                                                                           
Senator David Donley                                                                                                            
Senator Jerry Ward                                                                                                              
Senator Gary Wilken                                                                                                             
Representative Allen Kemplen                                                                                                    
Representative John Coghill                                                                                                     
Representative Sharon Cissna                                                                                                    
Representative Tom Brice                                                                                                        
Representative Hal Smalley                                                                                                      
Representative John Davies                                                                                                      
                                                                                                                                
COMMITTEE CALENDAR                                                                                                              
                                                                                                                                
British Petroleum-ARCO Merger                                                                                                   
Executive Session:  Legislative Briefing                                                                                        
                                                                                                                                
PREVIOUS ACTION                                                                                                                 
                                                                                                                                
See the Joint Special Committee on Mergers minutes dated 6/11/99,                                                               
7/28/99, and 9/24/99.                                                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                                
                                                                                                                                
BRUCE BOTELHO, Attorney General                                                                                                 
Department of Law                                                                                                               
PO Box 110300                                                                                                                   
Juneau, Alaska 99811-0300                                                                                                       
Telephone:  (907) 465-2133                                                                                                      
POSITION STATEMENT:  Offered to answer any questions.                                                                           
                                                                                                                                
JOHN SHIVELY, Commissioner                                                                                                      
Department of Natural Resources                                                                                                 
400 Willoughby Avenue                                                                                                           
Juneau, Alaska 99801-1724                                                                                                       
Telephone:  (907) 465-3886                                                                                                      
POSITION STATEMENT:  Spoke to the Administration's view on the                                                                  
issues brought forth by BACKBONE.  Answered questions.                                                                          
                                                                                                                                
FRED BONESS, Attorney                                                                                                           
Preston, Gates & Ellis                                                                                                          
420 L Street, Suite 400                                                                                                         
Anchorage, Alaska                                                                                                               
Telephone:  (907) 276-1969                                                                                                      
POSITION STATEMENT:  As outside counsel for the committee, he                                                                   
provided the committee with information and answered questions.                                                                 
                                                                                                                                
JOHN MESSENGER, Attorney                                                                                                        
Preston, Gates & Ellis                                                                                                          
420 L Street, Suite 400                                                                                                         
Anchorage, Alaska                                                                                                               
Telephone:  (907) 276-1969                                                                                                      
POSITION STATEMENT:  Discussed the tax structure.                                                                               
                                                                                                                                
ACTION NARRATIVE                                                                                                                
                                                                                                                                
TAPE 99-6, SIDE A                                                                                                               
Number 001                                                                                                                      
                                                                                                                                
[NOTE:  This meeting is technically a continuation of the                                                                       
September 24, 1999, meeting which was recessed to the call of the                                                               
chair.]                                                                                                                         
                                                                                                                                
CHAIRMAN HALFORD called the Joint Special Committee on Mergers                                                                  
meeting to order at 3:30 p.m.  Committee members present were                                                                   
Senators Halford, Ellis and Representatives Green, Porter, and                                                                  
Kerttula.  Other Senators present were Senators Miller, Leman,                                                                  
Elton, Green, Taylor, Torgerson, Hoffman, Donley, Ward, and Wilken.                                                             
Other Representatives present were Representatives Kemplen,                                                                     
Coghill, Cissna, Brice, Smalley, and Davies.                                                                                    
                                                                                                                                
BRUCE BOTELHO, Attorney General, Department of Law, expressed his                                                               
apologies that he has been summoned to another meeting.  Therefore,                                                             
Commissioner Shively is prepared to speak to the BACKBONE issues on                                                             
behalf of the Administration.  Attorney General Botelho also                                                                    
expressed his desire to continue to work closely with the committee                                                             
and the legislature with regard to the state's best interests in                                                                
the merger.  He offered to answer any questions.                                                                                
                                                                                                                                
Number 032                                                                                                                      
                                                                                                                                
JOHN SHIVELY, Commissioner, Department of Natural Resources,                                                                    
expressed the need to recognize that the state could have chosen a                                                              
variety of venues in order to review this merger.  The state could                                                              
have worked under the assumption that the merger would have been                                                                
approved, leaving BP as the single largest player.  The state                                                                   
instead took the route to obtain divestiture in order to maintain                                                               
a competitive force on the North Slope as well as other parts of                                                                
the state.  Commissioner Shively pointed out that with that                                                                     
approach one must recognize that one can't fix every problem in the                                                             
oil industry.  He said, "The key becomes divestiture, the key                                                                   
becomes having another strong operator on the Slope against which                                                               
we contest things like pricing, like how they do business with                                                                  
Alaska, like how they treat the environment, like what they're                                                                  
doing with technology."                                                                                                         
                                                                                                                                
COMMISSIONER SHIVELY acknowledged that some, such as BACKBONE,                                                                  
suggest that the state should bring a suit in court.  Although                                                                  
there are issues beyond divestiture which are important issues, he                                                              
believed, personally, that in court the state would face only the                                                               
anti-trust issue.  Such a situation would probably result in only                                                               
one solution which he identified as divestiture.  He mentioned that                                                             
in such a situation a number of the other issues would                                                                          
automatically be taken off the table.  Commissioner Shively turned                                                              
to the issues attached to the letter from BACKBONE.  The first                                                                  
issue listed is the wellhead value.  He stated that the settlement                                                              
agreements provide some ability to revisit the wellhead value on a                                                              
regular basis.  Therefore, there is some protection.  He wasn't                                                                 
sure it is appropriate to establish a particular approach for BP                                                                
since there will be another operator.  Internally, there is regular                                                             
discussion with regard to whether the reopeners should be                                                                       
activated.  He believed that even with divestiture there is some                                                                
danger that values would change.  He didn't believe that every                                                                  
valuation problem would be fixable as part of the negotiations.                                                                 
Commissioner Shively turned to the issue of competition.  The                                                                   
state, the Governor, and BACKBONE all seem to be in agreement that                                                              
there needs to be a strong operator.  With regard to access to TAPS                                                             
and TAPS tariffs, the Governor has realized that high tariffs are                                                               
potentially a barrier to competition.  However, he acknowledged                                                                 
that the state negotiated an agreement in good faith.  He commented                                                             
that TAPS and TAPS tariffs continue to be an issue of discussion                                                                
with BP.                                                                                                                        
                                                                                                                                
COMMISSIONER SHIVELY turned to the issue of access to facilities                                                                
and infrastructure on the North Slope which is important even with                                                              
divestiture.   He stressed that virtually no one is a single owner                                                              
of infrastructure.  All fields built involve a number of oil                                                                    
companies.  For example, the Alpine field is owned by ARCO and                                                                  
Anadarko.  If someone wants access to the fields both companies                                                                 
would have to agree on the fees.  In a location such as Prudhoe,                                                                
where there are multiple owners, the situation becomes more                                                                     
complicated.  Therefore, no single company can set those fees.                                                                  
However, internally there has been the view that the state has some                                                             
authority over these issues if companies can't resolve such issues.                                                             
Although there have been a number of disagreements on the Slope, to                                                             
his knowledge there hasn't been a situation in which oil wasn't                                                                 
developed due to disagreements over fees.  As part of the state's                                                               
ability to manage units, he believed the state could say that oil                                                               
has to be developed.  Commissioner Shively recognized that this is                                                              
a complex issue because it isn't just access or money, the issue                                                                
also involves capacity.  However, this issue is on the task force's                                                             
list.                                                                                                                           
                                                                                                                                
COMMISSIONER SHIVELY said that natural gas is also on the task                                                                  
force's list.  The Governor has been clear that if there is a                                                                   
viable project, the gas should be made available.  He pointed out                                                               
that BACKBONE had expressed concern that if there was a gas to                                                                  
liquids project, the state would receive no value for its gas.  He,                                                             
as commissioner, said that he had never been under that impression.                                                             
If people use Alaska's gas, there will be a value to it.  To his                                                                
knowledge, no one has ever suggested that there would be a zero                                                                 
royalty.  This Administration has always made it clear that they                                                                
believe there is a value which they intend to obtain.  Certainly,                                                               
tax policy on natural gas can be utilized to promote various                                                                    
things.  Commissioner Shively offered to answer any questions.                                                                  
                                                                                                                                
Number 153                                                                                                                      
                                                                                                                                
SENATOR TAYLOR understood Commissioner Shively to say that access                                                               
to processing facilities would be dependent upon consent from the                                                               
owner or owners.  He also understood Commissioner Shively to say                                                                
that if the owners of such facilities were unable to achieve an                                                                 
agreement with the new entrant, that Commissioner Shively had the                                                               
authority to step in.  In those negotiations, who would protect the                                                             
State of Alaska?                                                                                                                
                                                                                                                                
COMMISSIONER SHIVELY replied no one.  He explained that he didn't                                                               
believe those costs are deductible.  The facility costs are between                                                             
the industry.  For instance, if Company A tries to enter and                                                                    
Companies B, C, and D charge too much, Company A would pay, not the                                                             
state.                                                                                                                          
                                                                                                                                
SENATOR TAYLOR asked if that would impact the production, should                                                                
the company fail to produce based on too high of a rate.                                                                        
                                                                                                                                
COMMISSIONER SHIVELY said that is the issue.  He reiterated that,                                                               
to his knowledge, no oil has failed to be developed because of                                                                  
owners not coming to an agreement on the use of facilities.  If the                                                             
owners did end up in disagreement, then the state should come in                                                                
and state that the oil should be developed.                                                                                     
                                                                                                                                
SENATOR TAYLOR posed the assumption that the state receives back                                                                
some oil leases which are made available.  In such a case, what                                                                 
could the potential purchaser of a lease rely upon with regard to                                                               
access to facilities?                                                                                                           
                                                                                                                                
COMMISSIONER SHIVELY didn't view that situation as any different                                                                
than the current situation.  He wasn't sure that if there is                                                                    
competition, that it would change.  Furthermore, not all fields                                                                 
need access to other facilities.  He believed that there needs to                                                               
be comfort for those who need facilities, in that the state would                                                               
have the ability to review that.  With divestiture, Commissioner                                                                
Shively didn't really see a change from the current situation.                                                                  
                                                                                                                                
Number 207                                                                                                                      
                                                                                                                                
CHAIRMAN HALFORD said that he understood the law and regulations to                                                             
clearly provide that one can eliminate a fractional interest in                                                                 
300,000 or 400,000 acres while maintaining absolute majority                                                                    
control of 800,000.  He understood that would comply with the law's                                                             
500,000 acre requirement.  What will be done and how will it be                                                                 
done?                                                                                                                           
                                                                                                                                
COMMISSIONER SHIVELY commented that there are discussions with BP                                                               
regarding how the divestiture in acreage would take place.                                                                      
Currently, BP and ARCO have bid with other partners who generally                                                               
have preference right if BP or ARCO wants to sell their portion to                                                              
buy in at whatever someone else offers.  That is an issue that must                                                             
be dealt with.  They may not have total control as to who they sell                                                             
to.  There have been discussions, which he wasn't prepared to                                                                   
discuss in public at this point, regarding how to assure one could                                                              
obtain control of definite prospects.  Commissioner Shively                                                                     
commented that BP wouldn't be able to have a controlling interest                                                               
if there are other operators.  Ultimately, if BP doesn't meet the                                                               
requirement, they can be given a 90 day notice which must be                                                                    
completed in 90 days or the lease reverts back to the state.                                                                    
                                                                                                                                
SENATOR PEARCE recalled that at yesterday's meeting, Attorney                                                                   
General Botelho said that the Governor wants to ensure there is a                                                               
second operator on the North Slope.  Does that mean a new entrant                                                               
coming in to operate new fields that aren't presently produced?                                                                 
Or, is the desire to merely have a second operator on the North                                                                 
Slope?                                                                                                                          
                                                                                                                                
COMMISSIONER SHIVELY said that he believed the Governor has made it                                                             
clear that there has to be actual transfer of production.                                                                       
Therefore, the new company or companies would have some production                                                              
from what is ongoing.  Equally as important, would be decent                                                                    
exploration acreage.  He explained that no one would come to merely                                                             
operate for awhile, there have to be opportunities for the future.                                                              
The two must go together.                                                                                                       
                                                                                                                                
SENATOR PEARCE surmised then that a transfer of ownership would be                                                              
production.                                                                                                                     
                                                                                                                                
COMMISSIONER SHIVELY agreed.                                                                                                    
                                                                                                                                
CHAIRMAN HALFORD interjected that it would include both ownership                                                               
and operation.                                                                                                                  
                                                                                                                                
COMMISSIONER SHIVELY agreed and noted that there are a variety of                                                               
ways to achieve such.  According to how it has been done on the                                                                 
Slope, there would have to be someone with controlling interest in                                                              
production and production facilities in order to be an operator.                                                                
                                                                                                                                
CHAIRMAN HALFORD pointed out that the conditions and 500,000 acre                                                               
limit that are in statute are part of the ownership and lease side                                                              
of the negotiations.  He assumed that those are part of the                                                                     
contractual obligations which are protected by the constitution                                                                 
against unilateral amendment.                                                                                                   
                                                                                                                                
COMMISSIONER SHIVELY agreed.                                                                                                    
                                                                                                                                
CHAIRMAN HALFORD surmised then that real changes in those areas                                                                 
would have to be done in the negotiating process versus something                                                               
in the legislature's power to change by law.                                                                                    
                                                                                                                                
COMMISSIONER SHIVELY said that he believed that to be true.                                                                     
                                                                                                                                
CHAIRMAN HALFORD expressed the importance of understanding that is                                                              
an area that can't be fixed by statute.                                                                                         
                                                                                                                                
SENATOR TAYLOR noted that it can be fixed with regard to future                                                                 
uses.                                                                                                                           
                                                                                                                                
CHAIRMAN HALFORD agreed, but believed the notion that we have                                                                   
absolute control over the 500,000 acre limit is a misnomer.                                                                     
                                                                                                                                
SENATOR TAYLOR recalled that Commissioner Shively indicated that                                                                
the return of those properties in excess of the 500,000 acre limit                                                              
is a complex issue.  Are there issues within that limit for which                                                               
the legislature could provide some guidance to the Administration                                                               
with regard to which property should be returned?  Are there some                                                               
vague areas within that law which are problematic?                                                                              
                                                                                                                                
Number 275                                                                                                                      
                                                                                                                                
COMMISSIONER SHIVELY replied no.  He believed it clear that the                                                                 
companies have been given a property right.  Those leases contain                                                               
certain conditions, including the amount of acreage a company can                                                               
own in non-unitized areas.  As a result of the property right, the                                                              
company has the ability to take actions with the lease themselves                                                               
in order to come down to the 500,000 acre limit.  If the company                                                                
takes no action, the state has the right to make the company return                                                             
the acreage to the state.  Commissioner Shively didn't believe                                                                  
there to be much confusion on that point.                                                                                       
                                                                                                                                
CHAIRMAN HALFORD posed an example of a company which owns 51                                                                    
percent of 100 acres.  Although that company would have absolute                                                                
control, it would count as 51 acres.                                                                                            
                                                                                                                                
REPRESENTATIVE KEMPLEN asked if the state would accept Exxon as a                                                               
second operator.                                                                                                                
                                                                                                                                
COMMISSIONER SHIVELY commented that there are an endless number of                                                              
operators.  Exxon Mobil will be the world's largest oil company                                                                 
and he believed having it as an operator on the Slope would be                                                                  
advantageous to the state.                                                                                                      
                                                                                                                                
SENATOR ELTON recalled that Commissioner Shively had mentioned that                                                             
some of the issues are complex and complicated.  He expressed                                                                   
concern with the Governor's aggressive schedule to reach an                                                                     
agreement with BP.  He wondered if the suggestion to file the anti-                                                             
trust legislation would afford more time for negotiations with BP                                                               
through the settlement process.                                                                                                 
                                                                                                                                
COMMISSIONER SHIVELY pointed out that the schedule is somewhat                                                                  
driven by the schedule of the FTC.  As previous testimony                                                                       
indicates, we must work in conjunction with the FTC because it has                                                              
more clout than the state.  At this point, he guessed the FTC could                                                             
deal with this in November.  As the attorney general and the                                                                    
Governor have said, if an agreement can't be reached, a suit will                                                               
be filed.  Commissioner Shively stressed his belief that filing                                                                 
suit is the last approach, not the first because once in court the                                                              
number of issues becomes confined.  The litigation would be                                                                     
confined to anti-trust issues.  Therefore, in order to maximize                                                                 
what is on the table, there should be negotiations.                                                                             
                                                                                                                                
SENATOR TAYLOR inquired as to the fate of the proposed $40 million                                                              
gift to the university as a condition of the merger.                                                                            
                                                                                                                                
COMMISSIONER SHIVELY wasn't sure.  However, he reiterated that such                                                             
an issue, BP's commitment to the community, would not be available                                                              
if the state moved to litigation.                                                                                               
                                                                                                                                
SENATOR TAYLOR reminded the commissioner that the legislature                                                                   
appropriates money, not the Governor.  If revenue is to be                                                                      
generated, it comes into the general fund.  He stressed that the                                                                
legislature should determine where such money is appropriated.                                                                  
                                                                                                                                
COMMISSIONER SHIVELY said that he would relay that to the Governor.                                                             
He commented that there is no question that if the money comes                                                                  
directly to the state, the legislature has the ability to                                                                       
appropriate it.  If BP chooses to give money to the Boy Scouts or                                                               
the university, that is BP's business and the legislature isn't                                                                 
generally involved.                                                                                                             
                                                                                                                                
SENATOR TAYLOR stated:                                                                                                          
                                                                                                                                
     If, in fact, the negotiations on behalf of the people of                                                                   
     the State of Alaska for a state-owned resource and                                                                         
     revenue is generated from that or side deals made on                                                                       
     where revenues are going to go should come through this                                                                    
     legislature.  (Indisc.) place an appropriation on                                                                          
     whatever the needs are, I think the legislature deems to                                                                   
     be most appropriate.                                                                                                       
                                                                                                                                
CHAIRMAN HALFORD commented that he didn't disagree with Senator                                                                 
Taylor's premise, however he wouldn't pre-judge how the                                                                         
Administration would handle it.                                                                                                 
                                                                                                                                
SENATOR TAYLOR said he wouldn't either.  He clarified that he was                                                               
suggesting there is an appropriate way to deal with such a                                                                      
condition which must be kept in mind.                                                                                           
                                                                                                                                
Number 351                                                                                                                      
                                                                                                                                
SENATOR PEARCE asked if Commissioner Shively could inform the                                                                   
committee at what level the negotiations are occurring within the                                                               
BP ARCO corporation.  Does any negotiated agreement have to be                                                                  
placed before the company's board or can Mr. Browne merely make the                                                             
decision?  Is there any knowledge as to how long the process will                                                               
take?                                                                                                                           
                                                                                                                                
COMMISSIONER SHIVELY stated, to his knowledge, the Chief Executive                                                              
Officer has the ability to negotiate these issues.  He believed                                                                 
that the shareholders of both companies have voted on the merger                                                                
itself.  Commissioner Shively believed, to his knowledge, that it                                                               
wouldn't have to go before the board.  However, that question                                                                   
hasn't been specifically answered.  In terms of timing, BP isn't                                                                
interested in prolonging the process.                                                                                           
                                                                                                                                
SENATOR PEARCE pointed out that the shareholders voted on a                                                                     
specific merger which included some specific statements regarding                                                               
the financial gains.  She expressed curiosity at what point the                                                                 
Federal Communications Commission (FCC) will make the companies                                                                 
take another vote of their shareholders, if the merger is different                                                             
than what was originally voted on.                                                                                              
                                                                                                                                
COMMISSIONER SHIVELY said that he didn't have an opinion on that.                                                               
                                                                                                                                
CHAIRMAN HALFORD commented that that information should provide the                                                             
state with some understanding of the state's relative benefits from                                                             
this process.                                                                                                                   
                                                                                                                                
SENATOR TAYLOR asked if there is a price differential on a barrel                                                               
of oil, if that barrel's ownership transfers, based on wellhead                                                                 
cost and field cost, from ARCO to BP.                                                                                           
                                                                                                                                
COMMISSIONER SHIVELY replied yes.                                                                                               
                                                                                                                                
SENATOR TAYLOR inquired as to the estimated loss or gain in state                                                               
revenue.  How much would be gained or lost if an ARCO barrel, worth                                                             
X amount of dollars to the state, now becomes a BP barrel.                                                                      
                                                                                                                                
COMMISSIONER SHIVELY stated that he couldn't answer that                                                                        
specifically.  He noted that it wouldn't even be the same from                                                                  
month to month due to a variety of factors which affect both                                                                    
companies with regard to how their oil is priced.  The price                                                                    
changes can largely be attributed to the transportation deductions.                                                             
                                                                                                                                
SENATOR TAYLOR said that he had heard that the mere transfer of                                                                 
ownership of a barrel of oil between the two companies would result                                                             
in a significant loss of revenue to the state.  He explained his                                                                
understanding that the loss would occur because BP has higher field                                                             
costs or associated production costs.                                                                                           
                                                                                                                                
COMMISSIONER SHIVELY indicated that is basically the transportation                                                             
costs.  Some of that does work itself out due to the efficiencies                                                               
that occur as BP is able to align its shipping interest with where                                                              
production comes from.                                                                                                          
                                                                                                                                
SENATOR TAYLOR commented that although some of it may work out                                                                  
because of efficiencies, overall there would be a loss in that                                                                  
volume of production.                                                                                                           
                                                                                                                                
COMMISSIONER SHIVELY responded that there may or may not be a loss.                                                             
He said that he couldn't answer that question now.  He reiterated                                                               
that the settlement agreements all provide for reopeners on a                                                                   
regular basis.  Therefore, there are ways outside of the merger to                                                              
deal with such an issue.                                                                                                        
                                                                                                                                
CHAIRMAN HALFORD stated:                                                                                                        
                                                                                                                                
     We, ..., picked the month with the highest differential                                                                    
     and tried to run it through and there were explanations                                                                    
     back from the Administration when we did that.  But if we                                                                  
     ran through the month that we picked and the explanations                                                                  
     didn't come through, the ... range of that difference of                                                                   
     converting all ARCO barrels to all BP barrels - in that                                                                    
     worst month scenario were then annualized - was in the                                                                     
     range of $80 million a year.  It was significant, but the                                                                  
     answers back pointed out that some of that wouldn't                                                                        
     happen and some, on the other side, might come up.  It's                                                                   
     at least a question that is very worthwhile to ask and to                                                                  
     try and figure out.                                                                                                        
                                                                                                                                
COMMISSIONER SHIVELY agreed that it is also worth keeping track of,                                                             
but he reiterated that he wasn't sure that everything can be fixed                                                              
within this merger.                                                                                                             
                                                                                                                                
CHAIRMAN HALFORD interjected that it seems that part of that is                                                                 
bound by settlements which go with the oil, not with the owner.                                                                 
                                                                                                                                
SENATOR PEARCE asked if the knowledge of whether there is a                                                                     
reopener on those is confidential information.                                                                                  
                                                                                                                                
COMMISSIONER SHIVELY answered that he didn't know the answer to                                                                 
that, but offered to find that answer.                                                                                          
                                                                                                                                
REPRESENTATIVE KEMPLEN asked if Commissioner Shively makes a                                                                    
distinction between an owner and an operator.  If so, please                                                                    
clarify the two.                                                                                                                
                                                                                                                                
Number 425                                                                                                                      
                                                                                                                                
COMMISSIONER SHIVELY said that he does make a distinction between                                                               
an owner and an operator.  He pointed out that lots of people own                                                               
leases and the oil under them in Prudhoe Bay.  However, two or                                                                  
three actually manage a field or fields.  He explained that an                                                                  
operator is one who performs the management, hiring personnel and                                                               
contractors who work in the field.  The operators produce the cost                                                              
estimates for capital constructions.  The operator receives a fee                                                               
for managing.  Therefore, there are a number of owners with,                                                                    
traditionally, only two operators in terms of production.                                                                       
Commissioner Shively noted that Exxon is designated the operator of                                                             
Point Thompson, but since Exxon hasn't really produced anything he                                                              
didn't consider them an operator.                                                                                               
                                                                                                                                
CHAIRMAN HALFORD pointed out that the series of maps, the pre-                                                                  
merger and post merger map, illustrate the operators for given                                                                  
fields.  He clarified that the leases indicate owners.                                                                          
                                                                                                                                
REPRESENTATIVE KEMPLEN asked if there could be a situation in which                                                             
BP could be a part owner, although a very influential owner, with                                                               
two operators.                                                                                                                  
                                                                                                                                
COMMISSIONER SHIVELY agreed that could be correct theoretically.                                                                
However, he didn't believe that any oil company would want to                                                                   
operate in a field in which it didn't have controlling interest.                                                                
Such has not been the case in the past.                                                                                         
                                                                                                                                
REPRESENTATIVE KEMPLEN surmised then that a second operator would                                                               
really mean another owner.                                                                                                      
                                                                                                                                
COMMISSIONER SHIVELY clarified that it may not be another owner.                                                                
Perhaps, someone who already owns a piece of the field takes a                                                                  
bigger piece by purchasing it from BP.  It would be a different                                                                 
company that would be the operator and they would have a different                                                              
percentage ownership than currently.                                                                                            
                                                                                                                                
REPRESENTATIVE KEMPLEN understood then that the predominant color,                                                              
green, on the map would change after the settlement.                                                                            
                                                                                                                                
COMMISSIONER SHIVELY agreed and noted that to be the point of the                                                               
divestiture.                                                                                                                    
                                                                                                                                
SENATOR ELTON asked if Commissioner Shively envisioned the pipeline                                                             
tariff as one of the fixes that would occur outside the merger                                                                  
context.                                                                                                                        
                                                                                                                                
COMMISSIONER SHIVELY answered that the issue of pipeline tariffs is                                                             
on the table.  He reiterated that the issue of pipeline tariffs is                                                              
a complex issue due to an agreement which the state was involved                                                                
in.  The current tariff situation is clearly anti-competitive.                                                                  
There are a variety of solutions.  Therefore, in terms of a new                                                                 
operator that is an issue that must be addressed.                                                                               
                                                                                                                                
SENATOR TAYLOR inquired as to whether there has been contemplation                                                              
of any changes in existing legislation or a new package of                                                                      
legislation in order to encourage independent operators to enter                                                                
Alaska.  If so, what has been contemplated?                                                                                     
                                                                                                                                
COMMISSIONER SHIVELY replied no.  If there is a competitive system                                                              
combined with the area wide leasing program, that would allow                                                                   
entrants.  He believed that without reviewing divestiture there                                                                 
wouldn't have been much interest from others on the North Slope.                                                                
Once the divestiture situation unfolds, he believed it will add to                                                              
the interest of other independent oil companies to come to Alaska.                                                              
At this point, there is no anticipation of any legislation which                                                                
would change the current bidding system.  He commented that the                                                                 
bidding system had worked well until ARCO decided it didn't want to                                                             
be there any longer.                                                                                                            
                                                                                                                                
CHAIRMAN HALFORD predicted then that the state would be able to                                                                 
measure its success in the number of bidders in the next major                                                                  
North Slope lease sale.                                                                                                         
                                                                                                                                
COMMISSIONER SHIVELY affirmed that could be the case.  He pointed                                                               
out that the Beaufort sale had just been postponed because he felt                                                              
the current instability didn't maximize the state's opportunity for                                                             
others to enter.                                                                                                                
                                                                                                                                
CHAIRMAN HALFORD commented that he believed that to be a good                                                                   
decision.                                                                                                                       
                                                                                                                                
SENATOR TAYLOR said that he didn't believe there was a choice with                                                              
regard to divestiture, that law had to be enforced.  He                                                                         
acknowledged that divestiture may be a negotiating point.  Senator                                                              
Taylor asked if the assumption would be that upon resolution of the                                                             
divestiture, there would be additional and more attractive                                                                      
properties to offer.                                                                                                            
                                                                                                                                
COMMISSIONER SHIVELY responded that is unclear because there is no                                                              
knowledge as to whether properties will be returned to the state or                                                             
whether BP will make changes.  He referred to maps present at the                                                               
hearing.  He noted that one of the challenges the state faces is                                                                
that the state owns from [Mount] Canning to [Mount] Colville and                                                                
most of the good acreage is currently leased.  There have been some                                                             
interest in various geological formations to the south.  Anadarko                                                               
has made a commitment to review Arctic Slope lands well south of                                                                
the state's lands.                                                                                                              
                                                                                                                                
COMMISSIONER SHIVELY turned to the North Slope and the potential                                                                
for new fields.  He indicated that one would look at what would                                                                 
occur in the National Petroleum Reserve-Alaska (NPR-A) which is                                                                 
mentioned with regard to divestiture.  Regardless of changing or                                                                
keeping the current law, he didn't believe many would be excited by                                                             
the acreage.  He pointed out that currently some relatively small                                                               
companies are bidding large amounts for strategic leases which they                                                             
believe will connect with existing fields.  However, there is not                                                               
much great acreage at this point.                                                                                               
                                                                                                                                
SENATOR TAYLOR surmised then that divestiture would be left up to                                                               
the companies to decide what negotiations they may have with their                                                              
partial owners.  After they make the decision with regard to what                                                               
they return to the state, the state will...                                                                                     
                                                                                                                                
COMMISSIONER SHIVELY interjected that would not be the exact                                                                    
scenario.  He said that he wouldn't discuss the total negotiating                                                               
strategy.  However, he believed that the state has a role in how                                                                
the divestiture will end up.  The divestiture is not being totally                                                              
left in BP's hands.                                                                                                             
                                                                                                                                
CHAIRMAN HALFORD reiterated that the law is clear and not in the                                                                
state's favor.  This is an issue that must be won in negotiations.                                                              
                                                                                                                                
COMMISSIONER SHIVELY agreed.  However, the divestiture model for                                                                
the FTC and the state will have to meet certain criteria,                                                                       
regardless, which will be BP's problem.  He specified that was his                                                              
personal thought.                                                                                                               
                                                                                                                                
Number 536                                                                                                                      
                                                                                                                                
REPRESENTATIVE CISSNA recalled that there was a question regarding                                                              
the DR&R (Dismantling, Removal and Restoration) funds in escrow and                                                             
the state demanding discontinuation of that collection.                                                                         
                                                                                                                                
COMMISSIONER SHIVELY informed everyone that Mr. Fineberg has                                                                    
requested that he have nothing further to do with that issue.  Mr.                                                              
Fineberg believes Commissioner Shively has a conflict of interest                                                               
because how the state deals with DR&R was part of the tariff                                                                    
settlement developed when Commissioner Shively was Chief of Staff.                                                              
At this point, Commissioner Shively said that he hasn't made a                                                                  
decision on that point yet.  Commissioner Shively stressed that                                                                 
DR&R has never been made an issue and has never been handled that                                                               
way in any location.  He assumed that when it comes time to                                                                     
cleanup, a big company would do so.  He turned to the Cook Inlet                                                                
when Shell decided to sell to Cross Timbers.  When Shell wanted to                                                              
transfer the leases, the state informed Shell it could transfer the                                                             
leases, but it couldn't transfer its responsibility if Cross                                                                    
Timbers can't clean it up.  Therefore, a different scenario was                                                                 
utilized for DR&R for Cross Timbers because Cross Timbers is                                                                    
smaller.  At this point, the state doesn't require large companies                                                              
to escrow DR&R.                                                                                                                 
                                                                                                                                
CHAIRMAN HALFORD commented that he too was around when the tariff                                                               
settlement was developed.  Bob Maynard did much of that                                                                         
negotiation.  Both Mr. Maynard and the Administration at that time                                                              
did the best that they could.  If they made mistakes, those are                                                                 
mistakes that can be identified in hindsight with much new                                                                      
information.  Chairman Halford explained that most of the money                                                                 
returns to them because it was their oil.  It was a portion of the                                                              
tariff on all the oil that went through.  Therefore, the numbers                                                                
look bigger than he thought they would come out.  Chairman Halford                                                              
indicated that it is an exercise that may not arrive where he had                                                               
initially hoped.                                                                                                                
                                                                                                                                
REPRESENTATIVE KERTTULA spoke to the comments regarding the loss of                                                             
some conditions if the state were to go to court.  However, if the                                                              
state filed an anti-trust lawsuit and the merger stopped, then a                                                                
different scenario would exist.                                                                                                 
                                                                                                                                
COMMISSIONER SHIVELY acknowledged that BP may find that there are                                                               
requirements that make the deal unattractive.  Whether BP would                                                                 
return to its shareholders or make a decision to oppose the deal,                                                               
that would be BP's decision.  Commissioner Shively believed that                                                                
ARCO has made a decision.  If BP changes its mind, he didn't expect                                                             
ARCO to remain in the long-run.                                                                                                 
                                                                                                                                
CHAIRMAN HALFORD asked if it was possible that ARCO's situation                                                                 
changed between the time of $13 and $24 oil.                                                                                    
                                                                                                                                
COMMISSIONER SHIVELY believed, personally, that the decision was                                                                
broader than the price of oil at the time.  Although ARCO is in                                                                 
better shape today, he believed review of ARCO's Alaska operations                                                              
reveal that it was a viable company and could continue as such.                                                                 
However, ARCO had other operations.                                                                                             
                                                                                                                                
TAPE 99-6, SIDE B                                                                                                               
                                                                                                                                
SENATOR PEARCE asked if Usibelli, for example, has to escrow money                                                              
as they cleanup or do they also have to escrow money for final                                                                  
remediation.                                                                                                                    
                                                                                                                                
COMMISSIONER SHIVELY answered that, to his knowledge, Usibelli                                                                  
wouldn't escrow any money.  However, there are some things which                                                                
require bonds and there is also a state bonding pool to which                                                                   
mining companies contribute.                                                                                                    
                                                                                                                                
Number 578                                                                                                                      
                                                                                                                                
FRED BONESS, Attorney, Preston, Gates & Ellis, testified as outside                                                             
counsel for the committee.  He informed the committee that a number                                                             
of the topics he had intended to address had been addressed by                                                                  
Commissioner Shively.  Mr. Boness turned to the issue of the                                                                    
divestiture or interests and leases on the North Slope.  Previous                                                               
discussions have used the word divestiture in various different                                                                 
contexts.  He noted that he would first discuss divestiture in                                                                  
terms of the state statute, which requires divestiture of state                                                                 
leases.  He highlighted the limited nature of the divestiture                                                                   
statute.  He referred to the map as well.  The state statute                                                                    
requires when there is over 500,000 acres divestiture must occur,                                                               
in non-unitized areas.  He explained non-unitized as being                                                                      
essentially not developed.  Therefore, the discussion is not about                                                              
Prudhoe Bay, Kuparuk, Badami, or Duck Island all of which are                                                                   
unitized.  He commented that BP would probably attempt to get below                                                             
the 500,000 acre maximum in order to bid in the future.  Mr. Boness                                                             
explained, "When they do that, if they own 100 acres -- 100 percent                                                             
of the lease, for simplicity, 100 acres.  If they divest 49 percent                                                             
of that, then under the statute they own 51 percent of the lease                                                                
and it's credited as 51 acres."  Therefore, in many of the areas                                                                
where BP owns a lease now or after the merger, that could remain                                                                
green [controlled by BP] simply by reducing the percentage of                                                                   
ownership in those leases.                                                                                                      
                                                                                                                                
CHAIRMAN HALFORD asked if the change, between the maps, could occur                                                             
under the 500,000 acre limit.                                                                                                   
                                                                                                                                
MR. BONESS replied yes, but noted that he hasn't worked out the                                                                 
math.  He mentioned that it may be easier to achieve the same                                                                   
objective by eliminating a lease here and there.  He pointed out                                                                
another important aspect.  For instance, if BP recognizes that                                                                  
there is a logical unit in the future, then BP could choose to                                                                  
divest, in total, the leases outside of that unit in order to                                                                   
continue to own some percentage within the unit expected in the                                                                 
future.  If BP determines that it has some leases that aren't                                                                   
particularly valuable or unlikely to be in the overall plan, BP                                                                 
could choose to divest those leases.  That would still accomplish                                                               
the objectives, and therefore it wouldn't matter that some of the                                                               
lease tracks weren't green [controlled by BP].  Perhaps, it will be                                                             
far more important which areas remain green [controlled by BP] and                                                              
the percentage at which they remain so.                                                                                         
                                                                                                                                
MR. BONESS clarified that the divestiture to which Commissioner                                                                 
Shively referred is a negotiated divestiture, which is probably                                                                 
premised on the anti-trust notion of divestiture.  For example, in                                                              
the CARRS Safeway merger there was a divestiture of certain CARRS                                                               
stores.  That divestiture was an anti-trust type of divestiture,                                                                
not a concept which specifies the amount of grocery stores that one                                                             
owner can own.  Therefore, the notion of going beyond the lease is                                                              
important.  Mr. Boness pointed out that the only divestiture                                                                    
required by the state statute is that which is not in units.                                                                    
However, Commissioner Shively indicated that there is the desire                                                                
for divestiture of production as well, which would have to be                                                                   
premised on an anti-trust concept.                                                                                              
                                                                                                                                
MR. BONESS mentioned that he had intended to address the                                                                        
distinction between an owner and an operator, but Commissioner                                                                  
Shively has already covered that issue.  However, he said:                                                                      
                                                                                                                                
     I think some of the questions and Commissioner Shively's                                                                   
     answers were in the context of what if BP continues to                                                                     
     have a controlling interest.  And I suppose for most                                                                       
     purposes, people would think that that means 51 percent                                                                    
     or more.  You can go again to the concept of maybe                                                                         
     there's a block out there where BP is going to divest 49                                                                   
     percent.  And I think it's important to keep in mind that                                                                  
     it may not be a controlling interest in the sense of 51                                                                    
     percent that is important to focus on in the negotiations                                                                  
     with divestiture.  Because, typically, when you get into,                                                                  
     for example, negotiations by owners with respect to                                                                        
     sharing of facilities, the requirement is going to be                                                                      
     more than, in many of the agreements amongst the parties,                                                                  
     ... 50 percent approval.  In other words, ..., in the                                                                      
     agreements that exist up there if I come to the various                                                                    
     owners of a unit up there and say I would like to gain                                                                     
     access to your facilities, it may not be that I have to                                                                    
     have 100 percent approval of all the owners, although it                                                                   
     is possible I would have to have 100 percent.  But I,                                                                      
     almost certainly, am going to have to have something like                                                                  
     66 percent of 75 percent or 90 percent.  Therefore, if BP                                                                  
     divests in such a way that they own a percentage which                                                                     
     gives them veto power, as opposed to controlling power,                                                                    
     that is something that has to be considered and kept in                                                                    
     mind in analyzing the divestiture.  I think where that                                                                     
     leads one is simply underscores the notion that the                                                                        
     negotiation and the ability to implement a program which                                                                   
     will encourage competition is, as Commissioner Shively                                                                     
     said, complicated because it does involve these kinds of                                                                   
     considerations of control via the veto power as well as                                                                    
     control by a more traditional way of having majority                                                                       
     ownership in the matter.                                                                                                   
                                                                                                                                
Number 496                                                                                                                      
                                                                                                                                
MR. BONESS turned to the subject of net-back in revenues.  He                                                                   
clarified that field costs don't really enter in to the state's                                                                 
revenue considerations of the merger.  He acknowledged that there                                                               
are various ways that the state receives revenue from the industry                                                              
in the area of taxes.  He explained that the production tax,                                                                    
commonly referred to as the severance tax, taxes a percentage of                                                                
the value at the point of production.  In the case of Prudhoe Bay,                                                              
the point of production is pump station one.  Therefore, the                                                                    
severance tax values the oil from pump station.  He pointed out                                                                 
that the cost of getting the oil from the wellhead to pump station                                                              
one is irrelevant for purposes of the state's valuation because                                                                 
that valuation is done on a net-back.  He explained that the net-                                                               
back starts with a price in California or Asia and the cost of the                                                              
transportation and the pipeline tariff are subtracted out.  For                                                                 
severance tax purposes, no field costs are subtracted out.                                                                      
                                                                                                                                
MR. BONESS turned to royalties.  Field costs do enter into                                                                      
royalties.  He explained that royalties are what landowners                                                                     
typically reserve for themselves when entering into an oil and gas                                                              
lease.  This is a common practice, which Alaska followed when it                                                                
leased lands on the North Slope.  The original leases specified                                                                 
that royalty is valued at the wellhead.  He informed the committee                                                              
that the wellhead was part of litigation filed in the 1970s.  He                                                                
believed that the wellhead portion of the litigation was settled in                                                             
1980.  The settlement provided that the field cost deduction be a                                                               
fixed amount with some adjustment provisions.  Therefore, the                                                                   
deduction for field costs with respect to royalties is a fixed                                                                  
number which isn't really tied to costs.                                                                                        
                                                                                                                                
CHAIRMAN HALFORD understood then that the effect would be as                                                                    
follows.  If there is a $1 billion savings which is in the field                                                                
before the oil gets to pump station one, the state shares nothing                                                               
in the benefit of that savings.                                                                                                 
                                                                                                                                
MR. BONESS responded, that is correct.  He emphasized the                                                                       
importance of that realization.  BP has advanced the justification                                                              
that there will be a substantial savings in lifting costs.  Such a                                                              
rationalization is good, from a purely economic standpoint.                                                                     
However, BP may not have to acquire ARCO for such to occur.  He                                                                 
stressed that those savings will not be reflected in the current                                                                
royalty structure.  Furthermore, the legislature doesn't really                                                                 
have any access to do anything about those savings.  He pointed out                                                             
that those savings wouldn't be reflected in production taxes either                                                             
because the legislature made the valuation at pump station one.                                                                 
The legislature is limited with regard to capturing a share of                                                                  
those benefits.  Mr. Boness stated that the state can capture                                                                   
benefits in reductions of the tariff or tanker charges which are a                                                              
function of the net-back.  He believed the estimate to be if the                                                                
tariff decreases by one cent, the net benefit to the state is                                                                   
approximately $910,000.  Therefore, there is a substantial benefit                                                              
to the state in having reductions in the tariff.  Mr. Boness agreed                                                             
with Commissioner Shively in regards to a strictly anti-trust                                                                   
forum, such a lawsuit would not allow a great ability for                                                                       
adjustments in the tariff.  He informed the committee that BP has                                                               
always filed at the maximum tariff.  That tariff is governed by                                                                 
settlement agreements entered into in 1985 with some adjustments.                                                               
He explained that those adjustments were the result of litigation                                                               
with regard to the complexities of the federal regulatory system in                                                             
place at that time.  Mr. Boness believed that dealing with the                                                                  
tariff can only be achieved through the negotiation process.                                                                    
                                                                                                                                
MR. BONESS, per Representative Kerttula's request, addressed the                                                                
TAPS settlement methodology (TSM).  The TSM agreement provides that                                                             
between 2006 and 2008, the parties will attempt to negotiate a new                                                              
agreement.  If the parties haven't entered into a new agreement by                                                              
2008, the TSM terminates.  Therefore, the state and the companies                                                               
would return to setting tariffs under the federal law which didn't                                                              
work very well and resulted in the TSM.  This should be kept in                                                                 
mind as it is very important to the state's overall financial                                                                   
picture.                                                                                                                        
                                                                                                                                
MR. BONESS pointed out that many are concerned with the technology                                                              
and innovation impacts that result from the elimination of any                                                                  
entity such as ARCO.  For example, advances in technology have                                                                  
increased the projected 10 billion barrels of oil from Prudhoe Bay.                                                             
He believed that Prudhoe Bay has already produced 12 billion                                                                    
barrels of oil and continues to produce substantial oil.  That                                                                  
increase in production can be substantially attributed to advances                                                              
in technology such as lateral drilling.  He recognized the concern                                                              
that two thinkers/organizations with two sets of ideas is almost                                                                
always better than centralized control.                                                                                         
                                                                                                                                
Number 383                                                                                                                      
                                                                                                                                
REPRESENTATIVE DAVIES asked if the Administration could negotiate                                                               
a voluntary reduction in the tariff in order to reduce the tariff.                                                              
If so, how would that affect the other capacity (indisc.)?                                                                      
                                                                                                                                
MR. BONESS agreed that the Administration could try to negotiate a                                                              
voluntary reduction in the tariff.  There are various options the                                                               
Administration could take in this area.  He pointed out that, to                                                                
some extent, ARCO's tariff has always been lower than BP's tariff.                                                              
He noted that it is a function of tanker charges.  Therefore, one                                                               
negotiating posture would be to simply ensure that formerly-owned                                                               
ARCO barrels are treated under the same tariff as if under ARCO.                                                                
Such a posture wouldn't necessarily require an amendment to the                                                                 
TSM.  Mr. Boness expressed concern that there are ways to negotiate                                                             
for competition, but what is being discussed is competition among                                                               
a small entity.                                                                                                                 
                                                                                                                                
REPRESENTATIVE KERTTULA understood the question to have a mix with                                                              
regard to tariff reduction and increase in capacity.  She didn't                                                                
believe that capacity would be increased.                                                                                       
                                                                                                                                
MR. BONESS clarified that capacity and competition are intertwined                                                              
here.  One group identifies capacity as whatever goes down the                                                                  
pipeline.  Another group identifies capacity as whatever could go                                                               
down the pipeline.  Those two aren't necessarily the same.                                                                      
Obviously, as pump stations are taken off line, capacity decreases.                                                             
However, if there is less oil put down the pipeline and the pump                                                                
station is not paid off, there could be additional capacity.  Mr.                                                               
Boness informed the committee of the drag resistant agent (DRA).                                                                
He explained that by placing more or less of the DRA into the                                                                   
pipeline, the capacity can be increased or decreased.  Therefore,                                                               
there isn't a fixed number with regard to the amount of oil that                                                                
can travel down the pipeline.  He believed that the state and other                                                             
parties negotiated a capacity settlement agreement in 1997.  That                                                               
capacity settlement agreement defined a set of parameters such that                                                             
there will always be the assumption for tariff purposes that there                                                              
is a capacity of 105 percent.  Consequently, there is more pipeline                                                             
capacity than there are barrels to go down the pipeline.  That was                                                              
intended to create competition.  He stated that the merger will not                                                             
better the situation.                                                                                                           
                                                                                                                                
MR. BONESS informed the committee that BP also claims there will be                                                             
a better alignment of ownership of oil and gas.  He believed that                                                               
was fair to say, however there are trade offs.  In Prudhoe Bay                                                                  
there has been differences in ownership of gas and oil which have                                                               
often resulted in production compromises.  He mentioned that BP                                                                 
would refer to them as costs and inefficiencies.  If BP acquires                                                                
ARCO, the better alignment would result in more effective and                                                                   
efficient decision-making.  He acknowledged that is probably true.                                                              
"The question to the extent that ... it results in cost savings,                                                                
... independent of royalty benefits, independent of severance tax                                                               
benefits and the state's benefit will be limited to that which may                                                              
result in additional production, if in fact some marginal barrels                                                               
of oil are produced sooner than they otherwise would have been."                                                                
He noted that assessing that is very difficult due to the interplay                                                             
between technological developments.  Furthermore, the trade off                                                                 
impacts the question of natural gas commercialization.  He believed                                                             
there is a question with regard to how that could be factored in                                                                
the overall negotiations.  Again, the matter won't be easily                                                                    
addressed in a strictly anti-trust litigation.  Therefore, he felt                                                              
it important to discuss the tax structure and how it relates to the                                                             
various benefits which Mr. Messenger will address.                                                                              
                                                                                                                                
SENATOR TAYLOR said that those people who own those interests                                                                   
within those leases have done studies on their properties and know                                                              
what is present.  Does the state have that information?                                                                         
                                                                                                                                
MR. BONESS answered that the state does have some of that                                                                       
information.  Furthermore, the leaseholders don't have the same                                                                 
level of information amongst themselves.                                                                                        
                                                                                                                                
SENATOR TAYLOR expressed concern with this situation because it                                                                 
reminds him of the game Battleship in that the leaseholders have                                                                
information which the state doesn't.  He indicated that the                                                                     
negotiations occur without the same knowledge and thus could result                                                             
in one player having the choice properties.  How does one avoid                                                                 
such a situation?                                                                                                               
                                                                                                                                
Number 276                                                                                                                      
                                                                                                                                
MR. BONESS said that he believed there is an element of correctness                                                             
to Senator Taylor's comments.  However, any one negotiator has                                                                  
his/her own level of information.  The state has information from                                                               
other parties, which may not be available to BP.  Mr. Boness                                                                    
believed that the state has the following choices:  if the state is                                                             
satisfied with the information, the state can make judgements based                                                             
on that information; the state could simply demand BP to provide                                                                
the state with the information it is utilizing to negotiate its                                                                 
position.  He believed that BP has said that it intends to make                                                                 
seismic information available to the potential purchasers.  Mr.                                                                 
Boness agreed that there may be different levels of information,                                                                
but didn't believe it is at the same level as Battleship.                                                                       
                                                                                                                                
SENATOR TAYLOR disagreed with the comments, of both Mr. Boness and                                                              
Commissioner Shively, that merely filing an anti-trust action would                                                             
not allow the state to do these things.  The resolution of an anti-                                                             
trust action could involve many other parameters.                                                                               
                                                                                                                                
MR. BONESS commented that anti-trust lawsuits are huge and                                                                      
expensive endeavors.  Once the lawsuit is filed, the dynamics of                                                                
negotiations are likely to change.  That is a judgement call that                                                               
has to be made by those doing the negotiating.  As an attorney, Mr.                                                             
Boness has experienced that things change, in comparison to the                                                                 
time before the lawsuit was filed, for an extended period of time                                                               
once a lawsuit is filed.  He didn't disagree with Senator Taylor's                                                              
comments with regard to what is on the table for settlement                                                                     
purposes, once a lawsuit is filed.  Mr. Boness stated that the                                                                  
decision to accept a particular settlement without filing a lawsuit                                                             
or filing a lawsuit and negotiating back to what could've been                                                                  
achieved before the lawsuit is a judgement call.                                                                                
                                                                                                                                
SENATOR TAYLOR understood there will be negotiations to reach a                                                                 
settlement which will be presented to the people of Alaska.  All of                                                             
this will occur prior to the final decision regarding whether a                                                                 
suit will be filed.  He wasn't sure what would occur at that point.                                                             
If the public is happy, is the process over.  If the public is                                                                  
unhappy, will the state return to the drawing board.  That is of                                                                
concern.                                                                                                                        
                                                                                                                                
CHAIRMAN HALFORD stated that he shared Senator Taylor's concern.                                                                
With regard to the access to seismic data, it has been a major                                                                  
issue for many years.                                                                                                           
                                                                                                                                
REPRESENTATIVE KERTTULA pointed out that filing a lawsuit has its                                                               
own intrinsic value, in terms of pressure.  She agreed that filing                                                              
a lawsuit wouldn't take issues off the table.  However, she                                                                     
believed that filing an anti-trust suit without a settlement would                                                              
limit some of the possible remedies in the long run.  For instance,                                                             
she didn't believe that the issue of Alaska hire would be settled                                                               
in a court.  She agreed that the settlement could address that                                                                  
issue.                                                                                                                          
                                                                                                                                
SENATOR TAYLOR agreed that the lawsuit may place some limitations                                                               
upon where negotiations go and the final options.  However, he was                                                              
concerned with the speed with which this process is occurring, the                                                              
lack of public input, and the need to sign confidentiality                                                                      
agreements for information.  Senator Taylor emphasized that he                                                                  
would like to be informed as to how much BP and ARCO owe in back                                                                
taxes.  Should someone request those taxes be paid before the deal                                                              
is resolved?  He noted that one can't obtain such information                                                                   
without signing a confidentiality agreement.  That should be public                                                             
information.  Senator Taylor also expressed the need to resolve the                                                             
question of corporate taxation within the merger.                                                                               
                                                                                                                                
Number 162                                                                                                                      
                                                                                                                                
REPRESENTATIVE KEMPLEN returned to the issue of tariffs.  He                                                                    
understood Mr. Boness to have said that for each dollar reduction                                                               
in tariffs, the state would see a $90 million increase in revenues.                                                             
Later, Representative Kemplen received the impression that the                                                                  
state is locked into those tariffs because of the TSM.  Therefore,                                                              
the question seemed to be whether the state would not lose any                                                                  
revenues.                                                                                                                       
                                                                                                                                
MR. BONESS explained that the state obtains more revenue by                                                                     
reducing costs from either the tankers or the tariffs, et cetera.                                                               
The TSM establishes a maximum rate, and therefore the state can                                                                 
increase its revenue by lowering the rate.  He explained that a TSM                                                             
reduction would require a revision to the existing TSM or require                                                               
that barrels of oil currently under a tariff established by ARCO                                                                
will continue as such.                                                                                                          
                                                                                                                                
REPRESENTATIVE KEMPLEN understood then that it is possible to                                                                   
negotiate that the state would want all the barrels of oil to be                                                                
treated as under the ARCO arrangement.                                                                                          
                                                                                                                                
MR. BONESS replied that it would be possible, theoretically.                                                                    
                                                                                                                                
CHAIRMAN HALFORD interjected that the actual agreements go with the                                                             
barrels to the new purchaser.                                                                                                   
                                                                                                                                
MR. BONESS clarified:                                                                                                           
                                                                                                                                
     There is a provision in the agreements that, what lawyers                                                                  
     call covenants running with the land; but there is also                                                                    
     a provision in a different agreement or a different part                                                                   
     of the agreement that says ... when BP acquires ARCO, BP                                                                   
     has the right to elect to treat the ARCO barrels as if                                                                     
     they're BP barrels.                                                                                                        
                                                                                                                                
Mr. Boness said that the state could lose money that the state                                                                  
could have received had the merger not occurred.                                                                                
                                                                                                                                
[Manual tape change, approximately 5 minutes of blank tape.]                                                                    
                                                                                                                                
TAPE 99-7, SIDE A                                                                                                               
                                                                                                                                
Number 026                                                                                                                      
                                                                                                                                
JOHN MESSENGER, Attorney, Preston, Gates & Ellis, informed everyone                                                             
that he is a partner of Mr. Boness, counsel to the committee.  He                                                               
announced that he would be discussing the tax structure.  The tax                                                               
structure is important with regard to the impact the merger will                                                                
have on Alaska's tax revenues.  He indicated that he would also                                                                 
address whether the current tax structure is appropriate, given the                                                             
new environment after the merger.  He noted that the committee had                                                              
been provided a series of charts, which illustrate some of the                                                                  
points he will be making.  Mr. Messenger referred to the charts                                                                 
entitled, "Comparison of Actual Oil and Gas Corporate Income Tax                                                                
Collected with Estimated Revenues using a Separate Accounting                                                                   
Income Tax Approach Assuming Existing AS 43.20 Rate" and "Net                                                                   
Income From Prudhoe Bay and TAPS."  These charts should help                                                                    
address questions involving the corporate income tax as they                                                                    
illustrate the difference in separate accounting and formula                                                                    
apportionment.  He explained that the tall bars on these two charts                                                             
represent the profits that would be earned by the industry in                                                                   
Alaska directly, without reference to operations that occur                                                                     
worldwide.  The lower bars represent the tax base under formula                                                                 
apportionment, which is another type of corporate income tax.                                                                   
                                                                                                                                
MR. MESSENGER addressed the situation that the state faced in 1978,                                                             
which relates to the tall blue bars on the "Net Income From Prudhoe                                                             
Bay and TAPS" chart.  The blue bars refer to the net income or                                                                  
profit from Prudhoe Bay and TAPS as estimated by various parties.                                                               
The short red bars on this graph illustrate the amount to be                                                                    
measured under formula apportionment.  At that time, the                                                                        
legislature made the judgement that the industry wasn't paying an                                                               
effective tax rate similar to what a corporation would earn if it                                                               
was operating those same assets in the state.  In other words, the                                                              
oil companies were paying a tax rate substantially below the 9.4                                                                
tax rate that other corporations were paying.  The debate was                                                                   
regarding how to change the corporate income tax such that the oil                                                              
companies would pay a fair portion of the corporate income tax as                                                               
being paid by other corporations.  Ultimately, the legislature                                                                  
adopted the separate accounting approach, which more accurately                                                                 
measured that income earned directly in Alaska.  Therefore, the                                                                 
issue became whether the oil industry was willing to pay 9.4                                                                    
percent of the income it was actually earning in Alaska.  Mr.                                                                   
Messenger read the following question, which illustrates the nub of                                                             
the dispute, posed by Senator Huber at a committee hearing.                                                                     
Senator Huber asked Mr. Donaldson, an executive of SOHIO, the                                                                   
following:                                                                                                                      
                                                                                                                                
     Does SOHIO object to paying 9.4 percent on its true net                                                                    
     income, the same as they would have to pay if they were                                                                    
     strictly an Alaskan corporation.                                                                                           
                                                                                                                                
Mr. Messenger said that Mr. Donaldson replied, "Yes."                                                                           
                                                                                                                                
Number 160                                                                                                                      
                                                                                                                                
MR. MESSENGER explained that separate accounting merely measures                                                                
the activities in the state and measures that directly which, in                                                                
the case of the oil companies, would be the production, pipeline                                                                
and transportation operations, et cetera.  Formula apportionment,                                                               
on the other hand, would review the company's worldwide income and                                                              
then apply a formula.  That formula, property, payroll, and sales,                                                              
would then be multiplied times that worldwide income in order to                                                                
estimate the amount of activity taking place in the state.  He said                                                             
that the formula didn't correctly reflect the amount of activity in                                                             
the state because those factors didn't account for the sale of oil                                                              
that took place outside of the state or the value of the oil and                                                                
gas reserves as property.  Therefore, the legislature passed the                                                                
separate accounting bill in order to focus Alaska's tax structure                                                               
on activities that were taking place in Alaska.  The oil companies                                                              
challenged the separate accounting statute and ultimately, the                                                                  
Alaska Supreme Court approved the constitutionality of the tax in                                                               
1985.  Subsequently, in 1986 the oil companies took that to the                                                                 
U.S. Supreme Court, who dismissed the appeal by the oil companies                                                               
for want of a substantial federal question.  In 1981, the                                                                       
uncertainty with regard to the lawsuit and the amount of liability,                                                             
led the legislature to repeal the separate accounting bill and                                                                  
substitute another form of apportionment.  Therefore, the repeal                                                                
wasn't based on a change in policy.                                                                                             
                                                                                                                                
MR. MESSENGER turned to the chart entitled, "Comparison of Actual                                                               
Oil and Gas Corporate Income Tax Collected with Estimated Revenues                                                              
using a Separate Accounting Income Tax Approach Assuming Existing                                                               
AS 43.20 Rate."  In this chart the tall red bars represent the                                                                  
estimated separate accounting revenues, while the small blue bars                                                               
represent the actual O&G income tax collected.  When the                                                                        
legislature passed the new tax laws in 1981, the legislature                                                                    
modified the apportionment formula so that it better reflected                                                                  
activity in Alaska.  The modified apportionment formula substituted                                                             
an extraction factor for the payroll factor, which took into                                                                    
account actual production in Alaska versus production elsewhere.                                                                
Still, that formula didn't result in earnings parallel to earnings                                                              
measured more directly under the separate accounting approach.                                                                  
                                                                                                                                
CHAIRMAN HALFORD observed that the charts seem to reveal that the                                                               
higher the oil price, the higher and more significant the loss from                                                             
having apportionment versus separate accounting.                                                                                
                                                                                                                                
MR. MESSENGER agreed that Chairman Halford's observation is the                                                                 
case.  It is a trade off between profitability in Alaska versus                                                                 
profitability elsewhere.  He recognized that oil prices affect the                                                              
company worldwide.  In terms of prices in Alaska, the higher bars                                                               
seem to occur during higher oil prices in Alaska.  Mr. Messenger                                                                
clarified that this chart, "Comparison of Actual Oil and Gas                                                                    
Corporate Income Tax Collected with Estimated Revenues using a                                                                  
Separate Accounting Income Tax Approach Assuming Existing AS 43.20                                                              
Rate," represents information from 1982-1997.  He recalled that a                                                               
letter from the Commissioner of Revenue indicated that, for the                                                                 
next five years, formula apportionment would collect approximately                                                              
$150 million per year.  If the separate accounting approach were in                                                             
effect, that collection would be 50 percent higher.  That is,                                                                   
another $75 million per year would be collected under a separate                                                                
accounting approach.                                                                                                            
                                                                                                                                
CHAIRMAN HALFORD pointed out that the Commissioner of Revenue's                                                                 
statement was made when oil prices and projections were in the $13                                                              
range versus the $23 range.                                                                                                     
                                                                                                                                
MR. MESSENGER indicated that he wasn't sure of the date of the                                                                  
Commissioner of Revenue's comments.  If Chairman Halford is                                                                     
correct, then higher prices would result in higher collections.                                                                 
                                                                                                                                
MR. MESSENGER returned to the chart entitled, "Comparison of Actual                                                             
Oil and Gas Corporate Income Tax Collected with Estimated Revenues                                                              
using a Separate Accounting Income Tax Approach Assuming Existing                                                               
AS 43.20 Rate."  He explained that 1982 is a transition year, the                                                               
year when the separate accounting approach changed to the modified                                                              
apportionment.  Therefore, 1982 includes some overlap in earnings                                                               
from both approaches.  Mr. Messenger stated that this chart                                                                     
reflects the difference between the two methodologies.  However, he                                                             
clarified that the chart doesn't mean that the state lost this                                                                  
entire amount when the law was changed in 1981.  That would be a                                                                
separate calculation.                                                                                                           
                                                                                                                                
Number 281                                                                                                                      
                                                                                                                                
REPRESENTATIVE GREEN asked if this chart follows, although not                                                                  
dollar for dollar, crude prices.  He asked:                                                                                     
                                                                                                                                
     If we're using a modified apportion on the worldwide                                                                       
     profits, - where you're dealing with vertically                                                                            
     integrated companies that actually make money on crude                                                                     
     purchase or sale and refining and marketing - wouldn't                                                                     
     that have much less of an exaggeration compared, and I                                                                     
     think that's what this shows, in the crude price since                                                                     
     essentially all we get from those is the crude price                                                                       
     (indisc.).                                                                                                                 
                                                                                                                                
MR. MESSENGER clarified that it is not just the crude oil price, it                                                             
is activity in Alaska.  The state's fortunes are being tied to the                                                              
company's profits and activities in Alaska which would include                                                                  
their earnings on oil produced in Alaska as well as the company's                                                               
earnings from their pipeline assets in Alaska.  Mr. Messenger                                                                   
agreed with Representative Green, in that formula apportionment                                                                 
will be affected by a variety of things which happen to the company                                                             
worldwide.  On the other hand, separate accounting focuses on                                                                   
activities in Alaska.  Therefore, the question is what is better                                                                
for Alaska in the long-term.                                                                                                    
                                                                                                                                
CHAIRMAN HALFORD commented that previous discussions have included                                                              
comments regarding at what point, on the downside, does                                                                         
apportionment reflect a better picture for the state.  He recalled                                                              
that number to be considerably lower than the lowest number "we"                                                                
have seen.  The danger sign would be if the pipeline was shut down                                                              
for a two month period, then there would be real problems.                                                                      
However, he inquired as to whether the state wants to bet on its                                                                
own actions or some else's actions.  He stated, "Of all the                                                                     
exposures that were argued in the past, we've never gotten near a                                                               
price that wouldn't generate more under separate accounting than it                                                             
generates under apportionment."                                                                                                 
                                                                                                                                
SENATOR ELTON interpreted the discussion to say that before                                                                     
separate accounting, oil companies were paying less at                                                                          
approximately 3.5 percent in corporate taxes.  He asked if under                                                                
separate accounting, the oil companies paid a corporate income tax                                                              
more or less equal to that paid by Alaskan corporations and now,                                                                
the oil companies have fallen below Alaskan corporations.                                                                       
                                                                                                                                
MR. MESSENGER, in a general sense, agreed with Senator Elton.  He                                                               
reiterated that the separate accounting approach measures an amount                                                             
of income that would be commensurate with an Alaskan company as                                                                 
opposed to an approach where the income is estimated by a formula                                                               
based upon occurrences elsewhere.                                                                                               
                                                                                                                                
Number 337                                                                                                                      
                                                                                                                                
REPRESENTATIVE GREEN posed a situation in which another operator                                                                
entered.  If that operator was strictly an Alaskan company, would                                                               
this type of differential unfairly penalize such an operator.                                                                   
                                                                                                                                
MR. MESSENGER specified that it would depend upon the company.                                                                  
Obviously, an apportionment formula would result in paying less                                                                 
tax, which is advantageous to the company.  However, this is an                                                                 
income tax, which many believe to be the fairest type of tax.  He                                                               
then turned to the barrel chart entitled, "Estimated Revenues and                                                               
Costs per Barrel of Alaskan Crude Oil."  This chart illustrates how                                                             
the separate accounting approach taxes.  He noted that one of the                                                               
arguments made by the oil companies in the lawsuit against Alaska                                                               
was that the separate accounting approach was unfair.  The oil                                                                  
companies believed it to be unfair because Alaska was taxing 100                                                                
percent of the barrel of oil, and therefore reached income/activity                                                             
outside of Alaska.  He noted that this chart was actually included                                                              
in the Alaska Supreme Court opinion upholding the constitutionality                                                             
of Alaska's tax.  The chart illustrates that the separate                                                                       
accounting approach only taxes halfway down the equation, which is                                                              
the wellhead.  He clarified that the gross income under a separate                                                              
accounting approach for production income is the value at the                                                                   
wellhead.  From that, the companies are allowed to deduct royalty,                                                              
production taxes, ad valorem taxes, direct operating costs,                                                                     
acquisition and development costs, uncapitalized interest,                                                                      
overhead, and exploration costs.  Therefore, only the profit would                                                              
be subject to tax.  Also the state wouldn't tax anything downstream                                                             
of that such as refining, marketing, et cetera.  In terms of the                                                                
merger, the separate accounting approach would allow both BP and                                                                
the state to share in the savings.  He explained that as a company                                                              
would become more efficient and reduce costs, that company's                                                                    
reductions on their tax return would be reduced.  However, it would                                                             
increase the company's profits and the net income subject to tax.                                                               
Under the worldwide apportionment approach, those cost reductions                                                               
become more diffused in the overall operation and the state would                                                               
receive a slice of that in the formula apportionment approach.                                                                  
                                                                                                                                
CHAIRMAN HALFORD related his, admittedly naive, assumption, "If                                                                 
they saved a billion dollars and our structure gained a third of                                                                
that, somewhere along the way, without changing the laws ..., the                                                               
State of Alaska would receive $330 million."  Now he has heard that                                                             
will not happen in both royalty and severance taxes.  Furthermore,                                                              
he pointed out that apportionment occurs at a rate of about six                                                                 
percent while the rate under separate accounting would be 9.4                                                                   
percent.  Therefore, the amount the state would receive from that                                                               
billion dollars would only be $60 million under apportionment and                                                               
$94 million under separate accounting.                                                                                          
                                                                                                                                
MR. MESSENGER stated that it is really worse than Chairman                                                                      
Halford's scenario because the state isn't receiving that six                                                                   
percent of the cost savings.  He explained that the companies                                                                   
overall costs are included in its worldwide operation, and                                                                      
therefore only a minuscule portion of the slice of that cost would                                                              
be received by the state.                                                                                                       
                                                                                                                                
REPRESENTATIVE GREEN referred to the chart entitled, "Net Income                                                                
from Prudhoe Bay and TAPS."  He pointed out that the net income                                                                 
from Prudhoe Bay and TAPS, the blue bars, are practically equal for                                                             
Exxon and ARCO.  While the red bars, the UDITPA tax base,                                                                       
illustrate a significant difference between Exxon and ARCO.  He                                                                 
indicated that difference would support the discussion that ARCO's                                                              
worldwide misfortunes drew ARCO down, not its operations in Alaska.                                                             
Therefore, Representative Green believed that to provide further                                                                
support for revisiting the separate accounting approach.                                                                        
Representative Green, in response to Chairman Halford, said that he                                                             
realized that chart is from 1979.                                                                                               
                                                                                                                                
Number 425                                                                                                                      
                                                                                                                                
SENATOR ELTON referred to the "Estimated Revenues and Costs per                                                                 
Barrel of Alaskan Crude Oil" chart and inquired as to why tanker                                                                
costs and profits are exempted.                                                                                                 
                                                                                                                                
MR. MESSENGER noted that there are some constitutional questions                                                                
which relate to how far the state can reach with its tax powers.                                                                
He reiterated that the state was only looking to activities taking                                                              
place inside of Alaska.  Some tankers spend some time in Alaska,                                                                
but their major operations are outside of the state.  Therefore,                                                                
the category of taxation referred to as other income was                                                                        
established in order to accommodate situations in which there was                                                               
some activity in Alaska by the oil industry which didn't fall under                                                             
production or pipeline transportation.  That other income was                                                                   
multiplied times the formula while subtracting out pipeline income,                                                             
production income, and the activities in the formula related to                                                                 
those.  So, anything left would represent any other activity.                                                                   
                                                                                                                                
MR. MESSENGER turned to the severance tax and directed the                                                                      
committee to the three charts entitled, "Economic Limit Factor."                                                                
He explained that the current ELF applies two nominal tax rates to                                                              
the value of the oil at the point of production.  As Mr. Boness                                                                 
mentioned, the value of the tax is determined at pump station one,                                                              
in the case of the North Slope.  There is also a cents per barrel                                                               
tax rate, 80 cents per barrel, which the state would receive even                                                               
if the value of the oil fell below a certain level.  He estimated                                                               
the threshold to be about $5.33.  If the value of oil fell below                                                                
$5.33, the tax rate would be $.80 per barrel multiplied by the ELF                                                              
rather than a percentage of value.  Any value above $5.33 and the                                                               
value rate applies.                                                                                                             
                                                                                                                                
CHAIRMAN HALFORD surmised then that $.80 per barrel multiplied by                                                               
.1 equals $.08 per barrel.                                                                                                      
                                                                                                                                
MR. MESSENGER continued by saying, "Nominally, under the statute,                                                               
it's 15 percent of value or in the case of new properties, it's                                                                 
12.25 percent for five years and then it goes to 15.  That then is                                                              
multiplied times the ... ELF which then gives you your ...                                                                      
effective tax rate."  He further explained that when the ELF is                                                                 
close to one, that is tantamount to multiplying the tax rate by                                                                 
one, which results in the same tax rate.  If the ELF is below one,                                                              
then the nominal tax rate is reduced.  For example, Prudhoe Bay oil                                                             
has a nominal tax rate of 15 percent and an ELF of 95 percent which                                                             
results in an effective tax rate of 12.47 percent.  He referred to                                                              
the double-sided chart entitled, "Economic Limit Factor" which                                                                  
illustrates that newer fields, those five years from commercial                                                                 
production, have a nominal tax rate of 12.25 percent.  Those have                                                               
a lower effective tax rate.                                                                                                     
                                                                                                                                
MR. MESSENGER commented that the ELF is a complicated figure that                                                               
is computed under the formula by factors of production, days, the                                                               
number of wells, and field size.  Fields larger than 150 barrels                                                                
per day have a higher ELF than those smaller fields.  Therefore,                                                                
there is an incentive to be a new small field because the effective                                                             
tax rate will be lower.                                                                                                         
                                                                                                                                
Number 501                                                                                                                      
                                                                                                                                
REPRESENTATIVE GREEN inquired as to why the nominal tax rate                                                                    
multiplied by the ELF does not equal the effective tax rate.                                                                    
                                                                                                                                
MR. MESSENGER said that this information was provided to him.                                                                   
                                                                                                                                
CHAIRMAN HALFORD pointed out that from 1999 to 2003, there is an                                                                
overall decrease from 11 to under nine which is a 20 percent                                                                    
reduction in severance tax average for all Alaska production in the                                                             
next four years.                                                                                                                
                                                                                                                                
MR. MESSENGER replied that he didn't have an answer for this right                                                              
now.  However, he mentioned that 1981 was the year the separate                                                                 
accounting bill was repealed.  To make up for that repeal the state                                                             
enacted the modified apportionment income tax.  As illustrated the                                                              
modified apportionment income tax doesn't measure up to the                                                                     
separate accounting approach.  Therefore, the severance tax rate                                                                
was raised from 12.25 percent to 15 percent.  The state also set                                                                
the ELF at one for Prudhoe Bay for a 10 year period beginning with                                                              
the commencement of production.  He believed that the ELF of one                                                                
for Prudhoe Bay ended in 1987.  Subsequent to that, the legislature                                                             
changed the ELF by introducing the field size component to the ELF.                                                             
Therefore, raising the ELF for larger fields and reducing the ELF                                                               
for smaller fields.  This is the situation today.                                                                               
                                                                                                                                
CHAIRMAN HALFORD commented that, in that time frame, it was a net                                                               
benefit due to the size of Prudhoe Bay and Kuparuk.  In this time                                                               
frame, the ELF was reduced for the smaller fields.  He identified                                                               
the current difficulty as Prudhoe Bay production is being replaced                                                              
with small field production.                                                                                                    
                                                                                                                                
MR. MESSENGER noted, as the chart illustrates, that the ELF is                                                                  
continuing to decrease which affects the severance tax revenues                                                                 
over time.                                                                                                                      
                                                                                                                                
REPRESENTATIVE DAVIES surmised:                                                                                                 
                                                                                                                                
     If we were to have another owner/operator on the North                                                                     
     Slope and they were to want to have access to existing                                                                     
     facilities - which are at some limit right now - and you                                                                   
     substituted a new barrel with existing barrels from                                                                        
     Prudhoe Bay, we would lose because of the economic limit                                                                   
     factor.                                                                                                                    
                                                                                                                                
CHAIRMAN HALFORD clarified that a one percent severance tax barrel                                                              
would be substituted for a 12 percent severance tax barrel.                                                                     
                                                                                                                                
MR. MESSENGER interjected that the incentive is to get production                                                               
under something classified as new and small.                                                                                    
                                                                                                                                
SENATOR PEARCE asked if the state has ever challenged whether                                                                   
production coming on-line be called a new field versus a satellite.                                                             
                                                                                                                                
MR. MESSENGER said that nothing comes to mind.                                                                                  
                                                                                                                                
SENATOR PEARCE asked if advertising and public relations expenses                                                               
are deductible in the corporate income tax for the oil companies.                                                               
                                                                                                                                
MR. MESSENGER answered that he didn't know the answer to that                                                                   
question, although he assumed such expenses are deductible.                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA informed the committee that Charlie Cole,                                                               
the ex-attorney general, challenged putting the advertisement for                                                               
the Exxon Valdez into the tariff and the state settled.                                                                         
                                                                                                                                
SENATOR PEARCE commented that the state is paying for the                                                                       
advertising.                                                                                                                    
                                                                                                                                
SENATOR TAYLOR said that he believed the state was paying for all                                                               
of the institutional advertisements.                                                                                            
                                                                                                                                
Number 560                                                                                                                      
                                                                                                                                
MR. MESSENGER returned to the property tax which was enacted in the                                                             
Special Session of 1973 in order to tax equipment and facilities                                                                
related to exploration, production, and pipeline transportation.                                                                
The tax wasn't applied to the value of the oil and gas in the                                                                   
ground, although other states do impose such a tax.  He noted that                                                              
there was one exception when the state enacted a reserves tax for                                                               
a two year period in the years 1975 and 1976.  That two year tax                                                                
was on the value of the oil and gas reserves in the ground.  Mr.                                                                
Messenger pointed out that in 1975, the state's general fund was                                                                
dwindling considerably and the pipeline wasn't scheduled to start                                                               
production from the North Slope until 1977.  In order to deal with                                                              
the crisis, the legislature adopted the aforementioned reserves tax                                                             
and allowed the companies to credit their current severance taxes                                                               
or those in the future against the reserves tax.  That reserves tax                                                             
provided a bridge for the state during that difficult time.  The                                                                
reserves tax was initially set at 20 mills for the first year.  He                                                              
believed the legislation allowed the second year to establish a                                                                 
millage rate similar to a municipal millage rate in order to cover                                                              
the budget for that year.  Ultimately, the legislature provided                                                                 
that the millage would be 20 mills unless action was taken.  The                                                                
reserves tax was 20 mills in both 1975 and 1976.                                                                                
                                                                                                                                
CHAIRMAN HALFORD understood then that the tax was a credit against                                                              
the future severance tax on the resource.  If the gas were                                                                      
produced, then it would be a nontax.                                                                                            
                                                                                                                                
MR. MESSENGER replied that Chairman Halford was correct.                                                                        
                                                                                                                                
TAPE 99-7, SIDE B                                                                                                               
                                                                                                                                
SENATOR TAYLOR commented that if a mill levy was assessed every                                                                 
year against oil reserves or properties based on the current fiscal                                                             
gap in the general fund, the oil industry may be willing to cut the                                                             
budget.                                                                                                                         
                                                                                                                                
SENATOR TAYLOR suggested that the committee eliminate the ELF and                                                               
institute the separate accounting approach.                                                                                     
                                                                                                                                
CHAIRMAN HALFORD indicated the need for the leadership to request,                                                              
from the Governor, an expansion of the call if such action is                                                                   
desired.                                                                                                                        
                                                                                                                                
Number 561                                                                                                                      
                                                                                                                                
REPRESENTATIVE THERRIAULT thanked the committee for the                                                                         
information.  He inquired as to the time line of this special                                                                   
committee as it attempts to interject the legislature's desire to                                                               
protect Alaska and its citizens in this process.  He noted that the                                                             
Administration will possibly be moving forward and producing a                                                                  
package within the middle of October, when the legislature isn't in                                                             
session.                                                                                                                        
                                                                                                                                
CHAIRMAN HALFORD stated that he believed the committee has arrived                                                              
at the table in a way that no legislative committee ever has.  He                                                               
believed that the committee has good counsel and a good economist.                                                              
Furthermore, the FTC appears willing and interested in talking with                                                             
the committee.  Chairman Halford noted that these meetings have                                                                 
occurred in order to obtain a sense of what members want with                                                                   
regard to the merger.  This is the only option short of an                                                                      
expansion of the call or a resolution.                                                                                          
                                                                                                                                
SENATOR TAYLOR suggested the committee should take a poll and                                                                   
determine if the legislature would call itself back into session to                                                             
take up this matter which is of such magnitude.                                                                                 
                                                                                                                                
REPRESENTATIVE GREEN agreed and believed any criticism over another                                                             
special session would be worth it.                                                                                              
                                                                                                                                
REPRESENTATIVE DAVIES asked if there is anything that prevents the                                                              
legislature from calling itself into another special session now.                                                               
                                                                                                                                
CHAIRMAN HALFORD informed everyone that the committee has a legal                                                               
opinion that indicates that it would be difficult for the                                                                       
legislature to call itself into session while in a special session.                                                             
Chairman Halford reiterated that the way to address the merger                                                                  
would be for the two presiding officers to go before the Governor                                                               
and request the call be extended to the subject of the merger.  If                                                              
such is the will of the majority of the membership of both houses,                                                              
then that request should be made.  Short of that scenario, much can                                                             
be achieved by asking questions.                                                                                                
                                                                                                                                
REPRESENTATIVE THERRIAULT pointed out that although the FTC doesn't                                                             
care about the timing, negotiations with the companies can occur                                                                
regarding reduced tariffs.  However, that negotiating leverage will                                                             
likely be unavailable by the time the legislature returns.                                                                      
                                                                                                                                
CHAIRMAN HALFORD stressed that "this leverage" will be available.                                                               
He said that we should continue to want the state's fair share with                                                             
as much competition as possible.  Without competition, there would                                                              
be a regulatory structure that would be beyond the legislature's                                                                
capacity to understand, manipulate, and control in order to protect                                                             
a small operator's ability to operate.                                                                                          
                                                                                                                                
REPRESENTATIVE THERRIAULT stated:                                                                                               
                                                                                                                                
     If one of the goals is we do want to have a very                                                                           
     competitive environment, and all we do is rely on                                                                          
     taxation without using the opportunity to get (indisc.-                                                                    
multiple speakers) we potentially lose the opportunity and lower                                                                
the tariffs which would increase competition.  ... So that does not                                                             
help us.                                                                                                                        
                                                                                                                                
CHAIRMAN HALFORD agreed.  However, there are ways for the state to                                                              
obtain a benefit.  Lowering the tariff helps the companies and the                                                              
state, although there are different things that hurt the companies                                                              
and the state.                                                                                                                  
                                                                                                                                
SENATOR TAYLOR indicated that it would be premature to follow that,                                                             
but in the next few weeks there would have to be a decision.                                                                    
                                                                                                                                
CHAIRMAN HALFORD commented that the Governor may return with a                                                                  
proposal for which the committee would want to request formal                                                                   
action and take a formal position for the FTC.                                                                                  
                                                                                                                                
Number 489                                                                                                                      
                                                                                                                                
REPRESENTATIVE KERTTULA said that would be at a minimum.  She noted                                                             
that it is difficult to negotiate after a deal is cut.  The                                                                     
committee has had some strong assurances with regard to bringing                                                                
anti-trust cases, if necessary.  Although the FTC may hold out,                                                                 
there is value for the committee to be personally involved while                                                                
there is interest.  She also mentioned the involvement as helpful                                                               
in that it provides background information for the FTC.                                                                         
Representative Kerttula agreed that the magnitude of the merger is                                                              
huge.                                                                                                                           
                                                                                                                                
REPRESENTATIVE CISSNA inquired as to the options that would help                                                                
strengthen the committee's bargaining position.  Can the committee                                                              
simply survey the legislature?                                                                                                  
                                                                                                                                
CHAIRMAN HALFORD noted that in his time with the legislature, he                                                                
has not seen a subpoena issued by a committee of the legislature.                                                               
This committee has issued a subpoena in order to obtain the                                                                     
information.  He also noted that the resolution creating the                                                                    
committee said the committee should do whatever necessary.                                                                      
However, once actions are taken the opponents of the actions would                                                              
counter by saying the committee is acting out of session with no                                                                
authority.  The opponents would further counter that the committee                                                              
isn't expressing the legislature's position or the state's                                                                      
position.  Chairman Halford believed that the more authority and                                                                
the more formal the authority, the more strength a body has.  The                                                               
question is how much is necessary.  If the committee takes a tough                                                              
position and receives "heat" for it, then the entire legislature                                                                
would need to come together.                                                                                                    
                                                                                                                                
REPRESENTATIVE CISSNA inquired as to the specifics that would                                                                   
strengthen the committee in the coming weeks.                                                                                   
                                                                                                                                
CHAIRMAN HALFORD reiterated that the Governor could be approached                                                               
with regard to expanding the call, the legislature could send a                                                                 
resolution or a letter requesting the Governor's proposal be                                                                    
formally before the legislature for action.  The legislature could                                                              
adopt a resolution which points out the significance of this merger                                                             
and speak to the procedures of the FTC.  Chairman Halford believed                                                              
the entry level to be for the Governor to agree with a formal                                                                   
ability to take up the issues which could actually enhance the                                                                  
Governor's position.  This is not a matter of the legislature                                                                   
versus the Governor.                                                                                                            
                                                                                                                                
CHAIRMAN HALFORD, in response to Representative Kerttula,                                                                       
reiterated that Senator Pearce had requested a legal opinion                                                                    
regarding if the merger issue could be added to the call.  The                                                                  
opinion indicated that the simplest approach would be to adjourn                                                                
from this special session and then the legislature call itself back                                                             
for another special session.  He noted that there is some need to                                                               
avoid criticism that the merger is a way to avoid subsistence.  The                                                             
scheduling of this meeting has to stay behind the subject of this                                                               
special session.                                                                                                                
                                                                                                                                
SENATOR PEARCE informed everyone that the House set a precedent in                                                              
1994.  Taking time to argue whether action was taken in the                                                                     
appropriate place, takes away from the issue.                                                                                   
                                                                                                                                
REPRESENTATIVE DAVIES commented that if the legislature unanimously                                                             
passed a resolution, then who would care.                                                                                       
                                                                                                                                
CHAIRMAN HALFORD explained that the enforcement mechanism for the                                                               
call is to invalidate a law.  A resolution doesn't have the power                                                               
of law.  He indicated the need to do it right.  He couldn't believe                                                             
that the Governor would refuse an expansion of the call, if both                                                                
presiding officers approached him on the matter.  However, that                                                                 
conclusion hasn't been reached yet.                                                                                             
                                                                                                                                
REPRESENTATIVE CISSNA asked if the committee has any concept of the                                                             
timing on that readiness.                                                                                                       
                                                                                                                                
REPRESENTATIVE KERTTULA answered, perhaps a week.  The review of                                                                
the documents and analysis has been proceeding quickly.  The                                                                    
committee is close to determining the appropriate path.  She noted                                                              
that the Administration has cooperated as much as it legitimately                                                               
can.  All of this is difficult, under these time constraints.                                                                   
                                                                                                                                
CHAIRMAN HALFORD adjourned the Joint Special Committee on Mergers                                                               
at 6:10 p.m.                                                                                                                    

Document Name Date/Time Subjects