Legislature(1999 - 2000)
11/18/1999 01:35 PM Senate MER
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
JOINT SPECIAL COMMITTEE ON MERGERS
November 18, 1999
1:35 p.m.
MEMBERS PRESENT
Senator Rick Halford, Chair
Senator Drue Pearce
Senator Johnny Ellis
Representative Joe Green, Vice-Chair
Representative Brian Porter (via teleconference)
Representative Beth Kerttula
Representative Jim Whitaker
MEMBERS ABSENT
All Present
OTHER LEGISLATORS PRESENT
Senator Pete Kelly (via teleconference)
Senator Gary Wilken
Representative Allen Kemplen
Representative Eric Croft
Representative Ethan Berkowitz
Representative Norm Rokeberg
Representative Jerry Sanders
Representative Lisa Murkowski
Representative Sharon Cissna
Representative Scott Ogan (via teleconference)
Representative Reggie Joule (via teleconference)
Representative John Davies (via teleconference)
COMMITTEE CALENDAR
Presentations from the State of Alaska Administration, British
Petroleum, ARCO, Alaska Gasline Port Authority
PREVIOUS ACTION
See the Joint Special Committee on Mergers minutes dated 6/11/99,
7/28/99, 9/24/99 and 9/25/99.
WITNESS REGISTER
Mr. Bruce Botelho, Attorney General
Department of Law
PO Box 110300
Juneau, Alaska 99811-0300
Telephone: (907) 465-2133
POSITION STATEMENT: Commented on merger agreement.
Kevin Meyers, President
ARCO Alaska, Inc.
P.O. Box 100360
Anchorage, AK 99510
POSITION STATEMENT: Supported merger agreement.
Mr.Richard Campbell, President
BP Exploration Alaska, Inc.
P.O. Box 996612
Anchorage, AK 99519-6612
POSITION STATEMENT: Supported merger agreement.
Ms. Ann Drinkwater, President
BP Pipeline
P.O. Box 996612
Anchorage, AK99519-6612
POSITION STATEMENT: Commented on merger agreement.
Commissioner John Shively
Department of Natural Resources
400 Willoughby Avenue
Juneau, Alaska 99801-1724
Telephone: (907) 465-3886
POSITION STATEMENT: Commented on merger agreement.
Mr. Hank Hove, Chairman
Alaska Gasline Port Authority
P.O. Box 71267
Fairbanks, AK 99707
POSITION STATEMENT: Supported merger agreement.
Mr. Bill Walker, Counsel
Alaska Gasline Port Authority
P.O. Box 71267
Fairbanks, AK 99707
POSITION STATEMENT: Supported merger agreement.
Mr. Ken Konrad, Business Unit Leader
Eastern North Slope
BP Exploration Alaska, Inc.
P.O. Box 996612
Anchorage, AK 99519-6622
POSITION STATEMENT: Supported merger agreement.
Mr. John Griffin, Assistant Attorney General
Oil, Gas and Mining Section
Civil Division (Anchorage)
Department of Law
1031 West 4th Avenue, Suite 200
Anchorage AK 99501-1994
POSITION STATEMENT: Commented on merger agreement.
Mr. Bill Noble, Attorney
BP
P.O. Box 996612
Anchorage, AK 99519-6612
POSITION STATEMENT: Commented on merger agreement.
Mr. Peter Leathard, President
VECO Corporation
813 West Northern Lights Blvd.
Anchorage, AK 99503
POSITION STATEMENT: Supported merger agreement.
Mr. Mike Macy
Backbone
1315 Hillcrest Drive
Anchorage, AK 99510
POSITION STATEMENT: Commented on merger agreement.
Mr. Steve Conn, Executive Director
Alaska Public Interest Research Group (AKPIRG)
P.O. Box 101093
Anchorage, AK 99510
POSITION STATEMENT: Supported merger agreement.
Mr. Tim Wagner
Innovative Developers Inc.
P.O. Box 78
Anchorage, AK 99510
POSITION STATEMENT: Supported merger agreement.
Mr. John McDonald
Carlisle Enterprises
1800 E 1st
Anchorage, AK 99501
POSITION STATEMENT: Supported merger agreement.
Mr. Jack Lasch, General Manager
Arctic Petroleum Contractors
Natchiq
6700 Arctic Spur Rd.
Anchorage, AK 99518
POSITION STATEMENT: Supported merger agreement.
Mr. David Thomas
649 W 54th
Anchorage, AK 99518
POSITION STATEMENT: Supported merger agreement.
Alaska Interstate Construction
649 W 54th
Anchorage AK 99518
POSITION STATEMENT: Supported merger agreement.
Mr. Jim Udelhoven
Udelhoven Oil Field Services, et al.
184 E 53rd St.
Anchorage AK 99508
POSITION STATEMENT: Supported merger agreement.
Mr. Harold Heinze
1336 Staubbach Circle
Anchorage AK 99510
POSITION STATEMENT: Supported merger agreement.
Mr. Richard Fineberg, Oil & Gas Consultant
P.O. Box 416
Ester AK 99725
POSITION STATEMENT: Opposed merger agreement.
Mr. Tom Maloney
VECO Corporation
3215 Legacy Drive
Anchorage, AK 99516
POSITION STATEMENT: Supported merger agreement.
Mr. Terry Monaghan
333 M Street
Anchorage, AK 99516
POSITION STATEMENT: Supported merger agreement.
Mr. Maynard Tapp, President
Hawk Construction Consultants
7240 East 21 Avenue, Apt 3
Anchorage AK 99503
POSITION STATEMENT: Supported merger agreement.
Mr. Val Molyneux, President
Operations and Maintenance Services
VECO Corporation
18730 Petrel Circle
Anchorage, AK 99516
POSITION STATEMENT: Supported merger agreement.
Mr. Steve Stephens
Alaska Interstate Construction
13154 Stephenson St.
Anchorage AK 99515
POSITION STATEMENT: Supported merger agreement.
Mr. Doug Smaker
P.O. Box 402
Ft. Yukon, AK 99740
POSITION STATEMENT: Supported merger agreement.
Mr. Tom Lakosh
Peak Oilfield Service Co.
P.O. Box 100648
Anchorage, AK 99510
POSITION STATEMENT: Opposed merger agreement.
Mr. Vince Doran
923 W 11th Avenue, #411
Anchorage, AK 99501
POSITION STATEMENT: Supported merger agreement.
Mr. Wade Schnabl
9329 Emerald St.
Anchorage, AK 99515
POSITION STATEMENT: Supported merger agreement.
Mr. Ken Yockey
24271 Platser Dr.
Anchorage, AK 99567
POSITION STATEMENT: Supported merger agreement.
Mr. Bill McLaughlin
2525 C Street
Anchorage, AK 99503
POSITION STATEMENT: Supported merger agreement.
Mr. Dave Scarbrough
Air Logistics Alaska
P.O. Box 220845
Fairbanks, AK 99522
POSITION STATEMENT: Supported merger agreement.
Mr. John Dittrich
Brooks Range Supply
9024 Snow Owl Circle
Anchorage, AK 99507
POSITION STATEMENT: Supported merger agreement.
Ms. Ruth Moulton
120 W 11th
Anchorage, AK 99501
POSITION STATEMENT: Commented on the merger agreement.
Mr. Bruce Weiler
1751 George Bell Circle
Anchorage, AK 99515
POSITION STATEMENT: Supported merger agreement.
Mr. Murray Walsh
2974 Foster Ave.
Juneau, AK 99801
POSITION STATEMENT: Supported merger agreement.
ACTION NARRATIVE
TAPE 99-8, SIDE A
Number 001
CHAIRMAN HALFORD called the Joint Special Committee on Mergers
meeting to order at 1:35 p.m. All members were present except
Representative Brian Porter who was participating via
teleconference. Other legislators present were Representatives
Kemplen, Croft, Berkowitz, Rokeberg, Sanders, Murkowski and Cissna.
Other legislators participating via teleconference were
Representatives Ogan, Joule and Davies, and Senators Pete Kelly and
Wilken.
CHAIRMAN HALFORD informed committee members that the agenda
consists of a presentation by the Administration, followed by a
presentation by the participating companies, and then followed by
statements and questions from the public. The committee will then
discuss a series of questions it prepared and distributed to the
Administration and the participating companies.
CHAIRMAN HALFORD asked Attorney General Botelho to begin the
presentation.
BRUCE BOTELHO, Attorney General, Department of Law, described the
Administration's objectives during the negotiating process as
follows. The Governor made clear in his speech to the Anchorage
Chamber of Commerce that the Administration hoped to satisfy two
categories of objectives: first, to obtain commitments to create
a competitive environment to enhance competition in North Slope
development; and second, to obtain civic commitments dealing with
the environment, Alaska hire, and contributions to the community.
The Administration's focus, regarding competition, was from an
anti-trust standpoint. Alaska statutes make clear that the State
has the power to intervene where it appears that an acquisition is
likely to substantially lessen competition or lead to a monopoly in
the relevant market. The Administration believes the proposed
acquisition by BP Amoco of ARCO creates that risk. The
Administration has been looking at remedies to ensure that
competition is not lost in the leasing, development, and production
end of things, and also in terms of a loss of diversity in
exploration and development on the North Slope. The Administration
engaged in a series of meetings over two months to negotiate, which
resulted in the joint announcement by Governor Knowles and Rodney
Chase, President and Deputy Chief Executive Officer of BP Amoco,
of a draft charter for development of the Alaska North Slope. The
Charter sets forth how BP will meet the objectives outlined by the
Governor in his August 23rd speech.
ATTORNEY GENERAL BOTELHO described the contents of the Charter.
First, it provides for new production operators on the North Slope
with regard to the Alpine and Kuparuk River units. The Charter
allows for two separate operators, one on each unit, or a single
operator operating both units. The Administration's primary focus
on creating competition has been on the western North Slope, and in
particular, Alpine, which is the gateway to the National Petroleum
Reserve. The Charter also provides for the creation of at least
three new exploration operators; one in NPRA, which must be a new
production operator either at Alpine or Kuparuk; and at least two
new exploration operators on state lands. An Alaska statute limits
the amount of non-unitized state acreage which any company may
possess. This will require BP Amoco-ARCO to divest itself of at
least 320,000 acres. Under the terms of the proposed charter,
400,000 state acres would be relinquished and some 220,000 acres of
land inside NPRA will also be relinquished. This divestiture will
be built around blocks with significant development potential.
Those blocks are referred to as "play fairways."
ATTORNEY GENERAL BOTELHO explained that with respect to
infrastructure divestiture, BP will be required to divest
commensurate ownership interests in the Trans Alaska Pipeline
Service (TAPS) and other feeder pipelines. The ownership interests
divested will be commensurate with production, which is a
requirement that at least 175,000 barrels of soon-to-be daily
produced oil be divested. A share commensurate with that level of
production must be divested to purchasers of producing properties.
To the extent that the amount ultimately purchased does not equal
22 percent, BP will have a standing offer to sell the remaining
interests up to that amount. BP is required to make excess tankers
available for sale and a framework for facility access on
reasonable terms has been included. BP has committed to binding
third party arbitration if a dispute arises over the commercial
reasonableness of facilities access. The agreement makes clear
that the State maintains its authority to resolve any dispute that
may arise with regard to facilities access on terms that are in the
best interests of the State.
ATTORNEY GENERAL BOTELHO explained that in the interest of
encouraging both competition and interest in the North Slope, the
Administration and BP Amoco-ARCO have reached agreement on data
availability. The Charter requires BP to give up all proprietary
BP and ARCO seismic and well data for purchase by anyone, whether
new players or existing competitors. To the extent that they
possess data in common with others, they will make a diligent, good
faith effort to achieve agreement by other owners of divestiture or
availability of that data. BP is also required to purchase oil, up
to a total of 25,000 barrels per day, from companies with small
volumes. The Charter also contains provisions for contracting for
marine transportation.
ATTORNEY GENERAL BOTELHO described the gas commercialization issue
as one the Governor took input on before making his objective
public. Under the language in the Charter, BP will make 1.2
billion cubic feet of gas available per day to a gas project until
December 31, 2001. With respect to environmental issues, BP has
committed to spend at least $10 million for cleanup of orphan
sites. It has agreed to clean up abandoned barrels and inactive
reserve pits. BP has also committed to clean up a list of
contaminated BP and ARCO high priority sites by 2005, and other
sites by 2007. BP and ARCO will support and go for funding of an
independent North Slope oil spill response organization and will
commit to a program of arctic spill response research and
development. That funding level will be at least $200,000 per year
for a ten year period. BP will work with the Alaska Department of
Environmental Conservation (DEC) to develop a performance
management program for review of corrosion practices on the non-
common carrier pipelines on the Slope. Finally, BP has committed
to make available $500,000 per year for ten years for additional
orphan site clean up, spill response research and development, or
expert advice on corrosion issues at the discretion and direction
of DEC.
ATTORNEY GENERAL BOTELHO stated that BP will commit to ARCO's plans
to build new millennium-class double hulled tankers that will
replace existing tankers one year earlier than otherwise required
under the 1990 Oil Pollution Act (OPA). BP has commited to build
double-hulled tankers which have enhanced safety features, such as
redundant steering, propulsion and power. BP is directed to
encourage its tanker operating company to develop a performance
review program, including its safety practices. Federal law
precludes BP from directing such a program, so the word "encourage"
was used. With respect to Alaska hire, BP has commited to extend
recruitment and hiring obligations on the North Star model, and BP
has expressed support for training and recruiting Alaska Natives.
In terms of substantive provisions, the agreement would establish
a new charitable foundation to fund organizations and causes within
Alaska based on a net overriding royalty provision of .02 percent
which is based on the level of divestiture in this agreement at
about $6 million per year. Thirty percent of that amount would be
directed specifically to the University of Alaska Foundation. The
Charter is a contract, and, in terms of the anti-trust aspect, it
can be enforced at the state's election in either federal or state
court. To the extent that there is a failure to divest, the powers
of appointment of a trustee is established in the Charter. The
Charter also contains a most favored nations clause so that the
State may incorporate terms of any consent decree reached between
the FTC and BP Amoco in the event that increased divestiture is
required.
CHAIRMAN HALFORD asked representatives from BP Amoco and ARCO to
give their presentation.
KEVIN MEYERS, President of ARCO Alaska, Inc., gave the following
testimony.
Unlike the Commissioners, and unlike Richard, I am not going
to talk about the deal in terms of the terms and conditions.
I think you'll hear a good enough summary from all of them.
What I would like to do is talk to you about two things. I'm
here today to urge you first and foremost to urge the members
of the committee to support the merger of ARCO and BP-Amoco
and the draft charter. Finalizing this merger will be a step
forward for the companies, our employees, our shareholders,
and the people of Alaska.
Concluding the BP-Amoco ARCO merger will bring stability to
what has been a year of change in the Alaskan oil industry.
Since oil hit an all time low of $8.61 in December of last
year, it's risen to $26 a barrel today. What a difference a
year can make. We've seen during this time consolidation in
the industry worldwide. And the merger of BP-Amoco and ARCO
is a part of that consolidation and is critical to Alaska's
future.
The merger makes good business sense in the most basic form -
economic survival and growth. With continued reductions in
operating and development costs, access to exploration
acreage, and a working partnership for the State, I see a
positive - I say a very positive - long term future for the
oil industry in Alaska. Aligning the forces of ARCO and BP-
Amoco ensures investment, production, and the ability to survive
during the trials and peaks of oil prices like we've seen during
the last year.
After months of negotiating, the State of Alaska and BP-Amoco
have reached an agreement that addresses the concerns that
have been raised about this merger. Most importantly, the
Charter preserves most of the cost synergies and production
growth the acquisition is expected to deliver in Alaska, while
at the same time bringing one or more new major players into
the State.
In approving the merger, and approving the Charter and
ratifying it, I would like to stress a very real sense of
urgency. It's time to move forward with this approval.
Alaskans benefit from a strong oil industry; one that can
compete globally for the capital needed to develop Alaska's
resources.
Approval of this merger sends a message to the major players
in the industry and the business community as a whole, and we
want that to be a positive message. It tells them that Alaska
is truly open for business and willing to work as partners
with the industry for responsible development of the state's
resources.
Supporting the Charter agreement will also help end the short
term uncertainty for investment plans in Alaska. With the
uncertainty of the merger and now the added uncertainty of one
or more new players in Alaska, it's been very hard to plan for
the immediate future. Because we don't know who will
ultimately own the assets, it's difficult to make new capital
investment decisions.
Timing is critical as the winter construction season
approaches. This year's exploration and construction during
the winter is the driver for new production that will come on
in two to three years. Our Alaska contractors and vendors are
anxiously awaiting the outcome of this merger. This
uncertainty not only affects them, but also the Alaskan
communities where their employees live. Finalizing the
Charter agreement not only makes good economic sense, it makes
sense to the men and women of ARCO Alaska - men and women who
have been waiting for this merger to conclude since April 1.
About 1400 ARCO Alaska employees, and 500 BP-Amoco employees
in Alaska, are waiting to hear the outcome of this merger so
they may plan the future for their families. To our employees
and their families, timing is very critical. They feel a real
sense of urgency. I'm very proud of what the men and women of
ARCO Alaska have accomplished, especially this year, in the
face of great uncertainty. I believe it's a testament to
their abilities and what they will bring in their new roles to
BP Amoco and the new operators that will be coming in. Our
employees have played a very important role in helping to
build this great state. Companies like ARCO and BP have been
good neighbors while creating economic opportunity and a
better quality of life for Alaskans. Let's get on with it,
let's get back to work.
Before I conclude, I want to get to the second point of my
testimony. I would like to repeat a statement that I made in
Fairbanks earlier this week because my response has been
misquoted. I was asked, if given the rebound of oil prices,
could ARCO survive if the merger were not approved. Let me
state unequivocally, ARCO, as we know it today, would cease to
exist if the merger were not approved. ARCO would be an
acquisition or merger target for another company. Let's not
forget, the senior management, the board of directors, and the
shareholders have overwhelmingly approved our merger, our
joining with BP-Amoco. If by some chance we were not
acquired, ARCO would have to continue to repair its balance
sheet while dramatically restructuring its operations
worldwide. These changes would have negative impacts on our
Alaskan operations.
If we were acquired by another company, that company may not
have the financial strength of BP-Amoco, or the long term
commitment to Alaska, that BP has demonstrated over the past
40 years. Thank you and I'll be happy to answer your
questions after Richard's comments.
RICHARD CAMPBELL, President of BP Exploration (Alaska), Inc. gave
the following testimony.
Good afternoon Mr. Chairman, members of the committee, ladies
and gentlemen. For the record, my name is Richard Campbell
and I am the President of BP Amoco Exploration in Alaska. I'm
here to testify in support of the Charter for Development of
the Alaskan North Slope and to answer questions about the
draft agreement.
The agreement is short, written in plain language, and
contains clear benchmarks by which to judge BP Amoco's
performance. It is the product of seven months of information
sharing and discussions with the state.
By any standard, the Charter looks a lot like the outcome
described early on by members of this committee and the
Knowles Administration. It requires major reductions in BP
Amoco's ownership of North Slope production and
infrastructure. It ensures the presence of another major oil
company or companies in Alaska. It sets the stage for
increased North Slope investments, increased North Slope
production, and increased state revenues. And finally, I
believe it addresses concerns still being voiced by some
Alaskans.
In today's testimony I will try to address some of those
concerns. They are control and the size of the required
divestments, gas, enforceability and timing.
Because no one has defined an "acceptable level of control" I
will assume for the purposes of this discussion that the
status quo is acceptable to most Alaskans. The fact is that
while this agreement does allow an increase in BP Amoco's
ownership of North Slope production and infrastructure, it
does not deliver a corresponding increase in control. That's
because the carefully drawn operating agreement that governs
the Trans Alaska Pipeline System and North Slope oil fields
remain intact. These agreements mandate shared control of
these important assets.
By design, major operating decisions, major capital investment
decisions, major facility access decisions require the
approval of almost every owner. BP Amoco and played an
important and influential role in this shared control
environment. As a company with an ownership interest in every
major producing field, we have been involved in almost all of
the development spending that has occurred on the North Slope
and we have funded our proportionate share.
The production and asset sales mandated by the Charter are, by
any standard, very large. Acquiring these assets will require
investment of billions of dollars. 175,000 barrels of oil a
day is of a scale similar to the global oil production of
companies familiar to Alaska, such as UNOCAL, Marathon or
Phillips. The buyer, or buyers, of this production will play
a major and very visible role in the Alaskan oil industry.
Kuparuk, the second largest field in North America and Alaska,
and Alpine, Alaska's newest oil field, will be operated by
one, or possibly two, major oil companies. Together they
could employ something between 400 to 500 people, perhaps more
depending on how they staff their exploration, human resources
and business support organizations. These new operators will
be responsible for operating and maintaining these fields,
ensuring environmental compliance, forging alliances with
Alaskan contractors and suppliers, and developing plans for
continued development of these world class assets.
Because North Slope operating agreements generally require the
agreement of companies owning 90 percent or more of a given
reservoir, these new players will play a pivotal role in
determining the level of forward investment in these fields.
Under the Charter, operatorship of the Kuparuk field must go
to a company with assets of more than $8 billion; Alpine to a
company with assets of more than $3 billion. The new Alaska
operators will be companies with major operations in other
parts of the world. Even so, it is important to remember that
the assets and production they require here will be among the
largest in their global portfolios.
Almost overnight, Alaska will become a core area in which to
invest the human and financial resources necessary to grow
reserves and production.
The Charter ensures these new players will have a level
playing field. We have agreed to sell buyers of North Slope
production sufficient capacity in the TAPS and North Slope
feeder pipelines to move their oil to market. We will also
market TAPS capacity to finders of new fields if they want it.
TAPS will remain an open access, common carrier pipeline that
is required to carry production tendered by all North Slope
producers at fair, government regulated rates.
The tariff settlement methodology agreed with the state in the
mid 1980's is working and remains intact. TAPS tariffs are
lower today than they have ever been. Our goal is to keep
tariffs low by keeping production up. To build exploration
interest and encourage exploration activity, we will sell
North Slope seismic and well data where we have the legal
right to do so, and we will market 620,000 acres of highly
prospective state and federal exploration acreage. We will
work with the State to select and manage the sale of this
acreage to drive exploration activity and to ensure that other
companies end up as exploration operators.
I would like to emphasize that the Charter guarantees
companies the right to move forward alone if partners are
unable or unwilling to proceed with exploration drilling.
Concerns have also been voiced about how the Charter will
affect efforts to achieve the sale of North Slope natural gas.
Simply put, this agreement, I believe, will enhance those
efforts. We are committed to making the commercialization of
the North Slope's abundant gas resources a reality. After the
acquisition, when our ownership of this resource increases
from 20 percent to more than 50 percent, we will form a stand-
alone business unit in Alaska to pursue all options for moving our
gas to market. We are going to support these efforts by locating
in Alaska BP Amoco's global gas technology center. The center will
be staffed with scientists and engineers who are experts in high
pressure pipeline construction, LNG plant design and operations,
and the use of space age catalysts and membranes to make more
efficient the production of so-called "white crude."
The fact that we are locating it here should tell you
something about how we view North Slope gas sales in the
context of BP Amoco's global gas strategy. This committee is
aware of our efforts, I believe, to develop competitive LNG
and Gas to Liquids projects.
A third option, a gasline to the Lower 48, is now on the
table. New technologies and construction methods have been
making long distance pipelines less expensive. And the
northern expansion of the Canadian pipeline system would mean
building a shorter pipeline to carry Alaskan gas.
These costs savings, with growing natural gas demand in the
United States - the largest natural gas market in the world -
and a major opportunity becomes apparent. So apparent, that
two separate groups have recently issued press releases about
their plans to pursue development of gas lines to the Lower
48. It is important to remember that the gas sale options
I've described - LNG, GTL, and pipelines to the Lower 48 are
not mutually exclusive. We are pleased that other groups and
other companies are pursuing their own ideas for the North
Slope gas market. We won't stand in the way. In fact, after
the acquisition we have guaranteed availability of up to 1.2
billion standard cubic feet of North Slope natural gas per day
to any commercial project at a competitive net back price.
Together with the State we've agreed on $1 per million BTUs
indexed to price.
Concerns have been raised about the enforceability of the
Charter. The first half of the agreement - the section
requiring sale of production, acreage, infrastructure and the
relinquishment of field operator ships, is a binding contract.
We either conclude the sales in the time allowed or a trustee
is appointed to sell those assets for us. The requirements
are clearly stated. It won't take a court long to resolve a
dispute in the unlikely event that one should arise. Our goal
is to identify buyers and conclude sales as quickly as
possible.
The community and environmental commitments are also clearly
defined. Assessing our performance will be easy. Failure to
deliver on our promises would mean loss of credibility with
the Alaskan public and long term damage to valuable working
relationships with the State, its regulatory agencies, and
citizens oversight groups. That is a price that in my view is
just too steep to pay. BP Amoco is a company that keeps its
commitments.
Four years ago we promised to build Northstar production
facilities in Alaska. Despite lawsuits and permitting delays,
those modules are under construction in Anchorage today.
Finally, concerns have been raised about the time allowed
Alaskans to review and comment on the charter. While the
agreement has been on the street for only two weeks. this
issue has been before us for seven months. The Knowles
Administration brought in national experts and considered
input from a broad cross section of Alaskans in formulating
the state's position. That position was laid out for the
public in a major speech last summer. It's no accident that
the Charter looks like the agreement described at that time.
Our goal is to complete this acquisition before the end of the
year. I suggest today that this should also be your goal.
There's a tremendous prize to achieve. The acquisition
creates the potential to halt the decline of North Slope oil
production over the next five years. Significant progress
toward this prize can't occur until the production acreage and
asset sales required under the Charter are completed. The
participation of another major company is now required to
achieve our goals. We need them here as quickly as possible.
When this situation is resolved, we believe activity levels on
the North Slope will pick up.
It is time to end the uncertainty - for oil field service
companies, for contractors and for ARCO and BP Amoco employees
who are still waiting to know what their status is. It is
time to go back to work.
Mr. Chairman, that concludes my testimony. If you are wanting
to go into questions at this time, I would like to introduce
some of my colleagues who I brought with me here today in an
effort to ensure that we address your questions in as detailed
a form as possible.
CHAIRMAN HALFORD noted Representative Ogan and Senator Wilken were
participating via teleconference and that Senators Pearce and Ellis
and eight Representatives, including all committee members except
Representative Porter, were present.
CHAIRMAN HALFORD asked Commissioner Shively and BP Amoco and ARCO
representatives to join committee members at the table for
questioning.
MR. CAMPBELL introduced Ms. Ann Drinkwater, the President of BP
Pipeline and Business Unit Leader for Pipeline and Shipping
Activities; Mr. Ken Conrad, Business Unit Leader for the Eastern
North Slope; and Mr. Tom Holt, Business Unit Leader for the Central
North Slope.
CHAIRMAN HALFORD asked Commissioner Shively to address the
questions prepared by the committee.
Number 568
COMMISSIONER JOHN SHIVELY, Department of Natural Resources (DNR),
said, regarding whether the agreement creates a post-merger
situation that approximates the current competitive significance of
ARCO, that in the short run there is less production than ARCO has,
but he believes that the divestiture will bring at least one major
company of the size of ARCO, or larger, in because it will take
such a company to purchase the Kuparuk pieces. He believes that
company will also likely have exploration acreage and, over time,
the company could become as big a competitor as ARCO in terms of
production.
Regarding the question of whether the divested assets will attract
prospective buyers, COMMISSIONER SHIVELY stated that he has spoken
with individuals from most major companies and he believes there is
more interest in Alaska right now than in any time since 1969. No
major oil company in the world will overlook the potential of
175,000 barrels per day in North America. That business might not
go to just one company. At least four companies, the size of ARCO
or bigger, are preparing proposals.
TAPE 99-8, SIDE B
COMMISSIONER SHIVELY responded, "You can't have it both ways, Mr.
Chairman. If we wanted just efficiencies, we would have left the
agreement alone. We chose not to do that. I think there will be
synergies and efficiencies lost here, but we thought it was much
more important and, also more importantly, in view of the state's
law to provide for competition. We believe there are companies
that can operate this size of field, and want to operate it, and
will operate it. But there's no question that BP loses some of
what they thought they were buying as a result of these
divestitures."
REPRESENTATIVE CROFT asked Mr. Campbell if he has an updated
estimate of what the efficiencies savings from the merger will
bring with the new conditions.
MR. CAMPBELL replied that BP has a preliminary view of what
efficiencies would go away with the divestitures. He estimated BP
will lose $50 to $60 million of the original estimate of $200
million.
Number 021
MR. MEYERS added that it is important to remember that cost
efficiencies and synergies will result from having a single
operator at Prudhoe Bay.
MR. CAMPBELL indicated that another way to look at this issue is
that ARCO currently operates two-thirds of the production while BP
operates one-third of it. Most of the divestitures will result in
BP operating two-thirds of the production while a new company will
operate one-third of it.
REPRESENTATIVE CROFT questioned whether efficiency means two people
will not be doing identical jobs, or that two pipeline facilities
will not be necessary, so that BP will be able to use one person
and one facility.
MR. MEYERS replied it is more a matter of removing redundancies in
operations, not so much removing redundancies of facilities. Most
of the benefit will be in terms of overheads, for example, two
field managers will no longer be necessary. He added that a large
number of industry costs are related to labor so that when costs
are reduced, there are generally reductions in jobs.
Number 046
COMMISSIONER SHIVELY addressed the next question, which asked
whether the buyer of the Kuparuk and Alpine fields can be the same
company. The answer is yes and regarding whether the
Administration is encouraging one company to buy both, the option
is totally open. At one point during the negotiations, the
Administration was looking toward a single company because it felt
that to provide for options for different sizes of companies it
would be better to develop the divestiture this way. He noted he
is not aware of whether the Administration has identified which
companies are interested in which acreage, however it is common
knowledge that Anadarko is interested in the Alpine field.
CHAIRMAN HALFORD asked the amount of Anadarko's percentage in
Alpine now.
COMMISSIONER SHIVELY said it is 22 percent.
Number 058
SENATOR PETE KELLY asked if BP has employed 34 people in
exploration and ARCO has employed 50, and whether after the merger,
BP-ARCO will employ 32. He also asked if ARCO had about $150
million in exploration and BP about $75, and after the merger that
amount will be about $70 million. He questioned what kind of
commitment BP-ARCO will make to exploration, and if an aggressive
stance does not continue after the merger, that the bottom line is
that less oil will flow through the pipeline in the future.
COMMISSIONER SHIVELY replied that could happen, however every
company interested in the Alaska fields that the Administration
spoke with wanted two things: present production and future
production. That is why the Charter requires a significant
divestiture of exploration acreage. The Administration believes
that any company that comes to Alaska will look at the acreage that
is being divested on the exploration aspect and they will be driven
to explore that acreage.
Number 097
SENATOR PETE KELLY asked if the buyer of Kuparuk would only be
covering its own demand or position from the oil they are already
buying from BP.
COMMISSIONER SHIVELY said a number of companies are not buying a
barrel of oil from BP right now who are interested in the
divestiture. He emphasized that every company the Administration
spoke with stressed the need for an exploration piece. If that
company sits on existing production, it is sitting on declining
production. Any company that is going to invest enough to buy the
divestiture will want a future, and the investment will be a
commitment to that future.
MR. CAMPBELL maintained, in response to Senator Kelly's question
about the number of BP-ARCO employees post merger, that the numbers
quoted by Senator Kelly are from an Anchorage Daily News article in
which the data was totally garbled. He noted an apples and oranges
comparison was made of the different organizations between BP Amoco
and ARCO. He pointed out that a letter to the editor to clarify
those numbers was not published. He indicated the number of
exploration employees that will go forward after the merger will be
about 50. MR. CAMPBELL also emphasized that the divestiture creates
a tremendous opportunity for companies that want to do exploration
work in Alaska. Six hundred and twenty thousand acres of prime
exploration acreage will become available and strong competition
for those areas exists. He believes a lot of wells will be
developed on that acreage in the next few years. BP plans to put
together deals for new companies to come in and operate its
interest in ensuring that work will get done. In terms of
production operators interested in exploration, they will want to
look for the next discoveries, the next satellites, and the next
barrels of oil to keep their facilities full.
Number 121
COMMISSIONER SHIVELY noted the next set of questions are directed
at how the divestiture will actually work, in terms of pricing and
other things. Basically, BP will open its data to qualified
companies. The companies will make offers.
CHAIRMAN HALFORD asked if Commissioner Shively is referring to raw
data or a complete three dimensional analysis.
COMMISSIONER SHIVELY said it is both, and that it is traditional to
allow companies to come in and work the data themselves. BP will
evaluate those proposals and will probably narrow down a few and
negotiate. He assumes the divestiture will occur through
negotiated agreements, not through an auction or RFC.
REPRESENTATIVE BERKOWITZ asked what the dollar value of that kind
of data is.
MR. CAMPBELL replied, "Millions, it certainly cost us millions to
acquire it."
COMMISSIONER SHIVELY added that BP has committed to sell no matter
how low the best offer is. Regarding the question of whether the
State can compel BP to select a buyer in the case that two buyers
are interested and only one is aggressive about exploration, he
pointed out the State does get the chance to review the agreements
BP ARCO makes with the purchasers to ensure the buyer met the
criteria set out in the Charter, however if the criteria was met,
the State could not make the choice. He said he does not see that
as a problem however, because the purchaser of the Kuparuk field
will want to explore.
COMMISSIONER SHIVELY indicated that he cannot assure that the
company that buys will be as aggressive as ARCO was, and he does
not feel that question is fair. He noted that BP has been a leader
as well as ARCO, and what has bothered him the most about the
acquisition is the loss of intellectual competition that could
result from one company running everything. Bringing at least one
more company into the arena will maintain that competition.
COMMISSIONER SHIVELY stated that, in response to the question about
the total acreage in each of the "play fairways," he did not have
that information but could provide it to the committee. He noted
that on the State "play fairways" the figures are not final. The
Administration reserved the right to meet with BP once the merger
is finalized to complete those things but he can probably calculate
the acreage in the NPRA for the committee.
COMMISSIONER SHIVELY explained that the Colville River unit is
expected to be in production next summer. Production will begin at
about 40,000 barrels and will increase to 80,000 after about one
year.
Regarding question 7, COMMISSIONER SHIVELY informed committee
members that they are correct that the total divestiture for Buyers
A and B does not equal the total of 175,000 barrels, but it was not
intended to. The minimum divestiture was set at 175,000 barrels,
and requirements were set for two fields. After the requirements
for the two fields are met, if the 175,000 is met, BP is done. If
not, BP could sell from any field, i.e. Prudhoe, Endicott or Milne.
He added that different companies have different ideas about which
pieces on the Slope they want so where the other oil might come
from might be part of the negotiations.
Number 179
VICE-CHAIR GREEN asked whether the 175,000 barrels constitutes the
net or gross working interest.
COMMISSIONER SHIVELY said what was negotiated is not what was
written. The Administration negotiated for 175,000 gross barrels.
He maintained that confusion will be rectified in the final
agreement.
REPRESENTATIVE SANDERS asked whether BP will maintain 60 percent
interest in the Kuparuk and Alpine fields.
COMMISSIONER SHIVELY answered about 10 percent of Kuparuk is owned
by others and about 22 percent of Alpine is owned by Anadarko. If
Anadarko is the purchaser of Alpine, technically BP could be at 60
percent. He explained that the 40 percent divestiture figure was
derived as a result of discussions the Administration had with
other companies about the minimum they felt they needed to have
enough control. They might want more which is why there is
flexibility in obtaining the 175,000 barrels. He guessed that
whoever buys will want more than BP and they will buy more oil
under the 175,000 to get there. If the company does not want to do
that, it can amend the operating agreement so that it has the
controls it needs, but no company is going to make the kind of
investment it will take to buy Kuparuk without believing it has the
ability to control the major decisions.
CHAIRMAN HALFORD said if Anadarko buys Alpine, it will end up with
62 percent.
COMMISSIONER SHIVELY said the way the agreement is written,
Anadarko could add another 18 percent which would put them at 40
percent.
CHAIRMAN HALFORD noted BP does not have to sell 40 percent so it is
to BP's advantage to go to Anadarko because that will require a
smaller divestiture.
COMMISSIONER SHIVELY replied, " But Anadarko may not want to
operate at 40. If it meets the technical part of the agreement I
would guess that Anadarko would not want to stop at 40, but maybe
they would. If they do they're going to write an operating
agreement that gives them more control than a 40 percent owner
would have.
Number 207
CHAIRMAN HALFORD asked if another buyer that wants Alpine will have
to get 40 percent while Anadarko only has to get 18 percent.
COMMISSIONER SHIVELY said that is correct.
CHAIRMAN HALFORD noted that would give Anadarko a substantial
competitive advantage.
COMMISSIONER SHIVELY pointed out that BP will look at all of the
pieces and it will still have to sell 175,000 barrels, therefore in
some ways selling to Anadarko will be disadvantageous.
MR. CAMPBELL added it is in BP's interest to come out of this
process with an aligned set of interests in the fields that will
allow all of the activities to go forward and that is what it will
be working toward during the divestment process. He repeated that
the decisions in these fields about major expenditures are made by
all parties.
VICE-CHAIR GREEN asked if in the 175,000 barrel make-up that is now
gross, assuming that Alpine will be producing the equivalent of
80,000 barrels of that, if Alpine comes out like Badami and it only
produces 40,000 barrels per day, would BP only have to divest
135,000 barrels.
COMMISSIONER SHIVELY replied yes, they will have sold that to the
buyer as if the buyer was buying 40 percent of 80,000. If it does
not produce that way, they will have sold less production.
VICE-CHAIR GREEN asked, "If the agreement calls for selling 175,000
barrels, but only maybe 25,000 are left, does that relieve them
of obligation or do they have to go back into the good stuff to
make up that difference?"
COMMISSIONER SHIVELY replied they have to go back and find
something somebody wants to buy.
MR. MEYERS remarked, "... we have real numerous penetrations out in
Alpine, I don't know the exact count right now but it's probably in
excess of 20. All those penetrations are equal to or better than
our prognosis. We are confident that we are going to come on
production at our expected rates. So there's no confusion here 12
months from now and everybody says what the heck happened, Alpine
will only start up at 40,000 barrels a day because of the number of
penetrations we will have in the reservoir at start up. We have a
rig running year round out there. It will take about 12 months, as
the Commissioner said, to ramp up to 80,000. I might also point
out one thing too. We have already had a discovery next door to
Alpine called Fiord. That discovery was announced earlier this
year. Fiord has the potential to add another 10,000 barrels a day
to Alpine production if it proves up commercial, and we're working
through those right now. So, we already know of one highly
prospective satellite sitting that will come through. It's just a
few miles from the Alpine central facility so it will come through
Alpine. So when I look at that and the potential of the Colville
River Unit to deliver production, I think it's there - the
potential is clearly there."
COMMISSIONER SHIVELY noted the committee asked a couple of
questions about whether the recent commitments will be changed
under the new agreement, including the work agreements. He stated
the answer is no and that the general authority within DNR and the
AOGCC remains. Regarding excess acreage, normally DNR would give
the company 90 days to dispose of the acreage. The company could
sell small chunks to existing partners or give some back to the
state. Under the Charter, the companies will give control of two
play fairways which is a much more attractive proposal for the
State and for operators and it will make for more aggressive
exploration. In addition, they are divesting at least 20 percent
more than what they were required to under existing law. Therefore
instead of 330,000 acres they will have to divest 400,000 acres.
Regarding the question about the process for BP to reacquire
ownership of TAPS, regulatory commission approval is required.
COMMISSIONER SHIVELY explained that under the Charter, BP Amoco
agrees to participate in binding arbitration if a dispute over
facilities access occurs. That arrangement gives the company in
the field two choices: it can use binding arbitration or it can use
the State's authority. He said he was asked about why different
pipeline companies have different tariffs. He deferred to Ann
Drinkwater to answer that question.
COMMISSIONER SHIVELY explained that regarding the tanker
transportation, the whole system is about to change over because
OPA 90 requires the industry to build all new tankers beginning
with the millennium class tankers. The larger new companies
believe that they could make an agreement with the Alaska Tanker
Company or another company, or more likely find their own
transportation. There is some issue with smaller companies. As
the production picture changes on the Slope, that will be reflected
in the size of new tankers, which is why the Administration did not
spend a lot of effort on the marine transportation issue.
Number 323
REPRESENTATIVE PORTER asked if the State should be concerned about
having an adequate number of tankers for future production.
COMMISSIONER SHIVELY replied that past experience has shown that if
you have the production, you will get the tankers. If several
smaller, independent companies operate, that could be of concern
because they are generally not in the tanker business. Another
point that has tariff implications for the State is that the
tankers are expensive, which will affect the well head price.
REPRESENTATIVE PORTER indicated that only two shipyards in the
United States build these tankers and questioned whether enough
could be built in time even with an aggressive building schedule.
MR. CAMPBELL asked Chairman Halford to revert to a discussion about
tankers. CHAIRMAN HALFORD agreed to do so after Commissioner
Shively finished addressing the committee.
COMMISSIONER SHIVELY noted the Administration did raise the tariff
issue with the FTC and they did not view it as a good antitrust
tool at all, but divestiture was. He pointed out that we have to
recognize that the State did lease the right to the gas to BP, ARCO
and Exxon. If any company meets the criteria, BP must sell them the
gas, even if BP thinks it can do better in a year or two. Also,
there is nothing in the agreement that prevents BP and Exxon from
making an agreement with another company at any price on any
project. Regarding whether the period until December 31, 2001 is
long enough, he pointed out that some people think it is too long,
others think it is too short. The Administration believes it is
reasonable to push something quickly under these standards. The
1.2 BCF per day does not include royalty gas. He did not know how
much gas BP plans to use for its GTL project and suggested that
committee members ask BP. Regarding partner approvals, none are
needed because it was set up as BP's gas rather than field gas.
The determination of the net back price caused more concern than
any other issue. It is an aggressive price but the current State
policy is for the Commissioner of DNR to maximize the economic
benefit of our resources to the State. Also, the royalty
contributes to the Permanent Fund. The price was set in
conjunction with the State and the Administration is talking with
the mayors about how to craft language that might be better for
them. He repeated that nothing in the agreement precludes them from
making a separate agreement.
COMMISSIONER SHIVELY offered to answer further questions.
VICE-CHAIR GREEN asked, " If this contract is for BP, does that
mean that State gas is left in the ground?"
COMMISSIONER SHIVELY said the Administration was looking at 2.2 BCF
that the State would actually overlift to make up the difference.
VICE-CHAIR GREEN asked if that is stated in the agreement.
COMMISSIONER SHIVELY said it is not. He added if there is a
project that meets the criteria and the company wants the State to
overlift its gas, he believes it would be in the State's best
interest to do it.
MR. MEYERS replied that the unit operating agreement at Prudhoe
allows any owner under very specified conditions, which are
referenced in the agreement, to take the residual gas.
Number 437
REPRESENTATIVE ROKEBERG expressed concern that the stipulated price
is negotiated under most conditions and that to stipulate the price
in a contractual obligation does not make good business sense.
COMMISSIONER SHIVELY replied that if it was a different deal, BP
would have to agree to it, but BP is being forced to sell the gas
for two years if anyone meets the criteria in this agreement.
Under those conditions, he believes it is appropriate to set a
standard as part of a series of criteria that people could meet.
CHAIRMAN HALFORD said the committee has heard the Charter will be
amended in regard to the net 175,000 barrels versus the gross. He
asked what technical changes have arisen during the last two weeks
of review that are currently under consideration.
COMMISSIONER SHIVELY replied one of the major changes has to do
with the savings clause which is somewhat confusing regarding
whether BP is being relieved of any of its legal responsibilities
under existing law. That was not the Administration's intent nor
BP's intent.
MR. CAMPBELL asked if that clause would speak to the environmental
concerns.
COMMISSIONER SHIVELY said it would.
Number 494
CHAIRMAN HALFORD called upon members of the Alaska Gasline Port
Authority to give their presentation to the committee.
HANK HOVE, Chairman of the Alaska Gasline Port Authority, made the
following comments. The Port Authority has been engaged in the
construction of a model for the benefit of the State of Alaska
through the production of its vast gas resources on the North
Slope. The Port Authority recently entered into a memorandum of
understanding with Bechtel, Inc. for the purpose of first providing
an engineering analysis which the Port Authority requires in order
to develop construction costs estimates. Taylor-DeJongh, Inc., a
world recognized financial analyst, especially in matters related
to oil and gas around the world, has performed the financial
analysis.
[For the next portion of his presentation, Mr. Hove referred to a
handout entitled "Alaska LNG Project Benefit Analysis.]
The benefits to the oil companies through increased oil production
will amount to $588 million per year, largely resulting from the
increased production of NGLs as a byproduct of increased amounts of
natural gas from the North Slope. Income from gas sales from the
Port Authority to the producers would be in the amount of $349
million per year, so the total revenues to producers will amount to
nearly $1 billion per year. Other benefits to the oil companies
will be additional CO2 available for reinjection for
repressurization of the field. Pproduction of gas at Point
Thompson for inclusion in the gas flow from the field would result
in their ability to finally extract oil from that significant crude
oil deposit.
The last page contains a comparison of benefits to the State of
Alaska. Commissioner Shively said earlier it is his duty as the
Commissioner of the Department of Natural Resources to maximize the
benefit to the State from oil and gas activity. Commissioner
Shively, however, is focusing on the revenue to the State from its
traditional sources, that being from royalties and the severance
tax. Under the Port Authority concept, the potential for greatly
increased streams of revenue to the State could result from the
existence of a port. Excess cash from the project would be
deposited to the State's general fund to the extent of 60 percent
of the Port Authority's cash flow. Thirty percent of its cash flow
would be directly deposited with the communities of the State as a
result of contributions made directly from the Port Authority to
the communities. The benefits to the State of Alaska are
demonstrably better under a Port Authority concept than any other.
Assuming a Port Authority 30 cent price for the gas will result in
a total of $472 million in benefits to the State from royalty,
severance tax, corporate income tax and from the cash flow stream
and that would be directly deposited to the State or to its
residents.
The private project would be exposed to federal income taxes
TAPE 99-9, SIDE A
Number 001
MR. HOVE pointed out that whether money comes from a severance tax,
a royalty, interest or corporate taxes, the interests of the State
and its residents truly remain the amount of money collected, not
the means by which it is obtained. Offering this project for
members' consideration, " he said the Port Authority believes the
terms of Section J in the Charter are not conducive to natural gas
development. It is their position that while the producers have
suggested they have offers of $1 and $1.20 for gas, in reality
those are not anywhere near firm offers.
MR. HOVE noted one reason the Port Authority had delayed rolling
out this model: they had gone to the trouble to retain widely
acknowledged experts on oil and gas in the world, requesting as
exact a model as possible, which took not only time but also a few
million dollars. They did the work and held off until they felt
comfortable with rolling it out to the committee and the State.
They believe this is the best and perhaps the only opportunity for
Alaska to capitalize upon its gas resource. Mr. Hove emphasized
that the Port Authority is by no means "nationalizing" the gas
resource in which the producers have a leasehold interest.
However, they are cognizant that every Alaskan is an owner. Mr.
Hove suggested it is analogous to renting out prime real estate
where the lessee has agreed to pay a certain amount of money for
all the economic activity to take place there, only never to have
it developed and, therefore, to have no revenues flow from it.
MR. HOVE continued, saying the time has come for the State to take
control of its own destiny. He believes Alaska is looking to the
legislature, to this committee and, more importantly at this time,
to the Governor to provide the leadership that will ensure that
this important resource, which Alaskans own, is brought to market
and commercialized in such a way that it benefits everyone in
Alaska. "We have waited far too long," he concluded. After
thanking the committee, he added that the Port Authority does not
object, on any specific level, to any terms of the Charter other
than those that relate to the gas resource. Therefore, they had
distributed to the committee a sheet highlighting the five areas in
which they do have problems and for which they seek solutions.
Number 043
REPRESENTATIVE CROFT indicated his understanding that Alaskans
don't need to pay as much for the gas at the wellhead because they
are owners or get some of the benefit of the project itself.
MR. HOVE responded, "Under the Port Authority concept, you would
participate in the profits."
REPRESENTATIVE CROFT referred to the dollar price set. He voiced
his impression that a lot of the controversy around the gas line in
Dr. van Meurs' study related to the fact that selling the gas at
traditional market rates to a traditional private entity is only
marginally profitable.
MR. HOVE affirmed that.
REPRESENTATIVE CROFT continued, saying the idea of the Port
Authority is a new approach that made it profitable.
MR. HOVE concurred.
REPRESENTATIVE CROFT suggested in effect, then, the new approach
entails pricing on the old model, which only barely worked or about
which there was disagreement as to whether it worked.
MR. HOVE agreed, explaining that it essentially removes from the
table as an ordinary cost of conducting one's business - in terms
of return on equity, or return on investments - the marginal
corporate tax rate. Assuming these companies are subject to the
marginal tax rate, which Mr. Hove doesn't know to be the case, it
would remove the tax burden to which Dr. van Meurs had referred
repeatedly as "needing a fix." Taking that off the table would
dramatically change the economics surrounding this gas issue, Mr.
Hove pointed out, as can be seen by the figures.
Number 059
MR. HOVE, in response to an inaudible question by Representative
Kerttula regarding a tax exemption, answered:
No, we haven't. We expect that we would have that within
six or nine months. The IRS does not work at warp speed,
as one might imagine. ... We don't anticipate any problem
there. No one - absolutely no one - has suggested that
that won't be forthcoming. In fact, in a meeting I had
with Mr. Shively two weeks ago, he referred to it as a
"slam dunk," to quote him.
Number 069
REPRESENTATIVE WHITAKER asked if Attorney General Botelho was still
online, then read a portion of Article I, Section 15, of Alaska's
constitution, regarding prohibited State action: "No bill of
attainder or ex post facto law shall be passed. No law impairing
the obligation of contracts, and no law making any irrevocable
grant of special privileges or immunities shall be passed." He
asked Attorney General Botelho whether it is fair to say that the
Charter is a contract.
ATTORNEY GENERAL BOTELHO affirmed that.
REPRESENTATIVE WHITAKER suggested, therefore, its terms are binding
and cannot be undone. He asked whether it is correct that if we
don't change the stipulations of the charter relating to gas now,
we will be precluded from doing so in the future to allow a port
authority concept or something similar.
ATTORNEY GENERAL BOTELHO answered no, he doesn't think that is
correct. This contract does not purport to bind BP in its dealings
with third parties at all.
REPRESENTATIVE WHITAKER, responding to a question by Representative
Rokeberg, asked for confirmation that the contract binds the State.
ATTORNEY GENERAL BOTELHO said by the terms of its contracts, yes.
Number 090
REPRESENTATIVE CROFT noted that Section V, subsection D, of the
Charter makes it binding on successors. He asked if that means a
future governor can't change it or disagree with the finding in
there that this is in the State's best interests.
ATTORNEY GENERAL BOTELHO said that is correct. The contract,
entered into by people authorized to do so, is just like any other
contract that the State would enter into, and it becomes binding on
successors.
REPRESENTATIVE CROFT expressed his understanding that this agrees
not to sue under the antitrust laws, and if a future governor tries
to challenge it, it would be a violation of that contract.
ATTORNEY GENERAL BOTELHO responded:
No. Let me make clear what the agreement provides is
that the State is not going to challenge this merger
under its antitrust laws. It doesn't bind future
governors or this one from bringing other antitrust
actions for violation of the State antitrust law against
BP or its successors.
ATTORNEY GENERAL noted that it would be highly unlikely that
another governor would have the opportunity to challenge the merger
in any event. In response to further questioning, he clarified
that this Charter doesn't purport to limit the State's ability to
challenge other antitrust conduct alleged against BP or any other
party in the future. It is an agreement to forego litigation on
the terms of this merger. If a future governor were to take office
during the coming months - which he doesn't believe is probable -
that governor would be bound by the terms of this Charter with
respect to this merger.
Number 120
CHAIRMAN HALFORD pointed out that such a governor could still
proceed under any of the other antitrust provisions including, but
not limited to, those relating to monopoly control and predatory
activities. However, that governor couldn't reverse the merger
because it would have already taken place.
ATTORNEY GENERAL BOTELHO agreed.
REPRESENTATIVE CROFT noted that this says "the State accordingly
agrees that in exchange it will not seek to enjoin." He asked
whether that prohibits the legislature from doing so.
ATTORNEY GENERAL BOTELHO responded by saying Article III, Section
16, of Alaska's constitution authorizes only the governor to bring
lawsuits in the name of State. As to whether the legislature
should choose to do so, he noted that it is certainly purporting to
do so in other situations.
Number 132
REPRESENTATIVE WHITAKER requested confirmation that the State
wouldn't have an opportunity to rejoin this subject at a later
date, specifically regarding gas and the provisions of the Charter.
ATTORNEY GENERAL BOTELHO replied, "Not unilaterally."
REPRESENTATIVE WHITAKER expressed his understanding that it would
require British Petroleum to do that as well.
ATTORNEY GENERAL BOTELHO affirmed that.
Number 135
REPRESENTATIVE WHITAKER asked, "Mr. Mayor, would you conclude,
then, that if we let this opportunity slip to negotiate what your
group considers to be a fair market value, that the benefits that
you've outlined will be precluded in the future?"
MR. HOVE said that is his belief, and he believes this is the best
opportunity to strike a deal that all - producers, State and port
authority - can live with. "All others downstream are pretty much
foreclosed once the agreement is effectuated," he added.
REPRESENTATIVE WHITAKER asked whether, in Mr. Hove's opinion, it is
our only opportunity.
MR. HOVE affirmed that.
Number 146
CHAIRMAN HALFORD asked through what format Mr. Hove believes the
legislature can influence that.
MR. HOVE replied:
Last week I was thinking in terms of a special session.
This week I'm not sure what I'm thinking. It seems my
options have become fewer in number and less desirable as
time progresses. ... You may yourselves feel much the
same way. That's how I feel presently.
CHAIRMAN HALFORD pointed out that the legislative branch hasn't
been a party at the negotiation table, although they have certainly
tried to keep track.
MR. HOVE replied that in his view that is unfortunate, as things
have turned out. He doesn't believe Governor Knowles has entered
into an agreement as well as he could have on behalf of Alaska's
residents, whom he is charged by law to serve, and whose interests
he needs to retain paramount in his mind. Because "a significant
portion of the State is disadvantaged therefrom," Mr. Hove said he
looks to any and all players who can step up to the plate,
including the legislature or this committee, which might have some
standing "that would give us the ability to take care of those
disadvantageous features of this Charter."
Number 166
ATTORNEY GENERAL BOTELHO concurred with Commissioner Shively's
earlier comment that the State has obviously identified the gas
issue as a paramount concern. Attorney General Botelho said they
are reevaluating it. He pointed out, however, that there hasn't
been a price set. The obligation they are talking about is this:
If a project that meets certain viability criteria comes forward
and is prepared to pay $1 per million cubic feet (mcf), BP has no
choice but to sell. It is not a situation of "the price that BP
has to accept." Rather, it is simply a point where the discretion
that BP otherwise would have evaporates. Attorney General Botelho
concluded:
Again, our purpose here was not to detract from, but
hopefully advance, the gas commercialization in the
State. Again, we may not have succeeded here, and we
understand the criticism that we've heard. But, again,
I want to reaffirm that our purpose was to try and
advance the ball, and that is to create a situation where
a major company was prepared, under conditions, to sell
commercial quantities of gas on the North Slope. And it
doesn't stand for anything beyond that.
Number 187
MR. HOVE expressed appreciation for the offer of what appears to be
increased flexibility in terms of determining what that price might
be, if not a dollar. He then stated:
But one has to look at what gas is truly worth, and gas
is truly worth what a buyer will pay for it. Now,
markets usually work efficiently. And I'm suggesting to
you that the way to commercialize and monetize Alaska's
gas resources is to fashion a method by which it can find
a market and let that market tell us what it is worth.
And we'll price it backward from there, subtracting all
of the costs that are associated with this production,
and that will determine its wellhead value, just as oil
is.
Oil does not have, by the way, any kind of a floor under
it. Oil seeks market level; so should gas. And most gas
sales around the world are somewhere in the neighborhood
or range of between 25 and 50 cents; 50-cent gas would
probably represent gas that is much closer to its
ultimate market than 25-cent gas might be. In our case,
we're quite a long way from any market ... that can
[accept] this amount of gas from Alaska. And so we're
suggesting that ... 30 cents is a pretty fair price,
probably. But by no means can Alaska's gas be assumed to
be worth a dollar. And what's more, until a pipeline is
constructed, the gas ... has a present value in the
ground of exactly zero to the State of Alaska.
And so what is placing, therefore, a value on gas? What
is creating value for Alaska's gas is the existence of
the means of transportation from Prudhoe Bay to the
marketplace. That is what we are proposing to build with
our capital. We are not interested in asking for - or
require - any capital contribution from any of the
producers or anyone else except for the port authority
itself. But one can make the argument that we are, in
fact, the ones that are monetizing gas in Alaska. It is
the existence and the application of our capital that is
creating its value for our gas in Alaska. And without
that means of transportation, that gas isn't worth much
more than just trading back and forth ... among the
producers for their field purposes.
Number 217
REPRESENTATIVE BERKOWITZ asked Mayor Hove whether he'd had a chance
to speak about his proposal with Attorney General Botelho, members
of the Administration or BP representatives recently, since the
Charter was first submitted to the State.
MR. HOVE replied:
We've had one meeting with Commissioner Shively, I
believe; I did a one-on-one a couple of weeks ago. But
that is all. We have met with BP. We have attempted to
meet with ARCO. We've attempted to meet with Exxon. ...
With the exception of British Petroleum, no one else will
negotiate or engage in substantial discussions on this
subject, which I find to be somewhat curious.
ATTORNEY GENERAL BOTELHO responded, "Mayor Hove, I understand that
Commissioner Condon met with your group on Monday."
MR. HOVE affirmed that, apologizing for the oversight and saying he
had been unavailable that day.
Number 231
SENATOR PEARCE noted that the Port Authority is now a legal entity.
She asked if they or their attorneys believe the Port Authority
would have standing if they filed an antitrust suit in state court.
MR. WALKER answered that their time to date has been spent totally
on putting the economics of this together to present to the
Administration. They really haven't spent any time on that option.
Although he believes they would have standing, they hope they would
not have to exercise it. Mr. Walker noted the attention on the
terms of the gas and the price. He pointed out, however, that
other terms are equally as challenging to a project. One,
requiring it to become a truly viable project without access to
gas, is a real challenge. Discussing some points set forth in the
handout titled "Problems with Charter," he told members:
The amount is 1.2 [billion cubic feet (bcf)], and really
it's 2.5 [bcf] ... that our project is going to require.
Allowing BP to retain the liquids once they get down to
tidewater doesn't seem to be truly fair. ... That's the
way we read the agreement, that they would be able to
recover them after it's gone through a pipeline. The
"take or pay" is very challenging; a requirements
contract ... is certainly much more viable for a project.
MR. WALKER emphasized that the timing is critical. In addition,
they believe the three factors on the selection of which project is
most viable should be based upon the following: the net benefit
back to the State; the base case net back pro forma; and the
project that has the earliest commercialization date to meet a
market window that he believes exists right now. He added that the
producers are actually competing in other parts of the world for
the same market. He concluded by restating that five or six areas
in that section are equally as challenging as the price of the gas
that has been established.
Number 262
REPRESENTATIVE ROKEBERG addressed Mayor Hove, recalling legislation
passed two years ago to encourage sponsor groups. He believes its
omission from the Charter is a glaring defect, he said. The terms
in the Charter seem proscriptive and would, in his reading,
preclude the Port Authority's operation from making any headway
until after the termination date, December 31, 2001. He asked if
Mayor Hove concurs, notwithstanding the Attorney General's seeming
desire to have a little more flexibility. He added that it seems
rather clear-cut to him.
MR. HOVE replied that assuming the Port Authority can secure
contracts for the supply of gas in quantities sufficient to meet
their requirements, they can meet all time lines set forth in the
Charter with difficulty; that is assuming they timely reach those
agreements, within the 45 days.
Number 284
REPRESENTATIVE ROKEBERG suggested perhaps his own question wasn't
clear. He indicated his belief that as it stands now, the Port
Authority would be precluded from going forward if they couldn't
get a lower price.
MR. HOVE disagreed.
REPRESENTATIVE ROKEBERG countered, "That's what you're saying, I
mean, notwithstanding the lower price. I mean, why even bother if
you -- you are bringing yourself up as a potential sponsor group."
MR. HOVE agreed.
REPRESENTATIVE ROKEBERG continued, "You're saying this is running
you out of business. That's why you're anxious for a special
session, is that not?"
MR. HOVE replied:
The terms that Bill [Walker] just here referred to,
together with the price, are difficult for us to live
with, if not impossible. Yes. If we don't have
substantial relief from those terms ... that you referred
to in the Charter, we have a very uncertain life head of
us. I won't say we're dead. But it would [be] extremely
difficult, and it would be extremely uncertain.
Number 297
REPRESENTATIVE ROKEBERG asked Attorney General Botelho, given the
context of the legislation passed two years ago and signed by the
Governor, if he doesn't believe this particular agreement goes
against that legislation, which was to encourage sponsor groups to
come together and so forth. He commented that to him this flies in
the face of that existing state policy, and he asked Attorney
General Botelho how he reconciles this agreement with that policy.
ATTORNEY GENERAL BOTELHO indicated the transmission was breaking up
because of papers moving. However, in essence he understood the
question: Is this inconsistent with the legislation enacted a
couple of years ago to foster gas commercialization?
REPRESENTATIVE ROKEBERG affirmed that.
ATTORNEY GENERAL BOTELHO answered that he thinks they are entirely
consistent. He explained:
Again, our point here was, for the first time, to get a
commitment, irrevocable, from BP that with liability and
this price they must make 1.2 billion cubic feet of gas
available a day. I think Mayor Hove spoke earlier about
the market value as a result of a willing buyer and a
willing seller, and whatever price they agree. What you
have here is a situation where we have perhaps removed
the willing seller. ... You can describe the seller as
either willing or unwilling, but under these
circumstances, this is when they must sell; it does not
preclude, in any way, BP or any other owner of gas on the
North Slope from selling at whatever price it wishes to,
and have a meeting of minds ... with purchasers.
ATTORNEY GENERAL BOTELHO emphasized that the fundamental policy
underlying this Charter is consistent with the State of Alaska,
both the legislative and executive branches, in wanting to promote
gas commercialization on the North Slope. Acknowledging that this
is a matter of concern, he noted that there are several competing
projects, all of which have views about the gas terms. "We've
heard them in the public testimony thus far," he told listeners.
"We expect to hear more of them. And we expect to spend some time
at the drawing board. [I] don't know that we can answer all the
questions, but we're going to give it a try, and it is, again, in
the context of wanting to promote gas commercialization, not to
inhibit it."
Number 344
CHAIRMAN HALFORD asked whether he'd understood the Attorney General
correctly that this is an area of potential modification in the
Charter in the next few days.
ATTORNEY GENERAL BOTELHO affirmed that.
CHAIRMAN HALFORD advised participants that the committee would take
public testimony after hearing from the companies; a sign-up sheet
was provided.
Number 394
MR. CAMPBELL noted that there seem to be questions regarding the
section under transportation.
CHAIRMAN HALFORD suggested returning to the beginning of the
Charter and having Mr. Campbell and his colleagues go through areas
that still require an answer, explanation or amplification.
MR. CAMPBELL directed attention to page 1, paragraph 2. Noting a
previous request for a general summary of the agreement, he voiced
the assumption that the detail would be provided by the
Administration.
CHAIRMAN HALFORD responded that the committee would come back to
the Attorney General on that question.
MR. CAMPBELL next referred to the general questions section, saying
his assumption is the first three questions would be addressed by
the State, perhaps by the Attorney General.
CHAIRMAN HALFORD asked if the third one was the termination date.
MR. CAMPBELL affirmed that. As to the fourth question under the
general questions section, he had requested clarification about its
meaning, he said, so as to be able to address it properly.
Number 433
REPRESENTATIVE KERTTULA recalled an announcement about keeping gas
prices down in California. She asked about an analogy regarding
ARCO's prices in some arenas that might be used in Alaska, and
(indisc. -- poor sound quality) tax structure. She also asked
about figures regarding the net back and pricing structure.
MR. CAMPBELL replied that he believes [BP] has indicated in
California - although he himself hadn't seen the detail of that -
that it would adopt a business practice that is currently the
practice of ARCO in that state, in terms of pricing structure.
Referring to the second part of the question, he said if it was
directed at the royalty agreements, not pricing agreements, for
fields acquired by "BPXE," BPXE would adhere to its existing
royalty settlement negotiated with the State. He added:
A new party, we believe, acquiring an interest would
likely adopt either a BP or an ARCO agreement. It could
also enter into any new agreement ... that it completed
with the State. That would be our sense.
[REPRESENTATIVE KERTTULA responded briefly, but most of it was
indiscernible.]
MR. CAMPBELL said that is his understanding, although he suggested
perhaps the State may wish to comment.
Number 500
SENATOR PEARCE asked if Mr. Campbell was saying that former ARCO
barrels being acquired by BP would, after the proposed merger, be
treated as BP barrels under all the settlements and tax agreements
for royalties, severance taxes and tariffs that have been entered
into between BP and the State.
MR. CAMPBELL deferred to Ken Konrad.
Number 506
KEN KONRAD, Business Unit Leader, Eastern North Slope, BP
Exploration (Alaska) Inc., noted that he heads up BP's merger team
in Alaska. He answered that yes, the barrels would be subject to
the BP royalty settlement agreement reached with the State however
many years ago. In terms of a severance tax, that applies equally
to all companies; hence, there is no difference. In terms of
tariffs, Anne Drinkwater would answer questions when they got to
that section, speaking to how, at various points in time,
companies' tariffs may be higher or lower but tend to average out.
Number 526
CHAIRMAN HALFORD called upon Attorney General Botelho.
ATTORNEY GENERAL BOTELHO asked Jack Griffin to comment further,
saying it really raises the issue of the "reopeners" that the State
has had under its royalty agreements.
JOHN GRIFFIN, Assistant Attorney General, Oil, Gas and Mining
Section, Civil Division (Anchorage), Department of Law, said he
would basically agree with Mr. Konrad: the tax structure is going
to be the same, before and after the merger. He explained:
We used an actual cost methodology under our tax regime
to determine, in particular, the marine transportation.
As I think most people know, we have reopened with both
BP and ARCO on various issues under the royalty
settlement agreements. ... If we just assume for the
moment, which I believe is the case, ... a goal of the
royalty settlement agreement is to come up with
transportation deductions that reasonably reflect their
actual costs, then what you should see after the merger -
assuming BP is able to achieve ... the synergies that it
expects (indisc.), or at least in the marine
transportation component - you should actually see a
higher overall average royalty value ... than you see
today. Now, of course, the divestiture is going to
change that equation somewhat. But the merger itself, in
my view, is not going to have a significant effect on the
royalty values ... that the State sees.
Number 564
REPRESENTATIVE BERKOWITZ requested the dollar value to the State of
combined BP-ARCO production from last year, as well as what that
value would have been with the calculation described that day.
MR. KONRAD responded that he didn't have the figures available.
However, he agreed with Mr. Griffin that the marine costs before
and after will be broadly the same; if anything, those costs
hopefully would be lower. He added that the revenues should be
broadly the same, except for the divestments, et cetera.
Number 578
REPRESENTATIVE BERKOWITZ commented that he is a little
uncomfortable with the terms "broadly" and "generally." To anyone
from the Administration paying attention, he formally requested the
dollar difference, which he suggested is significant information.
In response to Attorney General Botelho's indication that the
question didn't make sense, he then asked: How much money will we
make, and how much money did we make?
MR. KONRAD explained that currently BP doesn't transport barrels to
the "short-run" Cherry Point (ph) refinery in Washington, and it is
difficult to apply that under their formula. He added:
We don't currently make the same runs to California. We
make marine runs all over the world, so ... we will be
making those similar runs post-acquisition, and hence the
marine costs for those runs should be broadly similar or
lower. But we're not currently doing that, so to come up
with an exact number isn't physically possible.
Number 601
CHAIRMAN HALFORD said the question was asked retrospectively.
Although the answer is tied into a lot of confidential information,
it should be available from the Department of Natural Resources
(DNR) and the Department of Revenue, and he believes it could be
"sanitized." He also believes it will probably show that
retroactively there are tens of millions of dollars in loss. He
said prospectively there probably isn't a lot of significant
difference .... [ENDS MID-SPEECH BECAUSE OF TAPE CHANGE]
TAPE 99-9, SIDE B
Number 001
[REPRESENTATIVE BERKOWITZ responded, according to log notes, but
his comments weren't on the tape.]
CHAIRMAN HALFORD [BEGINS MID-SPEECH] referred to the relationship
of previous ARCO barrels, under whatever the ARCO agreements,
tariffs and costs were, to BP barrels, under whatever the BP
agreements, tariffs and costs were. He asked what the difference
would have been last year.
ATTORNEY GENERAL BOTELHO said he understood that question, but even
if the merger doesn't occur, the formulas are going to be
different.
CHAIRMAN HALFORD said he doesn't disagree, then suggested it may be
legitimate for the legislative branch to ask the executive branch
to produce the cost-benefit analysis of the merger.
MR. GRIFFIN expressed the need to sit down and talk more about how
the royalty settlement agreements work and how they will work after
the merger. He emphasized that BP is substantially different from
ARCO today, with the latter being a completely integrated
operation. Whereas ARCO knows, generally speaking, exactly where
it is going to bring all of its barrels, BP, generally speaking,
does not; BP has to sell all of its barrels to third parties, and
it is only natural to expect its marine transportation costs, in
particular, to be different. Furthermore, after the merger BP will
be substantially different from either BP or ARCO today.
MR. GRIFFIN continued. In looking at the likely effects of the
merger on the net back value of the ANS [Alaska North Slope], he
said, and putting aside the question of the effect of requiring BP
to divest barrels to another company that as of yet has not been
identified, there would be no expectation of a substantial change
in the net back value; that is because under the tax regime and the
royalty agreement, the goal is to reflect each company's reasonable
actual transportation costs. "And we believe that those agreements
have been relatively successful in doing that," Mr. Griffin stated.
He concluded by indicating his department would try to put together
the requested information, which will help to illustrate this.
Number 039
REPRESENTATIVE CROFT voiced his expectation that there were two
different regimes: one going to a set location in California and
the other shipping worldwide. Afterwards, those two elements would
continue to work, so that ARCO's barrels, although now owned by BP,
would go to that former ARCO refinery, using the same ships and at
the same distance and price. Similarly, BP's barrels shipped all
over the world would be under that agreement. It seems different
to now characterize all of the barrels as BP's, Representative
Croft concluded, saying he was under the impression it would have
a significant fiscal impact. "And that's the question we're trying
to get to," he added.
MR. GRIFFIN concluded that over time, both settlement agreements
can be expected to reflect the companies' actual marine
transportation costs, as the State believes has happened over time
in the past. If BP is correct that by merging these operations
they will experience synergies in marine transportation operations,
the average marine transportation cost for barrels carried by BP
after the merger should go down.
Number 064
MR. MEYERS responded that it is not the methodologies but the
costs, which one would hope would come down as a result of the
merger, divestitures notwithstanding because what gets divested is
an unknown piece of the puzzle. Even if the methodologies were
flip-flopped, the answer would be essentially the same, as the
difference is the cost. He explained:
We run, as been said, to the closest location in an
integrated concept. By definition, you would expect our
costs to be the lowest. That was going to change over
time because, as someone has said earlier, we were
bringing three new tankers into the fleet, three state-
of-the-art tankers that were also (indisc.) to be more expensive
than the tankers we have now, in terms of capital costs; so, over
time, that would have caused a changed of methodology. We were,
before the merger was announced, beginning discussions with the
State about that fact, that ... the costs were going to have to be
corrected because our tanker fleet was changing nature. So, again,
it's the cost; it's not the methodology. And as long as the costs
stay the same, or reduced, one would hope that it would be
reflected in the wellhead value.
MR. GRIFFIN pointed out that the average cost would be expected to
go down. However, as Mr. Meyers had pointed out, the very
expensive new tankers coming on line will be reflected in the
actual marine transportation deductions.
AN UNIDENTIFIED SPEAKER noted that those costs would be there
whether or not the merger occurred.
Number 079
REPRESENTATIVE GREEN noted that with the ARCO method, it is
determined by the price of the oil, which varies. Somewhere,
however, there is a "cross," at $16 or $17, for example, where the
methods are about the same. He asked if that number is available.
He further asked: When you go to supertankers, the ARCO method
will go up, but won't we be ultimately shipping everything in these
new millennium-class tankers?
MR. MEYERS pointed out that the so-called millennium tankers are
actually smaller in size than the average fleet because they are
designed for service in Puget Sound. As to the crossover point, he
said ARCO's formula is simplistic, meant to represent the cost at
average oil prices. As to where the crossover with BP is, he could
not say, as he doesn't know the accurate cost of BP's fleet.
Number 099
ATTORNEY GENERAL BOTELHO suggested this is an area that the State
is in a better position to answer because of access to the data on
both sides.
Number 113
ATTORNEY GENERAL BOTELHO noted the request, indicating his office
would give it its best shot.
REPRESENTATIVE CROFT mentioned the concept of negotiating an
agreement that contains no provision guaranteeing ARCO-barrel or
BP-barrel treatment. He suggested the question must have been
asked and answered in the negotiations; if not, that was
inappropriate, because it either has very little or a significant
fiscal impact. "Before we let that not be a part of the contract,
we should have known that," he concluded.
ATTORNEY GENERAL BOTELHO replied:
Our view and our approach in terms of the royalty
reopeners was that there is an ongoing process that deals
with valuing marine transportation, and that that would
happen whether or not the merger took place, that it in
itself did not raise an antitrust issue.
Number 133
REPRESENTATIVE BERKOWITZ suggested perhaps there could be a fiscal
note with a series of different possibilities attached. He said he
would just like some information. People are coming to the
legislature asking for its sanction or approval, and yet
legislators aren't being given the same information that he
believes the parties to the agreement had. He concluded, "If our
approval is important to this Charter, then I think we're entitled
to that kind of information, regardless of what alternatives ...
you throw in the hopper. Just give me a matrix, but give me some
data."
AN UNIDENTIFIED SPEAKER indicated they would do their best.
CHAIRMAN HALFORD returned attention to the list of questions, in
particular, the Federal Trade Commission (FTC) process. He
suggested the committee might be able to learn from the companies'
perceptions.
Number 140
MR. CAMPBELL in turn suggested the Administration would provide a
commentary on the FTC process questions, then added:
From our own perspective, and I'm not in touch on a day-
to-day basis with ... our folks that are dealing with the FTC in
Washington, but our time line with the FTC remains to conclude with
them ... before the end of the year. I'm not conscious of any
information that I've received from the FTC concerning the Charter.
Number 148
ATTORNEY GENERAL BOTELHO addressed both the time line and the
Charter itself, first discussing the attempted trigger of the 20-
day notice requirement. That notice requirement contains a
provision that once a party to a proceeding notifies the FTC that
it has substantially complied with document requests, the FTC has
20 days within which to decide whether to approve or block the
merger. On October 29, as he recalls, BP Amoco and ARCO provided
the remaining documents and triggered the 20-day rule, which led to
the Governor's notifying the FTC that unless that trigger date were
rescinded, the State's position was that the FTC should block the
merger; it was a communication directly from the Governor to FTC
Chairman Pitofsky.
ATTORNEY GENERAL BOTELHO explained that as a result of that notice,
BP and ARCO in essence suspended that trigger and stipulated
separately with the FTC and the State that they would not trigger
the 20-day period unless one of two events occurred: the State and
BP broke off negotiations and had concluded there would be no
agreement on which to go forward or, in the alternative, the final
agreement had been reached. In either event, BP would be free to
trigger the 20-day clock. At this point, Attorney General Botelho
noted, there is no statutory clock running regarding the FTC.
Number 186
CHAIRMAN HALFORD noted that the last question in the FTC series was
how the FTC generally requires divestiture to occur with regard to
the timing of the approval of the merger.
ATTORNEY GENERAL BOTELHO responded that it is typical for the FTC
to require divestiture up-front. Although certainly the tendency,
it is not a requirement of the FTC, however, and its practice has
varied over the last several years. The primary purpose for that
is to determine whether there are prospective buyers out there,
because if there aren't, then divestiture perhaps is not an
appropriate remedy. He indicated the State had examined that as
well, coming to the conclusion that there are prospective buyers
who have both the financial capacity and the stated commitment to
provide the strong operatorship which the State is looking for, or
participation, on the North Slope. For that reason, he indicated,
the State was satisfied that its approach was appropriate.
Number 200
CHAIRMAN HALFORD voiced his assumption that Attorney General
Botelho is in contact with the California's Office of the Attorney
General, at least regarding public information about timing on any
recommendation. He asked if Attorney General Botelho has any
information or ideas that are in the public domain.
ATTORNEY GENERAL BOTELHO replied that although he can say
Washington, Oregon and California have an active task force on this
matter, he probably cannot say more about what action any of those
states may undertake. He indicated those states have been in
standing communication with the FTC, as has Alaska.
CHAIRMAN HALFORD requested verification that Attorney General
Botelho doesn't know anything more about timing from those states,
particularly California.
ATTORNEY GENERAL BOTELHO answered that he does not.
Number 219
MR. CAMPBELL commented that Commissioner Shively had done a pretty
good job of going through this section. He expressed willingness
to address questions.
CHAIRMAN HALFORD responded that he would ask for confirmation,
noting that Commissioner Shively had mentioned at least four
companies of ARCO's size or larger.
MR. CAMPBELL asked whether Chairman Halford wished his company to
run through this and comment.
CHAIRMAN HALFORD suggested they hit those areas about which there
were questions.
MR. KONRAD referred to question 1 and stated:
I think Commissioner Shively said, more or less, yes, and
Richard [Campbell] said one-third, two-thirds in terms of
(indisc.) barrels beforehand and afterhand. In terms of
control, again, no difference whatsoever, but there's
been some mention, I know, in talking to the community,
about 51 percent or 50 percent control. I think Richard
touched earlier on the fact that actually you need 80 or
90 percent votes ... to make any major decisions in any
of these assets, and that dynamic does not change as a
result of the transactions. So the answer to [question]
1 is yes. Based on our conversations with buyers, yes,
there's a lot of interest, again confirming what
(indisc.) said.
Number 240
CHAIRMAN HALFORD suggested there was no need to go through every
one of those on divestiture. He clarified that he wanted
confirmation of Commissioner Shively's statement that there are at
least four companies ARCO's size or larger that have shown an
interest at this point.
MR. KONRAD and MR. CAMPBELL affirmed that.
CHAIRMAN HALFORD asked whether there were further questions
regarding divestiture.
Number 248
REPRESENTATIVE BERKOWITZ inquired whether, to anyone's knowledge,
there are any "FTC consequences" if there is no interest in
acquisition of the Trans-Alaska Pipeline System (TAPS).
MR. KONRAD replied, "We have said we would sell the TAPS with the
production."
REPRESENTATIVE BERKOWITZ asked what would happen if the producer
didn't choose to buy the TAPS.
MR. KONRAD responded:
Well, they would. ... That's the way we're marketing the
assets. We're saying if you buy property A or B or
whatever, that ... here's some TAPS that goes along with
it. No one has said 'no' to date, so it's, I guess, a
bit of a hypothetical. Of course, ... we're not through
the process, either.
Number 257
[REPRESENTATIVE ROKEBERG asked a question regarding marketing, TAPS
and a return on equity, but it was mostly indiscernible.]
MR. KONRAD replied:
We're not telling them anything. We're giving them the
"TSM" methodology, ... how tariffs are calculated, and
what the approximate throughputs off the North Slope are.
They know what oil they're buying, and they're doing
their own production forecasts, so they'll be doing their
....
REPRESENTATIVE ROKEBERG interjected, asking if Mr. Konrad knows the
ball-park range.
MR. KONRAD answered:
It's irrelevant. They're going to be buying a cash flow
stream, and they're going to pay for it at the -- what we
say the return can or shouldn't be, it doesn't factor
into it at all. They'll be buying a cash flow stream;
that's all they care about.
Number 268
SENATOR WILKEN spoke up via teleconference from Fairbanks.
Referring to "your page 3," number 11, he indicated his
understanding that a non-consent provision regards how an operator
or owner would view a field. As this doesn't address a premium or
percentage, he suggested there is no reason to reference a non-
consent provision. Referring to Section I(D) of the Charter, he
asked what the "non-consent" discussion gets Alaska regarding a
commitment to explore the fields.
MR. KONRAD explained that it says in the event BP elects not to
participate in an exploration well, other parties are free to go
ahead. Certainly all of BP's exploration agreements have non-
consent provisions in them; they vary from area to area, but often
result in a relinquishment of acreage or a penalty provision for
production out of that tract, often in "several-hundreds-of-
percent" penalties that are pretty steep. Mr. Konrad added, "We
are not party to ARCO's exploration agreements."
SENATOR WILKEN said he understood, then suggested the penalty or
premium to be paid is an indication of the commitment to develop
that particular acreage. However, the agreement only addresses a
"non-consent provision"; it doesn't restrict or nail down the
operators, indicating their degree of willingness to develop a
particular tract.
MR. KONRAD agreed, then said it speaks to exploration. Development
is clearly within the purview of the DNR, which has a fair amount
of statutory authority to create and enforce development.
Number 297
MR. MEYERS suggested the essence of the question he is hearing is:
If someone buys the acreage, even with these non-consent penalties,
what is the motivation to develop it? The answer he would have, if
he is hearing it correctly, is: "If you've just spent hard cash
for acreage, you should be highly motivated to explore and, if you
find something, to develop." He added:
Again, from ARCO's perspective, we always very much are
interested, when we're involved in properties, in non-
consent penalties, because even if you own 60 or 70 percent of the
acreage and you have an exploration prospect, and your partner may
not be interested for whatever reason, that still means if you
don't have those penalties, either you're going to end up carrying
them - which dilutes your economics - or you won't do the well. By
having non-consent, if you do the well and you have a discovery,
you earn some share of their interest. It's, if you will, ... the
enticement for you to go ahead without them, and ... they tend to
work very well. They tend to get people to participate, both in
terms of doing wells and it encourages people to join their
partners (indisc.) to do wells. And the higher the premium, the
more encouragement to participate ... before you drill.
MR. MEYERS noted that there is a dynamic balance there, a knife
that cuts both ways. "So, generally you look for that balance
between what's a reasonable return if you're going to carry
somebody," he noted.
Number 312
SENATOR WILKEN referred to Section I(D) of the Charter. He again
asked what the discussion of "non-consent" provisions gets the
State, and why that wouldn't just be left out if a percentage
weren't established at the time.
MR. MEYER expressed his belief that part of the problem in
establishing a percentage is many of these acreages have
preexisting agreements with partners, which he believes must be
honored. It would be difficult to specify a carte blanche number
across all the various acreage between ARCO and BP. The many
existing contracts, all with these provisions, are subtly different
from area to area.
Number 330
REPRESENTATIVE GREEN noted that without a divestiture, commonly one
might relinquish some ownership of a tract to another operator in
return for a commitment to drill some wells. He asked whether ARCO
foresees some of that in this divestiture, and he indicated the
answer might give the legislature a little better feel about
anticipated exploration, at least.
MR. KONRAD replied that it will depend, area by area, but it
certainly would be one of the mechanisms they would try to use.
It is dependent on the market and the buyers' interests.
Number 345
CHAIRMAN HALFORD asked how the timing of the divestiture works
regarding state laws. Noting that Commissioner Shively had touched
upon that, he asked: If the merger is approved January 1, is that
the trigger date when the two companies become one? Does it happen
when the FTC approves it? Does the agreement actually extend the
time to market excess acreage? Will there be legislation to extend
that time, or is a grace period provided by existing statute? How
does it actually play out in the time frame of actions?
MR. KONRAD answered, "Well, if the merger closes January 1, that's
when it closes, and that's when we would have acreage." He said
the statute reads that 90 days from notification by DNR those
divestments would take place. It would take DNR some period of
time after the merger closed to assess the acreage and what is
going on, he noted, indicating the company would work with the DNR
in terms of a plan for that.
Number 367
CHAIRMAN HALFORD suggested the question to ask DNR, then, is
whether they are actually going to make that notification when the
merger occurs, which would start that time frame. It would also
substantially "pressurize" the process for the divestiture, one way
or the other, or for negotiating, he noted.
MR. KONRAD pointed out that some of the language in the Charter
needs to be directly linked to the producing properties. By virtue
of the Charter, 100,000 of the acres in NPR-A must go to either
Buyer A or Buyer B, for example.
AN UNIDENTIFIED SPEAKER noted that that isn't state acreage and
therefore has nothing to do with the State.
Number 380
SENATOR PEARCE requested confirmation that the divestiture of TAPS
which goes with the divestiture of Kuparuk and Alpine ownership is
somehow equal to, and tied to, the ability to do the throughput.
She noted that for Alpine, the State doesn't yet know what the
outflow, or the potential outflow, will be, although perhaps Kevin
Meyers of ARCO may know. She then asked: How are you deciding
what percentage of TAPS you're going to have go along with buying
a percentage in Alpine? And is there, in this agreement, any
divestiture of TAPS that goes along with the divestiture of not the
production but the land on the North Slope which will be divested
"for future hopeful production"?
MR. KONRAD answered the first question:
For Alpine, we will be assuming 80,000 barrels a day,
which is the current operator's best estimate. There is
a provision in the agreement that should their production
increase, there are additional amounts of TAPS available
to that party, or any party, for that matter, including
the exploration operators or who picks up the exploration
acreage. They probably wouldn't want to buy a share
right now, because they're not sure whether ... they will
be successful on the exploration acreage or not. If they
are successful, then they have the opportunity to buy
shares of TAPS at the valuation, which is effectively set
by the State.
SENATOR PEARCE mentioned a scenario where someone wanted to buy a
portion of TAPS but wasn't asking for acreage on the North Slope.
She asked if there is a portion for sale.
MR. KONRAD replied, "In the Charter, yes." He specified it would
be up to ARCO's share of TAPS.
MR. CAMPBELL said it is up to a total of 22 percent.
Number 419
SENATOR PEARCE asked whether that 22 percent is after BP's
divesting of part of Kuparuk and part of Alpine.
MR. KONRAD stated, "A total of 22 percent, yes."
SENATOR PEARCE stated her understanding that it is not after, then,
but a total.
AN UNIDENTIFIED SPEAKER affirmed that.
SENATOR PEARCE suggested BP would still hold at least 51 percent of
TAPS.
MR. KONRAD agreed, adding, "It's the same as our current."
Number 425
CHAIRMAN HALFORD, still addressing divestiture, asked what BP's
interest is and how it works regarding the sale of 18 percent of
Alpine to Anadarko versus the sale of 40 percent of Alpine to
another player. Noting that they would still have to get rid of
the total barrels of production, he asked what the considerations
are.
MR. CAMPBELL replied that at the end of the day [BP] wants to be
working in these fields on an aligned basis, so that the
developments go ahead with the easiest possible format. The
alignment interest is what the company is leaning toward. He
deferred to Mr. Konrad.
MR. KONRAD indicated BP would, in any event, divest 175,000 barrels
a day. Although they don't know what the probabilities are, it
depends on what buyers are interested, and what the assets are.
For example, whether Anadarko actually is going to make an offer on
Alpine, and whether that offer is going to be higher or lower, Mr.
Konrad believes will be driven mostly by "the value we see being
received for the assets, as opposed to ... any other principal
driver."
Number 453
CHAIRMAN HALFORD responded that Anadarko obviously can reach the 40
percent more easily than anyone else; however, they may want more
than the 40 percent. They could also reach a majority percentage
easier than anyone else, he noted.
MR. KONRAD replied, "Well, certainly, if they offer us a higher
amount for 40 percent than another buyer offers us for 40 percent,
then we will choose that offer, ... most likely."
CHAIRMAN HALFORD commented that in either case, the operator is not
going to be BP.
MR. KONRAD concurred.
Number 453
CHAIRMAN HALFORD asked if there were further questions on the
divestiture section. He then brought attention to the facilities
access section. Referring to the memorandum of November 17, 1999,
he asked if Attorney General Botelho had comments and recalled that
Commissioner Shively had said something about it.
ATTORNEY GENERAL BOTELHO specified that "in our view, it does not
compromise the commissioner's ability or standing in the dispute."
CHAIRMAN HALFORD next turned members' attention to transportation.
Number 503
MS. DRINKWATER noted that one question revolved around why
different pipeline companies have different tariffs, since all use
the "TSM" mechanism. She affirmed that the TSM mechanism applies
to all companies that are carriers in the TAPS system. Under that
mechanism, she explained, a company has several different inputs:
some are actual recorded numbers, whereas some are forecasts. A
company goes through the process of figuring the tariff for the
following year, which usually happens around October; that is when
each company has to file an initial tariff with the State. As each
company makes forecasts, those forecasts may differ. There is also
a truing-up mechanism, which, after the event, adjusts forecasts
with the actual numbers. Although over time a company's set of
tariffs will differ, any high tariff one year will be compensated
by a low tariff the next year. Looking back at tariffs over the
last 15 years, there is never one company that is consistently high
or consistently low; rather, there is a real variation.
Number 544
MR. MEYERS pointed out that two factors with a high degree of
uncertainty in forecasting tariffs are the estimated gross TAPS
throughput and the estimated TAPS cost.
CHAIRMAN HALFORD recalled that in going through the information,
there were variations back and forth. However, taking a long-term
average, ARCO's numbers pretty consistently were lower than BP's,
although not to the degree found in the one month about which the
committee asked a question initially. He said it sounded as if Mr.
Meyers was saying that wasn't the case.
MS. DRINKWATER explained that when she had referred to the last 15
years, she was looking across all of the companies that have
interests in TAPS. Just looking at BP and ARCO, however, there has
been a difference of only something like three cents to six cents
for tariffs over the last four to five years.
CHAIRMAN HALFORD said in the information the committee had gone
through, it did seem that ARCO's costs were lower, he said,
although the explanation was that ARCO was going to the closest
place, and to one place, and not selling to a lot of other
marketers, among other reasons.
MS. DRINKWATER suggested there might be confusion among several
different things here. She specified that she had just been
referring to the tax tariff portion.
TAPE 99-10, SIDE A
Number 001
MS. DRINKWATER indicated the commissioner addressed discussions of
a reduction in TAPS tariffs and said she was not a party to those
discussions and therefore couldn't comment. She next moved to the
issue of tanker transportation.
MS. DRINKWATER told members the answer to whether there is a tanker
capacity that could be leased from third parties is yes but the
broader question is: does someone coming into Alaska, potentially
as a new producer, have options to transport production to market?
Ms. Drinkwater indicated such an entity could do a number of
different things, including selling the production to in-state
refineries.
Number 011
CHAIRMAN HALFORD asked whether in-state refinery production is
50,000 or 60,000 barrels.
MS. DRINKWATER replied that it is always difficult when looking at
refining capacity. She uses a number of about 60 [thousand] for
one refinery, for a total in-state capacity of just over 100,000 a
day "if you take Fairbanks and also (indisc.)." However, she has
been told theoretically that one refinery can go higher and take 75
[thousand] overall.
CHAIRMAN HALFORD said that is still significantly less than the
production that somebody is going to be buying, so it doesn't work
as an answer.
MS. DRINKWATER responded that it works as a partial answer, which
is the value of having options. She explained companies other than
BP can also procure a foreign-built tanker that qualifies as U.S.-
flagged and export oil to the Far East.
CHAIRMAN HALFORD asked if this actually works when all the changes
in the Oil Pollution Act of 1990 (OPA 90) are applied.
MS. DRINKWATER replied, "Yes, it does work, although I'm now
wondering in what sense you asked the question."
CHAIRMAN HALFORD said he was just trying to understand. He noted
that the Jones Act doesn't apply but OPA 90 does.
MS. DRINKWATER concurred.
MR. MEYER commented that plenty of OPA 90-qualified tankers are
available.
MS. DRINKWATER agreed there are hundreds of double-hulled and
foreign-built tankers available. She described another option
allowed for in the Charter is the purchase of a separate tanker
from BP Amoco. The final option, which any company has, is to
procure Jones Act tankers from the shipping market for export to
the West Coast. Ms. Drinkwater told members she was very
interested in the remark made early in the discussion, "...where I
think it was one of the commissioners had had discussions with
potential purchasers, and they indicated that they would more
likely find their own transportation." She suggested that perhaps
bears out the fact that there are a lot of different options.
Number 037
REPRESENTATIVE KERTTULA referred to the hundreds of OPA 90 tankers,
and asked how readily available those are.
MS. DRINKWATER answered they are readily available; the worldwide
tanker market is going through a tremendous depression right now.
Any time delay would be the result of meeting the necessary
requirements to qualify to sail in Alaskan waters, including having
a fully recognized (indisc.) plan and the necessary crew, plus
other requirements.
REPRESENTATIVE KERTTULA commented that it is a good reason to keep
the Department of Environmental Conservation (DEC).
Number 044
With no further questions about transportation, CHAIRMAN HALFORD
asked if committee members had futher questions on natural gas.
Number 050
VICE-CHAIR GREEN recalled asking the commissioner, on question 3,
whether BP plans to use the amount that was to be made available to
provide its own GTL. He suggested they perhaps hadn't heard a
response.
MR. CAMPBELL said if they are talking about the gas-to-liquids
pilot plant, the amount of gas they can use is such a small amount
that he believes it is irrelevant in the overall calculation. He
added, "Let's say, for the sake of argument, that it's outside of
the 1.2."
VICE-CHAIR GREEN asked if that means, then, that the answer to the
question would be "no."
MR. CAMPBELL replied, "I don't know that we've actually come to a
conclusion on it, but yes, you could take that 'no' from what I've
said." He reaffirmed that his answer was for the pilot plant.
VICE-CHAIR GREEN suggested the question cannot be answered either
"yes" or "no," then.
MR. CAMPBELL specified, "Unless you define it as the pilot plant."
Number 064
MR. KONRAD clarified:
We haven't decided what mechanism we're going to use to
commercialize gas. It could be GTL. It could be LNG.
It could be a pipeline to the Lower 48. Any commercial-
scale project, either any of those three or a combination of the
three, that gas could be used for any of those projects.
VICE-CHAIR GREEN thought that GTL may be too specific. He pointed
out the earlier part said BP would make up the 1.2 BCF per day
available and the question in many people's minds is whether BP
will make the 1.2 BCF per day available but then use it in its own
processes.
MR. KONRAD replied if BP comes up with the project that yields the
highest value it will select its project. The highest value will
depend on who has the best technology.
Number 078
CHAIRMAN HALFORD brought up a question on gas which he believes
came from the mayors. He asked why the mayors are concerned that
BP not be allowed to retain the right to recover liquids downstream
in Valdez, and whether it is just to make any kind of gas-to-
liquids unworkable as potentially competitive to an LNG project or
something else.
MR. KONRAD replied,
No, not at all. It is actually focused a little more on the
Lower 48 pipeline option, as opposed to the LNG option but, in
those cases, if you are transporting natural gas liquids,
there is a petrochemical industry in Canada and in the U.S.,
that could potentially use that feedstock. We have operations
there, and we would want to retain the right to use those
liquids for the petrochemical business. In any event, the
take point specified in the Prudhoe Bay Unit Operating
Agreement is that the gas needs to come off the PGF (ph)
outlet, and that's the base proposal for any of the three -
GTL, LNG or pipelines, that that gas would not contain a
significant amount of liquids in any event.
Number 095
MR. MEYERS referred to Vice-Chair Green's earlier question about
the ability to take gas and explained:
The unit operating agreement gives you the ability to
take the lean residual gas. No other approval is
required; that is an owner's right to do. If you take
anything other than that, you now have to go back into
the working interest owners of Prudhoe Bay, and so it's
impossible to make those commitments without getting
those other owners' approval. So, the take point is,
without other owners' approval, it is going to be the
lean residual gas that Ken referred to - you can't offer
any other take point and make that commitment without
other peoples' agreement.
MR. KONRAD said that is why that is in the Charter, and why it also
says "unless otherwise agreed." It is what all the owners have
agreed to for the past 20 years.
CHAIRMAN HALFORD said he asked because he was not sure what it was
trying to get at.
MR. CAMPBELL said he has only just seen the document and that one
interpretation is that they would want the value of the liquids to
accrue to that project.
Number 124
CHAIRMAN HALFORD said they would take up environmental questions
and asked if anything in the Charter affects any existing statutes.
MR. KONRAD asked to clarify one point on the gas issue in regard to
what Commissioner Shively said. He noted that one-eighth of the
1.2 BCF per day (BP's working interest gas) is the State's gas. He
said the State owns a significant amount of gas over and above that
amount.
CHAIRMAN HALFORD said he thought Commissioner Shively said the
opposite.
MR. KONRAD replied, "Well, it's both. The State owns one-eighth of
the eight BCF per day I suppose, but, included in the 1.2, it's
working interest gas, thus one-eighth of the 1.2 is state gas."
CHAIRMAN HALFORD contended that Commissioner Shively said the oil
was a gross figure and this was a net figure.
VICE-CHAIR GREEN agreed.
MR. KONRAD said he was just trying to clarify that question from
BP's perspective.
CHAIRMAN HALFORD noted there cannot be two perspectives in this
agreement.
MR. KONRAD indicated BP will sit with the Commissioner after the
meeting to clarify this point, but he believes Commissioner Shively
was referring to the gas in excess of the 1.2 BCF.
ATTORNEY GENERAL BOTELHO said his interpretation was as the
Commissioner presented it but he believes the Administration will
need to confer with BP on that point.
CHAIRMAN HALFORD asked if anything in the Charter affects any
existing statute with regard to environmental obligations.
MR. CAMPBELL answered Commissioner Shively addressed that question
in part and indicated they might wish to include in the final
Charter clarifying language.
ATTORNEY GENERAL BOTELHO responded that all of the terms in the
environmental section are in addition to current law; there is no
compulsion for those items - for instance, the $200,000 for
research development on spill participation and the $500,000
annually directed as the Commissioner would require for the
specific monitoring. There is reference in the agreement to the
tankers on station of a year ahead of the schedule. He emphasized
that BP would still be expected to satisfy all existing State and
federal environmental laws. Nothing in this would diminish those
requirements.
VICE-CHAIR GREEN asked if the annual $500,000 per year for a 10
year period was in conflict because they are scheduled to conclude
three years earlier.
ATTORNEY GENERAL BOTELHO explained the reason for the discrepancy
is that the portion of the provisions of the agreement only pertain
to the "competitive issues" of divestiture of assets, provision of
data, and some gas issues - all of which will be completed well
before 2008, if they were to occur. Issues like local hire are not
enforceable.
REPRESENTATIVE GREEN noted the date on page 1.
ATTORNEY GENERAL BOTELHO said that data was a coincide date for OPA
issues and TAPS, itself.
Number 197
MR. BILL NOBLE, an attorney representing BP, added that they looked
at what would be a reasonable period of time for all of the Section
1 commitments. Most of them happen in the first year, but in the
TAPS section, additional amounts would be allowed to be sold over
a period of time. This was meant to give a reasonable period of
time for new explorers to find how much new oil they had and how
much they would want.
VICE-CHAIR GREEN asked if the agreement disbands, what would be the
possible situation with a maturing field that is declining more
than it does now.
MR. NOBLE said there was a very extensive set of laws and
regulators to deal with things that happen between now and 2008.
All of those things will apply in 2010 since the event of the
merger wouldn't be governing anything.
He said it would be hard to make a set of public commitments that
are more public than those in Section 2 regarding cleaning up the
environment which have been published and circulated in every
newspaper, on the radio, etc.
MR. MEYERS added that the Charter doesn't have to address those
type of things as there is a whole series of contract law and
regulatory agencies that already exist to deal with these issues.
These are not really merger issues.
Number 263
SENATOR PEARCE asked if there was anything in the agreement that
would stop BP and Amoco from turning around and purchasing the
companies they have just sold the fields to.
MR. MEYERS answered that U.S. and State anti-trust law would be in
effect before and after the merger.
SENATOR PEARCE asked Attorney General Botelho how the terms of the
Charter would continue should there be further mergers on the North
Slope.
MR. GRIFFIN said he would answer for Mr. Botelho who had to leave.
There is nothing in the Charter that would affect the future
enforcement of the State's anti-trust laws. Secondly, the Charter
specifically provides that BP Amoco may not reaquire in any fashion
any of the assets they are required to divest as a consequence of
this Charter.
SENATOR PEARCE clarified that pertained to eight years, just the
term of the contract. She asked what happens if someone acquired
BP Amoco.
MR. GRIFFIN responded that the State and federal anti-trust laws
would still apply if the need arose.
CHAIRMAN HALFORD noted there was a final request for a fiscal note.
MR. CAMPBELL responded that more production would mean more
revenues for the State. Under Alaska Clean Seas, he explained, is
where companies agree to the allocation to various fields.
MR. MEYERS commented that were firm commitments for the three
tankers.
SENATOR WILKEN asked if an analysis had been done under Section 2
(d) of a charitable giving before and after the merger,
specifically regarding the University. He asked if charitable
giving premerger will be the same as the aftermerger charitable
giving with the addition of the money to the University.
Number 326
MR. CAMPBELL answered the money that will flow to the University is
certainly in excess to what contributions have been in the past -
30% or roughly $2 million. The charitable contributions would be
at approximately the same levels as today with the addition of the
estimated monies going to the University, depending on the price of
oil.
SENATOR WILKEN asked about the analysis by Preston Gates and asked
when that report would be available.
CHAIRMAN HALFORD said that was based on confidential information,
but they were putting together a version that didn't include the
confidential information based on this meeting.
SENATOR WILKEN asked if they would hear from the Governor's
consultants regarding the existing charter proposal.
MR. JACK GRIFFIN answered they hadn't asked their experts to
analyze the charter and hadn't intended to do so. Outside legal
counsel has examined it.
SENATOR WILKEN said he was interested in the Governor's fifteen
consultants' analysis of the final package.
Number 411
REPRESENTATIVE WHITAKER said he had contacted all 12 of the experts
hired by the Administration and the overwhelming response was that
they would not speak with the Legislature under instructions of the
Attorney General. He requested the information from the
Administration and had just received four boxes of biographies and
published reports - some by the experts. He wanted to see each of
the 12 reports that were provided to the Administration.
CHAIRMAN HALFORD said they would make that request and announced a
recess at 6:20 p.m.
CHAIRMAN HALFORD called the meeting back to order at 6:30 p.m.
MR. PETER LEATHARD, President, VECO Corp., asked them to move the
process forward and conclude this deal. This is a good deal for BP
and Alaska. During this uncertainty there is a period of minimum
activity going on the North Slope.
VECO Corporation has worked with the oil industry in Alaska for 32
years and need a vibrant oil industry to survive. They would not
support any deal that would mess up the Alaska oil industry. The
first deal from BP was good for the State; the present deal is also
good even though it contains more uncertainty.
We need BP to continue to invest its billions of dollars in Alaska
and VECO trusts them as a partner. Low costs are critical to keep
Alaska's oil competitive on the world market.
MR. LEATHARD said that gas values are going up. He concluded by
urging them to allow the deal to be concluded.
REPRESENTATIVE CROFT asked if the deal should be approved without
knowing the fiscal impact to the State.
MR. LEATHARD answered no matter whoever we bring in, the oil still
needs to be transported and would have to get the best price
possible. He didn't think the fiscal impact would make any
difference.
REPRESENTATIVE SANDERS asked if the work that is being held up now
on the North Slope was justified.
MR. LEATHARD answered that they are continuing with work that has
been committed, but waiting on everything else.
Number 574
MR. MIKE MACY, Backbone, said Backbone has three general concerns.
It wants protection from monopolies; it wants the value of our
resources maximized as required by the Constitution; and it wants
Alaska's political independence guaranteed. In addition, Backbone
has six broad areas of concern: 1) access to North Slope facilities
and infrastructure if the Charter fails; 2) access to TAPS for all
operators on the North Slope (the Charter contains disincentives
for additional development); 3) competition in leasing and
production (the Charter fails to ensure competition); 4)
commercialization of Alaska's vast quantities of natural gas; 5)
environmental protection.
TAPE 10, SIDE B
Number 000
MR. MACY continued: and 6) substantial endowment to the University
(the Charter fails to ensure that.) If Alaska's lifeblood is left
in the hands of one company responsible to only its shareholders
and not the public, our future is in grave peril, he said. This is
the last time in the next 25 years that Alaska has leverage to
protect our Permanent Fund and establish stable financial footing
for the future.
The agreement does not go far enough. The details do not support
the strong goals the Governor outlined in August or the strong
stand the Administration took in its letter to the FTC last week.
The Charter does not resolve BP's monopoly on production facilities
or TAPS. It contains no provision for tariff reduction which is
the main barrier. Current language will also make a natural gas
project impossible or exceedingly unlikely. This contract does not
deal with BP's initially stated commitment to invest in Alaska ($5
billion along with an increase in production of 150,000 barrels per
day.)
MR. MACY said he thought the divestiture language prohibits future
litigation on points of agreement or subsequent antitrust actions
growing out of it. The lack of penalties and wiggle words invites
BP to weasel. Everyone knows that everything in Section 2 is non-
binding. They would like to see penalties so severe that BP would
never contemplate weasling on the agreements. For instance, rights
to oil and gas production in Anchorage should revert to the State
if they are not divested according to the time table. The penalty
should be permanent and not just eight years. They would like to
see a competitive bidding process for Alaska's natural gas and
enforceable guarantees that BP Amoco will pay Alaskan taxes on
Alaskan production and shipping revenues without charging off
losses in other parts of the world. They would like firm
contractual language and targets for exploration and production
that finds surrender of leases for non-compliance.
He asked that the merger be delayed so he could conclude a deal
with BP using technology that he has developed.
He thought a good question would be how does the State keep BP's
ownership at 49% so we have a majority control of our oil and gas.
Why hasn't the State utilized all the consultants promised. Only
three ever issued reports. The State's star antitrust consultant
was not among them.
He concluded requesting the Legislature to recommend a special
session and ask the FTC for protection.
MR. STEVE CONN, Executive Director, Alaska Public Interest Research
Group, said they are against the merger wanting at least as much
competition in the oil fields as we have now. They want ARCO to be
sold to anyone but BP or EXXON and do not want to increase BP's
monopoly control over our economic and political life. He suggested
having a State generated report explaining the Charter as well as
the Legislative review. He thought it mandatory that the Committee
look out for Alaskans. The more he learns about this, the more he
feels the State has abdicated its role as our representative to a
private corporation who is educating and guiding us in a well
designed media campaign. He encouraged the Committee to encourage
the Legislature to file and antitrust action at this level or let
the FTC block a merger that will result in more of a monopoly for
us and other people in the U.S.
REPRESENTATIVE KERTTULA said she felt the process was moving along
too fast as they weren't involved in the confidential negotiations.
MR. TIM WAGNER, Innovative Developers Inc., said he understands
that BP has implemented a very efficient oil recovery process and
that is the reason for the merger. He thought the State would
benefit from the additional application of this process. There may
be some contest as to who actually owns the technology, however.
His work focuses on the utilization of the natural gas. The port
authority has proposed a pipeline. He could sell the license to
use certain technology to BP or BP/ARCO to transport natural gas
from Prudhoe Bay to Valdez for about $50 million. Another $500
million would be needed for a liquification plant at Valdez for
export. He originally developed his concept to help deliver
natural gas to communities in Alaska. He has an additional process
using a special vehicle that can export natural gas strictly from
Prudhoe Bay to anywhere on the globe. He didn't need a pipeline.
Number 315
MR. JOHN MCDONALD, Carlisle Enterprises, Anchorage, said he is one
of five owners of Carlisle Enterprises, a transportation company.
Until two months ago they employed about 360 people and they are
now down to about 330. On behalf of his company and its employees
he supported the Governor and the merger. He said it would help
get his people back to work. From his personal experience he knows
that BP is fair minded and an environmentally safe operator.
MR. JACK LASCH, General Manager, Alaska Petroleum Contractors
(APC),one of the Natchiq group of companies which is a wholly owned
subsidiary of Arctic Slope Regional Corporation. They employ over
2,500 people world wide, 2,000 of which are in Alaska. He expressed
support for the proposed acquisition of ARCO by BP Amoco. They
have had a good working relationship with both companies.
Consolidation of management would provide a cost saving approach to
oil production in the Prudhoe Bay reservoir as there is
considerable duplication between both companies.
BP has shown a strong commitment to Alaska hire in the past and he
thought this commitment would continue. Natchiq has invested
considerable time and capital into its Anchorage fabrication
facility and its Nakiski module assembly site. These facilities,
in addition to others, have created a new industry in Alaska.
As long as we make production of oil and gas in Alaska economically
attractive, BP Amoco, like any other for-profit corporation, will
aggressively pursue development of new oil fields in Alaska and
commercialization of North Slope gas. BP has said that not only
will they continue their community support, but will increase the
amount they contribute to charitable organizations. In his over 20
years of experience with BP, they have demonstrated time and again
their commitment to enhancing the lives of those in the community -
from their efforts with boys and girls clubs to their support for
the arts. Now we have the opportunity to realize expanded benefits
from BP's commitment through their expanded support of the
University of Alaska.
The whole industry is going through major restructuring to maintain
profitability while remaining competitive. He concluded by urging
them to endorse the acquisition.
MR. DAVID THOMAS, Alaska Interstate Construction (AIC), said the
merger would get Alaskans back to work. These companies are taking
major risks in Alaska and cannot be blamed for the slow down. We
will feel the impacts of wasting 1999 three or four years in the
future.
BP Amoco has financial strength as it is in their best interest to
develop Alaska's resources. They are a for-profit company. BP has
always been honest with AIC and he didn't doubt they will be honest
in the future.
MR. THOMAS said he thought the benefits of a single operator was
the natural progression of things. BP Amoco has always treated
Alaskans fairly.
MR. JIM UDELHOVEN, Udelhoven Oil Field Services et al., said he has
a keen interest in Alaska's future. This merger would avoid a
repeat of what happened in Alaska in the mid-80's. He said don't
ask for more so that we end up with less. Only a large and
powerful corporation can take on this level of risk as there is a
fine line between success in businesses and it doesn't matter if
it's a small business or a large business. It is extremely
important that government doesn't penalize tomorrow things that are
being done from the heart today, such as gift giving to the
University and the United Fund. This deal needs to be taken before
the FTC and be completed before the year's end.
MR. HAROLD HEINZE, former ARCO executive and former Commissioner of
DNR, supported the agreement. It appears to be a balanced
negotiation, he said. He thought they were doing the right thing
by having this review, but said they need to make a decision in a
timely fashion.
TAPE 99-11, SIDE A
Number 001
MR. HEINZE said he was concerned that there is no commitment to
hire Alaska workers or Alaska contractors. In looking at the
benefits presentation today, there were two major problems. Two
thirds of the claim benefits flow out of basically oil related
effects that have to do with gas production, not with gas sales.
As a former oil reservoir engineer, he has to ask where those
numbers come from.
Finally, it seems the Port Authority puts the State at risk in
terms of its credit and the principle of the Permanent Fund. The
Permanent Fund seems to transfer money to local governments in this
agreement and he didn't think you could take royalty from the
Permanent Fund and give it to local governments especially when
they are talking billions of dollars. He wanted to see a real
benefit analysis of the gas pipeline done by the Legislature. He
said Alaska should pick good companies to come in and replace ARCO.
CHAIRMAN HALFORD asked if would like to see the good companies
occur before or after the fact.
MR. HEINZE said he didn't care whether it was before or after, but
he wanted the State to have some say in who they are. They would
have to meet financial criteria, for instance. Maybe there should
be an interview process so there would be a more conscious effort
on behalf of the State.
VICE-CHAIR GREEN asked if he were the CEO of PHILLIPS, would he go
to his stockholders with this deal.
MR. HEINZE answered that he couldn't visualize a better
circumstance to make the deal under. He thought BP gave up
something very significant by committing to divestiture and no one
has really talked about that. The difference between selling an
asset and selling an asset under order is a very different price;
BP gave up that differential in agreeing to this. If he were
Phillips, he would like to buy it under orders to sell.
Number 97
MR. RICHARD FINEBERG, oil and gas development consultant, said the
Committee's questions have raised two huge questions regarding the
merger. The Charter lacks a savings clause and the drafters admit
they chose to describe the 175,000 barrels of oil that are to be
divested quite a treasure chest. He said the term "working
interest ownership" has two legal definitions. He asked what the
mergers teams had been doing for seven months.
The fifth slide of the Governor's presentation contained a
statement on the Governor's conditions of competition saying,
"Tariff reduction or divestiture on TAPS was on a slide." "Or
divestiture" was not in the Governor's August 23 speech and he
thought this misled the public. He thought the divestiture we've
got, partial divestiture, is not the right answer and is not going
to work. This debate should have happened before and he is
outraged. A producer-owned pipeline is an inadequate remedy that
is not likely to work. TAPS is an example of it. First of all,
it's very complex to do legally. If you could do it, it can't
balance, because by definition the State is a shipper of royalty
oil. So the solution of giving Chevron or Anadarko a piece of the
pipeline isn't going to work. The result is that any prosepective
developer is stranded, because he won't buy in without a share of
the pipeline. He had three examples of where small producer
ownership shares don't work. One is in the 1985 pipeline
settlement where three small owners had to be granted a three cent
per barrel subsidy to come into the settlement.
MR. FINEBERG said he hoped they would report to the Legislature
that this process has been totally inadequate to protect the future
of the State and should be rejected.
Number 241
REPRESENTATIVE KERTTULA asked if he tried to analyze whether or not
the 5,000 barrels we lost per day where BP would have to buy the
oil.
MR. FINEBERG said he saw that a few hours ago and couldn't get to
exhibit C, but he thought it was one of the few good things in the
Charter.
Number 254
MR. TOM MALONEY, VECO employee, said he is 100% for the acquisition
and the reason is BP and their decision to go ahead with North Star
resulted in a lot of jobs here in Alaska. The mixed module is an
example which employed 200 Alaskans and created a whole new
industry in Alaska. Local hire, procurement of goods and services,
and contracting with people here in the State which BP has done
creates a tremendous affect on the economy of Alaska.
Second, he can think of no other company who has the same level of
commitment to health, safety, and environmental issues. It has
been an integral part of every contract we have had with BP for a
number of years.
Third, BP's community involvement is notable; apprenticeship
programs, Native hire, etc. You have to get rid of uncertainty and
get Alaska moving again.
MR. TERRY MONAGHAN, Anchorage resident, encouraged support for this
agreement immediately. He believed the merger is in Alaska's best
interest. It provides for a robust economy and care of the
environment. Alaska needs this merger to continue being the bright
star it is. We all have a strong obligation to get this merger
behind us so the oil industry can be in the same position of our
neighbors in North America.
MR. MAYNARD TAPP, Hawk Construction Contractors, said over 90% of
his business comes from the oil companies. He assists them in
constructing cost effective projects so they can be competitive
participants in the world-wide oil market. In 1998, BP spent over
$953 million in capital projects with 80% going to Alaska
businesses. It was a good year. With the pending merger in 1999
he has lost half of his people and he knows his company is not
alone. Talented people are a resource of Alaska. How can they
hire in Alaska if the talent leaves. We need to figure out a way
we can produce more oil and encourage companies with a stable
economic environment.
This is also a good deal for BP because they get a refining base
and retail outlets in western U.S. They get a great place to live
and do business. Once we establish the oil market, it is unlikely
the refiners will want to retool to handle some other grade or
quantity of oil. He said that BP had given up a lot of their
potential revenue. BP and the oil industry pays for over 70% of
our government costs, provide Alaskan jobs in their industries and
those incomes go into the Alaskan economy. We can't wait another
year or even a day.
Number 428
MR. VAL MOLYNEUX said he had been in most management roles in the
development of most of the oil fields over the past 27 years. He
has worked for Veco for 20 of those years. Prudhoe Bay is the
largest oil field in North America, Kuparuk is the second largest.
Prudhoe Bay has produced in excess of 10 billion barrels of oil;
the future prognosis is 4 - 5 billion barrels. It continues to
decline at approximately 10% per year, a huge amount. To remain
competitive, cost reductions are necessary. To have one operator
in Prudhoe Bay makes good sense. BP and ARCO obviously recognize
this need and have made the necessary steps to insure that Prudhoe
Bay remains competitive on a global basis.
MR. MOLYNEUX respectfully requested that this agreement get signed
as quickly as possible. Delay would cause more confusion and loss
of work and maybe a repeat of 1986.
MR. STEVE STEPHENS, Alaska Interstate Construction, said he is a
life-long Alaskan and he thought this merger would benefit not
only the State, but the children of the State. They will benefit
from all the benefits BP has made within the communities as well as
the villages.
MR. DOUG SMAKER, Fort Yukon, said he is a construction worker and
supported the merger agreement as it would benefit the economy and
all the people of Alaska. Unemployment is very high in Ft. Yukon,
but since BP has started hiring locally there has been a large
increase in employment.
TAPE 99-11, SIDE B
MR. VINCE DORAN urged everyone to sign the agreement and "get on
with it."
MR. WADE SCHNABL said he lived here about 25 years and supports the
merger agreement. Both companies have been to him and his family
over the years and it looks like BP has done a lot to prove their
good intentions.
MR. TOM LAKOSH said he thought this agreement just contains more of
the same promises we got when the pipeline was being constructed.
We were promised double hulled tankers back then and we didn't get
a single one. The Governor said BP would replace existing tankers
one year earlier than required by the Oil Pollution Act of 1990 and
he thought this was curious because he would be signing an
agreement that has already been breached as OPA requires that the
Overseas Alaska be retired in December of this year. BP refuses to
pay for recovery of Berth 3 and you can't ship oil without a berth.
There is a 2001 deadline for Berth 3 to be closed because their
waiver will expire for loading. So BP can't handle the throughput
they have projected.
He said that ARCO bought the designs for millennium- class tankers,
but they are going to give us the lesser cape class tankers and
won't commit to a number of replacement tankers. They also don't
have vapor recovery. BP must have a firm commitment to build at
least nine tankers by 2006 because of current projections. The
millennium class of tanker is the best environmental tanker and he
doesn't know why we should settle for less. If something is not
legally binding on them, they will not follow through on it as in
the situation of the double hulls. They would rather pay their
lawyers than address the environmental concerns of the public.
MR. SCHNABL said that it is abundantly clear that DNR has
jurisdiction in this matter, but it has been usurped by the
Governor who has hired outside lawyers. He concluded by saying that
not having the tankers to get the supply of oil to the west coast
is restraint of trade. This clearly should be addressed before
this agreement can go past the FTC.
Number 203
MR. KEN YOCKEY, Alaskan engineer, said that BP is a good corporate
citizen and this is a good deal for Alaska. He would like to be
able to support his family here in the future. As the pieces of
the pie get larger, there is more money available for exploration
and development. If government continues to stand in the way of
development, all the money will go elsewhere.
MR. BILL MCLAUGHLIN, Peak Oilfield Service Co., said he has lived
here for 27 years and has worked in the oil industry his entire
life. He hopes to retire here. He said we need to get Alaska back
to work. At Peak, alone, they have laid off about 400 skilled
employees over the last 12 months. Combining Prudhoe Bay under a
single owner will remove one of the biggest obstacles in bring the
smaller satellite fields into production. The biggest problem with
satellites is coming to agreement on terms to share production
facilities. It took five years to negotiate the first facility
sharing at Prudhoe. He asked them to act on this agreement
expeditiously.
Number 284
MR. DAVE SCARBROUGH, Air Logistics of Alaska, supported the charter
and the merger in general. They are in their 18th year as the
helicopter transportation services vendor to Alyeska Pipeline
Services Company and also provide helicopter support to BP and
other oil industry firms on the North Slope. All of their current
employees are Alaskan residents. They believe the merger is
important so the North Slope resources are seen as competitive and
predictable in international oil markets. He suggested using a
portion of funding for industry, vocational, and technical programs
that would help replace the graying employees of the oil industry.
MR. JOHN DITTRICH, General Manager, Brooks Range Supply, said they
are a core supplier to BP and the Prudhoe Bay oil fields with their
store located in Dead Horse. Starting last spring they had to
reduce their staffing from 10 to 5 employees because of spending
decreases on the Slope. At least one company needs to become
active again to get people back to work and money flowing back into
the Alaskan economy. The merger agreement is a fair deal for the
State and BP.
MR. DITTRICH said he didn't think competition caused BP and ARCO to
be the corporate citizens they are. Rather, they believe it's the
right thing to do. He thought they would continue to honor their
commitments even if it's not in the Charter.
REPRESENTATIVE CROFT asked when the decline in BP contracting
started.
MR. DITTRICH answered about April and clarified that he meant there
was a decline in activity on the Slope.
CHAIRMAN HALFORD said he agreed that BP and ARCO had been good
corporate citizens and putting a percentage into an agreement tying
it in to social issues in the State cheapens the companies and the
recipients which is a mistake.
Number 455
MS. RUTH MOULTON said she thought this process has been much too
brief. The testimony does not go into the details of the charter
although it does go into other good topics like jobs.
MR. BRUCE WEILER said he is employeed by BP and has been a resident
of Alaska for nine years. He urged the Committee to approve the
Charter as it stands. Consolidation on the North Slope should not
surprise anyone as production is half of what it was at its peak.
Costs have continued to escalate. Pressures on margins have been
increasing exponentially. He thought the State's interests were
more than adequately protected.
TAPE 99-12, SIDE A
MR. WALSH supported the merger and the "get on" message. He said
if the oil industry gets out of line, the State has plenty of tools
to deal with it.
CHAIRMAN HALFORD thanked everyone for their testimony and adjourned
the meeting at 9:00 p.m.
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