Legislature(1995 - 1996)
03/29/1996 03:38 PM Senate RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE RESOURCES COMMITTEE
March 29, 1996
3:38 p.m.
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Drue Pearce, Vice Chairman
Senator Steve Frank
Senator Rick Halford
Senator Robin Taylor
Senator Georgianna Lincoln
COMMITTEE MEMBERS ABSENT
Senator Lyman Hoffman
COMMITTEE CALENDAR
SENATE BILL NO. 307
"An Act authorizing the Department of Natural Resources to exchange
with the federal government state land within, and adjoining, Dude
Creek Critical Habitat Area for federal land adjacent to Fall
Creek; and providing for an effective date."
SENATE BILL NO. 318
"An Act authorizing, approving, and ratifying the amendment of
Northstar Unit oil and gas leases between the State of Alaska and
BP Exploration (Alaska) Inc.; and providing for an effective date."
PREVIOUS SENATE COMMITTEE ACTION
SB 307 - No previous senate committee action.
SB 318 - No previous senate committee action.
WITNESS REGISTER
Senator Steve Frank, Co-chairman
Finance Committee
State Capitol, Juneau, AK 99801-1182¶
POSITION STATEMENT: Sponsor of SB 307.
Richard Levitt, President & General Manager
Gustavus Electric Co.
Box 102, Gustavus AK, 99826¶
POSITION STATEMENT: Supported SB 307.
Kellis Soule, Governmental Affairs Representative
Gustavus Electric Co.
Box 102, Gustavus AK, 99826¶
POSITION STATEMENT: Supported SB 307.
Nico Bus, Acting Director
Support Services Division
Department of Natural Resources
400 Willoughby Ave., Juneau, AK 99801-1724¶
POSITION STATEMENT: Supported SB 307.
Andy Pekovich, Regional Manager
Juneau Office, Division of Lands
Department of Natural Resources
400 Willoughby Ave., Juneau, AK 99801-1724¶
POSITION STATEMENT: Supported SB 307.
Commissioner John Shively
Department of Natural Resources
400 Willoughby Ave., Juneau, AK 99801-1724¶
POSITION STATEMENT: Supported SB 307 & SB 318.
John Morgan, President
BP Exploration Alaska
Anchorage, AK ¶
POSITION STATEMENT: Supported SB 318.
Attorney General Bruce Botelho
Department of Law
P.O. Box 110300, Juneau, AK 99811-0300¶
POSITION STATEMENT: Supported SB 318.
James Baldwin, Assistant Attorney General
Department of Law
P.O. Box 110300, Juneau, AK 99811-0300¶
POSITION STATEMENT: Supported SB 318.
Bill Allen, Chairman & CEO
VECO Corporation
813 W. Northern Lights Blvd.
Anchorage, AK
POSITION STATEMENT: Supported SB 318.
Carl Marrs, President
Cook Inlet Regional Corporation
2525 C St.
Anchorage, AK 99501
POSITION STATEMENT: Supported SB 318.
David Jensen, President & CEO
Arctic Slope Regional Corporation
301 Arctic Slope Ave.
Anchorage, AK
POSITION STATEMENT: Supported SB 318.
ACTION NARRATIVE
SB 307 DUDE CREEK HABITAT AREA LAND EXCHANGE
TAPE 96-39, SIDE A
Number 001
CHAIRMAN LEMAN called the Senate Resources Committee meeting to
order at 3:38 p.m. The chairman brought up SB 307 as the first
order of business before the committee. Chairman Leman asked
Senator Frank if he wished to testify.
Number 014
SENATOR STEVE FRANK, Co-chairman of the Finance Committee, sponsor
of SB 307, stated the bill would provide for a land exchange. He
said it isn't asking for any subsidies and is totally within the
private sector. So he is eager to do what he can to encourage the
exchange and allow it to go forward. Senator Frank stated that
members have in their bill packets a copy of SJR 27, which was
passed last year supporting this project.
CHAIRMAN LEMAN recalled that there was no objection to SJR 27. He
called Mr. Levitt to testify.
Number 047
RICHARD LEVITT, President & General Manager, Gustavus Electric Co.,
stated the land exchange would occur between the Department of the
Interior and the State of Alaska to allow the construction of a
hydroelectric project to provide electricity for the community of
Gustavus and Glacier Bay National Park. The land exchange is
necessary because the site is within Glacier Bay National Park and
Preserve, a wilderness area. The removal of land from a wilderness
area must be authorized by congress. We are here today, because
approval of the Alaska State Legislature is required for state land
to be given up. SB 307 approves the land exchange. SB 307 is
contingent on the passing of legislation in Washington, D.C., which
is going forward. According to sources in Washington, D.C., the
Senate Energy & Natural Resources Committee will be hearing the
bill soon. We are asking for passage of SB 307 at this time,
because it appears that the federal legislation will not be
complete until after the adjournment of the Alaska State
Legislature.
CHAIRMAN LEMAN asked Mr. Levitt to remind the committee of the
level of local support.
MR. LEVITT responded that three public meetings have been held in
Gustavus, and a vote was taken at each one. In each case, the vote
was unanimously in support of the project. That is documented in
minutes of the meetings and by a letter from the Gustavus Community
Association, who sponsored all the meetings.
Number 135
KELLIS SOULE, Governmental Affairs Representative, Gustavus
Electric Co., stated he can answer any questions about the project.
SENATOR LEMAN asked Mr. Soule what the expected reduction in the
cost of power will be for Gustavus.
MR. SOULE responded that, under a 30-year program, they estimate
that the Power Cost Equalization Program will be reduced by close
to $200,000.00. He believes the administration came up with a
figure of $100,000.00. The discrepancy in the two figures is that
Gustavus took into consideration growth in the program and a
continuation of the funding of the program. There will be savings
to the federal government as well.
Nico Bus, Acting Director, Support Services Division, Department of
Natural Resources, supports SB 307, as long as the expense for the
exchange is covered. It will be about two-staff months to
accomplish this project.
Number 165
SENATOR TAYLOR asked if there will be any requirements of the State
of Alaska to maintain any land classification, status, or use on
the property, once the exchange has taken place.
ANDY PEKOVICH, Regional Manager, Juneau Office, Division of Land,
Department of Natural Resources, stated the process of exchange
could include classification of the lands. It is his understanding
that there is still chapter 50 to deal with, and the only thing SB
307 does is allow the state to do an equal acreage exchange without
coming back to the legislature. It does not bypass the other
elements of the exchange.
SENATOR TAYLOR stated he understands that aspect of the exchange.
His concern is that we are giving up state lands that right now we
have the ability to classify any way we see fit. He doesn't want
to go through the exchange and then find out that we've allowed the
federal government to forever restrict future use of the land.
Number 195
MR. PEKOVICH stated that the land is on the boundary of the
national park; it is fairly wet, and it is sandhill crane area. In
his opinion, it is very doubtful that the state would ever consider
developing that land.
SENATOR TAYLOR stated that doesn't answer his question. The
question is, should there be a reason that we need to - he's not
talking necessarily about development, he looked at the map and
didn't think there was much to be done there, either. But should
there be some need in the future, would we be precluded by the
federal enabling legislation from acting in that area.
Number 210
COMMISSIONER JOHN SHIVELY, Department of Natural Resources, stated
Senator Taylor's concerns may depend on what the federal
legislation says. We are receiving land that would come out of the
boundaries of the park. He thinks the land would have no
designation and that the State would be free to designate the land
as they saw fit. He cannot predict what congress might do, but it
would be the administration's intent to have it unrestricted.
CHAIRMAN LEMAN stated Commissioner Shively was referring to the
land the State would be receiving.
COMMISSIONER SHIVELY responded that is correct.
SENATOR FRANK stated, in other words, there would be no covenant
running with the land.
COMMISSIONER SHIVELY responded that is correct.
SENATOR TAYLOR stated he just wanted to make sure that was the
intent.
SENATOR HALFORD commented as far as he is concerned, that is a
condition, not an intent.
Number 230
SENATOR LINCOLN asked if the analysis of the PCE (Power Cost
Equalization) savings would be done in house. She also wondered
why that had to be a part of the fiscal note. At one point, PCE
was listed as having a 20-year guarantee. But that has been
whittled away now to the point of 3-4 years. So PCE really is not
long term. Will DCRA continue with that analysis?
MR. BUS responded the reason that was written into the fiscal note
was to figure out what the savings would be. He is not in a
position to speak for DCRA, but this clearly seems like a good
proposal.
SENATOR LINCOLN thinks that is a good idea.
Number 257
SENATOR TAYLOR asked if the exchange will allow for the
construction of a hydroelectric project.
SENATOR HALFORD stated that was the whole purpose behind SB 307.
CHAIRMAN LEMAN reminded members of the passage of SJR 27 last year,
supporting this land exchange.
SENATOR PEARCE asked why they needed money.
SENATOR FRANK thinks it was to hold public hearings.
Number 275
MR. BUS replied that once the federal government approves the land
exchange, part of the exchange process is that there will be public
hearings. People in the Anchorage office will probably have to
travel to Gustavus.
SENATOR FRANK made a motion to discharge SB 307, and accompanying
fiscal note, from the Senate Resources Committee with individual
recommendations.
Number 285
CHAIRMAN LEMAN, hearing no objection, stated SB 307 was discharged
from committee.
SB 318 NORTH STAR OIL & GAS LEASE AMENDMENT
Verbatim Testimony
CHAIRMAN LEMAN:
That brings us next to SB 318.
SENATOR PEARCE:
You would think the Gustavus Electric Co. could afford the
public hearing.
SENATOR FRANK:
I think they can; I think that...
CHAIRMAN LEMAN:
We're on SB 318 an act authorizing approving ratifying the
amendment of Northstar Unit Oil & Gas Leases between the State of
Alaska and BP Exploration, Alaska, Inc. This is a bill by request
of the governor that was just introduced, and just so, Mr.
Commissioner and others, you can--we're--I'm not going to ask you
quite yet, that you can say that we're moving quickly on it.
Introduced on the 28th--oooh, just introduced yesterday. We might
get complaints in the senate about how fast we're moving on this.
SENATOR LINCOLN:
We might?
SENATOR TAYLOR:
It's the only way you can have a hearing that the governor
doesn't have one first.
SENATOR LINCOLN:
I object Mr. Chairman.
SENATOR PEARCE:
Actually, this morning Senator Duncan allowed on the radio,
his morning radio program, that we had slowed the bill down, which
I found rather interesting.
CHAIRMAN LEMAN:
We've slowed it down, we've slowed it down one day then. It
was read across yesterday. Let me just go through some quick
opening remarks and how we're going to conduct this hearing. The
purpose of today's meeting is, first, to have an overview from the
Department of Natural Resources to hear how it arrived at this
proposal; second, to hear from representatives of BP testifying as
to why it believes this proposal is necessary; third, I hope we
have the chance, I see the attorney general way in the back, to
hear from the Department of Law on its' perspectives on this
approach and some of the legal elements to it. We will be having
future hearings; we will take the governor at his word when he
asked for full and open and frank discussion of these issues, and
that is what we intend to do with this committee is to have full
overviews of it, and we will be announcing the future hearings and
we will be looking at, among other things in future meetings in
detail the net profit lease process; second, other leases that are
under net profit share agreements; third, a clear showing of the
economics leading up to this agreement. I would expect that will
probably exhaust us as we look at some of the details behind the
economics. And the fourth we will be looking at whether the
agreement is in the best interest of the State of Alaska. In
addition to that there may be some other topics that develop as the
record is developed. I just note these will be fact-finding
hearings and there will be future opportunity, even though today's
testimony for the most part is invited, there will be future
opportunity for public comment and we will be inviting that and
will welcome it. For members of the committee, I just ask that for
the first three presenters, we allow them to present, make their
presentations, and if you have questions, jot them down and we'll
hold them 'til the end and we can ask them to come back.
Otherwise, as I know this committee is capable of doing, we could
only get to the first presenter and not get to the others, some of
whom have travelled a long way to get her, so, with that we will go
with the first presenter, Commissioner John Shively.
COMMISSIONER JOHN SHIVELY, DEPARTMENT OF NATURAL RESOURCES:
Thank you Mr. Chairman; for the record my name is John Shively
I'm the commissioner of the Department of Natural Resources. I
would like to thank you Mr. Chairman for taking this up so quickly.
I do appreciate that. I also would like to apologize at the outset
for the lateness with which we presented this issue to the
legislature. We realize that presents certain challenges,
particularly something that's this complicated. However, we think
this is a very important issue, one deserving of thorough public
review, and we think this is the place to have it for a variety of
public policy and legal reasons, which we can discuss in detail if
you'd like. I'd like, Mr. Chairman, to go into a little bit of
history about these leases, sort of bring us to where we are today
and why we decided to negotiate with British Petroleum, and two,
why we eventually arrived at the agreement we did arrive at. You
need to take yourself back in time to the late seventies, 1979,
when all but one of these leases were in a lease sale we held, I
think jointly, with the federal government. In the late seventies,
most people, based on what had happened in the mid seventies were
predicting oil would continue to rise in price, estimates that we
used, and we will provide the committee with some background
material on this, but estimates ranged anywhere from $60.00 to
$100.00 a barrel of oil that we'd see at this time. So the State
wanting to cash in, I think, on some of that future growth, rather
than having a bonus bid on these leases, decided to use a new tool
and to bid these leases using net profits as a variable. This
prospect, Northstar was at the time looked upon very favorably,
people thinking that it might have had as much as a billion barrels
of recoverable oil or more. The bidding was very active, and
ultimately a consortium, primarily headed by Amerada Hess, got
these leases, and their average bid on net profits was about 89%.
In addition, the State required a 20% base royalty. That was for
four of the leases, I believe. The fifth lease was leased in 1983;
in that lease we set the net profits at 40% and set the base
royalty at 12.5% and used a bonus bid as a variable. That bid, I
believe, was bid for about $72,000.00. Amerada Hess, as they went
through their exploration, discovered that there wasn't as much oil
as anybody had hoped, and the further they went and the more
delineation drilling they did, the poorer the field became.
However, it is still a very attractive prospect. Today both we and
I think British Petroleum estimate that around 135,000,000 barrels
of oil could be recovered from this field. It is not a marginal
field; it is not the kind of field we talked about last year with
HB 207. It is a field fully capable of carrying its' own under the
appropriate economic conditions. Amerada Hess ultimately reached
a conclusion that others had reached, including the Department of
Energy, which in 1993 in a study said that this field was not
economic and said that the net profits requirements were one of the
main reasons why this field could not be developed economically.
In addition, at the time Amerada Hess was estimating that the
capital expense to do the development of the field would be
somewhere around 1.4 to 1.5 billion dollars. So I believe in late
1994, sometime in 1994, Amerada Hess came to the conclusion they
probably would not develop it, and as the leases were themselves
coming to a time when they might ultimately go back to the State if
not allowed to be extended, Amerada Hess offered the sale for
bidding, and it is my understanding at least two oil companies bid
on these leases, and British Petroleum ultimately did provide a
winning bid to Amerada Hess, and in January of 1995 the State
agreed to transfer those leases to BP and later in the year, I
think in April, approved a three-year development plan. At the
time, I think, although BP, and they can speak to this themselves,
but I think they understood approximately how much oil was in the
field but really had not done any preliminary work on engineering
to look at the capital expense or any real look at the economics.
But they started discussing this issue with us last spring, and
actually asked that net profit leases be included in HB 207. Some
of you may remember HB 207 [SENATE CS FOR CS FOR HOUSE BILL NO.
207(FIN) am S: "An Act relating to adjustments to royalty reserved
to the State to encourage otherwise uneconomic production of oil
and gas; and providing for an effective date."] It was sort of an
entertaining prospect at the end of the session which had its' own
share of problems, and at least I felt, and ultimately I think BP
felt, that adding another issue to the mix was probably not
appropriate. However, I committed to BP at the time to discuss
Northstar, but under the conditions that I believed, at the time,
that I probably did not have the legal authority to make a deal
with them on Northstar. And so therefore, that the individual deal
itself would have to come to the legislature. That was always part
of the discussions. We actually never did a thorough legal
analysis of that issue because of my feeling that, not only did I
basically in discussing with the Division of Oil & Gas feel we
probably didn't have the authority to do this kind of deal, but I
felt that the legislature would be the appropriate place to discuss
any kind of major change in net profit leases.
COMMISSIONER SHIVELY:
We actually, I think, really got started seriously late in the
fall, October, November, and December, and it took a fair amount of
time because the modeling to compare net profits, leases with other
kinds of schemes for government take was complex, and also we
needed to get to a point where we could agree with BP on what went
in to that model. There will be some discussion of that, I will
tell you that some of the things that are part of the financial
analysis have been given us under the confidentiality statutes by
BP. Those things can be made available to the legislature under a
confidentiality agreement, and I assume you will want them. Kevin
Banks, who is our economist, and Patrick Coughlin, who did a lot of
work on the agreement are prepared to assist in presenting that
information to you at the time you think is appropriate. I have
urged BP to make as much of this information public as possible; I
think that makes sense. What we ultimately agreed to was that the
20% base royalty on the four leases would remain, and that could
not be changed in the future. On the fifth lease, we changed the
base royalty from 12.5% to 20%. Then what we essentially did was
trade the net profits royalty for what we call a supplemental
royalty. That supplemental royalty is based on the price of oil.
It's a formula where the price of oil starts at $17.35 and is
adjusted at half the producer price index over time. The formula
itself is sort of a straight line formula: as price goes up, our
percentage of take goes up, up to a maximum of an additional 7.5%,
which would maximize our royalty, depending on what happens with
the price of oil, at 27.5%. So basically we traded something that
was price based for something that was profit based. In addition,
we negotiated a provision that's what we call "use it or lose it",
that either they get this project sanctioned by their board of
directors within a year or the leases come back to us and we can
release them. We believe that part of the reason for doing this is
to get the development on line now. I want to talk a little bit
about that, because the net profits leasing scheme is very complex,
and we won't take time to explain it all today, but there is one
critical part of it you need to understand, and that is something
that's called the development fund. What happens is under the net
profit regulations, as a company starts spending money, after they
get the lease, for exploration activities, seismic drilling, all of
that, that basically is accounted for in the fund, and then as they
construct, that's accounted for, and they earn interest on that
fund. And then, once they start development, the income comes in
and the amount of that fund starts coming down. I believe that the
development fund was about $260,000,000.00 that BP got. And what's
sort of unique about this is that BP did not actually spend that
money, Amerada Hess did. But because of our regulations, that
development account goes with the leases, and therefore BP is
earning interest on it. The implications for the State in that is
the longer the development is delayed, the less money the State is
going to get in net profits leasing. And so timing was critical to
me as we negotiated this deal with BP. And that's why we put a
"use it or lose it" provision in. If they want to do this, they
need to do it now. If they want to sit on the leases, then, you
know, that's their business, but they shouldn't get a change, in my
mind, in the royalty structure if they want to do that. We also
have language strengthening local hire and local contracting. I'm
sure that as this goes forward, we'll discuss that in more detail.
I want to talk a little bit about the numbers because there has
been some confusion, somewhat because the model itself is complex
and was continually being refined, and also because there are
several ways to look at the supplemental royalty and compare it to
what we might get under the net profit. We estimate under the
model right now that if this field was developed today, using the
net profits provisions, the State would receive about
$85,000,000.00 over the life of the field for net profits. We also
estimate right now that if you used the supplemental royalty, that
we would get $37,000,000.00. So that's a considerable difference.
In order for me to make this agreement with BP, I had to believe
them when they said they would not develop under these terms. And
I thinks that's something the legislature will have to do to. If
you believe that they will develop under these terms, and develop
this relatively immediately, then this deal should not be done.
The State might have the ability to force them into production, but
for reasons that I can explain in detail later, we do not believe
that we could start forcing them into production until after the
current development plan is completed, which takes place in April
of 1998. That, we believe, would mean that oil would start to come
on line in the year 2002, rather than in 1999, as we anticipate
under this deal. If you look at what we get in the net profits
royalty under that scenario, under a delayed scenario, oil coming
on in the year 2002, we get $41,000,000.00 in net profit, rather
than the $85,000,000.00, and I know people have questioned why I
have used different figures. So then, for me, in reality, the
State has to compare what the best we could do under net profits,
which is order them...
[At this point Commissioner Shively's testimony was cut off by the
teleconference operator turning all the electronic equipment off.]
COMMISSIONER SHIVELY:
...under that scenario, there's only a $4,000,000.00
difference between the supplemental royalty and the net profits
royalty. We will provide you with the information on how much
revenues total to the State, we believe that's about
$435,000,000.00. In addition the North Slope Borough will receive
some ad valorem tax. There are other positive implications if oil
is brought on. Putting additional oil in the pipeline increases
the tariff for existing oil, improving our economics for other oil
fields. I also think that this has another major positive
implication for the State. We have an oil and gas lease sale
offshore scheduled for about two years from now off the north shore
in Alaska, and if Northstar could be brought on, if we can prove
that we can do the first offshore development with a buried
pipeline ever done in the Arctic, then I think it increases the
value of our other leases on the North Slope. The negotiations
were long - longer than I had hoped. I had hoped to have this
agreement to the legislature earlier; they were at times very
difficult, but I believe that we have negotiated a deal that is in
the best interests of the State. However, of course, the reason we
bring it to you is so that you and the public can debate that
issue, and we think it deserves a thorough debate and we're
prepared to respond to any of the questions that you might have as
this process proceeds, and again, Mr. Chairman, I would like to
thank you very much for the expeditious way in which you've called
this hearing and are handling this. With that, I will let the next
person...
CHAIRMAN LEMAN:
Thank you. I'd just like you to run through, because I think
it's important to set the record on this, the dates on when these
things happened. We have when the lease was originally acquired,
but then when Amerada Hess offered them, I believe you said late
1994...
COMMISSIONER SHIVELY:
Right.
CHAIRMAN LEMAN:
Ok. And then BP purchased...
COMMISSIONER SHIVELY:
The State...
CHAIRMAN LEMAN :
The leases at sometime in, did you say earlier 1995?
COMMISSIONER SHIVELY:
Yes, the State approved the transfer in January of 1995. I'm
not sure...
CHAIRMAN LEMAN:
So they purchased it sometime before that.
COMMISSIONER SHIVELY:
Right.
CHAIRMAN LEMAN:
The State approved the transfer and you will have the dates...
COMMISSIONER SHIVELY:
It was January in 1995.
CHAIRMAN LEMAN:
January of 1995.
COMMISSIONER SHIVELY:
Right.
CHAIRMAN LEMAN:
And then at some time following that, BP came to you and
approached you about changing the net profit share provisions in
the HB 207 context.
COMMISSIONER SHIVELY:
Right. It was sometime, I think, I'm not sure, that date I
probably can't get you, because it was not an official
communication, but it was during the HB 207 debate. I didn't
become commissioner until February. I would guess that the first
time they raised the issue, which was in a very generic form, was
in early April of last year.
CHAIRMAN LEMAN:
Okay. Well we can pursue that; probably we'll do it in some
of our future hearings, or maybe even later today in more detail.
Is this a question that needs to be asked right now, or else we can
go to Mr. Morgan.
SENATOR FRANK:
No, it doesn't have to be asked right now.
CHAIRMAN LEMAN:
Okay. I'd thank you for joining us, Commissioner Shively.
Senator Taylor.
SENATOR TAYLOR:
Very briefly. Do you believe that the legislature's consent
is necessary to grant you or the governor the authority to enter
into this deal?
COMMISSIONER SHIVELY:
Yes I do.
CHAIRMAN LEMAN:
Thank you Commissioner Shively. Next is John Morgan from BP.
SENATOR HALFORD:
Legally necessary. Qualify it next time.
SENATOR PEARCE:
They didn't say they had to.
SENATOR HALFORD:
Legally necessary.
JOHN MORGAN, PRESIDENT OF BP EXPLORATION ALASKA:
Good afternoon, Chairman, Senators, I'm John Morgan, President
of BP Exploration Alaska. I would like to add my thanks to that of
the commissioner for the very expeditious movement of this
committee to pick up this piece of legislation. The bill, as
you've heard, is about seeking legislative approval of a negotiated
agreement between the DNR and BP Exploration Alaska, and I can't
stress enough, that from BP's perspective, this was a long and very
formal negotiation process, that I don't see the agreement
contained in this bill as in any way being an incentive to BP; I
see it as a very balanced agreement coming out of that negotiation
to remove a real barrier to the development of this resource to
provide certainty of early development, to unlock the potential of
Northstar, and to enhance the likelihood of development of other
small and offshore fields to provide a good alignment in the
relationship between BP and the State, to provide substantial jobs
for the citizens of Alaska, to provide real new business
opportunities in the State, and of course, to provide very
substantial revenues to the State.
You heard from Commissioner Shively a little of the history of
these leases, that in the course of their work, Amerada Hess and
Shell discovered oil on these leases and evaluated the development
using a well-known engineering company to work with them and
determined that the cost estimate for a major for a development
scheme would be, I believe something in excess of 1.5 billion
dollars. From that perspective, it was clear to them that
development was not possible, and at that point, I believe, they
moved towards the sale of these leases. As you heard, BP acquired
the leases in a competitive process in the early part of 1995. The
reason that we did that was because, using the experience that we
had gained in looking at small field development in Alaska, it was
our view that development of the field could be possible in a cost
range of $350,000,000.00 to $400,000,000.00. And that would make
this field into an economic proposition. In making that
acquisition, we did understand, and it was clear to us, that the
issue of net profit leases represented a problem, and a problem
that would need to be overcome with the State, if development was
to proceed. Let me say a little about the nature of that problem.
There are, I think, some 40 odd leases in existence in the
State with net profit lease terms. Some of them are producing,
some of them are partially explored. The Northstar leases, to my
knowledge, are the only ones that have the immediate prospect of
development. I don't believe that any leases have actually paid
out at this point, under net profit lease terms, thought clearly
that is possible in the future. There is, I believe, one example
of a lease where net profit interest terms were removed in the past
for a royalty adjustment, and that was the Thetis Island leases,
and that did not involve legislative approval. The problem that
exists is that the net profit leases create a very basic
misalignment between the leasing company and the State. Once the
net profit interest cuts in, then in the case of Northstar, some
90% or so of the revenue stream to the company would effectively
dry up, and that would lead to the premature shut-down of the
field.
We have never argued that the development of Northstar could
not be profitable under the terms including the net profit
arrangements. In profitability in terms of return on capital, this
would be possible. This is not a marginal oil field. The problem
that arises is that the net income stream is simply so far reduced,
once the net profit interest cuts in, that it would not be
acceptable for BP, or I believe any other reputable oil company to
continue to operate the field. We depend on our reputation in
doing our business around the world, and we would not be prepared,
as BP, to enter into an arrangement to develop an oil field in the
knowledge that we would be going forward on a basis that we would
prematurely shut in oil in that oil field. That's why we explained
to the commissioner and the department that we would not be able to
go forward. I'm certainly prepared to spend more time in the
future with you explaining that issue more fully, because I
understand that it is very important.
The other point about the net profit interest is that it is
common in the North Slope and elsewhere that as fields come on
production, and as technology is applied to them, the reserve base
can be expanded and additional production can be forth coming. And
certainly the existence of net profit lease terms like these take
away any incentive that the company would have to work on that kind
of expansion of the resource. The misalignment between the
industry and the State is really very serious. So what we did you
heard from Commissioner Shively was, in the first instance to
wonder whether there was a way of amending HB 207. We felt that
was not appropriate, and then we agreed with the commissioner to
enter into direct negotiations with him to try to find an
alternative arrangement that would work for both BP and the State.
I won't repeat the terms of that, the commissioner has explained to
you, only, I think, to emphasize that we have accepted a so-called
"use it or lose it" provision here, that means that we have to have
this agreement sanctioned by our board and the funds released for
it twelve months from the agreement to go forward. We'd hope to do
it earlier than that, but clearly there could be some contingencies
that would prevent it. And also to emphasize, we think that we
really don't see this as any kind of concession on the part of the
State; it really is a carefully negotiated arrangement that would
allow development to proceed quickly, where otherwise it wouldn't
do so, and without such agreement I believe that the possibility of
any future development would be extremely uncertain, as would the
terms, if any development did take place.
I think what I'd like to do is spend a few moments just
talking about the benefits, as we see it, to the State of Alaska
from this arrangement. We're targeting early development of the
field with the first production to begin in early 1999. The field
has approximately 130 million barrels of recoverable reserves, and
we are looking today at development costs of around $380,000,000.
The field would have a plateau production of some 50,000 barrels a
day. The overall benefit to the State can be expressed in a number
of ways, but in money of the day terms, it's our view that the
revenue to the State would be of the order of $575,000,000, with
additional benefits from the $200,000,000 of capital expenditure
likely to be spent in the State, and the $200,000,000 of operating
expenditure, which would be spent in the State over the life of the
field. We at BP have talked often about the potential that exists
on the North Slope, in and around the existing infrastructure. We
see possibly some 5 billion barrels of oil potential in that area,
made up of many things: made up of heavy oil, of enhanced oil
recovery in existing fields, of satellite production, and other...
TAPE 96-39, SIDE B
MR. MORGAN:
...things. A significant part of that potential would come
from new, small fields. Northstar, if we go forward with it, will
be the first of the new generation of small field developments. I
believe it's very important to show that this can be done and to
get on with it. The additional challenge here, and the additional
advantage arises because Northstar would be the first offshore
development in Alaska on the North Slope of Alaska, and success in
showing that can be technically achieved would, I think, expand the
potential even further. We've given a commitment in this
negotiation, a commitment to hire Alaskans and to use Alaskan
Contractors and to build the modules that will be required in
Alaska, including modules for sea-lift, provided the facilities for
those can actually be provided here. As far as jobs are concerned,
the oil industry in Alaska has the best record of all Alaskan
industries, but no doubt the percentage of Alaskan hire has been
falling, and the industry as a whole recognizes the need to do a
number of things to improve that record. The operators and the
contractors have been cooperating on this and recently presented a
set of proposals for improvement in the proportion of Alaska hire
to the administration. The industry is committed to that
improvement. I don't believe that Alaska hire issues can be
resolved with any single project, but I am absolutely clear that
the Northstar project has to be part of that program of
improvement. We are committed to use Alaska Workers in the
development. We estimate that over the peak construction period,
Northstar will create some 450 to 520 direct jobs, and in the
operating mode there will be approximately 50 direct jobs. Those,
of course, are each subject to a multiplier effect of something
over one, in terms of their further impact in the economy. We've
been working from the beginning of this project with Alaskan
contractors, and Alaskan contractors will do the vast majority of
the work. We have companies like AIC, now part of CIRI who will
construct the gravel island; HCC, who will be involved with the
pipeline installation; VECO and APC, who will be involved with
facilities fabrication; and VECO, who will be involved with
facilities installation. Other companies will deal with trucking,
with drilling, and with pipeline fabrication, and again, there will
be a high Alaska content. As I mentioned, the total development
spend will be approximately $380,000,000. Our best view is that
something of the order of $140,000,000 will be spent out of State,
and that includes around $100,000,000 which will be spent on
materials that simply are not available in Alaska. That leaves
something between $200,000,000 and $250,000,000 to be spent inside
the State, a high proportion relative to any development in the
past. In particular, as we look at the issue of fabrication, we
would expect today that fabrication costs out of the total
$380,000,000 would be somewhere in the order of $60,000,000. Today,
if you based your view purely on commercial decisions and
facilities in the State, probably about $10,000,000 out of that
total would be spent in Alaska. That would basically be truckable
skids.
Clearly the State has established that it can build that type
of module competitively. What we have said is that we will seek to
bring an additional $30,000,000.00 worth, or thereabouts, of
fabrication work into the State, and that we're prepared to accept
some additional cost in order to do that. It does mean that the
facilities to allow us to do this will have to be available at the
right time and in the right quality, and that is not directly in
BP's control, it will have to be done by others. There are
certainly others who own existing fabrication facilities that could
deal with Northstar, but more challenging is the notion of a
facility that would allow the modules to be assembled and floated
out for a sea-lift to the North Slope. There is no current
facility in the State to do that. In the past, all of this work
has been done out of the lower forty-eight. We've talked to
existing fabrication contractors, and they are clearly very
interested in this notion. We see a great opportunity to use
Northstar to create an opportunity for new business in the State of
Alaska, and we want to do that. Other players clearly will have to
make those investment decisions for themselves.
In summary then, we are very excited about this project.
We're committee to go forward with Northstar if we have agreement
from the State. We believe, and I believe, that the negotiated
proposal is good business for BP and good business for the State of
Alaska. If the project goes forward it will create jobs, and it
will create new business opportunities in the State. If it isn't
able to go forward, clearly those things won't happen. Thank you,
I'm happy to answer any questions you may have.
CHAIRMAN LEMAN:
Thank you Mr. Morgan. I was just thinking there at the end
where you were talking about the facilities for the modules, what
we've been trying to do at Ship Creek over the years and work with
another contractor, and I thought what a wonderful opportunity for
doing something with Ship Creek, so maybe we can. That's part of
my district. Senator Halford?
SENATOR HALFORD:
Thank you Mr. Chairman. Just a question on the fabrication
question. You're talking about being able to add $30,000,000 in
fabrication: is that the total value of the fabricated product,
including both labor and materials, or is that the fabrication
component in Alaska, which then generally is mostly labor, and not
a material component?
MR. MORGAN:
Yes Senator, that is the fabrication component in Alaska. It
does not include materials.
SENATOR HALFORD:
Doesn't include materials, okay. Thank you.
CHAIRMAN LEMAN:
In keeping with my earlier instructions, I'd like to hold
questions, and Mr. Morgan, you can stay with us, can you not? So
we'll get you back. I'd like to...
SENATOR LINCOLN:
Mr. Chairman, I do have to leave in a few minutes , and there
is one quick question that I need to ask.
CHAIRMAN LEMAN:
Make it quick. Please, Senator Lincoln.
SENATOR LINCOLN:
I will. You made a statement that there's, and maybe I
misunderstood you, that there's a misalignment between the State
and the industry is very serious. Would you expand on that please?
MR. MORGAN:
Yes. What I was saying is that with the net profit
arrangement in place, at the level that it exists, BP would not be
prepared to go ahead with the development of a Northstar project,
even though, if you run the economics, you can show that the return
on investment for the project is a sound sort of return on
investment. And therefore, you would say, and others have said to
me, if you have a development fund which you're allowed to recover,
and recover with interest, what's wrong with this? The reason is,
that at the time the net profit cuts in, and that is obviously
dependent on how much we spend and what the oil price is, but on
reasonable assumptions with this project, you would expect at some
point in the future, maybe in the middle of the first decade of the
next century, that net profit would cut in. What it would do is
drive the net income or the margin per barrel down to a very low
level on our calculations well below $1.00 per barrel. Now the net
income per barrel is one of the key financial parameters on which
the oil industry works. And BP, and I believe other major oil
companies would say they were not prepared to put themselves in a
position where that key parameter was being driven down by having
a component of their portfolio operate at that very low level of
margin. And so what we said is, we have to be clear and straight-
forward about this: we would never put ourselves in the position
where we had to shut down an operation before the full recovery
that we could make economically from an oil field was achieved.
And that is what the fundamental misalignment was.
CHAIRMAN LEMAN:
I'm going to allow two more quick questions, if we can have
very short answers. Senator Taylor, Senator Halford.
SENATOR TAYLOR:
Yes. You mentioned Thetis Island as another time when this
same thing had occurred. Do you know if those amendments had
legislative action?
MR. MORGAN:
My understanding is they did not.
SENATOR TAYLOR:
And the other only side-bar note I wanted to make was that I
have at least three facilities within my district that are
currently setting idle. Any one of the three has large gantry
cranes, acres of flat ground, and all three have deep-water ports
that you can bring any ship up to. So we're prepared to do
facilities work in Southeast Alaska.
MR. MORGAN:
Senator, there are members of the audience who, I'm sure, are
listening very carefully to that.
CHAIRMAN LEMAN:
There are sawmill operators who'd be happy to convert to
welders, right?
SENATOR TAYLOR:
They're already welders.
CHAIRMAN LEMAN:
Oh, they're already welders. Senator Halford.
SENATOR HALFORD:
Thank you Mr. Chairman. Just to get some kind of parameter,
I don't know whether this is, whether you're willing to make this
information public or not, but I guess the question that comes to
mind is what BP paid Amerada Hess for the leases.
MR. MORGAN:
Yes. The answer is that was covered by a confidentiality
agreement, which we believe we have to honor. Frankly I would have
no personal problem in making it available, but since we did enter
a confidentiality agreement at the time of that acquisition, we
believe we have to honor that agreement. The information has been
made available under confidentiality rules to the department.
CHAIRMAN LEMAN:
Is that available to us, Mr. Commissioner, under
confidentiality, so if we wish to have that we can go into a
confidential session?
COMMISSIONER SHIVELY:
[Nods "yes"]
CHAIRMAN LEMAN:
Okay. We'll take that under advisement and at a future time
we probably will have a list of other things that we may also want
to hear about that may be confidential and we'll put that on the
list. Senator Halford.
SENATOR HALFORD:
Before we get to a confidential session, I'll just say that my
guess was something between $5,000,000.00 and $6,000,000.00, and
that way I can't have possibly gotten it out of a confidential
session.
MR. MORGAN:
Noted.
CHAIRMAN LEMAN:
In my interests, smile if he's close, and since you're
smiling. Senator Frank, and then we do want to go to the attorney
general.
SENATOR FRANK:
Your basic thrust was that the net profits feature is not
conducive to maximum recovery, basically? So, I understand the
State doesn't do that anymore, and it's probably a good policy, I'm
not really sure. But somebody told us that BP just got through
bidding on a net profits basis down in Colombia or something like
that, is that true?
MR. MORGAN:
As far as I know, we haven't ever bid in any other part of the
world, ever on an arrangement like the net profit arrangement in
Alaska. And of course we did not bid on that here. If there are
other examples that you would like me to discuss with you at any
time, if we can get clear on the examples I would be happy to do
that, Senator.
SENATOR FRANK:
I don't know where that came from, but...
SENATOR PEARCE:
Venezuela.
SENATOR FRANK:
Venezuela? Okay. So what was that?
SENATOR PEARCE:
Actually, Mr. Morgan, the offerings he's talking about we're
just done at the end of January in Venezuela, and the report that
we got from Cambridge Energy laid out the different offerings and
who the successful bidders were, and it's my understanding from
that in January, which has been fairly recent, that BP
International - whoever is in Venezuela, whichever arm of the
company it is, did indeed bid on some net profit share leases. Or
did indeed somehow.
SENATOR HALFORD:
Yeah, the terminology, I think, is in partnership with the
government owned corporation at percentages in the 80-90% range,
which is the same affect as the net profit leases, it's not a net
profit lease, though.
MR. MORGAN:
I think I can assure you that this was not an arrangement
where there was the sudden imposition some way through the
development of the field of different terms that altered the basic
economics. There are a number of features that I'm aware of to do
with Venezuela. I don't want to go into them in detail, but I
would just say that it is an extremely low cost area, in terms of
finding development and transportation cost, and that certainly
distinguishes it from our activities on the North Slope. But I
would be happy to talk to you in more detail at another time on
that subject.
CHAIRMAN LEMAN:
Perhaps you or your designee would have some detail on that.
When we pursue this in more detail we can have the answer to that.
Thank you sir. Attorney General Botelho. You've been patiently
waiting there in the back of the room with Mr. Baldwin. Just
relax, you're among friends.
ATTORNEY GENERAL BRUCE BOTELHO, DEPARTMENT OF LAW:
Mr. Chairman, your staff requested on your behalf that we be
present and available to answer any questions you had. I trust
that members of the committee have received a copy of the opinion
which Mr. Baldwin authored regarding the legal basis for why the
governor requested introduction of the legislation to endorse the
leases. We're also prepared to discuss, at the request of
President Pearce, the question of confidentiality. We've actually
prepared appropriate agreements of confidentiality paralleling such
documents in the tax context so that the committee would be
available at the appropriate opportunity to review confidential
documents in full so that you're better advised of the issues, the
consideration negotiated. With that, Mr. Chairman, we're available
to answer any questions you may have.
CHAIRMAN LEMAN:
I have read your letter, Mr. Baldwin, and just for the benefit
of others who may not have read it yet, could you just hit the
highlights. I believe you answered four key questions. If you
could do that, then...
JAMES BALDWIN, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW:
Yes, thank you Mr. Chairman. My name is Jim Baldwin, I'm with
the Office of the Attorney General. We were asked to advise as to
the ability of the Department of Natural Resources to enter into
the lease amendments that are before you without further statutory
authority. We analyzed the framework of the statutes, existing
law, and concluded that it was a better approach to have specific
statutory authority. Based on the history of the amendments that
were enacted last year for royalty reductions and the actual
wording of existing law, it appeared that express authority would
be necessary to make these changes. The bill that's before you has
a couple of approaches in it for accomplishing it. One is an
actual ratification of the amendments themselves, and the other one
is providing the basic underlying statutory authority to make the
kind of changes that are being proposed here. So that's the first
part of the analysis.
The next part of the analysis goes on to consider the question
of whether an approval that is so specifically directed to an
individual lease or and individual lease holder would violate the
local or special prohibition set out in the constitution. We
conclude that this is a project of such state-wide importance, that
it would meet the test set out in State v. Lewis, which was a case
decided in the 80's concerning a land trade in the railbelt area,
and also that it would meet the equal protection analysis, which is
also laid out in that case, which is not the heightened scrutiny of
the strictest test for satisfying an equal protection challenge,
but it is more of a rational basis type standard, and we believe
that through the testimony that you're going to be hearing here
before this committee that will be brought to you by the various
parties that there will be an adequate basis laid to support the
valid State interests in making a very narrow statute, enacting a
very narrow statute to approve these lease amendments.
Finally, or nearly finally, we consider the competitive
bidding issues, that since this lease was initially competitively
bid, the law basically States that you can't really make a material
change in a competitively bid contract without really considering
going back and entering into an entirely new contract. There has
been some case law which further develops that to determine when
you have a material change and when you don't have a material
change. We set out to explain the factors which are taken into
consideration in resolving that question and conclude that this
would not be the kind of change that would be foreclosed by the
competitive bidding statutes that are set out in Title 38, the
Alaska Land Act. And finally, we discuss, and this was in response
to a question that was put forward by President Pearce concerning
whether this would not be some kind of an improper appropriation,
since there was a reduction in the potential take into the State
treasury, whether that would not constitute a violation of the
public purpose doctrine. And we conclude that there are many ways
of analyzing this, and that essentially there's a mutuality of
consideration on both sides on behalf of the lease holder and the
State, and that we think, based on the decisions that have been
handed down by our Alaska Supreme Court, that there would be a
great deference given to any decision made by the legislature in
it's regard, that it would be in the public interest or for the
public purpose to prove these kinds of lease changes or authorize
them. And that basically sums up what we said in our opinion.
CHAIRMAN LEMAN:
I'm just going to check with you: will either or both of you
be available tomorrow morning, if we want to go into detail? I
have a number of fairly detailed questions that I'd like to pursue,
but we have people here from out of town. I'd like to accommodate
them.
ATTORNEY GENERAL BOTELHO:
Mr. Chairman, we'll be available.
CHAIRMAN LEMAN:
Yes. And I think we might, or on some of them tomorrow we may
to give you time to research. I do want to pursue questioning on
this section on competitive bidding principles and I think in
advance so you can answer tomorrow about, if you can answer the
question: when did, for example, the timing of the change and you
conclude that because it's well seasoned that wouldn't be something
that would be--cause particular trouble. But then I ask the
question. I think this is one we need to get satisfied in our
minds, is did BP enter into that contract through acquiring the
Amerada Hess leases in 1980, or did they enter into it in 1995?
And that's--I would like to pursue some questioning there because
I think that sets the ground for at least one of the concerns that
I would have, and that is maintaining the legitimacy of the whole
leasing process. So you can come prepared. We'll want to ask
questions along that line. Senator Taylor did you want to ask...
SENATOR TAYLOR:
Yes, I'd have two, and whether you're prepared or not today,
tomorrow it would be fine. The first was, did you believe that it
was legally necessary for the legislature to grant the governor the
authority to amend this contract. And the second one was, if so,
was the same contract and the same law in existence at the time
that the Thetis Island amendments occurred, and if in fact your
answer is in the affirmative to the first one, then was not Thetis
Island done illegally? And I guess the last question is, how could
we have a more significant change to a contract than this one. I
can't imagine anything more material to the essence of the
agreement itself, than the term that has now been amended, and to
say that that is not a sufficient change to be material or
significant to the contract enough to bring into compliance what
the chairman was just asking about, which was the re-bidding
requirements. I don't know what would be, and so I would really
like to see an explanation of that.
ATTORNEY GENERAL BOTELHO:
Mr. Chairman would you like a brief answer now to those
questions?
CHAIRMAN LEMAN:
Sure. If you can answer now that would be fine.
ATTORNEY GENERAL BOTELHO:
And I expect that this may be a subject that you wish to
expand on tomorrow, but obviously first perhaps to take it in
reverse order.
The very point is another reason why we believe that it is
most prudent for the State executive to be coming to the
legislature asking for an express ratification, because clearly
these are terms of significance and while we believe, as Senator
Taylor well knows, lawyers can fashion arguments on all sides of an
issue, and each lawyers guess, until the Supreme Court has spoken
can come up with a better or a different estimate about the chances
of prevailing. Our view is the most prudent course of action for
that reason is to take the matter to the legislature. With regard
to the earlier question, a previous net profit share lease, again,
I think generally speaking, we have indicated in the opinion,
actually in footnote 2, highlights our view that there is a
question about whether the governor or the commissioner of Natural
Resources has implied authority to make changes to leases. It's an
area that is not developed in the law. We think it's highly risky,
and again, led in part to our conclusion that the most prudent
course, in order to speed the project along was to bring it to the
legislature. But there's also, I think there are two or three
facts that distinguish this lease from the state of the law at the
time that the State entered into the previous lease. There has
been a question about whether net profit share leases are royalties
at all, and that's been a question where there's been inconsistency
in the State practice long term. At the same time, there is a
consistent practice that if the commissioner has the power to
modify, that it occurs at the time of unitization. And that was
clear at the time Commissioner Wunnicke acted. The other, again I
think fairly--the only place we've seen it, but Commissioner
Wunnicke's position was that she was authorized to increase the
terms that is to the benefit of the State, but that she did not
have the power to decrease it.
Clearly what we're faced with here is with a diminution of
revenues that would come to the State. Whatever the case of the
law was before last year, there was a material change in AS
38.05.180, and that is the power that one would operate under is
180(p). But that in turn last year was modified to reference the
process at fourth and 180(j). And that would require the
commissioner in order to make the changes to make a finding that
this project would otherwise not be economically feasible. And
that was a conclusion which the commissioner would not and could
not make. And once again, whether in theory 180 would apply, in
this instance it could not apply. And, again, our reasoning
supports the need to put this matter before the legislature.
CHAIRMAN LEMAN:
Senator Taylor, any follow up?
SENATOR TAYLOR:
Just follow up. If in fact the commissioner could not make
that finding, then the finding must be based on something else.
And if in fact it's something else, then it must be some other
political consideration, such as Alaska hire, the development of
modules, whatever. But it would seem to me that in a matter of
this import, where we're talking about the authority of the
executive branch, it would seem to me that prudent is a word used
by a banker when he wants some additional collateral and coverage
on a loan. The word prudent could be synonymous with political.
It was politically more comfortable to have the legislature provide
coverage on this issue. That's certainly what the daily news
articles that I've read would indicate, and I think there ought to
be a clear definition, something more than just what's prudent for
the legislature to do it. There ought to be something clearly in
the law that says that the executive either has to do this, or does
not. And not having to do it seems to me to be somewhat of a
forfeiture of power that's not really necessary. And if in fact
it's not, why are we here, is my bottom line, because to put it
another way, if the legislature were to turn the deal down,
couldn't the governor still make the deal?
ATTORNEY GENERAL BOTELHO:
Mr. Chairman, whether he could or not, my understanding is,
and again I think that Mr. Shively is certainly prepared to speak
with this, if the legislature turns the deal down, there is no
deal. And the State, again, prudent is a word that I believe is
quite appropriate in the circumstance, quite apart from the view
that perhaps it's a bankers term. Our deal and our goal here is
try and get a project that will benefit the people of Alaska on
line as quickly as possible under terms that will be beneficial to
the people of Alaska. By bringing the matter to the legislature we
eliminate several legal issues that otherwise could well end up in
litigation, the outcome of which lawyers all of us can speculate,
but for which we can provide no degree of certainty.
CHAIRMAN LEMAN:
I just want to note that Senator Rieger and Senator Green have
joined us, and Senator Green, you've been blocked out by that very
nice map there, and you both are welcome to join us at the table,
and if I'm overlooking any other legislators, we have room, so come
on up. Senator Halford has some questions you want to ask. I
would like to get back to some questions for Mr. Morgan and
Commissioner Shively, and then we have three gentlemen from out of
town that I would like to get to them by 5:15, if we can, and
conclude this hearing by 5:30 tonight and then we will extend
tomorrow. So with that, Senator Halford?
SENATOR HALFORD:
Unless these are short answers, I will be asking them again,
but I wanted to ask the question so there are things that you can
come back with. What's the interest rate on the development fund?
COMMISSIONER SHIVELY:
The prime rate.
CHAIRMAN LEMAN:
Floating prime rate?
[The answer is not picked up by the recording equipment.]
SENATOR HALFORD:
Okay. I would like an analysis from the Department of Law as
to the carry forward of the development fund with the leases on
transfer and a conclusion as to whether they in fact do carry
forward so that we know the development fund really is an available
issue. I would also like a list of the other bidders on each of
the parcels in question at the time of sale, and the other bidders
bidding on any lease in that sale that were qualified to bid on
those parcels. I'd like, and one of the questions that is a
question for this agreement and both for the economic analysis and
the legal analysis, if there was a lawsuit that stops development
because of a change of the bid variable, and that then delays the
process, number one, what happens in the legal sense to the time
frames that are in the agreement, and number two, what happens in
the sense of the economic model to the differences in dollars based
on the time delay, because it appears that the benefit is the time
acceleration. And, also with regard to the economic model, if the
model could be run with the variables in income to the State based
on the recoverable of 135,000,000 barrels, but also based on a
recoverable of double that. How sensitive is the situation if it
is twice as good as we think to the changes proposed. And finally,
whether or some kind of a projection on what the projected
severance tax rates would be on this project under the existing
provisions of the economic limit factor.
ATTORNEY GENERAL BOTELHO:
Mr. Chairman, we've taken note of these questions. Several of
them are probably more appropriately directed to the commissioner
of Natural Resources. We understand it is an obligation of the
executive to try and provide that information to you.
CHAIRMAN LEMAN:
Senator Pearce.
SENATOR PEARCE:
Thank you. I have two questions right now. First, is there
a federal definition of net profit leases, net profit shares, I
guess.
ATTORNEY GENERAL BOTELHO:
Mr. Chairman, there is.
SENATOR PEARCE:
And, could we--I don't know if I want to see it, but could we
have that, please?
ATTORNEY GENERAL BOTELHO:
I would be glad to provide it to you tomorrow.
SENATOR PEARCE:
Second, Mr. Baldwin, on page 3 of your legal opinion to Mr.
Shively, first paragraph you say further under section 180(j), and
that's of, I believe of last years 207, the commissioner may reduce
royalty and unitize leases if the lessee makes a clear and
convincing showing that a modification of royalty meets the
requirements of this section and is in the best interests of the
State. And then the purpose says that it is to allow for
production that would not otherwise be economically feasible. And
then you go on to say that you have informed us that the Northstar
unit development does not meet this standard. Why is that?
MR. BALDWIN:
I think that's a question that's better addressed to the
commissioner. When we wrote the opinion, there were certain things
that were a given, and that was a policy decision by the
commissioner of Natural Resources.
SENATOR PEARCE:
Okay. Can you tell me what the standard that you're talking
about; is that the standard that it is not--that it would not
otherwise be economically feasible? Or does it go back up to the
standard of is it in the best interests of the State? I'm trying
to figure out first of all which standard is that you said isn't
being met.
MR. BALDWIN:
Economic feasibility is.
SENATOR PEARCE:
But the standard was would not otherwise be.
MR. BALDWIN:
Right.
SENATOR PEARCE:
Okay, then that's a question I'll be asking Mr. Shively.
CHAIRMAN LEMAN:
Okay. Commissioner Shively, will you be available tomorrow,
or you have other people from staff...
COMMISSIONER SHIVELY :
I will have staff here. I will not be in town.
CHAIRMAN LEMAN:
Okay. I'm just thinking in terms of what order to do these
in. I think, Mr. Morgan, I know you're not going to be available,
and why don't we have you come back for questions. Thank you, and
tomorrow morning at 10:00, and I would like somebody from the
division who is familiar with the administration of the former
leases to be with you, because some of the questions we're going to
pursue I think Mr. Baldwin can answer probably a lot of it, but
you'll probably want to rely on them and I'll just further note
that if you wear a tie tomorrow, we won't listen to you. No,
rather, we might ask tougher questions, though. We'll be fairly
informal, go from 10-12.
MR. BOTELHO:
Thank you Mr. Chairman.
CHAIRMAN LEMAN:
Okay. Mr. Morgan? I'm going to start. I think the numbers
you used were consistent with an article that I read in the
Fairbanks Daily News Minor where you had spoken, I don't know if
you spoke to a group in Fairbanks or talked with their editorial
board, but you talked in terms of a $380,000,000.00 project, and
then with the estimated reserves of 130 or $135,000,000.00 you said
it's $2.92 per barrel, and at that--let's see--at that price the
project begins to look interesting, is pretty much the quote. And
I'm not sure that I or other members of this committee are
experienced enough in this to know how to compare that with other
projects, but would you be able to provide us with comparable
numbers on a dollars per barrel invested on other projects that
you've considered and have committed to developing, like Kuparek,
Milne Point, Nyakuk, Point McIntyre, and other fields?
MR. MORGAN:
Mr. Chairman, I think we can--I'll have to take advice on
this, in terms of any barriers, but I would, subject to that
advice, I would be happy to try to find that information for you.
CHAIRMAN LEMAN:
Now, I'll ask you the other question; I think you may have
said it, I know I've heard it said, is that if these changes were
not made, you would not develop the field. And is that your
position?
MR. MORGAN:
Mr. Chairman, I can and will confirm that. And I would just
like again to repeat that BP is a very major international oil
company. We have operations in many locations around the world,
and as such, we depend on our reputation in the service that we
provide to host governments in order to gain access to
opportunities. We provide essentially, management and technical
skills and a background of knowledge in the development,
exploration for and development of oil fields. It is not just my
view, but it is the basic position of the BP Corporation that we
would not put ourselves in a position of developing an oil field
where we were not able to do that and follow it through in the very
best possible way that we can. To do that would actually be, in
our view, to damage our fundamental reputation.
CHAIRMAN LEMAN:
Okay, but in late 1994 when you purchased these leases from
Amerada Hess you knew that those were the terms in there so then,
I would assume, and I would hate to put words in your mouth, but I
would assume that you were then betting on being able to get a
revision to the terms of those leases, so then you could go ahead
and make the development.
MR. MORGAN:
Part of the risk that we took when we acquired the leases was
that the State of Alaska may not agree to a modification of the
terms that would allow us to go forward with development, and we
did that knowingly and clearly.
CHAIRMAN LEMAN:
And the risk to you would have been that you would have been
out the money for the leases and you wouldn't have developed them.
You might have tried to shop them to somebody else or waited for
market conditions to change.
MR. MORGAN:
Well, I think the risk was clearly that that investment would
not be fructified, and I think there are a set of other risks
around that in terms of the signals that would be sent from the
State, but essentially that was the primary risk we were taking.
CHAIRMAN LEMAN:
Okay. Questions of others? I don't want to dominate--Senator
Taylor?
SENATOR TAYLOR:
At any time during your negotiations, which as I understand it
have carried on for some time, were you aware of a requirement that
for this project to go, that you would have to have a statute
passed by the legislature of the State of Alaska? Since you're--I
assume two people sit down to make an agreement, and if the whole
agreement is going to end up being contingent on [indisc.], that
would be a major part of the discussion.
MR. MORGAN:
Chairman, Senator Taylor, the Department of Natural Resources
and Commissioner Shively were clear with us from the beginning of
that negotiation process that they believed that any agreement we
reached would be subject to legislative ratification. There is no
question in my mind that that position was quite clear. There was
literally more or less at the time we were concluding that set of
negotiations, the question appeared to be raised as to whether this
may not in fact be necessary, and the discussions that we had with
the administration at that time reflected a view from the Attorney
General's Office, which I think you just heard, which was that
there was a significant risk of some form of challenge if
legislative approval was not forth coming, and that therefore, the
prudent course of action was in fact to seek that approval.
Neither I nor we as a company have had any concern about bringing
the agreement we have reached into the public view for a full
discussion of the legislature. I believe that the agreement we
have reached is a very sound agreement, from the State's
perspective, as well as from our own. And so I believe that it is
positive for this kind of scrutiny to take place. Clearly, I very
much hope that the conclusion will be a positive one to allow us to
go ahead quickly with the development.
CHAIRMAN LEMAN:
Other questions? I'm going to ask one on your agreement, I
believe it says something to the effect that if the legislature
passes an act substantially similar to this act--what is your
position, is it that we'd have to provide the approval as is, or
would the legislature have the approval to make modifications to
the agreement?
MR. MORGAN:
It's my understanding that the way the bill has been prepared
and presented gives the legislature the opportunity to basically
say yes or no to the negotiated agreement. I understand that the
legislature can always seek to vary terms. I have to say that from
our perspective, we have in good faith reached a negotiated
agreement with the administration, and I believe that any variation
of those terms would cast that whole negotiating process into
doubt. So it's both my belief that that was the intent of the
administration in introducing the bill, and it would certainly be
my very strong preference that this should be handled essentially
on an approval or disapproval basis, without the introduction of
any significant or material changes.
CHAIRMAN LEMAN:
Let's say that in the course of the development of this record
in the hearings we conduct we come up with perhaps side boards that
give us a little bit more comfort, perhaps the level of commitment
for local hire, the use of local contractors, or something like
that. Let's face it, there's words in here that, I don't know if
you want to call them weasel words, but there's words that allow
you're best efforts, and things like that, and if we want to
provide some additional comfort and can work out something, I just
want to know if we're going to be at an impasse that's going to be
all or nothing, or if there's some of those types of things that we
can get agreement on, maybe through the hearing process, we say,
yeah, that would be acceptable, and maybe a win-win for everybody.
MR. MORGAN:
Well, chairman, you asked me the question very directly. I
can only repeat that my very strong preference would be that we
can, between us, honor a negotiated settlement that has been a
long, complex, and quite difficult negotiation where I believe the
kinds of considerations you're raising are likely to have been part
of our discussion. I would prefer to offer to you my own and my
company's presence to deal with any of the areas of concern that
you may have, and have us do our best to deal with them before you
in hearings of this kind, and I will certainly do my best to make
myself available to do those things. I believe that we are putting
our reputation on the line, by the statements that we are making on
issues around Alaska hire and the use of Alaska contractors and
manufacturing in Alaska, and that we will be clearly held to that
reputational test.
CHAIRMAN LEMAN:
Do you have any intention of marketing the Northstar unit to
anybody else over the next year?
MR. MORGAN:
We have no current intent of any change in the equity
arrangements.
CHAIRMAN LEMAN:
Commissioner Shively, could I ask you the same question about
the legislature were to come back with some proposed modifications,
how you would view that? Do you view this as an up or down or if
we wanted to--I don't want to say assist, but work out something
that is indeed what we believe in the best interest of Alaska and
this total agreement, how would you view that?
COMMISSIONER SHIVELY:
Well Mr. Chairman, as John Morgan has said, we have presented
this as an up or down vote. And we did it for a variety of
reasons, one the negotiations we went through were long and
complex. It is late in the session. On the other hand, if there
are things that BP believes that they would like to agree to, we
will certainly look at them. I think that really, in a lot of
ways, is more between the legislature and British Petroleum than it
is between the administration. I'll have to tell you that I think
if you start to get in to try to renegotiate this agreement, then
I would doubt that you would be able to finish this before you go
home on May 7.
TAPE 96-40, SIDE A
CHAIRMAN LEMAN:
[Tape begins midspeech] ... get some understanding at this
level of what your understanding is of it so as we proceed with
future hearings that, you know, we don't chase off on a area where
we're clearly going to come to logger heads with the two you.
Senator Taylor.
SENATOR TAYLOR:
Nice to have both of you at the table at once, because from
the testimony I have heard so far, there certainly appears to be
somewhat of a disagreement, and that may be the reason for this
deal. But you as commissioner, Mr. Shively, are reported to have
refused to make a finding that the project was not economically
feasible, whereas Mr. Morgan believes that the project is
economically feasible if, in fact, you grant him the relief sought.
COMMISSIONER SHIVELY:
I think that's a little confusing. You have to go back to
what we did last year in HB 207, and that's the analysis that I
believe Mr. Baldwin is doing. In that bill, we were looking at the
sort of base royalty reduction, and in that legislation I had to
find clear and convincing evidence that the change in royalty was
necessary in order for the development to take place.
I do not believe that no oil company in the world could
develop this oil field under the current provisions. When we did
the economic analysis, we believe the rate if return is sufficient
for somebody to want to do it. On the other hand, BP has told us
they would not do it, and, therefore, I cannot make a finding that
under the current situation the development of the field is not
economically feasible. It, in my mind, is economically feasible
under both considerations. Both of the considerations of the net
profits and using the supplemental royalty. BP has said for them
it is not developable under the net profit conditions.
MR. MORGAN:
If I may, Chairman. What I was careful not to say, was the
development was not economically feasible, and that it is the
broader consideration of the economic impact of coming into force
of those net profit terms before the field has been fully developed
that is the consideration. So there is something of a subtlety in
the words that we're all using here.
CHAIRMAN LEMAN:
If that's the case, then in negotiations why did you not, Mr.
Commissioner, insist on a net zero change in the value to the State
of Alaska when you modified the net profit share? You know, if
it's still economic, it would seem to me that you deal with the
issue of net profit share, but not come up with a new arrangement
that results in an economic disadvantage to the State, if I can
call it that, even in light of your -- you had a couple different
numbers; one I think was 45 million and the other 4 million that
your model projects.
COMMISSIONER SHIVELY:
Well, again, you have to get to the point where you believe
BP, that they will not develop now under the net profits
provisions. If you believe that, then the earliest we can force
them into production would bring the oil on in 2002. If you do
that analysis, then we're about $4,000,000, apart in what I believe
we would get under the supplemental royalty and what we would get
under net profits. If I believe that they would use the net
profits, then I should have worked on this deal, you're right, but
I believe and that's why I did it the way I did.
CHAIRMAN LEMAN:
Would you consider then the 4 million, in light of that model,
would be close enough to a wash that its ...
COMMISSIONER SHIVELY:
I consider it to be very close since the only thing we know
about all these numbers, since they are projections, is that
they're wrong. We just don't know how wrong.
CHAIRMAN LEMAN:
I don't know what other members have for time constraints, but
we have three others who have come from out of town that I said I'd
like to have a minute at 5:15.
Senator Rieger, did you have a question for these witnesses.
SENATOR RIEGER:
I appreciate your allowing me to participate in the hearing,
and I apologize for coming in late, but I was wondering if you
could just perhaps qualitatively, or if you could quantify it,
describe the nature of the negotiation -- of how much of the
negotiation was on the straight finances and straight economics of
the lease and the modification of the lease, and how much was on
other peripheral considerations that you've made reference to, like
I think it was use of local contractors or whatever, but who knows
what all else came up. Can you, in very rough terms, qualitatively
describe how much was one and how much was the other.
MR. MORGAN:
Mr. Chairman, Senator Rieger. Obviously, I did not personally
conduct these negotiations, although from time to time I was
involved in the process, so I think my answer is essentially an
impressionistic one. I think that most of the time that was spent
in technical discussions between ourselves and the department was
focused around under standing the issues around the impact of the
net profit arrangement and the creation of options for an
alternative arrangement that the State and ourselves would feel
comfortable with. Most of the time that was spent was spent in
that area. It was always clear that we were going to have and the
agreement was going to contain areas concerning some of the broader
issues around Alaska hire and contracting and the building of
modules. Those things I think were more specifically focused
towards the end of the more technical negotiations as it became
clearer to both sides that we were likely to reach a point of
agreement on the value or the technical components of this. I hope
that helps you get a feeling for it.
SENATOR RIEGER:
That does help. Were there issues beyond the contracting of
modules and local hire that were brought up, but maybe rejected?
MR. MORGAN:
Not to my knowledge, but, clearly, I wasn't involved in all of
the discussions.
CHAIRMAN LEMAN:
Mr. Morgan, I don't know if Mr. Luttrell was involved in those
negotiations, but it would be real good for us I think if you
wanted to pursue that first and maybe we could talk to some of you
folks that were involved in those negotiations.
MR. MORGAN:
Mr. Chairman, with pleasure -- you will be able to do that.
CHAIRMAN LEMAN:
Senator Halford, you had a quick question?
SENATOR HALFORD:
In the consideration of the economic analysis at BP, was there
any question that the capital credits or development credit account
went forward with the lease, or was that an area that you had
conflicting legal advice as to whether it actually would go
forward?
MR. MORGAN:
Chairman, there was never any doubt in the advice that we
received and I received. That we were very clear that on
acquisition of the leases the development account carried forward
into our name.
SENATOR HALFORD:
And the $260,000,000 value of that account, is that with
interest at this point, or is that a ...
MR. MORGAN:
Mr. Chairman, I'll have to take advice on the answer to that
question.
COMMISSIONER SHIVELY:
Mr. Chairman. Yes, that's correct. And I will tell you,
Senator, and I am sure that the Attorney General's office will
provide this information tomorrow, there has been a lawsuit on that
issue that I think clearly settled it, and we clearly believe that
the development account goes with the leases. Not on these leases,
but on ...
SENATOR HALFORD:
Yeah, yeah. So, I mean, there's a very significant incentive
if, for example, you could buy a $260,000,000 development account
for $5,000,000. That would be a fantastic starting point on the
overall lease obligations.
COMMISSIONER SHIVELY:
Mr. Chairman. I think it would, but it's also where the
State's risk is, and it's one of the reasons I thought it was
important to consider this is because as that development account
grows, our take only goes one direction and that's down. And the
development account will continue to grow, you know ...
SENATOR HALFORD:
On yeah, it's a benefit to the company, not at the State's
expense necessarily, but it's a benefit to the overall development
of the project based on prior expenditure. The only way the State
gets it back is if the State cancels the leases and resells it.
Then there is no development account left.
COMMISSIONER SHIVELY:
That's right.
MR. MORGAN:
Mr. Chairman. The point I would make of course is that were
that not the case, or were the account to be lower, the need for
the removal of net profit would have been -- I can't say it would
have been greater, but it would have been absolutely as great. And
that, in a sense, one of the unfortunate effects of the net profit
arrangement is that it provides a disincentive to reduce the
development cost of the field. It is only because through our
technical and professional efforts we were able to see the
development cost in the $350,000,000 to $400,000,000 range that
this actually became a live issue.
CHAIRMAN LEMAN:
Senator Frank.
SENATOR FRANK:
I've always thought that when we talk about development cost
we were talking about capital cost not ongoing operating cost. Can
you clarify that for me? Is that $380,000,000 totally capital, or
does include the operating costs over the life of the fields? I
assumed that an operating cost or a, you know, a guy spending money
doing something in the field was part of the development cost.
COMMISSIONER SHIVELY:
There are three pieces that go into the equation until you get
net profits. The first is what we would call sort of the
development cost, which is like the seismic, any exploratory
drilling, all of the work that goes forward to define out even if
there is any oil there. And then the next thing that goes is sort
of the next step of development, which is the engineering, then the
capital expenses. Those all go in. Also, then once you are doing
net profits, you also throw in their operating cost as an offset
against revenue so that ...
SENATOR FRANK:
Well, I understand that. That makes sense that your operating
costs would come off of your revenues and then you would have
operating earnings, and those, then, would offset against the
development cost before you got any net profits, right?
COMMISSIONER SHIVELY:
That correct.
SENATOR FRANK:
But my question is really the development cost because you say
that there's $380,000,000 worth of development costs, and are those
development costs made up of both operating and capital costs?
MR. MORGAN:
No, Sir. They are made up of the development cost to bring
the field onto production from its current State. So that is
moving ahead now from conceptual engineering, which we have already
completed, and we have spent, since we acquired these leases, I
think of the order of $24,000,000 on conceptual engineering work.
It is to go forward now into the detailed engineering phase, the
acquisition of material, the placing of orders, the spending of
monies with contractors to fabricate and construct the field to
bring it into operation.
SENATOR FRANK:
Okay, let me just follow up on that a little bit, because I'm
trying to understand how that works. So, I don't think you have to
put all your money in before you get your first barrel of oil, but
is it true that you put all the $380,000,000 in before you get your
first barrel of oil, or is that $380,000,000 -- I assume you put
most of it in and then maybe some of it comes after as you do
further development, or something like that.
MR. MORGAN:
I think the issue may be around the phasing of drilling
activity, in particular, given the nature of this reservoir. There
are not, in fact, a large number of wells to be drilled so it may
be that the whole of that $380,000,000, including all of the
drilling component of it, would not be complete by the time the
field came on, but you can have full technical input on that.
Certainly the vast majority of it, any residue would be a very
small proportion, I believe.
SENATOR FRANK:
Well, that's what I always thought when they talk in terms of
development costs being kind of an up-front capital cost, and then
oil starts to flow, and then you have operating costs that go along
and operating revenues, obviously.
SENATOR LEMAN:
One final easy question for you, Mr. Morgan. If my memory
serves my correctly, in the past you have advocated that the State
consider changing its severance tax and royalty policies in favor
of more profit-based systems. And, if that's true, and, if my
memory serves me correctly, how do rationalize your comments on the
net profit share leasing with that view, or is there something that
we're missing in the linkage that ...
MR. MORGAN:
Easily, Chairman, I think that it is quite clear that the net
profit interest arrangements that were in place here are not profit
related. They do a calculation of net profit, but then they have
no impact until the point when, under those arrangements, they cut
in, and then they simply cut in at that high level, certainly in
the case of Northstar. That is not a profit-related arrangement,
and what we're introducing here in terms of a supplemental royalty
is very much closer to a profit-related arrangement. It doesn't
have all the administrative complexity of actually defining and
keeping detailed accounting records of profit in a formal sense,
but, very clearly, the oil price is a strong proxy for the
profitability of an oil field operation.
So to the extent that we have now linked the supplemental
royalty to oil price, we have something that is much more profit
related than the so-called net profit scheme ever was. That,
indeed, is part of the benefit of this, because the arrangement we
have now leaves our interests, in my view, completely aligned with
those of the State. We have every incentive to increase the size
of this oil field going forward, and that's aligned with the State
because they will clearly take a significant share. We are now
talking even at 20 percent of the highest royalty rate in operation
on the North Slope, and clearly, if the supplemental royalty cuts
in significantly higher rates than the highest now in existence.
So I think my view is that that is one of the real benefits of the
arrangement that has been negotiated in that it really does align
those interests going forward.
COMMISSIONER SHIVELY:
Mr. Chairman, if I might, just briefly. The Oil & Gas Policy
Council has talked about this, and what they've talked about is the
State taking more risk and the supplemental royalty is a risk-based
royalty. We're taking risk on higher prices, and if those higher
prices come, we get a higher take.
CHAIRMAN LEMAN:
Senator Halford, last question.
SENATOR HALFORD:
Well, and I asked the question, but the question I have is it
would appear that because the net profit share comes in the back
end, the real variable that affects the relative take to the State
is the size of the field and the amount of recoverable oil, much
more so than the price. And I think if we double the size and run
the assumptions, I would be very curious to see what the
differences in dollars were, because it just seems to be much more
size sensitive. Because by the time you've recovered all your
costs, then if you can add, you know, ten, twenty, thirty, forty,
fifty thou -- every barrel you add is essentially in the net profit
share of the State.
COMMISSIONER SHIVELY:
Well, if you double the size without any increase in
investment, that is true. A lot of what's happened in terms of
increase in oil production or oil fields has been a result of
substantial investment, all of which goes back into the development
account. So, (a) you would have to make a guess at that. The
other side of it is timing, again, because our price-based
supplemental royalty, if one assumes some overall growth of oil
prices over the long run, we get some increase in the end, too, if
the oil field lasts longer. So it is not a simple calculation to
make.
I would say that we have looked at the geology. We had looked
at it independently -- BP actually even, I think, before the leases
were transferred -- and we independently came up with an estimate
that was very similar to theirs. So we're comfortable that we're
in the ball park.
MR. MORGAN:
I hope that it turns out to be twice as big.
CHAIRMAN LEMAN:
Me too.
SENATOR HALFORD:
I'd just like to see the numbers, or twice as recoverable,
maybe not twice as big, twice as recoverable.
SENATOR TAYLOR:
I want to thank you, Mr. Morgan and John Shively for coming
forward with this. I think it's wonderful to have the opportunity
to hear and to be educated on this process. But I do find myself
somewhat frustrated by the questions and answers I received earlier
in that it seems to me that if we are to be a true partner in the
Legislature in this process, that there is a certain level of
arrogance involved where we're handed a proposition and it says we
want you to know all about it, to be all involved in it, but it's
taking a [indisc. -- coughing]. I think that if, in fact, this is
to a meaningful process and there is to be public input and
participation and an affect by the elected representatives of the
State, that it ought to be a meaningful involvement and that ought
to involve something more than take it or leave it. And if, in
fact, it is take it or leave it, I certainly want to do whatever I
can to encourage both your good offices, Mr. Shively, and Mr.
Morgan's company to find good resolve and produce things for this
State. But I don't know that my participation or the rest of this
group, our participation is either essential or necessary, other
than or whatever the political purposes may be for doing so. It's
good to have educated and good to have us involved, but I just
don't believe that we need to be part of this process under the law
that currently exists. But I think it is nice that you came in
today and we've had this discussion. I appreciate it very much.
COMMISSIONER SHIVELY:
Well, I'd just like to say that we've considered this when we
went through it, much similar to a royalty oil arrangement where
the Executive Branch negotiates the arrangements, we bring those
arrangements to the Legislature, and the Legislature says, well you
did okay job or a good job and that's fine, or you did a terrible
job and we don't want it, and that's why we did this. I do think
it is the Executive Branch's responsibility to negotiate these
things and to bring, particularly this deal, forward because we do
not believe we have authority -- and I think negotiating an
arrangement like this in this kind of body would be very difficult,
even for the body. So, we're not trying to be arrogant, and we
think that there have been other instances, particularly in royalty
oil, where you have seen the same thing.
MR. MORGAN:
Chairman, I would only add that I would ask you to consider
how, from the perspective of my or any other company in our
business, the sense of having to negotiate an arrangement in public
in a legislative arena might appear. I have to say that there is
no where in the world where that happens, and I believe there are
very good reasons for that.
CHAIRMAN LEMAN:
Thank you both, gentlemen, for being with us today. I
certainly appreciate it. And, Mr. Morgan, happy traveling. I
understand that you will be able to be back with us, not next week
but the week after next, is that correct? Whatever, I don't
remember the exact details.
MR. MORGAN:
Thank you.
CHAIRMAN LEMAN:
Carl Marrs. Standing by, Bill Allen and Dave Jensen. Sorry
to keep you gentlemen waiting 17 minutes longer than I had
promised.
CARL MARRS, President, Chief Operating Officer, Cook Inlet Region
Corporation:
Thank you, Mr. Chairman, members of the committee.
One of the company's principal lines of business is natural
resource development, and that's what I'm here to talk about today.
CIRI is heavily involved in supporting the oil industry in Alaska,
including, through its three subsidiary companies, Peak Oil Field
Service Company, Construction Machinery and Alaska Interstate
Construction.
CIRI has benefited significantly from the oil industry's trend
toward alliancing and partnering and remains a significant
contractor on the North Slope. It is for these reasons I'm here
today to speak in favor of Senate Bill 318. So let me put my cards
on the table here.
CIRI and its shareholders will benefit greatly from the
development of the Northstar field. Our company, Alaska
Interstate, will be a prime contractor on the project. But beyond
CIRI's direct benefit, I'm here today to talk to you about why this
legislation makes sense for Alaska.
As you are aware, with the decline of the production of
Prudhoe Bay, Alaska must act quickly to develop new sources of oil
in order to ensure that jobs, business activities and State
revenues derived from the oil industry continue at a level that can
support our economy. Northstar can help make that happen. It's
one of a number of smaller reserves near existing fields and
infrastructure that we can bring on fairly quickly. That will help
us bridge the production gap between the decline of Prudhoe Bay and
the potential long-term opportunities of ANWR.
Looking at it from the State's benefit alone, Northstar will
channel in order of $500,000,000 into the State coffers over the
life of the field and contribute nearly $100,000,000 into the
State's permanent fund. To my way of thinking, those are two
excellent benefits to the State of Alaska and to support this
development. Northstar can also come on line very quickly. Its
projected completion date is 1999, and as far I know, it is the
only significant field that we have on the State development
horizon during this time frame. We ought not to miss the revenue
opportunity that developing this field provides.
I've appeared before legislative committees before and
advocated the State being more proactive in dealing with the
industry. This legislation does that. It will adjust an old, out-
of-date lease that has no chance of being developed into a working
field. We'll benefit from the new State revenues I've discussed,
and we'll put hundreds of Alaskans to work, and that, for CIRI, is
a number one priority. We'll build some instate know-how for
developing larger projects on the horizon. We see it as a win/win
proposition for everybody.
Finally, please don't buy into the argument that changing an
old lease will send the wrong signal for future development. We
believe it is just the opposite. Letting the industry know that
we're willing to change the past ways of doing business if it's not
working is the best way to ensure that Alaska remains competitive
in the future. Accordingly, on behalf of Cook Inlet Region and its
6,700 shareholders, I would urge strongly that you support SB 318
and keep Alaska moving forward. Thank you, and I'll answer any
questions if there is any.
CHAIRMAN LEMAN:
Thank you, Mr. Marrs. I'll just note that when you talk about
the $100,000,000 additional money to the permanent fund -- just
yesterday or it might have been day before yesterday I was speaking
with Byron Mallott from the permanent fund and he said that the
permanent fund lost $300,000,000 in that one day where the market
dropped what was 146 points ...
MR. MARRS:
Right, but its made a few billion dollars ...
CHAIRMAN LEMAN:
But made almost all of it back over the next two or three days
-- quite volatile. Thanks so much. Any questions for Mr. Marrs?
Thanks for joining us. Bill Allen.
BILL ALLEN , Chairman and CEO of VECO Corporation:
Good afternoon, Mr. Chairman and committee members. For the
record, I'm chairman and CEO of VECO. We're one of the largest
Alaskan owned companies in the State, and naturally, I'm here to
talk to you about Senate Bill 318.
Senate Bill 318 does a lot of unique and good things, in my
opinion. It's the first field that the government and industry can
work together on. It's the first field out there that [indisc.]
has State and federal leases. It's the first one that we'll be
able to run a pipeline to shore on. It'll add, I think, 50
thousand barrels a day to the oil coming down that pipeline, and
that will help save the economics on the big pipeline for a longer
period of time. It will be developed on just a six acre island, a
very small footprint compared to other fields.
As far as helping VECO, it'll help immensely. We've got --
well, we built the first truckable modules that was built in the
State, and we've been building them ever since. So has Arctic
Slope, APC. So we've got a good experience -- we have a lot of
experience on building truckable modules, and we've proved that we
can compete pretty well with those.
The thing that is really great about this is BP's committed to
build sea-lift modules if we can find a suitable facility to build
them in, and I think that we can. It'll probably cost a little bit
more to build sea-lift modules up here to begin with, but after we
get the infrastructure in, I think we can compete with the rest of
the world.
And that's going to develop a new industry that we never had
before. And like they said, just on Northstar it will be 500 new
construction jobs and 50 permanent jobs. Well, these 500 people
that's going to be working on building these modules up here,
they're going to have to live here. They can't live down south and
come up and work because you are going to be working five or six
days a week so they'll have to live in the State. We've built
these truckable modules that I was mentioning to you, and the
people that work on those have to live right here.
Also, by building these modules here, and particularly the
sea-lift modules, we can get the expertise, we keep the people
here, so if ANWR ever does go, we can build a lot of their sea-lift
modules. It's really a chance to develop a new industry. And I
think BP committing to that alone we ought to go ahead and give
them what they want as far as 318 and what they propose.
VECO has somewhere -- I don't know, we're close to 300,000
employees, and VECO and its employees urge you to see what you can
do as far as getting 318 passed and through.
I really want to, again, compliment BP on coming in here and
willing to particularly build the sea-lift modules. You know, BP,
right now, they're investing money in the State when nobody else,
no other oil companies are doing that right at this time. I think
if BP comes through with this and we can go ahead and build these -
- ARCO is talking about building Colville modules up here. If
Colville is economical, they'll build them here, so, we're really
starting a new industry, and I really encourage you guys to get
this senate bill through and I know BP will come through with what
they said they'll do. I believe it.
CHAIRMAN LEMAN:
Mr. Allen, in the revisions to the lease, there is certain
language, I don't know if you've seen it, on the local hire and
local contracting and the words "lessee shall use best efforts to
contract with Alaska firms and fabricate modules in Alaska whenever
feasible" and there's a number of phrases like. Are you satisfied
that these are sufficient and there is a strong enough commitment
to (1) use Alaskan contractors and (2) that Alaska residents will
be the workers that are working for those Alaska contractors.
MR. ALLEN:
Yes, I do because BP's staking their reputation on it, and I
don't think that they want to be looked as some company that said
they were going to do one and do something else. I've done
business with them a long time, and when they commit that they're
going to do something, they've never changed directions, and worked
for them since 1974.
SENATOR HALFORD:
The question I had is -- you're familiar with the, you know,
the difference in costs here to building outside. What do you
think is a reasonable differential? If we were trying to insure
that we're actually going to get the big modules built or the sea-
lift modules and we were to ask a question as to what BP is willing
to spend, recognizing that it will cost a little bit in Alaska to
build the same modules, and if they came back and said that if it
were anything under 10 percent they'd be willing to do it, would
that cover the kind of difference that you think it would take, at
least initially, to get sea-lift modules built in Alaska?
MR. ALLEN:
Yeah, I do. And I think once we get the infrastructure here,
I think we can compete with the whole Lower 48. I don't think
after we get the infrastructure here and we really get into it, I
don't think they would have to spend any more here than they would
in the Lower 48.
SENATOR HALFORD:
A big selling point, if this goes, will be because of instate
activity, and if there's $30,000,000 in module construction and
it's really labor cost getting into the economy, that's a big help.
It's just hard to ensure that that's actually going to happen
unless there's some recognition of what the differential really is.
If its five percent, 10 percent and they're willing to work in
those kinds of numbers, that, I think, is something we need to
know.
MR. ALLEN
We ought to jump on it, you bet, it it's within the 10
percent. I think there's more than $30,000,000 there. I don't
know where you came up with the $30,000,000, but ...
SENATOR HALFORD:
Well, I think the testimony was $30,000,000 more than would
otherwise be done in the initial development. So $30,000,000
increase ...
MR. ALLEN:
I think they're being conservative. I think there will be
more than $30,000,000 spent here than if they didn't -- I think
they're being conservative. They'll spend more than they would
have normally.
SENATOR HALFORD:
I think just the question of sea-lift modules was $30,000,000
more than they would otherwise spend if they didn't reach out and
build in Alaska what they wouldn't have built in Alaska on just
purely economic grounds.
MR. ALLEN:
Oh, I see, that's probably true.
SENATOR TAYLOR:
Mr. Allen, what do you need for infrastructure? We've got
three large facilities in my district alone, all of which have
major deep water ports, docks, huge gantry cranes that are sitting
there on rail, large warehouses with cement floors and electricity
to them. I mean, I don't know what you need for infrastructure to
build this type of thing.
MR. ALLEN
Well, that's along the lines of what you need. You need that
and then you need the skilled labor to do it with, and Anchorage
and the Mat-Su Valley and Kenai have a lot of skilled labor that
have moved up here and worked on construction for a long time.
Also, you know, in a real rainy climate, you need some kind of a
building that you can put these modules under while you're
building. But all of the other stuff that you tell me, it might be
real feasible. You know, like on the slope when you build stuff up
there, you have to have camps so that your workers can live in
them. Now that's an extra expense. In Anchorage or in the Mat-Su
Valley or even in Fairbanks, you know, the people have their own
homes there, so the only thing I can see that might not be as
favorable down where you're at is the skilled labor living right
there.
SENATOR TAYLOR:
Well, I think we've got quite a few of those too ...
MR. ALLEN:
Yeah, hey, tell you what. Loggers are good hands.
SENATOR TAYLOR:
We've got a lot of people like certified welders that have
worked on the slope. We've quite a number of people that have
worked on the slope.
MR. ALLEN:
Do you? Well, we ought to look into that.
CHAIRMAN LEMAN:
You just got an invitation from Senator Taylor to tour his
district.
SENATOR FRANK:
Well, I think there's a lot of people in my community, in
Fairbanks who feel like they're skilled in terms of this type of
work. I'm hearing a lot about the modular development and I'm
hearing a lot of excitement about it, and that's good and valid.
I have the same kind of desire to see my community benefit from
local hire as well and wondering about how you think that can be
accomplished.
MR. ALLEN:
Well, I think it already it is. You know, you guys are going
to get about 42 percent of it?
SENATOR FRANK:
Hey, I like that, that sounds good.
CHAIRMAN LEMAN:
Hmm, now that you tell me that, you might start losing some
of our support.
MR. ALLEN:
We've done a study and you're probably going to get 42 percent
of the money spent on Northstar, so you guys are ...
SENATOR FRANK:
Well, that's good. You know, I think that the oil industry,
if they were to spread out of the benefits of local hire throughout
the State adequately, they would be well served by that.
MR. ALLEN:
In talking to BP, they want, if it's at all possible, to build
more in Fairbanks.
SENATOR PEARCE:
Is there a -- you may have answered this, and if you did, I
apologize -- is there some sort of a written document between you
and BP saying that you will get some of the work if this project
goes forward?
MR. ALLEN:
No, but we're an alliance partner.
SENATOR PEARCE:
What does that mean?
MR. ALLEN:
We most of their construction. It's between us and Arctic
Slope, the mechanical part. Usually Arctic Slope gets 50 percent
and we get 50 percent and then Peak gets most of the civil work,
the dirt work.
SENATOR PEARCE:
Is there a formal document that makes you an alliance partner,
or is that just a gentleman's agreement.
MR. ALLEN:
Yes, there is one, a formal document.
SENATOR PEARCE:
Is that a public document?
MR. ALLEN:
No, it's not public, but I wouldn't have qualms if you wanted
-- would you, the alliance agreement?
MR. MORGAN:
I'd need to see the agreement first.
CHAIRMAN LEMAN:
Further questions of Mr. Allen? Thanks for joining us and
thanks for standing by. I know that sometimes these committee
meetings can get tedious and I appreciate your patience.
The last person to testify today is Dave Jensen.
DAVID JENSEN, President and CEO, Arctic Slope Regional Corporation:
Thank you, Mr. Chairman. We operate principally through our
two subsidiaries: Alaska Petroleum Contractors (APC) and Houston
Contracting (HCC).
You've covered just about everything that could be covered
with a long list of comments that I had to make here, so I'd like
to shift my emphasis to a here recurring theme brought up here is
what is your reassurance to you as a principal contractor, which we
are one of the principal contractors in the alliance agreement for
the Northstar project -- what is your assurances, do you have
something in writing, are their pledges, blood documents, and so
forth? And you've heard the answers to them. I would like to
convey to you at this time that I have been in the industry for
thirty-three years at this point. In the last two years, the
entire contracting community -- and it's been a little longer than
two years now, probably three; but in the last several years the
contracting community, as a general entity, has entered into a
variety of alliance agreements and contracts with the two principle
operators on the Slope: British Petroleum and ARCO. I can tell
you with a great deal of authority that those contracts have been
well honored. And I have never been, in the prior thirty-some
years, experienced that type of and level of cooperation both in
negotiating changed conditions in terms as we run into changed
conditions with them. I have the highest degree of confidence in
our agreements with BP to fulfill what they have set forward in
their considerations for the employment of Alaska corporations and
Alaska personnel with it. It's worked well for us and we look
forward to it in a very positive fashion.
I almost, I thought I heard a comment that the Alaska hire in
Alaska corporation work might be a peripheral issue. I take a
little umbrage with that and think about that for a moment as we're
all so engrossed in net profits and royalty considerations and so
forth. And of vital importance are those folks we call Alaskans
out there today. And generating work and future work in
considerations, this particular project offers us those
opportunities as we develop a more intensified, skilled labor pool
which we need to do again as we've lost a great deal of that labor
pool over the last ten years. They've exited the State. This
gives us an opportunity for the development of a larger skilled
labor force that will allow us or put us in a position where we
don't have to import labor or certainly reduce the requirements to
import outside labor. In addition to it, you've heard the
references to developing a improved infrastructure for these
manufacturing or fabricating opportunities that we have with the
process module considerations. As we do this, this again opens the
door to the future for us again. So, I would ask you to really
look at also, as we pick apart the royalty and net profits and so
forth...
TAPE 96-40, SIDE B
MR. JENSEN:
[begins midspeech] ...aren't we all considered with our future
in developing - in developing. This project offers that
opportunity and we needn't be so caught up with at least from the
Arctic Slope point of view, contracts that become iron clad and you
promised x number of positions and dollars and so forth. We're out
of that era, we're out of that era. I know that comes as news to
a lot of us, but I can tell you that with a great deal of
confidence. I know we're pressed for time so, I'll limit my
comments to that.
CHAIRMAN LEMAN:
Senator Pearce.
SENATOR PEARCE:
Thank you. I appreciate what you're saying about contracts in
the '90s, but some of the comparisons of both alliancings -- since
I learned this weekend you're not supposed to say partnering
anymore -- and the State's ability to have surety of how that
Alaskan contractors and Alaskans. Alaskan contractors will get the
jobs and then the Alaskan contractors will hire Alaskans, I guess
its a two step process. We use, because these projects have come
up as a basis for comparison -- things like Red Dot, where the
owner, the land owner was able to force because of a very good
local hire, a very restrictive local hire clause, and also the
Title 29 alliancing with Alyeska which was just the topic of a
dinner Wednesday night where certainly your parent company was
represented along with others in the State that have alliance
partnerships. And that of course, was required under federal law.
And I think that there are, if not, quotas per se, there were
certainly some performance measures that had to be met, and that
the Department of Interior gets to actually count noses, if they so
desire. I think we have not figured out of way because of the
problems we've had with Alaska hirer and our inability to figure
out a way to write an Alaska hire amendment in the Constitution
that can stick. We're kind of trying to feel our way toward being
able to go home to our constituencies and say, "We have an iron
clad agreement that we're going to have Alaskan contractors and
we're going to have Alaskans in those jobs," because our
constituents have come to expect it because they've seen it happen
in other cases. Maybe we should ask Congress if they'd write and
then they could do it because they can do things that we can't do.
But it is a give and take, and I understand your frustration with
our wanting something iron clad, but it's something that I think
the legislators feel is necessary for us to be able to explain
taking -- well, to explain positive votes on some sort of a
negotiated deal like this. So that's not really a question, it's
how we get to our position.
MR. JENSEN:
Well, I can understand your concern, Senator Pearce, and to
come to some quantitative solution with that that we can get down
in black and white, I think you have to be so cautious that we
don't run amuck with the previous issues that we've been faced
with, and Alaskan preference, and Alaska hire, and so forth. So
when you start to couch or incorporate in a document numbers and
percentages or make more than general references to Alaska hire, we
can certainly all experience a very difficult and a long and costly
legal problem, and I think that will make it the fourth time for us
as a State to become embroiled in that again. I know it's
difficult to go back and say "Trust me." We've heard that
previously, but I can again offer you my assurances and experiences
that have just transpired over the last several months when we
began to focus on this as a team with BP and the contractors; how
we've begun to develop some conceptual frameworks of how we can
accomplish this additional fabrication, transportation of these
modules, modules now up to 2,800 tons, which is pretty unique when
you take into consideration the modules fabricated here in
Anchorage were 80, 85, 90 tons maximum. We're making quite a
quantum leap with this whole approach.
CHAIRMAN LEMAN:
On behalf of Senator Taylor and perhaps Senator Frank, can you
tell us what your distribution of employment might be throughout
the State? Senator Taylor would probably offer that a number of
people in Southeast Alaska would be interested in these jobs.
Senator Frank, of course, interested in jobs in Fairbanks, and I'm
somewhat provincial too, so ...
MR. JENSEN:
I can share with you what our current distribution is and that
vacillates with the projects that we're doing. Currently, between
APC and Houston Contracting we're a little of excess of 2,000
employees solely within the State of Alaska. Of those,
approximately 80 percent are on the North Slope working for British
Petroleum, ARCO and Alyeska, through the northern end of the
pipeline for Alyeska. The other 15 percent of those employees are
in Fairbanks and Kenai. And that shift dramatically from year to
year. To give you example, if we have a shutdown at the Mapco
refinery in Fairbanks associated with our other maintenance work
for Mapco in Fairbanks, that number balloons significantly to a
couple hundred people immediately in Fairbanks in addition to the
number of Fairbanks residents that are hired, that are working on
the slope. So when we look at, you know, a cross-section of where
people are working, that isn't so important as to where they
reside. So we have a fair number of people from the Kenai
Peninsula that are employed on the North Slope, as well as
Fairbanks and Anchorage and from the various bush communities also.
CHAIRMAN LEMAN:
I'm would just suggest that for you and for the others who are
still here and listening that it would be interesting information,
I think, for this committee and for other legislators to have
perhaps a distribution of where these people reside so others will
know if they're coming from the districts. I think that would be
something that will be useful. Mr. Allen talked about 3,000, you
talk about 2,000, and I think we can probably show that the impact
of this project impacts probably every region of the State.
MR. JENSEN:
We are in the process of doing that as we speak, Mr. Chairman.
CHAIRMAN LEMAN:
Thank you. Any further questions? Thanks for joining us.
I'll announce that we will continue this hearing of Senate
Bill 318 tomorrow starting at 10:00 a.m., and we will pursue
primarily legal issues with the Department of Law, but also we'd
like to have the Division of Oil & Gas people here available, and
I would suggest that if BP has some of your people available
because undoubtedly as we get into questions we'll probably
encroach on turf that you [indisc. -- coughing]. I expect that
that will last for two hours tomorrow.
Next, just so we can plan farther in advance, I'd expect that
we will resume hearings on this next week on Wednesday. We will
work with our schedule; we have other bills scheduled. We may need
to go to an evening meeting on Wednesday evening like at 7:30 if we
can't deal with the other bills, but we are getting stacked on some
others that we do need resolve. But I want to keep the momentum up
now that we're started.
Monday's meeting we have posted the schedule: HJR 60, SB 311,
HB 539 and HJR 58.
Any further business to come before us? If not, we are
adjourned.
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