Legislature(1995 - 1996)

04/03/1996 03:55 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                   SENATE RESOURCES COMMITTEE                                  
                         April 3, 1996                                         
                           3:55 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                                                    
  MEMBERS ABSENT                                                               
 Senator Lyman Hoffman                                                         
  OTHER MEMBERS PRESENT                                                        
 Representative Norman Rokeberg                                                
 Representative Joe Green                                                      
  COMMITTEE CALENDAR                                                           
 CS FOR HOUSE BILL NO. 357(RES)                                                
 "An Act relating to the issuance of hunting, trapping, and                    
 noncommercial fishing licenses, tags, and permits and to residency            
 for fish and game purposes; and providing for an effective date."             
 HOUSE BILL NO. 329 am                                                         
 "An Act providing for restitution to the state for the unlawful               
 taking of game."                                                              
 SENATE BILL NO. 284                                                           
 "An Act relating to the four dam pool transfer fund and the power             
 development fund."                                                            
 SENATE BILL NO. 180                                                           
 "An Act authorizing the commissioner of the Department of Natural             
 Resources to negotiate and enter into timber sale contracts that              
 provide for local manufacture of high value-added wood products;              
 and establishing an Alaska Forest Products Research and Marketing             
 Program within the Department of Commerce and Economic                        
 SENATE BILL NO. 318                                                           
 "An Act authorizing, approving, and ratifying the amendment of                
 North Star 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                                             
 HB 357 - No previous action to consider.                                      
 HB 329 - No previous action to consider.                                      
 SB 284 - See Resources minutes dated 3/6/96.                                  
 SB 180 - See Resources minutes dated 2/21/96, and 3/8/96.                     
 SB 318 -  See Resources minutes dated 3/29/96 and 3/30/96.                    
  WITNESS REGISTER                                                             
 Linda Dahl, Staff                                                             
 Representative Scott Ogan                                                     
 State Capitol Bldg.                                                           
 Juneau, AK 99801-1182                                                         
  POSITION STATEMENT:   Staff to sponsor of HB 357.                            
 Captain Richard Graham                                                        
 Division of Fish and Wildlife Protection                                      
 Department of Public Safety                                                   
 5700 E. Tudor Rd.                                                             
 Anchorage, AK 99507-1225                                                      
  POSITION STATEMENT:   Supported HB 357 and HB 329.                           
 Representative Con Bunde                                                      
 State Capitol Bldg.                                                           
 Juneau, Alaska 99801-1182                                                     
  POSITION STATEMENT:   Sponsor of HB 329.                                     
 Anthony Crupi                                                                 
 Alaska Environmental Lobby                                                    
 419 6th                                                                       
 Juneau, AK 99801                                                              
  POSITION STATEMENT:   Supported HB 329 with proposed amendments.             
 Randy Simmons                                                                 
 Alaska Industrial Development Authority                                       
 Department of Commerce and Economic Development                               
 480 W. Tudor Rd.                                                              
 Anchorage, AK 99503-6690                                                      
  POSITION STATEMENT:   Commented on SB 284.                                   
 Tom Boutin, Director                                                          
 Division of Forestry                                                          
 Department of Natural Resources                                               
 400 Willoughby Ave., 3rd Floor                                                
 Juneau, AK 99801-1724                                                         
  POSITION STATEMENT:   Supported SB 180.                                      
 Al Pagh                                                                       
 Four Star Lumber Co.                                                          
 2849 Parks Hwy.                                                               
 Fairbanks, AK 99709                                                           
  POSITION STATEMENT:   Commented on SB 180.                                   
 Phillip Tschersich                                                            
 Alaska Environmental Lobby                                                    
 419 6th                                                                       
 Juneau, AK 99801                                                              
  POSITION STATEMENT:   Commented on SB 180.                                   
 Eric Luttrell, Vice President                                                 
 British Petroleum                                                             
  POSITION STATEMENT:   Commented on SB 318.                                   
 Ken Boyd, Director                                                            
 Division of Oil and Gas                                                       
 3601 C Street, #1380                                                          
 Anchorage, AK 99503-5948                                                      
  POSITION STATEMENT:   Commented on SB 318.                                   
 Kevin Banks, Petroleum Economist                                              
 Department of Natural Resources                                               
 3601 C Street, #1380                                                          
 Anchorage, AK 99503-5921                                                      
  POSITION STATEMENT:   Commented on SB 318.                                   
 John Shively, Commissioner                                                    
 Department of Natural Resources                                               
 400 Willoughby Ave.                                                           
 Juneau, AK 99801-1724                                                         
  POSITION STATEMENT:   Commented on SB 318.                                   
  Patrick Coughlin, Deputy Director                                            
 Division of Oil and Gas                                                       
 Department of Natural Resources                                               
 3601 C Street, #1380                                                          
 Anchorage, AK 99503-5948                                                      
  POSITION STATEMENT:   Commented on SB 318.                                   
 ACTION NARRATIVE                                                              
  TAPE 96-45, SIDE A                                                           
 Number 001                                                                    
            HB 357 FISH & GAME:LICENSES & RESIDENCY                           
  CHAIRMAN LEMAN  called the Senate Resources Committee meeting to             
 order at 3:55 p.m. and announced  HB 357  to be up for consideration.         
 LINDA DAHL, Staff to Representative Scott Ogan, said HB 357                   
 simplifies the enforcement of residency requirements for hunting,             
 trapping, and non-commercial fishing licenses.  It will reduce the            
 number of non-residents who use loopholes in current State                    
 residency laws to hunt trap and fish Alaska's resources.                      
 MS. DAHL said this bill addresses the concerns of ADF&G, Department           
 of Law, and Department of Public Safety.  The definition of                   
 residency was separated into two separate subsections for                     
 clarification purposes.                                                       
 Passage of HB 357 could increase revenue annually by thousands of             
 dollars in relationship to current statistics of non-residents in             
 terms of licenses, game tags, and hunting fees for guides.                    
 SENATOR LEMAN noted the problem they have is on page 2, lines 12 -            
 16 with the definition of who is a member of the military being               
 consistent within State statutes.  MS. DAHL said they would work at           
 making it consistent.                                                         
 SENATOR LEMAN asked her to work on it until next week and bring it            
 back to the committee as a CS.                                                
 SENATOR TAYLOR asked what was the purpose for the extensive                   
 residency and domicile redefinitions within the bill.  MS. DAHL               
 explained that the phrase "permanent place of abode" has been                 
 deleted and replaced with "a person's domicile."  The two main                
 reasons for this are requiring a permanent place of abode is unduly           
 restrictive and unnecessary to prevent non-residents from obtaining           
 resident privileges in the State.  If a person is forced to move              
 from one location to another around the State due to their work               
 commitment they may not satisfy the residency requirement because             
 they have not maintained a permanent place of abode.                          
 The second reason for this change is because the term "abode" is              
 not defined in statute.  The lack of strict legal definition                  
 creates enforcement problems.  Black's Law Dictionary says that a             
 person may have two places of residence as in the city and the                
 country, but only one domicile.  Residence means living in a                  
 particular locality, but domicile means living in that locality               
 with intent to make it a fixed permanent home.  They think that               
 replacing "a permanent place of abode" with "domicile" makes it               
 clearer that the legislature intended only those who are domiciled            
 in the State are entitle to residency and licensing.                          
 SENATOR TAYLOR asked about the young people who had left the State            
 and are attending college.  MS. DAHL replied she thought they would           
 be considered residents.  SENATOR LEMAN thought the same.                     
 CAPTAIN RICHARD GRAHAM, Division of Fish and Wildlife Protection,             
 said the guidelines under regulation say that people can travel to            
 and from the State and still maintain their fish and game                     
 residency.  They look at when they are out of State and what they             
 do to maintain their residency in the State during that time frame.           
 The Board's regulations allows them to look at licenses, voter                
 registration, maintaining property, household goods, where the                
 family is physically located; and it allows them to look at whether           
 or not the person has established residency or is receiving                   
 residency privileges in another state, which is the one they look             
 at most closely.                                                              
 SENATOR LEMAN said that was consistent with their intent.                     
 CAPTAIN GRAHAM said they support the bill and he noted that they              
 added the U.S. Coast Guard to the list of military organizations to           
 which they extend certain residency and license privileges.                   
 SENATOR TAYLOR commented that he thought that requiring people to             
 register to vote to then receive the benefit of a residency                   
 classification might be violating their rights.  He asked him to              
 work with Representative Ogan regarding his concerns with                     
 university children, people who may be off on some mission or                 
 volunteer work in Vista or the Peace Corps, and congressional                 
 CAPTAIN GRAHAM asked if he wanted to expand certain job categories            
 to allow people residency privileges in another state or country as           
 well as keep their Alaska residency.  SENATOR TAYLOR said he didn't           
 intend that at all.  He didn't want to confuse the residency                  
 SENATOR LEMAN asked if anyone else wanted to testify on HB 357.  No           
 one responded and he said they would work on it and bring it up on            
 April 10.                                                                     
         HB 329 RESTITUTION FOR CERTAIN GAME VIOLATIONS                       
 SENATOR LEMAN announced  HB 329  to be up for consideration.                  
 REPRESENTATIVE BUNDE, sponsor, said HB 329 allows for some                    
 financial reimbursement to the State for our wildlife resources.              
 Current statutes have no compensation to the State for the loss of            
 the value of the wildlife resource involved in a crime.  HB 329               
 provides a schedule of restitution for wildlife violators to repay            
 as a condition of sentencing.                                                 
 SENATOR LEMAN said he hoped that they wouldn't be prosecuting in a            
 situation where a person accidentally takes an animal and notifies            
 ADF&G and then the game is donated  to charity.  REPRESENTATIVE               
 BUNDE said it was not his intention to make problems for people who           
 make reasonable mistakes and he thought that was covered with the             
 discretion of the arresting officer and certainly with the                    
 discretion of the prosecutor as to whether it's a reasonable case             
 or not.  Also the bill says "may be ordered to pay restitution."              
 The judge also has discretion.                                                
 SENATOR TAYLOR gave some examples of people he thought had been               
 wrongfully prosecuted and he thought these instances were not rare            
 and could be found in every community across the State.  He thought           
 enforcement people frequently got overzealous in their efforts.               
 SENATOR LEMAN asked if the law differentiates between taking game             
 knowingly and unknowingly.  REPRESENTATIVE BUNDE said that                    
 ignorance is not an excuse and that applies in the law.                       
 CAPTAIN GRAHAM said the Division of Fish and Wildlife Protection              
 supports this bill.  He said they do have two classifications of              
 crimes, a misdemeanor which requires them to prove that a person              
 knowingly violated the law.  The penalties are higher and there is            
 jail time.  Then there is the strict liability regulation where               
 they do not have to consider the knowledge of the violator and the            
 penalties are substantially less and include no jail time.                    
 SENATOR LEMAN said the intent of the bill was to get restitution to           
 the State for the animals illegally taken.                                    
  TAPE 96-45, SIDE B                                                           
 Number 580                                                                    
 SENATOR LEMAN said it was the intent that the penalty isn't imposed           
 until after the criminal conviction is received and they would have           
 to see if additional language would be needed.                                
 REPRESENTATIVE ROKEBERG said he was trying to get to the worst case           
 violators where knowledge would be a factor and asked if the                  
 verbiage that he sent them would cover it.  CAPTAIN GRAHAM replied            
 that it wouldn't, but it would be an all encompassing sentence they           
 sent simply restricting it to fish and game laws.                             
 ANTHONY CRUPI, Alaska Environmental Lobby, said they support HB 329           
 with the proposed amendment because it provides restitution to the            
 State for illegal taking of its resources and discourages poaching.           
 He suggested putting a more equal value on Alaska's predators                 
 because they are an essential part of the ecosystem structure.                
 SENATOR LEMAN asked if he thought it was inappropriate to apply               
 these penalties to someone who inadvertently killed a moose.  MR.             
 CRUPI said he agreed with him and he thought Representative Bunde             
 had done a good job.                                                          
 SENATOR LEMAN thanked everyone for their help and said they would             
 work on the CS and pass it out on next Wednesday.                             
          SB 284 FOUR DAM POOL: RELATED FUNDS & BONDS                         
 SENATOR LEMAN announced  SB 284  to be up for consideration                   
 RANDY SIMMONS, AIDA, said he was available to answer questions.  He           
 said his letter addressed Senator Halford's concern with the                  
 legality of entering into an agreement and they sent the committee            
 six different alternatives showing the cost and annual debt service           
 payment over different scenarios.                                             
 SENATOR LEMAN said he agreed with him that a maximum 10-year term             
 with a one year payment deferral would be the best alternative.               
 MR. SIMMONS replied that they have no reason to want to go longer             
 than 10 years.  The only concern he has is that a lot of this is              
 market driven.  He said they could report to Legislative Budget and           
 Audit, but they would like to have the flexibility.                           
 SENATOR TAYLOR said the Four Dam Pool group indicated they wanted             
 no term longer than eight years.  He didn't know what triggering              
 device would make certain that divestiture actually occurs other              
 than to leave the hammer of self help in the hands of the people              
 who would need it for the purposes of maintaining and repairing               
 their facilities. He said he would like to see something in there             
 that gives comfort to the Four Dam Pool communities that if the               
 State does not act in good faith and does attempt to just delay               
 this divestiture discussion, they will once again have those self             
 help rights.                                                                  
 MR. SIMMONS responded that this bill does allow them to exercise              
 their self help right for the amount that is not being used for the           
 debt service payment.  Without the utilities agreeing that the                
 amount that needs to be set aside for the payment of the bond, they           
 would probably not be able to sell the bonds.                                 
 MR. SIMMONS said the utilities requested to go back to the table              
 for further negotiations and AIDA agreed.  The utilities actually             
 asked to have the divestiture negotiations be put aside.  Also the            
 term of the debt, whatever it may be, does not affect the utility             
 repairs at all.  It may affect the citizens of Alaska, however.               
 They have had discussions about the length of the bond.  In those             
 discussions they had to have a shorter term.  They signed an                  
 agreement, though, that allowed the term to be anywhere up to, but            
 no more than 25 years.  Some members of the utility wanted a 25               
 year term because they felt if they actually did the divestiture              
 they might want to reserve the bonds.                                         
 They agree that the shorter time was best.  Before they were to               
 float any bonds, members of the utilities will be consulted as part           
 of the agreement.                                                             
 SENATOR TAYLOR said the agreement is centered around taking away              
 their self help right.  The only thing he heard from members was              
 seven to eight years was plenty and they wanted to get it paid off            
 quickly.  There is an impact on the rate payer to the extent that             
 we take money out of the Four Dam Pool stream and dedicate those              
 monies to the bond reimbursement.  Those monies are not available             
 to go back into the Four Dam Pool Transfer Fund (Southeast Energy             
 Fund).  He wanted to see divestiture expedited or he wanted some              
 assurances that divestiture would occur or this legislation goes              
 MR. SIMMONS responded that the problem with waiting for divestiture           
 means that the repairs won't happen this year because there are a             
 lot of property transfers that have to take place which would take            
 from 12 to 18 months during which nothing could be done.                      
 SENATOR TAYLOR said that was not correct because even without a               
 bill, self help is still available giving them $11 million worth of           
 resources which is more than they are intending to put forward in             
 this construction season on the repairs.  They could exercise their           
 self help clause and do the repairs.                                          
 MR. SIMMONS said with bonds they would have most of the repairs               
 done this construction season.  With self help they would have to             
 do the repairs over a two to three year period.                               
 SENATOR TAYLOR said he wanted to make sure that all alternatives              
 were considered including power cost equalization.                            
 Number 212                                                                    
 SENATOR TAYLOR asked if the divestiture plan they have provides               
 funding for PCE out of the income stream they receive?  MR. SIMMONS           
 said it didn't; and that is a decision made by the Governor and the           
 MR. SIMMONS said that the State was willing to go back to the table           
 and negotiate.                                                                
 SENATOR TAYLOR said he had to see something that would show him               
 that closure will occur within this process in a given period of              
 time.  He wanted it to be fully understood that at the end of the             
 time if divestiture does not occur that the full opportunity of               
 self help comes in.                                                           
 MR. SIMMONS said he wanted to make it clear that they are not                 
 taking the self help right away from the utilities.  All they want            
 the utilities to do is to limit their right to the amount of bond             
 payments only.  They still have their self help right up to $7                
 million per year.                                                             
 SENATOR LEMAN said he wanted to work on amendments to the bill                
 before moving it from committee.                                              
           SB 180 VALUE-ADDED TIMBER SALES; MARKETING                         
 Number 80                                                                     
 SENATOR LEMAN announced  SB 180  to be up for consideration.                  
 TOM BOUTIN, Director, Division of Forestry, urged the committee to            
 pass this bill.  It was requested by some small mill operators both           
 in the Interior and Southeast.  It's a tool they don't now have and           
 there are some situations now up in the Tanana Valley where some              
 people have mills and want to add equipment so they can market                
 lumber in Fairbanks.                                                          
 MR. BOUTIN said in the past 12 months they have offered more timber           
 than they have offered in any two years in the past decade.  At the           
 same time they did a record amount of reforestation and did a                 
 record number of Forest Practices inspections.  They offered 27               
 million of bark beetle kill timber on the Kenai which have been               
 sold.  They initiated a timber sale program for the Mental Health             
 Trust Unit.  There is a timber sale in the Copper River area.                 
  TAPE 96-46, SIDE A                                                           
 Number 001                                                                    
 MR. BOUTIN said that the classification of land has to be taken               
 into account with the use of State land.  A classification process            
 must be followed for every timber sale and it hasn't been                     
 prohibitive.  It protects the State so it doesn't get too far ahead           
 of the public in offering timber sales.                                       
 SENATOR TAYLOR said he was concerned that while it may not be an              
 impediment in some areas that we are going to be making forestry              
 decisions based on pollsters and politicians and not what's the               
 greatest benefit to the people of Alaska and to the forest itself.            
 He was also concerned that enough timber is not being offered,                
 especially of diseased trees.                                                 
 MR. BOUTIN said the Division of Forestry has offered more beetle              
 kill timber in the last 18 months than all other public owners put            
 SENATOR TAYLOR encouraged him to make additional recommendations              
 for specific areas as a professional so the legislature could                 
 assist him if they could.  MR. BOUTIN replied that there are things           
 in the bill that don't bring an impediment or a cost to the way               
 they do business, but they might arguably give one more piece of              
 assurance to the part of the public that isn't sure about what they           
 are doing and he thought that was good value.                                 
 SENATOR FRANK said he supported this bill because he hoped the                
 Governor would become more comfortable with responsible timber                
 harvest.  He thought that even though the bill is modest, that if             
 it doesn't pass, the people who depend on the forest who could be             
 helped by this bill won't be helped at all.  He thought that only             
 through the process of experience will the harvest ever be                    
 AL PAGH said he and his son own and operated the Four Star Lumber             
 Company.  He is also chairman of the Interior Alaska Forest                   
 Association.  On page 9, line 1 a subsidy reduction is mentioned              
 and he said he didn't know of anyone in the logging industry                  
 asking for a subsidy.  He said they need a more reliable long term            
 supply of lumber and most importantly they need a market for hard             
 woods and pulp logs.                                                          
 On page 2, line 7, there is a limit of two contracts per year per             
 region for three years for up to 10 million board feet, but the               
 State Constitution states that any renewable resource be managed on           
 a sustained yield basis.                                                      
 Page 3, line 26 he had a concern [the recording was indistinct at             
 this point].  On page 4, line 4, giving the Commissioner the power            
 to cancel a contract if it conflicts with a Forest Land Use Plan,             
 he said he didn't know of anyone who would make an investment of              
 any size with a condition like that.                                          
 On page 4, line 15 - a purchaser may not be a party to more than              
 one contract under this section at any one time - would not allow             
 cooperative efforts.                                                          
 He recommended that the products list be deleted.  The priority               
 should go using logs that are currently valueless.                            
 Number 412                                                                    
 SENATOR TAYLOR asked him to send his comments to the committee.               
 MR. PAGH said he already sent them letters.                                   
 SENATOR TAYLOR asked why chipping for pulp purposes wouldn't be               
 adequate under the current regulations in Fairbanks.  MR. BOUTIN              
 explained that they had four different proposed regulations on                
 January 4.  The ones Mr. Pagh is talking about were regulations               
 pursuant to HB 121 which exempts salvage sales from the requirement           
 that they be in the five year schedule for the two prior years.               
 There had been talk and understandings that there would be                    
 regulations written and they talked with people in the industry and           
 anyone they could think of to see what kind of regulations they               
 could come up with for HB 121.  They decided if timber was going to           
 deteriorate within the next two years such that it would no longer            
 be suitable for lumber or veneer, that would qualify as a salvage             
 sale and hence not have to be in the five-year schedule. So much of           
 the State's timber is only pulp quality; never was lumber or veneer           
 quality and perhaps never will be.  It would seem like including              
 pulp wood in the regulation would be reasonable, but if you put in            
 pulp wood, that's the whole spectrum.  So they might not have a               
 They have also decided to drop the debt to equity ratio for changes           
 in the Schnabel law.  They also got rid of the 50-year or older               
 preference for beach log salvage, MR. BOUTIN said.  There is an               
 exemption in the Forest Practices Act to exempt salvage sales from            
 reforestation.  That applies to all ownerships, but the State, as             
 a matter of policy, reforests all of its salvage sales.                       
 Private landowners asked the Division what is a salvage sale for              
 purposes of exempting them from reforestation.  So they are going             
 back to the drawing board on that.  Yet it looks too complicated to           
 everyone and there weren't a lot of comments from the environmental           
 community so they modified that regulation.  They haven't received            
 advice, yet, as to whether they go out to the public again or                 
 whether they take the modifications and talk to the people they               
 MR. PAGH commented that it didn't make any difference as long as              
 there was a use for the lumber and he didn't know why it had to go            
 through a five year plan to get on a salvage sale.                            
 SENATOR TAYLOR said the legislature's intent was to get value out             
 of the forest resource whatever the product was.  MR. BOUTIN is               
 working within the directive to make sure timber can't be used for            
 any other purpose before it is offered at a salvage sale.  He would           
 encourage the Department to remove the regulation concerning                  
 MR. BOUTIN commented that the public relies on the five-year                  
 schedules as being the one place - and it is the only place - where           
 they can know they are looking at our entire timber sale program              
 for that area.  They can see all the sales and get an idea of all             
 the impact.  The public needs to be assured that the five-year                
 schedule shows all the sales, that the State is not playing around.           
 Number 550                                                                    
 SENATOR TAYLOR asked Mr. Pagh if he heard there would be a change             
 in the definition so that logs salvaged under the salvage sales               
 could be put into chips for pulp.  MR. PAGH said he heard about the           
 changes in the regulations they want to put forth.  MR. BOUTIN                
 explained that rather than putting pulp in, they are talking about            
 just not having regulations for AS38.05.117.                                  
 PHILLIP TSCHERSICH, Alaska Environmental Lobby, said they support             
 the concepts behind the original legislation, but they have                   
 concerns with the present form.  The changes made in the CS ignore            
 the recommendations of the Board of Forestry and depart from the              
 original intent of the bill which is to establish and sustain the             
 operation of small scale, local, timber processing that would                 
 produce high value added finished wood products in order to                   
 maximize the opportunities for jobs and minimize the impact on fish           
 and wildlife habitat.                                                         
 Their major concerns are that 10 years is too long for negotiated             
 contract limits.  Resource policy decisions rather than protracted            
 contract obligations should drive forest management.  Value added             
 operators in the Interior have indicated that they need                       
 approximately a three year guaranteed supply of timber in order to            
 acquire loans.                                                                
 A large portion of the trees should remain in state for processing.           
 Allowing the Commissioner to stipulate how much timber undergoes              
 high value added processing allows leeway above and beyond the                
 original language which required at least 50 percent of the timber            
 should undergo high value added processing in state.                          
 Some products were added to the high value added products that                
 should qualify.  They also feel that 10 million board feet is too             
 large for a negotiated contract.  The Board of Forestry recommended           
 5 million board feet per year.  Also, logging levels need to be               
 determined on a specific regional basis.  There should be a limit             
 on the number of contracts per region.                                        
 In conclusion, MR. TSCHERSICH said, they recommend readopting the             
 original SB 180.                                                              
 TAPE 96-46, SIDE B                                                            
 Number 580                                                                    
 SENATOR TAYLOR asked what information he had to reach a conclusion            
 that pulp is not a high value added product.  MR. TSCHERSICH                  
 replied that the amount of processing required to produce pulp is             
 not in keeping with the original intent of the bill as given by the           
 Governor that high value added products would be finished products            
 such as cabinetry.  He thought that while using pulp for medical              
 purposes was admirable, it did not contribute much to the dollar              
 SENATOR TAYLOR said it takes far fewer people to cut down a tree,             
 dry it, mill it, and make a violin out of it.  To take the same               
 tree and run it through the process so it turns into a rayon dress            
 or a product that 10,000 lbs. is needed every time it's used takes            
 a tremendous amount of capital and human investment.  There is no             
 higher amount of labor intensity that you can put into a product              
 than making dissolving cellulose pulp out of it.                              
 MR. TSCHERSICH replied that if rayon production was an industry in            
 the State and if the Challenger did launch out of the State of                
 Alaska, if these industries were in place and employing Alaskans,             
 they would see this in a different lite.  As it is, pulp products             
 are exported far before any downstream manufacturing would take               
 place.  Therefore, in state processing is still a low value                   
 SENATOR TAYLOR said the world price on pulp right, up until a few             
 months ago, is the highest it's ever been.  And the log you use for           
 pulp, you couldn't make a violin out of; it isn't good for anything           
 else.  The trees he's talking about are bug kill and burned trees,            
 not pristine forest.  He thinks that pulp is high value.                      
 MR. TSCHERSICH said SB 180 has its merit in trying to develop high            
 value added product industries in the Interior and they are                   
 supporting that aspect of the legislation.                                    
 SENATOR TAYLOR commented that the only concept being discussed in             
 this legislation is the word salvage.  The first and primary                  
 objective is that the people of the State need to salvage those               
 resources that have been decimated either by fire or by bug                   
 infestation.  If it's not salvaged, it's lost for all of us.                  
 SENATOR LEMAN announced a recess at 6:20 p.m.                                 
  TAPE 96-47, SIDE A                                                           
 SENATOR LEMAN called the meeting back to order at 7:07 p.m.                   
          SB 318 NORTH STAR OIL & GAS LEASE AMENDMENT                         
  CHAIRMAN LEMAN:                                                              
  Let's call the Resources Committee back to order and we're                   
 going to take up SB 318, the Northstar agreement.  As I announced             
 earlier, tonight's meeting, which I expect to be completed by 9:00,           
 will be for British Petroleum to present the Northstar Development            
 Plan and schedules and then any questions that we may have on the             
 materials that we distributed that BP provided and if we have time            
 for any follow up questions from the first two meetings we had.               
  I understand, Mr. Luttrell, that you're the man of the hour.                 
 Please join us.  Ready, please proceed.  Representative Green, if             
 you would like to join us at the table, take your chance at any of            
 these places and if the members show up, we're just going to ask              
 you shift to another spot.  But I think there's a good chance that            
 all of us who will be attending are in the room and you're welcome            
 to join us at our table and you can have a cookie.                            
  SENATOR PEARCE:                                                              
  He can come to the table if he quits calling us the dark side                
 on the floor of the House - a momentary lapse.                                
  CHAIRMAN LEMAN:                                                              
  The dark side, did you really say that?                                      
  REPRESENTATIVE GREEN:                                                        
  It was a momentary lapse, because it's vernacular, but it                    
 meant no disrespect.                                                          
  ERIC LUTTRELL, Vice President, Exploration and Development, BP:              
  Mr. Chairman, my name is Eric Luttrell and I'm the Vice                      
 President of Exploration and Development for BP and I'm happy to be           
 here tonight to talk about our plans for the development of                   
 Northstar.  You have in front of you a series of slides that we               
 might walk through just to give you a sense of what we plan to do             
 to bring Northstar to production.                                             
  Just a little bit by way of background - on the first display,               
 there, it talks about the project itself.  As we've discussed                 
 before, Northstar is a fully appraised field.  There are four wells           
 that are capable of production on the structure.  We believe the              
 field has about 130 million barrels of reserves.  We see a very               
 high well rates, well in the range of 7,000 barrels per day of high           
 quality oil, the highest quality oil on the North Slope.                      
  Northstar is a field that lies about six miles north of                      
 Prudhoe Bay. As you know, BP has about 98 percent of this field               
 with 2 percent belonging to Murphy Oil and Gas and a partial                  
 interest in one of the federal leases.                                        
  You know a lot about the State lease terms which are 20                      
 percent and the federal lease terms are 1/6 royalties.                        
  The next line talks about the existing plan of development                   
 between BP and the Department of Natural Resources - an agreement             
 which we reached last April, a three year plan and development in             
 which we were obligated to do several things.  But the three key              
 items in that plan of development are a 3-D seismic program to be             
 acquired this summer, an updated reservoir description by the end             
 of this year, and detailed development scenarios by 1998.  The 3-D            
 seismic, we're about to let the contract.  We've picked a                     
 contractor.  We're in negotiation with them.  It's something which            
 we believe is absolutely essential for the development of the                 
 field.  It's not essential for the appraisal of the field.  We want           
 to make sure we pick our development locations properly.  The                 
 reservoir description is in progress and we will have no problem              
 completing it.  Development scenarios are also in progress and will           
 probably be done long before the required time.  We fully expect to           
 meet the requirements of the plan of development for the Northstar            
 joint federal/State unit.                                                     
  In the line of the development scenarios, we have looked at a                
 large number of scenarios with our partners, VECO Corporation and             
 Natchiq Corporation which is a subsidiary of ASRC and we now                  
 visualize a stand alone facility located on an expanded Seal Island           
 which is the island in the east side of the field with a field life           
 on the order of 15 years with a plateau rate of about 50,000                  
 barrels a day and somewhere on the order of 25 wells.  That's                 
 really dependent upon how successful they are in maintaining                  
 pressure.  Certainly not all of those wells will be production                
 wells.  Some of them will be pressure maintenance wells.                      
  If you skip over one slide for just a minute and look at a                   
 picture of the facilities, I apologize for the quality of that                
 picture.  I thought this slide was in our Juneau office, but it               
 wasn't so I had it faxed down, but I think you can get a picture of           
 what we see the island looking like - a relatively square island.             
 The bottom side is drilling facilities, the ball mill is where                
 would grind the materials for reinjection of the cuttings.  In the            
 middle of the island would be the processing facilities where we              
 would separate the oil and the gas and the water.  Off to the                 
 middle of the side there's a dock for us to load and unload                   
 material.  On the top there would be fuel storage on the left and             
 quarters on the right of the top and other shops that have living             
 areas.  The helipad is  on the top of the living quarters.  I also            
 see a flare to the lower left and the crude oil line to onshore               
 coming off on the right.  The point of the slide is to say                    
 basically we have a fairly mature idea of what we think the island            
 is going to look like and what kind of facilities we expect to put            
 on there, how we have to manage the island.  This is a product of             
 our conceptual engineering phase which you will see later on and              
 it's now complete.  And what we're doing now is preliminary                   
 engineering which is basically trying to draw all the processing              
 facilities in a way that we can actually build them in an effective           
  Then if you go on to the previous slide, you'll see a picture                
 of how we see the expenditures and how we see the production.  This           
 is a very typical slide that we use inside of BP.  We talk about              
 when are we going to spend money, how much are we going to spend,             
 and then what are we going to see in terms of a production profile.           
 You see BP intends to spend upward of $100 million in '97 and '98             
 and somewhat less in 1999 to put in the pipeline, to build the                
 facilities, and do the drilling, extending on into 2001.  From that           
 we expect to see a fairly quick ramp up to about 50,000 barrels a             
 day starting early in 1999, a plateau in about two to two and a               
 half, three years, and then a long decline lasting out into the               
 year 2011 or 2012.  It's hard to predict at this point in time                
 exactly when it would take place.                                             
  Now, in order to get to that point, the next slide talks about               
 our development schedule and it has the key components that we're             
 managing as we go to development of this field.  Obviously the                
 first things that's important to us are the regulatory permits and            
 the key permit there actually is the EIS study.  That is ongoing as           
 we speak.  We hope that will be done just after the first of the              
 year.  That will help us to go forward effectively.                           
  The next line is the conceptual engineering or design process.               
 That was the process that we did with our Alaskan partners of VECO            
 and Natchiq.  That is now complete.                                           
  The next item says Exco approval as basically some of you may                
 know, I did go over to London early in March and got approval from            
 BP to go forward with this project subject to legislative approval.           
 It shows the legislative agreement, the process we're currently in.           
 We're also currently in the process of preliminary engineering                
 where we're doing the detailed drawings that will allow us to                 
 effectively cost this project out at a higher quality level.  That            
 will get us to the July/August time frame - what we call a class 2            
 cost estimate.  With that class 2 cost estimate I can now go to BP            
 and get the official sanction which is shown as the next item                 
  You can see the seismic program showing there in August,                     
 September, October of 1996 and a similar block of time in 1997.               
 Because of the ice conditions in the Northstar area, we have to               
 plan to do this over two seasons because we might not be able to              
 get the seismic this year.  We will have a contract...we should be            
 shooting seismic somewhere on the slope this year in the open                 
 water.  It shows there two seasons because it might take us two               
 seasons to get done.                                                          
  The next line talks about fabrication and construction.  The                 
 key short term objective there is the modification of the island              
 which we plan to do next spring.  And that is the critical path               
 right now.  If we fail to get the EIS permits in time, that will              
 affect our ability to do that.  We have been working the                      
 contingency plans, but there actually is a bottleneck in the system           
 is the island construction in the spring of 1997.  We will also be            
 ordering equipment and begin the fabrication of the modules here in           
 early 1997 and that will extend across into 1998.  You would see a            
 loadout in the summer of 1998 and taking the materials to the Slope           
 and installation on the island.  So that fabrication, construction,           
 installation is that long bar there.                                          
  Once the island is armored, then we can actually put the                     
 drilling rig on there which we would intend to do in the summer of            
 1997 and begin to predrill the field.  And the drilling obviously             
 goes out into the 2000s.                                                      
  We show here a startup by this aggressive schedule early in                  
 1999.  I expect to have a somewhat better date on the start up by             
 the time we get the sanction this fall, but it's certainly that               
 kind of timing we would see - maybe as early as the very late 1998            
 which we currently show right at that time window.                            
  Looking at that project, then, on the next line we look at the               
 costs associated with that and the costs are now broken into                  
 several components - the cost of the island, the cost of the                  
 pipeline, the cost of the facilities, the cost of the engineering,            
 drilling, and sort of everything else lumped into a pile.                     
  You see there a total cost for our current view of Northstar                 
 of about $350 million in the development phase and how much money             
 is being spent on buying imported materials, things like pipe,                
 compressors, and valves, etc. and how much is being done,                     
 contractor costs, and you can see of the contractor costs the                 
 amount of that is being placed in Alaska in aggregate we think the            
 contractor component is about 70 - 75 percent.  So this is a                  
 project which is dominantly Alaskan.                                          
  You can see on the next page a sense of the Alaskan content.                 
 We think the Alaska spend is going to be somewhere between $210 -             
 $250 million out of the $350 and that gets you a number of 60 or 65           
 percent of the total program or 80 or 85 percent, if you exclude              
 the inherently imported materials.                                            
  Alaska fabrication is actually an important part to us.  My                  
 staff and their partners and we have now expanded our lines.  We              
 now have AIC in our lines and our engineering contractor is really            
 working in our office in Anchorage.  There's about 18 of them                 
 working there and there's some other contract engineering work                
 being done elsewhere.  Working effectively to design the facilities           
 so they can be efficiently and effectively fabricated in the State            
 of Alaska.  Our commitment as part of the agreement with DNR is to            
 substantially increase the content of Alaska fabrication.  In the             
 past we have built a number of small modules, truckable modules in            
 the State of Alaska, and this will be the first time that any                 
 company has built large modules and aggregated them into                      
 megamodules in the State of Alaska.                                           
  Basically that slide simply says that we will do that and we                 
 will find a way to do that and it will actually have a pretty big             
 effect on Alaska industry.  My conversations with our partners,               
 VECO and Natchiq suggest they believe when we are done with this,             
 they will be able to prove to all Alaskans that they can                      
 effectively compete for the building of modules and so we're                  
 actually developing a business here which could have considerable             
  The last slide says that as a requirement that commitment be                 
 made for a port assembly yard.  I think that was a concern we had             
 several weeks ago.  We now think that concern is lesser.  We're               
 pretty sure we can assemble this in the port.  We haven't actually            
 got all the contracts and agreements, but we're pretty sure it can            
 be done.  Our main concern now is to make sure the fabrication                
 facilities in the City of Anchorage can handle both Northstar and             
 the other material they would be pushing through those facilities             
 in '97 and '98.  And that's sort of shown on the last slide because           
 the two fabrication facilities in Anchorage have been working at              
 1,000 - 1,200 tons a year at an ongoing basis building modules for            
 the oil industry and you can see that Northstar is going to be a              
 substantial change to that.  And it's something we're managing with           
 our contractors to make sure we don't get ourselves in the                    
 situation where they can't deliver on time and we get ourselves in            
 a time box.  It's a process which is being effectively managed.               
  So that's a sense of where we are.  I don't know what else the               
 Committee would like to know about our development plans.  I'm here           
 to answer any questions.                                                      
  CHAIRMAN LEMAN:                                                              
  I'd like to start the questions tonight by going through what                
 you've just done.  I have a number of questions I think would be              
 good to help clarify.  Let's stick with the presentation first and            
 then go back to some general questions and if we have time, some              
 follow ups on the other. I want to end at nine and then if we need            
 to, we'll pick up at another time.                                            
  Representative Rokeberg, Chairman of the House Oil and Gas                   
 Committee, you're welcome to join us at the table.  If you'd like             
 to sit back there, you're welcome to and there are cookies or                 
 brownies that you can have or offer them to others.  Just trying to           
 make you comfortable.                                                         
  Go back to the very first chart where it says project                        
 description.  This term, fully appraised, is that a term of art,              
 what does it mean, in terms of confidence limits.  Does it mean 90            
 - 95 percent?                                                                 
  MR. LUTTRELL:                                                                
  This is a term we would use inside BP which simply says we've                
 done enough work in the subsurface that we know how big the field             
 is and we would not believe any more work would need to be done in            
 terms of drilling wells or shooting seismic.                                  
 CHAIRMAN LEMAN:                                                               
  In terms of confidence limits you don't place a number on it?                
  MR. LUTTRELL:                                                                
  No, there is no number we would place on it.                                 
  CHAIRMAN LEMAN:                                                              
  How does this well productivity of 7,000 barrels a day per                   
 well compare with a typical well at Endicott?                                 
  MR. LUTTRELL:                                                                
  It's substantially better than a typical well at Endicott.  I                
 don't know the numbers, but I would thing the yearly well's were in           
 the 3 - 4,000 range.                                                          
  CHAIRMAN LEMAN:                                                              
  That's what I was remembering something around 4,000.                        
  MR. LUTTRELL:                                                                
  This is actually not quite as good as Prudhoe, but I think the               
 wells are probably capable of producing like some of the early                
 Prudhoe wells, but we will choke them back to manage the reservoir            
 pressure.  So I think those wells will be capable of 10 or 15 when            
 you get started, but we won't pull at that rate.                              
  CHAIRMAN LEMAN:                                                              
  Are there any more questions from others on that first page?                 
 Second page.                                                                  
  SENATOR FRANK:                                                               
  Just let me ask a question.  Does that mean there won't be an                
 ELF applied?                                                                  
  MR. LUTTRELL:                                                                
  There will be an ELF.  In fact the severance rate's going to                 
 be over 8 percent in the beginning part of the field because of the           
 high flow rates of the wells.                                                 
  SENATOR FRANK:                                                               
  I thought the ELF limited the tax as opposed ...it depends on                
 how you look at it, I suppose.                                                
  MR. LUTTRELL:                                                                
  There will be a severance tax on this field is the simple way                
 of looking at it.                                                             
  CHAIRMAN LEMAN:                                                              
  It would be higher than that if ELF had been one.                            
  MR. LUTTRELL:                                                                
  I think the ELF number is actually .7 as I recall the number.                
  SENATOR FRANK:                                                               
  What's severance tax - 12 or 15.                                             
  MR. LUTTRELL:                                                                
  SENATOR FRANK:                                                               
  So these are not, just to digress for a second to refresh my                 
 memory, what would a well have to be, both a well and field, isn't            
  MR. LUTTRELL:                                                                
  It's a well and field number so we're paying about as much as                
 you can on a per well basis, but we're not paying on a field basis            
 because it's affecting very large fields and very high flow rates.            
  CHAIRMAN LEMAN:                                                              
  That exponential is at 150,000, if you remember.  The                        
 secondary exponent - you remember how to solve that?                          
  SENATOR FRANK:                                                               
  I tried to work it out one time and I thought I understood it,               
 but I certainly....                                                           
  MR. LUTTRELL:                                                                
  We've all tried to work it out one time and thought we                       
 understood it.                                                                
  CHAIRMAN LEMAN:                                                              
  Next page - plan and development.  Under the key items in                    
 planning and development - updated reservoir description.  If                 
 you're not drilling additional wells, what are you doing to update            
 the reservoir description.  What's the basis for this updating.               
  MR. LUTTRELL:                                                                
  Mr. Chairman, when we acquired the field we didn't know very                 
 much about it.  We actually got a bunch of data in a box from                 
 Amerada and from Shell and we felt it was important for us to do a            
 lot of work studying that from both a geoscience point of view and            
 a reservoir engineering point of view and that has actually evolved           
 with time.  So we now have a pretty good idea with a high level of            
 confidence what the reserves are.  When we bought it, we                      
 effectively only had a sort of a low level quality estimate of the            
 reserves.  This is actually work we would normally do to ensure we            
 have reduced the uncertainty on reserves and production as much as            
  CHAIRMAN LEMAN:                                                              
  It is pretty much office work?                                               
  MR. LUTTRELL:                                                                
  It is office work, yes.                                                      
  CHAIRMAN LEMAN:                                                              
  The next part, the detailed development scenarios by first                   
 quarter '98.  That's two years from now.  You said the field is               
 delineated.  What is it that requires almost two more years to                
  MR. LUTTRELL:                                                                
  Now I have to think back as to why the agreement was made that               
 way.  Basically what we're trying to do is say we agree by that               
 time to have reviewed how we would develop it and convey those                
 scenarios to the State.  What you see in the following pieces of              
 paper essentially, we've already gone through that process and now            
 decided on the most effective way to develop.  When we have to do             
 it effectively, that job is now done.                                         
  CHAIRMAN LEMAN:                                                              
  Are there other questions on this page?  Development plans.                  
 Spent oil facility.  Assume based on this and what I see on the, I            
 guess, the way you presented it would have been on the next slide,            
 but on mine it's two more down, suggest that there would be a stand           
 alone facility.  Do you mean that you will process oil and gas on             
  MR. LUTTRELL:                                                                
  That's correct.                                                              
  CHAIRMAN LEMAN:                                                              
  What if you decide to go to, what would it be, Prudhoe Bay, I                
 guess, and pipe in and process there.  How would that affect the              
  MR. LUTTRELL:                                                                
  We carried early on scenarios which allowed us to decide                     
 economically whether it would be feasible to go to Prudhoe Bay, to            
 Endicott, to Milne Point, and to Lisborne.  About three months ago            
 we chose to eliminate Milne Point, Endicott, and Lisborne and                 
 entered into a conversation with Prudhoe Bay about the possibility            
 of them processing for us.  The amount of money you save is                   
 relatively modest, and therefore, the amount of processing fee we             
 could pay to make the economics similar is quite small.  We are now           
 convinced we will not be able to reach agreement with Prudhoe Bay,            
 a number they would agree to and process at Prudhoe Bay.  So we're            
 actually now planning to do a stand alone.  Does that answer your             
  CHAIRMAN LEMAN:                                                              
  Yeah, I guess, just knowing that you've looked at it.  I just                
 wanted to know if there was going to be any substantial difference            
 and if so, how is that going to affect the economics of ... you               
 know, you've got to look at costs when you're coming up with your             
 deal, and if it's a substantial difference, then I would like to              
 know what that would be.                                                      
  MR. LUTTRELL:                                                                
  As I said a moment ago, Mr. Chairman, the cost difference is                 
 actually modest.  And that's simply says it drives down the fee you           
 can afford to pay to make it economically equal, so...is that                 
 helping or not?                                                               
  CHAIRMAN LEMAN:                                                              
  Just before you ask that question, Gene and Mark, you're                     
 welcome to come to the table.  This space is for anybody who has              
 not called the Senate the dark side, or if they have, they've                 
 apologized.  Representative Green has apologized.                             
  MR. LUTTRELL:                                                                
  Let me answer on one more part of that question.  We actually                
 needed to make that decision relatively early, because unless you             
 make that part of your development plan as we go into preliminary             
 engineering, we simply have to decide.  So we informed Prudhoe Bay            
 that we did a decision by April 1, and we have, so far, not got               
 into an agreement with them, so it's moving on.                               
  CHAIRMAN LEMAN:                                                              
  And there will become a time very soon when it's going to be                 
 too late to turn back on that one.                                            
  Representative Green.                                                        
  REPRESENTATIVE GREEN:                                                        
  Thank you, Mr. Chairman.  Eric, does that mean that you will                 
 actually pipeline to PS 1, or will you join some other pipeline if            
 the oil is pipeline quality.                                                  
  MR. LUTTRELL:                                                                
  It's my understanding, Representative Green, is that we will                 
 take the oil by pipeline to either Westock or Point Storkelson, put           
 it on VSMs, and then ultimately get into the VSM parts of PBU, but            
 go to PS 1.  It would simply go across the area of Prudhoe Bay, but           
 not be part of their infrastructure.                                          
  CHAIRMAN LEMAN:                                                              
  Further questions on this slide?  Okay, production and capital               
 expenditures.  We went through this -- it appeared some                       
 inconsistencies from what's on here with some of the other charts             
 in terms of some of the timings, and I just wanted to point out               
 some of these things.  If you look at the time lines, up at the top           
 it says development schedules -- a couple of more sheets in -- you            
 probably have that ...                                                        
  MR LUTTRELL:                                                                 
  Yep, I have that.                                                            
  CHAIRMAN LEMAN:                                                              
  Okay.  The pipeline and facility construction is shown before                
 the detailed development scenario is completed, correct?                      
  MR. LUTTRELL:                                                                
  I don't know what chart you are on now, so you'll have to help               
 me there.                                                                     
  The pipeline will be something that we will be working on --                 
 I think they're going to do that, as I recall, in the winter of               
 '97-98.  They want to do it on the ice, that would be the winter              
 they would do it.                                                             
  CHAIRMAN LEMAN:                                                              
   I'm not following this.  You know, you can make notes to                    
 yourself and then ...                                                         
  REPRESENTATIVE GREEN:                                                        
  On that same issue.  I think if you look at the diamond and                  
 start up on the development schedule, it shows the first quarter of           
 '99 and the production chart shows the middle of '98.                         
  MR. LUTTRELL:                                                                
  Well, that's an artifact way the particular diagram was drawn.               
 It actually should be starting up on 119 in a vertical line.  It's            
 difficult to do this with the graphic program that we're using.               
 Visualize that line is essentially vertical off on the ordinate of            
  REPRESENTATIVE GREEN:                                                        
  That answered my question I was going to follow with that you                
 aren't going to try and make it up or anything.                               
  MR. LUTTRELL:                                                                
  No, it will start up and because we'll have enough well                      
 capacity we'll start out at 50,000 a day.                                     
  CHAIRMAN LEMAN:                                                              
  Okay, well let me try another one.  It appears that pipeline                 
 construction begins -- on this chart if you look at the production            
 and cap ex, first quarter of '97 -- I guess that's best as I can              
 read ...                                                                      
  MR. LUTTRELL:                                                                
  Well, it shows, I believe, Mr. Chairman, that there is                       
 expenditure in '97 and '98.  There's no quarters shown on that                
 graph.  If you were to see the one in color, you would see a color            
 bar for pipeline in '97 and "98.  That simply means that in that              
 winter we would be spending that money.                                       
  CHAIRMAN LEMAN:                                                              
  Okay, then if you look at the other chart, the development                   
 schedule, permitting is completed at the end of the third quarter             
 of '97.                                                                       
  MR. LUTTRELL:                                                                
  That's correct.                                                              
  CHAIRMAN LEMAN:                                                              
  So I assume that your pipeline permitting is going to be                     
 completed some time before that.                                              
  MR. LUTTRELL:                                                                
  In advance of that, yes.  The critical element of the                        
 permitting is the EIS.  Once that EIS is done, then the other                 
 permits are reasonably easy to obtain.                                        
  CHAIRMAN LEMAN:                                                              
  Okay, what is the significance of this reference to the                      
 Department of Revenue estimate of the first Northstar production in           
 the year 2002?                                                                
  MR. LUTTRELL:                                                                
  It simply points out that if you look at the Department of                   
 Revenue forecast for the state of Alaska, they've assumed that                
 Northstar would come on in 2002, and it just simply shows that what           
 we're proposing to do will accelerate that by three years.                    
  CHAIRMAN LEMAN:                                                              
   Okay, do you know what the basis was for that estimate when                 
 they made that?                                                               
  MR. LUTTRELL:                                                                
  Mr. Chairman, I do not.                                                      
  CHAIRMAN LEMAN:                                                              
  Okay, we'll ask that question of somebody else.  Any further                 
 questions of this sheet?                                                      
  Representative Green.                                                        
  REPRESENTATIVE GREEN:                                                        
   Thank you, Mr. Chairman.  Eric, you show a peak or a truncate               
 peak at 50,000 barrels a day.  Has there been any discussions or              
 work effort with the AOGCC as far as EMER for this might be.                  
  MR. LUTTRELL:                                                                
  We have begun the conversation with AOGCC.  The answer to that               
 question is I don't think we have done that yet, no.                          
  REPRESENTATIVE GREEN:                                                        
  Would that have any impact if for some strange reason that we                
 can't foresee that they would truncate that at something less.                
 Would that adversely affect your project.                                     
  MR. LUTTRELL:                                                                
  If they dropped it to 25,000 barrels a day, it would, but if                 
 you're talking about 5,000 barrel a day, I don't think it will have           
 an effect.                                                                    
  CHAIRMAN LEMAN:                                                              
  The next page of mine is the chart showing the island                        
 facilities.  This is when it starts getting interesting, the                  
 engineering drawings.                                                         
  MR. LUTTRELL:                                                                
  I wish, actually, it was a hard quality one, and I endeavor to               
 get the committee a higher quality, I apologize for it.                       
  CHAIRMAN LEMAN:                                                              
  This seems to me -- I was trying to figure out here the                      
 orientation of the main oil line to shore, which would suggest to             
 me that if north is up, then it should be this way, and that's with           
 this north arrow, but then it says wind, and northeast would be               
 that direction, but I'm not sure why it says wind there.                      
  MR. LUTTRELL:                                                                
  I think the wind is on there to think about where the flare                  
 is, but I think the orientation is about like this, which would be            
 consistent with the pipeline going due south towards the field.               
  CHAIRMAN LEMAN:                                                              
  So the wind is typically coming from southwest, then?  Is                    
  MR. LUTTRELL:                                                                
  Now you're into....I don't really know the answer to.                        
  CHAIRMAN LEMAN:                                                              
   What I really wanted to ask is slope protection.  Is that only              
 going to be on that one corner or is it all around.                           
  MR. LUTTRELL:                                                                
  It's all the way around.                                                     
  CHAIRMAN LEMAN:                                                              
   Next one, development schedule. This one is the one that                    
 interests me.  The legislative agreement you're showing, starting             
 in the first of February and going until about the first of May.              
 Did you suggest to DNR that we ought to see this about the first of           
  MR. LUTTRELL:                                                                
  Let's say that some of us had stretched objectives that it                   
 would show up earlier than it did.                                            
  CHAIRMAN LEMAN:                                                              
   So this chart was probably done...                                          
  MR. LUTTRELL:                                                                
  It has a history to it... several versions.                                  
  CHAIRMAN LEMAN:                                                              
   On seismic, I think you went through that earlier.  The couple              
 of events...I think that's open water.  What do you do, tow drogues           
 and set off explosions and take measurements?                                 
  MR. LUTTRELL:                                                                
  What we're going to do is actually is marine 3-D, but we're                  
 not going to tow like you would in the Gulf of Mexico.  We're going           
 to use bottom cable.  We'll put the geophones on the bottom and               
 move the boats over the top of them.  It actually is a much more              
 effective way to do it in the shallow water we have.  It also                 
 minimizes the impact on the modest floating ice that might be                 
 there. It's a fairly well established practice.  We will not use an           
 explosion.  It will be air guns.                                              
  CHAIRMAN LEMAN:                                                              
  When is the Anchorage to Northstar sea lift?                                 
  MR. LUTTRELL:                                                                
  The sea lift would be in the summer of 1998.                                 
  CHAIRMAN LEMAN:                                                              
   Next page, preliminary costs, pipeline, $28 million.  I assume              
 that will be a common carrier pipeline and there will be a tariff             
 association with it.                                                          
  MR. LUTTRELL:                                                                
  It is my understanding it will be a common carrier pipeline.                 
  CHAIRMAN LEMAN:                                                              
   Do you have any thoughts on what the estimated dollars per                  
 barrel tariff will be for that?                                               
  MR. LUTTRELL:                                                                
  I asked Daryl Clipin who works for me as commercial manager                  
 that question.  He says it's about like the Endicott pipeline.                
 It's a modest sum.  I can get that for you.                                   
  SENATOR FRANK:                                                               
  That's interesting to me, too.                                               
  CHAIRMAN LEMAN:                                                              
   We're not expecting you to know everything tonight.  You're                 
 doing a good job.                                                             
  SENATOR FRANK:                                                               
  What's the approximate capital cost of that pipeline?                        
  MR. LUTTRELL:                                                                
  That is the capital cost of the pipeline - about $28 million.                
  CHAIRMAN LEMAN:                                                              
   Alaska fabrication - I'm interested in what this means down                 
 here.  It says, "requires commitment to port assembly by mid-year             
 1996.  Now that's three months from now.  What is this commitment,            
 who makes it, what's required, is it going to take State bucks,               
 loan guarantees, whatever...                                                  
  MR. LUTTRELL:                                                                
  I read this through before I came in here and I would have                   
 changed that slide, but I think what we were concerned about was              
 our ability to fabricate at the port and load out.  I know this was           
 a concern of Mr. Morgan when he was here last week and it was a               
 concern for those of you who are in the briefing in the Governor's            
 office.  What we've discovered is that does not seem to be as big             
 a concern as we had thought.  We're pretty sure now that we can in            
 fact fabricate and assemble the modules in the port and load them             
 out.  Now there's some other work we're doing there, but I'm not              
 convinced this is a big problem.  But, this is a slide which is               
 about two weeks old.  It did say at that time we had to be assured            
 it could be done.  Otherwise we had a problem with what we were               
 planning to do.                                                               
  CHAIRMAN LEMAN:                                                              
  Are your contractors in fabrication going to be able to use,                 
 if they use the port of Anchorage area, be able to do that - build            
 whatever facilities they need within the contract prices or are               
 they going to be looking for infrastructure assistance.                       
  MR. LUTTRELL:                                                                
  I can't speak for them, but my sense is they are not going to                
 be seeking infrastructure expenses.                                           
  CHAIRMAN LEMAN:                                                              
   Anyone else have questions on this?  Senator Taylor.                        
  SENATOR TAYLOR                                                               
  What size acreage do you need for your assembly?                             
  MR. LUTTRELL:                                                                
  Rather than quote you a number, I'd like to come back and give               
 you the information.  I can get that from my engineers tomorrow.              
  SENATOR TAYLOR                                                               
  I only wanted you to be aware that we have a mill site for the               
 assembly - flat land with an already developed deep water dock.  It           
 has Gantry cranes with a rail mounting.  It's all paved and is                
 surrounded by warehouses.  Sitka is probably acres and we've got a            
 couple of other facilities.  Ketchikan Marine maintenance facility            
 - we might as well use it for fabricating something.  I can't get             
 a ferry boat to stop there, so...                                             
  CHAIRMAN LEMAN:                                                              
  We've got a lot of Knik Arm silt and Bootlegger Cove mud and                 
 other things...                                                               
  SENATOR TAYLOR                                                               
  That's very delicate and it's going to take an engineering                   
 permit to build that and an environmental impact statement, an Army           
 Corps of Engineers permit to build that and it would take a long              
 time.  I've got friends at DEC.                                               
  REPRESENTATIVE GREEN:                                                        
   Eric, you know last year when I toured the port facility they               
 were talking about moving one of the big modular containers to the            
 north end of what is now developed and then opening up that middle            
 area.  Do you anticipate that this fa yard would be in there or               
 what I'm wondering about is if it's on the undeveloped portion,               
 then you have to come all the way back through all that mess.                 
  MR. LUTTRELL:                                                                
  It's my understanding, Representative Green, that we'll                      
 actually use the Lynden dock or some part associated with Lynden              
 dock and not go to the actual port facilities further to the north.           
 It actually is better for what we need.  We're doing some boring              
 studies to make sure it can support the weight, but we're pretty              
 sure it can and then we would use that dock and that load out                 
 facility.  Basically, we now have to negotiate with Lynden and                
 their neighbors to do that, but I think it's achievable.                      
  SENATOR TAYLOR                                                               
  If they charge you too much, come and see us.  The nice part                 
 is southeast has much milder winters and you can work outside a lot           
  SENATOR FRANK:                                                               
  Now, are these modules ones that have been done in Seattle or                
 Louisiana or where do they get done?                                          
  MR. LUTTRELL:                                                                
  Historically, modules have been built in a variety of                        
 different places, but the image I think people have, is building a            
 large module of this sort in New Iberia and dragging it through the           
 Panama Canal and taking it up around Barrow.  New Iberia is a port            
 in Louisiana where a lot of stuff is built for the oil industry.              
 There's actually been modules built in Portland, Souther                      
 California, I think in the L.A. area, as well as New Iberia and in            
  SENATOR FRANK:                                                               
  So it isn't implausible to be serious about Senator Taylor's                 
 idea.  It could be done down here and sea lifted up there or                  
 whatever.  It wouldn't be a technical problem, it would be a cost             
 problem or something.                                                         
  MR. LUTTRELL:                                                                
  Let me answer your question directly, Senator Frank, one of                  
 the advantages of using the port is that the fabrication facilities           
 of the skids, the parts of the modules you've built somewhere else,           
 actually are in Anchorage.  So, it's most convenient to take those            
 skids and move them six miles to the north in to the port and                 
 assemble them into a mega-module.  If we were to do what Senator              
 Taylor   suggested, we would have to build those in Anchorage and             
 then load them on a boat and take them to some other site and then            
 construct them and then load them on a boat again.  It's that                 
 double handling that would make life difficult.                               
  SENATOR FRANK:                                                               
  Where do those things come from in the first place?                          
  MR. LUTTRELL:                                                                
  They're fabricated.  Basically, we bring in pipes and                        
 structural steel and actually build a processing facility or a                
 utility facility in series of boxes which we call skids.  That's              
 what's being built in the two existing facilities in Anchorage.               
  CHAIRMAN LEMAN:                                                              
   Back to this commitment by mid-year, or whatever you want to                
 call it.  I'd like to understand how you make commitments and yet             
 your board according to your schedule is not going to make a                  
 decision until October provided the legislature approves this.  So            
 you have some kind of a process where you can make commitments                
 ahead of the ultimate commitment on a go for this project?                    
  MR. LUTTRELL:                                                                
  Mr. Chairman, there is an official process in BP called                      
 sanction.  We can actually not go to sanction without having a                
 class II cost estimate which we will not have until mid-summer.               
 The managing director of BP, Mr. Chase, for whom I work has                   
 reviewed this with the Board and the Board is comfortable with him            
 making a commitment to develop in Alaska before we go to sanction.            
 We have an agreement that should the legislature ratify this                  
 agreement, we are committed to developing this field.                         
  CHAIRMAN LEMAN:                                                              
   One of the concerns expressed in the first meeting were these               
 words here, "potentially 75 percent could be fabricated in Alaska,"           
 and if we go back to the agreement, there's a whole bunch of words            
 like that.  Whenever they crop up it kind of makes us sit up and              
 say what are you saying.  I know there's probably some decisions              
 that have to be made and some things have to happen for that to               
 happen.  I guess I'd like to know what is your commitment to these            
 things happening and what do you think really is the risk of them             
 not happening.                                                                
  MR. LUTTRELL:                                                                
  Let me just address the word "potentially" because I think                   
 since we haven't actually finalized the final design, I don't know            
 whether the number is 65 or 68 or 72 or 75, that's part of the                
 sense of it potentially.  Our commitment is to design the facility            
 such that it can be largely built in Alaska and that's the process            
 we're currently in and that's what my engineers have sort of                  
 marching orders.  We have no sense here of trying to design a                 
 facility which can be built in multiple places.  We're designing              
 the facility to be built here.                                                
  CHAIRMAN LEMAN:                                                              
   Is Chris Cox still with you in Anchorage?                                   
  MR. LUTTRELL:                                                                
  Mr. Cox has taken a job with us in Australia.  So, he died and               
 went to heaven we claim.  He has a chance to work in Melbourne.               
 That's the garden spot of BP.                                                 
  CHAIRMAN LEMAN:                                                              
   O.K., general questions.  I'm going to ask a few questions you              
 can help us with.  Mr. Morgan in the first meeting said, "The net             
 profit leases create a very basic misalignment between the leasing            
 company and the State.  Once the net profit interest cut in...                
 TAPE 96-47, SIDE B                                                            
 CHAIRMAN LEMAN:                                                               
   ...In the case of Northstar, some 90 percent of the revenue                 
 stream to the company would effectively dry up and that would lead            
 to the premature shut down   of the field.  There's no question"              
 closed quote.  Under the net profit leasing regulations, wouldn't             
 BP be encouraged to continue production by those provisions which             
 allow recovery of BP's late fuel life investments with interest?              
 The net profit share leasing system allows for those future                   
 investments to also be recovered.  Is that not correct?                       
  MR. LUTTRELL:                                                                
  The answer to the question, Mr. Chairman is that the way that                
 net profits works.  Your profit would therefore be limited to                 
 prime.  I don't believe any major company would invest monies to              
 make the prime rate of return.  That's the reason we would not make           
 late life investments under those conditions.                                 
  CHAIRMAN LEMAN:                                                              
  It would seem to me that you would get prime return on the                   
 investment plus eight percent return.  That would be your share of            
 the profit.  Is that...                                                       
  MR. LUTTRELL:                                                                
  Mr. Chairman, I think I know where your going, but I...                      
  CHAIRMAN LEMAN:                                                              
  On questions like this I don't mind kicking to you and you can               
 get back to us on it.                                                         
  MR. LUTTRELL:                                                                
  Is the question, what would be the rate of return of late life               
 investments in the field?  Is that the question?                              
  CHAIRMAN LEMAN:                                                              
  Yeah, and I'm just trying to get to this issue of the                        
 misalignment to make sure that I understand it.  I understand how,            
 you know, you need to be motivated by making money all the way                
 through and returning your money and making sure in late life,                
 where you're trying to get out of the ground what's in there.  You            
 wanna be motivated to get that out, I understand that.  But, I just           
 wanna make sure I understand this net profit share leasing and why            
 -- and try to understand this misalignment.                                   
  MR. LUTTRELL:                                                                
  Typically, late life investments have actually relatively                    
 handsome rates of return because you have some much of the                    
 infrastructure already in place.                                              
  CHAIRMAN LEMAN:                                                              
  Well, we'd be happy to take a more handsome rate up front                    
  MR. LUTTRELL:                                                                
  You are getting a more handsome rate up front, actually.                     
  CHAIRMAN LEMAN:                                                              
  Maybe.  Senator Frank, you had a question on this.                           
  SENATOR FRANK:                                                               
  Yeah, the rate of return on the additional investment and its                
 always prime, is that it?  It's always prime.                                 
  MR. LUTTRELL:                                                                
  It works out that way because, because as you get to late life               
 effectively you put the money in and you're just earning interest             
 on the time.                                                                  
  SENATOR FRANK:                                                               
  I mean, but that's what the...                                               
  MR. LUTTRELL:                                                                
  I will get back with a precise number...                                     
  SENATOR FRANK:                                                               
  I know they told us that prior investment was at prime and I                 
 understand that.  And I can understand what you're saying.  I'm not           
 sure that you just take the -- I don't know where you came up with            
 eight percent.                                                                
  CHAIRMAN LEMAN:                                                              
  Well, if they're paying 92 percent to the state, the eight                   
 percent is what's remaining.  And it would seem to me that it would           
 be eight over prime, but I...                                                 
  SENATOR FRANK:                                                               
  It doesn't, I don't think you -- you're kinda adding apples                  
 and oranges there because you could have a that remaining eight               
 percent of the net profit that's available to the company may or              
 may not -- I mean compared to the investment is what you'd have to            
 do.  You'd have to take that, you'd take that net profit and for a            
 year and divide it by the investment to get a return on investment.           
 The eight percent would be on top of that prime, would be on top of           
 that I assume.  I don't know.                                                 
  MR. LUTTRELL:                                                                
   I think the simple thing to do is...                                        
  SENATOR FRANK:                                                               
  I don't know.                                                                
  MR. LUTTRELL:                                                                
  ...we can go back and get a very simple calculation and bring                
 it in and show it to you which I rather do than let us sit here               
 speculating as to what this number would be.                                  
  CHAIRMAN LEMAN:                                                              
  In the interest of time...                                                   
  SENATOR FRANK:                                                               
  Then it depends on how you look at the recovered cost of                     
 capital.  If you've recovered all your capital, you might have an             
 infinite, not that you'd look at it this way, you might have an               
 infinite rate of return because you'd have no [indisc.]...                    
  MR. LUTTRELL:                                                                
  We do have operating costs on late life too which we have to                 
 remember to count.                                                            
  SENATOR FRANK:                                                               
  Yeah, but those come out before you calculate net profits.                   
  MR. LUTTRELL:                                                                
  It's still expenses.                                                         
  CHAIRMAN LEMAN:                                                              
   Those, see those all come off first.  Well, we're gonna learn               
 how net profit share works.  We're gonna get walked through it.  It           
 doesn't the development account reactivate to offset a reduced net            
 profit share payments when a lessee makes additional investments to           
 prolong production late in the field life.                                    
  MR. LUTTRELL:                                                                
  This is the same question.                                                   
  CHAIRMAN LEMAN:                                                              
  Okay, I'll sort the March 29th hearing -- Mr. Morgan responded               
 to a question by Senator Frank concerning BP's net profit bidding             
 elsewhere by saying:  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.  This is a point of clarification.  Didn't BP testify that it           
 competitively bid against other companies for the Northstar leases?           
 I think there were others interested in these leases and so there             
  MR. LUTTRELL:                                                                
  I think that what Mr. Morgan was saying, Mr. Chairman, was                   
 that we did not bid in the lease sale.                                        
  CHAIRMAN LEMAN:                                                              
  SENATOR FRANK:                                                               
  In the original one.                                                         
  MR. LUTTRELL:                                                                
  In the original lease sale for Northstar leases.                             
  CHAIRMAN LEMAN:                                                              
   In discussing BP's recent net profit arrangement in                         
 Venezuela, Morgan testified:  I think I can assure you this was not           
 an arrangement where there was the sudden imposition someway                  
 through the development of a field of different terms that altered            
 the basic economics.  He offered to discuss the details of the                
 Venezuelan arrangement at some future time with the committee.  And           
 I don't know if you're prepared to talk about that.                           
  MR. LUTTRELL:                                                                
  As you know, Mr. Chairman, we did submit answers to your                     
 question.  In those answers there was a four paragraph ?rep? about            
  CHAIRMAN LEMAN:                                                              
   I remember reading...                                                       
  MR. LUTTRELL:                                                                
  ...talk about that or respond to whatever question you want.                 
  CHAIRMAN LEMAN:                                                              
  Okay, aren't all net profit arrangements in one form or                      
 another some sort of arrangement where the terms change after                 
 development costs are recovered?  Essentially, being deals where              
 the financial terms change to the royalty owner's advantage at some           
 point in the development of the field.                                        
  MR. LUTTRELL:                                                                
  That's a question I don't know how to answer yes or no to                    
 because I don't know all net profits terms.  If you're speaking to            
 Venezuela, Venezuela is not a net profits arrangement.  It is                 
 simply a tax and royalty arrangement which has been portrayed in              
 the press as being net profits, but I think they're using the word            
 net profits differently than you are in the legal sense of Alaska.            
  CHAIRMAN LEMAN:                                                              
  Maybe sometime you can explain us the differences between                    
 those arrangements in Venezuela and the...                                    
  MR. LUTTRELL:                                                                
  Is the note not clear?                                                       
  CHAIRMAN LEMAN:                                                              
  In your response?                                                            
  MR. LUTTRELL:                                                                
  CHAIRMAN LEMAN:                                                              
  I'll look at it.  If there's further questions, we'll go to                  
 round two on that one.                                                        
  MR. LUTTRELL:                                                                
  We're prepared to make it as clear as possible.                              
  CHAIRMAN LEMAN:                                                              
  Okay.  In an effort to differentiate the effects of profit                   
 sharing arrangements in Alaska versus those in Venezuela, Mr.                 
 Morgan noted that Venezuela is an extremely low cost area in terms            
 of finding development and transportation costs.  And that                    
 certainly distinguishes it from our activities on the North Slope.            
 I note however, that in the case of Northstar there, at least in              
 terms for you, there are no finding costs.  And that was somebody             
 else's investment.  Well, I guess we don't know cause you haven't             
 told us yet.                                                                  
  MR. LUTTRELL:                                                                
  Can I put something in for correction, so you understand the                 
 distinction here?  We would consider any cost done before sanction            
 as a finding cost.  It is an internal, an internal in actually how            
 it's characterized as the industry reports itself through the SEC.            
 So the cost that we've incurred and we will have incurred on the,             
 on Northstar in advance of our sanction date would be called                  
 finding cost.  Now we didn't actually spend any money to find it,             
 but those would be called finding costs.                                      
  CHAIRMAN LEMAN:                                                              
  All that engineering and the field work...                                   
  MR. LUTTRELL:                                                                
  Office work we're doing and the three...                                     
  CHAIRMAN LEMAN:                                                              
  ...as defined for the legislature.  Anyway, your record that                 
 you gave to us reflect, shows that the estimated development costs            
 are $2.92 per barrel.  And the primary transportation system taps             
 is just six miles away from the Prudhoe Bay unit.  And the question           
 is under these circumstances, do you believe that developing your             
 Venezuelan properties would be less costly than developing the                
 Northstar unit?                                                               
  MR. LUTTRELL:                                                                
  All I can tell you, Mr. Chairman, is what my compadres in                    
 Venezuela have told as to what their FND and transportation and               
 lifting cost numbers are and I'm sure they received the same level            
 of scrutiny by the BP board as mine would've so their numbers are             
 exceedingly much smaller than ours.                                           
  CHAIRMAN LEMAN:                                                              
  Smaller than 2.92.  I guess you showed me something on a                     
 chart, didn't...                                                              
  SENATOR FRANK:                                                               
  Mr. Chairman.                                                                
  CHAIRMAN LEMAN:                                                              
  Senator Frank.                                                               
  SENATOR FRANK:                                                               
  It seems like those arguments, I don't want to be argumentive                
 or anything, but it seems like those arguments about cost                     
 comparisons between Alaska and Venezuela or anywhere else would               
 have more relevance to what our underlying royalty ought to be                
 rather than the effects of a net profits arrangement because a net            
 profits assumes that you've recovered all your costs.  And if                 
 you've recovered all your costs in Venezuela and you've recovered             
 all your costs in Alaska, then you start paying net profits after             
 that.  And so it seems like, you kind of with the net profits --              
 and I'm not arguing for it, but it seems like just on a financial             
 standpoint you kinda of taking away the, you know, the elements               
 that are different between the two and then you're left with                  
 operating costs after recovering full, full -- excuse me, profits             
 after operating costs and after recovery of capital costs, what               
 you've got left here versus what you'd have left there.  It seems             
 like you'd kinda be in a percentage basis seems like you'd be kinda           
  MR. LUTTRELL:                                                                
  Both Alaska and Venezuela are tax and royalty systems.  They                 
 do not in Venezuela have net profits terms.  The bid that was made            
 recently by many oil companies in the Venezuelan sale was a bid for           
 a thing called a peg [ph] which I don't know the Spanish words for,           
 but effectively is a supplemental royalty.  And the companies then            
 bid that they would pay the state a supplemental royalty. And I               
 think in the case of our property, of additional 50 percent.  And             
 we were able to do that in our economics because of the very, very,           
 very low cost of finding and developing and operating the fields              
 there.  Obviously, if they had cost like ours in Alaska, they would           
 not have been able to bid a number that high and still make a                 
 profit.  It's just, it's simple economics.  We put a certain amount           
 of money in and we get a certain amount of money out and that                 
 becomes an economic venture.  The state of Venezuela obviously, is            
 was able to negotiate some very attractive terms for them in                  
 getting a very large piece of the pie.  But had their costs been,             
 you know total costs been in the range $7 a barrel like they are in           
 Alaska then they would not have been able to command that big,                
 large piece of the pie.                                                       
  CHAIRMAN LEMAN:                                                              
  Mr. Morgan also stated that the net profit interest                          
 arrangements that were in place here are not profit related.  Can             
 you explain why BP does not believe that the state's net profit               
 terms are profit related?                                                     
  MR. LUTTRELL:                                                                
  Well, Mr. Chairman, I think what he was trying to say was that               
 the context of the question had to do with the recommendation and             
 the Oil & Gas Policy Council that the state should move towards               
 profit related taxes.  In our view, the profit related taxes are              
 ones that when the profit goes up on a annual basis the income of             
 the state goes up on an annual basis.  And under those                        
 circumstances, the net profits all coming at one time in the life             
 of the field do misalign and therefore, they're not the kind of               
 profit related taxes that I think would attract industry to the               
 State of Alaska.  That's why we think the supplemental royalty                
 actually is more akin to the profit related taxes that were                   
 proposed in the Oil & Gas Policy Council because as our profits               
 goes up as proxy and by the oil price, the state's take goes up.              
  CHAIRMAN LEMAN:                                                              
  When DNR was drafting the state's net profit leasing                         
 regulations, it's my understanding that industry was actively                 
 involved in that process.  Do you know if BP was or participated in           
 the rule-making process and commented on the draft regulations?               
  MR. LUTTRELL:                                                                
  I do not know.  I could probably find out, that's some almost                
 20 years ago now.                                                             
  CHAIRMAN LEMAN:                                                              
  Right and I don't know the answer to that either, but I've...                
  MR. LUTTRELL:                                                                
  Probably all those people are...                                             
  CHAIRMAN LEMAN:                                                              
  Ken, do you know?                                                            
  KEN BOYD:                                                                    
    [indisc.] we don't Mr. Chairman.                                           
  SENATOR TAYLO  R                                                             
  I guess, I've read through your explanation of Venezuela a                   
 couple times, but focusing on Alaska.  You say comparable costs in            
 Alaska - lifting and transportation are about $7 a barrel.  Then              
 you go on to say in Alaska we look to make 3.25 per barrel on a               
 capital investment of 3.50 or above per barrel, a .94 ratio.  Isn't           
 that about a hundred percent, I mean of profit?  I mean if I'm                
 manufacturing wigets, and it cost me $3.50 to manufacture each                
 wiget and I sale it for $7, isn't that a...                                   
  MR. LUTTRELL:                                                                
  Senator, I understand your question and I think that the                     
 analogy we were trying to draw there does not get to the conclusion           
 you're trying to reach there.  Your conclusion, as you said it is,            
 is not incorrect.  But what we're simply trying to say is to give             
 you a comparable of what our income versus our capital in Venezuela           
 looks like relative to our income versus capital here in Alaska.              
  SENATOR TAYLOR                                                               
  I understood that ratio comparing because of the large volume                
 that you expect to recover and a lower net or a lower profit that             
 you expect to recover, but also at a lower cost.  And I can                   
 understand the volume factors, but that didn't look like too bad a            
 return to me, I mean.                                                         
  MR. LUTTRELL:                                                                
  The point of the illustration was to simply say that they are                
 comparable to Venezuela.                                                      
  SENATOR TAYLOR                                                               
  In fact, Venezuela is a little [indisc.]                                     
  MR. LUTTRELL:                                                                
  Better.  Venezuela is a little better.  I know that when I                   
 talked to Mr. Chase, he said anytime I can get a Venezuela deal               
 I'll take it.                                                                 
  SENATOR TAYLOR                                                               
  Till they nationalize you [indisc.]...                                       
  CHAIRMAN LEMAN:                                                              
  We won't nationalize you.                                                    
  SENATOR TAYLOR                                                               
   I don't know.                                                               
  SENATOR FRANK:                                                               
  You know, this is kinda interesting.  This statement here                    
 says, in Alaska we look to make about 3.25 per barrel on a capital            
 investment of about 3.50.  Now is that 3.25 an annual, that's a per           
 barrel thing so that's...                                                     
  MR. LUTTRELL:                                                                
  That's a sort of a aggregate real number.                                    
  SENATOR FRANK:                                                               
  Okay, so I know -- I mean to me I would say well that means                  
 your making 94 percent return on your investment annually.  Now I             
 know that if I looked up your information that's Standard & Poor's          
 or whatever, they wouldn't say BP is making a return on equity of             
 94 percent.  I know they wouldn't say that because your stock would           
 be selling for a much higher multiple if it was.                              
  SENATOR TAYLOR                                                               
  I figure it's spread over the life of the field.                             
  MR. LUTTRELL:                                                                
  Yeah, it's spread over -- it's the same question he's asking.                
  SENATOR FRANK:                                                               
  Well, if it's spread out over the life of the field, you                     
 wouldn't spend 3.20 or you wouldn't spend 3.50 to get 3.25 back;              
 would you?                                                                    
  SENATOR TAYLOR                                                               
  No, no they're spending...                                                   
  SENATOR FRANK:                                                               
  On top of your                                                               
  MR. LUTTRELL:                                                                
  I'm spending 3.50 up front and I get that production over a 15               
 year period and each year I make that, about that much out of each            
 barrel I sell.  So, you can't actually make the mathematical                  
 construct that you're trying to make.  We are making a handsome               
 profit on both of these deals.                                                
  SENATOR TAYLOR                                                               
  So are we.                                                                   
  UNIDENTIFIED SPEAKER:                                                        
  So are you.                                                                  
    CHAIRMAN LEMAN:                                                            
  Senator Frank, we're starting to feel sorry for you, it's                    
 looking like you're loosing money and it's probably gonna see if we           
 can cut you in the capital budget.                                            
  SENATOR FRANK:                                                               
  Well, it's just clear that I don't understand.  That's the                   
 only thing I'm clear about now.                                               
  SENATOR TAYLOR                                                               
  I guess we could always take the Governor's deal and sweeten                 
 it a little bit.                                                              
  CHAIRMAN LEMAN:                                                              
  And ask for [indisc.], whatever that's called.  Okay, I'm                    
 gonna go back to -- I just have a few more on this, this area.  Did           
 you ever provide testimony, and there again this has been a ways              
 back so you made need to get back to us on this, ever prior                   
 testimony or formerly communicate with the Department of Natural              
 Resources your view that the leasing provisions were not profit               
 related before 1979 and 1982 when you successfully bid on the net             
 profit sharing, share leases you own in Duck Island in Point                  
  MR. LUTTRELL:                                                                
  A pretty complicated question, maybe you ought to write it                   
 down so I can understand it.                                                  
  CHAIRMAN LEMAN:                                                              
  Okay. [indisc.]                                                              
  MR. LUTTRELL:                                                                
  If you provide me a written I'll get you a response.                         
  CHAIRMAN LEMAN:                                                              
  I'll give it to you.  Last week, Mr. Morgan referred to the                  
 substitution of a supplemental royalty as negotiated in this new              
 agreement, as very much closer to a profit related arrangement.  He           
 also said, very clearly the oil price is a strong proxy for the               
 profitability of an oil fields operation.  I think back to last               
 year's hearings on HB 207 and it seems like the primary reason the            
 commissioner needed flexibility to lower royalties was that they              
 were not sensitive to profit.  In fact, I believe there was                   
 testimony to the effect that both royalties and severance taxes               
 were regressive.  Question:  how can a supplemental royalty based             
 on the movement of oil prices be considered to be a profit related            
 arrangement late in field life or anytime in field life, for that             
 matter, if the royalty rate you have to pay bears no relationship             
 to your cost of continued operation?                                          
  MR. LUTTRELL:                                                                
  We, we run our economics, Mr. Chairman, with the 20 percent                  
 base royalty and we believe that under most price conditions we can           
 make this field work.  Obviously, it gets down in that $10 range              
 I'm not quite sure what's gonna happen.  We look that when the                
 price goes above something which is say $16 or $17, I guess we                
 actually agreed $17.35, then the fact there would be additional               
 profit from the field that we would be willing to share with the              
 state and that was the agreement that we reached.  And it simply              
 rather than going through a long involved process of actually                 
 establishing profit and taxing profit, we thought this was a simple           
 proxy to do.  It simply said, we know when price goes up we're                
 gonna make money, when the price goes down we're actually gonna               
 carry the burden of it and we were willing to share with the state            
 then the profits that are related to the price range.  That's how             
 we set the supplemental royalty.  I don't know if I answered your             
 question or not.                                                              
  CHAIRMAN LEMAN:                                                              
  If on this topic, cause if you can just hold it I wanna, I                   
 just wanna clear of this one series of questions.  We were told               
 last year that high royalties will lead to the premature                      
 abandonment of oil fields.  And yet, in this agreement you have a             
 high royalty rate, I mean, then you say in the agreement that                 
 you're not going to seek royalty reduction.  I mean, it seems to me           
 there may be some inconsistency there that maybe we're not going to           
 see it for 15 years, but at some time in the future it would seem             
 to me a good business decision would be to come knocking on the               
 door and say, hey, you know we've got this field and we've been               
 paying according to these terms, but if we can get some royalty               
 adjustment we can get this much more out of the field.  Then,                 
 whoever is commissioner at the time, is gonna go back and say,                
 well, you said you'd never seek it.  But you know, and at that time           
 it would seem - it might even be a good move.  And then you say,              
 we'll shut it in and the state says well, we better make some                 
 adjustments.  Doesn't that hold true for this project also?                   
  MR. LUTTRELL:                                                                
  It's hard for me to look that far into the future, but I think               
 your supposition is correct.  There might be a circumstance at the            
 end of the field life that might find it to the advantage of the              
 state and the company to change the royalty, I don't know.                    
 Certainly, our commitment to no change in royalty was one we made             
 early on to Commissioner Shively.  He wanted specifically for us to           
 articulate that we would not seek 207 relief for this field.  And             
 we felt that we could do that and we did do that.  And that's what            
 those words are about.                                                        
  CHAIRMAN LEMAN:                                                              
  And realistically that commitment, as far as your concerned,                 
 is it an indefinite commitment or about how many years would you              
 say that's good for.  I mean, can you...                                      
  MR. LUTTRELL:                                                                
  It's an indefinite commitment.                                               
  CHAIRMAN LEMAN:                                                              
  You have no plans to change that, although it's possible you                 
 might at some time in the future, but.  Okay.  Go ahead.                      
  SENATOR TAYLOR                                                               
  Did I note also in the Venezuela deal that their government                  
 owned enterprise was going to kick in 35% of the cost?                        
  MR. LUTTRELL:                                                                
  Senator Taylor that is correct.  The Petovesa [ph], which is                 
 the Petrolista [ph] Venezuela Company has the right to acquire 35%            
 of the fields that would be discovered in the block that we bought,           
 the Guarapichi [ph] Block, in fact all of the blocks that were                
 licensed recently.  We expect eventually that they would exercise             
 that right.  But if they do so, they actually have to pay past cost           
 and ongoing cost.  They would be a full, working interest down                
  SENATOR TAYLOR                                                               
  Plus prime, right?  That's what it said.                                     
  MR. LUTTRELL:                                                                
  Plus the prime of the past costs.                                            
  SENATOR TAYLOR                                                               
  Yes, that was my question.  And in fact, that's something I                  
 suggested last year during 207, that I thought that it was                    
 something that the state should start taking a serious look at if             
 we're going to insist upon these joint venture approaches that                
 maybe we ought to put our money where our mouth is and join in the            
 risk.  I didn't see a big rush to do that, but normally--                     
  MR. LUTTRELL:                                                                
  The Alaska National Oil Company, is that right?                              
  SENATOR TAYLOR                                                               
  I'm willing to do her.  I want to know what the inside                       
 information is and be part owner of this thing, I don't want to see           
 the profits going all to somebody else, and us has to be painted as           
 the bad guys in there taxing it.  I'd just as soon see us as joint            
 venture, as this is supposed to be some sort socialistic, wholly-             
 owned state up here, the "we own the ranch" garbage.  Well, if                
 we're going to own the ranch, maybe we ought to do something with             
 somebody on the ranch.  Obviously it worked for Venezuela.                    
  MR. LUTTRELL                                                                 
  You don't actually expect me to respond to this question, do                 
  SENATOR TAYLOR                                                               
  I don't imagine Venezuela's doing that because they're losing                
 money at it.  I don't see anybody jumping to go do it, but--                  
  CHAIRMAN LEMAN:                                                              
  Last question I have, maybe we might even get DNR back up                    
 here, we can move on, unless we want to quit for tonight.                     
  SENATOR HALFORD:                                                             
  I gotta quit pretty quick.                                                   
  CHAIRMAN LEMAN:                                                              
  You gotta quit?  In Mr. Morgan's comments last week, and I've                
 talked about some of this in the hallway with you today, he said,             
 "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."  I guess before I ask this question, I just               
 want you to clarify what Mr. Morgan meant when he was talking about           
 the reputation of BP in the world.  He said, "We want to protect              
 that reputation."  You told me earlier today what that meant, but             
 just the rest of the committee members and others hear that                   
 explanation, what did he mean?                                                
  MR. LUTTRELL:                                                                
  Well, when we talked about earlier today, I think the best way               
 to describe it is to put yourself, any one of you, in the position            
 of being in government, or actually probably a member of the public           
 in the year 2010, when the net profits were to kick in, if they               
 were to kick in, and BP would feel compelled to shut in the field.            
 The question is, "What would you feel, what would be your                     
 reaction?"  I postulate the reaction would be one of outrage, "You            
 mean we've actually done all this, and now when it gets to be our             
 turn to make money, you shut the damn thing in?"  I think that is             
 the reaction that people would have, and we simply didn't feel as             
 though that would be appropriate for BP to do, and we would not put           
 ourselves in the circumstance where the state and the population              
 would be outraged at our action.  That is the reputation issue.               
  CHAIRMAN LEMAN:                                                              
  This briefing book that DNR prepared I note, and this is                     
 something that we've talked about a little before, that BP owns               
 Alaska Division of Lands Lease third-312828, a lease which contains           
 about 25% of the oil in the Endicott Field.  That lease was bought            
 in 1979, in which all but one of the Northstar leases were sold.              
 Same sale.  It carries a 79.59% net profit share, which is a little           
 bit less than Northstar, and a 20% royalty.  Question: how can your           
 decision to go forward with development in Endicott under these               
 terms be reconciled with your unwillingness to proceed at Northstar           
 without the change.                                                           
  MR. LUTTRELL:                                                                
  Well I think there's two things that you need to know: number                
 one, when we developed Endicott, we actually didn't ever anticipate           
 getting to net profits.  And you can see the information we                   
 provided you earlier yesterday about the development costs at                 
 Endicott was actually probably relatively high.  We actually now,             
 it might actually sometime occur in the future.  I've actually                
 talked to the Endicott folks and asked them the specific question,            
 and the answer is because it's only one of a number of leases,                
 effectively we would continue to operate the field and the other              
 leases would effectively carry the profit of this one lease.  Now,            
 I do want to mention something that's complicating there is because           
 at Endicott, the various leases are owned by different companies,             
 and what's happening right now as we speak, is that different                 
 companies have different economic interests because their future              
 profitability looks different, and it's already beginning to affect           
 development plans at Endicott, the fact that we have misalignment             
 between the various parties.    Now in this case, it's misalignment           
 between the various owners, and not the state, but misalignment is            
 the kind of misalignment we were talking about previously.  But we            
 would continue to operate.                                                    
  SENATOR FRANK:                                                               
  Did you say that you didn't, at the time you made the                        
 investment in Endicott, you didn't anticipate getting to a net                
 profit situation?                                                             
  MR. LUTTRELL:                                                                
  It is my understanding they did not anticipate getting to                    
  SENATOR FRANK:                                                               
  So, that would indicate that you were willing to do it for                   
 prime, then, or what am I missing?                                            
  MR. LUTTRELL:                                                                
  It's a complicated question, Senator Frank, having to do with                
 some cost in forward-looking economics and development accounts and           
 time and all that kind of stuff.  You're right in saying what                 
 you're saying, is that it sounds like, overall, BP didn't                     
 anticipate making very much money in that that they could release.            
 That is correct.  Those costs, when they're past, were sunk, and              
 we're only talking about future investments.                                  
  CHAIRMAN LEMAN:                                                              
  REPRESENTATIVE JOE   GREEN  :                                                
  Thank you, Mr. Chairman.  There was a significant difference                 
 too, in that there were some pretty high exploration costs involved           
 in that also entered into this [indsc.], so that exploration costs            
 made it as much as ten years earlier, we're accumulating this                 
  MR. LUTTRELL:                                                                
  No, but Senator Frank's question is actually correct, because                
 in a full-cycle basis, BP wasn't going to make very much money on             
 this.  But it made it's decision on a money-forward basis at that             
 point in time.                                                                
 [Several people speak at the same time for a short while, and it              
 cannot be determined what any of them are saying.]                            
  SENATOR FRANK:                                                               
  But when did you make the decision to lease the properties,                  
 though, I think is what Senator Leman was getting at on a net                 
 profits basis was the decision that I think he was wondering about.           
 Didn't you make that decision to bid on that lease before you had             
 done much in the way of, I don't know about exploration, do explore           
 before you bid on a lease?                                                    
  MR. LUTTRELL:                                                                
  Senator Frank, I'm going to give you an answer, but I'm going                
 to give it with great caution.  I believe that Endicott was                   
 reasonably well understood when that lease bid was made, I don't              
 know that for a fact.  There was some exploration in the area prior           
 to that lease.                                                                
  SENATOR FRANK:                                                               
  But you had no sunk cost at that point?                                      
  MR. LUTTRELL:                                                                
  Now I can't do this without having a better sense of what took               
 place [indsc.].                                                               
  SENATOR FRANK:                                                               
  Not like this case, where you've got this, well in this case                 
 it's $300,000,000.00 without having actually paid, but 1% or 2% of            
 it or whatever, so--                                                          
  SENATOR TAYLOR                                                               
  Whatever, we don't know that number.  Yet.                                   
  SENATOR FRANK:                                                               
  But I still think that's irrelevant.  If the question's                      
 relevant, then I don't understand the answer.                                 
  CHAIRMAN LEMAN:                                                              
  Further questions of Mr. Luttrell?                                           
  UNIDENTIFIED SPEAKER:                                                        
  I've gotta go, Mr. Chairman.                                                 
  CHAIRMAN LEMAN:                                                              
  You've gotta go?                                                             
  UNIDENTIFIED SPEAKER:                                                        
  CHAIRMAN LEMAN:                                                              
  I'm trying to decide if I want to capture Commissioner Shively               
 while he's here.  Are you going to be back at any time?  Do you               
 want to go for a few minutes?                                                 
  SENATOR TAYLOR                                                               
  I don't have to go, but I'm tired.  I might want to go.                      
  CHAIRMAN LEMAN:                                                              
  John, why don't you come join us at the table, you're welcome                
 to stay here.  After 8:00 we get informal here.  Sometimes even               
 earlier than that.                                                            
  SENATOR TAYLOR                                                               
  And we're just hitting five hours, right?                                    
  CHAIRMAN LEMAN:                                                              
  Yeah, I know.  That cookie gave me a shot of sugar; I've got                 
 a little more energy.  Now, John, in your overview of the proposed            
 amendments you testified that the longer the development is                   
 delayed, the less money the state is going to get in net profits              
 and indicated the timing of development was critical to you as the            
 department negotiated the deal.  And you confirmed that today in              
 our hallway talk.  My question is, if you're concerned about the              
 need to hasten the development, and thus avoid the continued growth           
 of the development account, or at least retard its' growth, why               
 didn't your department insist on a firm commitment that it would              
 develop Northstar before agreeing to extend the unit another three            
  COMMISSIONER SHIVELY:                                                        
  Mr. Chairman, I can't totally answer that.  First of all,                    
 there are two questions: one I think that people have raised,                 
 should we have even allowed BP to take over the leases from Amerada           
 Hess, I think that's a question that's been raised.  That happened            
 before I was commissioner, and while I think in the transition I              
 think it happened, in January of 95', and while Mr. Eason was the             
 director of the Division of Oil & Gas, and I think the answer is              
 that it's pretty common when you have one company wanting to look             
 at another--take another shot at an oil field, to do that, I mean             
 that's what we've traditionally done.  I think that also you have             
 to look at the fact that both--that we didn't understand the                  
 economics of that field in the spring of last year, the way we                
 understand it now.  In fact BP didn't understand the economics of             
 that field when they bought it.  What we knew about the field at              
 the time that we did that three-year development plan was that                
 there was less oil than people had hoped, by a significant amount             
 in some ways, and that the last number we saw for developing the              
 field was $1,500,000,000.00.  We did believe, I think, or at least            
 the Division of Oil & Gas, that we were bringing in a company that            
 had far more experience on the slope that could look at those                 
 development costs and bring them down, and that provided an                   
 opportunity.  If we had all the information in the spring of last             
 year that we had today, we might have made another decision; we did           
 not have that information.                                                    
  CHAIRMAN LEMAN:                                                              
  And when did you get that, during the course of these                        
  COMMISSIONER SHIVELY:                                                        
  It was during the course of the negotiations, yes sir.                       
  CHAIRMAN LEMAN:                                                              
  Was there ever any discussion within your department about                   
 requiring such a commitment from BP before you extended it, or at             
 that time it was pretty speculative?                                          
  COMMISSIONER SHIVELY:                                                        
  Mr. Chairman, those discussions, to my recollection, did not                 
 reach my level.  They were done as most development plans are, in             
 the Division of Oil & Gas.  The professionals in that staff made              
 that decision.                                                                
  CHAIRMAN LEMAN:                                                              
  You recall, if I can ask the question here Ken, if those                     
 discussions took place?                                                       
  Yes, Mr. Chairman.  For the record, my name is Ken Boyd, I'm                 
 the director of the Division of Oil & Gas.  The discussion, as I              
 recall, centered around getting the field developed, you know, what           
 we're going to do to move the field forward.  We had a new owner,             
 we'd done the assignments, and I had a couple of concerns.  One               
 concern concerned the southern lease, the fifth lease, the fact               
 that a well had been drilled there that had not met expectations,             
 the well is still confidential, and what they were going to do                
 about that.  I said you will do this through the seismic program,             
 third quarter this year, or provide other information so that's on            
 the lease.  I wasn't looking to waste time.  3-D seismic survey in            
 my view is something BP will be able use later on in field                    
 development to not drill stupid wells.  We all knew what the field            
 looked like.  We'd all seen the wells.  Our resource evaluation               
 group was to confirm about what the reserves are.  I mean 130                 
 million barrels.  We can get as high as 160.  But the discussion              
 really was how to get the field developed.  What's a reasonable               
 amount of time.  BP provided a development plan or a plan of                  
 development, a proposed plan of development.  We talked to BP,                
 worked with our technical people, revised that technical plan.                
 That's all in your book there and you can sort of see our thinking            
 as the 3-D seismic survey to delineate or get rid of that southern            
 lease.  Show us there's something going to come off that lease or             
 get rid of it.  How can you afford on these leases you know have              
 oil on it.  There isn't any question about it.                                
  We looked at a reasonable plan development, we believe, and I                
 still believe that, and you'll see in the third quarter, no it was            
 the first quarter - April of 1998 call was the date we said that's            
 the day you're either going to be - some certainty of going into              
 production or we're going to start talking about the unit back.               
 That's the way the discussion went.                                           
  CHAIRMAN LEMAN:                                                              
  I think you probably understand our frustration and I think                  
 maybe you share it.  You kind of get to a point where a good                  
 company, a good partner in Alaska, says well, we can make money.              
 It's not uneconomic, but we're not going to do it unless we make              
 these changes no these terms.  Kind of puts us in a box, because if           
 it's delayed, there's ramifications to that.  It increases the cost           
 and it's just one of those situations where you kind of get                   
 yourself boxed in and if you go back and say what decisions led to            
 this, those are some of the them.  John says you don't have all the           
 information at that time and you can only make the decisions on the           
 best information you have, so...                                              
  COMMISSIONER SHIVELY:                                                        
   I'd like to say BP didn't have to be this aggressive, either.               
 They've taken a very aggressive look at the field which I think is            
 one of the things that intrigued us.  We had to look at the fact              
 situation before us when they came to us.  And you're right.  I               
 felt the same last summer and this fall as you are feeling now                
 about making these choices and it's one of the reasons I felt the             
 decisions we made needed to be reviewed by a public body is because           
 it is a tough choice that we've been put in here.  And we've made             
 the decisions that we think are correct and we're trying to lay out           
 the difficulties we had in reaching that and you're going to have             
 to make some of those same decisions.                                         
  CHAIRMAN LEMAN:                                                              
   Patrick, do you want to try a question?  This has to do with                
 your testimony.  I'm almost done.  Don't have any more cookies.               
 Robin? Joe? Any more questions?                                               
  SENATOR TAYLOR                                                               
  The only other question I had would have been a follow up on                 
 John's comment and that is that I - his inability to make the                 
 finding that it was noneconomic generated a situation where a                 
 decision had to be made.  I still don't think there's a legal basis           
 for this proposition.  I appreciate the prudence that's being                 
 offered, but I still don't think we have a role to play here.  I              
 know it makes everyone more comfortable if we do.  It certainly               
 doesn't make anyone more comfortable if we don't and I just reflect           
 upon it with Benjamin Franklin's great, great quote, "These are the           
 times that men plow quietly in the field and women weep silently in           
 their kitchens and the legislature is in session and no man's life            
 or property is safe."  There's a lot of places you could have                 
 placed this decision and I don't know where's the best spot to have           
  COMMISSIONER SHIVELY:                                                        
  Mr. Chairman, I think that's precisely because there were some               
 questions about the legal authority to do this.  This is why we               
 think legislative confirmation resolves the situation.                        
  CHAIRMAN LEMAN:                                                              
   Patrick, in your testimony of March 30 you indicated that all               
 bidders in the 1979 lease sale were on notice because of provisions           
 in the lease form that at some point in the future the State's                
 stake in royalty could be reduced from the terms of the contracts             
 and they all bid on that basis.  The question was paragraph nine of           
 the 1980 lease which is entitled "Reduction of Royalty" in case you           
 don't remember what paragraph nine is.  We're not trying to trick             
 you; we're just trying to see how good your memory is.  It's                  
 usually real good.  Anyhow, reduction of royalty, the lease                   
 provision you were referring to in your statement that all lessees            
 were on notice of the potential to pay reduced royalties.  Is that            
 what you were referring to?                                                   
  PATRICK COUGHLIN, Deputy Director, Division of Oil and Gas:                  
 Yes, that's right.                                                            
  CHAIRMAN LEMAN:                                                              
   Did you mean to equate notice of potential royalty relief                   
 after two years of production with the possibility the lessee could           
 renegotiate the competitively bid net profit share, particularly              
 where there has been no production.                                           
  MR. COUGHLIN:                                                                
   No, I simply meant that there wasn't in the law, in the                     
 leases, that there was some form of royalty relief that had been              
 available at some point in the development of the field.                      
  MR. BOYD:                                                                    
   The answer to Senator Frank's question is yeah, people do                   
 explore before they lease.  People go out and shoot seismic.  We              
 have thought that before.  I worked for Marathon when this lease              
 was being offered and it was one our best prospects and we had shot           
 seismic and we did know generally the shape and size of it.                   
  CHAIRMAN LEMAN:                                                              
  Knowing what you today from the experience you've had over the               
 last 17 years, would you ever recommend a net profit share leasing            
  MR. BOYD:                                                                    
  Mr. Chairman, I remember the vice president of our company                   
 writing a letter to whoever then was the governor saying don't ever           
 do this again.  Just stop doing it.  His name was Ron Burk and I              
 would call him here except he's dead.                                         
  CHAIRMAN LEMAN:                                                              
   One last one I have and it's one I asked you earlier today,                 
 John.  I could also ask Eric, also.  In negotiations I know you're            
 probably looking at different things and reacting to different                
 things.  As I would look at it to say over here is estimated value            
 used based on model of what's coming from the field and timing and            
 there's that value and if we change it, here's a value over here.             
 Why didn't you work to get those two values to be equal.  I think             
 they're pretty close, but it seems to me they would have been an              
 easier sell to the Anchorage Daily News. This is for Stan Jones to            
 see if he's still awake, but wouldn't it have been an easier sell             
 to say, look, we're changing the arrangements to create a better              
 alignment which I think makes sense.  To change some alignments,              
 but divert them so they're equal and I know if you look at the                
 model and we can delay it three years because if we don't make this           
 change, then it's within $4 million which for practical purposes is           
 probably a wash.  So maybe in your mind you're there, but...that              
 really wasn't a basis you were looking at in the negotiations.                
  COMMISSIONER SHIVELY:                                                        
   The problem was we sort of became, as I think you often do in               
 negotiations, more sophisticated as you go along.  We first                   
 concentrated on the rate of return when we looked at the numbers              
 and that almost ended the   negotiations when we saw what we thought          
 the rate of return was with the net profits.  Because we recognized           
 that it was a very decent field.  We sort of got beyond that, but             
 we really measured for most of the negotiations against the figure            
 that we - net profits assuming that the field would be developed on           
 the same time frame on the net profits as the supplemental royalty.           
 And that was a figure that ...                                                
  TAPE 46-48, SIDE A                                                           
  ...but we really didn't use that as a negotiating number.                    
  CHAIRMAN LEMAN:                                                              
  One other question I've had, and I don't think I've asked it                 
 yet, is why did you truncate the supplemental royalty at 27.5                 
 percent when it would seem to me that as you climb for each dollar            
 a barrel that there may be, I don't know that it's ever going to              
 get that high, but if it did, wouldn't it make sense to track even            
 higher than we are at 27.5 percent?                                           
  COMMISSIONER SHIVELY:                                                        
  We were very far apart on some of the numbers very early on.                 
 Basically, we adjusted that formula as--what I told BP is, as well            
 as protecting the 20 percent base royalty, which as far as I was              
 [indsc.] never up for negotiation.  We had to, out of the                     
 supplemental royalty, get what I thought was real money.  They                
 would have preferred not to give any real money, to say 20 percent            
 is a good return, and if things go exceptionally well with prices,            
 Eric can contradict me if I'm overstating their position, then                
 maybe the State gets something.  We didn't believe that was good              
 enough.  And we negotiated that formula; we negotiated over where             
 you started, we negotiated how it went up, we negotiated how high             
 you could go, and ultimately we talked about a figure that I felt             
 was what I wanted, which was the $37,000,000.00, and we adjusted              
 the formula to get that $37,000,000.00 when we agreed on that.                
 They always wanted the cap, and it was sort of where it was and               
 where it started and how you went up that we negotiated.                      
  MR. LUTTRELL:                                                                
  Just to add one point to that, I mean the amount of money that               
 comes from a higher cap and the way we were running the mathematics           
 didn't have very much impact at all, as I recall.  If the [indsc.]            
 cap had been higher, it had very little impact on the overall                 
 dollar figure that you were looking for.                                      
  CHAIRMAN LEMAN:                                                              
  Kevin, we've got everybody else up, why don't you come up here               
 and just answer one question.  Of all the people in the department,           
 you seem to escape the politics of the legislature, and for that we           
 thank you, and you've probably been one who's looked at the numbers           
 and the model and everything and you're going to go through that              
 with us more in detail.  Is it the next meeting we have?  I think             
 next Thursday is our plan, so you can spend more time then, but can           
 you just tell us tonight, in your opinion you looked at it all, is            
 this a good deal for the State of Alaska?                                     
  Mr. Chairman, for the record I'm Kevin Banks--                               
  CHAIRMAN LEMAN:                                                              
  A real easy question.                                                        
  MR. BANKS:                                                                   
  --Petroleum Economist.  Someone asked me that question last                  
 night, and I responded and then later thought--rather facetiously             
 thought, "Well, isn't that for you to decide," would have been the            
 answer to make.  And I think that is true. I would hope that the              
 legislature will come to the same conclusion that we did.  And for            
 my own part, I think this deal is, as I say, it's an okay deal for            
 the State.  There is a certain amount of certainty associated with            
 the supplemental royalty paying something to us and, I believe, at            
 least greater certainty that the net profit share offered to us.              
 And I also believe that the supplemental royalty--the state has the           
 opportunity to make revenues off of a supplemental royalty sooner             
 than the net profit share would kick in, if at all.  For those                
 reasons, and together with the fact that if BP will get this                  
 project going now, and would not have been able to get it going now         
 under the current system, that would also have ancillary benefits             
 to the State, in terms of jobs and early revenue from royalties and           
 taxes.  So my answer is, "Yes, I think this is an okay deal for the           
 state", and I think we did a pretty good job.                                 
  CHAIRMAN LEMAN:                                                              
  Any questions of any of these gentlemen?  Senator Taylor?                    
  SENATOR TAYLOR                                                               
  Just that last one.  The question you asked was, "Is this a                  
 good deal?" for the state.  The answer was, "This is an okay deal         
 for the state."  Is there some reason you don't choose to use the             
 adjective the chairman did?                                                   
  MR. BANKS:                                                                   
  Yes there is, Senator Taylor.  I think it has to do with the                 
 fact that the net profit share has considerable up-side for the               
 state.  If there's any change in the economics of the field that              
 improves, if prices are consistently higher, for example, or if               
 production is any higher.  As some of the materials that we sent              
 over to you earlier today would indicate, the net profit share                
 really pours in.  By the same token, it's exactly the problem that            
 BP has with it: that for any increase in the quote benefits that              
 might be associated with the higher production rates or higher                
 prices, or some other economic feature, the state gets all of it,             
 virtually all of it.  And it has a fairly serious impact on the               
 economics and the incentives for incremental kinds of projects for            
 the company.  And that's why I say it's "okay".  There is a high              
 side to this that I think we can't ignore.                                    
  CHAIRMAN LEMAN:                                                              
  Further questions?  I'll just note that the next committee                   
 meeting will be next Wednesday at 3:30.  The schedule will be                 
 posted tomorrow, and the next meeting on SB 318 will be next                  
 Thursday, and we will be taking up the state's model and fiscal               
 considerations.  Do you expect that any of that will need to be               
 done in confidential session, or everything we'll be doing next               
 Thursday will be public meetings?                                             
  MR. LUTTRELL:                                                                
  I think I'd like to get back to you with that, Mr. Chairman.                 
  CHAIRMAN LEMAN:                                                              
  Okay, I have Thursday--oh, I have a few more questions from                  
 the Department of Law.  Is anybody here from the Department of Law?           
 Okay.  I'd though they'd have somebody here today.  But the                   
 Attorney General and Jim Baldwin couldn't be at this meeting, so I            
 told them we'd just--I had about three more questions for them.               
 And your model, and then--I'd like to, if we could, spend a little            
 bit of time, so committee members will understand the net profit              
 accounting system, allowable deductions, etcetera, maybe we could           
 spend a few minutes on that.  If you can have a graphic to show               
 clearly those things, that would make it even easier to understand.           
 Senator Taylor?                                                               
  SENATOR TAYLOR                                                               
  I just wanted to let you know, for your future scheduling on                 
 this bill, that I'm going to be in D.C. on the 18th and the 17th of           
 April, but I will be available for your week of hearings on this              
  CHAIRMAN LEMAN:                                                              
  Well, if you're going to work on this bill then, you're going                
 to have to go up to the Finance Committee or over in the house by             
  SENATOR TAYLOR                                                               
  Oh really?  Oh.                                                              
  CHAIRMAN LEMAN:                                                              
  That's just a subtle hint about--                                            
  SENATOR TAYLOR                                                               
  I just wanted you to know where I'll be.                                     
  CHAIRMAN LEMAN:                                                              
  --about anticipated schedule.  I'm hoping, I think we've                     
 distributed the schedule.  We'll wrap up questions, if necessary,             
 on Saturday the 13th, and then start taking, maybe complete taking            
 public testimony.  I'd like to do that meeting in Anchorage on the            
 13th, but it looks very likely that it will be here, because I                
 think we'll be in session on that day.  So just for planning                  
 purposes, he'd like to be in Anchorage on the 13th, and would just            
 as soon do it there, and he knows a lot of other people probably              
 it's more convenient to be there.  But we're going to have to flex            
 with the schedule that we have here.  There being no further                  
 business to come before us, we're adjourned.                                  
 [Senate Resources Committee adjourned at 8:50 p.m.]                           

Document Name Date/Time Subjects