Legislature(1995 - 1996)

05/05/1996 04:35 PM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                                                                               
  CS FOR HOUSE BILL NO. 548(WTR)                                               
                                                                               
       An Act authorizing the amendment  of Northstar Unit oil                 
       and  gas  leases between  the  State of  Alaska  and BP                 
       Exploration  (Alaska)   Inc.;  and  providing   for  an                 
       effective date.                                                         
                                                                               
  Co-chairman Halford noted a request by members that CSHB 548                 
  (WTR) be brought on for hearing prior to HB 325 (North Slope                 
  Heavy Oil Royalty Modification).                                             
                                                                               
  JOHN SHIVELY, Commissioner, Dept. of Natural Resources, came                 
  before committee to  provide an  overview of the  bill.   He                 
  explained that Northstar  is an  offshore field in  northern                 
  Alaska.   Five state  and two  federal leases  are involved.                 
  Four of the state  leases were part of a 1979  lease sale in                 
  which the net profit was the bid variable.  Money is usually                 
  used as the  variable.  These  four leases reflect the  only                 
  sale which  utilized net  profits as  a bid  variable.   The                 
  fifth lease was  made in 1983.   It involved an  established                 
  net profit of 40%, and the bid variable was money.                           
                                                                               
  The  field  was originally  operated  by Amarada  Hess which                 
  conducted initial analysis.   As a result of that  and other                 
  work,  an  independent  1993  Department   of  Energy  study                 
  concluded that the  field was  uneconomic based on  findings                 
  that:                                                                        
                                                                               
       1.   Reserves had not yet been confirmed.                               
       2.   Net profit provisions made the field uneconomic.                   
                                                                               
                                                                               
  Amarada Hess ultimately  reached the  same conclusion.   The                 
  company believed that development costs  could total over $1                 
  billion, and it  subsequently offered  the leases for  sale.                 
  Two  companies bid:   one  was BP.   The  state  allowed the                 
  leases to be transferred to BP in January of 1995.                           
                                                                               
  The  net  profit  concept   was  discussed  (for   potential                 
  inclusion in HB 207) in the spring of 1995.  A  decision was                 
  subsequently  made not to do  so.  Commissioner Shively said                 
  he agreed to "take a look at it" but advised that he did not                 
  have legal authority to change the net profit provision.  He                 
  further advised  that if  agreement  in this  area could  be                 
  reached, it would require legislative confirmation.                          
                                                                               
  As   further   background   information,  the   Commissioner                 
  explained that four  of the five 1979 leases had  a 20% base                 
  royalty.  For  the fifth lease  the base royalty was  12.5%.                 
  That lease  has been raised to 20%.   Northstar would be the                 
  only field on the North Slope with a royalty rate of 20%.                    
                                                                               
  The Northstar agreement also drops net profit provisions and                 
  substitutes a "supplemental  royalty" based on the  price of                 
  oil.   That could ultimately  allow the state  an additional                 
  7.5% on top of the base 20%.                                                 
                                                                               
  Further provisions state that if BP does not obtain sanction                 
  or approval from  its board  of directors within  a year  of                 
  approval by the legislature, the  leases will be returned to                 
  the state for re-lease.                                                      
                                                                               
  The department performed  a series  of economic analyses  in                 
  reviewing the agreement and progression  of the bill through                 
  the legislature.  The department has  the ability to provide                 
  both  1996 dollars  and  net present  value dollars  for all                 
  analyses.   Commissioner Shively said he chose to "think" in                 
  1996 dollars.                                                                
                                                                               
  The department used  130 million barrels of  recoverable oil                 
  as  the base case.   That is  approximately half  of what is                 
  believed to be in the field.  Five wells have  been drilled.                 
  State geologists  and geophysicists  have had  more time  to                 
  review  the  field  than  has  BP because  information  from                 
  Amarada Hess was available to the state, and BP received the                 
  information only after it bought the leases.  The department                 
  is comfortable with base numbers.                                            
                                                                               
  The department  ultimately determined  that  if net  profits                 
  remain in place and the field is developed immediately,  the                 
  state would  receive $85  million from  the lease.   If  the                 
  supplemental  royalty  is used  and  the field  is developed                 
  immediately, the state would receive $37 million.  That is a                 
  significant  difference.    However,  BP  is not  likely  to                 
  immediately develop the lease with  net profit provisions in                 
                                                                               
                                                                               
  place.  Due to  the manner in which the  development account                 
  was established, the longer BP  delays, the less net profits                 
  the state will receive.  The  earliest the state could order                 
  BP into production would be 1998.   Under that scenario, oil                 
  would begin to flow in 2002  rather than 1999.  A review  of                 
  net profits at that time indicates $41 million.                              
                                                                               
  Commissioner Shively  explained that  under net profits  all                 
  operational   costs   (seismic   exploration,   engineering,                 
  drilling,  construction,  and   operating)  accrue  to   the                 
  development account.   That account  is not paid  down until                 
  production occurs and revenues begin to accrue.   A judicial                 
  decision  determined that the development account "goes with                 
  the  lease"  and  not   with  the  company  that  made   the                 
  expenditures.   BP thus receives  the benefit of  "over $200                 
  million  which  Amarada  Hess  spent,"  and the  development                 
  account bears interest  at prime  rate (slightly over  8.5%,                 
  today).  That is a large asset.   The longer the development                 
  account builds up, the less the net profits are.                             
                                                                               
  The proposed  agreement changes  the incentive.   Under  the                 
  supplemental royalty,  the longer  it takes  to develop  the                 
  field, the more BP pays to the state.                                        
                                                                               
  Co-chairman Halford noted that the  leases were scheduled to                 
  expire  and   asked  that  the  Commissioner   describe  the                 
  circumstances which led  to extension  when the leases  were                 
  taken over  by  BP.   The  Commissioner  explained  that  in                 
  January of last year, the department granted BP authority to                 
  take over the leases  plus a two-year development plan.   BP                 
  subsequently asked for several months in which to prepare  a                 
  more complete plan.  It then returned with a three-year plan                 
  which the department  approved in April  of last year.   Co-                 
  chairman Halford voiced  his understanding that  three years                 
  were  added.     Commissioner  Shively  clarified  that   an                 
  additional year was added.  The department previously agreed                 
  to a  two-year  development  plan when  it  "agreed  to  the                 
  extension of the leases," in January.                                        
                                                                               
  In  response to  a comment by  Co-chairman Halford  that the                 
  state did not "get anything" for the extension, Commissioner                 
  Shively noted that it is customary for the department to try                 
  to "make  leases work."   This  is not  the  first time  the                 
  department  has  granted   a  change  in  ownership.     The                 
  department was aware of the Amarada  Hess figure of "over $1                 
  billion to develop this field."   It was not unreasonable to                 
  "take  a company that's  one of the  best in the  Arctic and                 
  give them some  time to  look at it."   Everyone  recognized                 
  that  an  89%  net  profit  was  a  potential  hindrance  to                 
  development.  Co-chairman Halford agreed.                                    
                                                                               
  Commissioner Shively stressed the  importance of legislative                 
  involvement  in review  of  the Northstar  agreement, saying                 
  that  it   has  enabled   legislative  leadership   and  the                 
                                                                               
                                                                               
  administration  to send a unified  message to BP, and others                 
  in  the   industry,  regarding   local  hire   and  use   of                 
  contractors.  In development of  Badami, BP was "looking  at                 
  doing  .  .  .  all  their  construction in  Canada."    The                 
  department used  the proposed bill  to "get them  to rethink                 
  how they  can use  Alaska and  Alaskans."   The Commissioner                 
  noted  that,  for him  personally, the  foregoing was  not a                 
  "critical piece  of the pie."  If  the proposal did not made                 
  economic sense, it  would not be recommended,  regardless of                 
  Alaska hire.                                                                 
                                                                               
  Senator Rieger asked how the Commissioner could characterize                 
  a lease value lower than either the 1998 start  or a present                 
  start  (under  net   profit  provisions)  as  making   sense                 
  economically.    Commissioner  Shively  said  he  could  not                 
  guarantee  that  BP  would  start  in  1998  if  net  profit                 
  provisions are not removed.  The  state has never ordered an                 
  oil  field  into  development  or  threatened to  take  back                 
  leases.    The   focus  has   been  on  cooperation   toward                 
  development.  Under net  profits, it is to BP's  benefit not                 
  to speed up development.  That model  is "fairly sensitive."                 
  Effecting a small  interest-rate change  for one year  would                 
  move  the  projected number  even  lower.   The Commissioner                 
  stressed that that is the smallest piece of the pie, saying,                 
  "We're looking at a total take, for the state, of over  $435                 
  million."    The  supplemental royalty  and  the  net profit                 
  royalty  are  only  a  small  piece.    In  terms  of  total                 
  potential, there is  approximately a $9 million  difference.                 
  Obtaining certainty and "real  money" from the  supplemental                 
  royalty versus uncertainty of development and good potential                 
  that nothing would ever be paid from net profits  represents                 
  a "good economic deal for the state."                                        
                                                                               
  Senator Rieger  asked if  there was  a ground  rule, at  the                 
  start,  regarding  present  value  or  "money  of  the  day"                 
  equivalency  that provided  guidance  to  the  direction  of                 
  negotiations.    Commissioner Shively  responded negatively,                 
  saying that  he ultimately  settled on  1996 dollars.   When                 
  viewed from the perspective of net present value dollars, it                 
  looks better  from the state's perspective.   If viewed from                 
  the perspective of "money of the  day," it looks better from                 
  BP's  perspective.  Part of  the bottom line  was that if BP                 
  did not "do this, they were going  to lose the leases."  The                 
  Commissioner stressed that  part of the consideration  was a                 
  belief  that  the state  would "get  real  money out  of the                 
  supplemental royalty."  The  state was not going to  give up                 
  net profits for nothing.                                                     
                                                                               
  Co-chairman  Frank  inquired  concerning  what the  rate  of                 
  return  on the  supplemental  royalty would  have  to be  to                 
  achieve the 20% return under  net profits.  The Commissioner                 
  described  the  method  of  projecting supplemental  royalty                 
  revenues from a  base of $17.35.   If the base is  driven to                 
  $17.15, with a 7.5% cap, it would be "about equal."                          
                                                                               
                                                                               
  Senator Zharoff voiced support for  local hire provisions of                 
  the agreement  and referenced correspondence  from Teamsters                 
  Union 959.                                                                   
                                                                               
  Co-chairman Frank cited  the broad range of  activity on the                 
  North Slope and  the high  number of nonresidents  involved.                 
  He  voiced  need  for  greater   emphasis  on  Alaska  hire,                 
  particularly  Fairbanks hire.  He stressed need to "bring BP                 
  back  to  Alaska  for  development  of  their  modules"  and                 
  questioned  why  the  construction  was  originally  to have                 
  occurred in Canada.   He suggested that with as  much public                 
  exposure and emphasis on local hire over the past ten years,                 
  it  is  difficult  to  understand  why  it  is  an  item  of                 
  discussion at this time.    Commissioner Shively attested to                 
  positive aspects of  legislative debate focusing on  what is                 
  meant  by Alaskan and Alaska hire.   He pointed specifically                 
  to intent included within CSHB 548 (WTR) and noted that what                 
  is constitutionally  an Alaskan  may not  be what the  state                 
  intends  to  count  as  Alaska  hire.   Co-chairman  Halford                 
  commented that Alaska hire should apply to "somebody who got                 
  a dividend the year before they got hired."                                  
                                                                               
  Senator  Randy   Phillips  referenced  information   from  a                 
  constituent  working  for  BP  at  the  Endicott  field  who                 
  indicates that 50 of the 125 jobs are filled by out-of-state                 
  individuals.  The history  on this issue is not good.  Local                 
  hire is of concern for the Northstar project because of what                 
  has happened in  other fields.  Commissioner  Shively agreed                 
  that Northstar  would be a proving time  for BP.  While BP's                 
  local hire record is  not the worst of any  industry, it has                 
  been declining.  How the company recruits and trains for new                 
  jobs will  be critical.  If  BP does not change  its current                 
  system of rotation, it will not be able to meet commitments.                 
  Organized  labor,  because of  its training  and recruitment                 
  practices, can also assist.   The Commissioner  acknowledged                 
  that "It's not going to happen if we're not vigilant."                       
                                                                               
  Co-chairman Frank voiced his preference for structuring  the                 
  agreement so that the  reduction in the net profit  share of                 
  the royalty is "an  after-the-fact thing so that we'll  know                 
  that  they've  met  the  commitments."     He  said  he  was                 
  unconvinced  that  intent would  make a  change.   The House                 
  Resources bill was stronger in that regard.   The definition                 
  of a resident contained within CSHB  548 (WTR) is not strong                 
  enough.  Commissioner Shively emphasized that Alaska  cannot                 
  legally enforce  the issue  of local  hire.   The state  can                 
  encourage  that activity,  but  constitutional problems  are                 
  involved.   The House World Trade Committee  was forceful in                 
  making the  point that this would be a voluntary commitment.                 
  Co-chairman Halford voiced his understanding that there is a                 
  difference  between  the commitment  on  local hire  and the                 
  commitment  on  local  module  construction.    Commissioner                 
  Shively  agreed.   The  Co-chairman  noted testimony  before                 
                                                                               
                                                                               
  Senate Resources Committee indicating  that the state  could                 
  "absolutely enforce  local  module  construction"  while  it                 
  cannot enforce local hire.  The Commissioner concurred.                      
                                                                               
  Senator Rieger raised  a question  concerning the nature  of                 
  the competitive bid process on  the original competitive oil                 
  and  gas  bids.   Commissioner  Shively  indicated  that the                 
  problem with  net profit bidding  is that it  encourages the                 
  bidder  to  go  beyond the  comfort  level  "because there's                 
  nothing on the table."  Some feel the process is flawed from                 
  the beginning.   While the state  has, in the past,  changed                 
  terms of leases, it has not before changed the bid variable.                 
  He  advised that it would have  been easier for the state to                 
  do nothing--"to say 'no,' not to take a look at this."                       
                                                                               
  The Commissioner  further advised  that he  did not  believe                 
  other  companies  would  want  to  develop the  field  under                 
  original  bid provisions.   There  has  been no  outcry from                 
  those  involved  in the  bidding  process that  the proposed                 
  agreement is not proper.  Several approaches could have been                 
  taken.  One  would have been to  attempt "to get  the leases                 
  back and to rebid  them."  The department feels  the current                 
  approach is  the most  expeditious means  of developing  the                 
  fields.  The  Commissioner stressed that a  20% base royalty                 
  is a good royalty.  The state  is not giving the field away.                 
                                                                               
                                                                               
  Senator Rieger  next inquired  regarding the  impact of  the                 
  probability  of later  modification on  the  initial bidding                 
  process.  Commissioner Shively acknowledged that it "ups the                 
  bid potential."   It limits "somebody's risk."   Most leases                 
  are based on base royalties and a bonus bid.  If net profits                 
  are used as a variable, there is real danger that costs will                 
  reduce the royalty.                                                          
                                                                               
  The  proposed agreement sends the signal that the state will                 
  "look at things on  a case-by-case basis," and, if  it makes                 
  sense,  try to  work  toward development  of  an oil  field.                 
  Commissioner Shively  acknowledged that some  might say that                 
  is wrong, and the appropriate means  is competitive bid.  He                 
  suggested that had the state declined to deal with BP, taken                 
  the leases  back, and put  them out to  bid, all that  would                 
  have been known  is that it is  not a "very big  field," and                 
  development costs would be over $1 billion.  The state would                 
  probably not have  set a base  20% royalty.   It would  have                 
  been lower.   BP may have gotten  one, some, or none  of the                 
  leases.    The  unit  would  have   had  to  be  redone  and                 
  engineering commenced again.                                                 
                                                                               
  Commissioner Shively  admitted that if leases were returned,                 
  today, with as much public  scrutiny and information from BP                 
  (particularly  relating  to  significantly less  development                 
  costs), the state could  probably get more bonus money.   He                 
  noted, however,  risks associated  with the  first off-shore                 
                                                                               
                                                                               
  development on the North Slope.                                              
                                                                               
  Senator  Rieger suggested  that "someone  who assesses  that                 
  they don't have  the probability of getting  a modification,                 
  later,  is  not  going to  bother  bidding."    He expressed                 
  concern  over  the   practice  of  providing  after-the-fact                 
  modification of leases,  saying that it is  "extremely anti-                 
  competitive" in the long  run.  Only those who  believe they                 
  have  the "political stroke"  to get a  modification will be                 
  bidding in  Alaska.   Commissioner Shively  cited historical                 
  precedent  for   modifications  and  listed   the  companies                 
  receiving them.   He reiterated that the  proposed agreement                 
  had  to stand  on  its own  economics.   It  was not  merely                 
  acceptable because BP was involved.                                          
                                                                               
  Co-chairman Halford referenced debate at the time net profit                 
  leases were  offered.  Majors  in the  industry objected  to                 
  that approach,  saying that  one of the  problems with  that                 
  method was that  there would be pressure for small companies                 
  that received leases to try to  get the terms changed, after                 
  the fact.  He noted irony in the fact that those  opposed to                 
  net profit leasing are nor the owners of the leases.                         
                                                                               
  REPRESENTATIVE  RAMONA BARNES  next  came before  committee.                 
  She referenced Page  2 of the original HB  548 (Sects. 8, 9,                 
  and  10) and quoted language relating  to BP's commitment to                 
  hire  Alaska  residents  and to  fabricate  module  units in                 
  Alaska.  She further  attested to action on the  bill within                 
  House Resources Committee and told members that a subsequent                 
  legal opinion deemed the House Resources version of the bill                 
  unconstitutional.                                                            
                                                                               
  Representative  Barnes directed  attention  to  a March  26,                 
  1996,  memorandum  from  Assistant  Attorney  General  James                 
  Baldwin to Commissioner  Shively and noted that  in changing                 
  the terms of the leases, it is important that the state make                 
  clear   what   it   is  getting   in   exchange   for  lease                 
  modifications.  She then quoted the following from page 6 of                 
  the memorandum:                                                              
                                                                               
       We believe that a compelling case can be made that                      
       there  is  adequate  consideration  to  support  a                      
       finding of a direct and substantial public benefit                      
       flowing  from  the  reduction  of  the net  profit                      
       share.    We  assign  a  low  probability  to  the                      
       possibility of a successful challenge based on the                      
       public purpose doctrine.                                                
                                                                               
  One of the issues  raised by the public purpose  doctrine is                 
  whether  leases  should  be amended  in  exchange  for early                 
  development  of   the   field,  local   hire,   and   module                 
  construction in Alaska.                                                      
                                                                               
  Representative Barnes  pointed to past  legislation relating                 
                                                                               
                                                                               
  to   local   hire  and   the   fact  that   it   was  deemed                 
  unconstitutional by the  Alaska Supreme Court.   Since there                 
  is presently no way to constitutionally enforce Alaska hire,                 
  a way must be found to induce industry to do so voluntarily.                 
                                                                               
                                                                               
  Representative Barnes next directed attention  to a document                 
  entitled  "First Amendment  to  the  Northstar  Unit  Leases                 
  Between  the  State of  Alaska  and BP  Exploration (Alaska)                 
  Inc."                                                                        
                                                                               
  END:      SFC-96, #113, Side 1                                               
  BEGIN:    SFC-96, #113, Side 2                                               
                                                                               
  Language at Page  5, paragraph  10, consists of  replacement                 
  language for that within  Section 41 of the  original lease.                 
  Replacement  language  speaks  to  "Employment  of   Alaskan                 
  Residents."    It is  included  in the  document voluntarily                 
  signed  by both  the state  and BP.    Representative Barnes                 
  referenced  Page 5,  commencing with  line 27,  of CSHB  548                 
  (WTR) and explained  that "Employment of Alaskan  Residents"                 
  language   from   the  voluntarily   signed   agreement  was                 
  incorporated within the bill.                                                
                                                                               
  CSHB 548 (WTR) not  only sets forth provisions of  the lease                 
  (in law sections of the bill), it also references signatures                 
  voluntarily affixed.  The bill includes provisions requiring                 
  that  BP report  to the  Commissioner of  Alaska's  Dept. of                 
  Labor, every six  months, and that  the reports be given  to                 
  the legislature.  A  less formal report will be  provided to                 
  the Dept. of Labor every three  months, in order to evidence                 
  that provisions of the voluntarily  signed lease are carried                 
  out.   To ensure a  correct understanding between  the state                 
  and BP, Representative  Barnes said she asked  the President                 
  of  BP   Alaska  to  provide   correspondence  acknowledging                 
  provisions and  requirements of  the lease  agreement.   She                 
  then  directed attention of  April 29,  1996, correspondence                 
  from  John  Morgan,  President  of   BP  Exploration.    She                 
  reiterated  that  the  key  to  Alaska  hire and  hiring  of                 
  Alaskans is  not something  that can  be mandated.   It  is,                 
  however, something "We can get  someone to voluntarily agree                 
  to do."                                                                      
                                                                               
  In her concluding remarks, Representative Barnes  noted that                 
  the  legislature had  no knowledge  of  the contents  of the                 
  leases until  they were  submitted for  consideration.   The                 
  legislature cannot  be accused  of coercing  participants to                 
  "voluntarily"   incorporate   language   that  will   employ                 
  Alaskans, put Alaskans to work, and establish a business  in                 
  Alaska  to  build  modules.   It  is  hoped  that technology                 
  developed in building  the modules can be  imported to other                 
  places, such as the Russian Far East.                                        
                                                                               
  Representative Barnes voiced her belief that everything that                 
                                                                               
                                                                               
  can constitutionally  be done  has been incorporated  within                 
  the legislation  to ensure Alaskans  will be hired,  and the                 
  modules will be built in Alaska.                                             
                                                                               
  In response to a question from Co-chairman Halford regarding                 
  reports to the Dept. of Labor and enforcement of both Alaska                 
  hire and in-state module construction, Representative Barnes                 
  stressed the importance of narrowing module construction and                 
  Alaska  hire  to language  within  the  lease  itself.   The                 
  proposed bill does that.                                                     
                                                                               
  Senator Sharp  advised that  he would  be closely  reviewing                 
  reports to ensure true Alaska hire.   He then suggested that                 
  adjustments in many  areas could be  made to "get the  money                 
  back  because Alaska  hires weren't  done."   Representative                 
  Barnes expressed concurrence and directed attention  to Page                 
  3 of the bill where legislative  intent is spelled out.  She                 
  again  stressed   the  voluntary  nature   of  signature  by                 
  participants, prior to legislative  review and ratification.                 
                                                                               
                                                                               
  Representative  Barnes  pointed  out  that under  previously                 
  passed  SB   207,  there  is  no  legal  authority  for  the                 
  Commissioner to make the changes  set forth in the agreement                 
  and  recited  in CSHB  548 (WTR).    Beyond that,  under the                 
  Alaska Lands  Act itself,  the Commissioner  could not  have                 
  made the changes without presentation to the legislature for                 
  ratification.                                                                
                                                                               
  Co-chairman  Frank  noted  that the  language  in  the House                 
  Resources  version  was stronger.    He then  asked  how the                 
  executive branch should  enforce the terms of  the agreement                 
  relative   to   Alaska    hire   and   Alaska   fabrication.                 
  Representative Barnes  alluded  to  comments  that  she  had                 
  extracted  the  teeth  from  the  Resources  version.    She                 
  countered  those comments by advising that she gave CSHB 548                 
  (WTR)  constitutional  teeth.    She  said  she  would  have                 
  preferred the  stronger language,  but she  again referenced                 
  legal  opinions indicating  the  bill was  unconstitutional.                 
  She stressed the  importance of keeping oil  flowing through                 
  the pipeline.   When the flow reaches  approximately 600,000                 
  barrels a  day, the  pipeline becomes  non-economical.   The                 
  narrow language, voluntarily placed in law, is as far as the                 
  state can go toward enforcement.                                             
                                                                               
  ERIC  LUTTRELL,  Vice-president   of  Exploration  and   New                 
  Developments for  BPX, Alaska,  came before  committee.   He                 
  told   members  that   Northstar   legislation  relates   to                 
  development, alignment of interests,  and public commitment.                 
  Development would put $1 billion into the state economy.  It                 
  is hoped  it  will be  the  first  of a  new  generation  of                 
  smaller,  economic  fields  on the  North  Slope.   It  also                 
  involves development of a new industry to fabricate modules,                 
  in Alaska, for  those oil fields.  Development  of Northstar                 
                                                                               
                                                                               
  is in the best interest of Alaska and its citizens.                          
                                                                               
  The Northstar agreement is a  win/win agreement that unlocks                 
  the  potential  of a  field  that has  lain  undeveloped for                 
  sixteen years.   It also  ensures optimal development.   The                 
  agreement aligns the interest of BP  and the state through a                 
  partnership.    Normal commercial  actions to  be undertaken                 
  would benefit  both the  company and  the state,  equitably.                 
  That is how all other fields in Alaska operate.  That is the                 
  relationship  that  has  led to  continuing  investment  and                 
  reserve growth in  those fields.  The  alignment embodied by                 
  agreement ratification ensures two things:                                   
                                                                               
       1.   If the  oil price or field reserves were to exceed                 
  expectations, state revenues would increase significantly.                   
                                                                               
       2.   The  state  always  receives   substantially  more                 
  revenues than BP, regardless of the price on reserves.                       
                                                                               
  Because of the  alignment of interests, BP  will continue to                 
  make capital  investments, and  the field  will continue  to                 
  produce during deep decline.                                                 
                                                                               
  The  opposite of the foregoing is  true of net profits.  Net                 
  profits occurring late in  field life, when the field  is in                 
  deep  decline,  are likely  to  have the  opposite effect--a                 
  significant  reduction  of midlife  investments  and a  real                 
  potential  for  premature abandonment.    The would  put the                 
  state at risk  of realizing neither  the $41 million of  net                 
  profit share, nor the $19 million  in royalty and taxes from                 
  that period of net profit production.                                        
                                                                               
  Mr. Luttrell acknowledged that much has been said about non-                 
  binding  commitment to  Alaska hire and  Alaska fabrication.                 
  He then advised,                                                             
                                                                               
       Let me be clear.  We take our public commitment to                      
       the citizens of Alaska very seriously.                                  
                                                                               
  BP worked with the department to ensure that Alaska hire and                 
  Alaska  fabrication  was  as  strong  as  possible,  without                 
  raising an immediate constitutional challenge.   The company                 
  has made a very public commitment  to hire Alaskans and help                 
  establish  a  new  industry  by  building large  modules  in                 
  Alaska.    Mr.  Luttrell  referenced  the  letter  from  the                 
  President  of  BP  (referred  to  earlier  by Representative                 
  Barnes).     BP's  reputation  depends  upon   honoring  its                 
  commitments  and  reporting  the results  to  the  people of                 
  Alaska.  Mr. Luttrell urged support  and passage of CSHB 548                 
  (WTR).                                                                       
                                                                               
  Co-chairman Frank asked what BP could  do to increase Alaska                 
  hire  in  Fairbanks.   Mr.  Luttrell  attested  to industry,                 
  operators,  and  main  contractors working  together  in  an                 
                                                                               
                                                                               
  attempt to improve the record of Alaska  hire.  The group is                 
  focusing on three main thrusts:                                              
                                                                               
       1.   Training                                                           
       2.   Advertising                                                        
       3.   Reporting                                                          
                                                                               
  He attested to the benefits of Doyon Drilling, saying, "They                 
  set out, effectively,  to make sure that  their shareholders                 
  were  trained and  available to  work on  the  North Slope."                 
  Ultimately, the focus  must be upon training  to ensure that                 
  residents of local  communities have  the skills to  qualify                 
  for jobs.                                                                    
                                                                               
  Senator Randy Phillips again referenced out-of-state hire at                 
  Endicott.    Mr.  Luttrell  said   he  would  inquire  about                 
  specifics  and report back to committee.                                     
                                                                               
  Co-chairman  Halford voiced  his understanding  that in  the                 
  course of consideration of the  Senate version (SB 318), the                 
  Senate  Resources  bill was  deemed unacceptable  because it                 
  would require reopening  of negotiations.  He  then directed                 
  attention to  legislative  findings and  intent relating  to                 
  specific resident requirements  and noted that they  are not                 
  part  of  the  agreement.     Mr.  Luttrell  concurred  that                 
  findings, within the bill, are  supplemental to the original                 
  bill.    Co-chairman  Halford  then  asked  if  addition  of                 
  language  to  clarify that  a  resident is  someone  who was                 
  present  in the  state, last  year, would  be considered  an                 
  amendment to the  agreement.   Mr. Luttrell acknowledged  it                 
  would not be an amendment to the agreement.                                  
                                                                               
  Co-chairman Halford next  asked if there would  be objection                 
  if reporting provisions  (compliance on both local  hire and                 
  local  contracting)  included  receipt  by  the  Legislative                 
  Budget  and  Audit  Committee.    Mr.  Luttrell  voiced  his                 
  understanding  that the legislation  requires reports to the                 
  legislature.  In  response to  questions from Mr.  Luttrell,                 
  Co-chairman Halford  clarified his intent  that reporting to                 
  LB&A include both local hire  and local module construction.                 
  Mr. Luttrell said he could see no reason why that  would not                 
  be possible.                                                                 
                                                                               
  KEITH BURKE,  General  Manager,  Support  Industry  Alliance                 
  Organization, next came  before committee.  He  advised that                 
  the  organization  has  chapters  in  Fairbanks,  Anchorage,                 
  Kenai,  and   an  environmental  chapter  at   Prudhoe  Bay.                 
  Membership  consists of  approximately 350  support industry                 
  contractors who will gain advantage from the project, should                 
  it go forward.                                                               
                                                                               
  Mr. Burke attested to  the shrinking work force  and layoffs                 
  associated  with  decline  in  production  and  through-put.                 
  Workers  attempting  to  anticipate layoff  in  a  declining                 
                                                                               
                                                                               
  industry  often  put  their  homes  up  for  sale  to  avoid                 
  inability to meet mortgage payments if they are out of work.                 
  That is one cause of  the percentage of non-resident  people                 
  working within  the industry remaining  flat or  increasing.                 
  That trend  will continue unless the decline in the industry                 
  is turned  around and  growth begins.   Unless  that happens                 
  there  will  be  reluctance  on   the  part  of  specialists                 
  (technicians) to move,  from their  present residence, to  a                 
  state  that  is  not  on  the  growth line.    The  proposed                 
  legislation evidences a desire to reverse the present trend.                 
  Mr. Burke urged support and passage.                                         
                                                                               
  Senator Rieger  asked if the organization would  turn out as                 
  strongly  in  support of  a  lease modification  (before the                 
  legislature)  next   year  as   it  has   for  the   current                 
  modification.    Mr.  Burke said  that  if  the modification                 
  involves  jobs,  the economics  are  in place,  and revenues                 
  would  benefit the  state,  the organization  would  support                 
  modification of a lease that was previously uneconomical and                 
  would  not have  been  developed.   He  reiterated that  the                 
  industry is in  decline rather  than increase.   Oil is  the                 
  largest single revenue source to the state.                                  
                                                                               
  Co-chairman  Frank noted  that  information indicates  union                 
  hire is generally local to Fairbanks while non-union hire is                 
  not.    He  then asked  what  is  happening  in the  support                 
  industry   to  increase  resident  hire  generally,  and  in                 
  Fairbanks in particular.  Mr. Burke  said he was part of the                 
  original  committee established  to study  Alaska  hire with                 
  ARCO and BP.   One of  the recommendations from a  non-union                 
  perspective is to ensure that advertisement is placed in all                 
  papers,  not   just  Fairbanks,  when   non-union  jobs  are                 
  available.    The workforce  is  there.   Industry  was  not                 
  communicating  with  the community  regarding opportunities.                 
  There is  an agreement that  advertisements will be  made to                 
  all  areas  of Alaska.    That  is one  thing  the non-union                 
  contracting force can do.                                                    
                                                                               
  Mr. Burke  further acknowledged  that a  "certain amount  of                 
  courting" of local hire needs to occur.  He recommended that                 
  Fairbanks be more aggressive in  marketing what is available                 
  in the local market.  He pointed to previous construction of                 
  small modules in  Fairbanks.   The transportation for  small                 
  modules is  more  flexible from  Fairbanks  than  Anchorage.                 
  Fairbanks must sell its capabilities to the industry.                        
                                                                               
  Co-chairman Halford asked at what  point Mr. Burke feels the                 
  state  should  leave  oil  in   the  ground  for  the   next                 
  generations because  its value is not sufficient  for use in                 
  this generation.   Mr. Burke acknowledged the  difficulty of                 
  the question.  He then referenced other state resources that                 
  do not generate significant state  revenues but which create                 
  jobs  and keep  individuals  off the  welfare  system.   Co-                 
  chairman  Halford  noted  a significant  difference  between                 
                                                                               
                                                                               
  renewable resources and oil.                                                 
                                                                               
  SENATOR LOREN LEMAN next came  before committee to speak  to                 
  action  when the  companion  bill  (SB  318) was  in  Senate                 
  Resources.   Referencing three  proposed amendment,  he told                 
  members  the  committee  held  five  hearings  and  elicited                 
  information  to  develop  substantial  findings.    He  then                 
  referenced findings of  fact printed  in the Senate  Journal                 
  Supplement.   Conclusions  of those  findings are  contained                 
  within   CSHB  548   (WTR).     Senator  Leman   recommended                 
  incorporation of findings from CSSB 318 (RES) as well.                       
                                                                               
  END:      SFC-96, #113, Side 2                                               
  BEGIN:    SFC-96, #114-A, Side 1                                             
                                                                               
  The Senator acknowledged that the Senate  Resources approach                 
  met  with resistance  in  that it  proposed  changes to  the                 
  language  of  the  agreement.     The  House  bill  contains                 
  language, relating  to Alaska  hire and  Alaska contracting,                 
  lifted  directly  from  the  lease agreement.    It  has  no                 
  practical effect in terms of changing the  bill submitted by                 
  the administration.                                                          
                                                                               
  The Senate  Resources Committee made effective  date changes                 
  proposing that  agreement ratification occur  the day  after                 
  the legislature receives  a letter  saying that the  project                 
  has  been sanctioned.   This is different  than allowing the                 
  bill to become effective immediately and then waiting for BP                 
  sanction.    There  are practical  benefits,  to  the state,                 
  associated with the change.                                                  
                                                                               
  Senator Leman attested to interest by some Resources members                 
  to   capture  the   upside  potential--either   the  initial                 
  production rate, if  it is substantially  higher, or if  the                 
  field  were  substantially  larger  than   projected.    The                 
  committee ultimately decided not to address that.                            
                                                                               
  Co-chairman  Frank asked  if Senate  Resources explored  the                 
  constitutional question of  local hire.  Senator  Leman said                 
  the committee received advice from legislative attorneys who                 
  believe  CSSB 318  (RES) language  is forceful and  does not                 
  violate the constitution.   The Resources committee  revised                 
  wording saying that Alaska  hire would occur "to  the extent                 
  economically feasible" and replaced it  with, "To the extent                 
  allowed by law,  BP will construct  in Alaska and will  hire                 
  Alaskans."    That became  a  stumbling point.   Co-chairman                 
  Frank  asked that  Senator  Leman  provide information  from                 
  legislative attorneys  on the constitutionality  of language                 
  within CSSB 318 (RES).                                                       
                                                                               
  GERALD  HOOD, Chief Executive  Officer, Teamsters  Union for                 
  the  State  of  Alaska,  and  Vice-president  of  the  state                 
  AFL/CIO, next came before committee.  He referenced  his May                 
  3, 1996, correspondence (copy on file in the original Senate                 
                                                                               
                                                                               
  Finance Committee file  for HB 548)  in support of CSHB  548                 
  (WTR) and asked that the letter become part of the record.                   
                                                                               
  Co-chairman  Frank  inquired  concerning  how  the  industry                 
  chooses contractors  and how that  relates to "who  winds up                 
  working."  Mr.  Hood deferred comment  to the industry.   He                 
  referenced earlier  discussion of  Alaska hire  as an  issue                 
  much broader then Northstar and acknowledged that one of the                 
  benefits of discussion of the issue, with industry, has been                 
  a broader union  rule in  areas where unions  have not  made                 
  significant inroads, such as "core maintenance work."  There                 
  is  now   a  "relatively  strong  commitment   from  British                 
  Petroleum to, for the first time,  sit down and discuss ways                 
  that union contractors  can become involved.   Creativity on                 
  the  part of  both unions  and BP  will  be necessary.   The                 
  unions are encouraged by  this step.  Mr.  Hood acknowledged                 
  there is no firm commitment that unions will receive certain                 
  amounts  of work in  the industry.  He  attested to need for                 
  trust  and  voiced  his  belief  it  would  occur.    Recent                 
  discussions pertaining to Northstar indicate that union hire                 
  will enjoy 79 to 80 percent.   Union local hire numbers  are                 
  better than non-union  competitors.  The unions  will employ                 
  Alaskans.                                                                    
                                                                               
  Mr. Hood advised that the union  he represents is statewide.                 
  Calls will come from the Fairbanks  hall first.  Other local                 
  unions are also Fairbanks based.  All union North Slope work                 
  derives from those  halls.  The  interior will benefit  from                 
  agreements reached with subcontractors.                                      
                                                                               
  Co-chairman  Halford  inquired concerning  the  union versus                 
  non-union ratio of local hire.  Mr. Hood advised that he did                 
  not  have  the  information.    The  Co-chairman  referenced                 
  pipeline construction  and noted  that at  times union  hire                 
  appeared to  be  working  against  local hire.    The  Tulsa                 
  Pipeline Union seemed  to be in control of  "an awful lot of                 
  things against Alaskans for a while."                                        
                                                                               
  Co-chairman Frank directed attention to  pie charts from the                 
  Dept.  of  Labor and  noted allocation  of  hire.   Mr. Hood                 
  applauded committee  comments regarding  Alaskan  hire.   He                 
  suggested that CSHB 548 (WTR) comes  as close as possible to                 
  laying a foundation  and track record for that to occur.  He                 
  acknowledged that BP  would be  closely monitored and  would                 
  have to perform or  the tide of both legislative  and public                 
  opinion  would  change  dramatically  with  regard  to  "the                 
  business that they do here."                                                 
                                                                               
  ADJOURNMENT                                                                  
                                                                               
  The meeting was  adjourned for  floor session attendance  at                 
  approximately 6:20 p.m.                                                      
                                                                               

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