Legislature(1995 - 1996)
04/13/1996 10:00 AM Senate RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE RESOURCES COMMITTEE April 13, 1996 10:00 A.M. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Drue Pearce, Vice Chairman Senator Robin Taylor Senator Georgianna Lincoln MEMBERS ABSENT Senator Steve Frank Senator Rick Halford Senator Lyman Hoffman OTHER MEMBERS PRESENT Speaker Gail Phillips COMMITTEE CALENDAR SENATE BILL NO. 318 "An Act authorizing, approving, and ratifying the amendment of Northstar Unit oil and gas leases between the State of Alaska and BP Exploration (Alaska) Inc.; and providing for an effective date." PREVIOUS SENATE COMMITTEE ACTION SB 318 - See Resources minutes dated 3/29/96, 3/30/96, 4/3/96 and 4/11/96. WITNESS REGISTER Eric Luttrell, Vice President British Petroleum Exploration, Inc. POSITION STATEMENT: Commented on SB 318. Commissioner John Shively 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 St., Ste 1380 Anchorage, AK 99503-5948 POSITION STATEMENT: Commented on SB 318. Jim Baldwin, Assistant Attorney General Department of Law P.O. Box 110300 Juneau, AK 99811-0300 POSITION STATEMENT: Commented on SB 318. Kevin Banks, Petroleum Economist Division of Oil and Gas Department of Natural Resources 3601 C St., Ste 1380 Anchorage, AK 99503-5948 POSITION STATEMENT: Commented on SB 318. ACTION NARRATIVE TAPE 96-54, SIDE A Number 001 CHAIRMAN LEMAN called the Senate Resources Committee meeting to order at 10:00 a.m. The following is a verbatim transcript of the SB 318 portion of the meeting. CHAIRMAN LEMAN: Okay, we'll set those bills aside and take up SB 318, the Northstar agreement. I'll just note that we have on line teleconference in Mat-Su. I believe Bill Van Dyke with the Division of Oil & Gas is at the Mat-Su LIO, and in Fairbanks, John Ringstad from BP is on line. I don't who is available in Anchorage, but I assume that there are people in Anchorage on line on this issue. Just so we do things correctly, we'll recess the previous meeting, which dealt with the other bills, and we'll go back to that meeting at sometime when we have a quorum. I'll now call the Saturday meeting to order that was posted for Senate Bill 318. Mr. Luttrell, I think I'll run through just some quick questions for you, then Commissioner Shively. Is Attorney General Bothelo going to be here today? Okay, you're here, great. In your April 3rd testimony, you discussed the timing for BP sanction for the Northstar Project, and you said "I expect to have a somewhat better date on the startup by the time we get the sanction this fall." Here's the question: If in your view project sanction must be preceded by legislative ratification through Senate Bill 318 and you expect sanction this fall, why does the agreement provide a full year after the effective date for BP to sanction the project? ERIC LUTTRELL, Vice President, British Petroleum: When we addressed the question in the negotiation with the Department of Natural Resources, we always believed that we would be ready to go to sanction in the fall, but we felt it was prudent to put some time in there to allow for a clearer understanding of when the permits would be ready. Currently, the critical path in the development that we talked about in my previous testimony is the environmental impact statement, and clearly, it seemed to us prudent to give BP some flexibility to go sanction at a somewhat later date, although it certainly was not our intent. It just gave us some room in there in case that we thought the permits were not likely to come about in the time that we had predicted. CHAIRMAN LEMAN: I'm sure you are aware that Mr. Morgan on Monday -- when I was at the Anchorage chamber when he spoke -- also suggested that it was very likely that date could be his fault. I don't remember if he gave a month, but he suggested the same thing, that it was his desire that it would be this fall. If BP chose to use the Prudhoe processing facilities instead of new facilities out on Seal Island -- which you previously indicated that your intent is to build new facilities on Seal Island -- but, if you chose to use the Prudhoe facilities, what percentage of any processing fee paid by BP as the Northstar operator would go to BP as the operator at the Prudhoe Bay unit? MR. LUTTRELL: I'm going to give you an answer, but I'm only partly sure of my answer. BP is the operator of the western operating area, and I believe because the oil would be processed in the oil rim part of the field, I believe that the interest would be on the order of the 50 percent that we own in the oil rim, but that's not going to give you as an answer. CHAIRMAN LEMAN: How about if on that one we'll give you a chance to ... MR. LUTTRELL: I'll write the question down and we'll get you a better answer. CHAIRMAN LEMAN: If you chose not to build on-site processing facilities, or chose to do partial processing of the Northstar production on-site and the remaining elsewhere, such as at Prudhoe Bay, how would that affect the amount of capital spending expected instate, and also the employment numbers both short term and long term. MR. LUTTRELL: Well, Mr. Chairman, the decision to build stand alone facilities at Northstar has already been taken. Obviously, that is conditional upon the approval of the legislation, but we had been in negotiation with the owners of the several fields up there about partial processing and processing at other facilities and indicated to them that we would need to have a decision be made by April 1 before we would go forward, because it impacted the engineering drawings that we were doing. We have not been able to reach any kind of an agreement with any of the other fields, and so we have now proceeded forward with full processing on Northstar Island. CHAIRMAN LEMAN: But as far as you're concerned, there's essentially no chance that it would be that way. I believe that's what you said earlier. MR. LUTTRELL: I want to enlarge my question. It turns out that the amount of money that would be saved by partial processing and processing on shore is relatively small, in the tens of millions of dollars range. CHAIRMAN LEMAN: Like when you use present value of ... MR. LUTTRELL: No, that's just capital. CHAIRMAN LEMAN: Or even initial capital. MR. LUTTRELL: And what that means is that the processing fee would have to be very small, and that doesn't seem to be attractive to the other fields. CHAIRMAN LEMAN: In your April 8th letter regarding the materials for which BP is claiming confidentiality, you provided a table identifying the items submitted to DNR, the dates when the materials were submitted, and a notation of whether or not BP intends for the documents to be available for public review. In your identification of the materials, several documents are identified as not relevant, as opposed to being either confidential or not confidential. In the interest of full disclosure, are you willing to provide the committee with copies of the materials you've shared with DNR but which you feel are irrelevant. MR. LUTTRELL: I think I am provided there's a caveat attached to them, because we have been open in our conversations with the DNR, and as we went along, we began to develop materials which were more accurate and with greater certainty. And so some of those early materials tended to have answers that are different, or tended to have values that were different than what we ultimately agreed were the real values for things like reserves and costs. And so we just simply said the early materials are not relevant to the ongoing negotiations. CHAIRMAN LEMAN: Does DNR agree with you that they're not relevant? MR. LUTTRELL: I do know what the DNR agrees to. CHAIRMAN LEMAN: Maybe I can ask that question. Commissioner Shively, do you have an answer right off the top on that one. COMMISSIONER JOHN SHIVELY, Department of Natural Resources: Chairman, for the record my name is John Shively. We would have to look at them. The last category which they added, which was some of the information that went back and forth, we believe in that material is some numbers that are probably confidential under the confidentiality agreement. The rest of the document themselves may not necessarily fall under confidentiality, and we have not taken the time to review them. So that was our concern about them. And then there was some other information, and I don't a list in front of me, but I'm willing to go over that with you at later time, if you'd like. CHAIRMAN LEMAN: I just remind you. We haven't decided to go into any confidential session. I really haven't been asked to do so by you, and according to the -- I think there is information that you've identified as being confidential, but you haven't formally asked us to go into confidential session to look at it, so we'd have to vote to decide if we're even going to do it. MR. LUTTRELL: To clarify the issue, Mr. Chairman, in the hearing on Thursday night, the model was revealed to the committee in full context. We, in our letter, suggested and indicated it was our understanding that that model was confidential. We, in effect, on Thursday night waived our right to confidentiality of that model. CHAIRMAN LEMAN: Even though it was just illustrative? And that was done with your approval beforehand? MR. LUTTRELL: It was. CHAIRMAN LEMAN: Senator Taylor. SENATOR TAYLOR: Mr. Chairman, I appreciate the sincerity of the questions, and I think the questions are certainly relevant and need to be information that is available to the body. I would just like to apologize on behalf of this committee for the fact that we've now set around from 10:00 o'clock this morning, some of us, it's now 2:30 in the afternoon, and nobody is going to have the time in these closing days of the Legislature to wait for the transcript to be produced and read the transcript. I know that you and I will try to communicate as much of this information as we can, but I really believe it's somewhat of a useless gesture for us to all sit around and talk to a microphone for things that people are not going to take the time to read because they can't even take the time to be here. I've been around this place for 12 years and I've never encountered this level of arrogant disregard. I mean, we've got offices around here that I believe -- just the office of the attorney general, the office of the commissioner and others, and certainly your company, Sir, deserve a higher level respect than this. We've had members from the House seated around here all day long waiting for a bill to be heard. I know everybody else is very busy, but I'm just going to call on you at this point to just recess this and join me, and maybe let's go upstairs and have a little heart to heart chat with a few people because I'm personally embarrassed by this situation and I appreciate your patience and tolerance, and I know how embarrassed by all of this you are. I think at this point for you to sit here and testify to an empty table is an insult to you, and that's what I'd suggest we do. Let's just take a recess and see if we can get some people to start acting like professionals. CHAIRMAN LEMAN: I don't disagree, Senator Taylor, with your frustration, but I'd like to continue on, because if I have to wait for the others, then it's my opinion that I will have wasted a Saturday, and I don't want to waste my Saturday. SENATOR TAYLOR: I understand that. You won't mind then if I go up and try to beat the brush a little bit. CHAIRMAN LEMAN: I don't mind if you do, and we'll share with you the information we glean, and we'll applaud you when you come back with two on each arm. SENATOR TAYLOR: Don't be surprised if they're tied over the hood of my car. CHAIRMAN LEMAN: Your letter, if I can go back to the April 8th letter, lists a category of documents entitled "Federal Royalty Relief Efforts," and under the heading "Date to DNR" you note no data available. Question: does this mean that there still are no data available, that BP has not made any effort to reduce its federal royalties or what does that mean. MR. LUTTRELL: I'm trying to remember the exact context of the request, but I think the request was had BP requested relief on the federal leases within the Northstar unit to which I think the answer is no. As I recall the request is now four months back when that request came in. DNR might remember the exact details for that. CHAIRMAN LEMAN: DNR, can you enlighten us on this? Do you want to look it up and break in later when you have the answer. That's it, an easy day for you. Mr. Baldwin. Commissioner Shively, I think some of these questions will probably get into that never land in between Department of Law and DNR and you might as well come up here and we can - whichever one is better able to answer any particular one, you can do that. Commissioner Shively said in his opening remarks last week that we in the legislature must convince ourselves just as he has done that BP would not proceed with the development of Northstar unless the leases are amended as proposed in the agreement and ratified in the bill. The principal motivation from our perspective, the State's perspective, appears to be to encourage BP to develop earlier than might otherwise be possible, to develop those leases. It appears from the record so far that DNR, itself, may have had sufficient leverage to do just that without amending the leases and without involving the legislature before it approved the current three year plan of development which did not require BP to produce. That raises a couple of questions. The first one, has the Department of Law been consulted regarding whether the DNR may have had any legal basis for moving earlier than 1998 to force production of the lease terms, given the unique facts in this case? COMMISSIONER SHIVELY: Mr. Chairman, I do not believe we did. Perhaps the Department of Law on that issue. CHAIRMAN LEMAN: O.K., this is your recollection. MR. BALDWIN: I'm not aware of any request for our assistance in that area. CHAIRMAN LEMAN: Since testimony before this committee suggests that BP knew before it bought the leases, and definitely before the Department approved the three-year extension last June, that it was unwilling to develop the leases. Would that, perhaps, change how the courts might view the State's efforts to either expedite enforcement of its contract rights or to regain title to the leases. COMMISSIONER SHIVELY: Mr. Chairman, I should respond to that. We were not aware at that time they would not proceed. They had approached us about some discussion, really at that time in April we were still discussing whether or not the issue of NPSL's should be in 207. If it had been in 207, then, of course, we would have had to look at the economics and make a decision under the 207 requirements, but as far as I know, BP, themselves, at that time didn't have a good enough idea of the economics to know whether they could or couldn't proceed with the NPSL's. I think they did conceptually view them as a problem. You can ask them that whenever you look at something that's 89 percent of your net profits being part of the take, I think it causes certain questions. But really it was as we went through in the fall, October and then December, January and February when that became more apparent. CHAIRMAN LEMAN: But it was after the June approval of the plan of development that BP gave you, essentially, the comment that it would not move ahead without these changes. COMMISSIONER SHIVELY: Yes. CHAIRMAN LEMAN: Just a couple of questions here in the nature of policy questions, but I guess important ones on Alaska's need to remain competitive and make sure that companies believe Alaska is, as the Governor says, open for business. I think I've even used that on the floor of the Senate this week, didn't I? The question is have you, Commissioner Shively, considered where the State eventually ends up if as a matter of precedent it has to negotiate essentially against itself in other instances to encourage its existing lessees to honor the terms of their competitively bid contracts? COMMISSIONER SHIVELY: Well, Mr. Chairman, any of these things put the State in a difficult position. On the other hand there have been provisions that allowed the State to modify lease terms in law and in the leases since statehood. This is not a new concept. I was actually just reading an article the other day about the recent arrangements that were made between the Venezuelan government and a number of private companies and one of the conclusions in that article was that the first thing the companies were going to do down there was go back in and renegotiate their terms. And so it does put the government in a difficult position. It's why I think in things like this and also like heavy oil I think we need to do some economic and other analysis which we did. But I think in this day and age that's part of how the government manages its resources. But it's not new. We've made changes to leases before. We have not made changes in this particular way, but we have done them before and once you start down that road, which we started down years ago, yes, the State does put itself in a difficult position, but not an impossible position. CHAIRMAN LEMAN: Maybe in just a little bit different vein, but nevertheless it's one that I've thought of and I think it's one that exists as this whole process is exposed is whether the State's policies, its leasing policy, needs to be changed. I'm not sure, maybe, even statutes need to be changed to make this happen, but to give you the tools to make it easier to compel action on leases. I'm not sure if that's possible. Your testimony says that we have that ability, but we've never done it. And it seems like we get ourselves in the position of where it's going to be so many years and so much litigation that it almost becomes a useless exercise in many respects. I'm wondering if there are things that we can do as a legislature to help give you the tools to maybe make this whole process a little bit better. COMMISSIONER SHIVELY: I think that's something open to discussion - how leases are transferred, what can be transferred, whether or not we can bring extra pressure. I again want to go back to the sort of fact situation when a lot of this went on, because I think it's very important to understand when Amerada Hess put these leases up for bid, they really believed that they had a much smaller oil field than anybody had originally anticipated and they had a huge capital cost. My recollection is that only two companies bid on those leases. BP was - did win that bid. At the time, then Director Eason, agreed to allow for the transfer of these leases and then allowed BP to have an extension of time to do their development plan. Basically what was known about the field was that there was around 130 million barrels of oil and that the capital cost to develop it was about $1.4 - $1.5 billion. And that what was really known even three months later when then Acting Director Ken Boyd, I guess he was the Director by then, agreed to the three year development plan. I don't see anything out of the ordinary. You can go back and second guess either Mr. Eason or Mr. Boyd about their decisions, but BP didn't have a full analysis of what they were doing. They, then, did exactly what we expect when we look at a company taking over leases. One of the reasons I think people were interested, I assume that Mr. Eason and Mr. Boyd both decided that it was reasonable to allow that rather than to take the leases back was because of BP's experience and we expect a new company to go in and look at the economics to see if they can make some changes in and the development plan did allow for that. As part of that review, BP came to the decision that they came to, but they have made the field economic in terms of their review. I personally think if we'd, if Director Eason had decided that we should take the leases back at that time, he could not have ordered it into development last year. I do not think that was an option. If he'd decided to take them back, I'm not sure that when we bid them out that we would have gotten any significant amount of money because of what was known publicly. Unless BP or ARCO or someone else had done a pretty thorough engineering analysis at the time we bid them out, I do not expect that we would have gotten a lot of money. CHAIRMAN LEMAN: I guess if you in your post mortem on this exercise and last year's come up with things where we can help make changes that will help make this process better, I'd suggest you bring that to the legislature early next year so we or our successors, in the case of those who are going to be subject to elections, can have a chance to look at that. Early in the session there may be...I'm not trying to poke you too much for the late timing, but what ends up happening, the same thing as last year, we get in the final weeks and it just gets in the cross fire of all kinds of things. That just makes it that much more difficult to do this. COMMISSIONER SHIVELY: Mr. Chairman, I think there's one area that I think probably bears some looking at and I don't know what the constitutional taking issues there might be is this whole issue of a development account and what happens to it when leases are transferred. And that very much drives some of why I've come to the conclusion I have here. And I think that's something we may want to review for next year. CHAIRMAN LEMAN: Representative Phillips, you're welcome to be here and you're welcome to come to the table, if you like, but if you don't want me to draw attention to the fact that you're here, I guess I could do that, but it's too late...You're always welcome to participate in the Resources Committee. When the standard for determining whether or not to reduce the State's share of revenues is a determination that development would not otherwise be economically feasible and that determination is based upon a clear and convincing showing to the commissioner, as is the case under the royalty reduction statutes, I and hopefully all the State's lessees and you can understand the rules. My question is how can the Commissioner test whether and to what extent the State must give up public revenues to promote the development of the State's resources, if as in this case, there are no standards and no rules? COMMISSIONER SHIVELY: Well, I don't know that there are no standards and no rules. I mean we did a rather thorough economic analysis. We did come to the conclusion that there was not the kind of 207 standards, but you have to remember the other differences between 207 we were talking about generally driving royalties from about 12 1/2 percent down to about three or four percent. Here we're starting with a base 20 percent royalty. We're not reducing that at all and we're adding to it. So there's a significant difference. When you make these decisions, it's like anything else. You have to use your best judgement. I happen to believe one of the problems with government is we try to set all these sort of rules and guidelines and it's what make government unworkable. What you need is people who can make judgements, that can look at difficult situations, assess the information, and say this is a good idea or this is a bad idea. I see nothing wrong with that. I think that's better government. But this idea that we have now - that if you just have enough rules and enough regulations everything's going to be perfect is nuts. Even the bidding process doesn't necessarily guarantee the State that you get your full value for your resource. You get the most somebody wants to pay for it. That may or may not be full value. CHAIRMAN LEMAN: Do you recall if in the negotiations you talked about, and this may have come up before, but if you came up with a field size factor that if the field was considerably larger or I guess we've heard testimony that it's not anticipated to be considerably larger. Not like a factor of two, but it could be 30 or 40 percent larger. If there would be any corrective factor for that, was that ever a part of the negotiations? COMMISSIONER SHIVELY: We did have a proposal at one point on the table that would have taken that into account. That's not where we ended up. It was part of a more complicated formula that was developed by our Division of Oil and Gas that was part of our counter offers. CHAIRMAN LEMAN: Was that - just fell by the wayside or is it you geared toward something else that's kind of something you gave up in return for maybe the assurance of more.. COMMISSIONER SHIVELY: Money... CHAIRMAN LEMAN: money up front or a projection of more money in that supplemental royalty? COMMISSIONER SHIVELY: I think I'd also say in that regard because of the confidence that we have in some of the people who work in that part of our department, we feel very comfortable with these figures. We have some pretty exceptional people who have been very helpful in things like ANWR. This is not an unknown as Ken Boyd explained the other night- an unknown structure or an unknown field. So I think that's why we have a little more comfort than I think some other people do. The other thing is if there may be more oil, but one of the things you cannot predict right now is at what cost there is to bring it on. You know there's been a lot more oil in Prudhoe, but I think the letter we delivered to you yesterday about the cost that it's taken to get extra oil is significant. It's in the millions of dollars. So you can run extra oil, but I think it's unfair when you do an analysis then, not to try to assume there will be extra money to get it. Because that's been the sort of history. CHAIRMAN LEMAN: It seems to me that there has been no shortage of undeveloped leases across the North Slope and that's probably the reason for the proposal for areawide leasing. There's the Point Thompson unit, the Badami, and elsewhere. There are also pending projects like the gas pipeline. By the way, we passed the resolution yesterday. COMMISSIONER SHIVELY: Do we have a fiscal note on it? CHAIRMAN LEMAN: Yes, we did. Well, it passed - we left it in. We still have to deal with it, I guess, in the Finance Committee, but the question is how can Alaskans be assured - and I guess this comes down to what I consider the first of the two questions I mentioned that I need to have answered in my mind to be satisfied with any answer before I agree to support this, but how can Alaskans be assured that passage of SB 318 would not simply set the precedent for a series of future negotiations potentially reducing the benefits for which the State originally bargained? COMMISSIONER SHIVELY: How can you be sure? If that's the test, I don't know if we can pass it. I think there may be other... CHAIRMAN LEMAN: I'm not so much calling for a guarantee that there wouldn't be future ones. I think there's a good chance there will be, but does it set a precedent that undermines a process that is in place. If we were to say something essentially to the effect that we want the existing lease process, the bid process to be the rule rather than the exception to the rule and only in unique cases you bring these exceptions or they may be proposed or we may authorize you to do it on the exceptional cases. Then that would set at least a precedent for a system that bidders will know when we bid in the bid variable is such and such, whatever it is, then the State of Alaska is going to be consistent with that. That's more of what I'm getting at. COMMISSIONER SHIVELY: I think there are a couple of precedents we've set here. We do have some precedent as a result of 207 when they are marginal oil fields. No one is calling this a marginal field. The one precedent I think we've set here with this field in this kind of situation is that it is something that not only gets the review of the executive branch, but the legislative branch. And I think that's an assurance that it's not just some kind of precedent that can go wild. There are two very extensive levels of review. And I think that forces any of these kinds of arrangements to be economically realistic. CHAIRMAN LEMAN: Do you view the State's leasing statutes as being just a starting point for negotiations or would you view them as being competitively bid is the norm and other than the exception. How do you view it? COMMISSIONER SHIVELY: I think, yes, I view it as the leases competitively bid are the norm and that's the way most leases have been developed. But this is not the first set of leases that there have been negotiated changes on and I do not believe it will be the last whether or not the legislation passes or not. In most of our leases there are not changes. That should be the starting point and that should be the - again you've got to look at the situation. Here you have some leases. These leases were leased out 16 years ago at a time when people had much different assumptions, both about the amount of oil that might be in that structure, but also more importantly about what oil prices would be today. Today, if you bid, of course we don't use the net profits as a bid variable, but of course if you did, there wouldn't be anybody bidding 80 - 90 percent net profits. It just wouldn't happen. CHAIRMAN LEMAN: I guess just to still my questions and concerns two main ones and the first is are we maintaining the integrity of our leasing program and I believe you've satisfied yourself on that one that we have. Is that correct? Good. And the second one is are we maximizing the return to the people of the State of Alaska. And I believe you've satisfied yourself on the answer to that one in the affirmative. Is that also correct? COMMISSIONER SHIVELY: I guess the problem I have is with maximizing. I'm not quite sure I'd do that. I think given the current set of circumstances this is a very reasonable change for the State to make because we have a declining asset in the net profit leases. And that declining asset is also based largely on money that BP never spent. Given this fact situation, I think this is a very good deal for the State. In addition we have some other things. Kevin Banks testified several days ago for him it was an O.K. deal. I think that's exactly the correct answer from Kevin's standpoint. On the other hand there are some things that aren't in the economics that I think are important to the State. One that BP has to go ahead or otherwise we get the leases back. That gives us, you know, an advantage that otherwise we would have to litigate. And then I think the sort of moral commitment that BP has made in terms of what they're going to do in construction. There's an extra economic benefit that has some interest to me as commissioner, but also I think some interest to the State as a whole. So you've got to look at the whole package. SENATOR LEMAN: Are you satisfied that the conditions in the agreement are enforceable? COMMISSIONER SHIVELY: The conditions on local hire and local contracting? I do not think we could - that that language allows us to enforce to the extent that BP has morally committed to do and I don't think you can write language to do that. I think their commitments are beyond what is allowed by the law. CHAIRMAN LEMAN: If we were to add some provisions that maybe help enhance that particular area which has been an expressed concern of several members of this committee, as well as many members of the public, would you view that as being a deal breaker in terms of - we heard testimony before about how much we as a committee and as a legislature change this. Would you view that as a deal breaker between the State and BP. COMMISSIONER SHIVELY: You have to ask BP that. For me making the deal better is not a deal breaker; it's just another deal. If you could find a way to do it, we would be very supportive of that. MR. BALDWIN: I think one thing to be cautious of is not to import something into the transaction that would lead to some successful litigation to block it. In other words, first I see two areas of concern. One is creating a record here that shows that your primary concern here is local hire as being the basis for this legislation. There are other sound valid reasons for this which the Commissioner has outlined for you and that should be the primary State interest. Those should be the primary State interest to pursue here. The other night you and I had the discussion about what was direct and indirect benefits and I had a memory block. Well, I think local hire should be an indirect benefit on that analysis, not a direct benefit and that's how you should approach it for determining the public purpose of this transaction. And so I think the thing the committee wants to be careful of is making as a solid rock hard condition of this transaction that local hire be enforced. I mean, as much as the Commissioner likes the concept of local hire as we all do, as a State it's been fairly well determined in at least three State Supreme Court opinions and one U.S. Supreme Court opinion that we are very limited in what we can do in that regard. The agreement was very carefully worded to say that BP will do whatever it can within the extent of the law and BP can do a lot of stuff on its own as a private actor, but when we as a State start enforcing them to do things, that's when we get into legal difficulties. CHAIRMAN LEMAN: What if we get them to agree to do it as part of the agreement. When you have agreement and we know what the agreement means and we understand it, then we agree to approve it. How can they litigate on something they voluntarily agreed to do. The question is one of whether or not there was State action involved in obtaining the agreement. I think that would be the issue and I don't want to state whether I would see it as being State action or not, at this point, but I think that would be the primary issue. The second thing is that the agreement or the way I understand the way it's worded is that the bill is attached to it as an addendum and it says if a bill in this form is passed, then this agreement takes affect - similar to this. COMMISSIONER SHIVELY: Mr. Chairman, I might add I think the problem is not necessarily litigation for BP, but litigation from a perceived aggrieved third party. TAPE 96-54, SIDE B I remember when we went through the local hire issue in Red Dog, you know, it was aggrieved third parties who didn't like the fact that there was a priority for people living in an economically depressed area. They brought the litigation. So that's the risk. SENATOR PEARCE: On Red Dog? SENATOR LINCOLN: It's not on Red Dog, but it's on local hire. SENATOR PEARCE: That was discrete discrimination within Alaska, though. COMMISSIONER SHIVELY: I would have to go back and read the decision. I think the Supreme Court had a variety of reasons. You're right it did deal within Alaska. MR. BALDWIN: Right, but Hickel v. Orbeck, which preceded it, dealt with an attempt to do it as a part of a lease transaction. SENATOR LINCOLN: Mr. Chairman, I think that of all of the provisions that are within the bill and the lease that this particular portion of the bill I've had more contact on than any other. To me it isn't tied up as tightly as I think that we can make it. When within the bill it says they're committed to hire Alaska residents, one, my question is what is a resident. The same with the contractors and when we then, BP's letter, dated April 5th, says that it's a strong commitment to hire Alaskan workers, again I ask what the interpretation of Alaskan worker is and that they will hire as many of the more than blank number of people for the job. I don't think that that is strong enough and I think that if there is some way, Mr. Chairman, that we can get legal advice to strengthen this and it is not - what I hear is that if BP agrees to it, then it's not a deal breaker. I think that in the past we've seen terminology like this and it's not binding. It just doesn't - it just says, if at all possible qualified, those types of words that we've seen in the past not be terminology that is going to ensure we have Alaskans - local, local hire on these jobs. So that's one of the things I think we really need to somehow improve in our commitment. And then, I guess, the other question I had is on the modules that's a commitment to have that in Anchorage? That's the only place it's going to be done? SENATOR LEMAN: Are you asking that of me. I don't know that I can give the answer. I guess from my perspective I would say yes, but we all probably have different perspectives. Senator Taylor would say it's a commitment to have it in Sitka or Wrangell, but... SENATOR PEARCE: Ketchikan. SENATOR LINCOLN: What I did read here was that when they talk about that the - when they talk about the acreage of fabrication yard, it says very specifically in the BP letter, dated April 10th, that it would be in Anchorage in five to 10 acres. So they must have already made a commitment that this would be in Anchorage. COMMISSIONER SHIVELY: Mr. Chairman, Senator Lincoln, I think the reason for that is that's referring to the sea lift modules. So you have to have it in a place where there is access to the ocean and as I understand it and you can bring BP up here and I'm sure Eric can give a better explanation than I. But there are fabrication yards for the smaller part of the modules in Anchorage that would then be put into larger modules and since that activity is already there, that's why they are looking at Anchorage. But you need water to do sea lift modules. That's a requirement. SENATOR LINCOLN: I just hope that's not the only place they are looking at for doing fabrication. I understand the need to have a court. COMMISSIONER SHIVELY: Mr. Chairman, Senator Lincoln, certainly some of the final fabrication has to be done on the Slope. When things are put together there, as I understand it, there is some commitment in the interior that relate to trucking and moving and of course, a number of the contractors that will be involved here have statewide ownership and have the ability to recruit workers statewide. CHAIRMAN LEMAN: I may be speaking out of turn. It may be old information, but I understand that they are looking at Seward and Anchorage, maybe a couple of sights in Anchorage, and I don't know about other places. There may be other sights and they may be trucking them together and I believe there's probably several sights where they actually fabricate and truck together and then create the megamodules. Again, I'm probably not the best person to describe where all those are. It's just my understanding. Senator Pearce. SENATOR PEARCE: I have a different question. CHAIRMAN LEMAN: That's O.K. SENATOR PEARCE: As a follow up to your question about what would happen to the leases if BP didn't perform. Let's take one step back. What happens to the leases if the legislature doesn't approve this deal. COMMISSIONER SHIVELY: Well, what I would anticipate happening is that BP would complete their three-year development plan. Several things - they could come back next year as we all know or they could complete their development plan. That's scheduled to be completed in April 1998. At that time there would be discussions of a continuing development plan. That is the time that we could order them into production. In an attempt to do that there are three possibilities if we do order them into production in 1998. One is they do it. Second is they decide that because of the net profit lease provisions it's not economic and they give the leases back to us and the third thing to do is litigate. SENATOR PEARCE: Under.. COMMISSIONER SHIVELY: There is a forth option that we would come up with a development plan that would allow them to continue to delay and not go into production. That's the other thing we could do. SENATOR PEARCE: And under this agreement, if they don't proceed, what's the trigger in the agreement that we think would bring the leases back, if they don't get sanction from their Board to move forward or if they don't meet some performance measures. COMMISSIONER SHIVELY: Mr. Chairman, Senator Pearce, the measure we use to sanction by the Board of Directors, because we've assumed if their Board of Directors approves the expenditure of money, they are going to expend it. And we've given them a year to do that. They have indicated that they hope to get that done this fall. SENATOR PEARCE: You said, I think, at the very first hearing, that the paragraph 32 replacement was the product of what you described as intense negotiations. And I certainly understand that an inability to obtain permits would be a concern - obviously something the company doesn't have any control over and nor, God knows, do we. But is there anything else in that intensely negotiated rewrite that would give us less legal standing than we had in the present language on the lease should they not perform and we want the leases back. COMMISSIONER SHIVELY: I don't know. I'm not prepared to answer that. Mr. Chairman, Patrick Coughlin's on the line in Anchorage. If he is, he might be able to answer that. CHAIRMAN LEMAN: Mr. Coughlin are you on line and if so, do you want to respond to that question. MR. COUGHLIN: Yes, I think we are on line. For the record my name is Patrick Coughlin. I am the petroleum investment manager and Deputy Director of the Division of Oil and Gas. The only change that was made to paragraph 32 of the lease force majeure clause was the insertion of the words in the bracketed language on state, local, or federal permits or environmental impact statements. CHAIRMAN LEMAN: Does that complete your response, Mr. Coughlin? SENATOR PEARCE: It answers my question. CHAIRMAN LEMAN: O.K. question answered. Further questions at this point. Some final questions for the Department of Law. Governor Knowles transmittal letter states that the agreement between BP and the Department accomplishes several things and I quote and he may not have written that letter, but I'm sure you've seen it. If BP Exploration (Alaska) fails to perform its obligations under the project schedule, the leases terminate automatically, thereby allowing the State to lease the tracts to another company. Doesn't the agreement contain a provision that would allow the administration to waive this obligation by prior written consent? COMMISSIONER SHIVELY: Mr. Chairman, again I think Mr. Coughlin is ... MR. COUGHLIN: ...in paragraph 28 (c) which is added to the agreement. It states the State may waive performance of an obligation required as of the project schedule by prior written consent. CHAIRMAN LEMAN: O.K., I think we got you right in the middle of your response. We lost part of it and so you concur that the agreement does contain that provision. MR. COUGHLIN: Yes. CHAIRMAN LEMAN: So is the statement in the Governor's transmittal letter correct or is it just partly correct? MR. COUGHLIN: I believe that the statement in the Governor's letter is correct, that however one does things that the State wanted to reserve to itself the right to waive the obligation if the State determined that it was in its best interest. CHAIRMAN LEMAN: O.K., thanks. If the legislature passes the bill with the expectation that BP will be held to its obligations under the agreement, thus assuring the many benefits that come to the State through the agreement, what is to stop the administration from waiving that obligation? MR. BALDWIN: Whoever exercised that power, I assume it would be the commissioner, must do it reasonably and not in an arbitrary manner. CHAIRMAN LEMAN: Is there a process that has documented or at least, I guess, there has to be some reasons given. MR. BALDWIN: Yes, it would have to be done reasonably and not arbitrarily. CHAIRMAN LEMAN: Is that your understanding, Commissioner Shively? COMMISSIONER SHIVELY: Yes, assuming I last for a year and commissioners don't tend to last very long at DNR, but I might get, I mean I have no intention of waiving that. That's a very important part of the arrangement and I mean, I think that if we cannot get this project going, then we assess those leases and get them back out into the public market. CHAIRMAN LEMAN: The transmittal letter also says the agreement has provisions, and I quote, that require BP Exploration Alaska to hire Alaskans within the constraints of law and to contract with local construction and fabrication companies to build the project facilities. Finally, the letter says the agreement will result in Alaska companies fabricating production modules, including one or more of the first sea lift modules ever constructed in Alaska. You have the agreement with you don't you? Would you read those provisions for the record where those are or at least identify which paragraphs they are in the agreement. MR. BALDWIN: This sounds like a deposition. CHAIRMAN LEMAN: I've been deposed before. MR. BALDWIN: I'll have to defer to Mr. Coughlin. CHAIRMAN LEMAN: O.K. Mr. Coughlin, could you at least identify the paragraphs. MR. COUGHLIN: The paragraphs that deal with the employment of Alaskans are paragraph 41 of the 1980 leases and paragraph 31 of the 1983 leases and they obligate, as the letter states, BP to employ Alaskans within the constraints of law. CHAIRMAN LEMAN: Patrick, I'm not sure if we're getting all of your testimony or if you're stopping or if we're losing a portion of it. Are you completed with your testimony, with your response? MR. COUGHLIN: Yes. CHAIRMAN LEMAN: How enforceable are those provisions in your opinion? MR. COUGHLIN: Well, I think that as Commissioner Shively stated, that you cannot, and Jim Baldwin can correct me, we try to draft a provision that would be constitutional, that is not unconstitutional on its face, but which would go as far as we could in ensuring that BP would hire Alaskans, that we try to require them to adopt programs provided for Alaskans. However, you cannot by law create a preference. And the agreement does not create a preference. That would not be enforceable. CHAIRMAN LEMAN: How would the administration or a court, if the need should arise, measure compliance given the number of disclaimers and qualifiers and the lack of any specific performance measures? COMMISSIONER SHIVELY: Mr. Chairman, maybe I can answer some of that. I think we've stated this before. What we are asking BP to do and what they have committed to do I do not believe is enforceable by law. We, as a result of some, I think, outstanding efforts put forth not just by the administration, but by leaders in the legislature to talk to BP about what it meant to develop these fields and what it meant to use Alaskans, both in contracting and hire, we have gotten BP to completely change how they were thinking about development. They've gone from a development plan for Badami which was somewhat similar where virtually everything was going to be done in Canada to talking about contractors in Alaska about how to do it here. And my test right now is not what BP says, although I think that's important. My test is what I'm hearing from the contracting community about how they're being approached and the discussions that are taking place about construction in Alaska. In Badami it was very clear what the discussions were. The discussions were original development of modules in Calgary, shipping them up to Hay River, gluing them together, making them a little bigger, and then shipping them to Prudhoe. The discussions now are not around that concept. They are around what we do to truck modules here in Alaska, what kind of facilities are needed for sea lift, how you're going to do it. I mean that's the test and I think that's a much more important test. We will not maintain, and I said this earlier today, that we can legally put into any agreement, as far as BP has said they are going to go and we now believe they are going as a result not just of what they are saying, but of what other people in the contracting community are saying and I think that's the important test. SENATOR LINCOLN: On the same point, Mr. Chairman, I just reiterate, and I think I heard, that it's nonenforceable. But when we look at that paragraph 41, it says again Alaska residents which is very narrowly defined, I think. The one kicker that we have experienced over and over again in the rural and bush communities if somebody does not want to hire you, they put in the clause "and qualified" and within paragraph 41 it says that the Alaska residents and the contractors that are available and qualified. And so that's a way to me that you always end up kicking people off of the roster and it's that paragraph 41, again, says to the best, they'll use "best efforts." Whenever feasible that they will fabricate the modules in Alaska. Whenever feasible - that they're going to encourage contractors. It's just weasel words, I thought. COMMISSIONER SHIVELY: Well, absolutely. SENATOR LINCOLN: If I might finish, Commissioner, that the lessee shall furnish the Department a quarterly report talking about the number of residents that personnel that have been hired. I'd like to see not only the residents that have been hired, but I want to see on that quarterly report, and it doesn't specify that in here, those non- residents that have been hired. Those from the lower 48 and I'd like to see what they use as resident. So I just don't think that particular clause in there and it might be because of the laws that we've got on the books that it's just - we've had this problem here in Alaska for years and as the Governor has stated that we need to have enhanced local hire. That it has to be truly Alaskan residents that get hired. I think this is an opportunity to do it, but I just don't read it in here. COMMISSIONER SHIVELY: Mr. Chairman, I agree with you. We took this as far as we thought we could go, not because of laws, but because of constitutional constraints. Both Alaska Constitutional constraints and U.S. Constitutional constraints. That doesn't mean that we can't force BP to go beyond what I think has been done by the industry in the past and we intend to do that. And I agree with you. As you know, both of us have spent a fair part of our careers trying to get people, particularly from rural Alaska, jobs. And I've seen time and time again when the word qualified has been used against particularly rural people. As part of what we're doing as an ongoing relationship, not with just BP, but with ARCO and the contractors is looking at how we can put together what their needs are and what our training programs are. Something that's never been done in this State before - to bring in the nonprofits in terms of doing the kind of recruiting they have done, for instance, for Doyon Drilling and for Nana, too. So, you're right. I mean, I'm not going to sit here and tell you that that language is going to do what you and I and the Governor and others want done. It will not. What it will take is a commitment from BP and others, ARCO, and constant vigilance by the political leadership of this State to make sure they do it. And all I can tell you it's our commitment to try to do that. And in terms of the sort of more specific thing about the kind of report. It certainly our intent, and we get to develop the kind of report they give, that you look at not just who got hired as the residents, but what the total work force is, where the people came from that weren't Alaska hire, so that's all very much part of what we would expect to see. We, of course, actually have some access to that information ourselves as a result of the Department of Labor. The issue on definition of residency is a real difficult legal one. I mean I think the legislature, I mean one of the things that certainly, at least in intent language, if you want to have some discussion of that issue of what you considered a resident. I think that would be appropriate. CHAIRMAN LEMAN: I have just one final question and I think this one should probably be directed to Mr. Coughlin. I'm going to revisit the - what I was just asking questions on and I'd like you to read for us the section of the agreement, the actual words that provide for what the Governor says in his letter. He says the agreement will result in Alaska companies fabricating production modules including one or more of the first sea lift modules ever constructed in Alaska. I'd like you to read for us where the agreement has that provision. MR. COUGHLIN: Well, the only language in the agreement that talks about fabrication of modules is again in the paragraph 41 of the 1980 lease and similar provision in the 1983 lease which provides for work in connection with this lease lessee shall use best efforts to contract with Alaska firms and fabricate modules in Alaska whenever feasible. That is the only language I am aware of that addresses the issue you've asked about. CHAIRMAN LEMAN: O.K., I believe in your previous response you've responded only to the Alaska hire portion, but I'll ask the same question as before and ask you to respond to the construction, the fabrication of production modules in Alaska. How enforceable is that provision in your opinion. MR. COUGHLIN: I would answer the question the same way the Commissioner did. It would be very difficult to enforce. My opinion is that BP has made commitment to hire the people of the State of Alaska and it will be up to the political will of the governor and the legislature to ensure that the representations that BP has made are followed in the event the legislature sees fit to pass this bill. CHAIRMAN LEMAN: Would you then consider it as important as Mr. Morgan stated in his opening address where BP has a world wide reputation to protect, that their reputation in the State of Alaska, with us, and probably how they would see it as equally as important to follow what is represented here and our understanding of it. MR. COUGHLIN: I believe that BP's reputation in the State of Alaska is on line with this agreement. And you can ask Mr. Luttrell the same question, but I believe that they have made representations. COMMISSIONER SHIVELY: Could I add one thing to that, Mr. Chairman? CHAIRMAN LEMAN: Yes. COMMISSIONER SHIVELY: I think there is one difference and that's, I want to go back to the Badami example. I mean one of the issues about the proposals that were made about Badami and Calgary there was a big disagreement about what was economically feasible and I think this language would allow us to go test that feasibility in ways that have not been done before should BP make a major change in their current proposal. So I think it does offer us a little bit of leverage. What the courts would finally say about that, I think, is, and that's the only place we could go to get restitution. I'm not sure. But I think there is a little bit of leverage there if they were to just all of a sudden get this thing through the legislature, turn around and go back to the proposal that I think was, in some ways, considered by many of us a slap in the face given that we already have a budding module business developing in Alaska. To build everything in a country that's basically opposed us recently on every major economic development step and on the other hand is now busy stealing our fish. CHAIRMAN LEMAN: You must have seen my presentation on TV last night. COMMISSIONER SHIVELY: I'm sorry to say I missed it. MR. BALDWIN: I saw it. CHAIRMAN LEMAN: I had to jab our friends to the south and east of us, right? Just a little bit. SENATOR PEARCE: Just a comment for the record. I think we're being a little schizophrenic here in terms of Alaska hire when on one hand we don't make our own union members be Alaskans like with the ferry system and we don't force them...I mean if they lie about whether or not they're Alaskans, that seems to be fine. And so I don't why we're being quite so energetic about pushing BP which has had a good Alaska hire record in the State. But, John, there's been some talk - discussion - I know amongst some of the legislative members and it's been just talk, so I don't want to characterize it as anything bigger than that. But there has been some discussion about the possibility of trying to put some sort of language that would require a project labor agreement. Would the Governor be supportive of that? COMMISSIONER SHIVELY: Mr. Chairman, Senator Pearce, I've seen some language that was developed that would suggest, as I understand, not requiring a project labor agreement, but requiring BP to use best efforts. To my knowledge we haven't taken a position on that. The other thing, Mr. Chairman, if I might, just add, we have taken a lot of time and effort today to beat up on the oil industry about their hire record. In terms of major industries in the State their record is not that bad. I mean it's not perfect and in some ways the trend recently hasn't been good, but in comparison to almost any industry it is excellent. And so I think that's something that should be said for the record. CHAIRMAN LEMAN: And I just am trying to clarify - I don't think we've been beating up on the oil industry and I hope BP doesn't take this a beating up on them as much as just the feeling of assurance that we understand what the agreement is and I think it is consistent with what they have represented to us and it's just our effort of ensuring that part of good public policy is being meted out and I hope they don't read it otherwise. SENATOR LINCOLN: Mr. Chairman, I want to state that, you know, I certainly am not when I ask the questions about local hire and want to see that there's local hire provisions in there. I just think it's good business that both parties when you're signing an agreement that both parties understand very clearly from the onset what those words mean. When I say they are weasel words I think it is a way to say well, we did do that. What more did you want? And so to make it very clear when we are talking about Alaskan hire what Alaskan - what that definition is for Alaskan resident. So I don't, I'm sure that BP fully well understands as well as the other companies that Alaska we need to ensure that we hire our own people here in Alaska first and exhaust all of the rolls that we've got of folks that are on unemployment and a letter that I just received April 8th says that, and I have no reason to disbelieve this, although I don't have statistics that show exactly how this is, but Alaskans experienced their lowest percentage of participation in the North Slope construction projects to date and if that is so, we just need to correct that and make sure, ensure, that we are in fact hiring Alaskans. I just think that's good business on both parties. I don't think that they take this personally. I agree that the ferry workers and all of the folks should be Alaskan hire. I have no problem with that. CHAIRMAN LEMAN: I'll check the Senate record, the Journal for yesterday to see the day before on that MEBA deal. SENATOR LINCOLN: Absolutely! CHAIRMAN LEMAN: Maybe you were gone. SENATOR LINCOLN: No, I have attended all of the...I don't think I've been gone on any of the roll calls. CHAIRMAN LEMAN: In response to Senator Pearce's comment. I agree with you. I think the legislature, at least the Senate, has been consistent in its response to that - that Alaskan residents should really be Alaskan residents. SENATOR PEARCE: Jim, how does the - how can Congress do or help through the U.S. Constitution - if we can't do Alaska hire, how can they do laws that force local hire which is by definition - cuts out non- Alaskans. How does that work? MR. BALDWIN: I'm not sure what specific statute... SENATOR PEARCE: Title 29, and I don't know either because I don't know enough about it. And John may know from his previous positions, but as I understand it in the pipeline right-of-way where the transalaska pipeline, Title 29 or 8 or Title something or other, that law, that right-of-way law allows, in fact calls for, a percentage of local hire of the local residents, not residents? MR. BALDWIN: Natives. SENATOR PEARCE: Alright, natives, but how can they racially define it if you can't define it by state? MR. BALDWIN: Well, I'll give a legalistic answer and then the Commissioner who is a very good jail house lawyer can clean up after me. SENATOR PEARCE: I'm not saying they shouldn't have done it. I'm just trying to figure out why we can't do that. MR. BALDWIN: Well, for one thing the provisions in the Constitution that we're dealing with are directly toward state action, as to what states can do concerning the privileges and immunities of citizenship. And so the idea in the Constitution is that the State should not be left to their own devices to come up with fragmented employment criteria. In other words, if you are a citizen of one state, you should be able to exercise certain privilege and immunities equally in all of the states. So that's directed toward state action. Now, Congress has vast powers under the commerce power. It also has vast powers in relation towards deals with native people. It has a special relationship toward native people. So maybe under a mix of those powers that Congress can act in a different way than a state can. So I think that may very well be the legal answer to your question. I don't know specifically on the pipeline act, but I tend to think it's probably grounded in those elements. SENATOR PEARCE: The actual contracts that call for the example, Red Dog, I think the actual contractual arrangement called for the local and native hire was the contract between the land owner which was a private land owner and the company and, therefore, that was obviously legal, I assume. Can we transfer the Northstar leases to a private entity and make them require whatever kind of help they wanted? It's not as facetious as it sounds. MR. BALDWIN: Well, I think you're probably a pretty good jail house lawyer, too. But...I don't know. That would be a hard one to analyze. What they look for is state action and I've been sitting here kind of curling my toes every once in a while and when I say we've gotten BP to do this or gotten BP to do that - you know a lot of what's going on here is what BP's going to do on its own because it sees its in its interests to do it and to the extent we can foster that attitude in BP that's probably O.K., but the minute we start enforcing it, then it becomes State action and we get into the legal arena and we do something that may either stop or impair this transaction. On Red Dog we had a statute that set up preferences within the State and that was attacked in the Ensearch case. COMMISSIONER SHIVELY: I think he is talking about the agreement between Nana and Cominco which provided for a preference for Nana shareholders. MR. BALDWIN: But there was no State action involved in that, though. COMMISSIONER SHIVELY: No. SENATOR PEARCE: And is that for just Nana shareholders? COMMISSIONER SHIVELY: We had a sort of what I called a concentric circle approach and Nana shareholders got first, people in the northwest second, and people living in Alaska third. SENATOR PEARCE: I can remember Suzy Erlich counting noses, quite literally. COMMISSIONER SHIVELY: They are required every month to report their hire to Nana. CHAIRMAN LEMAN: Are there further questions of these two gentlemen? That's all I had of you. Kevin Banks, I believe you are going to run through what was it, another run or was it something else. I remember we left and kind of cut out about 10:00 and said this is about all the farther we're going to go tonight. I just got this new information this morning and I haven't had a chance to spend much time with it, but if you can run through it quickly, it's 3:30 (p.m.). I had announced previously that I'd like to take public testimony today and I know there are some people waiting to do that. I would like to get into public testimony today and take as much of that as possible. I will need to close this down at 5:00 (p.m.). So, do you t think we can fit this section in within the next half hour, do you think? KEVIN BANKS: Well, Mr. Chairman, for the record, I'm Kevin Banks, Petroleum Economist for the Division of Oil and Gas. After my experience on Thursday night I hope the Committee will find that my ability to predict how long it will take to tell if this does better than my prediction about what the model says. I had really only one area to discuss, an additional area to discuss, about the model and I didn't anticipate that would take very long at all. And so it truly does depend on questions. CHAIRMAN LEMAN: I recognize that the amount of time is directly related to the questions we asked, but I do believe the level of questions asked last Thursday was probably very good and I'm glad we had those questions asked and you were able to be here to answer them. KEVIN BANKS: Mr. Chairman, what I handed out, or what is being handed out to the Committee at the moment, and what I had brought over last night to your staff represents another run of the model. You will recall that the model, the printout, that we were discussing on Thursday night calculated what the net profit share would be assuming that development occurs with full production beginning in 1999. Now, the second run predicts what the supplemental royalty will earn with the same assumption - that production begins late 1998 and goes into full production by 1999. I can illustrate, for example, where this difference shows up is on page three, the very far right hand column. You can see that the sum of the State supplemental royalty. I'm looking at the, basically the third line of the printout of that page. Sorry, the third line shows 50.6 million dollars for State supplemental royalty. And that's in inflation adjusted dollars. CHAIRMAN LEMAN: And this is the illustrative model. In the actual model you used that number was just a little bit lower than that if I remember correctly. It was 41 million dollars. Was that correct? KEVIN BANKS: We did pass out some materials and if you will bear with me...materials that were passed out with the white notebook. We indicated that, I believe, it was 37 - that was in 1996 dollars. That number, in fact, appears in the second box below, down on the, below the dollar sign m reel heading and then the right hand column. It's the second figure there - 37 million. CHAIRMAN LEMAN: So this illustrative model in terms of the output is producing something pretty close to what you actually used? KEVIN BANKS: That is correct, sir. In particular this, the supplemental royalty is a function of production and prices so that would be unchanged by some of those other assumptions. We got as far on Thursday night as the development account calculations and some of the information that I characterized as BP's financials. As far as a lot of discussion was had about page five and I'll just make a couple of observations here. Senator Frank looked at page five and in the row that identified as development account and capital expenditures that it didn't appear as though some of those numbers equalled 350 or 380 million dollars as you would expect - 378 actually is the number it should add up to. It is the total capax for the field. The reason for that is that the allocation of cost to the net profit share leases is in proportion to the allocation of the oil under those leases - that we have assumed. So this represents roughly 76 percent of the total capital expenditures that are added to the development account. Obviously, the capital expenditures that are being made in Northstar will produce oil on the federal leases which bear a little bit more than 23 percent of the oil. So these numbers reflect the amount of the capital expenditures that can be allocated to the net profit share leases. I hope that answers Senator Frank's concern. We've also tried to in the cover letter of the packet that we've submitted to answer a couple of other questions. I could either proceed with the discussion of the model now or maybe touch on those questions first. CHAIRMAN LEMAN: At your pleasure, either one. KEVIN BANKS: Well, in the cover letter Senator Halford asked questions about the ultimate recovery at the Prudhoe Bay reservoir and he observed that we started out at around 9.6 billion and we're now well into the 13 billion barrel range. And this letter just simply states that the original oil in place estimate that has been bantered around over the years has not really changed very much, but it is after the expenditure of over 2 billion dollars on enhanced oil recovery projects like gas cycling and miscible injection that it's been possible to raise the recoverable rate from what it may have been in 1977 to the 55 percent or so that we see today. And so as a result the recovery estimates for Prudhoe Bay have risen dramatically. And I think a related question to that was there an expectation that 3-D seismic shot over the field that is tentatively scheduled for this summer whether or not that would change our estimate of the oil in place. And the answer is no that in fact this is development 3-D seismic which is intended to illustrate or show a model for them where the anomalies are in the field and where the most efficient placement of production injection wells need to be put in. And lastly, Senator Frank asked about what impact on the rate of return would an early shutin of the field create if BP were to shutin the field when the net profit share payments began to be required...(indisc)and their share of the profits had to be traded. Senator Frank speculated and I agreed with him.... TAPE 96-55, SIDE A CHAIRMAN LEMAN: ... get some understanding at this level of what your understanding is of it so as we proceed with future hearings that, you know, we don't chase off on a area where we're clearly going to come to logger heads with the two of you. Senator Taylor. SENATOR TAYLOR: Nice to have both of you at the table at once, because from the testimony I have heard so far, there certainly appears to be somewhat of a disagreement, and that may be the reason for this deal. But you as commissioner, Mr. Shively, are reported to have refused to make a finding that the project was not economically feasible, whereas Mr. Morgan believes that the project is economically feasible if, in fact, you grant him the relief sought. COMMISSIONER SHIVELY: I think that's a little confusing. You have to go back to what we did last year in HB 207, and that's the analysis that I believe Mr. Baldwin is doing. In that bill, we were looking at the sort of base royalty reduction, and in that legislation I had to find clear and convincing evidence that the change in royalty was necessary in order for the development to take place. I do not believe that no oil company in the world could develop this oil field under the current provisions. When we did the economic analysis, we believe the rate of return is sufficient for somebody to want to do it. On the other hand, BP has told us they would not do it, and, therefore, I cannot make a finding that under the current situation the development of the field is not economically feasible. It, in my mind, is economically feasible under both considerations. Both of the considerations of the net profits and using the supplemental royalty. BP has said for them it is not developable under the net profit conditions. MR. MORGAN: If I may, Chairman. What I was careful not to say, was the development was not economically feasible, and that it is the broader consideration of the economic impact of coming into force of those net profit terms before the field has been fully developed that is the consideration. So there is something of a subtlety in the words that we're all using here. CHAIRMAN LEMAN: If that's the case, then in negotiations why did you not, Mr. Commissioner, insist on a net zero change in the value to the state of Alaska when you modified the net profit share? You know, if it's still economic, it would seem to me that you deal with the issue of net profit share, but not come up with a new arrangement that results in an economic disadvantage to the state, if I can call it that, even in light of your -- you had a couple different numbers; one I think was 45 million and the other 4 million that your model projects. COMMISSIONER SHIVELY: Well, again, you have to get to the point where you believe BP, that they will not develop now under the net profits provisions. If you believe that, then the earliest we can force them into production would bring the oil on in 2002. If you do that analysis, then we're about $4,000,000, apart in what I believe we would get under the supplemental royalty and what we would get under net profits. If I believe that they would use the net profits, then I should have worked on this deal, you're right, but I believe and that's why I did it the way I did. CHAIRMAN LEMAN: Would you consider then the 4 million, in light of that model, would be close enough to a wash that its ... COMMISSIONER SHIVELY: I consider it to be very close since the only thing we know about all these numbers, since they are projections, is that they're wrong. We just don't know how wrong. CHAIRMAN LEMAN: I don't know what other members have for time constraints, but we have three others who have come from out of town that I said I'd like to have a minute at 5:15. Senator Rieger, did you have a question for these witnesses. SENATOR RIEGER: I appreciate your allowing me to participate in the hearing, and I apologize for coming in late, but I was wondering if you could just perhaps qualitatively, or if you could quantify it, describe the nature of the negotiation -- of how much of the negotiation was on the straight finances and straight economics of the lease and the modification of the lease, and how much was on other peripheral considerations that you've made reference to, like I think it was use of local contractors or whatever, but who knows what all else came up. Can you, in very rough terms, qualitatively describe how much was one and how much was the other. MR. MORGAN: Mr. Chairman, Senator Rieger. Obviously, I did not personally conduct these negotiations, although from time to time I was involved in the process, so I think my answer is essentially an impressionistic one. I think that most of the time that was spent in technical discussions between ourselves and the department was focused around understanding the issues around the impact of the net profit arrangement and the creation of options for an alternative arrangement that the state and ourselves would feel comfortable with. Most of the time that was spent was spent in that area. It was always clear that we were going to have and the agreement was going to contain areas concerning some of the broader issues around Alaska hire and contracting and the building of modules. Those things I think were more specifically focused towards the end of the more technical negotiations as it became clearer to both sides that we were likely to reach a point of agreement on the value or the technical components of this. I hope that helps you get a feeling for it. SENATOR RIEGER: That does help. Were there issues beyond the contracting of modules and local hire that were brought up, but maybe rejected? MR. MORGAN: Not to my knowledge, but, clearly, I wasn't involved in all of the discussions. CHAIRMAN LEMAN: Mr. Morgan, I don't know if Mr. Luttrell was involved in those negotiations, but it would be real good for us I think if you wanted to pursue that first and maybe we could talk to some of your folks that were involved in those negotiations. MR. MORGAN: Mr. Chairman, with pleasure -- you will be able to do that. CHAIRMAN LEMAN: Senator Halford, you had a quick question? SENATOR HALFORD: In the consideration of the economic analysis at BP, was there any question that the capital credits or development credit account went forward with the lease, or was that an area that you had conflicting legal advice as to whether it actually would go forward? MR. MORGAN: Chairman, there was never any doubt in the advice that we received and I received. That we were very clear that on acquisition of the leases the development account carried forward into our name. SENATOR HALFORD: And the $260,000,000 value of that account, is that with interest at this point, or is that a ... MR. MORGAN: Mr. Chairman, I'll have to take advice on the answer to that question. COMMISSIONER SHIVELY: Mr. Chairman. Yes, that's correct. And I will tell you, Senator, and I am sure that the Attorney General's office will provide this information tomorrow, there has been a lawsuit on that issue that I think clearly settled it, and we clearly believe that the development account goes with the leases. Not on these leases, but on ... SENATOR HALFORD: Yeah, yeah. So, I mean, there's a very significant incentive if, for example, you could buy a $260,000,000 development account for $5,000,000. That would be a fantastic starting point on the overall lease obligations. COMMISSIONER SHIVELY: Mr. Chairman. I think it would, but it's also where the state's risk is, and it's one of the reasons I thought it was important to consider this is because as that development account grows, our take only goes one direction and that's down. And the development account will continue to grow, you know ... SENATOR HALFORD: On yeah, it's a benefit to the company, not at the state's expense necessarily, but it's a benefit to the overall development of the project based on prior expenditure. The only way the state gets it back is if the state cancels the leases and resells it. Then there is no development account left. COMMISSIONER SHIVELY: That's right. MR. MORGAN: Mr. Chairman. The point I would make of course is that were that not the case, or were the account to be lower, the need for the removal of net profit would have been -- I can't say it would have been greater, but it would have been absolutely as great. And that, in a sense, one of the unfortunate effects of the net profit arrangement is that it provides a disincentive to reduce the development cost of the field. It is only because through our technical and professional efforts we were able to see the development cost in the $350,000,000 to $400,000,000 range that this actually became a live issue. CHAIRMAN LEMAN: Senator Frank. SENATOR FRANK: I've always thought that when we talk about development cost we were talking about capital cost not ongoing operating cost. Can you clarify that for me? Is that $380,000,000 totally capital, or doesn't include the operating costs over the life of the fields? I assumed that an operating cost or a, you know, a guy spending money doing something in the field was part of the development cost. COMMISSIONER SHIVELY: There are three pieces that go into the equation until you get net profits. The first is what we would call sort of the development cost, which is like the seismic, any exploratory drilling, all of the work that goes forward to define out even if there is any oil there. And then the next thing that goes is sort of the next step of development, which is the engineering, then the capital expenses. Those all go in. Also, then once you are doing net profits, you also throw in their operating cost as an offset against revenue so that ... SENATOR FRANK: Well, I understand that. That makes sense that your operating costs would come off of your revenues and then you would have operating earnings, and those, then, would offset against the development cost before you got any net profits, right? COMMISSIONER SHIVELY: That's correct. SENATOR FRANK: But my question is really the development cost because you say that there's $380,000,000 worth of development costs, and are those development costs made up of both operating and capital costs? MR. MORGAN: No, Sir. They are made up of the development cost to bring the field onto production from its current state. So that is moving ahead now from conceptual engineering, which we have already completed, and we have spent, since we acquired these leases, I think of the order of $24,000,000 on conceptual engineering work. It is to go forward now into the detailed engineering phase, the acquisition of material, the placing of orders, the spending of monies with contractors to fabricate and construct the field to bring it into operation. SENATOR FRANK: Okay, let me just follow up on that a little bit, because I'm trying to understand how that works. So, I don't think you have to put all your money in before you get your first barrel of oil, but is it true that you put all the $380,000,000 in before you get your first barrel of oil, or is that $380,000,000 -- I assume you put most of it in and then maybe some of it comes after as you do further development, or something like that. MR. MORGAN: I think the issue may be around the phasing of drilling activity, in particular, given the nature of this reservoir. There are not, in fact, a large number of wells to be drilled so it may be that the whole of that $380,000,000, including all of the drilling component of it, would not be complete by the time the field came on, but you can have full technical input on that. Certainly the vast majority of it, any residue would be a very small proportion, I believe. SENATOR FRANK: Well, that's what I always thought when they talk in terms of development costs being kind of an up-front capital cost, and then oil starts to flow, and then you have operating costs that go along and operating revenues, obviously. SENATOR LEMAN: One final easy question for you, Mr. Morgan. If my memory serves me correctly, in the past you have advocated that the state consider changing its severance tax and royalty policies in favor of more profit-based systems. And, if that's true, and, if my memory serves me correctly, how do rationalize your comments on the net profit share leasing with that view, or is there something that we're missing in the linkage that ... MR. MORGAN: Easily, Chairman, I think that it is quite clear that the net profit interest arrangements that were in place here are not profit related. They do a calculation of net profit, but then they have no impact until the point when, under those arrangements, they cut in, and then they simply cut in at that high level, certainly in the case of Northstar. That is not a profit-related arrangement, and what we're introducing here in terms of a supplemental royalty is very much closer to a profit-related arrangement. It doesn't have all the administrative complexity of actually defining and keeping detailed accounting records of profit in a formal sense, but, very clearly, the oil price is a strong proxy for the profitability of an oil field operation. So to the extent that we have now linked the supplemental royalty to oil price, we have something that is much more profit related than the so-called net profit scheme ever was. That, indeed, is part of the benefit of this, because the arrangement we have now leaves our interests, in my view, completely aligned with those of the state. We have every incentive to increase the size of this oil field going forward, and that's aligned with the state because they will clearly take a significant share. We are now talking even at 20 percent of the highest royalty rate in operation on the North Slope, and clearly, if the supplemental royalty cuts in significantly higher rates than the highest now in existence. So I think my view is that that is one of the real benefits of the arrangement that has been negotiated in that it really does align those interests going forward. COMMISSIONER SHIVELY: Mr. Chairman, if I might, just briefly. The Oil & Gas Policy Council has talked about this, and what they've talked about is the state taking more risk and the supplemental royalty is a risk-based royalty. We're taking risk on higher prices, and if those higher prices come, we get a higher take. CHAIRMAN LEMAN: Senator Halford, last question. SENATOR HALFORD: Well, and I asked the question, but the question I have is it would appear that because the net profit share comes in the back end, the real variable that affects the relative take to the state is the size of the field and the amount of recoverable oil, much more so than the price. And I think if we double the size and run the assumptions, I would be very curious to see what the differences in dollars were, because it just seems to be much more size sensitive. Because by the time you've recovered all your costs, then if you can add, you know, ten, twenty, thirty, forty, fifty thou -- every barrel you add is essentially in the net profit share of the state. COMMISSIONER SHIVELY: Well, if you double the size without any increase in investment, that is true. A lot of what's happened in terms of increase in oil production or oil fields has been a result of substantial investment, all of which goes back into the development account. So, (a) you would have to make a guess at that. The other side of it is timing, again, because our price-based supplemental royalty, if one assumes some overall growth of oil prices over the long run, we get some increase in the end, too, if the oil field lasts longer. So it is not a simple calculation to make. I would say that we have looked at the geology. We had looked at it independently -- BP actually even, I think, before the leases were transferred -- and we independently came up with an estimate that was very similar to theirs. So we're comfortable that we're in the ball park. MR. MORGAN: I hope that it turns out to be twice as big. CHAIRMAN LEMAN: Me too. SENATOR HALFORD: I'd just like to see the numbers, or twice as recoverable, maybe not twice as big, twice as recoverable. SENATOR TAYLOR: I want to thank you, Mr. Morgan and John Shively for coming forward with this. I think it's wonderful to have the opportunity to hear and to be educated on this process. But I do find myself somewhat frustrated by the questions and answers I received earlier in that it seems to me that if we are to be a true partner in the Legislature in this process, that there is a certain level of arrogance involved where we're handed a proposition and it says we want you to know all about it, to be all involved in it, but it's taking a [indisc. -- coughing]. I think that if, in fact, this is to be a meaningful process and there is to be public input and participation and an affect by the elected representatives of the state, that it ought to be a meaningful involvement and that ought to involve something more than take it or leave it. And if, in fact, it is take it or leave it, I certainly want to do whatever I can to encourage both your good offices, Mr. Shively, and Mr. Morgan's company to find good resolve and produce things for this state. But I don't know that my participation or the rest of this group, our participation is either essential or necessary, other than or whatever the political purposes may be for doing so. It's good to have educated and good to have us involved, but I just don't believe that we need to be part of this process under the law that currently exists. But I think it is nice that you came in today and we've had this discussion. I appreciate it very much. COMMISSIONER SHIVELY: Well, I'd just like to say that we've considered this when we went through it, much similar to a royalty oil arrangement where the Executive Branch negotiates the arrangements, we bring those arrangements to the Legislature, and the Legislature says, well you did an okay job or a good job and that's fine, or you did a terrible job and we don't want it, and that's why we did this. I do think it is the Executive Branch's responsibility to negotiate these things and to bring, particularly this deal, forward because we do not believe we have authority -- and I think negotiating an arrangement like this in this kind of body would be very difficult, even for the body. So, we're not trying to be arrogant, and we think that there have been other instances, particularly in royalty oil, where you have seen the same thing. MR. MORGAN: Chairman, I would only add that I would ask you to consider how, from the perspective of my or any other company in our business, the sense of having to negotiate an arrangement in public in a legislative arena might appear. I have to say that there is no where in the world where that happens, and I believe there are very good reasons for that. CHAIRMAN LEMAN: Thank you both, gentlemen, for being with us today. I certainly appreciate it. And, Mr. Morgan, happy traveling. I understand that you will be able to be back with us, not next week but the week after next, is that correct? Whatever, I don't remember the exact details. MR. MORGAN: Thank you. CHAIRMAN LEMAN: Carl Marrs. Standing by, Bill Allen and Dave Jensen. Sorry to keep you gentlemen waiting 17 minutes longer than I had promised. CARL MARRS, President, Chief Operating Officer, Cook Inlet Regional Corporation: Thank you, Mr. Chairman, members of the committee. One of the company's principal lines of business is natural resource development, and that's what I'm here to talk about today. CIRI is heavily involved in supporting the oil industry in Alaska, including, through its three subsidiary companies, Peak Oil Field Service Company, Construction Machinery and Alaska Interstate Construction. CIRI has benefited significantly from the oil industry's trend toward alliancing and partnering and remains a significant contractor on the North Slope. It is for these reasons I'm here today to speak in favor of Senate Bill 318. So let me put my cards on the table here. CIRI and its shareholders will benefit greatly from the development of the Northstar field. Our company, Alaska Interstate, will be a prime contractor on the project. But beyond CIRI's direct benefit, I'm here today to talk to you about why this legislation makes sense for Alaska. As you are aware, with the decline of the production of Prudhoe Bay, Alaska must act quickly to develop new sources of oil in order to ensure that jobs, business activities and state revenues derived from the oil industry continue at a level that can support our economy. Northstar can help make that happen. It's one of a number of smaller reserves near existing fields and infrastructure that we can bring on fairly quickly. That will help us bridge the production gap between the decline of Prudhoe Bay and the potential long-term opportunities of ANWR. Looking at it from the state's benefit alone, Northstar will channel in order of $500,000,000 into the state coffers over the life of the field and contribute nearly $100,000,000 into the state's permanent fund. To my way of thinking, those are two excellent benefits to the state of Alaska and to support this development. Northstar can also come on line very quickly. Its projected completion date is 1999, and as far I know, it is the only significant field that we have on the state development horizon during this time frame. We ought not to miss the revenue opportunity that developing this field provides. I've appeared before legislative committees before and advocated the state being more proactive in dealing with the industry. This legislation does that. It will adjust an old, out- of-date lease that has no chance of being developed into a working field. We'll benefit from the new state revenues I've discussed, and we'll put hundreds of Alaskans to work, and that, for CIRI, is a number one priority. We'll build some instate know-how for developing larger projects on the horizon. We see it as a win/win proposition for everybody. Finally, please don't buy into the argument that changing an old lease will send the wrong signal for future development. We believe it is just the opposite. Letting the industry know that we're willing to change the past ways of doing business if it's not working is the best way to ensure that Alaska remains competitive in the future. Accordingly, on behalf of Cook Inlet Region and its 6,700 shareholders, I would urge strongly that you support SB 318 and keep Alaska moving forward. Thank you, and I'll answer any questions if there is any. CHAIRMAN LEMAN: Thank you, Mr. Marrs. I'll just note that when you talk about the $100,000,000 additional money to the permanent fund -- just yesterday or it might have been day before yesterday I was speaking with Byron Mallott from the permanent fund and he said that the permanent fund lost $300,000,000 in that one day where the market dropped what was 146 points ... MR. MARRS: Right, but it's made a few billion dollars ... CHAIRMAN LEMAN: But made almost all of it back over the next two or three days -- quite volatile. Thanks so much. Any questions for Mr. Marrs? Thanks for joining us. Bill Allen. BILL ALLEN , Chairman and CEO of VECO: Good afternoon, Mr. Chairman and committee members. For the record, I'm chairman and CEO of VECO. We're one of the largest Alaskan owned companies in the state, and naturally, I'm here to talk to you about Senate Bill 318. Senate Bill 318 does a lot of unique and good things, in my opinion. It's the first field that the government and industry can work together on. It's the first field out there that [indisc.] has state and federal leases. It's the first one that we'll be able to run a pipeline to shore on. It'll add, I think, 50 thousand barrels a day to the oil coming down that pipeline, and that will help save the economics on the big pipeline for a longer period of time. It will be developed on just a six acre island, a very small footprint compared to other fields. As far as helping VECO, it'll help immensely. We've got -- well, we built the first truckable modules that was built in the state, and we've been building them ever since. So has Arctic Slope, APC. So we've got a good experience -- we have a lot of experience on building truckable modules, and we've proved that we can compete pretty well with those. The thing that is really great about this is BP's committed to build sea-lift modules if we can find a suitable facility to build them in, and I think that we can. It'll probably cost a little bit more to build sea-lift modules up here to begin with, but after we get the infrastructure in, I think we can compete with the rest of the world. And that's going to develop a new industry that we never had before. And like they said, just on Northstar it will be 500 new construction jobs and 50 permanent jobs. Well, these 500 people that's going to be working on building these modules up here, they're going to have to live here. They can't live down south and come up and work because you are going to be working five or six days a week so they'll have to live in the state. We've built these truckable modules that I was mentioning to you, and the people that work on those have to live right here. Also, by building these modules here, and particularly the sea-lift modules, we can get the expertise, we keep the people here, so if ANWR ever does go, we can build a lot of their sea-lift modules. It's really a chance to develop a new industry. And I think BP committing to that alone we ought to go ahead and give them what they want as far as 318 and what they propose. VECO has somewhere -- I don't know, we're close to 3,000 employees, and VECO and its employees urge you to see what you can do as far as getting 318 passed and through. I really want to, again, compliment BP on coming in here and willing to particularly build the sea-lift modules. You know, BP, right now, they're investing money in the state when nobody else, no other oil companies are doing that right at this time. I think if BP comes through with this and we can go ahead and build these - - ARCO is talking about building Colville modules up here. If Colville is economical, they'll build them here, so, we're really starting a new industry, and I really encourage you guys to get this senate bill through and I know BP will come through with what they said they'll do. I believe it. CHAIRMAN LEMAN: Mr. Allen, in the revisions to the lease, there is certain language, I don't know if you've seen it, on the local hire and local contracting and the words "lessee shall use best efforts to contract with Alaska firms and fabricate modules in Alaska whenever feasible" and there's a number of phrases like that. Are you satisfied that these are sufficient and there is a strong enough commitment to (1) use Alaskan contractors and (2) that Alaska residents will be the workers that are working for those Alaska contractors. MR. ALLEN: Yes, I do because BP's staking their reputation on it, and I don't think that they want to be looked on as some company that said they were going to do one thing and do something else. I've done business with them a long time, and when they commit that they're going to do something, they've never changed directions, and worked for them since 1974. SENATOR HALFORD: The question I had is -- you're familiar with the, you know, the difference in costs here to building outside. What do you think is a reasonable differential? If we were trying to ensure that we're actually going to get the big modules built or the sea- lift modules and we were to ask a question as to what BP is willing to spend, recognizing that it will cost a little bit in Alaska to build the same modules, and if they came back and said that if it were anything under 10 percent they'd be willing to do it, would that cover the kind of difference that you think it would take, at least initially, to get sea-lift modules built in Alaska? MR. ALLEN: Yeah, I do. And I think once we get the infrastructure here, I think we can compete with the whole Lower 48. I don't think after we get the infrastructure here and we really get into it, I don't think they would have to spend any more here than they would in the Lower 48. SENATOR HALFORD: A big selling point, if this goes, will be because of instate activity, and if there's $30,000,000 in module construction and it's really labor cost getting into the economy, that's a big help. It's just hard to ensure that that's actually going to happen unless there's some recognition of what the differential really is. If its five percent, 10 percent and they're willing to work in those kinds of numbers, that, I think, is something we need to know. MR. ALLEN We ought to jump on it, you bet, it it's within the 10 percent. I think there's more than $30,000,000 there. I don't know where you came up with the $30,000,000, but ... SENATOR HALFORD: Well, I think the testimony was $30,000,000 more than would otherwise be done in the initial development. So $30,000,000 increase ... MR. ALLEN: I think they're being conservative. I think there will be more than $30,000,000 spent here than if they didn't -- I think they're being conservative. They'll spend more than they would have normally. SENATOR HALFORD: I think just the question of sea-lift modules was $30,000,000 more than they would otherwise spend if they didn't reach out and build in Alaska what they wouldn't have built in Alaska on just purely economic grounds. MR. ALLEN: Oh, I see, that's probably true. SENATOR TAYLOR: Mr. Allen, what do you need for infrastructure? We've got three large facilities in my district alone, all of which have major deep water ports, docks, huge gantry cranes that are sitting there on rail, large warehouses with cement floors and electricity to them. I mean, I don't know what you need for infrastructure to build this type of thing. MR. ALLEN Well, that's along the lines of what you need. You need that and then you need the skilled labor to do it with, and Anchorage and the Mat-Su Valley and Kenai have a lot of skilled labor that have moved up here and worked on construction for a long time. Also, you know, in a real rainy climate, you need some kind of a building that you can put these modules under while you're building. But all of the other stuff that you tell me, it might be real feasible. You know, like on the slope when you build stuff up there, you have to have camps so that your workers can live in them. Now that's an extra expense. In Anchorage or in the Mat-Su Valley or even in Fairbanks, you know, the people have their own homes there, so the only thing I can see that might not be as favorable down where you're at is the skilled labor living right there. SENATOR TAYLOR: Well, I think we've got quite a few of those too ... MR. ALLEN: Yeah, hey, tell you what. Loggers are good hands. SENATOR TAYLOR: We've got a lot of people like certified welders that have worked on the slope. We've quite a number of people that have worked on the slope. MR. ALLEN: Do you? Well, we ought to look into that. CHAIRMAN LEMAN: You just got an invitation from Senator Taylor to tour his district. SENATOR FRANK: Well, I think there's a lot of people in my community, in Fairbanks who feel like they're skilled in terms of this type of work. I'm hearing a lot about the modular development and I'm hearing a lot of excitement about it, and that's good and valid. I have the same kind of desire to see my community benefit from local hire as well and wondering about how you think that can be accomplished. MR. ALLEN: Well, I think it already is. You know, you guys are going to get about 42 percent of it? SENATOR FRANK: Hey, I like that, that sounds good. CHAIRMAN LEMAN: Hmm, now that you tell me that, you might start losing some of our support. MR. ALLEN: We've done a study and you're probably going to get 42 percent of the money spent on Northstar, so you guys are ... SENATOR FRANK: Well, that's good. You know, I think that the oil industry, if they were to spread out of the benefits of local hire throughout the state adequately, they would be well served by that. MR. ALLEN: In talking to BP, they want, if it's at all possible, to build more in Fairbanks. SENATOR PEARCE: Is there a -- you may have answered this, and if you did, I apologize -- is there some sort of a written document between you and BP saying that you will get some of the work if this project goes forward? MR. ALLEN: No, but we're an alliance partner. SENATOR PEARCE: What does that mean? MR. ALLEN: We do most of their construction. It's between us and Arctic Slope, the mechanical part. Usually Arctic Slope gets 50 percent and we get 50 percent and then Peak gets most of the civil work, the dirt work. SENATOR PEARCE: Is there a formal document that makes you an alliance partner, or is that just a gentleman's agreement. MR. ALLEN: Yes, there is one, a formal document. SENATOR PEARCE: Is that a public document? MR. ALLEN: No, it's not public, but I wouldn't have qualms if you wanted -- would you, the alliance agreement? MR. MORGAN: I'd need to see the agreement first. CHAIRMAN LEMAN: Further questions of Mr. Allen? Thanks for joining us and thanks for standing by. I know that sometimes these committee meetings can get tedious and I appreciate your patience. The last person to testify today is Dave Jensen. DAVID JENSEN, President and CEO of Natchik, the Oil and Gas Division of Arctic Slope Regional Corporation: Thank you, Mr. Chairman. We operate principally through our two subsidiaries: Alaska Petroleum Contractors (APC) and Houston Contracting (HCC). You've covered just about everything that could be covered with a long list of comments that I had to make here, so I'd like to shift my emphasis to a recurring theme brought up here is what is your reassurance to you as a principal contractor, which we are one of the principal contractors in the alliance agreement for the Northstar project -- what is your assurances, do you have something in writing, are there pledges, blood documents, and so forth? And you've heard the answers to them. I would like to convey to you at this time that I have been in the industry for 33-years at this point. In the last two years, the entire contracting community -- and it's been a little longer than two years now, probably three; but in the last several years the contracting community, as a general entity, has entered into a variety of alliance agreements and contracts with the two principle operators on the Slope: British Petroleum and ARCO. I can tell you with a great deal of authority that those contracts have been well honored. And I have never been, in the prior thirty-some years, experienced that type of and level of cooperation both in negotiating changed conditions in terms as we run into changed conditions with them. I have the highest degree of confidence in our agreements with BP to fulfill what they have set forward in their considerations for the employment of Alaska corporations and Alaska personnel with it. It's worked well for us and we look forward to it in a very positive fashion. I almost, I thought I heard a comment that the Alaska hire in Alaska corporation work might be a peripheral issue. I take a little umbrage with that and think about that for a moment as we're all so engrossed in net profits and royalty considerations and so forth. And of vital importance are those folks we call Alaskans out there today. And generating work and future work in considerations, this particular project offers us those opportunities as we develop a more intensified, skilled labor pool which we need to do again as we've lost a great deal of that labor pool over the last ten years. They've exited the state. This gives us an opportunity for the development of a larger skilled labor force that will allow us or put us in a position where we don't have to import labor or certainly reduce the requirements to import outside labor. In addition to it, you've heard the references to developing an improved infrastructure for these manufacturing or fabricating opportunities that we have with the process module considerations. As we do this, this again opens the door to the future for us again. So, I would ask you to really look at also, as we pick apart the royalty and net profits and so forth. TAPE 96-55, SIDE B MR. JENSEN: ...aren't we all considered with our future in developing - in developing. This project offers that opportunity and we needn't be so caught up with at least from the Arctic Slope point of view, contracts that become iron clad and you promised x number of positions and dollars and so forth. We're out of that era, we're out of that era. I know that comes as news to a lot of us, but I can tell you that with a great deal of confidence. I know we're pressed for time so, I'll limit my comments to that. CHAIRMAN LEMAN: Senator Pearce. SENATOR PEARCE: Thank you. I appreciate what you're saying about contracts in the '90s, but some of the comparisons of both alliancings -- since I learned this weekend you're not supposed to say partnering anymore -- and the state's ability to have surety of how that affects Alaskan contractors and Alaskans. Alaskan contractors will get the jobs and then the Alaskan contractors will hire Alaskans, I guess its a two step process. We use, because these projects have come up as a basis for comparison -- things like Red Dog, where the owner, the land owner was able to force because of a very good local hire, a very restrictive local hire clause, and also the Title 29 alliancing with Alyeska which was just the topic of a dinner Wednesday night where certainly your parent company was represented along with others in the state that have alliance partnerships. And that of course, was required under federal law. And I think that there are, if not, quotas per se, there were certainly some performance measures that had to be met, and that the Department of Interior gets to actually count noses, if they so desire. I think we have not figured out of way because of the problems we've had with Alaska hire and our inability to figure out a way to write an Alaska hire amendment in the Constitution that can stick. We're kind of trying to feel our way toward being able to go home to our constituencies and say, "We have an iron clad agreement that we're going to have Alaskan contractors and we're going to have Alaskans in those jobs," because our constituents have come to expect it because they've seen it happen in other cases. Maybe we should ask Congress if they'd write and then they could do it because they can do things that we can't do. But it is a give and take, and I understand your frustration with our wanting something iron clad, but it's something that I think the legislators feel is necessary for us to be able to explain taking - - well, to explain positive votes on some sort of a negotiated deal like this. So that's not really a question, it's how we get to our position. MR. JENSEN: Well, I can understand your concern, Senator Pearce, and to come to some quantitative solution with that that we can get down in black and white, I think you have to be so cautious that we don't run amuck with the previous issues that we've been faced with, and Alaskan preference, and Alaska hire, and so forth. So when you start to couch or incorporate in a document numbers and percentages or make more than general references to Alaska hire, we can certainly all experience a very difficult and a long and costly legal problem, and I think that will make it the fourth time for us as a state to become embroiled in that again. I know it's difficult to go back and say "Trust me." We've heard that previously, but I can again offer you my assurances and experiences that have just transpired over the last several months when we began to focus on this as a team with BP and the contractors; how we've begun to develop some conceptual frameworks of how we can accomplish this additional fabrication, transportation of these modules, modules now up to 2,800 tons, which is pretty unique when you take into consideration the modules fabricated here in Anchorage were 80, 85, 90 tons maximum. We're making quite a quantum leap with this whole approach. CHAIRMAN LEMAN: On behalf of Senator Taylor and perhaps Senator Frank, can you tell us what your distribution of employment might be throughout the state? Senator Taylor would probably offer that a number of people in Southeast Alaska would be interested in these jobs. Senator Frank, of course, interested in jobs in Fairbanks, and I'm somewhat provincial too, so ... MR. JENSEN: I can share with you what our current distribution is and that vacillates with the projects that we're doing. Currently, between APC and Houston Contracting we're a little in excess of 2,000 employees solely within the state of Alaska. Of those, approximately 80 percent are on the North Slope working for British Petroleum, ARCO and Alyeska, through the northern end of the pipeline for Alyeska. The other 15 percent of those employees are in Fairbanks and Kenai. And that shifts dramatically from year to year. To give you an example, if we have a shutdown at the Mapco refinery in Fairbanks associated with our other maintenance work for Mapco in Fairbanks, that number balloons significantly to a couple hundred people immediately in Fairbanks in addition to the number of Fairbanks residents that are hired, that are working on the slope. So when we look at, you know, a cross-section of where people are working, that isn't so important as to where they reside. So we have a fair number of people from the Kenai Peninsula that are employed on the North Slope, as well as Fairbanks and Anchorage and from the various bush communities also. CHAIRMAN LEMAN: I would just suggest that for you and for the others who are still here and listening that it would be interesting information, I think, for this committee and for other legislators to have perhaps a distribution of where these people reside so others will know if they're coming from the districts. I think that would be something that will be useful. Mr. Allen talked about 3,000, you talk about 2,000, and I think we can probably show that the impact of this project impacts probably every region of the state. MR. JENSEN: We are in the process of doing that as we speak, Mr. Chairman. CHAIRMAN LEMAN: Thank you. Any further questions? Thanks for joining us. I'll announce that we will continue this hearing of Senate Bill 318 tomorrow starting at 10:00 a.m., and we will pursue primarily legal issues with the Department of Law, but also we'd like to have the Division of Oil & Gas people here available, and I would suggest that if BP has some of your people available because undoubtedly as we get into questions we'll probably encroach on turf that you [indisc. -- coughing]. I expect that will last for two hours tomorrow. Next, just so we can plan further in advance, I'd expect that we will resume hearings on this next week on Wednesday. We will work with our schedule; we have other bills scheduled. We may need to go to an evening meeting on Wednesday evening like at 7:30 if we can't deal with the other bills, but we are getting stacked on some others that we do need resolve. But I want to keep the momentum up now that we're started. Monday's meeting we have posted the schedule: HJR 60, SB 311, HB 539 and HJR 58. Any further business to come before us? If not, we are adjourned (4:22 p.m.).