Legislature(1995 - 1996)
04/10/1996 03:16 PM House L&C
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
April 10, 1996
3:16 p.m.
MEMBERS PRESENT
Representative Pete Kott, Chairman
Representative Norman Rokeberg, Vice Chairman
Representative Kim Elton
Representative Jerry Sanders
Representative Brian Porter
Representative Beverly Masek
MEMBERS ABSENT
Representative Gene Kubina
OTHER HOUSE MEMBERS PRESENT
Representative Joe Green
Representative Jeannette James
COMMITTEE CALENDAR
Presentation by British Petroleum Out-Sourcing
PREVIOUS ACTION
No previous action to record
WITNESS REGISTER
JOHN MORGAN, President
BP Exploration (Alaska), Inc.
P.O. Box 196612
Anchorage, Alaska 99519-6612
POSITION STATEMENT: Gave Presentation on Out-Sourcing by BP
ACTION NARRATIVE
TAPE 96-34, SIDE A
Number 001
The House Labor and Commerce Standing Committee was called to order
by CHAIRMAN PETE KOTT at 3:16 p.m. Members present at the call to
order were Representatives Kott, Elton, Porter, Sanders, Rokeberg
and Masek. Members absent were Representative Gene Kubina. A
quorum was present to conduct business.
CHAIRMAN KOTT announced the calendar for the meeting was a
presentation by British Petroleum on out-sourcing. He said there
have been a number of concerns expressed regarding some of the
problems perceived by the public on out-sourcing. In an effort to
clarify some of the issues, Chairman Kott felt it would be helpful
to get the information directly from the source.
Number 112
MR. MORGAN thanked the committee for giving him the opportunity to
talk on the topic of out-sourcing. He, too was aware of the
concerns and perceptions of difficulties regarding this issue. He
prefaced his remarks by saying he was prepared to discuss what he
means by out-sourcing which is the way in which BP organizes their
work in order to be as effective and efficient as possible in their
relationships with parties to provide them with services and
manpower. In his mind, there are two other topics that are
separate, but related. Those two are not what he primarily
intended to address; however, if the committee had issues that
overlapped in those areas, he was prepared to answer questions.
The first of the two additional areas goes under the general
heading of Alaska hire which is clearly related to the number of
people working for British Petroleum and their contractors, who are
resident in the state of Alaska. British Petroleum and ARCO,
together with a number of contracting companies, have been
addressing this issue recently and had presented a set of
recommendations to the Administration. He didn't intend to
directly address that issue unless the committee had questions.
Mr. Morgan said the other area was generally under the heading of
the purchasing of goods and the proportion of their spend in
purchasing goods that come into Alaska. This again is an area
where he thought there had been some difficulty or concern
expressed recently. In his mind, it is separate from the issue of
out-sourcing; however, he knew there were some overlaps in people's
minds so he was prepared to answer questions from the committee.
Number 309
MR. MORGAN remarked he would like to spend a few minutes discussing
the background in the sense of the way he perceived the economic
and commercial challenges that the people in the oil industry were
trying to deal with to remain competitive in Alaska. This, in a
sense, is certainly background to all three of the areas he had
mentioned. The Prudhoe Bay field has been in decline since about
1988 or 1989. Despite that decline, Prudhoe Bay clearly still
dominates production from the North Slope and it's likely to
continue to do that for a long time to come. At the same time, the
other large fields on the North Slope, fields like Kaparuk and
Endicott, are struggling to hold off decline at this stage in their
life cycle. In the longer term, they obviously hope to see major
new developments able to take place in the Alaska National Wildlife
Refuge (ANWR) and through the development of the gas project. At
best, those kinds of developments are 10 years away and remain, at
this stage, somewhat uncertain. In the meantime, in BP's view
there is a great deal of potential on the North Slope. British
Petroleum has estimated there is as much as five billion barrels of
potential new production available. It is made up of a whole range
of different opportunities of satellites to existing fields,
extensions to existing fields, enhanced oil recovery in existing
fields, heavy oil and new smaller fields like Northstar; fields
probably in the 100 to 200 million barrel range that so far have
not been able to be produced economically in Alaska. All of that
potential - that in existing fields and that in new opportunities
like smaller fields - of course requires investment to make it come
to fruition. Many of those opportunities may well be attractive
investment opportunities in their own right while others will be
relatively marginal opportunities.
MR. MORGAN felt it was important to understand that in making those
investment decisions, it isn't just the individual project that
matters, but it's the overall business context that exists in
Alaska. There may be attractive investment opportunities, but if
they sit within an overall context that is looking increasingly
unprofitable, then it will make it more difficult to attract those
investment funds here into the state. That's why in his view it
was so important to maintain the health of the base business in
Alaska which is a tough challenge. Prudhoe Bay does dominate that
base activity and Prudhoe Bay is currently declining at about 15
percent a year. He said if they can continue to invest in Prudhoe,
then by the end of the decade he believed that decline would level
off and a new plateau on Prudhoe would emerge perhaps around
500,000 barrels a day which is capable of being sustained for some
considerable time. But clearly in moving down that decline curve,
they obviously have the challenge of adjusting their costs to try
to retain profitability in Prudhoe and in the underlying base
business and by doing that, to keep an attractive climate to
attract new investment funds for new opportunities. Therefore, in
his discussion on out-sourcing, he would be mostly focusing on the
way in which they are trying to manage that base business; the way
in which they are trying to keep it efficient and keep it
competitive over time.
MR. MORGAN stated out-sourcing or contracting with third parties to
provide them with services and manpower skills is nothing new in
the oil industry either in Alaska or elsewhere. Traditionally, oil
companies have relied on contractors to provide a wide range of
special skills and to help them accommodate variations in workload
over time. The kinds of services that are really very
conventionally handled in this way are catering services, security
services, seismic, drilling and well services, project engineering,
construction, et cetera. Here in Alaska over the years, the two
operators, BP and ARCO relied on a number of Alaskan contractors;
well known companies like VECO, APC, Doyon, NANA, Lynden and others
to provide a whole range of maintenance general services including
maintenance support, project design and construction, support for
operational activity, drilling activity, housekeeping, catering and
general administration. Of course, over time the market moves.
The existing contractors themselves develop new skills in their
organizations, new contractors emerge in new areas of activity and
new technology develops which creates new opportunities both for
existing contractors and for new companies. Examples of areas
where new companies or new skills have been emerging and where a
person would be led to look at those organizations in terms of
taking on activities that have conventionally been carried out
inside their own company, include computing, telecommunications and
accounting services. In all these cases, the companies that
specialize in providing these kinds of services which for them
represent their core business, can offer a number of particular
advantages to a company like BP: They can offer economies of scale
because they are providing that service not just to a single
business, but to a whole range of other companies; they can provide
specific management expertise in that area of their specialization
at the level which is beyond that that's available inside the oil
company; they have ready access to technology; they find it easier
to maintain links perhaps with smaller companies who are at the
forefront of developing technology improvements in their area;
they are able to provide a flexible response to changing workloads
as projects come and go; and they can offer to their own staff
greater development opportunities within that core business of
their own, than a company like BP could offer to them working in
what is simply one peripheral component of BP's overall business
activity. He noted those are some of the key benefits that can
exist in terms of having a company provide an oil company a set of
services on a specialist basis.
Number 781
MR. MORGAN further stated that here in Alaska and elsewhere in BP's
business, when they have contracted out an area in this way, quite
often they have formed what has become known as an "alliance"
between themselves and that contractor which carries with it the
sense of a long term relationship. A relationship in which the
business goals of the two companies are aligned together where the
outside company is operating to help BP achieve their objectives
and are measured on that performance and where their reward is
actually aligned to the delivery of that performance and the
delivery of BP's own objectives. Usually in those cases, although
the intent is to have a long term relationship, there will be
regular performance reviews or approaches to bench marking to
ensure the competitive performance continues to be delivered. He
thought that was a fairly general statement about the nature of
BP's view of out-sourcing.
Number 837
MR. MORGAN went on to discuss some of the activity currently going
on in relation to out-sourcing inside British Petroleum. He
thought that some of this activity may have been the cause of some
of the concern. There were two broad areas that he would discuss.
Firstly, in relation to activity on the North Slope itself and then
a second area in relation to their accounting activities and the
out-sourcing of those which has been going on in the recent past.
Number 866
MR. MORGAN said firstly, on the North Slope they are currently
looking at out-sourcing four broad areas which would together
include some 23 BP employees. The first of those areas is telecoms
which is by far the largest. There are 15 BP employees involved in
a potential out-sourcing of telecoms; however, they have not taken
a position at this point to out-source telecoms. BP has a study
currently going on to examine whether this would be the right
approach to developing a new out-sourcing relationship and he
believed that study would be concluded around the middle of May.
He said in the event they do go forward with out-sourcing in this
area, probably either GCI or AT&T Alascom would be the company they
would likely contract with. He reiterated there is no decision at
this time, but there is a study going forward at this stage.
Number 934
MR. MORGAN continued that the next three areas are areas where BP
has basically taken a decision to out-source, but it is still
subject to the conclusion of a satisfactory contractual
relationship with the out-sourcing company. The first is the tool
room area in which there are two BP employees involved and the out-
source company would be a company called Fairmont. Fairmont is a
company that BP has recently brought in to take over their
warehouse activities on the Slope. Fairmont has a lot of
experience and skills in managing warehousing and materials
activities and to expand their warehouse activity to include the
tool room seems to be a natural outgrowth which offers particular
elements of efficiency by putting those two areas together.
Number 980
MR. MORGAN noted the other two areas are the welding shop where
there are four BP employees involved and the painting and carpentry
shop where there are two BP employees involved. British Petroleum
is looking to out-source both of those areas to VECO. He said BP
believes the benefit of out-sourcing to VECO is that they can
provide a more efficient operation by centralizing those activities
in their own pre-existing workshop that exists in Deadhorse. That
is the current extent of BP's out-sourcing consideration and
activity on the North Slope.
Number 1053
MR. MORGAN said he would now discuss what may be behind some of the
concern expressed by constituents of committee members. He said to
some extent this is speculation on his part, but it is clear that
we are now working within a union environment in Prudhoe Bay. The
Oil, Chemical and Atomic Workers union gained a bargaining unit at
Prudhoe Bay at the beginning of 1995. During the summer of 1995,
BP was in a long process of negotiating the contract with the
bargaining unit at Prudhoe Bay. A contractual agreement was
reached during the fall of last year and in the course of pursuing
that agreement, it was important to BP to maintain the flexibility
to manage their business at Prudhoe Bay. A contract was achieved
whereby BP was allowed to maintain that basic flexibility. In a
sense, these out-sourcing activities he described are the first
such activities to develop since the conclusion of that contract
and they do, in fact, involve people who are part of the Prudhoe
Bay bargaining unit. He believed that may explain some of the
sensitivity of the union members in Prudhoe Bay and may account for
some of the correspondence directed to the committee.
Number 1127
MR. MORGAN said the other current area is the out-sourcing of BP's
accounting activity to Anderson. Anderson is perhaps not very well
known to a lot of people, but it is one of the largest accounting
firms in the world. He wasn't sure if it was a big four or a big
six these days, but certainly Anderson is one of the very top
companies. An off-shoot of Anderson Accounting is Anderson
Consulting and BP has recently entered into an out-sourcing
arrangement with them. The history to this is that some years ago,
BP entered into an arrangement with the same company in the North
Sea for their North Sea operations accounting activities. That has
three or four years of history and has actually been a very
successful operation. He thought it was viewed as quite a high
risk in the first instance when BP made that decision in Aberdeen,
but it has worked very well. What happened earlier last year, was
there was a move on the part of the BP group to out-source the
accounting activities of all the BP businesses in North America;
primarily those in Alaska, an exploration activity based in Houston
for the Gulf of Mexico and downstream oil and chemicals business
activities centered in Cleveland but with a number of operating
areas around the Lower 48. It was fairly clear there was a
significant potential price to BP in doing this. There were
discussions with a number of companies and Anderson Consulting
emerged as the front runner for this activity. He was a little
alarmed when he first became involved in this process because it
became clear to him that Anderson envisioned setting up a single
processing center in Houston to deal with all of this activity.
There were a number of meetings with Anderson and with BP's
colleagues in the Lower 48 to explain the needs of BP's operation
in Alaska. As a result of that, instead of seeing all that
activity disappear to the Lower 48, Anderson agreed to set up a
branch of their activity here in Alaska which preserved about 60
percent of the jobs previously providing this service for BP here.
He thought this was an extremely valuable thing to do rather than
see those jobs disappear into the Lower 48. The transition process
is underway currently and he thought there were about 59 people
involved overall, both in BP and NANA Corporate Services, who
contracted their services to BP in this area, and about 35 of those
people will continue to have jobs in Alaska serving BP through the
Anderson organization. Of the balance, more than half have decided
to accept jobs with Anderson in Houston and the balance either
redeployed to other jobs in BP or in a very few cases, elected to
leave the company at this stage. He remarked that's a living
example of where BP is on that particular issue. He said there is
no doubt the savings to the BP Group from that out-sourcing
activity will be really quite considerable.
Number 1347
MR. MORGAN explained that BP has no other specific plans for out-
sourcing on their books but as he said earlier, this is an issue
that revolves around movement in the market and the opportunities
that contracting companies create to do business with them.
Therefore, BP will continue to examine all areas of their business
because they are clearly concerned about reducing their costs and
to increase their activity, to remain competitive, to keep that
base of their business competitive so they can continue to attract
investment funds here. He believed it is likely that in the course
of time, BP will see other areas they will want to contract out.
He thought it would be a constant process as other organizations
seek to develop further core skills which they could sell and
persuade BP they could perform more effectively than what BP could
perform within their own organization. In the first instance, BP
would always aim to use an Alaskan company when contracting out
these activities. The vast amount of the activity that is out-
sourced is out-sourced to an Alaskan company. But where that isn't
the case and as was the case in the Anderson arrangement, BP would
work very hard to ensure that the contractor became established in
Alaska and operated to the same standards as BP themselves wish to
in terms of the hiring of Alaskan residents. He didn't actually
think there was any direct overlap between the issue of Alaska hire
and the issue of out-sourcing. There is no reason why out-sourcing
their activities should not continue to provide at least as high a
proportion of jobs in Alaska as the industry has currently. Mr.
Morgan invited questions from the committee.
Number 1448
CHAIRMAN KOTT referred to the half dozen areas that BP is currently
either proposing or has already out-sourced and asked Mr. Morgan
what the time line was and what kind of considerations are entered
into the equation as to whether or not out-sourcing was going to
become a reality.
MR. MORGAN said it's all the things that would be looked at in
terms of a normal commercial business decision. Obviously, cost is
a key factor and what they look at is whether the third party
company can provide that service over a period of time in a way
that will provide cost savings to BP over continuing to provide the
service within their own organization. He believed that was the
essential driving element. He had stated earlier, what's driving
BP overall is the need to reduce costs and retain efficiency in
order to remain competitive in attracting new investment into the
state. He said they clearly have to be very conscious of the
personal implications of these kinds of decisions; the implications
for the people who are involved. He thought there had been times
in the past when BP had probably managed some of these activities
less professionally in terms of managing the people issues than
they would have liked, but believed BP has become much more
conscious of that. For example, while most of the people involved
in the accounting out-sourcing may not be very comfortable with
what happened, Mr. Morgan thought they would believe they'd been
treated with fairness and respect in the course of the
implementation of that decision. Clearly, that is one of the
concerns that has to be taken into account. But underneath that,
clearly the decision is primarily a commercial cost based decision.
Number 1557
CHAIRMAN KOTT asked about the time line involved from the initial
idea to the time it's actually put into action.
MR. MORGAN said it varies. If you think of something like
transferring welding shop activities on the North Slope into VECO's
existing activities in Deadhorse, that ought to be something that
could be handled in a very short time frame. On the other hand,
something like the Anderson out-sourcing arrangement which is on a
much bigger scale, probably has taken 12 months from inception to
implementation and perhaps longer than 12 months by the time it's
finally implemented.
Number 1596
CHAIRMAN KOTT said even though there's only a half dozen areas
being looked at by BP to out-source, theoretically there could be
another area identified next week.
MR. MORGAN said that was correct because it is a constant process
and analysis of these kinds of issues is ongoing.
Number 1613
CHAIRMAN KOTT recalled a newspaper article regarding out-sourcing
to a company in Utah and asked if BP Exploration (Alaska), Inc. was
involved with that.
MR. MORGAN thought this was one of the areas of overlap and
confusion he had alluded to earlier. He wasn't quite sure of the
relationship with Price Utah, but he thought it dealt with an area
that concerns BP's policy in relation to the procurement of goods
and the spending of their funds to buy the goods needed for their
operations in Alaska. He stated this was a whole different policy
area in a sense. Some activity has been out-sourced to a very
successful out-of-state company called Fairmont who is a major
procurement contractor in the Lower 48. They provide to BP a range
of procurement services including the information technology
services to support BP's procurement activity and a range of
information services that go along with that. Also, Fairmont
supplies BP with goods for a specific area of their purchasing
requirements and those goods are largely being sourced from
Fairmont's existing supply sources in the Lower 48. He thought the
company referred to by Chairman Kott was probably one of those
existing supply sources.
Number 1700
CHAIRMAN KOTT asked what BP does with employees that lose their
positions due to out-sourcing?
MR. MORGAN said whenever they see a redundancy situation arise,
they have a range of policies in place to support the people who
are involved. They have out placement services, general counseling
services and rather generous redundancy terms that are available.
For those people who are members of a union, obviously the
arrangements are governed by BP's contractual relationship with the
union.
Number 1732
REPRESENTATIVE BRIAN PORTER said the first time he was told that BP
was out-sourcing, it struck him as a natural conclusion that a
company that size would be able to out-source other companies;
however, at that time he didn't know what out-sourcing meant.
After reading a few articles he now understood it and suggested
that for general public appreciation, the term "contracting out"
might be better understood.
MR. MORGAN responded that "out-sourcing" was a word that had become
current in the business vocabulary; however, it is effectively
contracting out. Because it does impact people in the way it does,
there is an emotional level of involvement surrounding it.
Number 1780
REPRESENTATIVE PORTER commented that having been on both sides of
the table, the discussions that go on about contracting are
interesting at the very least. He presumed that BP Exploration had
a contract in place that allows contracting out within that union's
work.
MR. MORGAN replied yes, and added that was what he was referring to
when he had stated it is a key priority for them to retain
management flexibility to make those kinds of changes as part of
their contract arrangements with the union.
Number 1810
REPRESENTATIVE PORTER said generally for a whole lot of reasons,
not the least of which is good company policy, it seems to him that
the kinds of things BP did in the process of out-sourcing the
accounting activities provides about as much protection as
employees can expect. With the exception of three or four
employees, they all either stayed in Alaska doing the same job for
another employer, stayed within the company or got an opportunity
to relocate. He asked if it was a fair assumption that the other
23 people who may be out-sourced would have the same kinds of
opportunities?
MR. MORGAN believed that was right. It is their hope those people
would be prepared to transfer to the contractual organization and
use their skills within the more efficient context of that
organization. It is clear that one of the issues here is that the
contractual organization's pay rates are lower than BP's pay rates.
He didn't believe that in the vast majority of cases the motivation
for a contracting out decision of that kind can and should be
driven purely by lower wage rates. It needs to be driven by a
broader business logic of efficiency. In the cases previously
discussed, that efficiency would come from centralizing activities
within a pre-existing single work shop rather than having
duplicated work shops. In the case of telecoms for example, it
would come from the development of a much more specialized body of
knowledge around this area and the fact that this is now the core
skill for some third party organization. In a world of fast moving
technology, it makes sense to use that third party organization to
manage that activity because they have access to a much broader
skill base.
Number 1915
REPRESENTATIVE NORMAN ROKEBERG said he would like to further delve
into the relationship between BP and the Fairmont Company to gain
a better understanding. Some of the major concerns expressed by
many of the vendors in the state is they are fearful of BP's
relationship with Fairmont in that it will have a negative impact
on their ability to do business in the state. Also, the concern is
that the relationships they've had with BP and other members of the
petroleum industry will be jeopardized because of that particular
contract. He asked Mr. Morgan to describe the scope of services
covered in BP's contract with Fairmont.
MR. MORGAN commented he would like to take a moment to discuss
their policy for the procurement of goods. He felt it was only by
explaining it that the committee could understand fully what the
nature of their relationship is with Fairmont.
Number 1965
REPRESENTATIVE ROKEBERG interjected that he wanted committee
members to understand the distinction between contractors and
vendors.
MR. MORGAN said what had been discussed in relation to out-sourcing
was contracting with third parties for the provision of services;
the provision of a welding shop, provision of the service of
managing their telecommunications, managing their accounting
activity and the provision of skilled manpower to go with that
service. That is what he had been discussing under the general
heading of "out-sourcing." Essentially, what he's talking about
now is the way in which BP goes about acquiring the goods actually
needed as inputs for their business in Alaska. He noted that BP
would establish a direct relationship with a Lower 48 supplier for
items like valves and things of that nature because those items are
not directly available to them in Alaska. However, in looking at
the goods that are essentially available in Alaska through Alaskan
suppliers, we're talking about an overall group of goods with a
value of about $32 million. In their minds, BP has divided those
goods into two categories. One is the category referred to as
general industrial goods which is sometimes called "rope, soap and
dope." That group of goods has a value of about $5 million to
$5.5 million. The balance of approximately $26 million is a group
of 8 or 10 broad categories of goods that are more homogenous
groups than the general industrial goods group. The contract
entered into with Fairmont about 15 months ago, had really two
parts to it. One was Fairmont was going to provide BP with general
support services for their procurement activities including
information technology support services; actually managing BP's
transactions through electronic data management across all their
procurement activities. Also, BP agreed that Fairmont could
provide to them, as the prime supplier, the general industrial
goods area. The reason for that decision was that BP's analysis
suggested that Fairmont had a competitive advantage over that range
of goods of about 22 percent over the suppliers that exist in
Alaska. He said that is actually a range that runs from probably
minus 6 percent up to plus 70 percent in terms of the value
differential. It's a significantly wide range but averages about
22 percent.
Number 2112
MR. MORGAN said in reality in 1995, roughly $3 million of that
business transferred from Alaskan vendors to go through Fairmont
and clearly that represented a loss of business to a number of
small vendors in Alaska. In that general area of BP's business, it
was costing them about 75 cents to administer their procurement for
every dollar spent; clearly this arrangement very substantially
reduces that overhead burden.
Number 2139
MR. MORGAN stated that BP's overall policy in terms of this
procurement is very clearly to increase the level of their spend in
Alaska and what they are very close to doing and will be moving
towards in the course of the next couple of weeks, is going out to
bid for the 8 or 10 bundles of goods beyond this general industrial
goods group. They will be going out to bid purely to Alaskan
suppliers on that group of goods which means they expect to bring
about $6 million to $7 million worth of value that is currently
spent in the Lower 48 to Alaska as a result of those contract
awards. That should be fully in effect before the end of this
year. Mr. Morgan stated, "What we have said to the suppliers at
the smaller end of the spectrum, the general industrial goods end
of the spectrum, is that having examined that bundle -- when we
took our decision with Fairmont, we simply looked at that overall
bundle of goods and could see that 22 percent differential and that
was why we put that package through to Fairmont. Having looked at
it more carefully, we have seen there is one area within there that
actually may have a competitive benefit or certainly be competitive
in Alaska and that is the area of electrical goods. What we have
told those suppliers is that providing we can agree to a
contractual amendment with Fairmont - and I believe we will be able
to - we will be prepared to offer those electrical goods for
bidding purely to Alaskan contractors, so that piece of it should
come back into the state. We've also told those suppliers that if
they can approach us and convince us that in some way they can
create a structural change to overcome that competitive
disadvantage that exists in the other areas, then we would again be
prepared to approach Fairmont within the terms of our existing
contract with them and seek another contract variation in order to
bid that particular area again to Alaskan suppliers. But we would
need to be convinced that there was a genuine ability to be
competitive in Alaska in order to do that."
Number 2242
REPRESENTATIVE ROKEBERG asked if there was a provision in the
contract with Fairmont that they locate any premises in the state
of Alaska?
MR. MORGAN didn't believe so.
REPRESENTATIVE ROKEBERG asked if they were located in Price, Utah
or somewhere in Utah?
MR. MORGAN believed that was correct.
REPRESENTATIVE ROKEBERG commented that Fairmont was actually
conducting a good deal of this business in accumulating the general
commodity merchandise...
MR. MORGAN said this has been their business for many years in the
Lower 48 and they are one of the two or three leading operators in
the general procurement and supply area.
Number 2279
REPRESENTATIVE ROKEBERG asked, "Did your accounting department or
administrative people make an analysis of the number of vendors
that you were able to delete off the 75 percent high overhead costs
to go to one vendor versus how many other vendors?"
MR. MORGAN responded he was absolutely sure they did, but he
couldn't give the exact number. He added it was a very significant
reduction in the size of the overhead.
REPRESENTATIVE ROKEBERG asked if BP had re-openers in their
contract with Fairmont?
MR. MORGAN said no, they didn't but the contract with Fairmont had
another three years to run. He thought Fairmont was sensitive to
wanting to achieve the same outcomes as BP. He thought that BP has
indicated that in a couple of areas they have found a better way to
put into effect the policy they've always had. Their policy is
clearly to balance on the one hand the achievement of the possible
cost for these materials and efficiency in delivering them with
properly looking to do the maximum amount of that business they can
legally do in Alaska. And by looking inside that bundle rather
than treating it as a whole, at this stage BP has said there is one
area - the electrical group area - which they believe could be
competitive in Alaska and they are prepared, subject to Fairmont
agreeing to modify the contract, to put that out to bid to Alaskan
vendors.
Number 2350
REPRESENTATIVE ROKEBERG questioned if at the time BP entered into
the contract with Fairmont, there were any Alaskan vendors that
could meet the specifications of the scope of work that BP
contracted Fairmont to do.
MR. MORGAN responded no.
REPRESENTATIVE ROKEBERG commented that basically they were limited
in the choice of people who provide that service.
Number 2363
REPRESENTATIVE JERRY SANDERS expressed his appreciation to BP for
their existence in Alaska and all the things they've have done
cooperatively.
MR. MORGAN said they intended to be in the state for a long time to
come.
REPRESENTATIVE SANDERS commented that the Governor in support of
concessions on Northstar made the statement that if we're going to
share in the rewards, we have to share in the risks. When the
Governor talked of sharing the rewards, in Representative Sanders'
mind, one of the biggest rewards that could be shared in is good
paying, meaningful jobs for Alaskan people. To him, jobs are as
important or more important than profits and dollars that go into
the state coffers that can be spent for welfare, unemployment or
government jobs. He likes good private sector jobs, which BP can
supply. He asked Mr. Morgan what percentage of BP employees were
Alaskans?
MR. MORGAN said the definition of Alaskans is tricky, but by BP's
calculation 85 percent of BP employees are resident in Alaska. He
admitted there is an issue regarding measurement in this area. He
believed the state's official measurement numbers are geared to
people who are recipients of the permanent fund dividend check and
of course, there is a significant residency permit for that and
some of his colleagues who come from abroad and live in Alaska for
three or four years may never qualify for the dividend, as he may
never qualify. Yet he is here in Alaska, spending his money in
Alaska and thinks of himself clearly as an Alaskan resident while
he's here, which he hopes will be for a long time.
Number 2459
REPRESENTATIVE SANDERS asked if the 23 people who will be displaced
with the current out-sourcing program are Alaskan employees?
MR. MORGAN didn't have the answer to that question, but added he
could get the answer for Representative Sanders.
TAPE 96-34, SIDE B
Number 008
REPRESENTATIVE SANDERS... 5 percent like yours is?
MR. MORGAN said he hesitated to use the word "control" for all
sorts of reasons; however, he thought BP could have lots of
discussions and influence in their relationships with their
contracting companies. He said he liked to preface these kinds of
comments by saying, "The oil and gas industry has by far the best
record of any industry in Alaska in terms of the employment of
Alaskan residents." Having said that, it is clear the proportion
has been falling for not just the operators, but the contractors in
the course of the last couple of years. As a result of that, BP
and ARCO as the two operating companies came together with about 20
of their contracting companies earlier this year to work a set of
issues between them as to how the level of Alaskan employment could
be enhanced and produced a report with a set of recommendations
which has been presented to the Administration and which they
intend to follow through very carefully. The recommendations in
that report are under three broad headings. First, in relation to
training, having some good forecasts about what their labor
requirements will be, looking at what is available in the state and
making sure training programs are available to have Alaskans
available for those jobs in the future. The second set of
recommendations are under the general heading of hire. Here there
are some really quite simple issues. Sometimes, the jobs have not
been widely advertised in Alaska. The third area is that of
measurement and he personally believes that if these areas of focus
are properly measured, then things will be done to change them. He
thought all companies involved in those discussions have agreed
individually to set themselves a goal for improvement and to
measure their performance against that goal and to make that
information available. He thought there were some very good signs
out of that activity including individual commitments from the main
contractual organizations and he believed that genuinely would have
an effect. He added that it's not something that happens in five
minutes but he thought that over a period of 18-24 months, a
positive effect will be seen from those actions.
Number 121
REPRESENTATIVE BEVERLY MASEK said during the course of Mr. Morgan's
testimony she had been of thinking about what's been going on with
Alaska's economy and the oil companies and noted that ARCO had done
some downsizing in the past. She thought that according to ARCO's
testimony before the Joint House/Senate meeting on April 2, 1996,
they had asked each of their departments to meet or beat bids from
outside companies for functions like accounting and maintenance.
She asked Mr. Morgan if BP Exploration (Alaska), Inc., planned
to do that also or what their plans were for the future relating to
downsizing.
MR. MORGAN said there are no specific plans beyond those that he
spoke about in his earlier testimony for the out-sourcing of
further work from BP. However, there is a constant evaluation
process going on so there is no great master plan of any kind that
he could tell committee members about. He could say that all the
areas of their organization, both on the North Slope and in
Anchorage, understand the context of their business activity. He
believed that only if all their employees understand the business
context they operate within, can they properly make their maximum
contribution to the enterprise. Therefore, BP takes a lot of time
and a lot of trouble to try to keep all their employees involved
and fully informed on that context. That means that in all those
areas, people are engaged in looking for ways to reduce costs.
They are looking at ways to do that in terms of internal spending
in the organization, the way overheads are set up internally;
looking at it in terms of how they manage their external spending,
their relationship with all their contractors, which includes the
possibility of changing the boundaries of those relationships and
putting some more activities into the contractual (indisc.-
coughing) that are currently in BP; it involves looking at
transportation costs, both through the work that Alyeska is doing
and the work that BP's shipping organization based in Cleveland is
doing to try to ensure they are operating effectively while
obviously maintaining the safety and environmental standards. He
said that all of these areas of focus exist in their organization
and they will be constant changing. However, it's not organized in
some totally controlling way from the top or a small group of
managers; it's one where the whole organization is engaged in
trying to create that greater efficiency needed to maintain the
competitive position. He commented that people do understand there
is a real opportunity to new investment. There are some really
good opportunities that exist on the North Slope today, but if BP
is going to compete inside the organization for the investment
funds to do that, they must keep the whole organization
competitive.
Number 266
REPRESENTATIVE MASEK asked Mr. Morgan what BP's plans were for
getting more Alaskan hire on the North Slope? She didn't think
that Representative Sanders' question had been completely answered
regarding the percentage of Alaska hire versus BP's total North
Slope employees. She asked if BP had any plans to implement a
tracking system to determine exactly how many of those employees
were truly Alaskan residents? Also, she thought the Department of
Labor should look at the criteria for determining residency for
individuals working on the North Slope. Many of her constituents
have expressed concern about individuals working on the North Slope
and although they actually live in the Lower 48, they still collect
the permanent fund dividend.
Number 373
MR. MORGAN commented the questions raised by Representative Masek
were certainly broad. With respect to what may amount to potential
fraud in relation to the dividend checks, that goes beyond what he
is prepared to address. He is conscious that a number of the
addresses that BP and their contractors have for employees are post
office boxes and perhaps they need to be a little more careful in
understanding whether those really do represent residential
addresses in Alaska or not. That is one of the things they have
identified as needing to get a better understanding of. With
regard to setting targets and objectives, Mr. Morgan said the work
that BP, ARCO and their contractors have just done, does include a
recommendation that all of the companies involved should set
targets themselves individually. He thought it was likely illegal
for BP to seek to set targets for its contractual organizations.
It is absolutely fine if those organizations wish to set targets
for themselves. He didn't think it would be sensible to try to set
a single target that all companies should aspire to; they do have
different situations. Some of the contractors are really quite
low, perhaps even 50 percent in terms of Alaska residents employed
while others are 75 percent and above. He said, "One might look to
those at the lower end, perhaps not to achieve 75 percent in six
months, but certainly to see some earlier and fairly rapid
improvement. Those at 75 percent clearly are not going to be able
to see enormous gains on where they are now. So, a different
target would be appropriate for them." He commented that BP has
not yet themselves set their target against the 85 percent number
but there is a group working on these issues and what actions
should be taken internally to try to improve their position. He
was very confident that some improvement would be seen, but
hastened to add the oil and gas industry is very, very
substantially the best performer in this area and other Alaskan
industries should no doubt be receiving some attention on this
issue, also.
Number 496
MR. MORGAN said in response to the issue of timing of tours on the
North Slope, there has been increasing flexibility in timing
between the one/one schedule and the two/two schedule for BP
employees and they have a fair degree of choice available. He
noted that one thing they could do is try to move all their staff
on a one/one schedule which would make it much more difficult to
live in the Lower 48. He thought that might raise some significant
difficulties with the union and it certainly would be a negotiable
item as far as the union was concerned. Also, he had been told it
would be a difficult issue as far as some of the Native staff with
respect to travel to and from the villages. He remarked these were
not simple issues. To some extent, they also have an aging work
force and as some of those people have gotten older and have to
begun to think about their retirement possibilities, surprising as
it may be, some of them obviously don't anticipate spending all
their declining years in Alaska and have decided to set up a home
out of state. Therefore, some of those things are structural
issues that are difficult to deal with and maintain a real sense of
fairness in the way BP treats their people.
Number 569
REPRESENTATIVE MASEK asked what the future was as far as BP working
with Alaskan companies that could provide contract work? Also, she
asked if Mr. Morgan had a listing of all the companies BP deals
with and what was involved in the decision making process to bring
in out-of-state companies for services such as maintenance,
welding, etc.
MR. MORGAN said the vast majority of the companies that BP deals
with providing those kinds of services are Alaskan companies. He
thought perhaps the issue more properly is how does a company like
VECO or APC go about recruitment when it needs additional skilled
staff. As he stated earlier, if BP does find themselves wanting to
contract with a company from outside the state because they offer
the quality of service that BP feels they need for that particular
activity, BP would then strongly encourage them to move their
operating base into Alaska and to operate to the standards of
Alaska hire as BP themselves do. He thought that is broadly what
happened in the Anderson arrangement. He commented that in the
last few weeks, he had talked to a number of legislators about
Northstar and he believed this is a terrific opportunity to start
moving on a new generation of smaller oil fields which do represent
part of the future in Alaska and indeed move into the offshore
area, which introduces its own set of issues and problems
particularly for the residents of the North Slope. It will create
real jobs throughout the state for Alaskans and it will create real
new business opportunities, particularly in building some of the
larger modules for Sealift up to the North Slope that have always
been built in the Lower 48 previously. He knew there was a lot of
interest and discussion around the agreement between BP and the
Department of Natural Resources on Northstar. He urged committee
members to familiarize themselves with the agreement and to use
their judgment as to whether this is a good and favorable deal for
the state of Alaska. He truly believed it is and will help create
the future discussed.
Number 718
REPRESENTATIVE KOTT noted that if an individual is living out of
state and receiving a dividend check, it is in fact a violation and
it's fraudulent activity. He asked Mr. Morgan if his assessment
was correct in that 85 percent of the work force is made up of
Alaskan residents and the other 15 percent are those individuals on
the two-week rotation.
MR. MORGAN said some employees may manage to do this on a one-week
rotation if they live in Seattle for example, but he thought most
of them would be on the two-week rotation. He commended the report
produced by BP, ARCO and their contractors on this issue and
offered to make it available to the committee.
Number 792
REPRESENTATIVE KOTT said that committee members had received the
report the previous week at the joint hearing. He thought it was
difficult to address out-sourcing without addressing Alaska hire
and believed what Representative Masek was getting at was the
Department of Labor's annual report which indicated that about $106
million was earned by non-Alaskans within the oil and gas industry.
Thus, while the oil and gas industry has the highest employment
rate of residents, there's also the highest amount of dollars
leaving the state from nonresidents.
Number 820
REPRESENTATIVE KIM ELTON asked what the scope was in terms of
vendors? He could understand electrical supplies, but what about
office supplies? Did BP go down the street and buy office supplies
or was that part of the vendor contract?
MR. MORGAN replied he couldn't answer that specifically, but he
thought that was precisely the kind of supplies - it is very much
the small end of things. Protective gloves and those types of
things would be included in the general industrial goods group that
he discussed earlier.
Number 884
REPRESENTATIVE ELTON surmised that some of the concerns that had
been expressed were from smaller suppliers who would like to have
an opportunity to provide some of the smaller items. He commented
that the scope then does go down quite far; in other words it's not
just major procurement but general office procurement, also.
MR. MORGAN responded yes, and added this area of general industrial
goods is the area in which BP was paying literally 75 cents in
overhead for every dollar they spent. Not only did they have that
overhead, but overall they could see there was a 22 percent average
competitive disadvantage to buying those goods in Alaska versus
what they were available through the Fairmont supply arrangement.
Those two components together make that a very attractive
proposition. What is does, of course, is have a relatively
disproportionate impact on quite a number of Alaskan suppliers,
which he understood. As he indicated earlier, BP is always trying
to strike a balance between managing themselves in a cost effective
and efficient way and doing all they can to properly maximize the
amount of their spend in Alaska. With regard to the other $26
million worth of goods, it is clear that BP will do everything they
can to do that business in Alaska. They will bid it only to
Alaskan companies; however, they do expect to have a conversation
on competitive performance within that framework, but he thought
they would be bringing roughly $6 million worth of business into
the state which has previously been in the Lower 48. In doing
that, there will be a consolidation, so there will undoubtedly be
some winners and some losers in the process. He thought that was
the nature of trying to do this work more efficiently; it's tough
to do that and keep everybody happy.
Number 995
REPRESENTATIVE ELTON agreed with Mr. Morgan and said oftentimes
some of the concern is that a company may not have the contract to
supply a certain item, but if they have the notion they won't have
an opportunity to get it in the future, it's obviously going to
create concern. Representative Elton mentioned the fishing and
tourism industry as specific examples of industries that don't have
the Alaska hire record that the oil and gas industry has. Alaskans
don't want a lot of those jobs either, but they probably covet the
jobs in the oil and gas industry. He thought one of the ways the
oil and gas industry could help would be to suggest what the state
needs to do in some of these cases. For example, with the
construction of the modules in Alaska, if that's possible and if
Northstar is developed, they may need to know what infrastructure
the state or the city of Anchorage for example, is needed to make
that possible. It may even be down to the level of what university
programs are needed or what the vocational education programs need
to be. He hoped the dialogue could continue between the state and
the oil and gas industry.
MR. MORGAN said he appreciated Representative Elton's comments and
added there are some real practical issues. For example, he was
aware that conversations had taken place with the Department of
Transportation in terms of weight limits on roads for transporting
modules. Those limits can be varied to make it possible to do more
in the state.
Number 1141
REPRESENTATIVE JOE GREEN said that Mr. Morgan had indicated in the
Resources Committee hearing earlier in the day there was some $380
million to be spent of which all but about $140 million would be
spent in state and of the $140 million roughly $100 million would
be on materials that weren't available within the state. If that's
the case, he wondered if BP planned to use in-state suppliers of
equipment like truck tires for example, that aren't made in Alaska
but could be procured through vendors in the state and would that
be considered part of the in-state or part of the $100 million?
MR. MORGAN said, "Well, I think what I would say is that the policy
that I've just been describing for procurement which is for most of
those areas and I would imagine -- I can't -- I'd have to confirm
this, but that things like tires and transport materials would be
one of those 8 or 10 categories that I'm talking about being bid
out, that that would basically play by the same rules that our
chosen supplier under those bidding arrangements to Alaskan
companies would be the supply source that the project would use."
Number 1226
REPRESENTATIVE GREEN asked if Fairmont would be considered the
procurement decider or would it be done within BP?
MR. MORGAN responded all of those areas that will be bid out,
including the electrical goods area subject to the contract change
that he discussed earlier, will be bid out by BP; the contracts
will be directly with BP; and the business relationship will be
managed by BP. Fairmont would still provide the underlying
information and technology services to support BP's supply
management systems, but the business relationship would be with BP.
Number 1273
REPRESENTATIVE GREEN asked in the categorization of in-state versus
out-of-state, would a company like Fairmont be considered in-state
or out-of-state.
MR. MORGAN said he thought a company needed an office address in
the state and an Alaskan business license to be an in-state company
legally. He was sure that Fairmont and any other Lower 48 company
could achieve that. One of the things BP is considering internally
is whether, within the framework of the law, they can try to define
a somewhat more substantial Alaskan presence in terms of what they
mean by an Alaskan contractor. He didn't know what would be
legally possible, but clearly it would be quite helpful if they
were able to create some broader definition that required a more
substantial presence in the state.
Number 1391
REPRESENTATIVE GREEN said he was thinking in terms of more than the
legal requirement or a post office box; he surmised that it would
be regulated by whether or not they meet the requirement legally.
MR. MORGAN remarked what he was saying was he thought that would be
the legal definition of an Alaskan company. What he had indicated
earlier is when BP enters into a relationship with a company from
outside the state, they would encourage the company to have that
direct presence in the state and to apply the same standards in
relation to hiring employees as BP themselves would apply. He
further stated that BP was investigating whether it's possible,
within a legal sense, to have some tighter specification regarding
an Alaskan company than the minimal legal requirement and he didn't
know the answer at this point.
Number 1410
REPRESENTATIVE ROKEBERG asked how committed BP is at this time to
construction of the largest modules in the Port of Anchorage?
MR. MORGAN asked if that question was in relation to Northstar?
REPRESENTATIVE ROKEBERG affirmed that.
MR. MORGAN reiterated that BP has said for the Northstar project,
they are committed to hiring Alaskans, committed to work with
Alaskan contractors, and committed to build modules in Alaska
including the largest modules for Sealift provided the facilities
are available. He said they aren't in the business of investing in
those facilities; this is an issue that must fall therefore with
the main fabrication contractors that exist like APC and VECO, both
of whom are alliance partners with BP on the Northstar project. He
further stated that BP will do everything possible to work with
those contractors to figure out how to make those facilities
available. Also, there was testimony in the House Resources
Committee earlier that there is likely to be some premium involved
in building those modules here at this time and that's something BP
has accepted in going forward with that proposal. He is
increasingly confident from conversations he's had that it will be
possible to build those modules here, find a way to assemble them
and load them out in the port of Anchorage area.
Number 1513
REPRESENTATIVE ROKEBERG asked if Mr. Morgan knew how many
foreigners or non-United Kingdom residents worked for BP in the
North Sea?
MR. MORGAN said there was quite a lot. He didn't have the exact
number, but offered to furnish the information to the committee at
a later date. He added the North Sea work force is a pretty
cosmopolitan work force.
REPRESENTATIVE ROKEBERG said his point was that BP has this type of
issue; e.g., local hire, in other parts of the World.
MR. MORGAN thought it was a natural and proper conversation and
added BP's policy is to hire Alaskans and to do business in Alaska
to the maximum extent possible, clearly always respecting the law.
He noted that when he was working in Aberdeen, they had many
similar conversations about, in particular, support of local
business in the area. He thought the difference was that there's
a deeper infrastructure supporting the oil industry around Aberdeen
as there is in Houston. He thought the problem in Alaska is that
many of the companies who operate in Alaska actually still have
their head offices somewhere in the Lower 48. There are not that
many Alaskan companies that have grown up, so it's a much thinner
group of companies in Alaska than the deeper infrastructure that
exists in other major oil operating centers.
Number 1651
REPRESENTATIVE PORTER thanked Mr. Morgan for addressing the
committee. He thought Mr. Morgan had adequately addressed the
concerns he had heard.
Number 1679
REPRESENTATIVE GREEN commented that BP probably hadn't come to a
selection site but once the Northstar project was sanctioned and
had been given the go-ahead, he wondered how long it would take BP
to determine that large modules could be built in Anchorage so the
port could prepare for that eventuality.
MR. MORGAN thought it was the other way around. He said BP would
need to know with a pretty high degree of confidence by the middle
of summer this year, that the appropriate facilities can be
provided of the right quality, at the right time in order to decide
how to fully implement the design of the project and begin to
contemplate where to place the orders for the modules. He noted
this would be a very intensive piece of activity for the project
team in the course of the next couple of months.
REPRESENTATIVE GREEN asked if the port of Anchorage was involved in
that loop?
MR. MORGAN thought the port of Anchorage as well as the city of
Anchorage was involved.
Number 1777
CHAIRMAN KOTT asked if there were additional questions for Mr.
Morgan. Hearing none, on behalf of the House Labor and Commerce
Committee he thanked Mr. Morgan for his testimony and for
clarifying the confusing term known as "out-sourcing."
ADJOURNMENT
Number 1832
There being no further business to come before the House Labor and
Commerce Committee, CHAIRMAN KOTT adjourned the meeting at 4:40
p.m.
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