Legislature(2005 - 2006)Anch LIO Conf Rm

08/18/2006 09:00 AM House RESOURCES


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Audio Topic
09:00:49 AM Start
09:01:22 AM Prudhoe Bay Corrosion Crisis
09:03:09 AM British Petroleum - Alaska
11:08:34 AM Patrick H. Vieth - Cc Technologies
11:35:16 AM Attorney General, Department of Law
01:17:26 PM Alaska Oil & Gas Conservation Commission
01:46:45 PM Department of Revenue
02:27:06 PM Commissioner Menge, Cabinet Team Leader
02:28:50 PM Department of Environmental Conservation
02:54:40 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Testimony <by Invitation Only> --
+ Joint with Senate Resources Committee TELECONFERENCED
Prudhoe Bay Corrosion Crisis
Presentations by:
British Petroleum - Alaska
Commissioner Menge, Cabinet Team Leader
Alaska Oil & Gas Conservation Commission
Department of Environmental Conservation
Department of Revenue
Attorney General
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        August 18, 2006                                                                                         
                           9:00 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
HOUSE RESOURCES                                                                                                                 
                                                                                                                                
 Representative Jay Ramras, Co-Chair                                                                                            
 Representative Ralph Samuels, Co-Chair                                                                                         
 Representative Paul Seaton, Vice Chair (via teleconference)                                                                    
 Representative Carl Gatto                                                                                                      
 Representative Gabrielle LeDoux                                                                                                
 Representative Harry Crawford                                                                                                  
 Representative Mary Kapsner                                                                                                    
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Thomas Wagoner, Chair                                                                                                  
 Senator Fred Dyson                                                                                                             
 Senator Kim Elton                                                                                                              
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
HOUSE RESOURCES                                                                                                                 
                                                                                                                                
 Representative Jim Elkins                                                                                                      
 Representative Kurt Olson                                                                                                      
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Ralph Seekins, Vice Chair                                                                                              
 Senator Ben Stevens                                                                                                            
 Senator Bert Stedman                                                                                                           
 Senator Albert Kookesh                                                                                                         
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Kevin Meyer                                                                                                      
Representative Les Gara                                                                                                         
Representative Mike Chenault (via teleconference)                                                                               
Representative David Guttenberg (via teleconference)                                                                            
                                                                                                                                
Senator Gretchen Guess (via teleconference)                                                                                     
Senator Hollis French                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRUDHOE  BAY   CORROSION  CRISIS   PRESENTATIONS  BY:     BRITISH                                                               
PETROLEUM  - ALASKA;  COMMISSIONER  MENGE,  CABINET TEAM  LEADER;                                                               
ALASKA  OIL   &  GAS   CONSERVATION  COMMISSION;   DEPARTMENT  OF                                                               
ENVIRONMENTAL  CONSERVATION;  DEPARTMENT   OF  REVENUE;  ATTORNEY                                                               
GENERAL                                                                                                                         
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Presenters were:                                                                                                                
                                                                                                                                
STEVE MARSHALL, President                                                                                                       
BP Production                                                                                                                   
                                                                                                                                
BILL HEDGES, Manager of Corrosion                                                                                               
Strategy and Planning, BP                                                                                                       
                                                                                                                                
PATRICK H. VIETH, Senior Vice President                                                                                         
CC Technologies, Inc.                                                                                                           
                                                                                                                                
DAVID W. MARQUEZ, Attorney General                                                                                              
Department of Law                                                                                                               
                                                                                                                                
JOHN NORMAN, Commissioner/Chair                                                                                                 
Alaska Oil & Gas Conservation Commission(AOGCC)                                                                                 
Department of Administration                                                                                                    
                                                                                                                                
CATHY P. FOERSTER, Commissioner                                                                                                 
Alaska Oil & Gas Conservation Commission                                                                                        
Department of Administration                                                                                                    
                                                                                                                                
BILL CORBUS, Commissioner                                                                                                       
Department of Revenue                                                                                                           
                                                                                                                                
MICHAEL MENGE, Commissioner                                                                                                     
Department of Natural Resources (DNR)                                                                                           
                                                                                                                                
KURT FREDRIKSSON, Commissioner                                                                                                  
Department of Environmental Conservation (DEC)                                                                                  
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR THOMAS  WAGONER called the  joint meeting of the  House and                                                             
Senate  Resources Standing  Committees  to order  at 9:00:49  AM.                                                             
Senators Elton,  Dyson, and  Wagoner and  Representatives Ramras,                                                               
Samuels,  Gatto,  LeDoux, were  present  at  the call  to  order.                                                               
Representatives   Seaton  (via   teleconference),  Kapsner,   and                                                               
Crawford,  and  Senator French  arrived  as  the meeting  was  in                                                               
progress.   Also in attendance were  Representatives Kevin Meyer,                                                               
Les  Gara,   Mike  Chenault   (via  teleconference),   and  David                                                               
Guttenberg (via  teleconference), and Senators Hollis  French and                                                               
Gretchen Guess (via teleconference).                                                                                            
                                                                                                                                
^PRUDHOE BAY CORROSION CRISIS                                                                                                 
                                                                                                                                
9:01:22 AM                                                                                                                    
                                                                                                                                
CHAIR WAGONER announced that the  only order of business would be                                                               
the presentations related to the Prudhoe Bay Corrosion Crisis.                                                                  
                                                                                                                                
CHAIR  WAGONER  let   it  be  known  that  the   purpose  of  the                                                               
presentations is for  fact-finding.  He said BP is  being given a                                                               
chance  to  follow  up  on   a  short  meeting  that  took  place                                                               
previously.                                                                                                                     
                                                                                                                                
^BRITISH PETROLEUM - ALASKA                                                                                                   
                                                                                                                                
9:03:09 AM                                                                                                                    
                                                                                                                                
STEVE MARSHALL,  President, BP  Production, outlined  four points                                                               
that he  would cover: the  reason the  decision was made  to shut                                                               
down the  Prudhoe Bay oil field;  the steps that are  being taken                                                               
to  safely   and  expediently  get  back   into  production;  the                                                               
corrosion program that  is used to manage corrosion  on the North                                                               
Slope; and  the employee concerns  program for both BP  staff and                                                               
contractors on the  North Slope.  He explained that  the August 6                                                               
decision to  shut down the  Prudhoe Bay field was  made primarily                                                               
to "avert the potential of a major incident."                                                                                   
                                                                                                                                
MR. MARSHALL  said he  has worked  with BP for  29 years  and has                                                               
spent half of the time in Alaska.   He first arrived in Alaska in                                                               
1978, just when the pipeline was  begun, and he reported that the                                                               
company is  facing the prospect  of another 50 years  of business                                                               
here.   He introduced some  of the  other presenters.   He stated                                                               
that over  the last two  weeks BP has  worked hard to  attempt to                                                               
come to grips  with its discovery [of corrosion  in the pipeline]                                                               
on  August  6.   He  commended  the  following groups  for  their                                                               
cooperation and  in providing  both insight  and oversight:   the                                                               
Department of Revenue (DOR), the  Department of Natural Resources                                                               
(DNR), the  Alaska Oil and  Gas Conservation  Commission (AOGCC),                                                               
the  Department  of  Environmental Conservation  (DEC),  and  the                                                               
federal   Department   of    Transportation   and   Environmental                                                               
Protection  Agency.    He  credited  the hard  work  of  all  the                                                               
agencies in enabling  BP to maintain production  from the Western                                                               
area  of  Prudhoe  Bay.     He  reported  that  BP  has  exceeded                                                               
production  of over  200,000 barrels  per  day for  the last  two                                                               
days.  He relayed that BP is now  focused on doing what it can to                                                               
bring the Eastern area of Prudhoe  Bay up to speed as quickly and                                                               
safely as possible.                                                                                                             
                                                                                                                                
9:07:18 AM                                                                                                                    
                                                                                                                                
MR. MARSHALL turned to the decision  to shutdown.  He stated that                                                               
in early August, BP received the  results of a "smart pig" survey                                                               
that had  been run in  late July on  the Eastern transit  lines -                                                               
the lines  to the far  east of the  field.   He said BP  had been                                                               
sequentially "pigging"  a number  of its lines  in response  to a                                                               
spill that  occurred in March.   He said,  "One of the  things we                                                               
committed to  and worked  with ... DOT  on was  to systematically                                                               
maintenance pig  and smart pig  all of  our transit lines."   The                                                               
first  of those  lines -  the  Lisburne line  - was  successfully                                                               
pigged in June,  and the line was pronounced fit  for service - a                                                               
status still met today.   That line produces about 18,000 barrels                                                               
a day, he noted.                                                                                                                
                                                                                                                                
MR. MARSHALL continued:                                                                                                         
                                                                                                                                
     The results  received from the  Flow Station 2  to Flow                                                                    
     Station 1  section of line  ... showed ... a  number of                                                                    
     anomalies or  defects ...,  which was  a concern  and a                                                                    
     surprise to us; we were  not expecting to see that kind                                                                    
     of  severe  corrosion  or  severe  wall  loss.    After                                                                    
     receiving those  results, typically what you  do from a                                                                    
     smart  pig is  go out  and corroborate  or confirm  the                                                                    
     indications   from  the   smart  pig   with  ultrasonic                                                                    
     testing, ...  [which is] generally  regarded as  one of                                                                    
     the  most accurate  tools  to  confirm wall  thickness,                                                                    
     corrosion in pipe and in oil field infrastructure.                                                                         
                                                                                                                                
     On the  morning of August  6, we found  some insulation                                                                    
     that had  been oil stained  on the  pipe at one  of the                                                                    
     locations.   We  immediately  took the  decision ...  -                                                                    
     given   that   this   was  an   indication   that   was                                                                    
     communication  with the  fluid in  the pipe  - to  shut                                                                    
     down  ...  Flow  Station  2.   That  was  about  35,000                                                                    
     barrels  a   day.    That  precautionary   action  then                                                                    
     depressured  the  line  and proceeded  to  inspect  the                                                                    
     further  locations that  had been  identified from  the                                                                    
     smart pig run.                                                                                                             
                                                                                                                                
     About two to  three hours later, as  we were inspecting                                                                    
     one of  the other locations,  we saw a leak  to tundra,                                                                    
     which  we  were  able  to  arrest  and  put  drip  pans                                                                    
     underneath.   But because  we were  now seeing  two ...                                                                    
     potential spots  which had  oil communication,  we were                                                                    
     very  concerned  about what  was  happening  here.   We                                                                    
     contained the  spill; I  think the  spill right  now is                                                                    
     estimated  at  about  23  barrels.     The  cleanup  is                                                                    
     complete, and we're working  through the normal process                                                                    
     on  that.    The  indications  ...  were  very  much  a                                                                    
     surprise on the back of  the March spill on the Western                                                                    
     area line,  and it was  that which challenged  our team                                                                    
     to say,  "Did we  understand what was  happening here?"                                                                    
     This  was not  anticipated ...,  and we  said we  don't                                                                    
     fully  understand   and  cannot   predict.     We  lost                                                                    
     confidence  in   our  ability   to  predict   what  the                                                                    
     condition of  the lines  [was].   We made  the decision                                                                    
     then ...  - out of  an abundance  of caution -  to shut                                                                    
     down the field  until we could confirm  and verify that                                                                    
     the  remaining  transit  lines   were  indeed  fit  for                                                                    
     service.   And  only then  would we  consider continued                                                                    
     operations.                                                                                                                
                                                                                                                                
     ... We're  still seeking answers  to the cause  for the                                                                    
     pitting  corrosion that  we've  experienced, and  we'll                                                                    
     only  know  the  results  of   that  once  we  complete                                                                    
     [LaBarge, Inc.]  testing of  the steel.   That  will be                                                                    
     some  time  away.   But  really,  because this  was  an                                                                    
     unknown,  as  operator,  we believe  the  only  prudent                                                                    
     action - the  only responsible action -  ... to prevent                                                                    
     the potential  of a  major spill was  to shut  down the                                                                    
     field.                                                                                                                     
                                                                                                                                
9:11:42 AM                                                                                                                    
                                                                                                                                
MR.  MARSHALL relayed  that  over  the last  weeks,  BP has  been                                                               
working 'round the  clock inspecting the Western area  lines.  He                                                               
said  BP initially  focused on  the  Eastern area  of the  field,                                                               
estimating  it would  take  three  to five  days  to complete  an                                                               
orderly shutdown  and "do the freeze  protection."  Consideration                                                               
was given toward understanding "the  implications to provide fuel                                                               
gas" for  other fields, the  Northstar Unit, and the  first three                                                               
pump stations.   He said hundreds of  ultrasonic test inspections                                                               
were  conducted,   and  he  credited  many   agencies  for  their                                                               
assistance.   Mr.  Marshall stated,  "Indeed, on  Friday of  last                                                               
week ..., five days after the  Flow Station 2 incident, we made a                                                               
decision to  keep that line  in service."   Notwithstanding that,                                                               
he noted that crews are  continuing their inspection on that line                                                               
around the clock, through the  use of such technology as forward-                                                               
looking infrared  sensors and hydrocarbon  detectors, as  well as                                                               
performing visual inspections.   He said BP expects  that line to                                                               
remain  in  service "through  to  when  we  can actually  do  the                                                               
maintenance pigging and smart pigging in the weeks to come."                                                                    
                                                                                                                                
9:14:47 AM                                                                                                                    
                                                                                                                                
MR.  MARSHALL said  the Eastern  Operating  Area, save  Lisburne,                                                               
remains "shut in."   Inspections on the line  are continuing from                                                               
Flow Station  1, past flow  station three, to  skid 50.   He said                                                               
the  insulation there  is more  difficult to  remove, because  of                                                               
differences in  "the final coatings  that were put on  the line."                                                               
He said  BP's intention  is to  demonstrate that  the line  is in                                                               
reasonable  condition to  bring back  into production  and/or pig                                                               
the line.   He stated, "In the event that  that transit line from                                                               
Flow  Station 1  to  Pump Station  1  proves not  to  be fit  for                                                               
service,  we are  looking  at  a number  of  by-pass options,  as                                                               
reflected  on  a  handout  in  the  committee  packet,  entitled,                                                               
"Prudhoe Bay Pipeline Schematic."  He continued:                                                                                
                                                                                                                                
     Those  are  tie-ins  that   our  engineering  team  has                                                                    
     identified,   which   would  bring,   basically,   full                                                                    
     production  from the  eastern  side of  the field  into                                                                    
     existing  lines  -  either the  Endicott  line  or  the                                                                    
     Lisburne line  - both of  which have been  confirmed to                                                                    
     be in good condition.                                                                                                      
                                                                                                                                
     The Endicott  line was originally  sized to be  able to                                                                    
     produce the  full production  from Endicott,  but there                                                                    
     is  capacity in  that line  for the  volumes from  Flow                                                                    
     Station 1 and from Flow Station 2.                                                                                         
                                                                                                                                
MR.  MARSHALL  said  340 engineers  and  inspectors  are  working                                                               
tirelessly  on "these  dual fronts."   Still  to be  done is  the                                                               
detailing  engineering and  material procurement.   He  indicated                                                               
that the  pipe is available,  the company is still  "sourcing the                                                               
valves," and as  soon as the detail engineering  is completed, BP                                                               
will  be in  a better  position to  share with  everyone what  it                                                               
estimates  the  completion  time  to be  for  resumption  of  the                                                               
eastern side of the field.                                                                                                      
                                                                                                                                
MR. MARSHALL  stated, "We're working  on parallel paths.   One is                                                               
the  inspection, which  so  far  has proven  the  line  to be  in                                                               
similar  good  condition to  the  western  area  line, but  I  do                                                               
caution that ...  we don't have as many inspection  points.  That                                                               
is proceeding  as quickly as we  possibly can."  He  said BP made                                                               
the  announcement   and  commitment  to  purchase   16  miles  of                                                               
replacement transit  line piping, which  has been ordered  and is                                                               
scheduled for  delivery in  Alaska "on the  fourth quarter."   He                                                               
explained, "That would be the  backstop to replacing all of those                                                               
lines."                                                                                                                         
                                                                                                                                
9:18:29 AM                                                                                                                    
                                                                                                                                
MR. MARSHALL commented on BP's  role as an operator, stating that                                                               
the  company is  responsible for  all the  safe operation  of the                                                               
field  and the  condition  of the  infrastructure, including  the                                                               
transit lines.   He stated that BP thought it  had understood the                                                               
state of  the lines,  but obviously  it did not.   He  stated the                                                               
company's  commitment   to  continually  improve   its  corrosion                                                               
program, and stressed its responsibility  for keeping the western                                                               
area  producing and  bringing  the  eastern area  up  as soon  as                                                               
safely possible.                                                                                                                
                                                                                                                                
9:19:39 AM                                                                                                                    
                                                                                                                                
MR. MARSHALL  then turned  to the corrosion  program.   He stated                                                               
that corrosion is a fact of  oil fields that the company attempts                                                               
to manage.   Many factors  are involved, including the  amount of                                                               
residual  carbon  dioxide,  water,  and solids  that  exist,  how                                                               
effective  inhibition is,  what the  geometry of  the lines  are,                                                               
whether there  are low  spots, and  if there  is bacteria.   Only                                                               
through laboratory  testing can  BP be  able to  definitively say                                                               
what exactly caused the corrosion on the line.                                                                                  
                                                                                                                                
MR.  MARSHALL,  to explain  why  BP  did  not suspect  there  was                                                               
corrosion  in  its lines,  pointed  out  the "Oil  Process  Flow"                                                               
handout that relates the process  utilized by Prudhoe Bay, and he                                                               
reviewed the  process with the committee.   He said once  the oil                                                               
has  gone  through  the  process, it  is  called  "sales  quality                                                               
crude," and it is, at that  point, considered to have lower risks                                                               
of  corrosion.   He said  that BP  has a  comprehensive corrosion                                                               
management  program.     Each  year  BP   performs  over  100,000                                                               
inspections  and involves  a  number  of technologies,  including                                                               
ultrasonic testing, x-rays, and pigging.   In fact, each year 370                                                               
maintenance pigs  are run.   Furthermore,  three to  five in-line                                                               
smart pigs are utilized to  supplement the pigging operation.  On                                                               
any given  year, he reported,  BP repairs between  250-300 pipes;                                                               
many of those  pipes are small-bore piping  inside BP's gathering                                                               
centers and flow  stations.  He then related what  BP has done in                                                               
the way  of maintenance over  the course of  the last years.   On                                                               
any  given day,  225  people are  inspecting  and monitoring  the                                                               
condition of  BP's infrastructure, but because  of the discovered                                                               
gap,  the  company  will  provide   an  even  more  comprehensive                                                               
program, including  smart pigging  in the future  and reanalyzing                                                               
its entire corruption program.                                                                                                  
                                                                                                                                
9:26:03 AM                                                                                                                    
                                                                                                                                
MR. MARSHALL  addressed transit line  inspections.  He  said many                                                               
people have asked  why BP did not pig the  lines [that were found                                                               
to  be  corrupted].    He  explained that  BP  started  with  the                                                               
assumption  "that this  was sales-quality  oil,  with the  water,                                                               
CO2,  and  solids pretty  much  removed,"  and  that it  met  the                                                               
pipeline  specifications  for  Alyeska Pipeline  Service  Company                                                               
("Alyeska"), which is  part of BP's contractual  requirement.  He                                                               
stated  that BP  believed that  the risk  and the  expectation of                                                               
corrosion were both considered to be  low.  He said smart pigging                                                               
was done in 1990 and 1998, and  in the latter year, less than two                                                               
cubic yards of  solids were removed from the  western area lines.                                                               
The smart  pig information  confirmed that  the western  line was                                                               
fit for  service.  He  related, "The 1998  smart pig run  for the                                                               
west  is indeed  our baseline,  even today."   Annual  ultrasonic                                                               
testing has been  done on that line to  confirm the inspections."                                                               
When BP took over the eastern  field in 2000, he said, ultrasonic                                                               
testing was  done on the  eastern transit lines,  which confirmed                                                               
that the line was in  good condition and corroborated the results                                                               
from  the smart  pig  run  on the  western  line  only two  years                                                               
earlier.   He  offered  further details.   He  said,  "We had  no                                                               
reason to  believe, certainly  given the  testing that  was done,                                                               
that the east was in any  different shape."  He said BP continued                                                               
to  monitor the  eastern  lines on  an annual  basis.   Over  the                                                               
course  of the  last 18  months, ultrasonic  testing indicated  a                                                               
slight  increase  in  the  corrosion rate  on  the  line  between                                                               
gathering centers  one and two,  thus BP increased  the frequency                                                               
of testing  and number  of points tested,  and it  commissioned a                                                               
smart pig for 2006.  However,  that run did not take place before                                                               
the March  spill.  Mr.  Marshall said  plans for the  future will                                                               
include whatever technology necessary.                                                                                          
                                                                                                                                
9:30:03 AM                                                                                                                    
                                                                                                                                
MR.  MARSHALL acknowledged  that  many BP  employees have  voiced                                                               
concerns,  and he  said the  company  wants to  know about  these                                                               
concerns  in order  to address  them.   He  listed the  following                                                               
forums that can  be used by employees:   management; employee-run                                                               
safety  committees;  an  anonymous  world-wide  internet  program                                                               
called, "Open  Talk"; a toll-free  telephone health,  safety, and                                                               
environmental  hotline; another  toll-free  number  to a  contact                                                               
outside  the  company; and,  upcoming,  an  ombudsman to  address                                                               
Alaskan and "broader American issues."   Beyond that, he related,                                                               
employees are  free to raise  concerns through  outside channels,                                                               
such  as the  media.   He stated,  "Regardless of  the source  of                                                               
those concerns, we  treat them all seriously.  The  only thing we                                                               
need  is   specifics  ...   [in  order   to]  do   a  responsible                                                               
investigation.    We  look  into everything  we  hear  about  ...                                                               
internally  or  using  external  resources.    We  just  want  to                                                               
understand  the issue,  get to  the bottom  of it,  and take  the                                                               
appropriate action."  He reported that  over the last five or six                                                               
years,  the  safety  committees alone  have  addressed  over  600                                                               
safety concerns covering a broad spectrum.                                                                                      
                                                                                                                                
MR.  MARSHALL stated  that  there  has been  concern  that BP  is                                                               
focused on cost  management to the detriment of  "the things that                                                               
we need  to do."   To that he  informed the committee  that while                                                               
production  has declined,  costs have  increased considerably  as                                                               
specified in  the handout.   He stated,  "We are committed  to do                                                               
what it  takes to  keep that  field as robust  and healthy  as we                                                               
possibly can.   We are  ... investing."   He offered  examples of                                                               
areas in which spending has increased.                                                                                          
                                                                                                                                
9:34:32 AM                                                                                                                    
                                                                                                                                
MR. MARSHALL related that BP has a  great staff.  He stated he is                                                               
confident  that production  will  be back  as  soon as  possible.                                                               
Since March,  a gap  in the  system has  been identified  in BP's                                                               
corrosion system.  The result, he  said, will be a better system,                                                               
not only  to protect the  effected pipelines, but to  protect the                                                               
entire infrastructure.  He concluded:                                                                                           
                                                                                                                                
     From  this adversity  we will  enhance our  capability.                                                                    
     We all  benefit from  that, whether  it's the  State of                                                                    
     Alaska,  your  constituents,  the  nation.    I  deeply                                                                    
     regret  the problems  we've caused  the  state and  the                                                                    
     nation from these actions and  the condition of Prudhoe                                                                    
     Bay.  We will emerge stronger.                                                                                             
                                                                                                                                
9:36:19 AM                                                                                                                    
                                                                                                                                
SENATOR  DYSON inquired  as to  when corrosion  monitoring began,                                                               
particularly on the western side.                                                                                               
                                                                                                                                
MR. MARSHALL deferred to Mr. Hedges,  but said, to date, BP has a                                                               
capable corrosion management  team consisting of a  core BP staff                                                               
that  is supplemented  by  contractors who  provide  much of  the                                                               
inspection expertise.   Since  March, a  new technical  group has                                                               
been  created in  order to  review corrosion  planning, and  that                                                               
group reports directly to Mr. Marshall.                                                                                         
                                                                                                                                
9:39:36 AM                                                                                                                    
                                                                                                                                
SENATOR DYSON  recalled that  in the mid-  to late-'80s,  BP laid                                                               
off many in  the state.  He  said he found it a  stretch that 225                                                               
people are  actively looking at  corrosion on the North  Slope on                                                               
any  given day.   He  inquired as  to how  many employees  BP has                                                               
operating the flow stations and gathering centers, for example.                                                                 
                                                                                                                                
MR.  MARSHALL replied  that  of the  225,  approximately 200  are                                                               
contracted staff  and 25 are  BP employees.   He deferred  to Mr.                                                               
Hedges to provide further detail.                                                                                               
                                                                                                                                
9:40:57 AM                                                                                                                    
                                                                                                                                
BILL  HEDGES, Manager  of Corrosion,  Strategy and  Planning, BP,                                                               
confirmed  that BP  has approximately  25  employees between  the                                                               
North Slope and Anchorage and  200 contractors who work mainly on                                                               
inspection services  and other corrosion-related activities.   He                                                               
added  that the  number is  not  exact, because  for example,  BP                                                               
tends to have more employees in the summer than in the winter.                                                                  
                                                                                                                                
9:43:04 AM                                                                                                                    
                                                                                                                                
SENATOR  DYSON  stated  that  the implication  is  that  all  the                                                               
employees  are experts;  they are  not field  hands doing  manual                                                               
labor  that  enables  inspection,  but  are  trained  experts  in                                                               
corrosion.                                                                                                                      
                                                                                                                                
MR.  HEDGES   responded,  "No,   that  would   include  everybody                                                               
associated  with corrosion,  so it  will include  the removal  of                                                               
insulation.   But they're all  professionals in their  own field.                                                               
Even  activities  such  as  removing   insulation  is  a  skilled                                                               
operation on the North Slope."                                                                                                  
                                                                                                                                
SENATOR DYSON said,  "So, ... you didn't mean to  infer that each                                                               
one of  those people  ... specifically  had advanced  training in                                                               
corrosion itself, but  they're a part of the  team that's working                                                               
on the problem."                                                                                                                
                                                                                                                                
MR. HEDGES answered, "That is correct, Senator."                                                                                
                                                                                                                                
9:44:03 AM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS asked if there has  been a change in the quality                                                               
of  the oil  from the  flow  station and  whether procedures  for                                                               
testing need to be changed.                                                                                                     
                                                                                                                                
MR. MARSHALL replied that the oil  from the Prudhoe Bay field has                                                               
remained fairly  the same, with one  exception:  in the  far west                                                               
of  the  field  the  oil  produced  is  viscose.    Because  that                                                               
reservoir is  shallower, it is typical  for the sands to  come up                                                               
through the  well into  the gathering center,  at which  point BP                                                               
tries to accumulate  them and remove the ... solids.   He stated,                                                               
"We suspected,  after the March  spill, the solid  carryover from                                                               
Gathering Place 2  was one of the key factors  of what had caused                                                               
some accelerated corrosion in that ...  line.  It still remains a                                                               
strong working theory  around what happened there.   There are no                                                               
similar sands  and solids  from the reservoir  in other  parts of                                                               
the  field."   He said  he thinks  that, largely,  the crude  oil                                                               
quality  and the  specification  -  which is  .35  percent -  has                                                               
remained the same.                                                                                                              
                                                                                                                                
9:46:49 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO remarked that  an article in yesterday's USA                                                             
Today said  BP has used smart  pigs and found 16  anomalies in 12                                                             
locations  and has  not done  so since  the early  1990s, relying                                                               
instead on  other tests.   He  read:  "After  the March  spill of                                                               
267,000  gallons, the  ... U.S.  Pipeline and  Hazardous Material                                                               
Safety Administration  ordered the company  to use smart  pigs to                                                               
test the  line.  ... The  agency has criticized BP  for not doing                                                               
the testing sooner."  He asked  that Mr. Marshall comment on some                                                               
of the accusations from USA Today.                                                                                            
                                                                                                                                
MR. MARSHALL,  in response to  the comment about 16  anomalies in                                                               
12 locations,  confirmed that  was accurate  reporting.   He said                                                               
those  anomalies indicated  wall-thickness losses  of between  70                                                               
and 81  percent.  He said,  "We were in the  process of verifying                                                               
those anomalies  with ultrasonic  testing when we  discovered the                                                               
contaminated  insulation."   He said  although some  people think                                                               
smart pigging is  the only tool, it is actually  only one; a more                                                               
accurate  tool is  actually ultrasonic  testing.   The two  tools                                                               
combined, he said, provide a good picture.                                                                                      
                                                                                                                                
MR. MARSHALL reiterated that BP  had based its assessments on the                                                               
pigging that  it had done on  its western area lines  in 1990 and                                                               
1998, and  the pigging done  there demonstrated that  those lines                                                               
were  in good  condition.   Mr.  Marshall said  BP  did not  just                                                               
accept that,  it followed up  with ultrasonic testing.   Clearly,                                                               
he said,  BP was not  quick enough to  identify a threat  to that                                                               
line; a  smart pig  was ordered  for 2006, but  "was going  to be                                                               
done  too  late."    Ultrasonic testing  was  instituted  on  the                                                               
eastern line when  BP took it over  in 2000.  In  response to Co-                                                               
Chair  Samuels'   question,  he  said,  "We   believed  that  the                                                               
condition would be broadly similar  to that which has been pigged                                                               
only two  years earlier.  The  ultrasonic testing that we  did on                                                               
those eastern  lines indeed  confirmed ... that  the line  was in                                                               
good  condition."   He  said the  events of  the  last two  weeks                                                               
showed that that was incorrect, and  he repeated that BP will fix                                                               
that problem.                                                                                                                   
                                                                                                                                
9:51:38 AM                                                                                                                    
                                                                                                                                
SENATOR  ELTON  related  his understanding  that  Mr.  Marshall's                                                               
testimony to  the legislature 7-10  days ago was that  "the line"                                                               
had not  been pigged  since 1992.   He stated  that he  has heard                                                               
subsequent to  that that BP  has issued a clarification  that "it                                                               
hadn't been  pigged in  1992, and  it had  not been  pigged since                                                               
1977."  He asked if that is correct.                                                                                            
                                                                                                                                
MR. MARSHALL clarified as follows:                                                                                              
                                                                                                                                
     In  1992, the  eastern area  lines -  the flow  through                                                                    
     Pump Station 1  lines - were pigged.   They maintenance                                                                    
     pigged [and]  cleaned ...  with some  success.   I mean                                                                    
     they were  pigged to  the point where  a smart  pig was                                                                    
     run.   What ARCO was unable  to get was good  data from                                                                    
     that  pig.   What  I  can't  [indisc --  coughing]  was                                                                    
     whether that  was because of the  incompleteness of the                                                                    
     pigging or  the solids, or  whether or not there  was a                                                                    
     problem with  the ...  pig run itself.   But  that line                                                                    
     was pigged in 1992 and a smart pig was attempted.                                                                          
                                                                                                                                
SENATOR ELTON asked  if it had been determined that  no good data                                                               
had been procured.                                                                                                              
                                                                                                                                
MR. MARSHALL deferred to Mr. Hedges.                                                                                            
                                                                                                                                
MR. HEDGES related that he had  spoken with somebody who had been                                                               
involved  in  that  smart  pigging  program,  and  that  person's                                                               
recollection  was that  the line  had  been cleaned  successfully                                                               
enough that [ARCO] was confident enough  to put a smart tool into                                                               
the  line.   The data  that was  produced by  the smart  tool was                                                               
terrifying, he said; it suggested  that the entire pipe was fully                                                               
corroded.  He continued:                                                                                                        
                                                                                                                                
     They  went  back  and  did spot  checks,  as  code  and                                                                    
     standards  would   recommend  you  to  do,   and  found                                                                    
     actually that the line was  in very good condition.  It                                                                    
     raised  questions  about  the  tool.   There  was  some                                                                    
     research done,  and in fact  the tool  was subsequently                                                                    
     withdrawn from  the market.   It was in the  early days                                                                    
     of smart  pigging.  And  consequently, although  a tool                                                                    
     was run, there  was no smart pig  later associated with                                                                    
     the eastern line  until we recently ran one  in July on                                                                    
     the upper section.                                                                                                         
                                                                                                                                
9:54:34 AM                                                                                                                    
                                                                                                                                
SENATOR  ELTON  referred  to Mr.  Marshall's  written  testimony,                                                               
which relates that BP actively  encourages its workforce to raise                                                               
issues  of  concern  and  promote  open  communications  in  many                                                               
forums.   Senator Elton said  through performing a search  on the                                                               
Google   search   engine  on   the   internet,   he  reached   an                                                               
understanding  that BP  employees may  not fully  agree with  Mr.                                                               
Marshall's statement.  He said he  found that a few years ago, BP                                                               
employees  came  to  Mr.  Marshall  with  complaints,  but  those                                                               
complaints were  dismissed.   There were  allegations by  some of                                                               
the BP employees of "harassment  and intimidation when it came to                                                               
maintenance issues."                                                                                                            
                                                                                                                                
MR. MARSHALL  said that  he is  aware of  those issues,  which he                                                               
said   were   investigated   comprehensively,   and   for   which                                                               
appropriate action was taken.  He  stated that he has not been in                                                               
the  position of  dismissing any  safety concerns  or allegations                                                               
during his time in Alaska.  However,  he pointed out that BP is a                                                               
large organization, and not a perfect  one.  He stated that it is                                                               
his  responsibility  to  ensure   that  everyone  in  the  entire                                                               
workforce  believes the  same  thing,  which he  said  is a  huge                                                               
challenge, but one  to which he is committed.   He stated, "Until                                                               
every ... one  of the 4,000 people  that are on the  slope at any                                                               
one time  truly believe[s]  that it  is okay  to raise  a concern                                                               
without reaction, we haven't done our job."                                                                                     
                                                                                                                                
9:57:10 AM                                                                                                                    
                                                                                                                                
SENATOR ELTON recalled  that there was another  gentleman who had                                                               
raised  maintenance   concerns  related   to  safety   valve  and                                                               
corrosion  issues,  and  he  said  he would  like  to  know  what                                                               
happened  after that  gentleman's allegations  were made  four or                                                               
five years ago.                                                                                                                 
                                                                                                                                
MR. MARSHALL  recalled that upon  his arrival in  September 2001,                                                               
there had  been a  number of  allegations made  about maintenance                                                               
backlogs.    He  said  he  instituted a  weekly  meeting  of  his                                                               
integrity management  team to address  these issues.  He  said he                                                               
has been determined  to eliminate these issues,  and he indicated                                                               
that there  are no backlogs regarding  equipment and maintenance.                                                               
He  stressed the  importance of  listening to  the people  in the                                                               
field.                                                                                                                          
                                                                                                                                
SENATOR ELTON  said he  appreciates that  part of  the discussion                                                               
has to  do with BP's history  before Mr. Marshall's arrival.   He                                                               
recalled a  report in  the Wall  Street Journal,  as well  as the                                                             
Anchorage  Daily News  regarding a  safety valve  issue that  was                                                             
reported, but took four years to fix.   He said he would like Mr.                                                               
Marshall to respond to that issue.                                                                                              
                                                                                                                                
MR. MARSHALL  stated that every  time BP receives  allegations it                                                               
looks into  them.   He said  he can  recall over  100 allegations                                                               
from various  letters from outside  the company, and  the company                                                               
has dug  into each one, correcting  things when it can.   He said                                                               
he is  conscious that a track  record takes a long  time to build                                                               
and a short time to lose.  He  said BP is on a path of rebuilding                                                               
its track  record, and  clearly what has  happened over  the last                                                               
few weeks has been a big setback in that regard.                                                                                
                                                                                                                                
10:01:31 AM                                                                                                                   
                                                                                                                                
SENATOR  ELTON  expressed  his  appreciation  of  Mr.  Marshall's                                                               
presence.  He said he would  like to hear whether BP thinks there                                                               
is a state responsibility for  the problems that have arisen over                                                               
the last few weeks, or if  the company believes that the issue is                                                               
theirs and  there ought not be  any impact on the  state treasury                                                               
through taxes or credits or any other  form.  He said he wants to                                                               
know whether  BP is planning to  finance the repairs on  its own,                                                               
or whether it expects assistance from the State of Alaska.                                                                      
                                                                                                                                
MR.  MARSHALL said  BP's focus  has been  on the  swift and  safe                                                               
restoration  of   production,  while  pursuing   inspections  and                                                               
bypasses.   He asked Senator Elton  to confirm that he  is asking                                                               
if BP  will be  seeking state  assistance on  the funding  of the                                                               
repairs.                                                                                                                        
                                                                                                                                
SENATOR ELTON  clarified that he  is interested in whether  BP is                                                               
going to use state taxes or  state credits to help finance any of                                                               
the repairs  that are  necessary, or  whether Mr.  Marshall fully                                                               
expects that it is the obligation of BP.                                                                                        
                                                                                                                                
10:03:36 AM                                                                                                                   
                                                                                                                                
MR.  MARSHALL responded  that  money isn't  the  object; BP  will                                                               
backstop and  fund whatever it  takes to get the  production back                                                               
on line.   He said  BP will work  with the existing  system, make                                                               
changes where  necessary, and replace equipment  wherever it can.                                                               
He stated, "I have not really  spent a lot of time thinking about                                                               
the implications of that."                                                                                                      
                                                                                                                                
SENATOR ELTON said he would  appreciate BP's consideration of the                                                               
issue.                                                                                                                          
                                                                                                                                
10:04:30 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE LEDOUX inquired  as to what programs  BP offers to                                                               
protect  workers  who come  forward  with  comments or  criticism                                                               
regarding BP's maintenance practices.   For example, she asked if                                                               
there  is any  method  by which  a worker  can  file a  complaint                                                               
anonymously.                                                                                                                    
                                                                                                                                
MR. MARSHALL replied  yes.  He said anonymity  has been perfected                                                               
through a  number of methods,  and as  long as people  "raise the                                                               
specifics," BP can and does investigate the issues.                                                                             
                                                                                                                                
REPRESENTATIVE  LEDOUX  asked  Mr.  Marshall  what  he  would  do                                                               
differently,  in regard  to BP,  if he  could turn  back time  10                                                               
years.                                                                                                                          
                                                                                                                                
MR.  MARSHALL, characterizing  that as  a hypothetical  question,                                                               
said clearly  the events of  the last  few weeks and  months have                                                               
shown that  the investment BP has  made over the last  five years                                                               
has  been  insufficient,  and  the company  will  take  steps  to                                                               
correct that moving forward.                                                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX  asked what  those steps  are and  how they                                                               
will prevent current events from happening in the future.                                                                       
                                                                                                                                
MR. MARSHALL said that he is proud  to work for a company that is                                                               
committed to learn from its experiences  - good and bad.  He said                                                               
BP  will  have  to  operate  transit  lines  in  a  fundamentally                                                               
different way.  He said  BP will incorporate maintenance pigging,                                                               
smart pigging, ultrasonic testing,  and whatever other technology                                                               
necessary  it needs  to bring.    It is  reevaluating its  entire                                                               
corrosion   program,   and  the   company   will   look  at   its                                                               
infrastructure with an eye to answering the questions.                                                                          
                                                                                                                                
REPRESENTATIVE LEDOUX asked when  BP thinks it realistically will                                                               
have a more advanced program in place.                                                                                          
                                                                                                                                
MR.  MARSHALL said  new pipe  has  been ordered  and will  arrive                                                               
later this year, and whatever  new programs are installed will be                                                               
in  place "to  accompany  those  new lines  in  service."   Going                                                               
forward from  this point, he  said, the  goal is to  complete the                                                               
maintenance   and  smart   pigging   of   the  remaining   lines.                                                               
Currently, he reported, the western  area lines are in good shape                                                               
and  will  be  pigged  and  smart pigged  as  soon  as  possible.                                                               
Furthermore, inspections  on the five  miles of eastern  line are                                                               
being conducted;  so far, the results  show that that line  is in                                                               
good condition.                                                                                                                 
                                                                                                                                
REPRESENTATIVE  LEDOUX   raised  the  issue  of   the  number  of                                                               
employees, noting  that it  is "up to  225 employees,"  which she                                                               
pointed out  means it could  be any number  from zero up  to 225.                                                               
She asked Mr.  Marshall how many people are working  on the North                                                               
Slope on average, on any given day.                                                                                             
                                                                                                                                
MR. MARSHALL said the number varies  depending on the season.  He                                                               
deferred to Mr. Hedges.                                                                                                         
                                                                                                                                
10:12:27 AM                                                                                                                   
                                                                                                                                
MR.  HEDGES estimated  that the  number of  employees could  be a                                                               
minimum of 100 on any day, up to 250.                                                                                           
                                                                                                                                
CHAIR WAGONER asked  whether BP expects any  employee layoffs due                                                               
to the shut down of part of the field.                                                                                          
                                                                                                                                
MR. MARSHALL  answered no.  He  explained that BP is  keeping the                                                               
facilities idled - "keeping them warm"  - and is producing oil in                                                               
flow stations one and three.   Furthermore it is producing gas to                                                               
keep  the fuel  gas running,  producing  oil for  the purpose  of                                                               
freeze protection,  continuing to run seawater  for the injection                                                               
wells,  and seeking  to take  advantage of  the throttle  back by                                                               
performing  critical  maintenance.     He  mentioned  redeploying                                                               
drilling work  because of  the use  of diesel.   He  relayed that                                                               
employees were  assured that  their jobs  are secure,  because it                                                               
was an issue that was raised.                                                                                                   
                                                                                                                                
CHAIR WAGONER asked  when the eastern [line] will be  back up and                                                               
running.                                                                                                                        
                                                                                                                                
MR.  MARSHALL  replied  that only  after  completing  the  engine                                                               
reassessment will  he be able to  provide a definitive date.   He                                                               
said inspections  are continuing "at pace,"  working with various                                                               
state and federal agencies.                                                                                                     
                                                                                                                                
10:15:15 AM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS asked, "What umbrella  are these activities going                                                               
to fall  under in the  long term?   Force major,  negligence, ...                                                               
deferred maintenance, or something else?"                                                                                       
                                                                                                                                
MR.  MARSHALL,  seeking  clarification,  said that  BP  has  been                                                               
focused  on  understanding  what  has  caused  the  situation  of                                                               
unexpected corrosion in its lines and  what can be done to ensure                                                               
the supply  of crude  oil is  maintained to  both the  Alaska and                                                               
West Coast  refineries.  He  said BP  has indicated that  it will                                                               
backstop  all   the  Alaskan  refinement  as   needed  to  ensure                                                               
sufficient  supplies to  "keep them  running."   The company  has                                                               
also  purchased  4.5  million  barrels of  crude  oil  to  ensure                                                               
adequate supplies to the west coast.                                                                                            
                                                                                                                                
10:17:18 AM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS asked  what BP's long-term goals  are with regard                                                               
to  addressing  the  damage  that   has  been  done  to  people's                                                               
perception of  the integrity of the  Trans-Alaska Pipeline System                                                               
and Alaska's  ability to pursue environmentally  safe drilling of                                                               
the Arctic National Wildlife Refuge.                                                                                            
                                                                                                                                
MR.  MARSHALL said  he  understands the  impact  the recent  pipe                                                               
corrosion  has had  on both  BP's  and Alaska's  reputation.   He                                                               
restated that a  track record, though long to build,  is quick to                                                               
be lost.   He  said although  there is  no comprehensive  plan in                                                               
place, BP  is focused on  learning and doing something  about the                                                               
experience it has  had, and he stated that the  company will work                                                               
tirelessly  to  put  in  place   whatever  it  takes  to  restore                                                               
confidence in it operations.  He  said BP knows the importance of                                                               
being  an  environmental  steward,  which  is  why  it  made  the                                                               
decision to shut down the field in an orderly manner.                                                                           
                                                                                                                                
10:21:30 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE CRAWFORD related  that some years back  one of his                                                               
friends was  involved in ARCO's  corrosion crew and  ARCO brought                                                               
corrosion concerns to light that  subsequently were not addressed                                                               
to the  extent they should have  been.  He said  the recent spill                                                               
comes as  no surprise, because  his friend  told him that  it was                                                               
not a matter  of if it was  going to happen, but  rather a matter                                                               
of when.   He  indicated that  he has given  much thought  to the                                                               
matter.  He said, "I don't  know that there's a question that can                                                               
be asked about this now, it's just  I hope we all do a lot better                                                               
in the future."                                                                                                                 
                                                                                                                                
MR. MARSHALL said  he has reviewed as many  documents as possible                                                               
to discover whether specific concerns  have been raised about the                                                               
transit lines.   Corrosion,  he said,  has been  a fact  from day                                                               
one; corrosion inhibitors have been  incorporated into the system                                                               
since  the  beginning.    He related  that  particularly  in  the                                                               
upstream  areas  where  there   is  12  percent  carbon  dioxide,                                                               
corrosion  can  "eat"  a  quarter  of  an  inch  per  year,  left                                                               
unchecked.  So far, in  going through the documents, Mr. Marshall                                                               
said,  nothing  specifically  related  to the  transit  lines  in                                                               
question has been discovered.                                                                                                   
                                                                                                                                
The committee took an at-ease from 10:25:37 AM to 10:33:16 AM.                                                              
                                                                                                                                
10:33:23 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  asked if there  is an estimate as  to "why                                                               
the leak  occurred at  that time, four  hours into  the operation                                                               
there."                                                                                                                         
                                                                                                                                
MR. MARSHALL  said it had  been about  15 minutes since  the leak                                                               
started when  the original estimate  was made of five  barrels at                                                               
six gallons per  minute.  He said he would  have to reconfirm how                                                               
long the leak had been occurring at  the new estimate of 22 or 23                                                               
barrels.  He  said although BP does not have  a definitive answer                                                               
at this  stage, it is  not inconceivable that the  pressure shock                                                               
from shutting  down the system  could have finally  triggered the                                                               
leak;   that   answer   may  be   illuminated   through   further                                                               
investigation.                                                                                                                  
                                                                                                                                
10:35:06 AM                                                                                                                   
                                                                                                                                
MR.  MARSHALL,   in  response  to   a  follow-up   question  from                                                               
Representative  Seaton, related  his belief  that a  10-inch pipe                                                               
[is used for  the bypass lines] and is on  location on the slope.                                                               
He said, "We've been able to  source that with the corporation of                                                               
Alyeska and,  I believe, [ConocoPhillips  Alaska, Inc.].   We are                                                               
trying  to source  the remaining  materials -  the metering,  the                                                               
valves, and other  fittings - that will be necessary  to get that                                                               
in.    We are  proceeding  in  parallel  with  all of  the  other                                                               
inspection and  pigging efforts,  and that activity  will proceed                                                               
in  parallel  until  we've  got  it  completed."    Mr.  Marshall                                                               
mentioned that there are options  to pursue, naming bypasses from                                                               
Flow Stations 1 through 3, and  he indicated BP's plan to restore                                                               
the entire  Eastern Operating  Area to  production as  quickly as                                                               
possible.                                                                                                                       
                                                                                                                                
10:36:35 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON said he had  heard reports that maintenance                                                               
pigging was  not done  on the transit  lines because  the filters                                                               
could not handle  the amount of sludge that was  inside them.  He                                                               
asked if that report is accurate.                                                                                               
                                                                                                                                
MR. MARSHALL said  he classifies the initial  estimates of solids                                                               
in  the  line  after  the "GC2"  spill  as  worst-case  scenario,                                                               
because upon a subsequent technological  check, that estimate was                                                               
found to be about  10 times too high.  He  said BP has determined                                                               
it  will be  able to  do complete  pigging with  the estimate  of                                                               
solids  in  each   of  the  lines,  by  installing   one  of  two                                                               
"crossovers."   He explained  that crossover A  will allow  BP to                                                               
pig  from Skid  50 and  put the  solids into  Flow Station  3 and                                                               
dispose  of them  from there.    He noted  that there  is also  a                                                               
parallel activity being completed by  Alyeska, which will allow a                                                               
line  to be  installed to  put the  solids into  one of  the Pump                                                               
Station 1 tanks.  Mr.  Marshall estimated that by early September                                                               
[2006],  BP will  have two  methods  of pigging  those lines  and                                                               
capturing  the  solids  in  a   way  that  will  not  affect  the                                                               
strainers, meters, or any part of Pump Station 1.                                                                               
                                                                                                                                
REPRESENTATIVE  SEATON asked  if there  was consideration  of not                                                               
doing pigging prior to the spill.                                                                                               
                                                                                                                                
MR. MARSHALL  responded that he  can't comment on  what Alyeska's                                                               
position  might  have  been  prior   to  the  March  spill.    He                                                               
continued:                                                                                                                      
                                                                                                                                
     We  identified the  slight  increase  ... in  corrosion                                                                    
     rate  on the  GC2 line  in the  fourth quarter  of last                                                                    
     year.   We did order  and schedule  a smart pig  run in                                                                    
     the summer  of this year,  and that was  something that                                                                    
     was being planned  at the time of the March  spill.  We                                                                    
     were  going to  have to  find a  way to  deal with  the                                                                    
     solids  in  that  line, measure  them,  and  work  with                                                                    
     Alyeska to deal with them.   Certainly the events since                                                                    
     March have ... forced  us to examine two possibilities:                                                                    
     one to  cross over  the solids  to flow  station three,                                                                    
     and  one to  put in  an additional  cross over  at Pump                                                                    
     Station 1  so we  can handle any  of those  solids with                                                                    
     minimal impact to the ongoing operations.                                                                                  
                                                                                                                                
REPRESENTATIVE SEATON  asked Mr. Marshall to  check whether there                                                               
had  been any  contact with  Alyeska  in the  last several  years                                                               
prior  to the  March  spill in  regard to  pigging  the line  and                                                               
Alyeska's concerns  about whether  there was  too much  sludge to                                                               
handle that pigging.  He  recollected that the federal government                                                               
had required 12 wells to be shut  down for testing.  He asked Mr.                                                               
Marshall to describe the progress  of that testing and whether or                                                               
not that shut down was based upon corrosion concerns.                                                                           
                                                                                                                                
MR. MARSHALL  surmised that  Representative Seaton  was referring                                                               
to well  cellars, in  which there  were indications  of oil.   He                                                               
clarified that BP made the decision  to shut down those wells; it                                                               
was  not a  shut down  mandated by  the federal  government.   He                                                               
estimated that the shut down occurred  three or four weeks ago to                                                               
check the  integrity of the wells  and to ensure that  there were                                                               
at  least two  barriers between  the reservoir  and the  surface.                                                               
The tests  were completed, and  "each of those wells  did confirm                                                               
good integrity to  the reservoir."  He said each  of the wells is                                                               
designed  with  insulation materials,  and  it  is that  material                                                               
which  has leaked  through the  surface casing;  a number  of the                                                               
wells  has  exhibited some  corrosion  from  snow and  rain  melt                                                               
running down the side of a shallow  section of the well.  He said                                                               
BP  is in  the process  of identifying  repair plans  to fix  the                                                               
wells.                                                                                                                          
                                                                                                                                
10:42:18 AM                                                                                                                   
                                                                                                                                
MR. HEDGES  provided his resume  to the committee,  which relates                                                               
his experience  and education  in corrosion.   He stated  that BP                                                               
has  large infrastructure,  with  a team  in  place that  manages                                                               
several corrosion  risks, and the  company works  with regulatory                                                               
agencies to  overview its  programs.  He  said BP's  programs are                                                               
acknowledged as  very comprehensive,  and it  is working  hard to                                                               
close the gaps that resulted in  the leaks in March.  He provided                                                               
an illustration of the corrosion  process for which there is much                                                               
science.     Corrosion,  he  explained,  is   an  electrochemical                                                               
phenomenon.                                                                                                                     
                                                                                                                                
10:47:16 AM                                                                                                                   
                                                                                                                                
MR. HEDGES  reviewed the various infrastructure  of the pipeline.                                                               
He  noted that  BP  has 3,500  regulated  vessels, 750  regulated                                                               
tanks.    Platforms   are  regulated  as  well.     The  new  EPA                                                               
requirements will mean many more  tanks will be incorporated into                                                               
a regulated  environment.  Mr.  Hedges reported that  in addition                                                               
to oil production, BP produces  a record 9 billion standard cubic                                                               
feet  of gas  per day.    He said  BP also  produces 1.5  million                                                               
barrels of  water per day,  which is  a 75 percent  average water                                                               
cut; for every oil barrel there are three barrels of water.                                                                     
                                                                                                                                
MR. HEDGES  said that within  its facilities, BP faces  a variety                                                               
of  corrosion  risks,  particularly  from  water,  without  which                                                               
corrosion  cannot  exist.   Many  fields  begin their  life  with                                                               
little  water,  but as  they  get  older,  water starts  to  come                                                               
through and  corrosion problems begin  and continue as  the field                                                               
ages.   He said carbon  dioxide gas  can dissolve into  the water                                                               
and  cause a  mild,  corrosive  acid.   Solids,  he relayed,  can                                                               
create    different    environments   and    shelter    bacteria.                                                               
Furthermore,  he stated  that  if  fluids are  flying  at a  high                                                               
velocity, they  can remove  metal - a  process known  as erosion.                                                               
Bacteria, he said,  can produce organic gas  byproducts which can                                                               
cause  corrosion.    Mineral  acids are  used  in  operations  to                                                               
stimulate  reservoirs, and  BP must  be careful  to manage  those                                                               
acids.   How  fast  the fluids  are flowing  down  the pipe  also                                                               
influences corrosion, he said.  He  noted that BP has programs to                                                               
manage   corrosion,  and   those  programs   have  oversight   by                                                               
government agency.                                                                                                              
                                                                                                                                
MR.  HEDGES listed  four forms  of corrosion:   inside,  outside,                                                               
spread, or localized;  more than one type of  corrosion can occur                                                               
at a  time.  He  offered some  examples (indisc. --  other voices                                                               
overlapping   on  recording).     He   mentioned  the   corrosion                                                               
management team and noted that BP  has 21 programs to address all                                                               
the risks and  threats.  He said the company  makes extensive use                                                               
of  contractors  for program  execution  and  works closely  with                                                               
regulators.  Mr. Hedges related that  during his year with BP, he                                                               
has  attempted to  foster as  open  a dialog  with regulators  as                                                               
possible.  He reported that the  budget this year is $72 million.                                                               
Those  operating Alaska's  pipeline  have access  to BP's  global                                                               
corrosion network.                                                                                                              
                                                                                                                                
10:53:14 AM                                                                                                                   
                                                                                                                                
MR. HEDGES related  the types of corrosion  control programs that                                                               
BP has.  He  said often pipes are made thicker  to allow for some                                                               
of  the  steel  to  corrode.   To  address  conditions  that  are                                                               
particularly   aggressive,  he   said,  BP   can  use   corrosion                                                               
resistance alloys - referred to as  stainless steel.  He said the                                                               
Endicott facility  is made significantly  out of what  is called,                                                               
"duplex   stainless  steel."      He  reported   that  BP   pumps                                                               
approximately 3 million gallons  of corrosion inhibitor each year                                                               
and spends  approximately $35  million a year  on chemicals.   He                                                               
asked  the   committee  to  think  of   corrosion  inhibitors  as                                                               
chemicals that are injected into  the pipeline and mixed with the                                                               
fluid  inside,  thereby traveling  down  the  pipeline leaving  a                                                               
single molecular layer all around.                                                                                              
                                                                                                                                
MR.  HEDGES  confirmed reports  that  BP  dilutes its  chemicals,                                                               
explaining that  because it  costs approximately  $1 a  gallon to                                                               
send the  chemicals up from  Houston, Texas, to the  North Slope,                                                               
they are sent up in super  concentrated form, and BP dilutes them                                                               
so they can  be pumped through the line.   That practice saves BP                                                               
approximately $3 million  dollars a year.   Management ensures BP                                                               
does  not  "go  to  high velocity,"  which  would  cause  erosion                                                               
problems.  The  condition of the pipelines  is tracked carefully,                                                               
he said,  and when they come  to the end of  their useful service                                                               
life, plans are in place to repair or replace them as necessary.                                                                
                                                                                                                                
10:55:50 AM                                                                                                                   
                                                                                                                                
MR. HEDGES turned to the subject  of pigs and provided photos and                                                               
models  of the  various  types of  pigs to  the  committees.   He                                                               
defined  pigs as  "pieces of  equipment designed  to travel  down                                                               
pipelines and either clean them  or gather information around the                                                               
condition of  the pipeline."   He said  if there is  any residual                                                               
corrosion, there should  be corrosion inhibitor in  place to deal                                                               
with it.   He then provided a graph of  corrosion rates over time                                                               
since the 1990s.  Corrosion rates  came down in the 1990s, but at                                                               
a  price of  having  to  pump more  corrosion  inhibitors in  the                                                               
pipeline.   In  fact, BP  has to  pump more  corrosion inhibiting                                                               
chemicals  into its  pipelines in  Alaska than  are used  in many                                                               
other  parts  of  the  world, due  to  Prudhoe  Bay's  aggressive                                                               
conditions.   He  discussed the  "coupon" approach  to corrosion.                                                               
He explained that  coupons are "strips of metal made  of the same                                                               
material as the pipeline which we  insert into the pipeline."  He                                                               
said  there  are  other  approaches   that  allow  BP  to  get  a                                                               
continuous feed  of corrosion  rate data.   He stated  that where                                                               
inhibitors exist  there is great  protection, but where  they are                                                               
missing there  can be "great  problems."   In the late  1980s and                                                               
early 1990s,  when water started  to be produced in  Prudhoe Bay,                                                               
corrosion  became a  problem,  and  in the  early  to mid  1990s,                                                               
control programs were  put in place to lower  the corrosion rates                                                               
to well below BP's target of  "2NPY."  He then referred to charts                                                               
regarding to the  effectiveness of the coupons,  and he explained                                                               
the use  of averaging.   Mr. Hedges then reviewed  the ultrasonic                                                               
testing  and radiographic  testing  programs,  which are  methods                                                               
used in addition  to smart pigging.  BP chooses  from its variety                                                               
of  inspection   programs  to  target  the   specific  mechanisms                                                               
previously mentioned.   He talked about how  BP chooses locations                                                               
to test.   First, it repeats testing in areas  that have shown to                                                               
have corrosion to  see if the areas have become  worse.  Also, BP                                                               
chooses new  areas to find out  if anything new is  happening; it                                                               
chooses  those  new  spots, both  through  corrosion  engineering                                                               
judgment  and by  random selection.   In  recent years,  he said,                                                               
external corrosion has  become a problem, and there  is a program                                                               
to address that issue.                                                                                                          
                                                                                                                                
11:05:47 AM                                                                                                                   
                                                                                                                                
MR. HEDGES  said corrosion probability  was considered to  be low                                                               
in  the  transit lines  and,  until  this year,  with  monitoring                                                               
inspection, Mr.  Hedges said, BP  was doing "fairly well  with no                                                               
leaks in 29  years."  He provided an ultrasonic  scan of the leak                                                               
area for  the committees to review,  which illustrates "discrete"                                                               
pitting -  "not one giant network  running into each other."   In                                                               
summary, Mr. Hedges  said BP has clearly identified a  gap and is                                                               
working as fast as possible to fix that gap.                                                                                    
                                                                                                                                
^PATRICK H. VIETH - CC TECHNOLOGIES                                                                                           
                                                                                                                                
11:08:34 AM                                                                                                                   
                                                                                                                                
PATRICK H.  VIETH, Senior Vice President,  CC Technologies, Inc.,                                                               
informed the  committees that CC  Technologies works in  the area                                                               
of  corrosion  around  the  world.   He  said  his  expertise  is                                                               
primarily in  the area of  the development and  implementation of                                                               
integrity   management    programs   for    pipeline   operators.                                                               
Specifically,  he  said,  he develops  programs  to  prevent  the                                                               
likelihood  of   failures,  through   methods  such   as  in-line                                                               
inspection, hydrostatic  testing, defect assessment,  and fitness                                                               
for purpose.   He  stated, "It  is my job  to bring  together the                                                               
experts  within our  company, to  take  a look  at the  available                                                               
information, and  provide input  to BP throughout  this process."                                                               
He offered  further details.   He said  CC Technologies  has been                                                               
involved  in assessing  the  information  produced and  providing                                                               
input to BP  related to the Western Operating Area  (WOA), and it                                                               
is currently doing similar work  related to the Eastern Operating                                                               
Area (EOA).                                                                                                                     
                                                                                                                                
11:13:28 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE LEDOUX inquired  as to how long  the corrosion has                                                               
been forming.                                                                                                                   
                                                                                                                                
MR. HEDGES  responded that BP  would like  to know the  answer to                                                               
that question, as well.  He  said the company does have some data                                                               
from running  the smart  pig in 1998,  which produced  a baseline                                                               
assessment.  He  said BP was tracking the damage  in the pipeline                                                               
every  year following  that assessment,  but was  not seeing  any                                                               
significant changes  until some  slight increases  [in corrosion]                                                               
were  found  in  2004-2005.    He said  BP  was  following  those                                                               
increases and, based  on them, ordered a smart  pig run scheduled                                                               
for  this year.   Unfortunately,  the leak  occurred on  March 2,                                                               
2006, before the smart pigging was run.                                                                                         
                                                                                                                                
11:14:35 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  CRAWFORD mentioned  one article  said BP  had not                                                               
had a leak, whereas another  article [from April 2001] said there                                                               
had been  five leaks in three  months - one rupture  resulting in                                                               
92,000 gallons of seawater and crude oil on the tundra.                                                                         
                                                                                                                                
MR. HEDGES specified  that when he said BP hadn't  had any leaks,                                                               
he was referring  to the oil transit line  sections; he explained                                                               
there have been leaks in other parts of the infrastructure.                                                                     
                                                                                                                                
11:15:29 AM                                                                                                                   
                                                                                                                                
SENATOR  DYSON  said  he  is  mindful  of  the  sanctity  of  the                                                               
relationship  between  CC  Technologies  as  contractor  and  BP;                                                               
however,   he   said   the    legislature   has   an   overriding                                                               
responsibility for the people's oil,  the money it brings in, and                                                               
the  care  of  the  environment.   He  said,  "I'm  wondering  if                                                               
there'll be  any restrictions  on the reports  that you  get from                                                               
these various  experts here  that won't  be available,  either to                                                               
the regulators or ultimately to the  public, on the nature of ...                                                               
what the investigations find."                                                                                                  
                                                                                                                                
MR. VIETH  said BP  allowed outside  agencies to  participate and                                                               
learn about  new findings in "real  time."  To that,  he remarked                                                               
that many of  the presentations and results that  he has prepared                                                               
over the last  week have been seen simultaneously,  for the first                                                               
time, by both BP and other agencies.                                                                                            
                                                                                                                                
MR. MARSHALL reinforced  that he is personally  committed to have                                                               
information available to anyone interested.                                                                                     
                                                                                                                                
11:17:48 AM                                                                                                                   
                                                                                                                                
SENATOR ELTON  recalled that  the presenters  had said  that [the                                                               
events of] March  2 helped identify a significant gap.   He asked                                                               
if, either  prior to or following  that date, there had  been any                                                               
review  done  of  the  Kauffman report  mandated  in  the  merger                                                               
agreement that  identified significant corrosion problems,  or if                                                               
there had been time to review  the 2001 BP report that identified                                                               
significant staff and maintenance issues.                                                                                       
                                                                                                                                
MR. HEDGES responded that in his  year at BP he has reviewed some                                                               
of BP's  annual reports  and was  actively engaged  in publishing                                                               
the 2005 reports,  but he has not read the  Kauffman reports from                                                               
previous years.                                                                                                                 
                                                                                                                                
SENATOR ELTON  expressed concern  that there  are four-  to five-                                                               
year-old   reports  that   identified   gaps,  but   it  took   a                                                               
catastrophic  incident  that  affected  state  revenues  and  gas                                                               
markets to catch BP's attention.   He said he is trying to figure                                                               
out what happened  between the time that  reports that identified                                                               
a  gap were  available and  the March  2 incident,  and what  the                                                               
operator's response to those reports were.                                                                                      
                                                                                                                                
MR.  MARSHALL said  he cannot  recall the  specifics of  the 2001                                                               
report without  refreshing his memory.   Notwithstanding that, he                                                               
surmised that  in any  year, gaps will  be identified  and issues                                                               
will  need to  be addressed  and corrected.   He  stated that  he                                                               
wasn't aware of  any of the reports that  identified corrosion in                                                               
the transit  lines.  He  said he would  like to clarify  that the                                                               
first indications  that BP  had that the  transit lines  began to                                                               
experience an  increase of  corrosion was  in the  2004-2005 time                                                               
frame, as Mr. Hedges previously  noted.  The last inspection done                                                               
on the GC2 transit line was,  he estimated, in September of 2005,                                                               
and it was  judged then that BP needed to  increase the frequency                                                               
of  inspection  and  commission  the  smart  pig  run  to  get  a                                                               
reestablishment of the condition of that line.                                                                                  
                                                                                                                                
SENATOR ELTON  said he remains  confused with regard  to pipeline                                                               
corrosion;  he   questioned  why  corrosion  was   not  an  issue                                                               
following the Kauffman report.                                                                                                  
                                                                                                                                
MR.  MARSHALL  said,  "What  we're  talking  about  here  is  one                                                               
hundredth of  that pipeline  system."  He  said he  suspects that                                                               
the  Kauffman reports  speak largely  to many  of the  lines more                                                               
likely to  have corrosion  issues, for  example, those  with high                                                               
carbon  dioxide  and  water.    He reiterated  that  it  is  only                                                               
recently that  corrosion has  presented as a  problem on  the oil                                                               
transit lines.   He offered, "Certainly we'd be happy  to go back                                                               
and try and  provide a summary of the findings  and put that into                                                               
context for you."                                                                                                               
                                                                                                                                
11:23:42 AM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS  said he believes  that BP is a  careful company,                                                               
thus he  wants to know if  the spill is characterized  as: an act                                                               
of God, a  physical depreciation of the line  that went unchecked                                                               
for  a  significant  period  of  time that  lead  to  70  percent                                                               
failure,  or deferred  maintenance that  was not  addressed in  a                                                               
timely fashion.                                                                                                                 
                                                                                                                                
MR.  HEDGES  replied  that  BP  is still  in  the  middle  of  an                                                               
investigation, and  until the  mechanism is  proven, it  would be                                                               
foolish to speculate.                                                                                                           
                                                                                                                                
CO-CHAIR RAMRAS restated his question for Mr. Marshall.                                                                         
                                                                                                                                
MR. MARSHALL responded that he is  not able to say at this point,                                                               
but he is working to find out.                                                                                                  
                                                                                                                                
11:27:01 AM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS  asked if the  Kuparuk River Unit or  other major                                                               
fields are at risk for similar problems.                                                                                        
                                                                                                                                
MR.  MARSHALL  deferred  to   ConocoPhillips  Alaska,  Inc.,  the                                                               
operator of the Kuparuk River Unit.                                                                                             
                                                                                                                                
11:27:51 AM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS  inquired as to  the revenue  flow.  He  asked if                                                               
the oil will come  through in the later life of  the line or push                                                               
through to recapture  lost volume in the next  calendar year, and                                                               
how that would affect the state treasury.                                                                                       
                                                                                                                                
MR. MARSHALL said  he would be happy to provide  "a more detailed                                                               
analysis of that question."   He proffered that certainly the oil                                                               
that would have  been produced from the east lines  today that is                                                               
not being produced  will remain there.  He said  BP is continuing                                                               
to inject  sea water and produce  water in flow stations  one and                                                               
three; one  benefit of that is  that the company is  able to keep                                                               
the pressure  in the reservoir  as high as possible.   Typically,                                                               
he  noted, when  a field  or portion  thereof is  shut down,  the                                                               
field  comes   back  with  "flush  production"   -  increases  in                                                               
production for some time.  He said  he would need to talk to BP's                                                               
reservoir engineers to get a better understanding of that.                                                                      
                                                                                                                                
CO-CHAIR RAMRAS said that would be appreciated.                                                                                 
                                                                                                                                
11:31:20 AM                                                                                                                   
                                                                                                                                
CHAIR WAGONER pointed out that  all the documents being presented                                                               
to the joint  committee are available on the  following web site:                                                               
www.akrepublicans.org,  and  through  either  the  link  for  the                                                               
Senate or the House Resources Standing Committee.                                                                               
                                                                                                                                
The committee took an at-ease from 11:32:02 AM to 11:35 a.m.                                                                  
                                                                                                                                
^ATTORNEY GENERAL, DEPARTMENT OF LAW                                                                                            
                                                                                                                                
11:35:16 AM                                                                                                                   
                                                                                                                                
DAVID  W. MARQUEZ,  Attorney General,  Department of  Law, stated                                                               
that  this hearing  should assure  the people  of Alaska  and the                                                               
rest   of  the   United  States   that  the   administration  and                                                               
legislature  "are   diligent  and  vigilant  in   overseeing  the                                                               
responsible  development of  Alaska's important  natural gas  and                                                               
oil resources."  He introduced  attorneys serving on his own task                                                               
force, as well  as other related individuals present.   He said a                                                               
thorough  fact-finding investigation  of BP's  management of  the                                                               
North Slope oil  field is taking place.   After the investigation                                                               
is complete,  appropriate legal action  will be taken  to protect                                                               
Alaska's interest.   Corrosion issues  of the past,  present, and                                                               
future will be considered, relating  to what damage has been done                                                               
and  how  "the   risk  that  this  will  ever   happen  again  is                                                               
significantly reduced or eliminated."                                                                                           
                                                                                                                                
ATTORNEY  GENERAL MARQUEZ  reported that  yesterday, through  the                                                               
authority of the Department  of Environmental Conservation (DEC),                                                               
subpoenas  were  issued   to  BP  and  other   Prudhoe  Bay  unit                                                               
leaseholders  with  regard  to  documents  related  to  corrosion                                                               
dating back  to 1996.   After BP announced the  complete shutdown                                                               
of the Prudhoe Bay field,  Governor Frank Murkowski announced the                                                               
formation of a special cabinet  team, which included Commissioner                                                               
Mike  Menge,  the commissioners  of  DEC  and the  Department  of                                                               
Revenue  (DOR),  John  Katz, in  Washington  D.C.,  and  Attorney                                                               
General  Marquez.   The  goal  of the  team  was  to protect  the                                                               
environment, develop  an action plan,  and get oil  production up                                                               
and running.                                                                                                                    
                                                                                                                                
ATTORNEY GENERAL  MARQUEZ said he  formed an internal  task force                                                               
within DOL,  which was headed  by Deputy Attorney  Generals Susan                                                               
Parks and  Craig Tillery, and  made up of  experienced attorneys,                                                               
for  the purpose  of  recommending the  proper  legal courses  of                                                               
action  for the  state  to  pursue and,  at  the  right time,  to                                                               
implement  those  recommendations.     One  consideration  is  to                                                               
determining whether BP,  and possibly other parties,  can be held                                                               
legally responsible for losses incurred by the state.                                                                           
                                                                                                                                
ATTORNEY  GENERAL MARQUEZ  said  he appreciates  BP's efforts  to                                                               
quickly  address the  effects  and causes  of  the corrosion  and                                                               
consequent  spill  and  the  apologies  of  BP's  executives  and                                                               
managers.    Acknowledging  the  shortcomings  of  the  company's                                                               
maintenance  corrosion   control  programs,  he   said,  reflects                                                               
favorably  on  BP's intentions  to  address  this serious  issue.                                                               
Furthermore, Attorney General  Marquez acknowledged that billions                                                               
of  barrels of  oil have  flowed through  safely and  reliably to                                                               
market.   He  said Alaskans  go to  work every  day on  the North                                                               
Slope with  the best of  intentions to perform their  jobs safely                                                               
and in an environmentally sound  manner.  Nevertheless, he stated                                                               
his deep concern regarding the  practices that led to the current                                                               
situation.    Attorney General  Marquez  said  apologies are  not                                                               
enough;  the problem  must be  corrected,  and BP  must make  all                                                               
necessary  efforts to  ensure that  other  existing problems  are                                                               
identified and resolved.                                                                                                        
                                                                                                                                
11:42:09 AM                                                                                                                   
                                                                                                                                
ATTORNEY  GENERAL  MARQUEZ  said  there is  an  ongoing  criminal                                                               
investigation related to both the  March and August spills, which                                                               
involves DEC investigators and  the DOL environmental prosecutor.                                                               
He said  he is not  at liberty  to discuss the  investigation, in                                                               
order to  preserve its integrity,  and also because the  state is                                                               
working  cooperatively with  federal  authorities.   Pursuant  to                                                               
Federal  Rule of  Criminal  Procedure VI,  he  said, the  subject                                                               
matter  of a  federal grand  jury investigation  is confidential.                                                               
He  stated, "Any  successful criminal  prosecution  at the  state                                                               
level will  require that the  state prove that the  actions taken                                                               
or  omitted  were  criminally  negligent."     He  said  criminal                                                               
negligence is  defined in AS 11.81.900.   Title 46 of  the Alaska                                                               
Statutes contains  several provisions  related to oil  spills, he                                                               
noted.    Violations  are  criminalized   in  AS  46.03.790;  any                                                               
criminally  negligent violation  of  a  DEC statute,  regulation,                                                               
order,  or permit  is a  misdemeanor.   It becomes  a felony,  he                                                               
said,  if the  spill  is  10,000 barrels  or  more.   The  recent                                                               
incidents, he  noted, are  well below  that threshold.   Attorney                                                               
General Marquez said under these  provisions, the maximum penalty                                                               
for an  individual for a  misdemeanor is one  year in jail  and a                                                               
$10,000 fine.   For  an organization, the  maximum penalty  for a                                                               
misdemeanor is  a fine of  $200,000 or three times  the pecuniary                                                               
gain to the defendant or up to three times the damage or loss                                                                   
caused by the defendant's conduct.  He listed the penalties for                                                                 
a felony offense.                                                                                                               
                                                                                                                                
11:44:59 AM                                                                                                                   
                                                                                                                                
ATTORNEY GENERAL MARQUEZ turned to civil remedies available to                                                                  
Alaska.  He stated:                                                                                                             
                                                                                                                                
     Under  Alaska law,  a person  who discharges  petroleum                                                                    
     into  or upon  the  waters  or land  of  the state,  in                                                                    
     violation of AS 46.03.740, is  liable in a civil action                                                                    
     to  the state  or a  sum assessed  by the  court in  an                                                                    
     amount  not   more  than   $100,000  for   the  initial                                                                    
     violation, [and] no  more than $5,000 for  each day the                                                                    
     violation  continues.   The  award  shall reflect  when                                                                    
     applicable   reasonable    compensation   for   adverse                                                                    
     environmental effects,  costs incurred by the  state in                                                                    
     detection, investigation,  and attempted  correction of                                                                    
     the  violation, and  the economic  savings realized  by                                                                    
     the person in not complying with the requirement.                                                                          
                                                                                                                                
     In  addition, the  liability under  AS 46.03.760(a),  a                                                                    
     person  who  violates AS  46.03.740  is  liable to  the                                                                    
     state for the  full amount of actual  damages caused by                                                                    
     the  state  by  the  violation,  including  direct  and                                                                    
     indirect   costs   associated   with   the   abatement,                                                                    
     containment, or  removal of the  pollutant, restoration                                                                    
     of the  environment, and all  incidental administrative                                                                    
     costs.                                                                                                                     
                                                                                                                                
     A person found liable under  any other state law for an                                                                    
     unpermitted discharge of crude  oil in excess of 18,000                                                                    
     gallons  faces  a  potential  civil  penalty  up  to  a                                                                    
     maximum of $500  million.  For example, a  person is to                                                                    
     be charged  a penalty  of $8 per  gallon for  the first                                                                    
     420,000 gallons of crude oil  discharge, and $12.50 per                                                                    
     gallon for  amounts in excess  of 420,000.   If subject                                                                    
     to the $500 million  statutory maximum, the court shall                                                                    
     assess  four times  the penalty  if it  finds that  the                                                                    
     discharge  was  caused  by   the  gross  negligence  or                                                                    
     intentional act of the  person.  Additionally, pipeline                                                                    
     owners  and  operators  are  strictly  liable  for  the                                                                    
     state's response  cost.  Owners and  operators are also                                                                    
     liable for damages,  including injuries, property, loss                                                                    
     of income, loss  of means of producing  income, or loss                                                                    
     of economic benefits.                                                                                                      
                                                                                                                                
     If the  state sues for civil  assessment for penalties,                                                                    
     then  it may  recover full  reasonable attorneys'  fees                                                                    
     and  costs,  and  the  operator  must  pay  restoration                                                                    
     damages  to restore  the environment  to its  pre-spill                                                                    
     condition.    Owners  and   operators  are  liable  for                                                                    
     natural  resources  damages,  such as  damages  to  the                                                                    
     tundra.   The owners and  operators of a  facility from                                                                    
     which  there is  release  of oil  are strictly  liable,                                                                    
     jointly and  severally, for  damages resulting  from an                                                                    
     unpermitted release.   Damages are  statutorily defined                                                                    
     as  including loss  of  income, loss  of  the means  of                                                                    
     producing income,  or the loss of  an economic benefit.                                                                    
     If the field  shuts down and any resulting  loss of tax                                                                    
     and  royalty  revenue is  seen  as  the result  of  the                                                                    
     release,  then AS  46.03.822 will  provide  a cause  of                                                                    
     action for lost tax and royalty revenue.                                                                                   
                                                                                                                                
     The  Alaska Supreme  Court, in  the case  Kodiak Island                                                                  
     Borough v. Exxon Corp. -  a 1999 case - recognized that                                                                  
     the  legislature intended  AS  46.03.822  to allow  for                                                                    
     broader  damages  to  government  entities  than  those                                                                    
     compensable  with  common law.    There  may be  issues                                                                    
     regarding extra  costs due  to decreased  flows through                                                                    
     TAPS.   It is  known that the  state's royalty  and tax                                                                    
     interest in  North Slope  production are  calculated on                                                                    
     the wellhead value of the  oil.  The wellhead value for                                                                    
     oil  that  is  shipped   intrastate  is  determined  by                                                                    
     subtracting the transportation  cost, TAPS tariff, plus                                                                    
     any  tariff for  shipping upstream  of Pump  Station 1,                                                                    
     plus  tanker  costs  from  the   market  price  at  the                                                                    
     purchasing refinery.   Higher TAPS tariffs  thus result                                                                    
     in a lower wellhead value  on which state royalties and                                                                    
     taxes are calculated.                                                                                                      
                                                                                                                                
     Because  of   TAPS,  current  TAPS  tariff   rates  are                                                                    
     through-put  driven;  any  reduction of  total  barrels                                                                    
     shipped on TAPS may result  in a higher cost per barrel                                                                    
     tariff  rate  applied  to remaining  through-put.    In                                                                    
     turn, these  higher tariff  deductions would  result in                                                                    
     lower state royalties and taxes  on all remaining TAPS-                                                                    
     shipped oil,  even if no additional  costs are incurred                                                                    
     to  taps operations  from the  corrosion  problem.   Of                                                                    
     course,  additional costs  arising  from the  corrosion                                                                    
     problem may show up in  the tariff also.  Cost revenues                                                                    
     to the  state, therefore, may be  consequential damages                                                                    
     caused by BP conduct and that of others.                                                                                   
                                                                                                                                
ATTORNEY  GENERAL   MARQUEZ  said  enforcement  tools   are  also                                                               
available to  the state.   For example, a person  responsible for                                                               
the discharge  of oil must  immediately contain and clean  it up.                                                               
He noted the following authority of  DEC:  to take over the clean                                                               
up if  not done adequately;  to investigate the spills  and issue                                                               
subpoenas  to  reserve records  and  evidence;  to obtain  search                                                               
warrants to investigate actual  or suspected pollution incidents;                                                               
to inspect  oil terminal  facilities, pipelines,  and exploration                                                               
production  facilities to  ensure pollution  control; to  perform                                                               
its own inspection  of the structural integrity  in operating and                                                               
mechanical systems of pipelines in  oil facilities in the absence                                                               
of  timely and  adequate  inspection by  other  agencies; and  to                                                               
issue notice of  violation, requesting the violator  to cease and                                                               
desist the violations and explain  why the violation occurred and                                                               
how the problem will be cleaned up or repaired.                                                                                 
                                                                                                                                
11:51:06 AM                                                                                                                   
                                                                                                                                
ATTORNEY  GENERAL  MARQUEZ  relayed  that DOL  is  reviewing  the                                                               
state's  rights  under  various leases,  unit  agreements,  state                                                               
statutes,  and common  law.   He predicted  that the  claims most                                                               
likely to  arise will  be those based  on principals  of contract                                                               
law  -  specifically,  those  claims  based  on  breach  of  both                                                               
expressed and implied  terms of the applicable oil  and gas lease                                                               
and the unit agreements.  He continued:                                                                                         
                                                                                                                                
     Section  19 of  the lease  expressly provides  that the                                                                    
     lease contemplates  the reasonable development  of said                                                                    
     land  for oil  and gas  as the  facts may  justify, and                                                                    
     that  upon  the  discovery  of oil  or  gas  in  paying                                                                    
     quantities  on the  land, the  lessee shall  drill such                                                                    
     wells  as a  reasonably prudent  operator would  drill,                                                                    
     having  due regard  for the  interest of  the lessor  -                                                                    
     that's  the state  - as  well  as the  interest of  the                                                                    
     lessee - that's the oil  company.  A reasonably prudent                                                                    
     operator is  someone who represents  him or  herself to                                                                    
     possess  an  expertise  in   matters  relating  to  the                                                                    
     technology and  operating practices of the  oil and gas                                                                    
     industry  that  most  persons do  not  have,  and  must                                                                    
     consider  the  lessor's  -  in our  case  the  state  -                                                                    
     interest while pursuing his or her own.                                                                                    
                                                                                                                                
     To  that  end,  Section  20  of  lease  correspondently                                                                    
     provides  that the  lessee -  the oil  company -  shall                                                                    
     exercise  reasonable diligence  in drilling,  producing                                                                    
     and  operating wells  on said  land  unless consent  to                                                                    
     suspend  operations  is   temporarily  granted  by  the                                                                    
     lessor.  This section  further provides that the lessee                                                                    
     shall carry  on all operations  in a good  and workman-                                                                    
     like  manner in  accordance with  approved ...  methods                                                                    
     and practices, having due regard  for the prevention of                                                                    
     waste of oil and gas.                                                                                                      
                                                                                                                                
     This mandate is also echoed  in Section 4.2 of the unit                                                                    
     agreement, which requires  that working interest owners                                                                    
     shall,  with due  diligence, develop  the unit  area in                                                                    
     accordance   with  good   engineering  and   production                                                                    
     practices.     In  this  case,   the  matter   of  what                                                                    
     constitutes   "good  and   workman-like  manner,"   and                                                                    
     "reasonable," and "prudence," are  issues of fact to be                                                                    
     determined later.                                                                                                          
                                                                                                                                
     Ordinarily,  lessees  are  bound by  implied  terms  or                                                                    
     covenants,  in addition  to express  terms and  leases,                                                                    
     and our leases include  implied duties.  Addressing the                                                                    
     relationship  between the  state  and its  oil and  gas                                                                    
     lessees, the Alaska Superior Court  ..., by Judge - now                                                                    
     Justice  - Carpeneti,  in the  ANS royalty  litigation,                                                                    
     held that oil  and gas producers have  an obligation to                                                                    
     act  as  reasonably  prudent  operators  in  performing                                                                    
     their  duties under  the lease.   A  reasonably prudent                                                                    
     operator standard  obliges the operator to  act in good                                                                    
     faith,  with competence,  and with  due  regard to  the                                                                    
     interest of  the lessor -  the state  - as well  as its                                                                    
     own interest.   This obligation includes reasonableness                                                                    
     and  prudence regarding  the  technology and  operating                                                                    
     practices of the industry.                                                                                                 
                                                                                                                                
     Judge  Carpeneti  explained  that lessors  cannot  take                                                                    
     actions  that injure  a lessor's  right to  recover the                                                                    
     benefit  under   a  lease.    [The]   prudent  operator                                                                    
     standard  imposes an  affirmative  duty  to do  certain                                                                    
     things in a  given, factual scenario, he said.   In the                                                                    
     same  scenario, the  covenant of  good  faith and  fair                                                                    
     dealing  commands  the  lessee to  refrain  from  doing                                                                    
     anything  to  injure  the  lessor's  right  to  receive                                                                    
     benefits under the oil and gas lease.                                                                                      
                                                                                                                                
     The  covenant  to  conduct operations  with  reasonable                                                                    
     care and  due diligence  is of particular  relevance to                                                                    
     the  ... case.   In  this matter,  the types  of claims                                                                    
     that generally  fall under this  covenant are  that the                                                                    
     lessee has  damaged the  royalty interest  by operating                                                                    
     negligently,  carelessly,  or incompetently,  and  that                                                                    
     the   lessee   failed   to  use   advanced   production                                                                    
     techniques.   An  argument may  also be  available that                                                                    
     BP's breached  the covenant to conduct  operations with                                                                    
     reasonable care and due diligence.                                                                                         
                                                                                                                                
11:55:24 AM                                                                                                                   
                                                                                                                                
ATTORNEY  GENERAL  MARQUEZ said  the  state  may have  causes  of                                                               
action  under  the  express and  implied  covenant;  however,  he                                                               
emphasized the  importance of  not treating  BP unfairly  at this                                                               
stage  of   the  investigation   or  unjustifiably   raising  the                                                               
expectations of  the public and  legislature "with regard  to the                                                               
opportunity to recover damages under  these theories."  The state                                                               
will  have to  establish fact  as information  unfolds, and  will                                                               
need to  assess the relevant  industry standards and  review BP's                                                               
documents, in order to determine  whether BP's conduct fell below                                                               
those  standards.    Then  there is  the  question  of  allowable                                                               
damages, he  said.  Monetary  damages, he related,  generally are                                                               
measured by  lost royalties  or taxes -  those monies  that would                                                               
have  been  paid  had production  continued  uninterrupted.    He                                                               
continued as follows:                                                                                                           
                                                                                                                                
     A difficulty  in application of  the damages  remedy is                                                                    
     the proper measure of the  damages.  For example, where                                                                    
     the breach results  in no permanent loss of  oil or gas                                                                    
     and the  action is  either for  failure to  produce the                                                                    
     oil now,  rather than later,  the value of  the royalty                                                                    
     or  tax that  would have  been paid  on the  production                                                                    
     from the  well, had it  been operating properly  at the                                                                    
     time,  may be  considered  double  recovery, since  the                                                                    
     state may  receive a royalty  or tax, once  again, when                                                                    
     the  oil is  eventually  produced.   Other measures  of                                                                    
     damages  may include  the time  value  of royalties  or                                                                    
     taxes  received  later  rather than  now.    Also,  the                                                                    
     interest  on the  sum  that would  have  been paid  the                                                                    
     state  if  no breach  had  occurred.   Overall,  it  is                                                                    
     difficult  at  this  time   to  ascertain  the  precise                                                                    
     measure of  damages from BP's  acts or others'  acts or                                                                    
     omissions  until   the  field  comes  back   into  full                                                                    
     production.    We are  examining,  in  addition to  the                                                                    
     previously  discussed remedies,  whether  there may  be                                                                    
     more attenuated damaged claimed.                                                                                           
                                                                                                                                
ATTORNEY GENERAL  MARQUEZ stressed the importance  of BP's acting                                                               
quickly to mitigate damages for  the purpose of getting the field                                                               
up and running  to the capacity that it was  running prior to the                                                               
shutdown  as soon  as safely  possible.   He expressed  a serious                                                               
concern as  being whether production  can resume to the  level it                                                               
was prior to the shutdown after production is resumed.                                                                          
                                                                                                                                
11:58:17 AM                                                                                                                   
                                                                                                                                
ATTORNEY   GENERAL   MARQUEZ,   regarding   future   legislation,                                                               
regulation, and other  actions, said he wants to  ensure that all                                                               
state  agencies have  the authority  needed,  with no  regulatory                                                               
holds  between  federal  and  state authorities.    He  said  the                                                               
appropriateness  of the  criminal and  civil sanctions  are being                                                               
reviewed, as well  as the oil and gas leases,  for the purpose of                                                               
deciding "whether future leases  should have provisions that more                                                               
expressly  deal with  these types  of maintenance  situations and                                                               
more explicitly set forth our rights and remedies as lessor."                                                                   
                                                                                                                                
11:59:17 AM                                                                                                                   
                                                                                                                                
CO-CHAIR  SAMUELS, regarding  Attorney General  Marquez' previous                                                               
statement  that   the  owners  and  operators   are  jointly  and                                                               
[individually] liable,  noted that the owners  would also include                                                               
the ExxonMobil  Corporation and ConocoPhillips  Alaska, Inc.   He                                                               
asked   for  further   explanation  regarding   those  companies'                                                               
liabilities as opposed to solely BP's liability.                                                                                
                                                                                                                                
ATTORNEY  GENERAL MARQUEZ  responded  that there  is a  potential                                                               
liability relating to any direct  action against any of the other                                                               
parties, including contractors  and other owners.   He said there                                                               
will not be payments for the same damages.                                                                                      
                                                                                                                                
CO-CHAIR  SAMUELS   asked  if  the   state  gets   involved  with                                                               
commercial relationships.                                                                                                       
                                                                                                                                
ATTORNEY GENERAL  MARQUEZ answered that certainly  the state will                                                               
review  communications between  all  parties  to determine  "what                                                               
relationship may have caused damage to the state."                                                                              
                                                                                                                                
12:01:58 PM                                                                                                                   
                                                                                                                                
SENATOR ELTON  said he is  interested in knowing how  the federal                                                               
investigation implicates the state  investigation, and whether or                                                               
not there are things one can  or can't do, or should or shouldn't                                                               
do because of an ongoing federal investigation.                                                                                 
                                                                                                                                
ATTORNEY GENERAL  MARQUEZ reminded  the committee of  the ongoing                                                               
criminal investigation  involving state and federal  agencies and                                                               
his  inability to  speak to  it.   With regard  to other  factual                                                               
investigations  of  a  noncriminal  manner, he  deferred  to  the                                                               
commissioners  of DEC  and DNR  with  regard to  how the  state's                                                               
teams are working with the federal teams.                                                                                       
                                                                                                                                
12:03:46 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  LEDOUX asked  if  there is  a  criminal or  civil                                                               
action for negligence,  in the absence of a suit  on the lease or                                                               
contractual suit and with no oil spill.                                                                                         
                                                                                                                                
ATTORNEY GENERAL  MARQUEZ reminded  Representative LeDoux  of the                                                               
statutory  provisions  he cited  during  his  testimony that  are                                                               
related to  a spill.  He  stated, "With regard to  any actions we                                                               
may have  under a  lease, if  we've been  damaged because  of the                                                               
operator that lessens the prudence and  is not up to the industry                                                               
standards, we would still have a  claim, even if there were not a                                                               
spill."                                                                                                                         
                                                                                                                                
12:05:20 PM                                                                                                                   
                                                                                                                                
CHAIR WAGONER announced  that the committee would  be [in recess]                                                               
until 1:15 p.m.                                                                                                                 
                                                                                                                                
1:17:22                                                                                                                         
                                                                                                                                
CHAIR  WAGONER  called  the  Joint  House  and  Senate  Resources                                                               
Standing Committee back to order.                                                                                               
                                                                                                                                
^ALASKA OIL & GAS CONSERVATION COMMISSION                                                                                     
                                                                                                                                
1:17:26 PM                                                                                                                    
                                                                                                                                
JOHN NORMAN,  Commissioner/Chair, Alaska  Oil &  Gas Conservation                                                               
Commission(AOGCC),  Department of  Administration, noted  that he                                                               
had submitted written testimony, and,  rather than reading it, he                                                               
said he would  try to address some remaining  concerns that might                                                               
be in  the minds of the  legislators present.  He  said there has                                                               
been  question related  to whether  there is  a risk  in shutting                                                               
down part of the pipeline.   He indicated that upon consideration                                                               
of  the  question,  AOGCC  sees  no  evidence  that  a  one-time,                                                               
temporary shutdown  of oil production from  the Eastern Operating                                                               
Area of the Prudhoe Bay reservoir  will damage the reservoir.  He                                                               
said the  pipeline operator has  informed the commission  that BP                                                               
plans to  continue water  flood and gas  cap injections  into the                                                               
reservoir, which will  benefit the line by  allowing the pressure                                                               
to be  maintained and build up.   When production is  resumed, he                                                               
said, it is possible that one or  more wells may not come back on                                                               
line  in  the  same  fashion that  they  were  producing  before;                                                               
however,  Commissioner Norman  said,  AOGCC does  not think  that                                                               
will result in  any decrease in ultimate  recovery, because other                                                               
wells  can  be utilized  to  produce  the  same reserves  or  the                                                               
operator can perform "workovers" to access the reserve.                                                                         
                                                                                                                                
COMMISSIONER  NORMAN  said   another  potential  risk  identified                                                               
relates  to  the  timing  synergies of  oil  production  and  gas                                                               
pipeline startup.  He explained,  "Producing gas from Prudhoe Bay                                                               
while there's still  oil in the ground to be  reproduced will put                                                               
ultimate oil  production at  risk."  He  said the  commission has                                                               
previously corresponded with the  legislature in this regard, and                                                               
he  said he  believes that  that  type of  reservoir behavior  is                                                               
understood:   the gas  represents energy in  the reservoir.   The                                                               
more oil that  can be recovered before beginning  major gas sales                                                               
from the reservoir, he said, the  less oil is at risk when large-                                                               
scale gas off-take  begins in the future.   He stated, "Obviously                                                               
this   particular  slow-down   delays  rather   than  accelerates                                                               
recovery  of oil,  and  thus could  possibly  have some  negative                                                               
impact upon total ultimate recovery."                                                                                           
                                                                                                                                
COMMISSIONER NORMAN  said a  greater concern  is to  identify the                                                               
cause  of the  leaks and  to  have everyone  involved working  to                                                               
ensure  this is  not repeated.   He  said there  are also  safety                                                               
considerations related to the integrity  of the well.  The AOGCC,                                                               
through its experience  reacting to conservation-related mishaps,                                                               
has procedures in  place dictating how wells are  to be restarted                                                               
and  pressures  monitored.    He   predicted,  "As  long  as  the                                                               
operator,  upon  restart of  each  well  and bringing  pads  into                                                               
operation, follows  these procedures,  we do not  believe restart                                                               
will be a problem."                                                                                                             
                                                                                                                                
1:21:41 PM                                                                                                                    
                                                                                                                                
SENATOR ELTON  raised the  issue that it  has been  reported over                                                               
the years  that Alaska does  not have as many  inspectors working                                                               
in the fields as other  jurisdictions that produce much less oil.                                                               
He  asked if  that is  still the  case and  what the  appropriate                                                               
level of regulatory staff would be.                                                                                             
                                                                                                                                
MR. NORMAN responded that the  commission believes Alaska has the                                                               
resources  to do  the  job.   He  said,  "An  adequate number  of                                                               
inspectors would be  the number needed to  ensure compliance with                                                               
Alaska's regulations."   He  said currently,  100 percent  of the                                                               
time there is at least one  inspector on the slope; 75 percent of                                                               
the time there are two  inspectors.  He mentioned inspectors that                                                               
work out  of Kenai, and  said the  total number of  inspectors is                                                               
five.    He  admitted  that  it   would  be  nice  to  have  more                                                               
inspectors; however, he emphasized  the high level of experience,                                                               
competency, and  dedication that each of  the inspectors exhibit.                                                               
Commissioner said if  time permitted, he could  offer examples of                                                               
a  number of  enforcement  actions that  have  resulted from  the                                                               
careful oversight of those inspectors.                                                                                          
                                                                                                                                
SENATOR ELTON  indicated that he  would like the  commissioner to                                                               
supply that information to the  committee members.  He noted that                                                               
it  has also  been reported  that the  inspectors do  not perform                                                               
surprise inspections,  but rather schedule inspection  times with                                                               
the oil companies.  He asked if that was and is still true.                                                                     
                                                                                                                                
COMMISSIONER NORMAN  said generally the inspectors  schedule with                                                               
the  companies  because  the  inspection   is  for  a  particular                                                               
purpose; however, he pointed out  that there have been times when                                                               
inspectors  were at  a  site for  one purpose  and  "picked up  a                                                               
violation on  other things."   He  said often  inspectors witness                                                               
tests  done  on  safety  valve   system  and  blowout  prevention                                                               
equipment, for example.                                                                                                         
                                                                                                                                
SENATOR ELTON said he has  been told that Louisiana does surprise                                                               
inspections on offshore oil rigs.   He asked if the standard that                                                               
Commissioner  Norman  described  is considered  the  standard  in                                                               
other oil producing regimes.                                                                                                    
                                                                                                                                
COMMISSIONER NORMAN  answered yes.   He revealed that  the reason                                                               
he can answer thus is that within  the past year he had a tour as                                                               
the  national chair  of  the Interstate  Oil  & Gas  Conservation                                                               
Commission  and had  the chance  to interact  with all  the other                                                               
regulatory agencies.   Notwithstanding  that, he said  he doesn't                                                               
want to  leave the impression  that surprise inspections  are not                                                               
done.    He  said  he  meant to  indicate  that  very  often  the                                                               
inspections  are  for  the  purpose   of  witnessing  testing  of                                                               
particular pieces  of equipment, which requires  the inspector to                                                               
be on site at a particular time.                                                                                                
                                                                                                                                
1:26:34 PM                                                                                                                    
                                                                                                                                
SENATOR ELTON  stated his understanding of  Commissioner Norman's                                                               
answer that  oftentimes inspectors are present  when the industry                                                               
is doing tests.  He questioned  whether the inspectors set a time                                                               
with  the industry,  or  if  they wait  to  be  invited when  the                                                               
testing is done.                                                                                                                
                                                                                                                                
1:27:12 PM                                                                                                                    
                                                                                                                                
CATHY P.  FOERSTER, Commissioner,  Alaska Oil &  Gas Conservation                                                               
Commission,  Department  of  Administration, said  typically  "we                                                               
invite ourselves  and we don't give  a lot of notice."   She said                                                               
the right  personnel has to be  on location to do  the testing of                                                               
specific equipment.  Typically,  she explained, an inspector will                                                               
call a  pad operator  and say,  for example, "I  intent to  be at                                                               
drill site  three this afternoon  to witness safety  valve system                                                               
tests on all  the wells on that pad; have  the appropriate person                                                               
there  to  conduct  those  tests."   She  pointed  out  that  the                                                               
inspectors test equipment  that has to run all the  time, so it's                                                               
not  as if  the  industry would  not have  it  operable and  then                                                               
quickly turn it on when the  inspector shows up; therefore, it is                                                               
not necessary to have surprise inspections.                                                                                     
                                                                                                                                
SENATOR DYSON asked if the  inspectors witness the calibration of                                                               
meters.                                                                                                                         
                                                                                                                                
COMMISSIONER NORMAN answered that's correct.                                                                                    
                                                                                                                                
SENATOR DYSON asked,  "If there was a  discrepancy between meters                                                               
that  might have  detected a  leak ...  and if  the operator  was                                                               
ignoring it, how would you know?"                                                                                               
                                                                                                                                
COMMISSIONER FOERSTER  explained that the only  meters over which                                                               
AOGCC has authority are the  custody transfer meters, so if there                                                               
are  meters on  either  side  of a  leak  that aren't  adequately                                                               
calibrated  to be  together, the  commission would  not have  the                                                               
information to  detect that.   She explained,  "What we do  is we                                                               
prove the oil meters; we get an  oil sample of a set size that we                                                               
can accurately  determine, and then  we run it through  the meter                                                               
to make  sure that  the meter  measures the  volume that  we know                                                               
we're  sending through.   But  we only  do that  for the  custody                                                               
transfer meters."                                                                                                               
                                                                                                                                
SENATOR DYSON asked  what other kind of  equipment the inspectors                                                               
look at.                                                                                                                        
                                                                                                                                
COMMISSIONER  NORMAN replied,  "We look  at virtually  the entire                                                               
operation."   He said,  in drilling,  pressures far  greater than                                                               
"anything we're talking about with  this particular transit line"                                                               
are encountered.   He  offered examples  ranging from  100 pounds                                                               
per  square inch  (psi)  to  10,000 psi,  and  he emphasized  the                                                               
importance of  being able to  monitor those pressures.   He spoke                                                               
of gauges and hydrogen sulphide measures  that are used.  He said                                                               
inspections are made to ensure that  the integrity of the well is                                                               
intact and that  there are at least two  competent barriers "that                                                               
will  prevent whatever  that produced  or  injected substance  is                                                               
from  escaping in  any way  into  the environment  that could  be                                                               
harmful."  He indicated that  the following categories fall under                                                               
the  responsibility  of AOGCC:    all  equipment, the  subsurface                                                               
strata,  the  reservoirs,  the  destination  of  substances  when                                                               
injected,  the protection  of fresh  water,  and the  underground                                                               
injection control program.                                                                                                      
                                                                                                                                
1:31:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR RAMRAS directed attention to  the last bulleted point on                                                               
page 3 of Commissioner Norman's  written testimony, which read as                                                               
follows:                                                                                                                        
                                                                                                                                
     In order for production to be restored in a timely                                                                         
     manner, there will likely be modifications that will                                                                       
     require our involvement as the operator continues to                                                                       
     pig lines and to look for alternate routes for the                                                                         
     transportation of EOA oil.                                                                                                 
                                                                                                                                
CO-CHAIR  RAMRAS   questioned  how  a  numerical   value  can  be                                                               
determined regarding loss of revenue.   He indicated that it must                                                               
be  determined whether  the oil  will  be recaptured  in 2007  or                                                               
2008, or perhaps will  go "to the end of the train  in 2030."  If                                                               
the latter,  he said, the  oil may be  at risk, because  by then,                                                               
presumably, "we will be bringing  gas out and, potentially, those                                                               
barrels that  could have  been recovered right  now will  be lost                                                               
forever."                                                                                                                       
                                                                                                                                
COMMISSIONER  NORMAN  suggested  that   that  question  could  be                                                               
answered more  fully later.   Notwithstanding that,  he proffered                                                               
that a period  of lost production is anticipated.   However, when                                                               
production begins again, it is expected  to be "at a higher level                                                               
or flush as  you used."  Then, he said,  those lines should begin                                                               
to converge and should "return to normal."  He continued:                                                                       
                                                                                                                                
     Now,  exactly when  or how,  we don't  know yet  in the                                                                    
     fullness of time;  but insofar as damages  to the state                                                                    
     are  concerned, it  will depend  upon  whether we  have                                                                    
     enhanced  - I'll  use the  word enhanced  or flushed  -                                                                    
     production  whenever the  field  starts  up, that  will                                                                    
     offset this.                                                                                                               
                                                                                                                                
COMMISSIONER  NORMAN   pointed  out  that  his   comments  relate                                                               
strictly to  the physical resource  recovered; however,  he noted                                                               
that  there also  is the  time value  of money  with which  AOGCC                                                               
normally does not concern itself.                                                                                               
                                                                                                                                
1:36:22 PM                                                                                                                    
                                                                                                                                
COMMISSIONER   FOERSTER  said   that   the   operator  has   very                                                               
sophisticated tools for  creating estimated production forecasts,                                                               
and  the  state  uses  that  data in  conjunction  with  its  own                                                               
prediction tools.  She related, "So,  we can compare what we have                                                               
predicted with what we actually see  ... to see if the losses are                                                               
recovered."                                                                                                                     
                                                                                                                                
CO-CHAIR RAMRAS referred to page  5 of the aforementioned handout                                                               
and read [original punctuation provided]:                                                                                       
                                                                                                                                
     This  incident is  a  wake  up call  of  all  of us  in                                                                    
     Alaska.    We  face   declining  production  and  aging                                                                    
     infrastructure.   This  event leaves  no question  that                                                                    
     there is  a need  for State  regulation of  the design,                                                                    
     construction,  installation, operation  and maintenance                                                                    
     of critical oil and gas infrastructure in Alaska.                                                                          
                                                                                                                                
CO-CHAIR RAMRAS asked whether it is  possible to ask the AOGCC to                                                               
pass some  guidelines prior to  January, so that  the legislature                                                               
can   implement    precisely   what   Commissioner    Norman   is                                                               
recommending.  He stated his  concern about the reputation of the                                                               
State of  Alaska, as  well as the  protection of  the environment                                                               
and  income  stream.   He  opined  that  those three  issues  are                                                               
clearly the most important ones on the table.                                                                                   
                                                                                                                                
COMMISSIONER NORMAN  surmised that after some  time, "things will                                                               
be back to normal"  He  predicted, "The greatest harm is going to                                                               
be  done to  perception,  particularly to  those  not in  Alaska.                                                               
Alaskans will digest  this and ... move on,  and perhaps everyone                                                               
will  be  better  for  it."   With  regard  to  Co-Chair  Ramras'                                                               
specific  question,  he  noted that  currently  there  are  other                                                               
agencies   with  statutory   jurisdiction  over   pipelines,  for                                                               
example, DEC,  DNR, and  the RCA.   He  suggested that  if, after                                                               
listening to  the testimony, the  legislature's decision  is that                                                               
AOGCC should be  tasked, then the commission would  be willing to                                                               
accept that;  however, he said he  is not convinced at  this time                                                               
that AOGCC is the best agency to be the lead in that regard.                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  asked how long  it would take before  the state                                                               
gets its money back on a net present value basis.                                                                               
                                                                                                                                
COMMISSIONER FOERSTER replied that she does not know.                                                                           
                                                                                                                                
CO-CHAIR SAMUELS asked  if the state has access  to the company's                                                               
own production forecast.                                                                                                        
                                                                                                                                
COMMISSIONER FOERSTER  replied that it is  information that could                                                               
be requested.                                                                                                                   
                                                                                                                                
CO-CHAIR SAMUELS asked  if the shutdown will result  in a steeper                                                               
decline curve because of reservoir engineering.                                                                                 
                                                                                                                                
COMMISSIONER FOERSTER said that is not expected.                                                                                
                                                                                                                                
CO-CHAIR SAMUELS asked, "How will  you know when you've equalized                                                               
what would  have been?  ...  Is it more an  economic question for                                                               
[the  Department of]  Revenue,  or  is it  going  to  more of  an                                                               
engineering-type question, or  is it a strictly  a legal question                                                               
that the courts will decide?"                                                                                                   
                                                                                                                                
COMMISSIONER NORMAN  responded that  there have been  studies and                                                               
extensive "modeling" done of the  entire reservoir; therefore, it                                                               
is possible to  project some trend lines,  "ignoring this event,"                                                               
and then compare  the event with those trend lines  to figure out                                                               
the differences  and draw  some conclusions  "with some  level of                                                               
scientific and  engineering confidence,"  to say, "This  is where                                                               
we would have been  but for this event, and this  is where we are                                                               
because of this event."                                                                                                         
                                                                                                                                
The committee took an at-ease from 1:43:08 PM to 1:46:33 PM.                                                                
                                                                                                                                
^DEPARTMENT OF REVENUE                                                                                                          
                                                                                                                                
1:46:45 PM                                                                                                                    
                                                                                                                                
BILL  CORBUS,  Commissioner,  Department of  Revenue,  offered  a                                                               
presentation  outlining the  potential financial  impacts to  the                                                               
state resulting from the Prudhoe Bay  shut down.  He reminded the                                                               
committee that his  presentation is based on  assumptions and the                                                               
scene continues to  change.  He began by  informing the committee                                                               
that the state's revenues consist  of five components:  royalties                                                               
on oil and  gas; severance tax on oil and  gas, property taxes on                                                               
oil and gas,  corporate income taxes on oil and  gas, and non-oil                                                               
revenues  consisting  of  corporate income  tax  on  nonpetroleum                                                               
corporations and a  myriad of other taxes and fees.   He directed                                                               
attention to the fiscal year 2007  (FY 07) budget as presented on                                                               
slide 3  of his  PowerPoint presentation.   The revenues  in that                                                               
budget, he noted,  were based on an assumption that  oil would be                                                               
produced at  the rate of 825,000  barrels a day, with  an average                                                               
price of oil  for the fiscal year of $53.60,  and severance taxes                                                               
would be  based on  the old economic  limit factor  (ELF) system.                                                               
He said the  presentation will focus on  two different production                                                               
and price scenarios  in an attempt to specify  the potential loss                                                               
of  revenue to  the state  under  the various  scenarios and  the                                                               
effect on  the day-to-day, monthly,  and yearly budget.   He said                                                               
the  presentation  would  also  offer   a  look  at  the  state's                                                               
liquidity.                                                                                                                      
                                                                                                                                
1:50:36 PM                                                                                                                    
                                                                                                                                
COMMISSIONER CORBUS  turned attention  to the slide  entitled ANS                                                               
Crude  Oil  & natural  gas  liquids  (NGLs)  Production.   On  an                                                               
annualized basis, if 825,000 barrels  a day were produced for 365                                                               
days  of a  year, the  total would  amount to  about 300  million                                                               
barrels.  If Prudhoe Bay  were to produce roughly 200,000 barrels                                                               
a day, the  total loss would be approximately  69 million barrels                                                               
for  August through  June, or  23 percent  of the  total budgeted                                                               
production.  The  second scenario, he said,  is considerably more                                                               
optimistic; it assumes that for  the month of August, Prudhoe Bay                                                               
will  produce about  200,000 a  day and  will ramp  up to  normal                                                               
production  level by  the end  of December.   Under  that set  of                                                               
assumptions, total  production will be  down by about  21 million                                                               
barrels for the year and total  production will be off by about 7                                                               
percent of the total budgeted production.                                                                                       
                                                                                                                                
1:53:47 PM                                                                                                                    
                                                                                                                                
MR. CORBUS  moved on to a  PowerPoint slide that shows  crude oil                                                               
prices.   He characterized the  graph as having an  upward trend,                                                               
but with some spikes along the  way.  Those spikes, he explained,                                                               
correspond either  with major international events  or changes in                                                               
the  supply.    He  noted   that  the  day  after  Prudhoe  Bay's                                                               
announcement that its  production would close down,  the price of                                                               
crude oil rose $2.22 [per barrel].   Yesterday, he said, the West                                                               
Texas Intermediate (WTI)  price of oil froze at $70.06.   He said                                                               
the budget assumed a price of  $53.60.  He explained, "When we're                                                               
talking about the price we assume,  that is for the price for ...                                                               
Alaska North  Slope (ANS) oil delivered  to the West Coast."   He                                                               
clarified that  that is not  the same price  as WTI shown  on the                                                               
graph.   He stated that the  difference between the WTI  and [the                                                               
ANS]  is called  the  differential, and  in  recent times,  [ANS]                                                               
"North Slope oil" has been about $1.30 below WTI.                                                                               
                                                                                                                                
COMMISSIONER  CORBUS said  fortunately FY  07  is off  to a  good                                                               
start; for  the first two months  of the fiscal year,  the August                                                               
average  price  of West  Coast  oil  has  been $71.31,  which  is                                                               
approximately $18,31 ahead of budget.                                                                                           
                                                                                                                                
COMMISSIONER CORBUS  said the second  price scenario  reviews the                                                               
future.  He turned to  the PowerPoint slide showing a spreadsheet                                                               
of WTI  Futures Prices.   The  spreadsheet, he  explained, places                                                               
the value  for contracts for  oil that  will be delivered  in the                                                               
future.  He pointed  out that a column on the  right of the slide                                                               
shows  that  of  the  total  transactions  occurring  for  future                                                               
periods  "falls dramatically  off after  the month  of December."                                                               
He said  the futures  also indicate  a higher  price for  fuel in                                                               
future.   Commissioner  Corbus said  the  department is  somewhat                                                               
nervous about using  this as a method of projecting  the price of                                                               
oil, because  so few transactions are  occurring beyond September                                                               
to give  comfort in  regard to  the value  of oil.   He  said the                                                               
state has  a better  track record in  predicting oil  prices than                                                               
the  futures  market   does.    He  then   highlighted  the  next                                                               
PowerPoint  slide  regarding  ANS  Crude Oil  Price  Scenarios  -                                                               
futures prices compared to revenue sources book prices.                                                                         
                                                                                                                                
2:00:53 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  CORBUS  continued  his presentation  in  regard  to                                                               
comparisons.   He referred  to the cumulative  losses due  to the                                                               
Prudhoe  Bay Unit  shutdown as  illustrated  on slide  13 of  the                                                               
PowerPoint.  Assuming a pessimistic  scenario of 200,000 barrel a                                                               
day production throughout the remainder  of the year, the futures                                                               
price shows a revenue loss of  about $2 billion a year, while the                                                               
revenue  source book  price shows  a loss  of approximately  $1.1                                                               
billion.  Using  the more optimistic scenario  of 400,000 barrels                                                               
a day production, the futures prices  show a loss to the state of                                                               
approximately  $815 million,  whereas the  amount lost  using the                                                               
revenue source  book would be  $460 million.   He noted  that the                                                               
following assumption had to be  made in calculating the severance                                                               
taxes  under the  new production  profits tax  (PPT) system:   an                                                               
investment for FY 07 of  $1.45 billion; an average operating cost                                                               
of  $4.00-plus   per  barrel;  and   a  disallowance   for  heavy                                                               
maintenance of 30  cents per barrel, which would  result in about                                                               
$80 million that won't be included as capital expenditures.                                                                     
                                                                                                                                
2:03:36 PM                                                                                                                    
                                                                                                                                
COMMISSIONER CORBUS  addressed Co-Chair Ramras'  earlier question                                                               
as to when  the lost production will occur and  whether, when the                                                               
oil  is produced,  it  will  be produced  at  the same  favorable                                                               
market prices as today or be  lower or higher than today's market                                                               
prices.    He then  directed  the  committee's attention  to  the                                                               
PowerPoint  slide  showing  the  monthly  cash  flow  versus  the                                                               
budget.   He  noted  that  for the  months  of September  through                                                               
January, the cash flow projections  were based on severance taxes                                                               
computed on the old ELF-based  system.  Beginning in February, he                                                               
said, severance taxes and payments  will be based on the estimate                                                               
using the  PPT methodology of  tax rates.   He stated,  "And then                                                               
for the month  of March, there's going  to be a true  up to cover                                                               
the period  from the  effective date through  ... December  - the                                                               
difference between the  ELF-based system and the  PPT system, [a]                                                               
net profit  system."  He  said there is  a major influx  of cash.                                                               
The next  slide shows the  same analysis assuming  the optimistic                                                               
production forecast, in which an  August through December ramp up                                                               
from  200,000  to 400,000  barrels  a  day  results in  the  same                                                               
circumstances  in  which there  is  a  favorable cash  flow  from                                                               
February to the end of the  year reflecting the impact of the new                                                               
PPT  taxes.    The  futures  prices  at  year's  end,  under  the                                                               
pessimistic  production  scenario,  he  summarized,  would  still                                                               
result  in the  state being  about  $2 billion  ahead of  budget;                                                               
however, if  successful in getting  production back up  to normal                                                               
by the end of December, that  number would be about $3.2 billion.                                                               
He stated:                                                                                                                      
                                                                                                                                
     Under  the  assumptions  that we  will  return  to  the                                                                    
     budgeted price  of $53.60, we  find that we  will still                                                                    
     have  a budget  surplus  for either  the optimistic  or                                                                    
     pessimistic production  forecast.  Now, this  is indeed                                                                    
     a favorable  picture just from  strictly the  cash flow                                                                    
     point  of view.   We  must keep  in mind  that this  is                                                                    
     greatly impacted,  at least in  the case of  the $53.60                                                                    
     scenario, by  the fact that  we have a good  head start                                                                    
     in cash flow for the months  of July and August, due to                                                                    
     the  fact  that prices  are  quite  a bit  higher  than                                                                    
     projected.  And in all cases,  the impact of the PPT is                                                                    
     very substantial  compared to what we  had assumed when                                                                    
     the budget was prepared and adopted last ... spring.                                                                       
                                                                                                                                
2:10:01 PM                                                                                                                    
                                                                                                                                
COMMISSIONER CORBUS moved on to  the state's liquidity situation.                                                               
He   reminded   the   committees   of  the   existence   of   the                                                               
constitutional  budget reserve  fund, which  currently sums  $2.3                                                               
billion.   He said  the state  has the  authority to  borrow from                                                               
that fund month to month, but must  pay it back before the end of                                                               
the  fiscal year.    He said  there is  also  the permanent  fund                                                               
earnings  reserve fund  in the  amount  of $2.5  billion, but  it                                                               
can't   be   accessed   without   the   legislature's   approval.                                                               
Commissioner   Corbus   concluded    that   regardless   of   the                                                               
assumptions, the loss to the  state is substantial.  However, due                                                               
to  the  higher oil  prices  for  the  fiscal  year to  date  and                                                               
incremental revenues from  the PPT, it's unlikely  that the state                                                               
will have  to cut spending to  [avoid] a deficit.   Moreover, the                                                               
state  has  substantial  reserves  to address  cash  flow  timing                                                               
issues and, with legislative approval, to cover a deficit.                                                                      
                                                                                                                                
2:13:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR RAMRAS asked if, prior to  the shut down of Prudhoe Bay,                                                               
the production of 825,000 barrel-a-day production was on track.                                                                 
                                                                                                                                
COMMISSIONER  CORBUS replied  that production  was below  825,000                                                               
barrels;  however, generally  speaking,  production  tends to  be                                                               
lower in summer and catch up in the winter.                                                                                     
                                                                                                                                
2:13:56 PM                                                                                                                    
                                                                                                                                
SENATOR ELTON  inquired as to  the magnitude  of what BP  will be                                                               
able  to  write  off  because  of "the  investment  that  we  now                                                               
recognize as needed to correct the problem."                                                                                    
                                                                                                                                
COMMISSIONER  CORBUS said  that the  department doesn't  have any                                                               
information with regard to the cost  of the repairs.  He said the                                                               
department assumes investments of  $1.45 million, which is higher                                                               
than was  assumed during all  the discussions previously  held on                                                               
the PPT.  He said the  department determined that with the higher                                                               
oil prices,  there was  an incentive  to increase  the investment                                                               
and take  advantage of trying to  hold taxes down.   He mentioned                                                               
statutory provisions  for disallowance  for 30 cents  per barrel,                                                               
which are to cover situations such  as the present.  It turns out                                                               
that $80 million will be  disallowed, whatever the cost of making                                                               
the repairs.                                                                                                                    
                                                                                                                                
2:17:03 PM                                                                                                                    
                                                                                                                                
^COMMISSIONER MENGE, CABINET TEAM LEADER                                                                                      
                                                                                                                                
MICHAEL  MENGE,  Commissioner,  Department of  Natural  Resources                                                               
(DNR), said  the department  is the lease  manager and  draws its                                                               
ultimate authority for regulation from  the leases.  He explained                                                               
that  there is  a patchwork  of regulatory  authority -  federal,                                                               
state, and  local - but  ultimately DNR,  by virtue of  the lease                                                               
and the right  of way, has the ability to  exercise any necessary                                                               
authority  to exercise  the lease.   Currently,  he relayed,  the                                                               
appointed task force is working on  six topics:  operation of the                                                               
Western Operating Area; operation  of the Eastern Operating Area;                                                               
reduced  flow  impacts  to   the  Trans-Alaska  Pipeline  System;                                                               
impacts to other  Prudhoe Bay Unit operations,  other fields, and                                                               
in-state  refineries; a  transit pipeline  replacement plan;  and                                                               
the implementation of a system  integrity oversight.  He said one                                                               
of the  first steps the  department will  take is to  measure the                                                               
effectiveness  of the  quality  control  program, including  spot                                                               
checks, which allows  the effective gauging of  the entire system                                                               
with a  minimal amount of  resource and personnel.   He specified                                                               
that it  is important to  decide what  to monitor, to  ensure the                                                               
quality  control   program  of  each  company   is  effective  in                                                               
maintaining a  safe operating  system, and  to carry  out quality                                                               
control spot checks.                                                                                                            
                                                                                                                                
2:27:06 PM                                                                                                                    
                                                                                                                                
COMMISSIONER MENGE  provided a  flow chart  with regard  to where                                                               
the aforementioned entity will reside.   He said the organization                                                               
will be co-located  with DNR's joint pipeline  office, because of                                                               
the  expertise that  is already  available there.   He  expressed                                                               
pride  in the  quality control  program that  the government  and                                                               
Alyeska  assembled over  the last  decade,  characterizing it  as                                                               
probably the best in the world outside of the nuclear industry.                                                                 
                                                                                                                                
2:28:19 PM                                                                                                                    
                                                                                                                                
CHAIR WAGONER requested  additional copies of the  report be sent                                                               
to the committee.                                                                                                               
                                                                                                                                
COMMISSIONER  MENGE  obliged,  but   noted  that  they  are  also                                                               
available online.                                                                                                               
                                                                                                                                
^DEPARTMENT OF ENVIRONMENTAL CONSERVATION                                                                                     
                                                                                                                                
2:28:50 PM                                                                                                                    
                                                                                                                                
KURT  FREDRIKSSON,  Commissioner,   Department  of  Environmental                                                               
Conservation (DEC), referred  to a handout which  begins with the                                                               
six  elements   of  a  good  regulatory   program:    unambiguous                                                               
statutory  authority; documented  basis  for concern;  protective                                                               
standards;  rational  regulatory scheme;  documented  compliance;                                                               
and enforcement.   The department's broad  authority includes not                                                               
only crude oil but also noncrude  oil activities, as shown on the                                                               
next  page  of  the  handout.   He  stated  that  although  spill                                                               
prevention  is the  topic of  the day,  it is  important for  the                                                               
committee to  understand DEC's  role in oil  spill response.   He                                                               
echoed Attorney  General Marquez' remark that  any person causing                                                               
an oil spill must immediately contain  and clean up that spill to                                                               
the satisfaction of  DEC on behalf of the state.   Regarding both                                                               
the GC2 and Flow Station  2 spill incidents, Mr. Fredrickson said                                                               
BP  "and others"  responded in  an exemplary  manner; the  spills                                                               
were contained,  oil was removed,  damage to health  and wildlife                                                               
was prevented, and  the impact to the  environment was minimized.                                                               
Moreover,  Mr.  Fredriksson  said   DEC  expects  that  the  area                                                               
impacted will be fully restored within the next year or two.                                                                    
                                                                                                                                
COMMISSIONER FREDRIKSSON  stated that  DEC pursues its  goals for                                                               
spill prevention response "through  development of regulations in                                                               
a disciplined  manner, using a  risk-based approach based  upon a                                                               
documented   basis  of   concern.     He  listed   the  following                                                               
considerations:  historical spill data;  lack of other federal or                                                               
state agency regulation of the  facility or operation; request by                                                               
the public  or other government  agencies to regulate  a facility                                                               
of operations; and  the environmental risk posed  by a particular                                                               
type of facility or operation.   He said there are many different                                                               
types of  pipelines on the North  Slope.  He said  leak detection                                                               
for crude  oil transit lines  was first  imposed by EPA  in 1992,                                                               
and those same  requirements remain on the books  today. In 1999,                                                               
DEC  identified  pipeline  integrity associated  with  the  aging                                                               
infrastructure  of Prudhoe  Bay.   He  explained, "That  occurred                                                               
when BP and  ARCO merged, and there was a  commitment by industry                                                               
to extend  the life of the  Prudhoe Bay field."   He reminded the                                                               
committee that BP's  policy is to invest heavily  in the recovery                                                               
of the oil and  to extend the life of the Prudhoe  Bay field.  He                                                               
continued:                                                                                                                      
                                                                                                                                
     The  initial steps  to  manage the  risk  posed by  the                                                                    
     aging  infrastructure of  the  North  Slope included  a                                                                    
     commitment   imbedded  in   the  North   Slope  Charter                                                                    
     Agreement to  develop a performance  management program                                                                    
     for corrosion monitoring,  maintenance, and inspection,                                                                    
     and evaluate  if a documented basis  of concern existed                                                                    
     for further regulation.                                                                                                    
                                                                                                                                
COMMISSIONER  FREDRIKSSON noted  that  the  handout contains  the                                                               
actual language  taken from the  charter agreement,  with respect                                                               
to corrosion.   At the  bottom of the  page, he pointed  out, the                                                               
following  additional   environmental  commitments   are  listed:                                                               
cleanup of  abandoned sites; cleanup of  abandoned empty barrels;                                                               
cleanup  of  existing BP  and  ARCO  sites; closure  of  inactive                                                               
reserve pits;  commitment to North Slope  spill response; renewed                                                               
commitment  to  the  Oil  Pollution   Act  of  1990;  replacement                                                               
vessels;  and marine  operations.   He noted  that he  provided a                                                               
copy of all of the  reports required under the charter agreement,                                                               
including annual  reports that  are then  reviewed by  the third-                                                               
party consultant, Kaufman Engineers.                                                                                            
                                                                                                                                
2:36:32 PM                                                                                                                    
                                                                                                                                
COMMISSIONER FREDRIKSSON stated:                                                                                                
                                                                                                                                
     Subsequent  spill data  and other  information provided                                                                    
     to  DEC   under  the  charter  agreement   indicated  a                                                                    
     documented basis  for concern  with respect  to further                                                                    
     regulation  of the  flow lines.   The  documented basis                                                                    
     for  concern   led  DEC  to  increase   its  regulatory                                                                    
     corrosion  control  requirements   in  response  to  an                                                                    
     unacceptable increase  in the transit spills  from flow                                                                    
     lines.    Following  two  years  of  study  and  public                                                                    
     review,  this last  month  I  adopted regulations  that                                                                    
     will impose  additional corrosion  control requirements                                                                    
     on the flow lines.                                                                                                         
                                                                                                                                
COMMISSIONER  FREDRIKSSON emphasized  the  need  to realize  that                                                               
this matter  is complicated; state  resources must be  matched to                                                               
the appropriate level  of oversight.  He  explained that expanded                                                               
oversight and  more in-depth  analysis requires  more engineering                                                               
expertise,   technical  training,   and  technical   consultants.                                                               
Following the  GC2 spill of  March 2006,  DEC joined DNR  and the                                                               
OGCC to create  an arctic pipeline technology  team to coordinate                                                               
the  state's  pipeline  priority  oversights.   The  purpose  and                                                               
structure of  the team, he  said, is described in  the memorandum                                                               
of  agreement,  which is  shown  as  the  last  part of  the  DEC                                                               
handout.   He said  Commissioner Menge  described DEC's  plan for                                                               
improving  the state's  system integrity  oversight, to  be built                                                               
upon  the interagency  coordination  of  the pipeline  technology                                                               
team and  the joint  pipeline office model.   Moreover,  he said,                                                               
DEC has enlisted  the support of North Slope  operators to expand                                                               
its technical  knowledge of  pipeline corrosion  control systems;                                                               
both BP and ConocoPhillips Alaska,  Inc. have provided funding to                                                               
conduct  a pipeline  technology conference  in Alaska  to examine                                                               
the   latest  technology   and  best   practices  for   corrosion                                                               
management,  monitoring inspection,  and leak  detection for  oil                                                               
pipelines operating in arctic conditions.                                                                                       
                                                                                                                                
2:38:51 PM                                                                                                                    
                                                                                                                                
SENATOR ELTON  said it has  been easy to  point the finger  at BP                                                               
over the last  few weeks, and there  has not been a  lot of focus                                                               
on the issue  of the state's responsibility in  ensuring that the                                                               
proper  regulatory  efforts  are  being  made.    He  recalled  a                                                               
statement made by Mr. Fredriksson  that transit lines contain oil                                                               
only - no water.  Conversely,  he recollected that there had been                                                               
previous  testimony by  BP that  there  is water  in the  transit                                                               
lines.                                                                                                                          
                                                                                                                                
COMMISSIONER  FREDRIKSSON said  he believes  that there  is water                                                               
within the transit  lines, albeit a small amount  compared to the                                                               
flow lines that  contain a potentially large volume  of water and                                                               
gas.                                                                                                                            
                                                                                                                                
SENATOR  ELTON asked  Mr. Fredriksson  to confirm  that regarding                                                               
the issue of pipeline corrosion,  the Kauffman reports focused on                                                               
the flow lines rather than the transit lines.                                                                                   
                                                                                                                                
COMMISSIONER FREDRIKSSON specified that  the Kauffman reports are                                                               
a  review  of the  BP  and  ConocoPhillips Alaska,  Inc.  reports                                                               
submitted by the companies.  He  stated his belief that after its                                                               
review of  the oil companies'  information, Kauffman  advised DEC                                                               
that  the corrosion  problem was  presenting itself  in the  flow                                                               
line "to a much greater extent  than we were lead to believe with                                                               
respect  to the  transit  lines."   In  response  to a  follow-up                                                               
question, he said  he thinks DEC did independent  analysis of the                                                               
data that came from Kauffman.                                                                                                   
                                                                                                                                
2:42:31 PM                                                                                                                    
                                                                                                                                
SENATOR ELTON  related his understanding  that until  1985, there                                                               
were DEC regulators stationed in Prudhoe  Bay.  He asked if there                                                               
have  been any  people  from  DEC stationed  on  the North  Slope                                                               
subsequent to that time.                                                                                                        
                                                                                                                                
COMMISSIONER  FREDRIKSSON replied  yes.   He said  DEC, DNR,  and                                                               
perhaps  staff from  the Alaska  Department of  Fish &  Game have                                                               
staff in a joint office located on the North Slope.                                                                             
                                                                                                                                
SENATOR ELTON  asked if  the responsibility of  the staff  on the                                                               
slope  is to  perform  permit  reviews or  act  as  "cops in  the                                                               
field."                                                                                                                         
                                                                                                                                
COMMISSIONER  MENGE explained  that the  DNR staff  on the  North                                                               
Slope are essentially  permit monitors; they look  at the various                                                               
permits,  authorizations,  leases,  and right-of-ways,  and  then                                                               
focus  on   stipulations  related  to  a   best  interest-finding                                                               
process.   To  date, he  said, that  staff has  primarily ensured                                                               
that all stipulations [are followed].                                                                                           
                                                                                                                                
COMMISSIONER FREDRIKSSON  said that much  the same applies  as it                                                               
relates  to DEC  staff on  the  North Slope;  they are  primarily                                                               
there for inspection purposes.                                                                                                  
                                                                                                                                
2:44:48 PM                                                                                                                    
                                                                                                                                
SENATOR ELTON  said during  his search online,  he was  struck by                                                               
comments that  BP employees had  made regarding  maintenance that                                                               
implicated  both employee  and  environmental safety.   He  asked                                                               
what DEC's response  was in reading newspaper  articles about the                                                               
spill and BP employees' concerns about corrosion and safety.                                                                    
                                                                                                                                
COMMISSIONER  FREDRIKSSON said  many  of those  issues have  been                                                               
brought to the  attention of DEC by Charles  Hamel in Washington,                                                               
D.C.   He said he  has also received complaints  from individuals                                                               
in Alaska, but it is  sometimes difficult to get more information                                                               
from  people if  they have  concerns related  to confidentiality,                                                               
even though  DEC ensures  its own confidentiality.   He  said DEC                                                               
takes that  feedback seriously and not  only pursues information,                                                               
but  also  lets   the  person  who  brought  it   know  what  was                                                               
discovered.                                                                                                                     
                                                                                                                                
2:47:31 PM                                                                                                                    
                                                                                                                                
SENATOR ELTON  requested a list  showing the chain of  command of                                                               
on-site staff.   Furthermore, he said he would like  to know what                                                               
percentage  of the  state jobs  on  the North  Slope consists  of                                                               
permit  review   and  what  percentage  consists   of  doing  the                                                               
necessary  inspections.    He  also   inquired  as  to  what  the                                                               
department's request has  been over the last five  years to reach                                                               
the  necessary  level  of  compliance  inspection  and  what  the                                                               
results have been related to those requests.                                                                                    
                                                                                                                                
COMMISSIONER FREDRIKSSON agreed to  provide that information.  He                                                               
related that he is proud that,  particularly in the area of water                                                               
and  air,   DEC  has  actually   increased  its   commitment  "in                                                               
measurable terms of staff."                                                                                                     
                                                                                                                                
SENATOR  ELTON  specified that  he  is  more concerned  with  the                                                               
effort in  the Prudhoe Bay  Unit, as  compared to air  quality in                                                               
Dutch Harbor, for example.                                                                                                      
                                                                                                                                
COMMISSIONER  FREDRIKSSON noted  that  there  have been  concerns                                                               
about air quality  on the North Slope, and he  reiterated that he                                                               
would provide Senator Elton with the requested information.                                                                     
                                                                                                                                
2:50:18 PM                                                                                                                    
                                                                                                                                
CHAIR  WAGONER  requested  information  as  to  which  state  and                                                               
federal agencies are  responsible for what programs  on the North                                                               
Slope.                                                                                                                          
                                                                                                                                
COMMISSIONER  MENGE  agreed  to  provide that  information.    He                                                               
reiterated  the concept  of  the patchwork  of  authority in  the                                                               
area, saying  that some people on  the North Slope have  a lot of                                                               
authority, while others have implied  authority, and still others                                                               
have authority  "by virtue of  assumption of programs."   He said                                                               
the first thing the department will  do is identify all the state                                                               
and federal agencies with regulatory  authority, and then it will                                                               
outline  the  scope  of  that   authority  and  how  it  is  best                                                               
implemented.   He  said the  concept of  a coordinated  state and                                                               
federal oversight  program is to  first identify a  problem, then                                                               
determine a  procedure to remediate  that problem, and  third, to                                                               
sit  down as  a  group  and decide  who  has  the best  authority                                                               
available to exact change as  quickly as possible.  He concluded,                                                               
"But it  all rests ... on  our ability to understand  exactly who                                                               
has  authority to  do what.   ...  It will  be a  living document                                                               
[such] that we can give you  a broad overview, and then I promise                                                               
you over time it will develop  into a very detailed assessment of                                                               
precisely   which   organization   and  individuals   have   what                                                               
authorities to exercise."                                                                                                       
                                                                                                                                
CHAIR  WAGONER  said  the committees  would  consider  hearing  a                                                               
presentation from Commissioner Menge sometime in September.                                                                     
                                                                                                                                
COMMISSIONER  MENGE  said he  would  be  happy  to offer  such  a                                                               
presentation to  help the committees  understand how each  of the                                                               
programs evolved  and the  control systems that  are in  place to                                                               
ensure  that  all   the  requirements  of  the   state  are  met.                                                               
Furthermore, he  noted that there  is "a huge  futuring component                                                               
in  there."   A  lot of  quality  risk assessment  is  done.   He                                                               
offered  further   details.    He  talked   about  risk  analyses                                                               
regarding where  the critical components  in the system  are, for                                                               
example,  the  central  gas  facility,  transit  lines,  and  the                                                               
central  power plant.   He  said, "There  are crucial  components                                                               
within any  engineering system, that  if there is a  problem with                                                               
them, then  the entire house of  cards comes down."   He said the                                                               
state can never  reach a point where it can  say there will never                                                               
be another  accident, but it  can take extraordinary  measures to                                                               
ensure  it  does everything  in  its  power to  anticipate  where                                                               
accidents occur and what might be done to prevent them.                                                                         
                                                                                                                                
2:54:40 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the joint                                                               
meeting  of the  House and  Senate Resources  Standing Committees                                                               
was adjourned at 2:55 p.m.                                                                                                      

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