Legislature(1999 - 2000)
04/23/1999 05:10 PM House WTR
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON WORLD TRADE AND STATE/FEDERAL RELATIONS April 23, 1999 5:10 p.m. MEMBERS PRESENT Representative Ramona Barnes, Chair Representative John Cowdery, Vice Chair Representative Beverly Masek Representative Gail Phillips Representative Joe Green Representative Ethan Berkowitz Representative Reggie Joule MEMBERS ABSENT All members present OTHER HOUSE MEMBERS PRESENT Representative Brian Porter Representative John Coghill Representative Scott Ogan Representative Eldon Mulder Representative Beth Kerttula Representative Sharon Cissna SENATE MEMBERS PRESENT Senator Pete Kelly COMMITTEE CALENDAR OVERSIGHT HEARING: PROPOSED PURCHASE OF ARCO, INC. BY BP AMOCO BP AMOCO AND ARCO TESTIMONY PREVIOUS ACTION See House Special Committee on World Trade and State/Federal Relations minutes dated 4/13/99, 4/15/99 and 4/20/99. WITNESS REGISTER KEVIN MEYERS, President ARCO Alaska RICHARD CAMPBELL, President BP Exploration Alaska ACTION NARRATIVE TAPE 99-13, SIDE A Number 0001 CHAIR RAMONA BARNES called the House Special Committee on World Trade and State/Federal Relations meeting to order at 5:10 p.m. Members present at the call to order were Representatives Barnes, Cowdery, Masek, Green, Berkowitz and Joule. Representative Phillips arrived at 5:11 p.m. She noted the presence of Representatives Porter, Coghill, Ogan, Mulder, Kerttula, and Cissna as well as Senator Pete Kelly. Number 0125 KEVIN MEYERS, President, ARCO Alaska, began by noting that ARCO has been a major player in Alaska for 45 years. He commented that ARCO's business in Alaska is in excellent shape and has had exploration success. ARCO Alaska is developing new fields and, despite the record low oil prices of recent months, is on track with regard to stabilizing ARCO's share of North Slope production. He expressed ARCO's pride in its history in Alaska. He predicted a bright future for the oil industry in Alaska with continued efforts to drive down operating and developing costs, and continued access to exploration acreage, and a continued working partnership with the state. Having said that, he acknowledged that many Alaskans were surprised to hear that ARCO had approached BP-Amoco and proposed a acquisition; many are questioning why. He offered to answer questions, but noted that he may not be able to answer them all because for some questions there are no answers yet. Other questions can't be answered because ARCO has entered what the Securities and Exchange Commission (SEC) calls the "quiet period." During the "quiet period," ARCO employees are prohibited from saying anything that could be construed as urging our shareholders to approve the joining of ARCO with BP-Amoco. He compared the "quiet period" to some of the laws and restrictions that keep legislators from lobbying within so many feet of a polling place prior to an election. This restriction will apply until ARCO's proxy statement has been filed and approved by the SEC. The proxy statement will provide detailed information on this transaction. He noted that SEC rules do not prevent him from discussing the impact this merger will have on Alaska which he believed would be positive. MR. MEYER believed that combining ARCO Alaska and BP-Amoco would allow the restructuring of ARCO's Alaskan operations, eliminate duplication, lower ARCO Alaska's operating costs, and create new opportunities for growth on the North Slope. All of which will result in more capital spending, greater ultimate oil recovery, higher production and more state revenue. Although this merger will create short-term pain for many, it is also key to a better future for the Alaskan oil industry. He stated that today's tough business climate makes continued consolidation of ARCO Alaska's operations on the North Slope inevitable. In order to remain a viable industry and attract new investment, operating costs must be reduced as production continues to decline. Simultaneously, the record low oil prices of the last few months have had a significant negative impact on the industry's earnings and cash flow. ARCO Alaska has emerged from this last year and a half with a new understanding of what it's going to take to remain competitive in the oil business. He stressed that being a low-cost producer will be key to a successful long-term future. Number 0423 MR. MEYER acknowledged that many are concerned about the merger and how it will affect the suppliers, the contractors, and jobs. All those concerns are understandable, but even without this acquisition change was imminent. When the news of this deal became public, ARCO and BP were engaged in serious discussions aimed at establishing a single operator at Prudhoe Bay to achieve some of those aforementioned cost savings. However, Mr. Meyer emphasized that this transaction would deliver much more cost savings than a single operator; "...it better aligns the interest of BP-Amoco with the remaining PBU [Prudhoe Bay Unit] owners, and it delivers additional slope-wide cost savings and efficiencies." He returned to the issue of loss of jobs. Although it will be very difficult to see those who have made significant contributions go, the only way to build a better future for Alaska's oil industry is to make operations as cost effective as possible. He commented that he has personally seen what can happen when the cost is taken out of operations. He recalled 1994 when oil prices plummeted to $15 a barrel and ARCO Alaska's long-term plan showed years of declining North Slope production, in terms of our share and in terms of the gross. At that time, ARCO Alaska made some difficult, but necessary decisions such as the elimination of a large portion of its work force. He informed the committee, "Since 1994 ARCO Alaska has eliminated over 900 jobs in the Alaska, that's our employee's jobs, including more than 200 middle management positions." ARCO Alaska changed the way it purchases goods and services, forged new agreements with suppliers and contractors, used technology and facility sharing agreements all in order to reduce costs. That resulted in the removal of over 25 percent of ARCO's operating costs from its Alaska operations which would allow survival of low oil prices. More importantly, the new cost structure allowed the pursuit of new projects that were previously not feasible such as additional drilling in existing fields, the [indisc.] inject and expansion project, satellite exploration and development, et cetera. He said that ARCO Alaska's low-cost structure allowed it to increase its investment in Alaska. ARCO Alaska challenged its employees to make the most of the new low-cost structure which is embodied in No Decline After '99, a plan to stop decline in production. Number 0664 MR. MEYER said that after ARCO's executive management reviewed ARCO's global portfolio and ARCO Alaska, they liked what they saw. Due to this new cost structure, funding for Alaska increased. Over the last five years, ARCO's capital spending in Alaska has increased three-fold from ARCO Alaska. Once again this illustrates the benefits of the reduction of the cost structure, in terms of increased spending and increased production. "Last year for the second year in a row, ARCO replaced every barrel we produced in Alaska in 1998." He also mentioned that ARCO kick-started a new Alaskan industry when it awarded contracts to two Alaskan companies for the fabrication of the fist sea lift modules built in Alaska. Furthermore, the startup of Alpine 2000 will deliver on No Decline After '99. All this is tangible evidence that low cost operations result in increased investment and new opportunities. Therefore, efforts must continue to drive cost out of the system which is "why combining our Alaska operations with BP's Alaska operations is the right thing to do." Mr. Meyer said that he believed the merger would create new investment opportunities on the North Slope. He acknowledged that the Knowles Administration and this committee have a responsibility to carefully examine this transaction and he welcomed their interest and questions. He expressed confidence that all the concerns identified by the Governor's team can be addressed. Furthermore, he predicted that state and federal officials will conclude that this merger is in the best interest of the state as well as the nation. Over the long term the merger will result in "more investment in Alaska, more exploration, more new fields, more production, more state revenue." MR. MEYER informed the committee that prior to regulatory approval of this merger, ARCO will continue to operate as an independent company pursuing its plans for production growth in Alaska. He said, "Our capital spending program this year will not be reduced. I am pleased to tell you the Alpine project is on track." He stated that ARCO Alaska will continue to explore for new fields, to participate in state and federal lease sales, and bid at the upcoming National Petroleum Reserve-Alaska (NPR-A) lease sale, totally independent of BP-Amoco. Furthermore, ARCO Alaska will continue to support the community service organizations, protect the environment and the safety of employees. "In short, it's going to be business as usual until this deal is approved." Mr. Meyer identified the goal as simply to deliver to BP-Amoco a well run company with quality assets and tremendous growth potential. With regard to assets, he clarified that he was not only speaking of the rock and the steel, but more importantly the employees of ARCO Alaska. MR. MEYER, in closing, reiterated that ARCO supports and wants this combination to be successful. He pointed out that BP-Amoco was chosen for many easily quantified business reasons; moreover, BP-Amoco has made a commitment to treat ARCO's employees with respect and fairness. He noted that departing employees will receive generous severance packages and enhanced retirement benefits. Furthermore, ARCO knows BP-Amoco very well. Since the discovery of Prudhoe Bay more than 30 years ago, BP-Amoco and ARCO have been partners and competitors. Both share a common commitment to the development and marketing of cleaner burning fuels, to operating in an environmentally responsible manner, and to being good corporate citizens. He emphasized the commonality of a 40-year history of commitment to Alaska. CHAIR BARNES informed everyone that the testimony of the two presidents would be completed prior to any questions. Number 0868 RICHARD CAMPBELL, President, BP Exploration Alaska, commented that the merger begins a journey towards a new future for Alaska. "Two great Alaskan companies have taken the first steps towards becoming a single, more competitive Alaskan company that is positioned for the challenges and the opportunities of the Twenty-first Century." He recognized that this merger has come as a shock to many Alaskans and has spawned concern due to the central role both ARCO and BP have played in Alaska's economic and social fabric for more than three decades. He offered assurance that the vital economic and social role of both companies will continue after the merger. Mr. Campbell emphasized, "This deal is critical to ensuring the long-term health and competitiveness of the industry that is the foundation of Alaska's economy. Both companies believe this will be good for Alaska. Good for it's communities and people, good for investment and good for the future of our industry in Alaska." He explained that the merger will enable the maximization of oil and gas recovery on the North Slope. The merger will make the company more efficient, more competitive, and enhance the company's ability to invest in Alaska. Furthermore, this merger will enhance Alaska's ability to compete for investments in a low-price environment. MR. CAMPBELL said that he hoped the government approval process can be completed in six to nine months. He acknowledged that this will not be an easy period for anybody, but he promised that he and the team will do everything to move the process forward to minimize the uncertainty for everyone. He also promises that the decisions made which shape the new organization and its course will be made in a fair, equitable, and collaborative manner. With regard to the question of what this merger means to the State of Alaska and its citizens, Mr. Campbell didn't think he could answer that question definitively. However, the principles on which the decisions will be based and the commitments to all Alaskans can be identified as this moves forward. MR. CAMPBELL explained, "BP-Amoco is about to spend more than $26 billion to acquire ARCO, in large part to enhance the competitiveness of Alaskan investments in our global exploration and production portfolio." He identified that as an expression of BP-Amoco's confidence in Alaska's potential and future. "As further evidence, we will invest $5 billion on the North Slope over the next five years, an increase over the combined Alaskan investments of BP and ARCO in the past five years." He interpreted that to mean ongoing business opportunities for Alaskan companies, continued efforts and programs expanding the role of Alaskans in all activities. The company will have a bias for Alaskans in its training, hiring and contracting. The efficiencies gained by the merger will make Alaska more competitive in a sustained low-price environment, such as the one experienced for the past year. Mr. Campbell stated, "ARCO and BP are taking our destinies in our hands in order to make our Alaskan investment opportunities attractive in any business environment. In this context, we are not asking for a review of the tax structure. We will continue to work cooperatively and collaboratively with all levels of government in Alaska." MR. CAMPBELL stated that ARCO's commitments to build the new "Millennium Class" double-hull tankers for Alaska trade will be honored. He noted that BP already uses three double-hull tankers and six double-bottom tankers in its 11-ship chartered fleet. Furthermore, BP will comply with the Oil Pollution Act of 1990 (OPA 90). The work of the LNG (liquefied natural gas) sponsor group will also continue. He announced that BP will consolidate its worldwide gas technologies into Alaska, and will build a gas-to-liquids pilot plant on the North Slope. In an effort to commercialize North Slope gas, no stone will be left unturned. Therefore, the merger will take a quantum leap forward towards achieving that goal. He noted that BP will continue to be actively involved in the state and federal lease sales, including the upcoming NPR-A sale. Furthermore, BP will continue to pursue exploration and development opportunities in Alaska. He acknowledged that the combined onshore exploration holdings of both companies will exceed that allowed. Therefore, BP is prepared to reduce the amount of onshore exploration holdings in order to comply with state limits if the state so desires. BP will also do everything it can to make spare capacity in North Slope facilities and infrastructure available to others so as to encourage additional development on the North Slope. Mr. Campbell continued by saying, "We will increase by 50 percent our financial support of community organizations in Alaska from the current combined level of BP-Amoco and ARCO, that is from [$]4 million a year to $6 million a year." BP will continue to encourage its managers, staff and business partners to participate in and support community activities and organizations. He further pledged that BP will honor all current agreements with ARCO's contractors and suppliers, and treat all business partners with dignity and respect. "The reasons are simple since we believe a robust and competitive local contractor market is in everyone's interest." Number 1294 MR. CAMPBELL recognized that there is a great deal of concern about the size, influence, power, and competition within Alaska that could result upon approval of this deal. However, he pointed out that BP has been responsible and responsive corporate citizens of Alaska for 40 years which won't change. He commented, "As the importance of Alaska grows in BP-Amoco's global portfolio, so does our sense of responsibility to Alaskans. Our bigness, the experience, the skills, the financial resources and the stability we bring will be Alaska's competitive advantage, not a competitive threat. We're not competing against Alaska for shares of a shrinking pie, we are partnering with Alaska to compete together for a larger slice of a global investment pie. We will be an even more powerful ally of Alaska in this quest." In conclusion, he reiterated that the new combined organizations will maintain the same high standards of environmental, safety and social performance that the two companies maintained separately. REPRESENTATIVE COWDERY requested a rough estimate of the amount of land leases, in acres, that each of company now holds. MR. CAMPBELL estimated that the combined total will be 860,000 acres of onshore state lands. He estimated that the offshore total is 350,[000], but he could not split it unless Mr. Meyer knows ARCO's amount. REPRESENTATIVE COWDERY clarified that he was interested in the amount of land BP and ARCO presently own. MR. CAMPBELL estimated that BP owns close to 500,000 acres independently. MR. MEYERS said that he believed ARCO to hold about the same. He pointed out that there have been some recent lease surrendering between the two companies, but he didn't know the actual count. "I do know the [indisc.] 60 is correct." He clarified that is acreage that is not unitized or currently under production, although there is additional acreage that is unitized and under production. He further clarified that just reflects onshore state land. Number 1383 REPRESENTATIVE COWDERY foresaw two possibilities. Under one possibility, the new company could maintain the 500,000 acres which would result in disposal of the surplus. The second option would allow BP to keep all the acreage. Representative Cowdery recognized that currently a statute restricts that, but raised the possibility of an exemption. He explained his view that more land out on lease would provide more opportunity to explore and develop. Representative Cowdery inquired as to who is each company's primary oil field service contractors. MR. CAMPBELL commented that both probably use the same companies in different areas. He identified the oil field service contractors as VECO Corporation, APC, ASRC in its various forms, Houston Engineering, Houston Contracting, and others. MR. MEYERS specified that on the drilling side there is Doyon, Neighbors, Pools. On the catering side there is Doyon and NANA Marriot. He turned to the engineering side which utilizes Apple and Alaska Amble [ph]. MR. CAMPBELL said those are the ones most recognizable in Alaska. However, there are a whole series of international sales companies such as Slumberge' [ph], Baker-Hughs, as well as those who also provide services through local companies. REPRESENTATIVE COWDERY asked then if the intent, if the merger occurs, is to continue to use the same contractors with about the same ratio with the combined companies. MR. CAMPBELL stated that BP doesn't know the full detail of what contracts ARCO has, and that knowledge won't be forthcoming until after the deal is concluded or approved. He restated BP's commitment to continue all the contracts that ARCO currently has. REPRESENTATIVE COWDERY inquired as to the affect of this restriction of leases in Cook Inlet due to Judge Murphy's [ph] recent ruling. MR. MEYERS informed the committee that ARCO bid in the Cook lease sale. Although Cook Inlet is ARCO's origin in Alaska and remains something that ARCO still has an interest in, ARCO's focus over the last few years has been on the North Slope. Nonetheless, it is always of concern when perspective acreage is withdrawn from a sale. He believed the industry has shown that it can develop in an environmentally sound fashion. Mr. Meyers said, from ARCO's perspective, it is always disappointing when acreage is removed from a sale. Number 1570 REPRESENTATIVE PHILLIPS recalled Mr. Meyers' statements that the only way to create a better future for the oil industry in Alaska is to make the industry more cost effective and this reorganization of both companies will bring the same for the future of Alaska. MR. MEYERS agreed and stated his belief that the merger will result in increased capital spending, and as a result increased investment. Hopefully, that will lead to increased exploration leading to more development and new fields which is the ultimate solution to the decline. He indicated that he wasn't sure that he answered the question. REPRESENTATIVE PHILLIPS clarified that she recognized the fact that Mr. Meyers thought this merger will be the best for the future of the industry. However, Representative Phillips wanted to approach the merger from the view of what is best for the future of Alaska. MR. MEYERS said he believed that from the standpoint of what is best for Alaska, the answer remains the same. A significant part of Alaska's economy, as well as a significant part of the state's revenues come from the oil industry; therefore, improvements to the longevity and viability of the industry are in the best interest of the state, in terms of its economy as well as state revenue. REPRESENTATIVE PHILLIPS recalled Mr. Meyers' comments regarding the concept of merging in order to increase cost effectiveness as a single-source provider. She asked, "Was ARCO ever looking at an ARCO-BP intertwining as that single-source provider without this -- this concept happening that we are looking at today?" MR. MEYERS answered yes, although he noted it wouldn't have been to the same extent. He commented, "We were looking at a single operatorship at Prudhoe Bay." Mr. Meyers pointed out that BP has, for years, been consolidating operations in that one organization drills for all the Prudhoe Bay unit which is run by BP-Amoco, one organization does all the project engineering for Prudhoe Bay which is run by ARCO, and one organization provides all the road and pad maintenance for Prudhoe Bay which is run by ARCO. This merger consolidates all of ARCO's operations across the slope; therefore, this is the ultimate consolidation in terms of efficiencies, and removal of redundancies from the two organizations. Number 1723 REPRESENTATIVE GREEN commented that it has been the "Big Three," for the last 22 years. He inquired as to what Mr. Meyers saw as the relationship between the merged company and Exxon as the other big investment. He asked if this merger will create any animosity due to many of the leases that were jointly held with ARCO and Exxon. MR. MEYERS acknowledged that ARCO and Exxon, in a large part of the North Slope, have been very aligned partners with very similar interests dating back almost to the days of the discovery of Prudhoe Bay. He said that ARCO has had and intended to maintain a close partnership because of those aligned interests. Therefore, from a purely ARCO perspective, one might predict there'll be less alignment with Exxon in that. However, from a global perspective, Mr. Meyer believed the merger helps achieve closer alignment between the interests of the merged BP-Amoco, ARCO entity and Exxon. REPRESENTATIVE GREEN expressed concern with Mr. Meyers' last statement regarding the global perspective, because "we're selfishly looking at Alaska." MR. MEYERS clarified that he was referring to the North Slope global perspective. MR. CAMPBELL added that there are obviously, relationships with Exxon on the slope which would continue to be governed by the relative contracts and agreements in place. He indicated that BP is involved with Exxon in many parts of the world and enjoys a good relationship. Mr. Campbell believed it useful, in terms of relationships, when the two parties at the table are of a roughly equal size because it usually means that agreements can occur more quickly. REPRESENTATIVE GREEN continued by asking whether this merger would have any affect on the attitude toward partnering, especially partnering with independents. MR. CAMPBELL answered that he didn't think the merger changes their attitude. He informed the committee that BP-Amoco has its own series of partnerships with other relatively smaller companies on the North Slope. He suggested that the acreage beyond the statutory limit of 500,000 acres could potentially provide more opportunities for partnering with other companies. REPRESENTATIVE GREEN recalled that for the last several years ARCO has been fairly active in the Cook Inlet area, which he recognized as a more mature basin than the North Slope, while BP has been more of a North Slope operator. Will this merger adversely affect continued exploration in the Cook Inlet area? Many believe there remains an awful lot of oil and gas to be found in Cook Inlet. MR. CAMPBELL agreed that BP has not been active in the Cook Inlet for some time. He explained that once the deal is concluded and all of ARCO's data is available then review of Cook Inlet, in terms of where that acreage would play in BP-Amoco's portfolio in Alaska, would occur. Clearly, BP-Amoco will uphold all of ARCO's contractual arrangements in that area. Number 1953 REPRESENTATIVE BERKOWITZ asked Mr. Campbell what role he believed the increased holdings will have in BP's global, around the world, strategy now. MR. CAMPBELL echoed his earlier comments that Alaska will remain a large part of BP-Amoco. "The $26 billion that -- that's involved in making this deal happen is in very -- is in a large part acquiring additional Alaskan opportunities, which we are clearly going to follow up on in an -- in an energetic and efficient way." That is reflected in BP-Amoco's commitment to spend $5 billion over the next five years. REPRESENTATIVE BERKOWITZ inquired as to which pricing scheme Mr. Campbell anticipated BP-Amoco will use in the future; the ARCO, the BP, an amalgam, or an entirely different pricing scheme. He clarified that he was speaking in relation to the spot price. MR. CAMPBELL stated that the spot price is set by an international market. The market for ANS (Alaska North Slope) in Pad Five, the western U.S. states, is a global market. Only 35 percent of the oil in Pad Five is ANS. He explained that the market is set by lots of other crude that come into that marketplace. REPRESENTATIVE BERKOWITZ turned the question to refinery prices, and any other prices where there are currently differences between ARCO and BP. Representative Berkowitz understood that there are different returns to the state based on different prices. He believed that currently, BP has an incentive to go with a higher price while ARCO has an incentive to go with a lower price. What will happen in the future? CHAIR BARNES clarified that Representative Berkowitz was speaking about tariffs. Under the old Dinkum Sands settlement, one of the two companies has a lower tariff than the other which affects the amount of money the state receives. MR. CAMPBELL surmised that reference is to shipping tariffs. CHAIR BARNES indicated that it also has to do with the delivery through the pipeline. MR. CAMPBELL reiterated his comments about the spot price which is an international price-setting mechanism. With regard to any differences between agreements that BP-Amoco has with the state or ARCO has with the state, he was sure that will be the subject of discussions the state may want to have with us. He said that whenever the state reveals what it wants in respect to that, we can respond. REPRESENTATIVE GREEN explained that a transaction that takes place between the crude that comes off of a ship to an end point, whether it's on the west coast to a refinery, or through the Canal to an east coast or a gulf coast area. He interpreted the question to be regarding whether the stream makeup will remain as it is. In other words, "if it's worth $16 at point A, then you start with reduced -- reducing certain costs to get it back to the wellhead. And your trip is a little further than ARCO's trip, and so the -- the net back is going to be more favorable, hence, the royalty and -- and the downstream to, as far as the state is concerned." MR. CAMPBELL responded that he would be speculating if he were to say more. "Who's to say where the marketplace will go into the future." He reiterated again that those prices are set by the global marketplace. Number 2174 REPRESENTATIVE OGAN referred to the LNG project and the working group that was formed, which many have a fair amount of anxiety about. He recalled a meeting with Mr. Campbell, a couple months ago, during which Mr. Campbell presented a series of charts and explanations regarding his view of the world market. He was left with the impression that BP was at least pulling its person out of Alaska and returning to London. Representative Ogan commented that many have invested a lot of time over the past couple of years in developing legislation which spurred the LNG working group, of which ARCO's a part of now. He asked if the gas pipeline, the LNG gas pipeline is dead. MR. CAMPBELL indicated that there is interest in commercializing all that gas on the North Slope which could happen with LNG, with gas-to-liquids, with converting it into electricity and bringing it down by wire out of the North Slope. He believed that the combination of BP-Amoco and ARCO brings two sets of thinking to this as well as additional resources. Mr. Campbell pointed out that BP-Amoco has already committed to building a gas-to-liquids plant there, which follows one potential course of commercialization. Furthermore, BP-Amoco is committed to the LNG sponsor group. Mr. Campbell expressed excitement with regard to the commitments placing the center of BP-Amoco's gas technology into Alaska. Although that's relatively small in terms of people, 20 to 25 people, it is all of the expertise that BP-Amoco has in the gas technology in Alaska. Mr. Campbell assured the committee that he was going to make sure commercializing North Slope gas is on the top of that agenda. TAPE 99-13, SIDE B Number 0001 REPRESENTATIVE OGAN interpreted that to be in direct competition with Alaska for which he had some serious concerns. He identified natural gas as "the ace in the hole in Alaska on the North Slope." MR. CAMPBELL pointed out that there are going to be gas developments around the world that will be in competition with Alaskan gas. Mr. Campbell identified BP-Amoco's task, through whatever means, as attempting to make Alaskan gas as competitive as possible. To that end, BP-Amoco will certainly work with "you." Number 0117 REPRESENTATIVE OGAN expressed concern that internal competition may be a larger factor than before. MR. CAMPBELL agreed that internal competition will be present. He reiterated that his task is to ensure that he does everything possible to present the case for Alaskan gas. The combination of BP and Amoco brings a lot of new LNG expertise into that joint company, given the involvement that Amoco had in LNG. He assured the committee that BP-Amoco is determined to present the case for Alaskan gas. REPRESENTATIVE OGAN turned to what the larger picture would look like with regard to BP-Amoco's natural gas holdings worldwide, assuming the merger goes through. MR. CAMPBELL agreed to provide that information, but wasn't sure he could do so in its entirety today. He stated that, globally, gas will represent about 35 percent of our production. Number 0252 CHAIR BARNES commented that she sees additional competition in the marketplace for gas with the merger. Chair Barnes believed that ARCO sought a willing buyer not because ARCO wasn't making money in Alaska, but rather they couldn't finance other projects around the world, such as Tan Gu(ph). She recalled that the Tan Gu(ph) project "has about 11 trillion cubic feet of gas at the onset to go into a marketplace, which, obviously, displaces some of the 14 million metric tons a year that we, as Alaskans, would have to put into a gas market if we were going with a natural gas pipeline. " She then turned to the working group. When ARCO put together the working group, they came up with the four other partners in addition to themselves. Both BP and Exxon refused to participate, and showed no inclination to ever support this working group. Chair Barnes expressed her belief that it is in Alaska's interest not to build a gas-to-liquids project at Prudhoe Bay, but rather to take Alaska's gas to the market down the gas pipeline and out by tankers into the Asian marketplace. She said, "Now, I want you to tell me how, with these new holdings you have, plus I think you've put $11 billion into Australia, that you will look at bringing Alaska's gas into an Asian marketplace where I believe that is the only effective place for us to take our gas. And I know that you're going to say gas-to-liquids, $70 million. I don't think that means anything to Alaska." MR. MEYERS turned to the question of why did ARCO do this deal. He said, "ARCO did not do this deal because we weren't making money. We had a sound balance sheet. We were making money. The company was not bankrupt. That was not the issue behind doing the deal." He agreed with the Chair, in that ARCO wasn't driven to do a deal because of Alaska. ARCO is very proud of Alaska and what it has accomplished here, although the same cannot be said worldwide. He identified the driving force behind this deal as simply the return to ARCO's shareholders. Upon review of ARCO's performance and comparison to competitors in the industry, ARCO's performance has lagged the last few years. He reiterated that the impetus was what could ARCO do to improve the return to its shareholders. That resulted in ARCO looking for numerous options, which eventually led to the conclusion that a merger was the best direction to head. He felt that information would be helpful for the committee to consider, although that doesn't answer the Chair's main question. Number 0560 MR. CAMPBELL disagreed with the Chair "on the worth of $70 million gas-to-liquids plan on the North Slope of Alaska because I think bringing that technology here, proving that technology here is a step forward in investigating whether gas-to-liquids can be part of commercializing gas on the North Slope for -- for Alaska." He acknowledged that there is an awful lot of gas on the North Slope. He pointed out that gas-to-liquids can be done in a modular way. A plant can be built using 300,000 million [indisc.] cubic feet of gas per day, which can be added to incrementally. Furthermore, the existing pipeline could be used as well as Alaskan industry to build the equipment in Alaska. "LNG requires ... a gas line that will cost an awful lot of money." He noted that, in terms of construction, the boom will be short and will not provide ongoing construction jobs in Alaska. MR. CAMPBELL turned to Tan Gu(ph) which he said will remain a competitor for Alaskan gas when it's part of the BP-Amoco portfolio, as it was when owned by ARCO. Furthermore, there will be internal competition inside BP-Amoco between those two projects that will remain. He commented, "We need to work with you to ensure that the Alaskan gas is going to be more competitive and that's going to be done through a mechanism of the gas sponsor group, and whatever other issues and ideas we have between us to ensure that that is a more competitive scheme." CHAIR BARNES inquired, with regard to Mr. Campbell's statement that BP would bring a $70 million gas-to-liquids plant to Prudhoe Bay in order to try out the technology, as to how many years that would take. MR. CAMPBELL clarified that the plant may not be located at Prudhoe, but will be on the North Slope somewhere. He believed that the life of that sort of pilot plan will be about 18 months, in terms of proving the technology at that scale. He specified that he was referring from the time starting it up. Number 0753 CHAIR BARNES commented that therein lies the problem. If BP-Amoco is given 18 months to try the technology, how long does it take to build the plant; perhaps, that's a three-year period. She pointed out that in order for Alaskan gas to get into the marketplace and be competitive, it must occur as early as 2005, and certainly not later than 2007. Therefore, if this gas-to-liquids project is allowed to continue without getting Alaska's gas into the marketplace via pipeline, Alaska is dead in the water. Chair Barnes didn't believe there is enough time to have BP attempt the gas-to-liquids process and get Alaska's gas to market through the pipeline, in a timely fashion, in order that Alaska can be competitive in the world marketplace. MR. CAMPBELL expressed his preference to view the work on gas-to-liquids as something that occurs parallel with the work on LNG, not at the expense of work on LNG. He reiterated that there is an awful lot of gas on the North Slope. He used LNG as an example, in that BP wants to start the LNG project in a relatively small way and build up the sales. This isn't an either or situation in his mind, or in the mind of BP. MR. MEYERS said that Mr. Campbell has hit upon the strategy with the sponsor group. He explained that one of the sponsor group's goals is to try to develop a scheme by a smaller project which can penetrate the market earlier, and then build from there. It is difficult to place 14 million metric tons a year. Therefore, we're attempting to find that minimum feasible project scope in order to penetrate the market and start building from there. At the same time, ARCO is also looking at its own GTL technology. He agreed with Mr. Campbell that it doesn't have to be an either or situation. At this point, from ARCO's perspective, both are worth maintaining parallel paths. CHAIR BARNES recalled that Mr. Campbell said that BP would put $5 billion into the North Slope over five years, which is a billion dollars a year. "I would like to understand how we can have that guarantee from you. I would also like to understand, just as we got a guarantee on North Star, I would like it through the state, in writing from BP, if this merger goes through, that you will -- you will use Alaska workers, Alaska contractors, to the greatest extent possible. I don't want anymore modules built in Canada and floated up the McKenzie River. So, I would like to know how you will assure that these things are going to take place." MR. CAMPBELL addressed North Star by saying that BP has done everything it can to fulfill its obligations on North Star. He said that he has spent $140 million on North Star to this point. CHAIR BARNES acknowledged that U.S. Fish and Wildlife is holding up the permitting project. She clarified that she was inquiring as to how Alaska could receive the same assurances in writing as received on the North Star project. How can Alaska receive assurances that once BP becomes this huge operator at Prudhoe Bay, that it will utilize Alaskan workers, contractors and buy Alaska. MR. CAMPBELL stated that he would stand on BP's record, in terms of Alaska purchase and Alaska buy which he believed to be a very good record. He informed the committee that 85 percent of all the work BP does on these projects is done in Alaska with Alaskan contractors. CHAIR BARNES commented, "Well, let's have BP stand on your record since you've been here. It has not always been so good because we are all very ... very aware of the airplanes that fly both ways." She recalled the out-of-state workers that flew both ways and reiterated the need for some assurances. MR. CAMPBELL stressed that policies have been put in place whereby anyone who works for any new employee of BP-Amoco in Alaska must be an Alaska resident. He agreed that occurred about a year ago. Furthermore, there have been incentives to get those people who do commute to move back into the state. Number 1085 REPRESENTATIVE PHILLIPS asked Mr. Campbell, "How do you perceive yourselves to be competitive in Alaska, and how does this new company view, or what is the philosophy of not having a competitive market to operate in, in Alaska?" She inquired as to who the new company, which would own almost all the resource, would be in competition with in Alaska not worldwide. If BP is positioning itself to be more competitive in the Twenty-first Century, who will it compete with? MR. CAMPBELL clarified that the latter portion of his earlier comments about competitiveness were aimed at Alaska being competitive within a BP-Amoco world, and competitive in the sense of attraction of additional investment into Alaska. Clearly, BP has made the commitment that it is going to spend $5 billion over the next five years. That commitment reflects BP's confidence that efficiencies will be achieved and BP will be competitive. As evidenced by the last lease sale in Cook Inlet, Alaska is competitive. He acknowledged that there are differences between Cook Inlet and the North Slope. He noted that although it is an extremely expensive place to operate, there are other companies who are working there, who are partners with BP. There are also companies who are working there independently. He believed it is a competitive environment. REPRESENTATIVE PHILLIPS emphasized that Mr. Campbell's comments address a concept that Alaska may not have not looked at; that is Alaska, as a state, has not looked at itself as having to compete in the global market. She said that notion deserves more conversation at a later date. REPRESENTATIVE PHILLIPS recalled Mr. Campbell's statement that the combined offshore exploration holdings of both companies will exceed the amount allowed, but BP is prepared to reduce that amount to comply with state limits if the state so desires. She asked if Mr. Campbell had made any determination on that yet. With regard to the comments pertaining to partnering with independents, she asked if Mr. Campbell had made any serious agreements with any of these independents at this time. She also asked whether Mr. Campbell had made the determinations on getting rid of those lands. MR. CAMPBELL stated that until all the information regarding the ARCO holdings is available, it is difficult to conclude any study on what acreage to relinquish. He reiterated the possibility, in terms of diluting down the interest that would be held by the joint company, of diluting individual licenses with other companies. In other words, rather than giving it all up, one could reduce one's interest by bringing other people in. Mr. Campbell clarified that he would like to bring that into the conversation with the state, but he noted that he has not had such conversations with other companies. REPRESENTATIVE PHILLIPS commented that she would like to follow-up on that in the future. Number 1367 REPRESENTATIVE GREEN expressed excitement "that there were two fab sites, or other than truckable modules." He asked, "As you move into these other areas that don't have the larger infrastructure, do you see maintaining activities in both places? Will they be concentrated, perhaps, more in one area? Or even a more basic question, do you anticipate continuing to try and build modules in Alaska as opposed to going to Louisiana, some other place, or maybe even some new -- new fab site?" MR. CAMPBELL said that he believed it to be inherent to BP's commitment to Alaska-build to encourage additional work in those yards in Alaska. He indicated the preference of competition in that. He pointed out that the investment in the North Star yard allowed the opportunity for those modules to actually be built in Alaska. That project is progressing in a very positive manner. He commented that the local industry has illustrated what it can do and, therefore, is competitively placed for additional work in the future. MR. MEYERS pointed out that although ARCO operates the MIX project on behalf of the Prudhoe Bay unit, BP-Amoco pays 50 percent of the bill for that project. Therefore, BP-Amoco is the major investor in the MIX project which some may not realize. Mr. Meyers identified another part to Representative Green's question with regard to how busy those yards will be in the future. Regardless of the entity, there must be new projects in order to keep the yards busy; new fields have to be found. He explained that sea-lift modules are large modules, that are only built for 100 million barrel fields and up. The smaller fields can be accommodated with truckables. He informed the committee that in order to have large fields, one must have continued access to acreage. In that sense, the area wide lease sale program plus the potential resumption of leasing in the NPR-A are good news as is the potential for mother nature to place oil underneath that acreage. However, new discoveries must occur in order to keep those yards filled. REPRESENTATIVE GREEN commented that he understood the economic issue, that it's a matter of dollars. Representative Green turned to the earlier reference to Alaska jobs. He reviewed what happened over the downsizing years that were experienced with the low crude price; the merger poses even more lost jobs. When those jobs are reduced significantly, there's a lot less money in circulation in the full economy of the state. Although Representative Green recognized this is a matter of economics, he asked if there will be a continuation of hiring Alaskans for those jobs left, or will some out-sourcing occur as is the case with the accounting in Colorado. Number 1581 MR. CAMPBELL explained out-sourcing is a way of supplying services which BP-Amoco utilizes. He acknowledged that BP-Amoco has out-sourced IT and accounting. However, that doesn't mean that jobs leave the state, but rather people are transferred from being employed by ARCO or BP to being employed by somebody else. He said that he would certainly be looking at the IT area and the accounting area in terms of out-sourcing. CHAIR BARNES directed discussion to the MIX module. She understood that module came in under budget and it's production is about 110 percent of what it would have been in the Lower 48. If those are correct figures and Alaska has the fields to develop, then can Alaska depend on having, whether it be truckables or sea-lift modules, it built in Alaska. MR. MEYERS clarified that he hasn't seen the most recent numbers, but in general the Alaskan workers working at the MIX module have at least equaled the productivity of those in the Gulf of Mexico. He noted that there has been discussion regarding the construction of these really large modules, sea-lift modules, which are about a 2,700-ton module(a nine-story building that moves). One of the big questions revolved around the weather for working conditions which is a little nicer in the Gulf of Mexico year around than in Alaska. Furthermore, could Alaska be as productive? So far, Alaska has been as productive. Although he reiterated that he hasn't seen the most recent numbers, he said that he wouldn't be surprised if production is up to 110 percent now. MR. MEYERS said that another issue revolved around whether Alaska would be competitive in terms of a profit basis. He answered yes; the Alaska contractors, especially those involved with the MIX project, have worked to make themselves competitive. With regard to labor rates, as a whole there tends to be higher labor rates in Alaska which the other two components sort of have to work against. However, if the productivity's there and one works with the company in the profit component, he believed Alaskan contractors, as evidenced by the MIX module, are competitive with the Lower 48. He described the MIX project as a well designed, well managed, well engineered project. Similarly, when ARCO has confidence that Alaskan contractors are going to perform they get the work. However, the company has an obligation to its shareholders, so if there's any question about their ability to perform, the company has to do what's right for its shareholders. CHAIR BARNES commented that committee members have an obligation to their shareholders as well. She indicated that Alaskans not only want a fair market return for their resources, but they also want to provide jobs and services to Alaskan workers. Chair Barnes turned to her previous question, how can Alaskans ensure that $5 billion will be spent over five years? She said that such comments make one inclined not to be as watchful as one should be. Furthermore, when there are only two real players, the merged BP-Amoco ARCO and Exxon, there is reason to be concerned and to protect our shareholders' interest. MR. CAMPBELL reiterated that the MIX project is a very efficiently done piece of work and places the Alaskan contractor in good stead in competing for ongoing work in the state. He commented that he believed there are more than the two companies that the Chair mentioned involved in making decisions about what happens in terms of giving contracts. BP has partners and there are other independents who are working. Mr. Campbell pointed out that the committee not only has his commitment of BP-Amoco in terms of capital expenditure over the next five years, but also the commitment of BP-Amoco's managing director. He was unsure how much farther he could go in ensuring everyone that BP-Amoco's managing director meant what he said. Number 1884 REPRESENTATIVE PHILLIPS recalled Mr. Campbell's remarks with respect to honoring all current agreements with ARCO's contractors and suppliers, and to treat all business partners with dignity and respect. She asked if BP has placed a time limit on those contracts with regard to how long they will be honored. In other words, if a person has a three-year or a four-year contract with ARCO right now, would BP honor the contract for the length of the contract? MR. CAMPBELL responded that the contract would be honored for the length of the contract. REPRESENTATIVE PHILLIPS referred to U.S. Senator Roth's recent introduction of a bill to permanently lock up ANWR for development. She was sure that will be a major issue for debate in the new organization, and Alaska will want to be a partner with you on this in order to ensure that this bill is not passed. She requested both Mr. Meyer and Mr. Campbell comment. MR. MEYERS stated that it is not in any of our interests to have ANWR locked up. He commented that the industry has demonstrated that it can develop and protect the environment. Furthermore, he believed it to be in the best interest of all Alaskans to see that development move forward. Therefore, from ARCO's perspective, ARCO does not want to see ANWR locked up. MR. CAMPBELL reiterated that BP will be at the NPR-A sale. He noted that BP has had a long-run interest in ANWR and, "We will be with you and that will be an effort." REPRESENTATIVE PHILLIPS commented that as a state, Alaska has spent a tremendous amount of money lobbying for ANWR over the years. "We will want to make sure that you're there with us lobbying in D.C., against this." Number 1988 REPRESENTATIVE JOULE asked if building modules in Alaska for other locations, for projects like Sakhalin, is doable. MR. MEYERS said that projects such as Alpine being built in Nikiski and MIX being built in Anchorage, have demonstrated that the Alaskan work force can build modules effectively. However, the success in the world marketplace depends upon their competitiveness. He noted that just as Alaska wants Alaska hire, those in Sakhalin would want their modules built in Sakhalin. Therefore, Alaskan fabricators are going to face the same regional desire to have modules built locally, but they will also have to compete. Alaska will have to compete against locally built modules in Sakhalin, as well as Malaysia, Indonesia, Singapore, and Korea. Mr. Meyer said that he didn't know the module-building business well enough to discuss Alaska's competitiveness and deferred to the experts. REPRESENTATIVE KERTTULA inquired as to the efforts being made to keep the ARCO employees working for BP. MR. CAMPBELL commented that, at this point, about 400 redundancies would result from the combination of the two companies. He believed those redundancies will be largely in Anchorage while the affect on the North Slope will be relatively small. Currently, there are about 900 ARCO employees and about 400 BP employees on the North Slope. Therefore, in the combined company there will be far more ARCO people than BP people in terms of jobs on the Slope. Mr. Campbell predicted that the combination of the two companies would result in a mix of employees that's approximately 50 percent from BP-Amoco and 50 percent from ARCO. REPRESENTATIVE KERTTULA asked if there will be any assistance for those BP and ARCO employees, who wish to relocate within Alaska , who are going to lose their jobs. MR. MEYERS echoed Mr. Campbell's comments that the majority of ARCO's employees will have a job with the new entity. He commented that during this process, one of his jobs is to make sure that the number of ARCO employees increases. TAPE 99-14, SIDE A Number 0001 MR. MEYERS informed the committee that there are a choice of four packages to choose from. The minimum package consists of a six-months salary, from there it becomes more generous. He explained that there are four packages because some of ARCO's employees are nearing retirement age and may prefer an enhanced retirement package as opposed to a lump sum cash payment. With regard to the relocation aspect, Mr. Meyers was not sure of that yet. He emphasized that in the past, ARCO's policy has been to relocate people at least to the point of their origin or an equivalent distance. However, Mr. Meyers stressed that he hasn't seen the final details. MR. CAMPBELL added that the BP-Amoco package is similar. Number 0136 REPRESENTATIVE OGAN asked Mr. Campbell whether it is true that BP is paying a rather generous premium to the stockholders of ARCO for this merger. MR. CAMPBELL explained that the deal "is an all paper deal whereby ARCO stockholders will obtain shares in BP-Amoco." He said that, in line with the marketplace, a premium will be paid, and the level of that premium will depend upon what the relative share prices are on that day. He recalled that the day the deal was struck, the premium was about 20-25 percent which falls in line with other deals done in the industry. REPRESENTATIVE OGAN inquired as to whether BP is open to discussing a premium for Alaska. MR. CAMPBELL said, "I didn't know Alaska was for sale." Mr. Campbell commented that he was not sure that he understood Representative Ogan's question. REPRESENTATIVE OGAN indicated that BP had to have done something to sweeten the deal for the stockholders of ARCO. Representative Ogan said, "You know, Alaska is for sale. We -- we -- we sell our -- the rights to our -- our oil, you know, in our royalty and do a lot of business, and I just thought maybe see if the door was even open for a discussion ... sweeten the deal for us." MR. CAMPBELL pointed out that a large portion of the $26 billion that is being paid in this deal is in relation to Alaskan assets, "which we are going to invest a lot of money in developing." He said, "I think that will ensure an efficient oil industry in Alaska for the long run, and will sustain production. I think that's where Alaska wins out." MR. MEYERS explained that part of the reason these transactions can occur is because redundancies will be removed from the system. The cost reductions taken will result in increased earnings to the shareholders. Therefore, care must be taken when using the word premium. Mr. Meyers said that he couldn't comment further because the process is in the quiet period. However, he noted that this merger will result in a significant reduction in cost; as BP has quoted, about $1 billion a year. In part, that reduction can justify what Representative Ogan referred to as the premium. Number 0392 REPRESENTATIVE GREEN acknowledged that Mr. Meyers and Mr. Campbell are upstream types. He posed a situation in which ARCO became the number one marketer in California and performed a marketing ploy that was very effective. The marketing ploy eliminated credit cards and reduced the price of their product. Representative Green understood that BP sold their marketing in the Northwestern area. He asked if there was any feel as to whether BP would market in such a case, under ARCO, or their own brand, or a different brand? This all returns to whether there will be this continued strong emphasis on North Slope crude being refined and sold on the west coast. MR. CAMPBELL answered that he did not know. He reiterated that it is a global marketplace and the conditions will be set by global competition. CHAIR BARNES commented that there are several areas that have not been covered such as pipeline ownership, tankers, and how the company would divest itself of the additional acreage if required to do so. Chair Barnes announced that she did not wish to keep Mr. Campbell or Mr. Meyer any longer this evening, but would entertain having them return again. She indicated the need to ensure that, whatever happens, everyone continues to have a good working relationship and that the interest of Alaska's stockholders are protected. She viewed Prudhoe Bay as now having only Exxon and BP and Alaska doesn't have the same relationship with Exxon as it does with BP and ARCO. Exxon does not have much of a presence in Alaska. Chair Barnes thanked Mr. Campbell and Mr. Meyers. REPRESENTATIVE PHILLIPS expressed appreciation of the forthrightness of the answers today. She expressed the need to further discuss Alaska's relationship in the future of the global market as far as Alaska being that partner, or that player. REPRESENTATIVE GREEN also appreciated the candid nature of the answers today. CHAIR BARNES asked if any other legislator had any further comments. She thanked Mr. Campbell and Mr. Meyer again. ADJOURNMENT There being no further business before the committee, the House Special Committee on World Trade and Federal/State Relations meeting was adjourned at 6:48 p.m.
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