Legislature(1999 - 2000)
04/13/1999 05:00 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 13, 1999
5:00 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
MEMBERS ABSENT
Representative Reggie Joule
OTHER HOUSE MEMBERS PRESENT
Representative Brian Porter
Representative Jim Whitaker
Representative John Harris
Representative Scott Ogan
Representative Beth Kerttula
COMMITTEE CALENDAR
OVERSIGHT HEARING: PROPOSED PURCHASE OF ARCO, INC. by BP-AMOCO
PREVIOUS ACTION
No previous action to record.
WITNESS REGISTER
JOHN SHIVELY, Commissioner
Department of Natural Resources
400 Willoughby Avenue, 5th Floor
Juneau, Alaska 99801-1724
POSITION STATEMENT: Discussed Alaska's oil development history.
PATRICK COUGHLIN, Deputy Director
Division of Oil & Gas
Department of Natural Resources
3601 C Street, Suite 1380
Anchorage, Alaska 99503-5948
Telephone: (907) 269-8779
POSITION STATEMENT: Answered questions.
JACK (JOHN) GRIFFIN, Assistant Attorney General
Oil, Gas & Mining Section
Department of Law
1031 West 4th Avenue, Suite 200
Anchorage, Alaska 99501-1994
Telephone: (907) 269-5100
POSITION STATEMENT: Discussed the current fiscal regime and how
the merger may ultimately affect Alaskans.
BRUCE BOTELHO, Attorney General
Department of Law
PO Box 110300
Juneau, Alaska 99811-0300
Telephone: (907) 465-2133
POSITION STATEMENT: Discussed the merger.
ACTION NARRATIVE
TAPE 99-10, SIDE A
Number 0001
CHAIR RAMONA BARNES called the House Special Committee on World
Trade and State/Federal Relations meeting to order at 5:08 p.m.
Members present at the call to order were Representatives Barnes
and Cowdery. Representatives Masek, Phillips, Green and Berkowitz
arrived as the meeting was in progress. Representative Joule was
not present. Representatives Porter, Whitaker, Harris, Ogan and
Kerttula were also present. [Tape commences with Commissioner
Shively's testimony.]
CHAIR BARNES announced that the committee's agenda today was to
begin an oversight hearing of the proposed purchase of ARCO, Inc.
by BP-Amoco.
JOHN SHIVELY, Commissioner, Department of Natural Resources, stated
that he would review the history of Alaska's oil development in
order to understand the role oil development has played in Alaska,
even before statehood. The first oil claims were staked in Alaska
in 1896 around Catalla (ph) which is near Cordova. There was a
discovery there in 1902 and production occurred until the facility
burned. There was a fair amount of exploration in the state during
the 1920s which increased in the 1930s and 1940s, particularly in
the National Petroleum Reserve-Alaska (NPR-A). In the 1950s oil
development started to get very serious in Cook Inlet. People such
as Bob Atwood, Elmer Rasmuson, Lot Jacobs, and Jack Roderick, and
companies like Richfield (which eventually became part of ARCO),
Marathon, and Unocal promoted oil development. In 1955 they formed
the Swanson River unit where ARCO announced a discovery two years
later. In 1957 Chevron bought into that also. "At that time,
there were over 100 companies active in the state." Of course,
Alaska became a state shortly afterwards. Commissioner Shively
believed that the revenues from that area did play a role in
Congress's determination that Alaska could survive as a state as
well as Alaska's ultimate survival once statehood was achieved.
COMMISSIONER SHIVELY continued with the 1960s during which there
was a fair amount of activity in Cook Inlet. Chevron opened a
refinery in 1963. Shell set the first offshore platform in 1964
which was the same year the Tyonek Indian reservation sold leases
on its reservation. Offshore production in Cook Inlet started in
1967 and in 1968 Unocal's fertilizer plant began operation.
Tesoro's refinery and the LNG (liquefied natural gas) plant that
Phillips/Marathon operated began in 1969. Commissioner Shively
emphasized that 1969 was a critical year in the oil industry
because the governor left in that year to start Grizzly Burger. If
he had stayed, Alaska might have a little different oil history.
Commissioner Shively moved forward to 1990 in Cook Inlet when
Unocal started buying up Amoco, ARCO, Chevron, and Texaco's oil
interests in Cook Inlet. In 1994 UTP, who was ultimately purchased
by ARCO, came to Cook Inlet. In 1996 ARCO and Anadarko signed an
agreement, and Anadarko became active in oil in Alaska as did
Forcenergy. That brings us to where Cook Inlet is today.
Number 0484
COMMISSIONER SHIVELY acknowledged that the North Slope developed
later. In 1958 BP and Sinclair first teamed up to explore North
Slope acreage and in 1959 BP opened its first office in Alaska. In
January of 1964 the state selected the area that encompassed
Prudhoe Bay. He noted that there was criticism by some politicians
concerned with the state acquiring a bunch of wetlands well north
of the Brooks Range. However, it turned out to be a relatively
good decision. The first sale was in 1964 and netted the state a
little over $5 million. A second sale occurred in 1965, but the
state did not lease all the tracts around Prudhoe Bay. In 1968
Atlantic Richfield and Humboldt announced the discovery of Prudhoe
Bay and ARCO, BP, and Exxon formed what became the Alyeska Pipeline
Service Company. At that time, BP and Standard of Ohio also became
partners and BP drilled a confirmation well.
COMMISSIONER SHIVELY noted that the pipeline was officially
proposed in 1969. During September of that same year the state
held, probably its most famous lease sale, the $900 million lease
sale. Other companies such as Amerada Hess, Phillips, Mobil and
Unocal joined in the Trans-Alaska Pipeline System (TAPS) effort in
1969. That same year Sinclair and BP discovered Kuparuk, Atlantic
Richfield acquired Sinclair, Conoco discovered Milne Point, and
ARCO and BP agreed to a joint operation of Prudhoe Bay. As the
1970s began, the pipeline itself was slowed down through litigation
over environmental issues and Native claims. In 1971 the Alaska
Native Claims Settlement Act was passed. In the following year,
1972, the legislature began "debates on the pipeline with a variety
of different proposals, including one from then-Governor Egan that
the state actually owned the pipeline. Ultimately, ..., in 1969
the Governor and the Attorney General negotiated a compromise with
the oil industry that basically set the framework for the
right-of-way leasing laws and severance tax and property taxes that
are, more or less, in effect today." The pipeline was authorized
by Congress in 1973. During that same time, Congress did not ban
any export of North Slope oil. In the following year, 1974, the
haul road began. The pipeline was completed in 1977. That year,
Unocal drilled for the first man-made ice island in the Beaufort
Sea and Exxon also drilled its first well at Point Thomson. The
next year BP discovered Endicott. Commissioner Shively noted that
1979 was the first year that oil reached $10 a barrel. "So, the
fact that we now think that going below that is a catastrophe, in
1979 it was the record." Kuparuk started up in 1981. BP drilled
Mukluk in 1984 at a cost of over $100 million which was probably
the biggest disappointment, in terms of expense, in the state's oil
development history. That year Texaco and Getty merged. Chevron
purchased Gulf Oil in 1985.
Number 0750
COMMISSIONER SHIVELY informed the committee that oil prices went
from $24 to $12 in 1986 and Conoco shut in Milne Point. The
following year, 1987, Endicott started up. "In '88 Pt. McIntyre
was discovered. In '89 Milne Point was reopened. In '92 ARCO
drilled the Cooglam (ph) well. In '94 BP bought Milne Point from
Conoco and Chevron. In '95 Amerada Hess sold its Prudhoe Bay
interests. In '96 we, with the help of the chairman and others,
negotiated a deal on Northstar with BP. That was also the year
they confirmed the Liberty field discovery. And in '97 ARCO,
Anadarko, and UTP announced the discovery of Alpine." There have
been a variety of players on the slope and in Cook Inlet over the
years. Commissioner Shively commented, "So, the fact that there is
change is nothing new. But, I think what is significant is we've
never seen a situation where one company would exert as much
control, in terms of both ownership and economics, as we'll see if
this merger proceeds."
CHAIR BARNES recalled a place called Duck Island.
COMMISSIONER SHIVELY said that he believed Duck Island is part of
Endicott development; it's either one of the participating areas or
one of the units.
PATRICK COUGHLIN, Deputy Director, Division of Oil & Gas,
Department of Natural Resources, testified via teleconference from
Anchorage. He explained that Duck Island is the unit which
contains the Endicott field.
Number 0905
JACK (JOHN) GRIFFIN, Assistant Attorney General, Oil, Gas & Mining
Section, Department of Law, testified via teleconference from
Anchorage. He said that the recent announcement of the proposed BP
ARCO merger has caused the state to begin re-examining the
principles underlying the way oil and gas on the North Slope is
leased, produced, transported, and marketed. Some feel that the
proposed merger "has pitted the paradigms of diversity and
competition against claims of economic benefits attributable to
greater efficiency." The state must weigh those competing claims
and choose the path best satisfying the mandates of Alaska's
Constitution regarding that the state's resources be used,
developed, and conserved in a manner which maximizes the benefits
of those resources for Alaskans. Mr. Griffin indicated that an
understanding of the current fiscal regime would be helpful in
understanding how this proposed merger might ultimately affect
Alaskans. The state's fiscal regime, as it applies to North Slope
oil and gas development, has the following four principal parts:
the severance tax, the property tax, the oil and gas corporate
income tax, and the royalty obligation.
MR. GRIFFIN explained that the property tax is an annual tax of 20
mills on oil and gas property in the state. He noted that
municipalities may also impose a property tax on such a property
within their borders. "To the extent that municipalities do impose
such a tax, it is a credit that the oil and gas property owners can
take against the state property tax." Therefore, practically
speaking, most of the state's property tax flows directly to the
municipality. Alaska also imposes a 9.4 percent corporate income
tax on income earned from business activities that are taxable in
the state. Mr. Griffin pointed out that oil and gas corporations
are taxed a bit differently from other corporations in Alaska. He
noted the use of worldwide combined reporting. He explained that
the Department of Revenue first determines the worldwide income of
an oil and gas corporation. Then the department reviews the income
of the corporation's affiliate. The portion of that worldwide
income subject to state tax is determined by using apportionment
factors which compare the oil and gas corporation's sales,
property, and barrels produced in the state with its sales,
property, and barrels produced everywhere.
MR. GRIFFIN moved to the principal aspects of the fiscal regime as
it applies to oil and gas development which are severance taxes and
royalties. The two differ in some significant ways. The two are
administered by different agencies. "With respect to the
royalties, the principal difference is that the producer's
obligations there are first contractual which is to say they are
defined principally by the terms of the leases and, ultimately, the
unit agreement that the user signs with the state. The severance
tax, on the other hand, is an exercise of the state's sovereign
taxing power." Although these are significant differences, that
should not "cloud the fact" that these two aspects of the fiscal
regime have substantial similarities. Both severance taxes and
royalties are based on the taxable value. Mr. Griffin explained
that the taxable value and the value for royalty purposes of ANS
(Arctic North Slope) is determined by the netback basis which means
the state reviews the value of the crude at the point at which it
reaches its destination market. He cited the United States' West
Coast as an example. On the West Coast the principal measure of
the value of ANS, for royalty and tax purposes, is the publicly
reported ANS spot price. He indicated that the importance of that
may become more apparent later on. Once the destination value has
been determined, the state tracks the cost of transporting the oil
from the North Slope. Those costs generally fall into the
categories of TAPS or marine transportation.
MR. GRIFFIN turned his discussion to leasing. He informed the
committee that "Outside of units, oil and gas corporations in the
state can hold a maximum of 500,000 acres in onshore state oil and
gas leases. The same 500,000-acre limitation applies to offshore
oil and gas leases." With regard to the BP-ARCO merger, the
combined company would have over 870,000 acres in onshore oil and
gas leases which is 370,000 more acres than currently allowed by
law. Offshore there is not the same problem as the combined
company would have approximately 351,000 acres of oil and gas
leases that are not within units. Mr. Griffin stated that his
materials sent to the committee contain a number of graphs
illustrating the current ownership percentages in the various units
in the state.
Number 1458
MR. GRIFFIN referred to the pie chart entitled "PBU (Prudhoe Bay
unit) Oil Rim." The PBU as a principal reservoir. The Sadlerochit
reservoir within the Prudhoe Bay unit is divided into two
participating areas: the oil rim and a gas cap. He noted that the
oil in the Sadlerochit reservoir is divided differently from the
way gas is divided among the various owners. The "PBU Oil Rim"
graph, the pre-merger graph, provides the percentages of oil from
the oil rim that are currently held by companies doing business on
the slope. That graph points out that BP owns a little over 51
percent of the oil rim, and ARCO owns approximately 22 percent of
the oil rim. Therefore, after the merger the new BP will own over
73 percent of the Prudhoe Bay oil rim. Mr. Griffin moved on to the
"PBU Gas Cap" graph which illustrates that currently BP only owns
13.8 percent of the gas cap, while ARCO owns almost 43 percent of
the gas cap. Therefore, after the merger BP's interests will be
over 56 percent. Mr. Griffin moved to the Kuparuk River Unit of
which ARCO currently owns 39 percent and BP owns 55 percent. After
the merger, BP would own over 90 percent. He noted that he did not
have a Kuparuk River Unit post-merger graph.
MR. GRIFFIN stated that he did not intend to go through every
graph, unless the committee so desires, because the information
illustrates the nature of ownership on the North Slope if the
merger moves forward. He continued with the "Lisburne P.A." graph
which illustrates that BP owns 20 percent and ARCO owns about 40
percent. After the merger BP would own 60 percent of the Lisburne
participating area. Mr. Griffin then directed the committee to the
"Pt. McIntyre - Post Merger" graph which illustrates that BP would
move from an ownership of approximately 32 percent to over 62
percent. He then discussed the newest and closest to production
field on the North Slope, Alpine. He informed the committee that
his graph, "Alpine - Post Merger," contained an error because Union
Texas is now a part of ARCO. Therefore, Union Texas should be
added into ARCO's share which would mean that after the merger, BP
would have 78 percent of the Alpine field.
Number 1648
MR. GRIFFIN pointed out that along with the ownership of the field
comes ownership of the facilities that are used to strip water and
separate gas from the oil and get the oil into pipeline quality.
He indicated that the state needs to examine what it means for one
company to have that much control over the facilities producing the
state's oil and gas resources on the North Slope. With regard to
production, he noted that he would be utilizing the Department of
Natural Resources' production numbers in its latest oil and gas
consumption booklet. He said, "BP ships approximately 40 percent,
including NGLs (natural gas liquids) and royalty and value oils, of
the barrels that move down TAPS. And we know that ARCO ships
approximately 28 percent. TAPs throughput today is approximately
1,160,000 barrels a day." He roughly estimated that BP ships
470,000 barrels of oil a day from the North Slope, while ARCO
currently ships approximately 325,000 barrels a day. That oil is
transported through TAPS. Mr. Griffin noted that the committee
should have several graphs relating to TAPS.
MR. GRIFFIN pointed out that in 1985 when the TAPS settlement
agreement was signed, BP owned 17 percent of TAPS, although his
outline says 34 percent. Currently, BP owns 50 percent of TAPS.
If the merger proceeds, BP would own and control 72 percent of TAPS
and its feeder pipelines as well. He said that BP owns 57 percent
of Endicott which would not change after the merger. At Milne
Point BP owns 91 percent of the pipeline which also would not
change after the merger. However, at Kuparuk BP currently owns 38
percent and ARCO owns 57 percent which would result in BP owning 95
percent of that pipeline after the merger. "The [indiscernible]
pipeline is a pipeline that transports NGLs from Prudhoe Bay to
Kuparuk for enhanced oil recovery. Today that pipeline is owned
100 percent by ARCO. Tomorrow that pipeline may be owned 100
percent by BP." Once the Alpine pipeline is complete, ARCO would
likely own 100 percent of that pipeline and if the merger proceeds,
BP would own 100 percent of that pipeline. Mr. Griffin believed
that to be important.
MR. GRIFFIN said the same situation exists with the ANS tanker
fleet. He informed the committee that Jones Act tankers must be
used in the transfer of oil from Valdez to the West Coast, but
there are not that many Jones Act tankers available for the ANS
trade. "Currently, by tonnage, BP owns 41 percent of those
tankers. ARCO owns 32 percent, and Exxon owns 21 percent. After
the merger, BP would own approximately 73 percent of that tanker
capacity." He reiterated that if an oil company is thinking about
doing business on the slope, it is important to think about access
to facilities, to pipelines, and to tankers in order to get the oil
to market. Here again, BP's control becomes a factor that the
state needs to examine.
Number 1922
REPRESENTATIVE PORTER inquired as to tanker capacity. He noted
that during a discussion with Mr. Doug Webb, Mr. Webb indicated
that a company had been formed which would result in BP only owning
25 percent of that. He asked if Mr. Griffin was familiar with
that.
COMMISSIONER SHIVELY explained that federal law confines BP's
ownership of any tanker company that owns tankers that would
operate and carry North Slope crude to 25 percent or less. He
believed that there are other major owners such as Keystone and
Overseas Transportation which are the other two American-owned
firms. Originally, the company was established by BP to run its
tanker traffic and look for other customers. That company will
take over the ARCO tanker fleet also. He noted that includes
ownership of the three millennium tankers ARCO is currently
contracted to build.
COMMISSIONER SHIVELY explained, in response to Chair James, that he
understood the Jones Act to require the use of a U.S.-built ship
with U.S. crews for shipping between two American ports. He felt
that most people would feel, if the lowest cost producer was used,
those ships and those crews would be non-competitive; however, it
is a federal law.
CHAIR BARNES commented that for many years Alaska crude was not
allowed to be shipped out because of the Jones Act, but an
amendment to that Act allowed us to do that a few years ago.
REPRESENTATIVE WHITAKER informed the committee, based upon a
conversation he had with Mr. Webb yesterday, that his impression
was that the current ARCO tankers probably will not be sold to the
Alaska Tanker Company, the new company, but rather will be leased.
It would still be owned, potentially, by BP.
COMMISSIONER SHIVELY said that he was not positive about that.
However, Commissioner Shively did not believe BP could actually own
those tankers because it is a foreign company and the Jones Act has
certain restrictions on foreign ownership. He deferred to BP or
Mr. Webb on that issue.
REPRESENTATIVE COWDERY commented that he thought foreign bottom
boats could not be utilized, but American bottom boats could be
utilized no matter who the owner was.
Number 2053
BRUCE BOTELHO, Attorney General, Department of Law, offered to
provide a definitive answer later or, as Commissioner Shively
indicated, that question could be posed directly to either BP or
Alaska Tankers. He understood, as did Commissioner Shively, that
the following three criteria must be met: U.S. built; American
crews, and foreign interests cannot exceed 25 percent.
CHAIR BARNES indicated agreement with Attorney General Botelho.
MR. GRIFFIN continued his discussion noting that BP does not
internally refine its ANS nor does BP take its ANS to its own
refineries. BP sells its ANS to third parties and most of BP's
ANS, perhaps the vast majority, goes to the U.S. West Coast market.
Some of BP's ANS is sold in Alaska while some is shipped to Hawaii
and Asia.
CHAIR BARNES interjected that BP ships ANS to Taiwan and Mainland
China also.
MR. GRIFFIN noted that ARCO, on the other hand, has two refineries
on the West Coast. The publicly reported, combined capacity of
these refineries is approximately 457,000 barrels per day which is
approximately 140,000 barrels per day more than ARCO's current
estimated production. Therefore, some rough conclusions can be
drawn from these numbers. "Of BP's estimated combined post-merger
production of today, 790,000 barrels per day, approximately 460,000
barrels of that could be internally refined. And thus instead of
selling 470,000 barrels per day to third parties, BP might have
only 330,000 barrels per day, or so, available to sell to third
parties."
CHAIR BARNES asked if BP used those two ARCO refineries to refine
460,000 barrels internally, could that service the service stations
that ARCO owns on the West Coast. She also inquired as to the
effect that would have on the barrels of oil that Alaska sells
every day.
Number 2171
MR. GRIFFIN understood if the merger happens, BP would acquire not
only the refineries but the other aspects of ARCO's current
downstream operation. He believed ARCO does use the products that
are refined at its West Coast refineries in its own service
stations which he presumed BP would do also. He noted that he did
not have any independent or proprietary knowledge to that effect.
COMMISSIONER SHIVELY stated, in response to the second part of
Chair Barnes' question, that the oil available to Alaska would not
be affected because that is set as part of the state's royalty
percentage. The royalty percentage would stay the same, assuming
the valuation system stays the same which is an issue that will be
before us.
REPRESENTATIVE WHITAKER recalled that BP had a West Coast refinery,
until recently.
MR. GRIFFIN replied that he did not know. He commented that BP has
not had a refinery since he has been with the Department of Law.
REPRESENTATIVE WHITAKER said that he would provide more information
on that to the committee. He informed the committee that BP had
retail outlets on the West Coast until relatively recently. He
asked Mr. Griffin if he was familiar with that.
MR. GRIFFIN replied that he was not familiar with BP's downstream
operation. Mr. Griffin continued his presentation. He said,
"Based on these facts, it is apparent that if the merger goes
through, it will have significant affects on how Alaska leases,
produces, transports, and markets ANS. If nothing else, it's clear
that this merger would place BP in a position of dominance over all
aspects of ANS development. So, I think that's something that the
state has to examine very closely."
Number 2295
ATTORNEY GENERAL BOTELHO commented that Mr. Griffin has highlighted
the areas of concern. In a meeting with the legislative
leadership, the Governor highlighted four general areas of special
concern for the state with regard to this merger. "First, with
regard to the question of the competitive environment in the state.
That is to look at what this acquisition would do to Alaska's being
open for business and available for other entrance into the Alaska
oil and gas arena both production and other upstream issues in the
state. Second, to take a look at its impact on a fair source of
revenues for state government. Third, looking at continued
concerns for the environment, and fourth, the concern about Alaska
hire, about supplying Alaska and companies participating fully as
citizens in the state in their respective communities." The
Governor has directed himself, Commissioner Shively, Commissioner
Wil Condon of the Department of Revenue, and John Katz, legislative
director in Washington, D.C. and former Commissioner of Natural
Resources, to undertake a review. That has begun and six areas
have been identified for which task forces were established in
order to specifically examine the acquisition.
TAPE 99-10, SIDE B
Number 0001
ATTORNEY GENERAL BOTELHO said, "...our historic reliance on spot
pricing that BP has undertaken and which has served the state well
in valuing for both taxes and royalties. Marine transportation.
The Trans-Alaska Pipeline. There are a series of issues related to
tariffs. What we have identified as our facilities focus on
accessibility or access to facilities. Generally, natural gas
development on the North Slope. And finally, leasing issues. What
they all have in common is the recognition that we be open for
business, to seek competition, and maximizing the state's resources
to encourage other companies to engage in leasing." He noted that
there are several choke points along the way any one of which can,
potentially, serve as a major deterrent to future investment in the
state. "If there is not ready access to new entrants, it is a
discouraging factor in whether they will make the decision to
participate in our competitive lease sales." He pointed out that
there are several common carriers; however, for regulatory purposes
there are several different pipelines. There is an opportunity for
mischief with BP acquiring a total of 72 percent of that pipeline.
Although he is not suggesting there would be mischief, it is a
factor that others looking at Alaska will take into account when
determining whether they want to be here for the long term.
ATTORNEY GENERAL BOTELHO addressed marine transportation. He
recognized that it is only profitable to be in Alaska if there is
the ability to market oil and take it to a distant market.
Therefore, there is a focus, over all, on the transportation
system, not only with TAPS but the tanker fleet as well. Attorney
General Botelho commented that one of the top priorities for Alaska
is regarding the future of natural gas on the North Slope.
Number 0250
ATTORNEY GENERAL BOTELHO stressed that the goal is to, as quickly
as possible, review each of these issues in detail. The intent is
to accomplish this review through the use of staff as well as
outside experts in order to provide an evaluation of these issues.
This issue is not solely of concern to the State of Alaska,
although Alaska will feel the impacts of this acquisition over any
other. "It is a matter of national magnitude. As a consequence,
it is a merger or acquisition that requires the approval of the
Federal Trade Commission (FTC) and could well require approvals
from other states that see an interest here." Consequently, there
will be meetings with representatives of the FTC in Juneau next
Monday. Representatives of the antitrust divisions of the states
of Washington, Oregon, and California have all expressed interest
in reviewing this acquisition and will also be present. Attorney
General Botelho hesitated to be much more committal about a
specific time line, but noted this is a $26 billion dollar deal
with major impacts for the state. He expressed the need to study
this merger very carefully and methodically. Time is of the
essence here, but there is no room for shortcuts. He expected this
to be a several month process.
REPRESENTATIVE PHILLIPS asked if the group had determined a time
line on returning with responses in those six categories.
ATTORNEY GENERAL BOTELHO said that the group is still identifying
all the questions that need to be answered. He informed the
committee that the deadline being aimed for is this Friday. With
regard to having answers, he thought that would probably take a
minimum of another six weeks.
REPRESENTATIVE PORTER mentioned that a certain percentage of the
information being gathered will be used to formulate a strategy for
the state to use to respond to this merger. All of this
information would seem to have a great bearing on Alaska's finances
and would not be public, for obvious reasons. He asked if there
has been consideration regarding the mechanism to be utilized to
receive this information and work with the legislature.
ATTORNEY GENERAL BOTELHO commented that Representative Porter
raises a very important question which is still being sorted out.
The legislature has a major role to play, and in order to execute
that role the legislature needs to be provided information. He
explained that in working with the FTC, document sharing takes
place, but in order to access that information a confidentiality
agreement must be signed which will constrain what information can
be shared with others. "They generally take the view that they
will only deal with those who are in a direct, what they would
characterize as a law enforcement role. That's how they see the
antitrust area." Therefore, access would be limited to a certain
extent. However, he noted that there are clearly antitrust issues,
but there are also lease administration issues and tax
administration issues for Alaska. Those issues have been shared
between the legislative and executive branches, oftentimes under
our own agreements of confidentiality. Attorney General Botehlo
stated that the Governor has made his wishes very clear; the
Governor wants the group to work with the legislature as closely as
the law would permit recognizing that everyone has a common
interest in achieving the best result for the State of Alaska.
Number 0650
CHAIR BARNES commented that if there is a point at which an
executive session is utilized to acquire this information, she
hoped that there will be a sign-in sheet and people have to swear
to keep the information confidential.
ATTORNEY GENERAL BOTELHO said that he appreciated Chair Barnes'
sensitivity to the confidentiality concerns which will be a
constraint for everyone. He understood that the legislature has
retained the services of outside counsel which the Governor
applauds as did he. To a certain extent, working on parallel
tracks makes sense.
REPRESENTATIVE OGAN acknowledged that he is very unfamiliar with
laws dealing with mergers and antitrust. He asked what will the
FTC review? He recognized that the FTC would review the large
picture and the consumer end. Will the FTC be a factor in Alaska
on the North Slope with regard to the issues of competition and
antitrust on the production end, including delivery and
transportation?
ATTORNEY GENERAL BOTELHO noted that this is a topic which has been
of great interest. He believed it would be fair to say that the
FTC has seldom, if ever, dealt with upstream issues when it has
dealt with oil and gas mergers. Normally, the focus would be at
the retail level, which for the most part will not be present in
this acquisition because the downstream is fairly geographically
dispersed. He informed the committee that the FTC's associate
director responsible for mergers in petroleum has indicated to him
that the primary focus will be on Alaska, the impacts on the North
Slope, the transportation corridor which is viewed as one of
national import, and on competition. He said, "I suspect that a
part of this has to do with the fact that the state, as a
sovereign, has a major interest. But I think we should not
overlook the fact that the other sovereign who may be impacted by
this is the federal government itself."
REPRESENTATIVE PHILLIPS asked if under the leasing component, there
would be review of new leases in addition to the disposal of
overage acreage?
ATTORNEY GENERAL BOTELHO deferred to Commissioner Shively.
COMMISSIONER SHIVELY stated that there will be review of both.
Number 0874
REPRESENTATIVE GREEN asked if there is any severability or is it an
all or nothing type of antitrust?
ATTORNEY GENERAL BOTELHO said that the commission and the Antitrust
Division of the Department of Justice are frequently involved in
antitrust matters. With regard to separating upstream from
downstream, he did not believe it is done explicitly; it is not all
or nothing in the sense that you either have a deal that passes
muster or you don't and it gets disapproved. He identified the
most frequent occurrence as a conditional approval. "That is the
direction for divestiture of some assets, ownership interests,
whatever it takes from the regulatory agency's view to make sure
there is not a substantial lessening of competition." Therefore,
there they have fairly broad powers and wide latitude in working
out agreements and most of the time those issues are not litigated.
He noted that very few cases are actually turned down.
REPRESENTATIVE GREEN asked if there is the possibility that the FTC
and the state may have divergent views on a monopoly or an
interest. He also asked if there would be primacy.
ATTORNEY GENERAL BOTELHO said that there is the possibility that
there are divergent interests which is certainly the case
internally. For example, the state has a strong interest in a very
high spot price and to have transactions measured that way. He
indicated that it would not be a surprise for the FTC and other
states to be interested in the lowest price to the extent that
there would be a lower price at the tank. Attorney General Botelho
emphasized that Congress has refused to preempt state antitrust
law, therefore both the FTC and states have concurrent jurisdiction
and both are free to act. This would result in the company having
to satisfy both. However, it is somewhat unclear when the two
reach diametrically opposed conclusions about a specific asset.
"For that reason, the trend has been for the FTC to work directly
with the states through the entire process ... or at least that
there is an ongoing exchange of information." He cited
Carrs-Safeway as an example of such. Similarly, there is a
multi-state task force along with the FTC regarding the Exxon-Mobil
merger and Alaska is participating in that as well.
Number 1140
REPRESENTATIVE GREEN recognized that there are other actions in
front of the FTC. He asked if there is a first-in, first-out type
of situation or are actions run concurrently?
ATTORNEY GENERAL BOTELHO replied that the process is not a
first-in, first-out situation. He explained that the action is
divided into sections which deal with particular subjects. The
schedule is driven by the demand for documents, the timeliness of
receipt of those documents, and the complexity of the issues in
which there are overlapping interests. First notification to the
FTC does not indicate that action will be the first one with the
answer.
REPRESENTATIVE COWDERY understood that, with regard to the retail
side, BP has sales as well as ARCO, although none of them are here
in Alaska. He was sure that would be reviewed in the light of the
antitrust. With regard to the earlier comments that BP primarily
sells to others and it does not really refine, ARCO seems to be the
opposite. How would that work? He said, "If they sell crude to
someone else and sell it to their own refinery once they merge,
that would be a little bit of a balance. Wouldn't it? I mean,
somebody else is going to pay them. You know, talking about spot
prices and competition ... You would establish some guideline for
value rather than selling it to your ... If you understand where
I'm going there on that."
ATTORNEY GENERAL BOTELHO commented that Representative Cowdery's
question seems to have a couple of parts to it. Firstly, the
merger would create a different creature than that existing six
months ago with simply BP. With regard to the FTC side, there will
be a whole retail system that would primarily be East Coast based,
which would be complemented by the ARCO portion which is focused as
the primary retailer on the West Coast. Attorney General Botelho
stated that it is difficult to predict BP's stance regarding spot
pricing or where it will deliver its crude. It would be logical
for it to feed the refineries it now owns. However, he recognized
that there will be competing internal pressures, depending on what
part of the company or which subsidiary one is addressing. The
refiner part of the company is going to want the lowest price
possible, while the marine transportation portion will presumably
want the highest price possible for shipping. Currently, it is
uncertain as to how that will work.
Number 1367
CHAIR BARNES noted that when the negotiated oil tax settlements
were present she understood that ARCO negotiated one level, while
BP negotiated another level as it relates to tariffs. She said
that BP pays Alaska less money for those tariffs than does ARCO
which under the merger, would result in Alaska receiving less money
for its oil.
ATTORNEY GENERAL BOTELHO believed Chair Barnes was referring to the
Amerada Hess litigation, a royalty settlement, which resulted in
the development of three different methodologies for each of the
following companies: Exxon, ARCO, and BP. In terms of pricing, all
were based on slightly different mixes. He indicated that was a
conscious decision by the state to have a diversified portfolio,
thus not relying on one particular methodology. He commented that
he did not want to characterize one methodology as more
advantageous than another.
REPRESENTATIVE PHILLIPS asked whether those payments would be
treated as liens and would have to be dealt with before the merger
proceeds.
ATTORNEY GENERAL BOTELHO clarified that those do not act as liens;
they are methodologies which remain in place as long as each
company is separate and until the merger goes through. Attorney
General Botelho pointed out that this is an area that will be
specifically reviewed due to the potential consequences for the
state.
REPRESENTATIVE BERKOWITZ asked if the merger does not proceed,
would the state's relationship with the entities remain the same as
it was prior to the merger.
ATTORNEY GENERAL BOTELHO acknowledged that there will inevitably be
some tensions during the process as information is requested.
Furthermore, there will be some hard negotiating in order to
achieve what is believed to be in the best interest of the state.
He noted that Commissioner Shively has repeatedly made an important
point regarding whether the state will be able to return to the
status quo.
Number 1582
COMMISSIONER SHIVELY said he believed that to be the base of the
issue here. He suggested that most people in the state would
support the status quo, if there were a choice between the status
quo and the merger. Commissioner Shively indicated that even
without this merger, he thought Alaska would have seen one operator
at Prudhoe Bay which would have certainly reduced jobs. More
importantly, most people reviewing the energy industry believe that
ARCO was ripe for a takeover or buy out. He pointed out that
clearly ARCO's North Slope assets would be of value to BP. If the
state was in a different situation in which there would not be such
an overwhelming ownership as in this merger, the buyer of ARCO
could have still not been interested in Alaska and took resources
from existing development. With regard to whether there is a way
to keep the status quo, Commissioner Shively did not believe that
to be an option. He stressed, "That's not necessarily to say that
the state has, at this point, concluded that this is the best
option. It clearly will not be the best option unless we can reach
some agreements with BP about some of the issues that the Attorney
General and others have talked about here today."
CHAIR BARNES emphasized that the commissioner has a constitutional
responsibility, as do legislators, to ensure that the state's
resources are used to the maximum ability and to receive the
maximum amount of money from the sale and use of those resources.
REPRESENTATIVE BERKOWITZ commented, "It seems to me it would be
very difficult to go home again. In the sense that the fact that
this merger has been approached has forever changed some of the
material terms of the relationship between the state and both ARCO
and BP, regardless of whether BP emerges as the single entity
afterwards."
REPRESENTATIVE OGAN echoed earlier comments that the relationship
is defined in statute and would certainly remain the same.
Representative Ogan noted that he had dinner with a couple of the
leaders of BP and ARCO as well as the chairman of the oil and gas
committee. During that dinner, he discussed that all involved
parties have a fiduciary responsibility to its board of directors
and stockholders which for the state are the people of the State of
Alaska. Representative Ogan expressed the need to define the
relationship between the legislature and the Administration in that
negotiation.
Number 1783
ATTORNEY GENERAL BOTELHO reiterated that he believes the Governor
is committed to close consultations. If laws need to be changed,
the executive and legislative leadership has to be part of the mix,
although there are constraints. Foremost among those constraints
relate to the extent to which we wish to work with the FTC which he
believed to be in the state's interest to do so. He said, "It [the
FTC] will view its interaction with the state [as] being with the
state executive or what, in a more narrow sense, they would define
as the law enforcement agency." He reiterated the desire to work
with the leadership and the legislature in as close a manner as the
law would permit as well as in a way that is responsible to the
state. However, he noted that there are also obligations with
respect to BP Amoco and ARCO as major corporate citizens of the
state. At times, balancing those will put us to the test, but at
this point he did not foresee a specific problem. Attorney General
Botelho suggested that it would not be helpful for us, as we work
through this process early on, to be constantly in hearings
offering our view of what needs to be negotiated. "We've got to do
our homework. And we need to do it, I think, outside of the public
limelight. And to the extent that there is coordination in
hearings, that would be a very helpful step from my perspective.
Our folks can spend their time focusing on getting the information
together, analyzing that information and helping to formulate a
plan. For our part, we will work with your designated leadership
and certainly the counsel that you have retained and try to make
sure that there is as good a flow of information as we can have.
And I guess I would also expect that, as you do your fact finding
and fact gathering, that in itself will be a very helpful adjunct
to what we're trying to do, particularly to the extent that you
have direct relationships with the citizens of the state, and they
wish to explain to you what they think government should be doing
and what they think the impacts are. I think your independent
ability to gather facts is a very important coordinate activity as
we go forward."
CHAIR BARNES informed everyone that it is the intention of this
committee to move forward, to hold hearings, and to acquire public
input. She explained that first she intended to hear from the
government officials charged with the task of reviewing the state's
current position as well as its future position as was heard in
this meeting. As this process of acquiring information continues,
there may be a point at which those present today will need to
return or other oil and gas experts will need to be present.
Number 1940
CHAIR BARNES announced that she intended to recess from meeting to
meeting. There will be a couple of meetings with the private
sector in order for the oil industry to hear the concerns of those
in the private sector. The committee will hear from the industry
itself as well. She felt it important to be able to discuss these
issues in order that everyone has an idea of where we're at and
where we're going. "Certainly there is nothing more important, as
it relates to the resources of our state and to the funds that come
into our state, than is Prudhoe Bay. Prudhoe Bay and all of its
many facets whether it is the pipeline, or the tankers, or selling
on the spot market--it all has an effect upon the resources of the
people of this state and how we manage those. So, we're going to
be looking to acquire information." She emphasized that she would
not attempt to acquire information that would, in any way,
compromise the governmental officials or the oil industry. Chair
Barnes intended for these to be friendly, fact finding meetings
until otherwise necessary.
ATTORNEY GENERAL BOTELHO agreed with Chair Barnes' sentiment.
"Again, we have a common, very important purpose and objective. We
have not seen anything, at this stage, that suggests that we are
doing anything other than walking in the same steps."
CHAIR BARNES announced that this meeting would be recessed until
5:00 p.m. on Thursday, at which point people from the private
sector that will be available to share their knowledge.
REPRESENTATIVE OGAN informed the committee that he has maps of the
production facilities and the latest maps of the leases, available
to anyone interested.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on World Trade and State/Federal Relations
meeting was recessed to 5:00 p.m. Thursday, April 15, 1999.
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