Legislature(1999 - 2000)
04/20/1999 05:06 PM House WTR
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON WORLD TRADE
AND STATE/FEDERAL RELATIONS
April 20, 1999
5:06 p.m.
MEMBERS PRESENT
Representative Ramona Barnes, Chair
Representative John Cowdery, Vice Chair
Representative Gail Phillips
Representative Joe Green
Representative Ethan Berkowitz
Representative Reggie Joule
MEMBERS ABSENT
Representative Beverly Masek
OTHER HOUSE MEMBERS PRESENT
Representative Beth Kerttula
Representative Scott Ogan
Representative Brian Porter
COMMITTEE CALENDAR
OVERSIGHT HEARING: PROPOSED PURCHASE OF ARCO, Inc. by BP-AMOCO
(* First public hearing)
PREVIOUS ACTION
See House Special Committee on World Trade & State/Federal
Relations minutes dated 4/13/99 and 4/15/99.
WITNESS REGISTER
DAVID COBB, Mayor
City of Valdez
PO Box 307
Valdez, Alaska 99686
Telephone: (907) 835-4313
POSITION STATEMENT: Urged the committee to review the merger for
Alaska's shareholders and the bottom line.
BILL ALLEN, Chairman and Founder
VECO
813 West Northern Lights
Anchorage, Alaska 99503
Telephone: (907) 264-8101
POSITION STATEMENT: Indicated that if the merger is to happen,
BP is the best company to be involved.
MAYNARD TAPP, President
Hawk Construction Consultants
Member, Alaska Support Industry Alliance
200 West 34th Avenue, Number 809
Anchorage, Alaska 99503
Telephone: (907) 278-1877
POSITION STATEMENT: Testified as a concerned member of the
Alaska Support Industry Alliance.
CARL MARRS, President and CEO
Cook Inlet Region, Incorporated
PO Box 93330
Anchorage, Alaska 99509
Telephone: (907) 274-8638
POSITION STATEMENT: Believed Alaska's long-term best interest is
to preserve the status quo even if it results in the reduction of
production and revenue.
DAVID GOTTSTEIN
Address and telephone not provided.
POSITION STATEMENT: Discussed growth as the only solution to
Alaska's long-term fiscal gap.
KEITH BURKE, Vice President
Business Development
Natchiq, Incorporated
6700 Arctic Spur Road
Anchorage, Alaska 998518
Telephone: (907) 267-3177
POSITION STATEMENT: "Natchiq is supportive of the merger given
that BP-Amoco is committed to local hire and Alaska buy,
recognition of local expertise and abilities, continued
aggressive exploration and field development in the North Slope
and Cook Inlet, reinvestment in Alaska of savings realized from
this merger."
MARY SHIELDS, General Manage
Northwest Technical Services
3330 Arctic Boulevard, Suite 201
Anchorage, Alaska 99503
Telephone: (907) 562-1633
POSITION STATEMENT: Discussed concerns with the merger.
STEPHEN LEWIS, CEO
PetroStar, Incorporated
Arctic Slope Regional Corporation
201 Arctic Slope Avenue, Suite 200
Anchorage, Alaska 99518
Telephone: (907) 344-2661
POSITION STATEMENT: Supported the decision of ARCO and BP to
move forward on the merger.
MATTHEW FAGNANI, President
Work Safe, Incorporated
Nana Development Corporation
341 West Tudor, Suite 106
Anchorage, Alaska 99504
Telephone: (907) 563-8378
POSITION STATEMENT: Testified that he did not view "this merger
as a crisis, but rather an indication of a changing global
environment that makes a company reduce costs to provide greater
benefits to shareholders."
JACK LAASCH, President and General Manager
Alaska Petroleum Contractors
6700 Arctic Spur road
Anchorage, Alaska 99518
Telephone: (907) 267-3104
POSITION STATEMENT: Supported the proposed BP-Amoco ARCO merger.
KEN FREEMAN, Executive Director
Resource Development Council
121 West Fireweed Lane, Number 250
Anchorage, Alaska 99503
Telephone: (907) 276-0700
POSITION STATEMENT: Stated that RDC has not developed an
official position on the merger, but does not view it with doom
and gloom.
THERESA OBERMEYER
3000 Dartmouth
Anchorage, Alaska 99508
Telephone: (907) 278-9455
POSITION STATEMENT: Opposed the proposed BP-Amoco ARCO merger.
ACTION NARRATIVE
TAPE 99-12, SIDE A
Number 0001
CHAIR RAMONA BARNES called the House Special Committee on World
Trade and State/Federal Relations meeting to order at 5:06 p.m.
Members present at the call to order were Representatives Barnes,
Cowdery, Phillips, Green and Joule. Representative Berkowitz
arrived at 5:20 p.m. Representative Masek was not present.
Number 0243
DAVID COBB, Mayor, City of Valdez, testified via teleconference
from Valdez. He commented that the proposed merger has been
described by some people as a cataclysmic development. The
proposed merger rivals the construction of the Trans-Alaska
Pipeline and the Exxon Valdez oil spill. While others, including
the oil industry, describe the proposed merger as the best thing
for Alaska. He, as a small-town mayor, did not believe either
characterization to be accurate. "We as the state and as citizens
can only conclude that this merger is a major change in whether the
oil industry will do business in Alaska." There are not enough
details known to offer either positive or negative criticisms.
Therefore, he expressed the need for this committee, the
legislature, and the Governor's office to uncover those details and
do what is best for the State of Alaska. Furthermore, the critical
issues to the state and to local government must be identified.
MAYOR COBB stated, as the mayor of a pipeline corridor community,
that he has several concerns. "First and foremost is the question
of ad valorem property taxes to pipeline corridor communities.
Instead of negotiating with four one hundred pound gorillas, I'm
now going to have to negotiate with one 720 pound gorilla that owns
over 70 percent of the bananas. Now that BP-Amoco may be the only
producer on the Slope, can I be assured that there will not be an
accelerated attempt to devalue the pipeline for tax purposes that
will adversely affect my community?" He also expressed concern
that the state and the legislature do not treat this issue lightly.
There should be review of the proposed merger through an open and
frank discussion with BP, Amoco, and ARCO in order to make an
educated and informed decision. BP, Amoco, and ARCO did so for its
shareholders as well as evaluating the bottom line. It is
appropriate for this committee, the full legislature, and the
Governor to do the same for Alaska and its shareholders.
Number 0496
BILL ALLEN, Chairman and Founder of VECO, informed the committee
that he started in business with ARCO in the Cook Inlet 31 years
ago, and is probably the oldest Alaskan service company. He
commented that he has known the ARCO people from the first
chairman, Robert Anderson, to the present chairman, Mike Bowlin
[ph] as well as those down to the production operators and they are
all good people. "BP is a good company. I think if this is going
to happen, they're the best ones to do it. They already have the
most invested in Alaska and have the money to develop the rest."
He indicated that BP's $26.5 billion investment for ARCO should
provide BP more incentive to keep investing and developing the
Slope and other places in Alaska. He pointed out that BP has
committed to $5 billion over the next five years which is more than
what would have been spent. Furthermore, BP will bring in its gas
expertise and build a liquids-to-gas plant on the North Slope. Mr.
Allen stated, "...they'll, one way or the other, develop the gas.
...they'll continue with the contractors that ARCO have.
...they've committed to work Alaskan companies and Alaskan people."
Mr. Allen stressed that if the merger does not occur, ARCO will be
weakened and BP will be disappointed. He predicted that ARCO would
be purchased by some entity at a reduced price, and it would take
time to make their deal with BP and the state which could delay
things for quite awhile. Mr. Allen commented that he did not like
to see ARCO go, but he believed it to be the best of all worlds.
REPRESENTATIVE COWDERY pointed out that there is a statute
regarding the limitations on the acreage of leases. Representative
Cowdery believed they are over about 280,000 acres on the land
side, but are within the limitations offshore. He asked Mr. Allen
if he had any suggestions on how that should be addressed.
MR. ALLEN indicated that a new rule or a new law, whatever it
takes, should be developed in order for development to progress.
He noted that ARCO has already leased it and therefore, he said he
would not hinder that. He reiterated, "They've got the money to do
it, and ... with the other $26.6 billion that they're putting in
here, they're going to have to make this place go."
REPRESENTATIVE COWDERY asked whether an exemption on this in the
statutes in order to assure the development of that in a time
certain would be appropriate.
MR. ALLEN replied yes.
Number 0816
REPRESENTATIVE GREEN inquired as to Mr. Allen's thoughts regarding
the attitude of such a large conglomeration of wealth on the North
Slope and activity in the services industry. Will the merger help,
hinder, or change that since one large conglomerate will own all
the infrastructure?
MR. ALLEN said that he did not believe it would hurt; the larger it
is the more there is to maintain. He believed it would be good for
the contractors that are present.
REPRESENTATIVE GREEN expressed concern with sole sourcing. At
Prudhoe, sole sourcing was a big concern for cost saving. He asked
whether a larger company with the same attitude, perhaps on other
areas, would work to diminish the competitiveness of service
industries there.
MR. ALLEN answered that he did not think so. "You know,
essentially they -- quite awhile back, they picked up the
contractors they wanted, both ARCO and BP. And that's the
contractors that have got the infrastructure and got the time in.
And I think they'll be fine."
REPRESENTATIVE PHILLIPS inquired as to Mr. Allen's thoughts
regarding the impact of this merger on the current independents as
well as bringing in more independents to Alaska since the
competitor owns so much of the pipeline and the fields.
MR. ALLEN commented that the pipeline is the secret. He eluded to
the need to be close to the pipeline whatever fields one would
develop which could afford an advantage. Mr. Allen noted, "BP says
if somebody wants to buy some of the pipeline they can."
REPRESENTATIVE PHILLIPS surmised that Mr. Allen did not think the
merger would hinder independents from being interested in Alaska.
MR. ALLEN acknowledged that independents may take a closer look
before entering Alaska. He stated that for an independent to
participate on the Slope it needs to be large; it takes large sums
because it takes such a long development time before there is a
return on the investment. He reiterated Richard Campbell's, BP's,
comment that BP will sell any part of the pipeline however, the
independents may not have the money to purchase it. He believed it
would be a major player that enters the Slope.
Number 1195
MAYNARD TAPP, President, Hawk Construction Consultants; Member,
Alaska Support Industry Alliance, testified next via teleconference
from Anchorage. He informed the committee that he is not speaking
for the Alliance, but as one of its concerned members. Mr. Tapp
stated that in order for his company to continue business in
Alaska, Alaska must remain competitive in a worldwide oil market.
He recognized that changes in the oil market and Alaska are
inevitable and it is only a matter of time until the North Slope
will be operated by one company. "The one company scenario is
somewhat frightening only because we are unfamiliar with its
operation. Hopefully, the scenario will offer competitive
opportunities for all Alaskan suppliers and contractors. BP,
Amoco, ARCO have been good citizens to the state in the past, and
I believe they will be in the future." He cited their announcement
regarding higher capital expenditures for the next five years as
well as the development of gas-to-liquids technology on the North
Slope as a positive indicator as well as the ongoing work being
performed by the ARCO sponsored LNG task force. He believed it
important to continue all efforts to promote commercialization of
Alaskan gas. Mr. Tapp recognized that consolidation in Alaska will
be painful for people in the merging organizations as well as for
the contractor community. Such a change could lead to disruption
of the contractors and the ARCO-BP organization. He expressed the
need for Alaska to retain its brain trust which has developed in
the oil industry over the years. "The State of Alaska needs to
maintain vigilance protecting the people and natural resource
wealth of the state."
REPRESENTATIVE COWDERY commented that he has heard different views
of the feasibility of the gas-to-liquids technology that BP is
working on. Can that be economical?
MR. TAPP said he believed there is a strong possibility. He hoped
that the combination of the knowledge base of ARCO and BP would
result in a synergy of ideas and possibly a technology leap which
would make gas to liquids economically feasible. He informed the
committee that the presentations by BP and ARCO that he has seen,
have indicated there is room for both projects with the amount of
gas that exists on the North Slope. Hopefully, the economic time
available would allow development of both projects.
CHAIR BARNES commented that it would have to be proven to her that
both gas to liquids and the gasline are feasible at the same time.
She pointed out that 50 million metric tons a year has to move into
the marketplace to make the gasline economically feasible and
furthermore, a certain amount of the gas is reinjected into the
ground to lift oil.
Number 1499
CARL MARRS, President and CEO of Cook Inlet Region, Incorporated,
commented that this merger will present a fundamental change in the
way the oil industry has historically operated in the state. Such
a change presents unique challenges which may profoundly alter the
way all Alaskans, including those in the construction and oil field
support industry, view and deal with the oil and gas industry.
Therefore, he believed the state should approach this matter with
due deliberation, prudence and caution. However, one must keep in
mind that some change is inevitable, and all change is not bad.
MR. MARRS stated:
As Alaskans and Americans we embrace the fundamental
principles of capitalism and a competitive market economy
will, notwithstanding rough spots and difficult times
along the road, ultimately lead to the most efficient and
effective distribution of resources for all Americans.
In this case, ARCO, presumably operating in its own best
economic interest, within the demands of the free market,
has decided that it no longer makes economic sense to
continue business as usual on the North Slope with two
competing operators in the Prudhoe Bay Field, a situation
many have long believed to carry inherent inefficiencies.
ARCO's decision to seek a buyer for itself demonstrates
that, in the professional judgment of ARCO's board and
management, it does not make sense for a company its size
with its economic future, to carry on alone. It is clear
that the wave of consolidation is sweeping the industry.
We as Alaskans cannot stop this trend. In considering
the consequences of the proposed merger, then we also
need to consider the alternative: If not ARCO-BP merger,
then what?
MR. MARRS believed, in an era of declining production and rising
costs, Alaska's long-term best interest is to preserve the status
quo even if it results in the reduction of production and revenue.
He asked whether preservation of some form of the two-operator
system will produce a bigger "pie" for all Alaskans or merely speed
up the decline in the industry overall? The state should proceed
cautiously. He believed, "The goal of the state in any effort to
limit the potential negative effects of the merger should be to
ensure that the 'cure' is not worse than the 'disease'."
MR. MARRS expressed the importance of the history of the players in
this situation. BP, which has a distinguished history of
commitment to and knowledge of the state and the communities in
Alaska, has operated in Alaska since the earliest days of Prudhoe
Bay. Although BP has vowed to continue its commitment in this
regard, Mr. Marrs was not convinced that a major divestiture of
some new and unknown player would result in a net benefit to the
state as a whole. He expressed concern about the impact of the
merger on overall competition in the state, not only in connection
with North Slope lease sales, but also in connection with the sales
of goods and services to the industry as a whole. That is a matter
of great importance to his industry, as well as all Alaskans,
because of the revenues and jobs at stake. However, on the whole,
he is cautiously optimistic that everyone may benefit from a
stronger and more efficient industry in the years ahead.
MR. MARRS commented, "ARCO has been a great supporter of the
community and a great operation for businesses in Alaska and for
Alaska itself." Mr. Marrs believed, for Alaska, BP to be the best
company to acquire ARCO. He did not believe the merger would limit
other potential mid-sized companies from coming in. He pointed out
that the pipeline is tariff regulated pipeline. Therefore, if
somebody else found oil on the Slope and wanted to produce it, the
oil would be sent down the pipeline on a tariff basis as
established by the state's tariff. In conclusion, Mr. Marrs
indicated that Alaska does not have a choice and therefore, he
believed BP to be in Alaska's best interest.
REPRESENTATIVE BERKOWITZ asked whether Mr. Marrs felt that the
dominance of the consolidated company would have any impact on the
competitiveness of bidding for future leases.
MR. MARRS believed, as Mr. Allen stated earlier, that the
competitiveness of the Slope will continue. There are three major
competitors in certain areas, of which CIRI is one. He did not
believe the merger would be detrimental to CIRI in that industry.
Number 1980
DAVID GOTTSTEIN testified via teleconference from San Francisco,
California. He informed the committee that he is the President of
Dynamic Capital Management, but he is testifying as a private
citizen. Mr. Gottstein commented that the state has a long-term
problem because of the transportation costs in and out of Alaska,
Alaska's isolation and diversity, and the high labor and
construction costs associated with conducting economic activities
in the state. Those difficulties make it unlikely that the state
will be able to draw from whatever economic vibrancy that can be
generated over time in order to provide a level of state government
service absent the resources from the North Slope. Mr. Gottstein
predicted that if a large enough fund to provide income in
perpetuity in the form of an annuity has not been developed by the
time those resources terminate, Alaska will experience depressed
levels of state government services. Therefore, growth is the only
solution to Alaska's long-term fiscal gap. He identified the
Permanent Fund as the most important asset of the state "and the
most important way to grow that asset is to increase the asset
allocation." He identified the next best alternative as
monetizing the assets in the North Slope.
MR. GOTTSTEIN continued saying that throughout history, most
governments have played a role as facilitators in order to help
private enterprise extract and exploit resources to their benefit,
receiving taxes and jobs. However, Alaska seemed to decide, long
ago, to take a different perspective. He explained that Alaska
takes the view of an ownership state, in which the assets are "ours
and we will put out to bid the right to outsource or subcontract
the production and transmission of our resources to get to market."
That is a very big difference. From that perspective, one must
conclude that whatever collection of resources is necessary to
accomplish that, in our own best interests, is what needs to be
reviewed. Perhaps, the BP-ARCO merger will facilitate that
process.
MR. GOTTSTEIN informed the committee that he provided
Representative Berkowitz with a 10-point plan outlining how Alaska
can grow. The state may need to consider owning the gasline in
order to get Alaska's gas to market because there are some serious
economic advantages by doing so, which are detailed in another
document. He emphasized the importance of the state deciding that
getting the gas to market is critical toward building a fund large
enough. In that regard, the interests of both parties must be
defined. "Our interests then are to monetize those assets over the
long term and to be able to part with some [indisc.] BP to satisfy
their interests which are returns on capital. And we don't want
anybody to unjustly exploit the other." Both parties need and
deserve to be able to meet their goals and interests. He pointed
out that BP-ARCO would be a subcontractor, which is of
significance. Mr. Gottstein suggested that the process be slowed
down, even taking whatever legal action necessary in order to stall
the merger so that Alaska's interests can be defined. This would
allow negotiation of a relationship with BP-ARCO in a manner that
serves both of parties in the long run. He explained that because
BP is buying rights to assets on the North Slope that can be
monetized for BP over the long term, BP has an increased vested
interest in getting North Slope gas to market. "That's a very good
thing." However, if there is not a definition ahead of time that
serves both parties, then Alaska will be at BP's mercy and the
situation will become one-sided. Such an environment could place
Alaska in a position such that Alaska cannot solve its problems
even if dividends are lowered, taxes raised, et cetera. He did not
believe that raising the asset allocation on the Permanent Fund,
making the Anchorage International Airport a global logistic
center, or other projects that deserve scrutiny will create enough
economic base to satisfy long-term state revenue needs without
monetizing the assets from the North Slope for the purpose of
serving the state first and then other participants.
Number 2293
REPRESENTATIVE COWDERY recalled Mr. Gottstein's testimony regarding
the state owning the gasline. Representative Cowdery understood
that some tax exemptions could possibly make it feasible for the
state to own the gasline versus the private sector. However, it
seems that the bottom line is the market.
MR. GOTTSTEIN commented that there are things that only the state
is capable of or in a position to accomplish because of the
uniqueness of Alaska's position. He restated his goal, to increase
the asset allocation on the Permanent Fund. Mr. Gottstein posed
the following, "... let's take $5 million of money we've invested
in U.S. treasuries, which would represent about $300 million a year
in interest income and then revenue bonds remaining necessary,
perhaps another $7-8 billion to construct the line." A lower cost
of capital to build the line would result. Additionally, the state
"would only need to charge transmission prices high enough to meet
revenue bond payments, not enough to put full returns on capital to
the gasline if other private enterprises owned it who weren't in
the position to extract profits from other assets such that we have
from the North Slope gas." Therefore, lowering the transmission
price lowers the cost of getting it to market and proves the
economics. Furthermore, the transmission prices can be raised as
gas market prices allow. "But we can have it much lower in weak
markets and lower the returns of volatility on capital for the
producers on the North Slope by making sure that the gas
transmission line costs are kept low because we've, in effect,
decided it's in our best interest to do so." He indicated that
just because it's a state-owned asset, does not mean all the other
activities of operation, construction, and design could not be
outsourced. BP and ARCO could build it and use it. The key for
tax purposes is the ownership. State ownership could result in no
federal taxes associated with the project. There are a variety of
elements that might dramatically reduce the cost of bringing it to
market and improve the overall global marketability of North Slope
gas.
REPRESENTATIVE PHILLIPS commented that she hoped Mr. Gottstein has
had the opportunity to read the All Alaska Plan.
MR. GOTTSTEIN answered yes, and noted that he has some concerns
with the All Alaska Plan that he would be happy to share.
REPRESENTATIVE PHILLIPS assured Mr. Gottstein that she would have
some concerns with his report that she would share with him.
CHAIR BARNES interjected that she has a plan as do many others.
MR. GOTTSTEIN stressed that most of the plans are not growth plans.
CHAIR BARNES requested that Mr. Gottstein reflect on the fact that
there is an awful lot of gas in the world market, and new gas
fields are being discovered all the time. It does not benefit
Alaska to build this gasline, if Alaska is not able to get its gas
into the marketplace prior to other projects such as ARCO's
Tangoo(ph) project. She emphasized that has to be first and
foremost. CHAIR Barnes stated, "Our effort is to make sure that
whatever we do, that our gas does not get displaced in the world
marketplace."
Number 2425
KEITH BURKE, Vice President, Business Development, Natchiq,
Incorporated, informed the committee that Natchiq is the third
largest employer in Alaska and currently has 2300 employees in
Alaska. Natchiq is one of the largest oil field support
contractors in Alaska with $90 million of invested capital in its
facilities and equipment in Alaska. Natchiq has been nationally
ranked in the top 30 percent of the largest oil field service
contractors in the United States for several years. He pointed out
that Natchiq has had a very good working relationship, with both
ARCO and BP for a number of years. "Natchiq is supportive of the
merger given that BP-Amoco is committed to local hire and Alaska
buy, recognition of local expertise and abilities, continued
aggressive exploration and field development in the North Slope and
Cook Inlet, reinvestment in Alaska of savings realized from this
merger. It is generally our feeling that this merger will reduce
the overall operating cost of the North Slope and place Alaska in
a more competitive, positive growth picture for the future of
Alaska."
REPRESENTATIVE COWDERY inquired as to Mr. Burke's thoughts on gas
to liquids; can it compete with the pipeline and the ownership of
the pipeline?
MR. BURKE noted that the producers and those working with the
subjects of gas to liquids, a natural gas, or just a gas pipeline
are struggling with that issue. He was confident that when it
becomes economic through whatever methodology, assuming there is a
market as the Chair has so noted, there will be a project. He said
that whether it will be economic or not is beyond his personal
capabilities.
REPRESENTATIVE PHILLIPS asked if Mr. Burke felt that the merger
will have an effect on independents that may want to invest in
Alaska.
MR. BURKE specified, as was previously stated, that it is expensive
to get into the North Slope. One cannot do that, in his opinion,
as a minor independent operator in a world economy, in a world
market. This merger illustrates the economic picture in the oil
industry today. In this case, it's taking BP $26 billion to stay
competitive and remain in the business of oil development.
Furthermore, it appears to be to ARCO's economic advantage to go
with this merger to stay economic for its shareholders. It's very
expensive to do business in Alaska, and extremely expensive to do
business on the North Slope. With regard to Representative
Phillips' question, Mr. Burke believed it's ruled by tariffs on the
pipeline which is under scrutiny. He did not believe that the
merger is going to place anybody at a disadvantage further than
they have already been disadvantaged by the cost of doing business
in Alaska.
CHAIR BARNES understood that ARCO's problem was not in Alaska, but
rather its holdings in other parts of the world.
Number 2759
MARY SHIELDS, General Manager, Northwest Technical Services,
testifying via teleconference from Anchorage, noted that she is a
past President of the Alaska Court Industry Alliance. She informed
the committee that Northwest Tech, as an employee support provider,
employs between 120 to 200 people at any given time. Many of those
work directly with the oil industry. Northwest Tech holds
contracts with BP-Amoco, and with ARCO Alaska, Incorporated.
Northwest Tech's relationship with both those companies is greatly
valued. She noted that like many in Alaska, she watched "oil
prices slide down the slippery slope last fall." Ms. Shields felt
that unless there was a dramatic turnaround in prices coupled with
the opening of the coastal plain, something would have to change.
The status quo would not continue to work and efficiencies needed
to be realized for Alaskan operators to continue to compete in a
global market. "As we all know, the state of affairs contributed
to the BP-Amoco merger which is now followed by the ARCO
transaction. Do I hate to see this happen? Of course I do." She
said that she has a high regard for the people in both companies
many of which she has worked closely with for nearly 15 years.
These people are very valuable to Alaska. However, she understood
the necessity of the merger. Furthermore, she did not regret that
BP-Amoco is the one that made the purchase. "BP has been involved
in Alaska Petroleum, exploration and development since the
beginning. Most of its employees as well as the ARCO employees are
long-time residents of Alaska and have an understanding of Alaska's
culture. They are committed to doing the job right,
environmentally, safely, and economically." Ms. Shields said that
ARCO and BP-Amoco have handled this transaction in a very
straight-forward fashion, noting the timely conveyance of
information to the Governor and state representatives as well as a
special meeting with the Alaska Support Industry Alliance during
which Richard Campbell of BP-Amoco and Kevin Maiers of ARCO Alaska,
Incorporated answered any and all questions put before them.
MS. SHIELDS expressed concern, as the manager of a contract
employment firm, about the numbers of people who will be released
from these companies as the merger moves forward. She also
expressed concern about the status of "our" contract and how
competition will be established as the process moves forward.
These decisions will affect the health of Northwest Technical
Services as well as the health of [indisc.] firm. She pointed out
that BP-Amoco-ARCO addressed those concerns both in the newspaper
and at the Alliance breakfast. As a citizen of Alaska, Ms.
Shields specified, "... she is always concerned for the health of
our economy. What will be the impact, not only on the lease sales,
but also on the contributions to charitable and arts organizations?
We have relied heavily upon BP and ARCO for their support over the
last 20 plus years. I was delighted to hear that that support will
also continue." She echoed Mr. Marrs' and Mr. Burke's testimony
with regard to looking for Alaskan hire which she believed will
happen. As a member of the Alaska community, both business and
social, she applauded both the Governor and the legislature as they
analyze the change in the business climate resulting from the
merging of two of the state's biggest employers.
TAPE 99-12, SIDE B
Number 2981
STEPHEN LEWIS, CEO, PetroStar, testified via teleconference from
Anchorage. He informed the committee that PetroStar is a
wholly-owned subsidiary of the Arctic Slope Regional Corporation.
PetroStar has maintained a long-standing business relationship,
both with ARCO and BP over the past 15 years during which BP has
been PetroStar's major crude supplier at the refinery. "PetroStar
feels confident we will not be adversely affected by this merger,
support the decision of ARCO and BP to move forward on the merger.
It is our opinion that the merger should enable the cost per barrel
produced to be reduced, thereby creating a better economic climate
for BP to invest in Alaska and also to be competitive in the rest
of the world." He believed this would be positive from the state's
standpoint as further investments are made throughout the world.
The merger should enhance the position of the producers. He
believed the merger would produce oil cheaper, which would provide
the companies with larger incentives to invest more money in the
state. Mr. Lewis did not believe the merger would adversely affect
the independents. He noted that he routinely talks with
independents who are looking at the potential of doing business
here. As has been stated, the cost of production on the North
Slope is extremely high. Therefore, independents are probably
reviewing areas where the cost of producing is lower. He indicated
that as more fields, more production, and more gathering lines are
built on the North Slope it should enhance the ability for those in
smaller companies to invest in sales. Arctic Slope Regional
Corporation certainly has a huge interest in the North Slope from
a bidding standpoint. After discussions with BP and other
companies, he did not feel the merger would adversely affect that.
MR. LEWIS agreed with the comments of Mr. Marrs and Mr. Burke
however, he did not agree with Mr. Gottstein's position that Alaska
should interfere with the business process of this merger.
Interference in that area would only send a very poor message to
ARCO, BP, and the rest of the industry. However, he did believe it
appropriate for the Governor as well as the legislature to look
into and understand the merger as well as get assurances that they
feel are appropriate. "From our standpoint, we support the
business decision they've made."
REPRESENTATIVE PHILLIPS asked Mr. Lewis, as a supplier, if he has
been given assurance by BP that it will honor the contracts that he
has with ARCO through the year or through the next five years.
Number 2775
MR. LEWIS stated that BP is supplying "our" crude oil out of
Prudhoe Bay, and we have been given assurances that nothing will
change. He felt that it would not adversely affect any of their
relationships with BP or their crude supply. He noted that his
product sales are tied with the oil companies relative to
production, and drilling activities. Therefore he felt that the
combined companies should have more incentive to increase
production and drilling activities.
REPRESENTATIVE COWDERY recognized that Mr. Lewis, as did most who
have testified today, supports the merger. However, as
legislators, we have to review all the aspects, including
antitrust, and scrutinize the contracts. The legislature is in the
process of choosing a law firm that's expert in this area. He
indicated that the Administration would probably do the same, if
they don't already have such experts. Such review is good for the
state, but he did not want to spend money unnecessarily.
Representative Cowdery clarified that this process is merely
prudent business, and is not against any oil company.
MR. LEWIS agreed that it's prudent to review the merger, antitrust
issues, et cetera. With regard to hiring a lot of consultants, Mr.
Lewis believed that there are actual people who work with and in
the industry, and are very closely aligned with the oil companies
that could be utilized. He informed the committee that he has
worked in the oil industry in Alaska for 25 years, and knows all
the companies. Mr. Lewis said he is willing to share his opinions,
and noted that there are many others with the same expertise.
REPRESENTATIVE GREEN recalled that Mr. Lewis indicated that through
the merger there would be an economy of scale, an efficiency of
size. The concern for many seem to be regarding whether the merger
would make such a large entity which would discourage any other
competitor from entering that market.
Number 2583
MR. LEWIS said that he did not believe it discourages Exxon, nor
did he believe it would discourage the Chevrons and other large oil
companies. "Certainly, there are a number of large oil companies
out there that look at sales worldwide that are capable of
competing with or against BP,...." The major problem with the
North Slope is the cost of drilling wells and getting them into
production. "So I don't know that independents or small people are
going to have a hard time getting this -- doing this stuff up there
regardless, but I do think that Royal Dutch Shell and those
companies are more than capable of coming in and looking at bidding
on the fields up there. We certainly have a high interest in the
oil companies being competitive up there, and they're not looking
at it negatively." Mr. Lewis commented that BP is a much better
choice as a partner with ARCO than some unknown or some other
companies such as Ramco(ph).
REPRESENTATIVE GREEN commented that several years ago when Conoco
left its operations at Milne Point, Conoco indicated that because
of the high pipeline tariff the company could not compete on a
barrel for barrel basis. He asked, "Does the pipeline ownership,
in your estimation, give any deterrence other than just the fact
that we're operating in a high cost area, do you think that the
pipeline ownership would be such that there would be a competitive
advantage in addition to the hostile environment?"
MR. LEWIS replied that he did not think so and noted, "We've been
involved for it seems like forever on [indisc.] issues, APUC issues
relative to pipeline tariffs. They're highly scrutinized, almost
[indisc.], I think every tariff filing was suspended. Burke(ph)
looks it over carefully, the state certainly looks it over
carefully, we do, all of the shippers." He indicated the need to
keep in mind that the oil does not compete at Prudhoe Bay, but
competes on the west coast and worldwide. Therefore, it's a net
back pricing which Mr. Lewis did not view as negative. Certainly,
there is opportunity for other people to invest in the pipeline as
has been the case for some time now. Entering the pipeline is just
not an attractive thing to do, unless you have production and can
be assured to move your oil through the pipeline. He reminded
everyone that the pipeline is, "in effect, a number of pipelines
from a tariff standpoint."
Number 2333
MATTHEW FAGNANI, President, Work Safe, Incorporated, testified next
via teleconference from Anchorage. He informed the committee that
Work Safe is a wholly-owned subsidiary of Nana Development
Corporation and began business in Alaska in 1989. Work Safe has 10
full-time employees on staff, four of them being Nana shareholders.
He explained that Work Safe is a "third-party drug program
administrator offering work place drug and alcohol testing and
random testing program management. ... Work Safe is considered a
third tier vendor in the Alaskan Oil Patch." He noted that 66
percent of Work Safe's business is estimated to come directly from
the support sector in Alaska's Oil Patch. ARCO and BP-Amoco have
their own drug testing program.
MR. FAGNANI informed the committee that this past January Work Safe
purchased one of its competitors, Medical Specimen Services, which
has made a significant difference in the bottom line and
shareholder benefits. It was a good business decision and is an
example of the positive aspects of mergers. Mr. Fagnani commented,
"It is in all of our best interests to take measures that ensure
that oil producers in the state are healthy and active. The recent
oil price plunge has taken its toll on the industry overall. We
have seen a significant reduction of activity and production on the
North Slope, largely due to the drop in oil prices and production
decline of mature fields." Currently, there are only three
operating drilling rigs which is down from the projected 23. "When
drillers aren't drilling, freight is not being hauled, security and
maintenance are not being needed, and the Alaskan economy suffers.
BP-Amoco and ARCO recognize the immediate need to tighten their
belt." This was evident early in 1997 and in 1998 with the purely
economic job force reduction within ARCO. Similar downsizing
occurred at BP in January. "As BP-Amoco and ARCO consolidate their
operations, they will undoubtedly realize efficiencies. Monies
freed up from cost savings may well be spent on exploration and
production activity, which would mean jobs and contracts to the
support industry businesses." Mr. Fagnani echoed prior comments
regarding BP-Amoco's commitment to invest $5 billion in North Slope
development over the next five years which would exceed projected
capital spending by ARCO and BP-Amoco combined. BP-Amoco also
committed to continuing the ARCO-led gas sponsorship group,
relocating its gas technology center to Alaska, and building a $70
million gas-to-liquids plant on the North Slope. He emphasized
that those commitments clearly illustrate that BP-Amoco plans to
heavily utilize their newly acquired ARCO assets.
MR. FAGNANI did not view "this merger as a crisis, but rather an
indication of a changing global environment that makes a company
reduce costs to provide greater benefits to shareholders." Mr.
Fagnani expressed faith in the legislature and the Administration
to act in the best interest of all Alaska and Alaskans. It is
critical that state leaders review the long-term impacts this
merger may have for future generations. "One thing is certain, is
things will continue to change."
Number 2130
JACK LAASCH, President and General Manager, Alaska Petroleum
Contractors (APC), stated that he was present to express his
support for the BP-Amoco ARCO proposed merger. He commented that
APC has had a very good, long-term working relationship with both
BP and ARCO. Mr Laasch's support for the proposed merger is based
on a number of reasons. Firstly, "one operator will provide a more
cost-effective approach to oil production on the North Slope
through a single management structure. ... Efficiencies will be
realized in all areas of oil production, operation, maintenance,
safety, quality, administration and many other areas of focus
through the consolidation into Slope-wide procedures and processes.
These efficiencies will benefit the State of Alaska through
increased revenues as well as our own employees, the citizens of
Alaska, with jobs and income."
MR. LAASCH pointed out that secondly, BP has shown a strong
commitment to Alaska hire in the past which he did not doubt would
continue. He informed the committee APC has invested considerable
time and capital into its Anchorage fabrication facility and
Nikiski module assembly site. Therefore, BP's commitment to Alaska
business development will ensure that this investment will be
honored. He was optimistic that, as long as production of oil and
gas in Alaska is economically attractive, BP-Amoco would, as any
for-profit corporation, aggressively pursue development of new oil
fields in Alaska as well as commercialization of North Slope gas.
Both pursuits will keep APC's facilities busy and Alaskans
employed.
MR. LAASCH noted that BP has stated it will increase the amount
contributed to charitable organizations. He commented that in his
more than 20 years' experience with BP, BP has often demonstrated
its commitment to enhancing the lives of those in the community
with their efforts with Boys' and Girls' Clubs to their support for
the arts. Alaskans must look to the future. He believed the
merger to be a necessary change for future development in Alaska.
He urged the committee to approve and endorse the merger. In
conclusion, Mr. Laasch said the merger is right for Alaska,
Alaskans, and for Alaska's contractors.
REPRESENTATIVE PHILLIPS asked if Mr. Laasch had the understanding
that long-term contracts with ARCO currently held by contractors
and suppliers would be honored by BP.
MR. LAASCH replied yes. The presentation that Richard Campbell and
Kevin Maiers made guaranteed that in 1999 there will be no
disruption to existing contracts, and that most of the contracts
will be honored.
REPRESENTATIVE COWDERY recalled a 1998 publication which predicted
that such mergers would occur and that in the future there would be
fewer oil companies due to mergers. He asked Mr. Laasch how many
major oil companies might be in existence worldwide in three years.
MR. LAASCH said that he believed the independents will be around.
He said, "Survival in this game means that you have to be able to
react to the economic conditions. The independents that can do
that will survive." The independents could survive by merging with
bigger oil companies or merging amongst themselves. The large
players, such as Royal Dutch Shell, Exxon, and BP will definitely
remain. Furthermore, he predicted that there will be room for
probably a half a dozen other bigger oil companies. Even still,
there will be a niche for the independents.
REPRESENTATIVE COWDERY understood Mr. Laasch to mean that there
would be six to eight large companies worldwide plus the
independents.
MR. LAASCH agreed with that understanding. Currently, it's
extremely tough for independents to come to Alaska because of the
cost to operate on the North Slope. Even with BP and ARCO present,
it's difficult for independents due to the infrastructure required.
He did not foresee that changing as a result of the merger.
Number 1845
REPRESENTATIVE COWDERY inquired as to who Mr. Laasch would identify
as the fiercest competitor to this merger worldwide.
MR. LAASCH said he had not given that any thought. He just saw BP
and maybe Exxon being present. If one has not been to Alaska
before, it is intimidating. Basically, the big players develop oil
where they know how to. BP, ARCO, and Exxon know how to do that.
He noted that Exxon is the only one that is not currently an
operator. Perhaps, Exxon would want to take a stronger role in the
future.
REPRESENTATIVE COWDERY commented that he would like Chair Barnes to
invite Exxon for their comments on this merger.
CHAIR BARNES said she would be happy to invite Exxon.
REPRESENTATIVE OGAN understood that typically, in mature fields in
the Lower 48, the independents that come in choose from the fields
that the large companies have passed up. He also understood that
the independents are a bit more innovative and aggressive in the
development of marginal fields. Representative Ogan expressed
concern that this merger could discourage that.
MR. LAASCH pointed out that there is a difference in Alaska where
independents can enter the market with lower overheads and lower
infrastructure. Conoco is a good example. Mr. Laasch noted that
he was present when Conoco was in Alaska. Conoco had to establish
its own fire department, [indisc.] department, and develop its PSN
procedures; drawing only from the resources at Milne Point. While,
BP and ARCO had different fields from which they could benefit from
the economies of scale, meaning they could draw on those resources
from their different assets. He acknowledged that independents can
come to Alaska and probably bring some very good cost savings
ideas, but he did not envision their survival.
CHAIR BARNES surmised then that there are two large players left on
the Slope with the BP-Amoco ARCO buy out plus the Exxon buy-out of
the other company as well. The third big player is Alaska. Chair
Barnes asked then if Mr. Laasch would agree that the state needs to
do what it can to protect its interest.
MR. LAASCH replied yes, the state is a big player in this merger.
He reiterated the importance of what the economy of scale means to
be competitive which he believed BP has done out of necessity. He
indicated that will ensure that there will be jobs for Alaskans and
contractors in the future.
Number 1605
KEN FREEMAN, Executive Director, Resource Development Council
(RDC), testified via teleconference from Anchorage. He informed
the committee that RDC is a non-profit, economic development
organization with a broad statewide base and focus. The members of
RDC range from individuals to leading companies throughout Alaska's
basic resource sectors such as oil and gas, mining, timber,
tourism, and fishing. The RDC membership also includes Native
corporations, construction, labor, and a number of local
communities. "All of these interests come together under RDC to
work on common issues, issues which transcend all resource and
economic sectors."
MR. FREEMAN said that RDC applauds the committee, the legislature
and the Governor for examining the proposed merger. Although there
is much information to gather about this merger, once the
information is compiled RDC trusts that there will be informed and
objective decisions. As has been said, the merger will certainly
result in change. He recognized the difficulty in immediately
identifying all the potential changes. However, holding hearings
and receiving the aid of technical experts in order to prepare a
comprehensive analysis of the merger allows the legislature and
Administration to make informed and thorough decisions.
MR. FREEMAN noted that for some time, RDC has felt, "A merger
between the North Slope's two major operators was likely
inevitable, given declining production and the high cost of
exploring, developing and producing oil in the Arctic." He echoed
earlier comments that increasing worldwide oil production,
declining Alaska production, and lower prices have forced the
industry to seek new efficiencies and streamline operations.
Therefore, to stay competitive in attracting new investment
capital, Alaska producers must do the same which is one of the
reasons ARCO officials have given for the merger. Although RDC has
not developed an official position on the merger, RDC does not view
it with doom and gloom. On the contrary, RDC prefers to believe
the merger offers hope for reducing redundancies while increasing
efficiencies. "If it makes a single operator on the North Slope
more competitive, internationally, under an increasingly difficult
global business environment, we believe this is good news for the
State of Alaska." He indicated that the resulting company may end
up with the competitive strength to sustain capital investments
over the long term and take advantage of new development
opportunities in Alaska.
MR. FREEMAN pointed out that BP-Amoco has a long and proud record
in Alaska. He reiterated comments regarding BP-Amoco's pledge of
increased investment in North Slope development and continued
efforts to commercialize North Slope gas. Those commitments will
continue BP's role as a leading investor in Alaska. Mr. Freeman
expressed confidence that a combined company will build on its good
record and will not diminish its commitments to Alaskans.
Furthermore, BP and ARCO have been leaders with environmental
protection and safety in Alaska as well as worldwide. A combined
company has the potential to obtain more experience and strength in
achieving environmental and safety standards. He noted that a
combined company must continue to follow the same environmental
laws and regulations as were followed as two companies.
MR. FREEMAN commented that the manner in which the merger comes
together in Alaska and is handled by the state will be closely
scrutinized by those in the oil and gas business as well as other
resource sectors in Alaska and abroad that are facing similar
economic realities. He expressed the need to do everything
possible to provide competitive advantages for Alaska's projects in
every resource sector. Alaska needs to recognize and respond to
change and new realities. Mr. Freeman believed it critical for the
legislature, Administration, and the public to understand what key
issues should be considered during the acquisition discussion and
he encouraged everyone to analyze all of the variables before
arriving at final conclusions. Alaska is on the verge of a new
millennium that will likely provide unparalleled challenges and
opportunities to which Alaska must adapt. He urged, "the
legislature to carefully but expeditiously study the proposal and
weigh the impact to the state, especially from a long-term,
open-minded and informed perspective to send a responsible signal
to the entire business community, both here in Alaska and
elsewhere."
Number 1251
THERESA OBERMEYER testified via teleconference from Anchorage. She
commented that it is election day in Anchorage and asked if
everyone had voted. She announced that her main focus is love of
country. She informed the committee that she lives down the street
from BP and could recall when the building opened. She noted that
she has not directly been involved in the oil industry, although
her husband did work at Alyeska Pipeline for a short time. As
Senator Murkowski noted, and as has been reported in the newspaper,
these issues, will be part of the presidential campaign of the year
2000. Ms. Obermeyer indicated that the State of Alaska is the
resource state for the future of the country and she was not
willing to hand it over to any foreign entity. She said that she
would always like to be labeled as the loyal opposition. She noted
that she is an educator. Ms. Obermeyer stressed that she will not
support this merger. She reiterated that she would always be
someone that raises questions, although that is not allowed where
she lives.
CHAIR BARNES asked if there was anyone else who wished to testify.
There being none, Chair Barnes expressed appreciation to everyone
who shared their time with the committee this evening. She
announced that the next meeting would be held on Friday, April 23,
1999, at 5:00 in the Finance Committee Room. At that time, the
committee will here from the President of BP, Richard Campbell, and
the President of ARCO, Kevin Maiers. In the very near future,
Exxon will be invited to participate, as well as some of the other
players on the Slope.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on World Trade and State/Federal Relations
meeting was recessed to the call of the Chair at 6:32 p.m.
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