Legislature(1999 - 2000)
01/19/2000 10:45 AM Senate MER
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
JOINT SPECIAL COMMITTEE ON MERGERS
January 19, 2000
10:45 A.M.
MEMBERS PRESENT
Senator Rick Halford, Chairman
Representative Joe Green, Vice-Chairman
Senator Drue Pearce
Senator Johnny Ellis
Representative Beth Kerttula
Representative Brian Porter
Representative Jim Whitaker
MEMBERS ABSENT
All members present
OTHER MEMBERS PRESENT
Senator Mike Miller
Senator Randy Phillips
Senator Gary Wilken
Senator Loren Leman
Senator Robin Taylor
Senator Jerry Ward
Senator Lyda Green
Senator Pete Kelly
Senator Kim Elton
Representative Lisa Murkowski
Representative Harold Smalley
Representative Bill Hudson
Representative Eldon Mulder
Representative Scott Ogan
Representative Sharon Cissna
Representative Eric Croft
COMMITTEE CALENDAR
Discussion of BP Amoco ARCO merger by BP Amoco
Mr. Richard C. Campbell, President, BP Exploration (Alaska), Inc.
Mr. Tim Holt, Senior Vice-President, BP Exploration(Alaska), Inc.
and Business Unit Leader for the Central North Sea(Prudhoe Bay)
Mr. Bill Noble, Senior attorney, BP Amoco
Presentation by the Administration
Mr. Jack Griffin, Assistant Attorney General
Mr. David Boies, Boies and Schiller(teleconference)
Mr. Bob Loeffler, Morrison and Foerster
Mr. Bradley Lui, Morrison and Foerster
Dr. Rick Warren-Boulton, MiCRA
Mr. Barry Pulliam, Econ One
Dr. Jeffrey Leitzinger, Econ One
Closing comments by Committee Consultants
Mr. Fred Boness, Attorney from Preston Gates and Ellis
Mr. William MacLeod, Attorney, Collier, Shannon, Rill and Scott
Dr. David Scheffman, Economist and Professor, Owen Graduate
School of Management, Vanderbuilt University
Mr. George Schink, Economist and Independent Consultant
PREVIOUS ACTION
See the Joint Special Committee on Mergers minutes dated 6/11/99,
7/28/99, 9/24/99, 9/25/99, 11/18/99, 11/19/99, 1/12/00, and
1/18/00.
ACTION NARRATIVE
TAPE 00-04, SIDE A
Number 001
CHAIRMAN HALFORD called the Joint Committee on Mergers meeting to
order at 10:45 a.m. and said the first presentation would be from
Mr. Richard Campbell, President of BP Alaska.
MR. RICHARD CAMPBELL, President, BP Alaska, introduced Mr. Tim
Holt, Senior Vice President, BP Exploration Alaska and Business
Unit Leader for the Central North Sea, and Mr. Bill Noble who was
the lawyer involved in writing and negotiating the Charter.
MR. CAMPBELL said the presentation would be simple and devoted to
what they believe to be the most important elements of the merger
and its benefits to the State of Alaska. "The main points are that
the merger will make Alaska more competitive globally and more
attractive for industry investment by lowering the cost base. This
new and continued advancement will enhance production and
significantly extend the productive life of the North Slope. This
enhanced production will result in more activity and State revenues
over a longer time than without the merger.
Finally, we believe the central concerns expressed in Alaska about
the companies have been fairly advanced by the Charter Agreement."
MR. CAMPBELL said the advantage of the merger is no more
complicated than that. It will lead to lower costs, more
advancement, more production, more work, more jobs, and more State
revenue for a longer period of time.
Number 80
MR. HOLT said his presentation starts on page 3 of the booklet they
handed to the Committee. The first point is that oil prices were
at an all time low last year for the North Slope and Alaska was at
risk of losing its position as an attractive place for investing
exploration production capital. We risk becoming a subpar global
prospect. The price of oil has gone from $9 to $25 today. Their
long-term view is that oil prices will be in the mid-teens range
and that is what they base their investment decisions.
The global oil industry is quite competitive and volatile and one
of the reasons for the big swing in prices is that there's excess
supply of crude in the world. The OPEC countries have an estimated
6 million barrel spare capacity today. Over the past 12 months,
OPEC has demonstrated a very high level of control which has
benefited oil prices. This is a very fragile situation as their
history is not of maintaining that discipline for extended periods
of time. At this time last year, Alaska did not look very good on
the global scale in terms of competition for capital.
MR. HOLT said his second point would be how Alaska stacks up as an
oil province and thirdly, he would talk about the Charter and how
it represents a fair result and does a good job of striking a
balance between global competition considerations and Alaska
specific considerations. A fourth point is about the trend across
the industry for consolidation and that Alaska is not isolated from
what goes on in the rest of the world.
Number 150
The market for exploration development capital is highly
competitive and global with no one or two players that dominate the
market. ANS crude is a relatively small part of the global crude
market with production of 1.1 million barrels of oil per day.
Total world-wide production is 70 million barrels per day. So
Alaska is about 1 - 1.5% of overall crude. Looking at the combined
proposed combination of BP Amoco and ARCO in terms of their
relative share of the world oil market as measured in terms of
crude oil reserves (a better indicator of longevity), the combined
company would have just over one percent of global crude reserves.
This "big" company would be a very small player in the overall
market. There is a wave of consolidation going on as seen with the
Exxon Mobil merger. Some of the countries with nationalized oil
are starting to compete outside of their own countries.
MR. HOLT referred to a chart showing capital investments in the oil
industry in 1997 with over $60 billion invested all over the world.
One of the more recent trends is that last year Western Europe,
U.S., and Canada has taken the lion's share of the investment
capital in the exploration production field. That capital is now
starting to shift toward other parts of the world. The reason is
prospectivity or the potential to find big accumulations. This is
best demonstrated by the discoveries made in West Africa.
The whole industry in Alaska in 1997 invested around $1.5 billion
of capital, a relatively small slice of the overall exploration
production capital.
Number 208
On page seven the key point is that capital moves quickly following
the areas or prospectivity like in the deep water Gulf of Mexico.
Alaska competes in this global market. The industry competes for
exploration funds on a world-wide basis. In Alaska over the last
10 years, two major players have left the State - Shell and Texaco.
This was partially because of their perception of better
opportunities in other parts of the world.
The definition of prospectivity that he is using is a view of the
potential for finding large oil fields and many oil fields. It's
one of the key factors that determines where companies put their
investment capital. There are four key factors: the first is what
are the costs of finding, developing, producing, and transporting
the oil to market for a particular area. Alaska has a relatively
high cost base.
The second factor is the size and number of potential fields. The
third factor is the level of total government take - local, state,
and federal. The fourth factor is the stability of the host
government. The U.S. and Western Europe had a major advantage in
stability in the last few years; but this is changing as other
countries recognize the need to change their behavior.
MR. HOLT explained that of these four factors, the only one they
can control is first one. They can bring their technology and
human resources to try to influence the cost. They can't do much
about the other three factors.
Number 241
He explained the graph comparing Alaska with some global
competitors for cost per barrel prepared by the Cambridge Energy
Research Associates (CERA). It's easy to see that Alaska is about
double the cost on average of the other areas. Alaska does have
significant undiscovered potential, but it's not significantly more
than several other countries. Since this is a relatively high cost
region, they have to work at being as efficient as they can be.
Not only is Alaska high cost compared to the rest of the world, it
is actually moving in the wrong direction. The fundamental reason
for this is declining production in the Prudhoe Bay field.
Production today is less than half of what it was 10 years ago. As
oil production declines, the associated water and gas production
has continued to increased more than two-fold. This is significant
because it costs money to lift this associated gas and water and to
separate and treat it and then reinject it. The costs are actually
increasing on a per barrel basis. Again, he said, this is the only
cost the oil industry can control and in Alaska it is going in the
wrong direction. They have to look for opportunities to change
that picture. This merger is such an opportunity.
In reference to page 11, MR. HOLT said that Prudhoe Bay has been
declining since 1989 and the North Slope overall has declined for
the last 10 years. The existing owner companies and operators on
the North Slope have been working very hard to control costs.
Steps they have taken so far are sharing of service between
companies such as the aviation service taking workers back and
forth from Anchorage and Fairbanks to the North Slope. They have
also reduced the size of the work force. They have not been
letting cost saving opportunities go by. It's been one of their
fundamental focuses for this last 10 years. Future opportunities
for cost savings are limited. Mergers like this are step-change
opportunities that provide a unique opportunity to take a major
chunk out of costs that you can't get out of separate companies
doing as much as they possibly can. There are legal constraints as
to how far separate companies can go in terms of combining
operations. Other things actually prevent companies from combining
operations.
Despite all their efforts at cost cutting, they have been heading
the wrong way on a per barrel basis, MR. HOLT reiterated. The
merger is a unique opportunity and would improve the attractiveness
of Alaska on a world-wide basis.
Number 319
When the merger was originally proposed, the figure of $1 billion
a year on a global basis was communicated; $200 million would come
from Alaska. That translates into approximately $.80 per barrel.
This has been changed and some of the savings have gone away. One
hundred and forty million has been preserved in the Charter and
this is still a significant step-change reduction in cost. He knew
of no other opportunities to make that sort of reduction in cost or
they would have already taken them. The $140 million is
significant and would have an influence on the per barrel earnings.
If you're in a commodity business, if you can reduce the cost
structure, you improve the economic attractiveness of incremental
opportunities. You draw additional investment from all players.
If you draw an incremental investment, you increase production. If
you increase production, you increase revenues-to the players and
to the State.
"Increased production actually is one of the most powerful forces
we have to control the unit cost per barrel for working on the
North Slope. There is a very high fixed cost base and the more
production we can get through the existing system, that includes
the field processing facilities, pipeline facilities, tankers, the
more efficient the whole system is."
MR. HOLT reminded them that the pipeline has handled 2 million
barrels per day in the past, about double of what they are handling
today.
Page 14 presents a picture of where the revenue goes in a $15-
world which is the price CERA used to for this analysis. MR. HOLT
reiterated that the investments the oil industry makes are long-
lived. That is they invest money today and you generate a revenue
stream that occurs over many years. You don't base that on today's
prices; you base it on the long-term view. BP's view of long-term
prices is this sort of range.
Number 355
CHAIRMAN HALFORD asked if on this chart royalty was on the cost
side or the tax side.
MR. HOLT answered that it was on the tax side.
CHAIRMAN HALFORD asked, "So, the combined total to the State is
$3.33 in all taxes and royalties?" Mr. Holt indicated yes and
explained that the $9.70 on the cost side represented development,
production, and transporting the oil. The total government take is
about $4, about 27 percent of the total pie; $9.70 is about 64
percent of the total pie. Earnings left for industry to reinvest
represents the $1.28 which is just under 10 percent of the total
revenues. He did not want to argue about how big the slices of the
pie are exactly. The key point is that costs are by far the
biggest slice and earnings is the smallest. If they can reduce the
$9.70 by taking a chunk out of costs, part of that will flow into
increased earnings. This will be reinvested in opportunities in
Alaska.
In addition to enabling a step-change in costs (page 15), there are
some intangibles the merger would bring. One is improving the
relative alignment of ownership interest in and around the Prudhoe
Bay field. The Prudhoe Bay field is rather unique in that there
are two sets of ownership interests - gas and oil. BP currently
owns somewhere around 51 percent of the oil rim and somewhere
around 14 percent of the gas cap. ARCO owns somewhere around 21
percent of the oil rim and 42 percent of the gas cap. These
differences in ownership interest actually increase the transaction
cost, because it takes human resources every time a project comes
up in the Prudhoe Bay field.
They must look at the implications from both the oil rim and gas
cap perspectives. In a traditional field, there is only one set of
interests. It's a simple investment decision. They have to
negotiate cost sharing and how to split the costs because the
project will benefit both the gas cap and the oil rim.
The merger would simplify the decision making of the BP Amoco/ARCO
interests. This has not been quantified monetarily, but it is an
intangible benefit.
He reiterated that in the commodity business, the most important
thing you can do is try to control and reduce the cost base. It's
the critical first step in trying to trigger a cycle that leads to
additional production. The cycle is simply to reduce the costs,
improve the economic attractiveness of new opportunities, draw in
more capital from all companies, increasing production ultimately,
and tax and royalty revenue for the State would increase.
Number 419
MR. HOLT said the Charter represents a reasonable balance between
considerations of local competition and some Alaska-specific
concerns.
Last year ARCO's management made the decision to sell their company
and they chose BP from several options. The merger would give them
the unique opportunity to reduce the cost base and improve
alignment on the North Slope; therefore, benefits would flow to the
entire industry and the State of Alaska.
The events of the merger give the State unprecedented opportunity
to actually reengineer the structure of the industry in Alaska.
This would not normally happen under normal business circumstance.
Through the review process, the Governor and Administration have
taken advantage of this opportunity and used their judgement to
restructure the industry to the benefit of all Alaska. Some will
argue that it will worsen it, but he feels that the Governor and
Administration have done their best to try to improve the dynamic
of the industry here. He thought the merger actually put a
positive spotlight on Alaska from the industry's standpoint.
MR. HOLT said the industry has not been as vital as it could have
been, certainly if you measure it by the number of companies who
have tried to come in. It's been heading the other way. There
have been rising unit costs. The merger allows costs to be reduced
substantially, it creates new opportunity for new players to come
in and get "some pretty big chunks of business in one fell swoop."
The Charter strikes a balance of taking some of the cost savings on
one hand to improve the basic competitive attractiveness of the
State of Alaska by carving up big enough pieces to draw in new
players to revitalize they dynamics of the State. There are lots
of views as to how to strike this balance, but in concept it's a
very simple balance.
Number 419
The proposed divestiture is presented on page 21. MR. HOLT
emphasized that these are huge pieces of business assets. These
are world-scale divestitures in the oil industries. These do not
come along very often. He said that more than 10 companies have
come through to look. Although he must keep the names
confidential, he said several of them were household names in the
oil industry-not second tier companies. Some of them are bigger
companies than ARCO. He informed them that these packages are
vertically integrated including exploration acreage, material and
operating interests in major producing fields. Kuparuk is the
second largest oil field in the United States. The package
includes more than half the interest plus operatorship of it. It
includes interest in pipelines, both field pipelines and the TAPS
and tankers.
MR. HOLT said there is a possibility that the two packages could be
sold to a single buyer and repeated that some of the interested
buyers are very big players. These packages are not complete
divestitures, but there are other pieces like segments in TAPS
totaling nine percent interest that will be sold. There is
additional exploration acreage on both on the State side and the
NPRA (federal).
MR. HOLT summarized that this a unique opportunity and they do not
come along very often to pick up assets of this scale. In fact, he
has never seen an opportunity like this come along. The size of
the packages are very attractive to buyers who have the financial
wherewithal to compete. It will represent a major holding in
anyone's portfolio. One hundred seventy-five thousand barrels per
day is a huge piece of business in the oil industry. Very few
profit center interests of any company, including BP Amoco, are of
that scale. It is bigger than some companies, like UNOCAL.
Another point to recognize is that the successful bidders could be
someone who already has a presence here in Alaska and sees this as
a golden opportunity to dramatically increase the size of their
presence here and take a bold step forward in terms of growing
their business in Alaska.
Number 519
The net effect of implementing the Charter will be complete
restructuring of the North Slope. The assets to be divested were
pretty much selected by the State, as they were very opposed
initially to divesting a majority interest and operatorship of the
Kuparuk and Alpine fields. They are prime assets and they wanted
to hang on to them. The State was insistent and they eventually
agreed as it would keep the right kind of relationship with the
State. The combined divestiture represents a very expensive
restructuring of a very mature oil province. This does not happen
normally.
There are some aspects of the oil industry that are competitive and
they generally center around competing for access to acreage. This
is seen in lease sales in the United States. Once that has been
achieved, the ball game changes fundamentally in the "upstream"
industry. The amounts of dollars required to develop fields is so
significant, the rifts are so large given the uncertainties that
traditionally the pendulum swings from hard-core competition to
very significant cooperation. This is to try and create the best
value possible. This is done all over the world. The two best
examples of that cooperation are the wholesale facilities sharing
on the North Slope and sharing between companies with a smaller
satellite pool here agreeing to use existing facilities in a bigger
field owned by another company. Another example is shared aviation
services.
He summarized that the Charter will promote broader cooperation
beyond the very traditional and classic divestitures that are
required through an anti-trust action. For instance, BP and ARCO
have agreed to share data that tens of millions of dollars were
spent to acquire. This should stimulate broader participation in
future lease sales. They have also agreed to use arbitration in
shared facilities in case any party feels like negotiations aren't
being resolved in a timely manner. They have also agreed to
purchase oil at Pump Station #1 from those who want that option at
a price established by the State. This would give more flexibility
to the smaller players.
MR. HOLT thought there would be efforts to push commercialization
of North Slope gas and, under the Charter, BP and ARCO have agreed
with the State to make gas available at an acceptable price. In
addition, BP Amoco is committed to bringing a global gas technology
group to Alaska consisting of 25 world-class technologists to drive
their efforts to commercialize gas. They would establish a new gas
unit headed up by the very senior manager to solely focus on
commercializing North Slope gas. They would look at all options.
BP Amoco is an active member in the ARCO-led LNG sponsor group.
His fourth and final point is that the merger is the result of
irreversible trends in the increasingly global economy. Some
traditionally national oil companies are stepping out of their
boundaries and competing in other parts of the world; and this
trend will continue. Oil companies will continue to consolidate to
reduce costs in order to compete more effectively globally. He
reiterated that the only factor private industry can influence is
cost. The Exxon/Mobil transaction is the best recent example of
this. They will continue to merge to achieve bigger scale, which
is necessary to invest in larger scale, riskier projects. The
nature of the oil industry involves tremendous risk. You need the
scale to be able to do that on a consistent basis, particularly
when you have the oil price cycling wildly up and down like it has
last year.
TAPE 00-04, SIDE B
Number 580
You need to be able to survive when you're in the low end of the
cycle as in last year and be able to invest in the long-lead
projects that are inherent to the oil industry. Companies need to
be strong financially. "This typically means having scale," MR.
HOLT said, "so you can make it through the low spots."
Private energy companies increasingly need to be able to compete
with state-run oil companies. Traditionally, nationalized oil
companies are extending beyond their boundaries in competing with
private companies. To compete with them, you have to get bigger
because they are bigger.
Alaska is not isolated from the global forces that work in the oil
industry even though we might want to be. There's competition for
capital throughout the industry and competition for human
resources. Companies like Shell and Texaco have left the State,
for example. We need to face reality and not think the problems
are going to solve themselves.
"Accepting and working with these global trends will ultimately
lead to the full development of the North Slope." He reiterated
that Alaska's high costs have actually been heading the wrong way
on a per barrel basis making Alaska progressively less competitive
- given the high cost and the maturing field, and the rising unit
costs. This merger is an opportunity to affect those costs.
The summary on page 31 says that the quicker the merger is
completed, the quicker Alaska can get back to making positive
investment decisions that will preserve and extend the future of
the energy business here. Time is an element.
Number 550
CHAIRMAN HALFORD asked in terms of activity in the industry in the
State, they have heard there is industry slow-down because of the
merger and asks what really was happening to numbers of rigs,
expenditures, etc. and what their proposed capital budget was for
next year.
MR. HOLT answered that 1999 was largely driven by the low oil
prices and was a low activity year. In 1998, they had 12-15 rigs
going; in 1999 they went down to 3-4 rigs. This was largely driven
by the low oil prices. For 2000, BP Amoco is pretty far along with
its independent business plans this year. He goes to London
tonight to get approval for his capital.
CHAIRMAN HALFORD asked him for a range of options in terms of
capital expenditures.
MR. HOLT replied that he couldn't give him precise numbers, but
that the momentum is swinging with Northstar which will continue no
matter what happens with the merger. They are looking at a modest
uptake in drilling activity this year in things like satellite and
in-field drilling. He would have a more accurate picture within
the next few weeks. The merger has to do more with the longer term
and what happens with some of the new opportunities that might be
created.
CHAIRMAN HALFORD said he thought it sounded like there wouldn't be
any reduced activity right now or even next year based on merger
considerations. Those considerations are further in the future.
MR. CAMPBELL responded that things they made investment decisions
on some time ago are moving forward and they are spending more than
$250 million in development at Northstar this year. The decisions
about new developments and new work that might involve a change of
ownership of assets, that might involve new operators, are
difficult to make today until they can see clarity in the
conclusion of the merger and the Charter. The money they should be
spending today to do the projects in the future is on hold. That's
the normal cycle of industry.
MR. HOLT explained that it's pretty hard to form an exploration
program if you're not quite sure what acreage you're going to own.
Number 498
REPRESENTATIVE GREEN said before the Charter, a year ago, BP
indicated that they were willing to spend $5 billion over five
years and they based their future spending on a projection of the
mid-teens for oil prices, and asked if that was primarily on
development of Northstar, was it mixed between exploration and
Northstar, or was it also including in-field drilling in Prudhoe
which they didn't plan to keep? If that is the case, is there a
reason now that they are still not active, because they are not
going to get rid of the Prudhoe Bay field.
MR. HOLT answered that the $5 billion commitment was expressed
shortly after the deal was announced and they tried to use that as
a clear indication of their interest in growing the business here
in Alaska. The ball game has changed since then with the
divestiture, etc., so the $5 billion is off the table.
Regarding the in-field drilling at Prudhoe is directly related to
the cost of producing oil at Prudhoe Bay. To the extent they can
achieve the step-change in cost, there will be more in-field
drilling that will occur at Prudhoe Bay. To the extent they are
not able to achieve it, it will be less. If they can get the costs
lower by $.50 per barrel, there will be more wells drilled, because
it will be economically attractive for some wells. If they are not
able to achieve the step-change in cost, there will ultimately be
less development. The cost structure of the North Slope is what is
going to drive development of the North Slope.
MR. CAMPBELL added that the $5 billion was a commitment they were
willing to make at that time based on acquiring the full set of
ARCO assets in Alaska. It wasn't a plan, but it was a commitment.
That goes away because the deal has changed. Projects that were
under way were included in that spending. They had also hoped to
finance the vision they had for Alaska of new projects that would
become viable because of synergies that would be achieved with the
combination of both companies.
Number 454
REPRESENTATIVE PORTER said their original proposal had a savings of
$200 million, but now it's down to $140 was that the expense of
development cost that had been reduced or what, he asked.
MR. HOLT answered that it wasn't a dollar for dollar correlation,
but there was a positive correlation. Of the $5 billion there are
too many variable to comment on.
Number 439
REPRESENTATIVE KERTTULA said she is trying to understand the risks
the State faces in going from two buyers to one big buyer and one
or two lesser buyers. She appreciated the explanation of the
global scenario, but wanted to know how to deal with the risk at
the Alaskan level. She felt the two perspectives were at odds with
one another.
MR. HOLT said in his view, there are more than 10 companies who own
an interest on the North Slope. Some of them are very large
companies. The nature of how decisions are made and who has
control with regard to the operation of the North Slope are all
highly defined through things like unit agreements and unit
operating agreements. Many companies, although they have small
interests, actually have control as to whether something happens or
not. For instance, at Prudhoe Bay many of the investment decisions
require 90 percent owner approval. BP owns 51 percent, ARCO owns
21 percent, and even combining those two doesn't give them
sufficient control to actually control things. Another owner
company has to approve them. In most cases on the North Slope
today where BP has an interest, Exxon has the controlling vote.
Today more than 10 companies own interests; three players and often
more have controlling votes. In the world we're heading for with
the merger there's the potential of four companies having control
of decision making. There's a plus and a minus to that. It could
take more energy to get four companies to agree to do things than
it takes three, but the notion because BP Amoco has around 50
percent of the production does not equate to control. They do not
have sole decision making power. They can block vote as does
Exxon, and as will the two new buyers. There are potentially four
companies with blocking votes, whereas today there are three.
Number 439
REPRESENTATIVE KERTTULA said she understood his point that there
may be more competition because of the merger, but would BP Amoco
become a more powerful buyer.
MR. HOLT answered that he didn't know how she measured power. His
business unit is in the Prudhoe Bay field and he has business
agreements he has to adhere to. They define who has the power and
this is reflected in things like what percentage of votes are
required to make decisions. This is where the real power presides.
The BP Amoco merger does not give them any more power in Prudhoe
Bay. They still need to get more owner companies to say yes to
things - in particular Exxon. He did not agree with the assertion
that more production meant more power.
MR. NOBLE added that in the primary phase where the State is the
seller and BP Amoco is the buyer is in selling development rights,
leases, and things like that. At that point the State is probably
the most powerful seller in the world. There are 10-15 ways they
could handle placing those leases in the hands of people who
develop them. It's a global market and the people who can
participate are dictated by the manner in which you handle the
sales. In fact, with new players coming in and with the addition
of the seismic data, he would expect it to be more dynamic than it
has ever been. What becomes a determining factor really becomes
how attractive it is to be here in the first place. That becomes
a function of the cost base of the Slope. This is something they
are trying to address.
Number 325
REPRESENTATIVE KERTTULA said that ARCO didn't always go along with
everything and that they didn't really know, yet, what the "shake-
out" would be with all the operators. And that's her concern.
MR. HOLT agreed that BP Amoco and ARCO had not always agreed on
investing decisions, but they have always worked out those
differences. He added that Exxon has always been a key part in
bringing another perspective to the table and they would continue
to do that. On occasion, the smaller owners at Prudhoe Bay would
do that. These "smaller" companies are Chevron and Phillips which
are actually big companies. Even though they don't make headlines,
they are at the table influencing decision making and often they
have a controlling vote for a negotiation. There is a variety of
other views there besides BP's. Even though they have small
interests, they know how to play the game.
MR. CAMPBELL emphasized that knowing the companies that have been
looking at these assets, he wouldn't expect to get any less of a
challenge on an on-going basis from the new owners of these assets
than they have in the past. These companies are going to be in the
leadership position at Kuparuk and Alpine.
Number 290
CHAIRMAN HALFORD asked about the agreement and when they list Buyer
B and a percentage, he thought the agreement said the majority
ownership of Alpine would go to a different company and a majority
of Kuparuk would go to a different company; and yet the
presentation on page 21 shows Alpine at only 43.1 percent going to
a different company. He asked how that worked.
MR. NOBLE answered that selling 40 percent would make the other
party the largest interest. So it would be making another company
the largest.
CHAIRMAN HALFORD asked if it didn't require to be a majority
interest.
MR. HOLT replied that it requires another company to become the
largest owner. The combination of BP Amoco and ARCO would own 78
percent of Alpine and the proposal is to sell 43 percent (leaving
them with BP with 35 percent). If a new company bought that 43
percent, they would be the largest owner of Alpine.
CHAIRMAN HALFORD asked if it's not Anadarko, it will not be a
majority owner of the field.
MR. HOLT replied that if he meant by majority greater than 50
percent, that was correct. If he meant majority to mean the
largest owner, the new company will be the largest owner as well as
the operator.
Number 270
SENATOR PEARCE said she appreciated the companies giving their
attorneys access to their 2,000 boxes of documents. It made their
efforts a lot more meaningful.
She said the original agreement would have allowed 100 percent
ownership of the assets owned by ARCO and BP to go to BP ownership
and asked what percentage of the present assets of BP and ARCO go
to BP after the divestiture today.
MR. HOLT answered that there was not simple measure. In terms of
current production, 175,000 barrels per day of working production
is about 50 percent of ARCO's current production. He said they
wouldn't know the value of the assets to be divested until they
actually do the divestiture.
MR. NOBLE added that he thought just in Alaska, on the exploration
production side, it becomes approximately 50 percent of ARCO will
be divested and put in other hands.
SENATOR PEARCE asked if that meant BP co-ownership goes from 50
percent to 75 percent of the North Slope assets.
MR. NOBLE agreed with that.
Number 220
CHAIRMAN HALFORD asked what level of TAPS divestiture was in that
calculation.
MR. NOBLE said being a lawyer, he was the worst one to value
anything, but for value he first looked at the production assets.
MR. CAMPBELL said he didn't think they would go anywhere, because
the numbers were not available. If they were going to acquire all
of ARCO's assets, they would have 100 percent of the combined
assets. If they divest half of them, they would end up with 75
percent of the combined BP/ARCO assets.
Another way to look at it is if they acquire ARCO's share of the
pipeline, they would go from just over 50 percent to 72 percent.
In the Charter, they would be divesting about 13 percent of that 22
percent of the pipeline with buyers A and B and there is a
provision to dilute even further by selling off the additional 9
percent. After the deal is done, they could still be back at the
original position in terms of a BP ownership in Alyeska. In terms
of production, whatever is quoted as the increase in production,
they would dilute by half of that approximately.
Number 170
SENATOR PEARCE said last year in a speech on January 22, 1999, Mr.
Albert gave a keynote speech for BP. In the speech he said there
would be more competition for the rare investment dollars because
of the state of world oil prices. This made a lot of sense at the
time. He said also that Alaska still has a highly significant
resource base and that the infrastructure is in place to develop
its further potential in accordance with our (BP's) standards of
care. He also said the BP Amoco was in it for the long hall.
Their presentation on page 3 says that at this time last year, the
North Slope was at risk of losing its position as an attractive
place to invest in new exploration and production capital and was
at risk of becoming a subpar global prospect. She thought there
was a discrepancy in the two statements.
MR. CAMPBELL responded that they are not implying that BP is going
to leave Alaska. Alaska is going to remain an important part of BP
Amoco's portfolio. That doesn't detract from the fact that they
will make a level of investment decisions on the competitiveness of
Alaska with other places around the world. All companies do that.
MR. NOBLE responded that there were differences in perspective of
Mr. Holt's first point and Mr. Albert's first point. Mr. Holt's
point was not just BP's perspective, but industry perspective,
because they can't invest in Alaska alone, no matter how they do
it. This is a partnership business and they need everyone voting
with their dollars in Alaska at the same time to get the fullest
possible development. They are here to stay, but they aren't here
alone.
Number 119
SENATOR PEARCE asked if we were at risk last year of not being at
an attractive place to invest, and if the merger is important
because it brings in $140 million per year in cost efficiencies,
why would Alaska be so attractive to all the companies which they
say are interested in buying what are realistically much smaller
prospectors for buyer A(Kuparuk) and buyer B(Alpine) without the
opportunity for efficiencies they will be getting from the merger.
MR. HOLT responded that using the words "bad" and "good" are
totally relative. Asset sales of the magnitude these divestitures
represent don't come along very often. They are unique
opportunities. Companies don't often have a chance to make
investments in asset purchases or profit centers like this in a new
region. It is very difficult to do that through a lease sale; it
takes a long time. Some companies will see this as a very unique
opportunity to establish a toe hold in the region and may see
opportunities to bring their own technologies to the table to
further reduce costs. They may see higher prospectivity than other
companies see. What will determine whether a company chooses to
bid on the divestments is they will take a long term view of how
Alaska stacks up to other places.
There is a lot of oil in Alaska, but the key to unlocking it is
managing the costs. Other companies will see this as an
opportunity to establish a big presence. Kuparuk is the second
largest field in the United States and you don't get the
opportunity to buy more than 50 percent of the second largest field
in the U.S. ever. He didn't see Alaska's relative attractiveness
as a place to draw continuing investment is diminishing. To the
extent they can reduce the cost base on a relative basis, it will
draw more on-going investment in Alaska. This is different than
the one time opportunity that the divestments represent.
Number 43
SENATOR PEARCE asked if it's that great, since they would end up
holding between 65 and 80 percent of the holdings of the old ARCO
and BP, why are they taking the $5 billion off the table and not
putting another there in its place.
MR. CAMPBELL asked if they could come back to that question when
they are finished with the previous answer.
SENATOR PEARCE acquiesced.
MR. NOBLE continued to explain that the assets that have to be sold
will go without a minimum price. This adds to the unique
opportunity for people coming in. Cost savings BP expects to get
are not going to be only enjoyed by them. More production reduces
the cost base of the entire North Slope. There is an advantage in
that to everyone.
TAPE 00-05, SIDE A
Number 001
MR. NOBLE said, "Oil production will lower tariff. Increasing the
TAPS tariff is a function of volume, in large part. Greater
production leads to lower tariffs."
MR. CAMPBELL turned to Senator Pearce's earlier question regarding
capital spending. As mentioned earlier, when the announcement was
made that BP Amoco and ARCO desired to combine there were a series
of commitments. Those commitments included the $5 billion capital
expenditure over a five year period. At that time, it was felt
those commitments would satisfy concerns in Alaska about the
merger. He acknowledged that since that time, Alaska in the form
of the Administration has expressed the desire to follow the path
encompassed in the Charter. He pointed out that the Charter does
not refer to the aforementioned capital expenditure. Mr. Campbell
said that although he did not have the information today, he would
be happy to inform everyone of what his capital expenditures will
be in Alaska for the year 2000 as well as the planning basis for
the following years. He clarified that he would be happy to
provide that information as soon as those figures are complete and
as soon he knew what assets he would own in Alaska.
SENATOR PEARCE referred to page 6 of BP Amoco's presentation, which
specifies BP Amoco's 1997 world exploration and production capital
expenditures. She then referred to page 9 of BP Amoco's
presentation, which specifies costs in various countries in
comparison to Alaska. Although no year is specified in regard to
the costs, she assumed that costs stay, on a relative basis, fairly
similar country to country. Therefore, she assumed the figures
could be compared. Senator Pearce turned to the notion that Alaska
is a high cost region by global standards. She inquired as to the
investment opportunities, in those countries listed, for
international oil companies that are not nationalized oil
companies. Of those countries listed, where are the investment
opportunities for BP Amoco or BP Amoco/ARCO.
MR. HOLT pointed out that Venezuela is "open for business." He
informed the committee that the capital that has flown into
Venezuela in the last two years is appreciable, including capital
from companies such as ARCO and BP Amoco. He indicated that
countries such as Kuwait are interesting in that companies such as
BP Amoco, Chevron, Exxon, et cetera have worked for a number of
years to establish a presence in the country. Most of the
companies in Kuwait share the view that "it is just a matter of
time." Mr. Holt estimated that BP has about 100 people in Kuwait.
Kuwait has indicated that it would like to invite more foreign
participation, although he noted that such does take time. He
noted that over the past two years, other countries have been
consistently sending signals that more private participation is
desired. BP Amoco and its competitors are "at the door."
Number 120
SENATOR PEARCE interjected:
That's fine, but to put a chart like this in front of us
- with the possible exception of Venezuela, where I know
both companies were active in the offerings because I
happened to be there when both companies were winners of
offerings - those were in the frontier areas where I
suspect the cost in the frontier areas aren't the costs
we see on this sheet - because I suspect those costs,
finding and development costs, have Petroelas de
Venezuela South America (P.D.V.S.A.) numbers and are also
opportunities in areas that aren't available. But I
guess, if you don't have present opportunities there, if
you can't, on one hand, say we're a high cost region by
global standards, as though that should affect our
interests here in Alaska and how we deal with the oil
industry when these companies aren't, at present,
available for investment, with the exception of
Venezuela.
MR. CAMPBELL responded that he believed it was the same CERA report
that this material was taken from. There is a comparison of Alaska
with some 30 other states and countries, which illustrates that
Alaska lies in the middle with regard to its competitiveness on
these parameters. Mr. Campbell acknowledged that Senator Pearce
may be correct with regard to Venezuela, but the international
industry has had a "feeding frenzy" with Venezuela over the last
few years. With regards to Kuwait, the Middle East will always be
focus of attention for the industry because of the very large
reserve that it has and the low productions cost. He noted that
access is clearly the issue in this area, although Kuwait and Saudi
Arabia are discussing access. Iraq and Iran remain politically
difficult to deal with. Mr. Campbell informed the committee that
this chart does not include the African countries such as Angola,
where the industry has recently experienced success. South America
could also be discussed. There are many opportunities and data
that could be included on this chart on page 9.
SENATOR PEARCE agreed. However, with regard to discussions of
worldwide opportunities for BP Amoco/ARCO capital and why something
happening in Alaska should be liked or disliked, then there should
be comparison between Alaska and the places that capital is likely
to go. The industry put $3 billion up-front in Venezuela in only
one of the three offerings. Of course, the investment dollars
followed because they often sign contracts that specify that a
certain amount will be spent over a specified amount of years in
investments over the $3 billion. Senator Pearce believed that BP
Amoco actually signed a contract saying that a specified amount
would be spent over a specified time frame and if that did not
occur, then the leases would be returned. Perhaps, the same sort
of opportunities could be had here. She suspected such a proposal
would be welcomed. She maintained that the examples provided are
not good examples of the other opportunities for capital
investment.
SENATOR PEARCE turned to the cost chart on page 14 of the
presentation. She commented that these are "round numbers" as were
the numbers discussed by Mr. Albert in January of last year.
Senator Pearce recalled that Mr. Albert said that at $10.50 oil,
it cost the industry $3.00 to produce the barrel, $3.00 to develop
that barrel, $2.00 on taxes and $2.50 to move it to market. Those
numbers have no earnings. She inquired as to what has happened to
make the cost rise that much; what is the difference between the
$10.50 oil and the $15.00 oil, in terms of the cost?
MR. HOLT specified that the pie chart is from CERA and is not a BP
view. Therefore, he deferred to CERA. Mr. Holt presumed that CERA
was taking the view of industry. In further response to Senator
Pearce, he stated that this is Alaska specific. Again, he deferred
to CERA.
CHAIRMAN HALFORD noted that the page 9 chart is also from CERA.
Therefore, is it not BP's view that the total cost to market for
Alaska oil is $10.00. If $10.00 is not the number, then what is.
Number 225
MR. CAMPBELL guessed that BP's view is that the cost of production
is around $10.00.
AN UNIDENTIFIED SPEAKER [MR. HOLT] said that he did not know the
following as a fact. However, he believed that part of the
difference between the $4.00 specified in the chart and the $2.50
on the transportation cost has to do with whether or not one owns
interest in a pipeline.
MR. NOBLE stated that he believed that Mr. Albert's statement that
the transportation cost of $2.50 is referring to transportation to
Valdez. Here, in the chart, he believed the transportation cost
refers to transportation to California.
REPRESENTATIVE CROFT returned to page 9 of the chart. He informed
the committee that he reviewed the CERA report, which lists all the
cost centers, not just those listed on page 9. He pointed out that
the CERA report lists the lowest in the world, in order, as Iraq,
Kuwait, Saudi Arabia, Venezuela, and Iran. He asked if the lowest
were chosen. Furthermore, he asked if there are significant
nationalization trends in some or all of those areas.
MR. NOBLE informed the committee that he was looking at the CERA
report entitled, "White Paper Industry Contacts" from September
1999. He believed that chart on page 9 of the handout is CERA's
chart, Table #2 on page 19 of CERA's report. He indicated that it
is an unedited list.
REPRESENTATIVE CROFT maintained that the chart he has from the CERA
report shows them all [the cost centers]. This chart has Alaska in
the middle. With regard to Mr. Campbell's comments that Angola and
Brazil are alternative sources, the CERA chart shows that the full
cycle cost of oil for Angola to be about 50 percent higher than in
Alaska, while in Brazil is shown to be one of the highest in the
world. Representative Croft acknowledged that it excludes
transportation but, as Senator Pearce noted, a fair amount of the
transportation costs are tariffs where there is an ownership
(indisc.). Representative Croft asked if it is true that Angola
and Brazil, before transportation, have higher costs than Alaska.
Furthermore, are those the countries Alaska is competing against.
MR. CAMPBELL indicated agreement with Representative Croft's
interpretation of the CERA chart in that Alaska is in the middle
and the numbers do not include transportation costs. With regard
to political stability, Mr. Campbell agreed that is something
companies review when considering investing in countries. He
recalled that there have been nationalizations in the past,
although he felt that it is somewhat "out of fashion" now.
However, companies will continue to review countries in terms of
political stability, the size of reserves that can found, and
whether the company can establish a large presence in that country.
Countries such as Brazil and Angola do offer opportunities for
companies to establish substantial positions in those countries.
REPRESENTATIVE CROFT referred to the cost savings achieved under
the two charter proposals. He then inquired as to the other areas
cost savings could be achieved.
MR. HOLT answered that the savings come from areas where there are
overlapping operations. For example, in the North Sea the savings
would be achieved through deleting duplicate facilities because the
combined companies would not need such an extensive corporate
office that ARCO has in Los Angeles. Other cost savings would be
achieved from research centers because all of them would not be
necessary after the merger. Therefore, the savings would be
achieved in areas of overlap in either corporate offices, research
centers, or operating areas such as the North Slope.
CHAIRMAN HALFORD pointed out that the committee is behind schedule
and there have also been requests for executive session on
confidential information. He suggested the committee take a half
hour lunch break and come back to BP. He announced that the
Administration would not want to push back its timing much due to
some testifiers who are teleconferenced from the East Coast. If
the meeting goes into executive session, Chairman Halford requested
that it be kept an all-member executive session at least for the
nonconfidential information. Then a collective decision regarding
how to proceed could be addressed.
MR. CAMPBELL, in response to Representative Green's question, said
that his staff have some time constraints that may affect their
ability to testify after the Administration. Mr. Campbell offered
to return after lunch.
CHAIRMAN HALFORD announced, at 12:40 a.m., that the committee would
break for a half hour. The committee reconvened at 1:30 p.m.
Number 349
REPRESENTATIVE ELTON referred to the $140 million that accrues in
savings helps the investment (indisc.) of Alaska. He recalled that
at yesterday's meeting a committee expert suggested that a large
part of that $140 million could accrue outside the framework of the
merger.
MR. HOLT commented that, in BP's view, that little to none of that
$140 million could be achieved without a major structural event
such as the proposed merger. As production has declined, the
existing operators/owners on the North Slope have been working hard
to take the cost out of the system on the North Slope. He informed
the committee that "we" [BP] feels it has tried everything under
the existing structure of separate companies and separate
operations.
[There is a small break in the tape, only a few seconds.]
MR. HOLT noted that BP has worked with the other owners [on the
North Slope] over the last 10 years in order to affect some of the
structural changes such as a single operator at Prudhoe Bay. Those
efforts have been unsuccessful.
CHAIRMAN HALFORD asked if a single operator would achieve a large
portion or any portion of the $140 million. He acknowledged that
a single operator may be difficult to achieve. He asked if
achieving a single operator would be a structural event.
MR. HOLT agreed that such would be a structural event, although it
would not be as big as the proposed merger. Therefore, he could
not provide a specific percentage that could be attributable to
achieving a single operator. He indicated that a fair portion
would be attributable to a single operator, but not all.
SENATOR WILKEN referred to page 14 and the pie chart entitled "Cost
Reductions Increase Earnings Materially in Investment Case ($15)."
[There is a break in transmission.]
SENATOR WILKEN asked if [the $.56] (indisc.) in the transportation
of the oil is part of the $9.70 cost or part of the $1.28 in
earnings.
MR. HOLT said that he did not know where the $.56 comes from. He
indicated that he would have to talk to CERA to obtain a direct
answer.
SENATOR WILKEN explained that the $.56 is a pre-tax margin built
into every fair up oil transport per TAPS. Senator Wilken said
that he did not know if that $.56 was counted as cost or earnings,
which would make a difference.
MR. CAMPBELL answered that they would be happy to get back to
Senator Wilken with that answer.
REPRESENTATIVE GREEN clarified that he wanted to make sure that his
series of questions was not misconstrued as negative.
Representative Green agreed with BP Amoco's statement on page 23
that, "The resulting combined packages of divestitures represents
a comprehensive re-engineering of a major oil province without
precedent in the United States, or even the world." That statement
could be raised exponentially in regards to the importance to
Alaskans.
Number 397
REPRESENTATIVE GREEN recalled that it had been reviewed to some
degree that oil prices had declined last year. He acknowledged the
difficulty for BP Amoco to make a commitment with regard to how
much money it will spend since it does not know what properties it
will own after the "dust settles." Representative Green surmised
that if all the known and producing fields are declining, then
Alaska must find real oil in order to have continued viability.
Therefore, exploration is necessary. He expressed concern that it
was unknown how much BP Amoco's commitment to spend $5 billion over
five years would go toward developing known oil accumulations or
exploration. One of the most dynamic exploration companies in
Alaska has been ARCO and if ARCO is gone, will the commitment of
the merged company be as aggressive. Representative Green noted
the discussion that Alaska is one of the many opportunities in the
world and pointed out that ARCO viewed that far differently. How
much of ARCO's aggressive exploration attitude may continue?
MR. CAMPBELL replied that clearly, BP Amoco is committed to a
exploration program in Alaska, as has been the case in the past.
He commented that "we" will end up with acreage in NPRA and that is
something that will be aggressively explored. With regards to
offering state acreage for farmers, he explained that the aim is to
ensure that there is the maximum amount of work and exploration on
those acres that are farmed out. He said that "we" are not
interested in selling that acreage, "we" are interested in building
on the base that "we" have established with additional exploration.
He indicated that he could not specify a number of the $5 billion
that would be put towards exploration. However, he emphasized BP
Amoco's commitment to exploration in Alaska.
REPRESENTATIVE GREEN understood the divestiture of acreage down to
the maximum would not be divestiture of 100 percent of any groups
of acres, but rather a percentage of each. He acknowledged that BP
Amoco cannot guarantee anything is this realm, it certainly has
veto power for a company coming in that may want to aggressively
explore. He realized that there would be agreements providing for
companies such as [the merged company]. However, there could also
be agreements that contain nonconsent clauses, which would charge
a large rate on the money that [the merged company] would otherwise
spent. He asked if this will be a deterrent to companies
interested in coming to Alaska to be aggressive; is that a
monopoly.
MR. NOBLE agreed that the Charter does contain a provision that any
divested exploration acres will include nonconsent provisions so
that BP Amoco would not have the contractual ability to stop the
investment of investor in any property. However, it is in BP
Amoco's interest to find attractive packages. BP Amoco, as the
largest infrastructure owner and largest owner of a fixed cost base
on the North Slope - no one has a larger interest in increased
production save the state. He informed the committee that a number
of those packages include majority ownership of those whereas the
Charter provided the opportunity for the company to dilute the
interest. The packages are structured such that they are
attractive for investors.
MR. HOLT added that there is risk in the exploration arena, and
therefore it is typical for folks to partner in order not to bear
100 percent of the risk. Of course, people want to partner with
those who have knowledge and/or capital. He believed the ability
to partner with others existing players or not would be attractive
in many cases.
REPRESENTATIVE GREEN expressed concern with BP's exploration
efforts, which were far less than those of ARCO. He was concerned
that with the merger that emphasis [on exploration] may be lost,
especially coupled with statements referring to the competitiveness
of the world market. With regard to the mention that Shell and
Texaco have left Alaska, Representative Green wondered if that
occurred due to Alaska's hostile and high-cost environment. He
noted that Shell and Texaco had the least developed and drilled
acreage on the North Slope, which this merger would make available
to BP Amoco.
MR. HOLT said that he could not speak for Shell or Texaco. He
reiterated that when a company decides whether to enter, exit, or
stay in a region many factors are considered. Factors such as the
cost structure of that region which determines the profit potential
of that region, the government take, the stability of the region,
and the prospectivity of the region are all reviewed. He guessed
that companies that have left have reviewed those factors and
determined that other opportunities looked better. With regard to
one of the factors being that the company did not have an
infrastructure position, Mr. Holt acknowledged that it may have
been a factor. However, he pointed out that the infrastructure
position could have been picked up. He mentioned that BP Amoco has
not had people pursuing obtaining interest in TAPS.
REPRESENTATIVE GREEN understood that BP Amoco did not want to
disclose with whom it has had conversations. However, has the
situation alluded to earlier been a deterrent to those companies
interested.
Number 547
MR. NOBLE stated that with BP Amoco has strict confidentiality
agreements with all the companies. Therefore, he did not want to
answer.
REPRESENTATIVE GREEN referred to page 8 and the indication that
there are things that could be modified such as taxes and
royalties. He asked if BP Amoco would be suggesting that Alaska
would do well to reconsider the tax structure and the royalty
demands. "Or that we can continue to be viable as we are, if we
don't go the other way with them?"
MR. CAMPBELL echoed the earlier comments that "we" could only
affect the costs. He added that producers in the state always need
to look at opportunities for development. If that can be
encouraged by the state reviewing a tax code, that is a choice for
the state. He indicated the need for Alaska to review its
competitiveness in comparison with other places around the world.
CHAIRMAN HALFORD asked then if Mr. Campbell meant that Alaska's
taxes and royalties are reasonable at this point.
REPRESENTATIVE GREEN pointed out that Mr. Campbell's testimony has
indicated that it is imperative to reduce costs as it makes for a
better profit picture. He said, "I'm wondering about the fields
that are higher cost operating fields than Prudhoe are those that
you are indicating you would be willing to divest in, but that the
Charter expires in 2008 and if you extrapolate the performance
curve at Prudhoe ... out to about 2008 ... then we're gonna have
water oil ratios that are probably up five, six, seven, eight to
one instead of two to one." Therefore, operating costs rise much
higher, but it is still profitable. He acknowledged that the lower
the performance curve to the economic limit, the less profit is
obtained. In general, that is an asymptotic curve that extends for
years and years if one is willing to work in a low margin such as
the Cook Inlet fields. He inquired as to what BP's attitude would
be if the merger was intact and the year is 2005 or so and the
declined curve can be helped with in-field drilling and more
technology. However, it is inevitable that the economic limit will
be reached some day. He recognized that those five to ten years
that it is nursed along will not mean much to the operator,
although it would have tremendous meaning to the state. Therefore,
"we" have introduced reduction in royalties when that has happened.
Representative Green asked if BP plans to be present in Alaska, for
the long haul, on low profit fields as well as any new fields,
which may have a higher profit ratio.
MR. CAMPBELL said BP would be here in the long term
TAPE 00-05, SIDE B
Number 580
REPRESENTATIVE GREEN commented, "Okay, long-term."
MR. CAMPBELL pointed out that BP had not once asked the state to
divest anything. Therefore, he said that BP would be happy to be
in all the fields. We would be happy to stay in Kuparuk, to be in
Alpine, and to continue in all of Prudhoe.
MR. HOLT said, with the "Kirby's" aside, he would agree. As fields
such as Prudhoe decline, there will be a long tail and BP fully
intends to make that tail as long as it can. One of the
motivations for trying to create a step change in cost in existing
fields, as well as existing use fields, is to help extend the life
of the field. BP intends to be part of driving that curve out as
far in time as possible. Mr. Holt expressed pride in being part of
the owners which have achieved more from Prudhoe than was
originally anticipated. The proposed merger will enable the
company to extend that further, but the number of specific years is
not known.
Number 571
REPRESENTATIVE GREEN turned to the heavy oil associated with the
Milne Point Schrader Bluff area. He acknowledged that BP Amoco has
been greatly involved with the Schrader Bluff area. Representative
Green surmised that it would be unlikely that the heavy oil will
ever be as lucrative on a per barrel basis as the light oil. He
asked if BP Amoco intends to perform research with regard to
extracting poor quality oil as well as the better oil.
MR. CAMPBELL replied yes because it is in BP Amoco's interest, both
in respect to Alaska and other places around the world. He noted
that heavy [oil] in Alaska is not heavy in other places and the
climate and temperature also come into play as well. He affirmed
that BP Amoco would continue its work on heavier oils.
MR. HOLT directed the committee's attention to the amount of money,
several hundred million dollars over the last five years, that BP
Amoco has invested in Milne Point. A fair amount of the investment
was to try to progress the heavier accumulation of development at
Schrader Bluff. He also noted that at Prudhoe Bay there is some
heavier oil as well, such as the Schrader Bluff Satellite. We are
working aggressively to try to develop ways to more of that heavy
oil. Mr. Holt said, "We are fully committed to keep (indisc. -
coughing) inputting investment capital at risk to try to ...
further develop that."
MR. CAMPBELL informed the committee that BP Amoco's work at Milne
Point has increased that production three times since BP Amoco took
it over from Conoco.
REPRESENTATIVE GREEN referred to the chart on page 14. He recalled
charts of an earlier era in which the ratio was one-third to one-
third to one-third between the state, federal government and
operators. This chart seems to be considerably skewed; is that
triad no longer valid?
MR. HOLT answered that there are at least two factors at play. The
costs have increased over time, which is the dark slice of costs.
The other factor is that the relative proportion of take is a
function of the absolute oil price. There are elements of the
state tax, which are independent of price. Therefore, as prices
fall, the lower prices the relative take associated with government
take actually increases. If prices go above $15 [per barrel], the
share of the earnings would shade more toward industry. He
specified that it is a function of the tax regime, and therefore
the oil price assumption will drive the relative size of those
slices. The cost will also drive the relative size of those
slices.
REPRESENTATIVE GREEN understood then that this curve would,
relative to each other, would improve if the oil moved back to the
mid-teens or $20 oil [per barrel].
MR. HOLT said that the curve would improve for industry if oil
prices were higher than $15 [per barrel]. He also pointed out that
the curve would improve for industry if some of the cost could be
taken out. It would improve for everyone, if cost was taken out.
CHAIRMAN HALFORD mentioned the windfall profits tax, which would
substantially change the equation.
SENATOR TAYLOR inquired as to the date that was used to fix the
valuation of assets that BP Amoco would acquire from ARCO in the
merger. Was that date and valuation period at a time when oil
prices were $10 or less? Currently, oil is at $25 per barrel, and
therefore he assumed that oil assets probably have a greater value
today than when BP Amoco acquired them through the merger
documents. He inquired as to the amount of profits that BP Amoco
would project it would make off of the forced liquidation or
divestiture of ARCO assets through this merger or the Charter, if
it proceeds.
MR. NOBLE said that he recalled that because of the share-to-share
trade, he believed that the valuations are fixed in the range of
the time of close. Therefore, as other forces go forward then the
price of oil is reflected in both sets of shares. He noted that
there ends up being a readjustment, but he did not believe there to
be a risk of false pricing based on oil prices on one side of the
equation and not the other. In summary, he believed that the two
move together towards the closing date.
SENATOR TAYLOR referred to the $9.70 cost per barrel reflected in
the CERA report and recalled that Mr. Campbell testified that BP
Amoco's cost to be a "ballpark" figure of $10. He said that cost
is reduced relative to the merger by $140 million or some portion
of the $1 billion in overall savings, this is according to BP
Amoco's numbers. He asked what the projected cost would then be;
would it be $8 per barrel?
MR. NOBLE responded that he believed that the figures currently
being worked with would place it in the range of $.60 per barrel.
MR. HOLT explained that if one took the $9.70 from the CERA report
and the $140 million referred to by BP Amoco would take it down to
the $9 range.
SENATOR TAYLOR surmised then that such would increase the earnings
reflected on the same chart up to approximately $2 per barrel.
Number 490
MR. HOLT replied, not quite because the profit element is taxed at
both the state and the federal level, and therefore is split
between the state taxes, federal taxes, and the earnings.
SENATOR TAYLOR indicated his interest in the numbers specific to
BP. What percentage of BP's worldwide production has and is now
coming from Alaska? He mentioned that he had been told 20 percent.
MR. HOLT informed everyone that in terms of BP Amoco's worldwide
oil production, leaving out gas production, he believed it fell in
the range of 3 million barrels per day. Alaska's production is on
the order of 400,000 divided by 3 million, which is 13 percent.
SENATOR TAYLOR indicated that he had estimated that a little
higher. With the addition of ARCO production, that would obviously
increase.
MR. HOLT said that the total increase, if the merger goes through,
since BP Amoco would receive ARCO's global production. Therefore,
the $3 million increases to something just under $4 million while
the Alaska piece increases to about $575[,000]. Therefore, the
ratio becomes $575[,000] divided by $4 million which results in
about the same percentage.
SENATOR TAYLOR inquired as to what percentage of BP worldwide
profit is due to Alaska production of oil. He mentioned that he
had been told that it was almost double that amount, close to 30 or
40 percent of the overall profit.
MR. HOLT agreed that the percentage of BP worldwide profit due to
Alaska production of oil is a function of the oil price. When oil
prices are low, Alaska's profit contribution is low. When viewed
in the overall relatively high cost of this state, the relative
profit margin of barrels here compared to other places ranks Alaska
in the lower tier, the lower third.
REPRESENTATIVE GREEN turned to the Charter. If BP Amoco does not
receive an internal value for the leases and the divestitures, he
understood the Charter to mandate that "you" will do it. Is that
BP Amoco's intention?
MR. NOBLE and MR. CAMPBELL both answered yes.
REPRESENTATIVE GREEN recalled the Governor recently saying that if
BP Amoco did not acquire ARCO, someone else will because ARCO can
no longer exist. He asked if they believed that, under the current
oil price.
MR. CAMPBELL deferred that question to ARCO.
REPRESENTATIVE GREEN noted that one of BP Amoco's Vice Presidents
from London was in his office and made that same statement.
Number 405
SENATOR PEARCE returned to her concerns regarding investment in
Alaska as she believed that is where Alaskans' support or
opposition to the merger should lay, outside of the antitrust laws.
The Administration is saying that there is a negligible effect on
Alaska's revenues due to the merger, even though there are some
fairly significant Alaskan cost savings that BP will receive from
the merger. Senator Pearce commented that she would like see some
part of the savings return to the state in revenues, although the
Administration says that nothing more should be expected from "his"
Charter. She explained that she is still stuck with regard to what
those investments will be because if the state cannot depend upon
more revenues coming from the current production base, then the
state has to look to future investments as the only reason the
proposed merger would be good for Alaska. Senator Pearce inquired
as to how reducing production costs affect the decisions that are
made in London with regard to investments in other areas.
MR. HOLT explained that BP Amoco is organized in business units,
which are substantial pieces of business that run, in large part,
as independent businesses within a framework of common standards.
He informed the committee that he manages the North Slope business
unit. The investment decision-making process begins with each
business unit laying out the opportunity steps that are believed to
be attractive, based on the technical work. He used Prudhoe Bay as
an example. In the near term, Prudhoe Bay looks like additional
in-field drilling and development of some of the satellite
accumulations around the Prudhoe Bay field. The economic
attractiveness of that opportunity is reviewed and the cash-flow
and reservoir models are run in order to determine the possible
benefit streams from drilling more wells and the costs that would
result as well as the economics. Based on the opportunity step, it
will be determined how much should be spent. At this point, Mr.
Holt would then meet with a group of peers, business unit leaders
from other parts of the U.S. and the world, who review the
collection of business units in order to see how the opportunity
steps compare. Judgements are made with regard to how much of the
total opportunity set should be supported and then a pitch is made
to executive management.
MR. HOLT turned to the cost savings of the proposed merger. For
example, if the lifting costs in Prudhoe Bay can be reduced through
the merger, there will be more individual wells that pass economic
hurdles, and thus more drilling opportunities at Prudhoe Bay. The
cost to produce oil will have decreased not only for them, but for
their partners, as well.
He explained that they use the same economic measures to put these
opportunity sets in the same sort of framework. He gets challenged
by some of his peers to test out the quality of their opportunity
set versus another and form a view as to how much capital they want
to make a pitch for and they make the pitch; generally getting what
they ask for.
SENATOR PEARCE said as a result of the merger, she would imagine
the numbers of people he would have to meet with has expanded,
because there are more opportunities.
MR. HOLT agreed that both the opportunity set and the capital
available increase as a result of the BP Amoco merger.
SENATOR PEARCE said she thought it was fair to say that the lion's
share of capital expenditures up here on exploration and
development are made by BP Amoco or ARCO. She asked how much has
the competitive factor in the past three years in Alaska, as he has
gone to London to ask to invest money in Alaska, been a stimulus to
the investment decisions because of competition.
MR. NOBLE answered that the value of the opportunity is what drives
the capital that is available. The opportunity has always been in
Alaska; they do not bid above what an opportunity is worth.
SENATOR PEARCE said she is trying to figure out if the Board really
looked at the competition in Alaska or at BP opportunity and is it
important to competitors on the North Slope.
MR. NOBLE answered that he thought much had been made of
competition in an analysis which treats Alaska like we have three
or four "widget factories" competing to sell widgets. But in his
view, oil and gas production is a dramatically different business.
The upstream end of it has not been the subject of anti-trust
analysis in the past. It's been where the consumers are with the
gas stations and refineries. This has been partly because Alaska's
laws mandates competition. For example once you get a lease, you
don't compete with each other to drill wells next to each other.
The State requires you to for the maximum production of that asset,
to develop that jointly in an intelligent way. When they talk
about competition, it has very different effect in the upstream and
downstream markets.
MR. NOBLE rhetorically asked if the State benefits from diversity
of views and said he thought it did. He asked if it benefited from
having a configuration which allows to compete globally for capital
in various markets around the world and he answered he thought it
did. But then he asked, is it a function of the number of players
there are up here and he didn't think it was. He thought that we
are much better off with an intelligent configuration of companies
that can keep costs low and develop resources than with having lots
of folks running around claiming they are competitors. He thought
the conversation about competition on the North Slope was misplaced
and misfocused.
Number 260
SENATOR PEARCE asked if competition isn't a factor, should Alaskans
expect that there will be an increase in investment in Alaska
because of the merger and the Charter and a sale of some of the
assets to what is maybe a big company (at least aggressive), should
we see more or less investments than we would have seen with BP and
ARCO.
MR. NOBLE answered that he believed we would see more. He believes
what Mr. Holt says about the "virtuous cycle." He believes the
economics of the North Slope; a very large pool very far from
market with very high fixed costs. You need large amounts of
production just to keep face load up, the state it's in right now.
Now, if you can lower costs, just by new investments, you will
attract new investments, not just from BP, but from the new
participants. You cycle up with more production and he thought
that was where to go, although he couldn't guarantee anything. He
said the State was in the same position Mr. Holt was in. You have
to pick your best horse and ride with it. You don't always know
what's going to happen. BP has worked for the last 40 years to
prove it's the best horse up here and he believes it is the best
horse. The merger will make it a better horse. We'd better get on
it. He predicted an explosion of growth on the North Slope and an
extension of those fields.
SENATOR PEARCE asked why BP was not willing to commit to some
number of investment over the next five years. There should be
some number they could commit to make Alaskans feel more
comfortable about this. The public is scared and she needs to tell
them some good reason why they should believe in it, that it's good
for Alaska. It's clear that it's not revenues to the State.
MR. CAMPBELL responded that they would increase revenues to the
State by increasing production. They plan to make more money with
the merger. The Commissioner of Revenue said the way to increase
revenues was to increase production.
SENATOR PEARCE retorted that he showed how the State would get less
money with increased production.
MR. NOBLE explained the revenue note as he understood it, made an
assumption of no increased production. BP has said there will be
more production.
Number 220
SENATOR PEARCE said she didn't understand why they would not commit
to a dollar figure.
MR. CAMPBELL said they were willing to make a commitment on the
basis of defined assets. Today they don't know what the asset set
is going to be.
MR. NOBLE added once you go down divestiture route, which had a lot
of support in Alaska, until you get the exact assets in place, you
can't say for sure.
REPRESENTATIVE GREEN asked on page 22 they ask that the new parties
will be fully integrated in Alaska and wanted to know if that meant
in the sense of the corporate structure they would be all the way
from producer to marketer in Alaska or some other meaning.
MR. HOLT answered that all he meant that they would have interest
in the whole upstream chain - exploration acreage, producing
fields, pipeline ownership.
REPRESENTATIVE GREEN reference Commissioner Shively's December 13th
letter and a provision in the Kuparuk River Unit about preferential
right of first refusal and that he could potentially disapprove of
the signing.
MR. NOBLE said it was premature to say anything about at this
point.
Number 156
REPRESENTATIVE GREEN said on page 24 they indicate there is a
common occurance of sharing of facilities and certainly in drilling
exploratory wells. He didn't recall any agreements for operators
coming on later and asked if they thought there would be anything
different for an operator coming later who wasn't in on the
original installation. How much would he be charged, for instance.
MR. HOLT answered that the best examples of facility sharing
agreements are between satellite owners and the old existing field
owners. These agreements are being negotiated all the time and
there are over 30 of them now.
REPRESENTATIVE GREEN said on page 26 BP and ARCO agree with the
State to make gas available at an acceptable price to viable
projects and asked what that meant.
MR. HOLT replied that there were a lot of comments on a specified
price for the gas in the first draft and that was deleted and
replaced with words like "commercially reasonable, fair market, to
be mutually agreed between three sets of parties," the parties
being BP, ARCO, and the State.
MR. NOBLE added that the Charter contains a definition of a
qualifying project in there as well. If the project can obtain
project construction financing, provide reasonable financial
security with respect to a take or pay contract, and can obtain the
necessary approvals from other fields.
REPRESENTATIVE GREEN said the third box on page 28 says energy
companies must continue to merge to achieve a scale necessary in
invest in the largest scale projects without sacrificing portfolio.
He asked if that threw a wet blanket on smaller independent
companies.
MR. NOBLE said he believed the scale on the North Slope is such
that it needs at least one critical mass investor. Once that's in
place, there's room for all sorts of participants who can pick an
opportunity set that, in effect, increases the pie.
Number 90
REPRESENTATIVE KERTTULA asked about long-term contracts.
MR. NOBLE answered that he really couldn't because his group
focused on the Alaska end of it and another group is focused on
those. He read in the paper they have been announced to the
public. He said he would find out and let her know.
CHAIRMAN HALFORD asked if $140 million was saved every year and if
did apply to the total combined production of ARCO and BP, it looks
like that would represent something less than $.50 per barrel. If
that's the exercise, it's frustrating to know this occurs with that
effort when the price of oil is fluctuating and moving so much.
It's a third of our severance tax, it's a third of our royalty;
it's pretty small numbers in terms of a per barrel comparison.
Number 23
MR. HOLT responded that he has been living that frustration for a
much smaller target on a per barrel basis. Much smaller targets
than that have been the driving force behind his organization for
a number of years. Fifty cents a barrel in the context of oil
price swings seems small, but he emphasized that most companies
actually make their investment decisions on what they perceive to
be an average price. The ignore the swings for the most part in
terms of making large investment decisions. Given that, if you can
reduce the cost base by 50 or 60 cents on the auspices of an
assumed average oil price.
TAPE 00-06, SIDE A
Number 001
SENATOR LEMAN asked if Mr. Holt could provide a category breakdown
of the $140 million cost savings so that legislators could see
where the savings accrue.
MR. HOLT responded that there is no detailed breakdown but he could
provide notional areas where they expect the costs savings to come
from and he would get that information to the committee if no
confidentiality problems exist. He added there are a number of
identifiable things, one being overhead costs in Anchorage.
CHAIRMAN HALFORD thanked the BP Amoco panel for their
participation.
Number 96
KEVIN MEYERS, President of ARCO Alaska, stated what drove ARCO to
approach BP was not the financial viability of ARCO, it was that
ARCO felt the merger would be in the best interest of its
shareholders, ARCO employees over the long term, and for the
communities ARCO serves. If the merger were not to happen, there
would be changes--it would not be the ARCO of 1999. Mr. Meyers
said he doesn't know what the changes would be, but costs would
continue to be reduced, ARCO would continue to focus its operations
worldwide, and the organizational structure would probably change.
CHAIRMAN HALFORD asked what the current plan would be, with regard
to expenditures for this fiscal year, and where ARCO is in that
plan process. He also asked Mr. Meyers what Alaska can expect from
ARCO, as a contingency plan, while the process continues.
MR. MEYERS responded that every year ARCO goes through a planning
process and puts an operating plan together for that year and the
subsequent three years and, in the long range, a ten year period.
ARCO finalized one of those plans in January 1999, just before the
merger was announced in April. ARCO implemented that plan through
1999 - last year ARCO spent about $535 million in Alaska, half of
which was spent on Alpine. ARCO will continue to implement that
plan this year. He offered to furnish the committee with actual
numbers for the 2000 plan when he returns from a trip to Los
Angeles but he pointed out the levels of expenditure are consistent
with the operating plan that was put into place a year ago and they
are consistent with the levels that were spent last year.
CHAIRMAN HALFORD asked if the amount is in the neighborhood of half
a billion dollars.
MR. MEYERS response was yes.
Number 132
REPRESENTATIVE GREEN asked Mr. Meyers if he envisions that the
timing would also be according to ARCO's one, two or three year
plan.
MR. MEYERS responded that ARCO would keep implementing according to
that plan so that the key activities that were in place will
continue. Alpine has always been scheduled for a third quarter
start up and that start up is on schedule. Alpine will be a
significant part of the investment. ARCO plans to drill a number
of exploration wells this year, several will be in NPRA. Point
Matthew(ph) projects would be set up in the first or second quarter
of this year. These projects are ongoing and will continue to be
implemented. The potential merger is impacting the long lead
items. Future projects and new plans are not being developed
because it is not known who the partners will be. Mr. Meyers
expressed concern about what will happen with long term plans. Part
of the difficulty is determining who their partners will be and
what the partner's perspective will be. ARCO planned to run two
seismic crews this year but because of some of the uncertainty
surrounding ARCO's exploration acreage, it's been difficult to
agree on how to fund those and to find partners so ARCO will
probably only run one crew.
Number 174
SENATOR PEARCE asked if the downturn that was experienced in the
fourth quarter of this year would have happened anyway.
MR. MEYERS answered that the plan ARCO has been following was
predicated on a gradual return of oil prices more indicative of the
normal. That plan was put together in December of 1998 and January
of 1999. The plan assumed that oil prices would be back to normal-
-oil prices are above that now. Additional activity could be
anticipated in response to that oil price.
SENATOR PEARCE stated that in December, 1999, the Governor and
others made a case that not having a decision on the merger was
having an impact on the number of rigs operating on the North Slope
and the amount of work going on. She said it sounds like that was
not true, at least for ARCO.
MR. MEYERS responded that this is not a black and white issue. The
industry has not responded as strongly as it would have, going from
$9.00 to in excess of $20.00 so there was clearly not as much
activity but, on the other hand, ARCO has continued to execute the
plan that was in place.
Number 242
SENATOR PHILLIPS commented that he spoke with several ARCO
employees this fall who expressed reservations about the merger.
MR. MEYERS responded that as an Alaskan, an ARCO employee and as an
oil field industry person, he has found himself torn on the issue
but, when he looks at the economics of the issue which is what is
important to Alaska, the merger is the right answer.
CHAIRMAN HALFORD thanked Mr. Meyers for his presentation and
welcomed the speakers from the Administration.
Number 305
MR. JACK GRIFFIN, Assistant Attorney General from Anchorage,
introduced some of the consultants who assisted members of the
Governor's cabinet review team to determine an appropriate set of
remedies. Mr. Griffin said the group's principle point is that the
Charter protects the public interest in maximizing total future
North Slope production in two ways. First, it attempts to capture
the efficiencies and benefits that the public would see at Prudhoe
Bay as a consequence of the merger. Second, it adopts the
competitive paradigm for future North Slope leasing and bidding.
ASSISTANT ATTORNEY GENERAL GRIFFIN continued. There are several
points to remember about the public interests and the government's
role in evaluating the contract that these two companies
voluntarily entered. ARCO went to BP Amoco, it wasn't the other
way around. This is not a situation in which one company is
attempting to do something that we disagree with and that perhaps
other companies disagree with. It is also important to know the
market reaction to what ARCO did, and what BP Amoco and ARCO agreed
to do, was overwhelmingly positive. The market saw the same
benefits to this transaction that the companies did, and the
shareholders of those companies agreed. The State is not in the
same position as the either companies, the shareholders or the
market.
ASSISTANT ATTORNEY GENERAL GRIFFIN discussed some of the issues the
Administration saw when it first looked at the merger. It saw
benefits at Prudhoe Bay. There was no public interest that
supported keeping BP Amoco and ARCO as "competitors" at Prudhoe
Bay. Everyone agreed that one operator is sufficient to operate at
Prudhoe Bay and BP believes other benefits would result at Prudhoe
Bay from rationalizing the disparate interests in the oil rim and
the gas cap. From the Administration's perspective, those
benefits were undisputed and could increase production at Prudhoe
Bay by lowering some of the barriers to some of the incremental
investment decisions that happened in that field.
ASSISTANT ATTORNEY GENERAL GRIFFIN noted that wasn't the only real
benefit from the merger; the Administration also saw potential
benefits that were talked about by BP Amoco earlier. There was a
very real possibility for an increase in production attributable to
the $5 billion dollars BP was willing to commit to spend over the
next five years. Also, BP's argument about the efficiency that
could be gained across the North Slope by having just one operator
and lowering the overall cost base was substantial. Those
efficiencies would increase the ultimate production from the North
Slope. That argument was not lightly disregarded. The
Administration agreed that there were substantial benefits to
Alaskans in capturing the efficiencies and rationalizations of
interests at Prudhoe, and given that had not occurred for over 25
years despite repeated efforts, it became a proposition for the
Administration's team to evaluate the anti-competitive effect of
the merger outside of Prudhoe Bay and to evaluate whether the
benefits of one operator at the North Slope outweighed the benefit
of a competitive environment. The Administration's team felt it
was necessary to take a very long term view of the merger and with
that view, it felt opting for a competitive solution for future
North Slope leasing was a better approach than having a single low-
cost operator.
Once that decision was reached, the question became, how can new
competitors be created to replicate what ARCO's anticipated
activities would have been in the future for new lease sales. To
answer that question, the Administration's team went to the players
in the industry.
Oil companies gave four essential answers to what it would take for
them to be interested in Alaska and what it would take for them to
be competitive in Alaska. The information is reflected in the
specific terms in the Charter. First, they would need to have an
existing and substantial base of production and you need to be an
operator. Second, a company would need to be an operator. A non-
operator would fall into a category of disinterested observer and
collector of revenues from the State and that is what the team did
not want to capture. Third, a company must be integrated and have
some of the infrastructure to take the oil from the producing field
to the point you are going to dispose of it. Fourth, companies
must have good prospects for exploration. The Charter has
accomplished those goals and creates a structure that will provide
the best opportunity to maximize the North Slope production.
Number 492
MR. DAVID BOIES informed committee members that he looked at the
merger from the perspective of the antitrust issues and, in this
case, how to balance the efficiencies that a merger will obtain.
Almost every merger has some potential efficiencies associated with
it as well as potential competitive problems. In doing that
analysis, the relevant markets of concern need to be analyzed. The
concern, from an antitrust standpoint, is competition within a
particular market or markets. When looking at potential
competitive problems, it is important to keep in mind the market of
concern.
MR. BOIES explained that his focus was on the upstream market
because if there is going to be an adverse competitive impact on
the State of Alaska, that is where the impact would be felt. Of
particular concern was a potential problem for the markets for
bidding and leasing properties on the North Slope and, to some
extent, the possibilities of competition for exploration of
properties once they had been leased. The latter has a much more
attenuated effect because the latter is going to be driven more by
world market conditions than by the number of operators or holders
of those resources on Alaska's North Slope. The extent to which a
company has development rights in particular properties and to
which a company tends to develop those rights is going to be a
function of how those values and costs of doing that exploration
compare to the cost and terms of exploration and development in
other areas of the world.
MR. BOIES pointed out that diminutive competition for bids for
leases was of concern. The number of viable bidders could have an
effect on bids and leases because of the importance of lease prices
and payments to the State of Alaska. From an antitrust
perspective, the extent to which the merger will cause a diminution
in competition for leases raises an antitrust problem is
complicated because the antitrust laws are designed to promote
consumer welfare. A diminution of competition for leases may or
may not adversely affect consumer welfare therefore an argument can
be developed to say diminution of competition could actually reduce
prices for consumers. Mr. Boies said he doesn't believe that
argument is well taken but the complications that are inherent in
that argument had to be taken into account in assessing the
litigation risk if they were going to attempt to bring an antitrust
action.
MR. BOIES stated the thing to assess in antitrust litigation is
one's prospects for winning or losing, because that affects
settlement leverage. The litigation risk had to be taken into
account to assess the value of the case. The Administration's team
also had to assess the "relative few precedent" regarding what
precedents exist for a state actually being successful in bringing
its own action to court and getting an injunction. In a number of
cases, states raised issues on mergers and worked out a settlement,
but there are few cases in which a state litigated a matter and
succeeded in getting an injunction against the merger. That was
likely to be the case in the BP Amoco and ARCO merger, and despite
its very significant impact to the State of Alaska, the state's
aspect was only one part of the merger.
MR. BOIES indicated that one background fact he kept in mind during
the antitrust analysis was where the potential competitive problems
were, and also what the realistic expectations were in achieving
the desired result in court if we were not able to achieve that
result in negotiations. To do that, he thought a potential
participant would have to have a certain degree of existing
production. Second, a potential participant would need certain
integrated transportation rights so that its incremental costs, as
opposed to the fully distributed costs that it would pay if the
participant was simply a user of the transportation facility.
Third, he thought it was important that a potential participant
have operating rights and, fourth, that the participant have a
substantial portfolio of exploration leases to provide incentives
and the scope and scale to operate efficiently. The team attempted
to address each of those four points in the Charter. The team
believes the Charter is a reasonable response to the potential
competitive problems and that it is preferable to litigation. This
approach enabled the team to maintain the efficiencies and benefits
to the State that would result from the merger, and the team was
able to achieve a solution as good, and perhaps better, than the
State would have likely achieved in antitrust litigation.
TAPE 00-06, SIDE B
Number 584
MR. BOIES' last point was that the Charter as the form of the
settlement does not differ from a judgment approach if a dispute
arises regarding whether the terms have been followed. In either
case, the State will have to go to court and establish that the
terms were not followed. In a regulatory context, a judgment has
the advantage of providing for a remedy of contempt which tends to
discourage the defendant from drawing too fine a line in terms of
its performance. That is not likely to be a problem where you have
a concrete step like divesting a particular quantity of acres, or
divesting certain ownership shares in feeder pipeline or in TAPS,
or divesting a particular quantity of barrels per day of
production. The form of the remedy is not a non-issue because had
it been done another way, the effect would not have been materially
different.
CHAIRMAN HALFORD asked when Mr. Boies referred to settlement
leverage with regard to going to court, whether he was talking
about a state going into state court, or the state being involved
in a federal court action in conjunction with the FTC.
Number 555
MR. BOIES said he was referring to either because the state has the
option of going to state court under Alaska law or going into
federal court under the federal antitrust laws. The federal courts
have exclusive jurisdiction over the federal antitrust laws, so if
the state were to assert a claim under the federal antitrust laws
it would have to be in federal court. Regardless of the forum
selected, the issue would not be materially different in terms of
the relative lack of precedence for a state achieving a litigated
successful result of enjoining the merger. That is something the
court, particularly in large national or multi-national mergers,
will tend to defer to the federal antitrust enforcement agencies,
and those agencies will tend to take the lead role in determining
any remedy.
CHAIRMAN HALFORD asked Mr. Boies when he referred to the antitrust
as designed to promote consumer welfare, whether the state is a
consumer of the development services of the industry in returning
a revenue for the state's natural resources.
MR. BOIES said that it could be in one sense, but it probably is
not in another sense. To the extent that the state, as the owner
of certain resources or having ownership interests in certain
resources, has consumed services like transportation services, the
state might be considered a consumer. However, where the state is
lessor of hydrocarbon leases, the state would not be considered a
consumer, the state would be considered a supplier of a factor of
production. Suppliers of factors of production are not irrelevant
under the antitrust laws because conduct that adversely affects
them can, in turn, adversely affect consumers under certain
circumstances. In this instance, the state has an interest in
competition among bidders because that will drive up the price that
the state is paid. The price increase, to the extent it has an
effect on consumer prices, which for a whole variety of reasons
given conditions in the international oil market, is a matter of a
lot of complexity and question. To the extent it has any effect,
that effect is going to be adverse to the consumer, not in
promoting the consumer, unless you were to tie the lack of
competition into a lack of actually developing leases once they
were let. In general, consumers have an interest in factors of
production being priced as low as possible, as long as the price is
not so low that supply drops below an optimum level. With respect
to these leases, it is hard to make a case that the consumer is at
harm, unless one argued that fewer leases would be available, as
opposed to the state getting less for the leases that were made
available for bid.
Number 502
CHAIRMAN HALFORD said he was thinking in terms of all the costs of
production, transportation and so on, that are deducted from the
wellhead value. Those costs drive up the price and drive down the
value at the same time. He asked if the state and the consumer are
really on the same side of the issue.
MR. BOIES said they are. For example, if this merger were viewed
as having a likely effect of increasing pricing power with respect
to charges that would be imposed on the TAPS pipeline, you would
have a different question than the one being analyzed.
Number 482
REPRESENTATIVE KERTTULA asked Mr. Boies' to clarify his last
statement.
MR. BOIES said one of the things the team focused on was to try to
ensure that an alternative operator on the North Slope would have
access as an owner to transportation so that they would be paying
in effect the incremental cost and not the cost that they would be
paying if they simply approached it as a customer of the pipeline.
The team concluded that the divestiture achieved in the Charter
would solve that problem. Had that problem not been solved, a
potential alternative operator on the North Slope might say it is
a competitive disadvantage to one of the incumbents.
REPRESENTATIVE KERTTULA asked if that is the reasoning for all four
areas - to be certain that you have someone that is vertically
integrated and able to compete?
MR. BOIES said yes.
REPRESENTATIVE KERTTULA asked why the vertical integration is
important ultimately.
MR. BOIES said if you want to have an operator or company on the
North Slope that is going to be an effective bidder for leases, you
want someone who has a cost structure that will make it practical
for them to be an effective bidder. You want them to have a scope
and scale that will be efficient, you want them to have integrated
access to transportation, and you want them to have the kinds of
things provided in the Charter so they can be an effective and cost
efficient operator because it is their ability to be cost efficient
that will give them both the incentive and the strength to be a
plausible bidder for leases.
REPRESENTATIVE KERTTULA agreed with Mr. Boies' statement.
Number 452
REPRESENTATIVE GREEN asked Mr. Boies if he considered the fact that
all North Slope production is from State land which is shared
equally among all the residents of the State, as opposed to Texas
where the leases are owned by individuals.
MR. BOIES replied the issue is whether it is owned by the State or
owned by individuals. Hydrocarbons are a factor of production.
From the standpoint of the State of Alaska, as the owner of
substantial hydrocarbon reserves, the State of Alaska has a fiscal
interest in getting a good return for that asset, just as a state
that owns a lot of timberland has an interest in getting a high
price for lumber. That is not really an antitrust concern. The
antitrust laws are not designed to get a good or even fair return
for producers. The antitrust laws are designed to get consumers
the lowest possible price. In effect, the antitrust laws are
designed to drive down the price that owners of productive assets
have. To the extent that the productive assets require renewing
capital investments, one doesn't want to drive it down to a point
where optimal investment becomes unprofitable. When the resource
is hydrocarbon in the ground, and the question is how much you are
going to be paid for those hydrocarbons, the antitrust laws want to
pay you as little as possible to reduce the price to consumers.
Number 420
REPRESENTATIVE GREEN said Alaska is different because we are
upstream. He asked if you carry that concept to the ridiculous and
assume that there is absolutely no profit on the upstream side
because the price was driven so low to benefit consumers in some
other state, whether Mr. Boies would consider that an adverse
situation from an antitrust perspective.
MR. BOIES said it would not be an adverse antitrust problem. It
would be a matter of great concern to the State of Alaska and it
would be something the State of Alaska would have an interest in
trying to counter. OPEC's desire is to attempt to stabilize and
improve the price of hydrocarbons to the producing states. If that
took place in the United States by private parties, it would be a
violation of the antitrust laws.
CHAIRMAN HALFORD asked about the State royalty oil barrels and
transportation.
MR. BOIES said one can argue that the State is a consumer of the
transportation resource. It is a consumer, in the sense of a
purchaser. When antitrust laws refer to consumers, they are
talking about the ultimate consumer. To the extent that a person,
state or entity in the production chain is a purchaser of goods or
services, the antitrust laws are interested in the purchaser to the
extent that what happens to that person, state or entity will
affect ultimate consumers. Another issue that the FTC is currently
grappling with in connection to this merger is whether this merger
will affect gasoline prices on the West Coast. That is unlikely
because such prices are determined by world market prices. One of
the things the FTC is looking at is whether one could consider the
refineries as protected consumers under the antitrust laws. They
would have to prove that there would be an affect on the price of
the crude oil. Even, if that was true, the legal issue of whether
those refineries are really protected consumers under the antitrust
laws remains.
CHAIRMAN HALFORD asked if the refinery is designed to handle
Alaskan crude oil and a change to that design would cost money, and
the refiner decides to pay the difference in the premium to avoid
making refinery changes, whether the refiner would be considered a
consumer.
Number 344
MR. BOIES said in the very short-term, it is probably the case that
there can be differentials in pricing. That is true for
commodities generally. There are a wide variety of reasons why
commodities are not priced uniformly, and some of those may be
differences in terms of the cost that would be required to make a
short-term adjustment. A particular refiner might pay an upper and
lower range expressed in a few cents for any particular kind of
crude oil, including ANS crude oil, depending on the refiner. You
have to accept that as something that happens in the real world.
REPRESENTATIVE WHITAKER asked to hear more about downstream issues.
ASSISTANT ATTORNEY GENERAL GRIFFIN stated the press has reported
that the FTC is concerned that the merger benefits Alaska at the
expense of people at the pump in California. He noted Dr.
Leitzinger has some information on that.
CHAIRMAN HALFORD asked where that information came from because he
hadn't heard that.
ASSISTANT ATTORNEY GENERAL GRIFFIN said he didn't know who leaked
the information, but the leak was that FTC staff was advocating to
the Commission that this merger would raise the price of gasoline
in California.
CHAIRMAN HALFORD asked if this is supposed to have come from the
FTC.
MR. GRIFFIN said it is alleged to have come from the FTC staff in
a paper they prepared urging the commission to take a particular
action.
Number 344
DR. JEFFREY LEITZINGER, President of EconOne Research, made the
following statements. He has spent much of his career looking at
ANS market issues, and much of that on behalf of the State of
Alaska. The issue the FTC is looking at is whether the merger will
result in higher ANS prices on the West Coast, whether that will
lead to higher crude oil prices generally on the West Coast and
then higher gasoline prices. Based on 15 years of looking at ANS
market conditions, he does not see how either of those effects will
result from this merger. His conclusion is based on three reasons.
First, the crude oil market prices today are set by world market
price conditions - by the cost of bringing imported crude to the
West Coast. Changes in ANS output or prices are not going to
affect West Coast crude oil price levels. Changes will only affect
how much ANS is used on the West Coast versus foreign crude.
CHAIRMAN HALFORD said there will be no impact at all on the West
Coast based on increases or decreases in ANS production.
Number 278
DR. LEITZINGER said yes, the West Coast today is very different
today than it was five or ten years ago when there was surplus ANS
production. Because of the export ban, the market that people
looked to for ANS was the West Coast. At that time, ANS had backed
off the West Coast and just about all of the imports that were
available to substitute for ANS. ANS became the price setting
crude oil. It was absolutely the case ten years ago, that when you
change the amount of ANS you tried to sell on the West Coast, it
had an effect on the West Coast crude oil prices. What happened as
a result of the decline in ANS production, and in some parts
because of the relaxation of the export ban, is in the mid-1990's
there was no longer enough ANS crude oil to supply demands in West
Coast refineries. What had been a small stream of imports, which
came into the West Coast for purposes of blending and increasing
average quality of California crude oil, had now become a veritable
flood of imports. Five years ago about 200,000 barrels a day of
imported crude oil was brought into the West Coast, this year there
will probably be close to 600,000 barrels a day. That is about 25
percent of what West Coast refiners demand.
DR. LEITZINGER continued. The importance of that is not just the
25 percent, but it is the 70 million barrel a day world market,
with six million barrels a day of excess capacity. In his view, if
an ANS producer were to attempt to raise West Coast crude oil
prices by holding back output, which is the mechanism used by a
firm with market power, the West Coast refiners will simply
substitute imports to take the place of ANS. In the last two or
three years, ANS production has fallen off and more imports are
coming in to take its place, but the relationship of ANS prices to
import prices has stayed the same. The 200,000 barrel decline of
ANS supplies to the West Coast over the past several years has had
no discernable impact on ANS prices as compared with foreign
prices. His point is that the West Coast is now driven by
worldwide market conditions and changes in ANS volume or any
efforts to raise prices are simply not going to succeed.
CHAIRMAN HALFORD asked if any refineries on the West Coast run 100
percent ANS crude oil.
DR. LEITZINGER replied yes, the two ARCO refineries are running
virtually 100 percent ANS crude oil, and he believes that EXXON's
Benicia refinery is also running 100 percent ANS crude oil.
CHAIRMAN HALFORD asked if there was any cost for conversion.
Number 223
DR. LEITZINGER answered no. ARCO's refineries are especially
suited to run ANS, and if ARCO were to try to change that to run
foreign crude oil, there would be significant cost. The reason why
that fact doesn't mean you can raise prices on the West Coast is
that the problem is the West Coast is a refining market of 2.4
million barrels a day. The ARCO and the EXXON refineries together
use about 500 thousand barrels a day, maybe a little more. There
is another 1.5 million barrels a day in refineries on the West
Coast that readily use imported crude oil, so a large part of the
market will readily switch to foreign crude. Even if you were to
try and target a particular refiner who, because of its
configuration, couldn't switch with the high price, because there
is that other large volume of crude oil coming to the West Coast,
they would just buy it from one of the other refiners. If you
wanted to put the squeeze on those few refineries that are ANS
specific, you would have to pull all the rest of the ANS off of the
West Coast. It will not be in a company's best interest to do that
because the West Coast is too important as a market.
DR. LEITZINGER explained the second reason for his conclusion is
that he doesn't believe the merger will increase BP's ability or
incentive to try and increase prices on the West Coast. The
Charter will reduce BP's position as a net seller of crude oil on
the West Coast. To the extent that volume is a measure of a
company's size and importance, it's going to make BP less important
on the West Coast because, as a result of the merger, while BP will
obtain ARCO's crude oil volume, BP is also going to be obtaining
ARCO's refineries, which today consume more crude oil than ARCO
produces. The estimates are that about 50 thousand barrels a day
of the supply that BP used to sell on the West Coast to third
parties will be needed to feed ARCO's refineries. That is 50
thousand that BP used to sell that won't be there. In addition,
the Charter will mean another 175,000 barrels a day in BP
production will go to two other parties who will either use or
market that oil on their own. The net result, from BP Amoco's
standpoint, is that 225,000 barrels of oil which it used to sell on
the West Coast, is now going into their own refinery or to other
parties to market. That volume is going to disappear from BP's
sales business as a result of the merger, and equals a little over
50 percent of the total volume it has to sell.
CHAIRMAN HALFORD asked about long-term contracts for another
200,000 barrels, and how that relates to all of this.
DR. LEITZINGER replied BP sells about 400 thousand barrels a day on
the West Coast today. Two-hundred-twenty-five-thousand barrels of
that is going to disappear because of the merger. It is going into
the ARCO refinery and it is going through the Charter to two other
sellers. BP has committed to sell 100,000 barrels of the remaining
200,000 barrels a day under long-term contracts. That should act
to reduce any concern that BP Amoco after the merger might somehow
try and pull back output. They have already shrunk the amount of
output they have to sell by over half, and half of what remains BP
has now committed to sell under long-term contracts. It is really
going to take them out of play as a seller. On the West Coast
today, there are really two significant arms-length sellers of ANS,
one is BP and one is EXXON. The merger with the Charter will turn
the West Coast into a market where there are potentially now four
significant sellers of ANS on the West Coast: BP, EXXON, and the
two companies that pick up the oil under the Charter. If there is
a concern that the merger may affect competition, it will mean
there are more arms-length crude oil sellers with significant
volumes, not less. If it will do anything, it will have to work in
the right direction competitively.
DR. LEITZINGER stated his third reason goes to the relationship
between crude oil prices and gasoline prices on the West Coast.
This is something at EconOne has been studying carefully for the
past six to eight months. One thing that has happened in the West
Coast over the last three years is gasoline prices have become
disconnected from crude oil prices. The margins that existed in
prior years in the refining business have increased 30 percent.
The market is much more volatile with peak margins doubling in size
over prior years. Several things contributed to that disconnect.
The "carb restrictions" were implemented. No longer can outside
supplies of gasoline be brought in to supply the important market
on the West Coast because outside sources typically can't make
large volumes of carb-gasoline quickly. Second, when you have a
refinery outage, there isn't an easy way to make that up, and we
have had several big price spikes in the last three years that have
caused average margins to go higher. Third, there are some issues
regarding the market structure and competitiveness of the gasoline
marketing and distribution business on the West Coast. There are
some very odd pricing relationships when you look at Northern and
Southern California and San Diego in gasoline prices, and the only
thing that seems to differ is differences in marketing margins and
what happens to retail under the business.
DR. LEITZINGER said that is significant for two reasons. First,
because of this disconnect, it's not crude oil costs that are
driving gasoline prices, it could be pure carb-refining capacity,
problems with inventory when there are crude outages, or marketing
issues in the distribution of gasoline. But, some combination of
those factors are what is driving gasoline prices on the West Coast
today, not crude oil costs. Even if one were to believe that a
modest increase in ANS cost for the West Coast were to occur, he
does not believe you would see it in gasoline prices. Carb-
refining, the availability of supplies for outages, and
implications of competitive concerns about the distribution system,
will be affected by the merger. Because the West Coast is part of
the world market, because he doesn't think the merger is going to
add to anyone's incentive or ability to increase West Coast prices,
and because of the disconnect between crude oil costs and gasoline
prices, he doesn't think there is a dangerous prospect here.
Number 44
ASSISTANT ATTORNEY GENERAL GRIFFIN said Dr. Leitzinger is not the
only one who has concluded this. We essentially had this debate in
1994, and 1995. At that point, part of the debate really was
should we lift the export ban. Since by doing so, we may cause ANS
prices to rise which would hurt California gasoline consumers.
Sounds a lot like some of the things we have been hearing that are
allegedly coming out of the FTC. Congress concluded when it decide
to lift the export ban that the national interest would be advanced
by allowing ANS to trade at world crude oil prices.
Because of the export ban, the ANS price was artificially
depressed. Alaska was picking up the tab for the export ban.
Congress found that it was not in the national interest, because
California gasoline consumers were not benefiting. Even though the
export ban was artificially depressing the price of ANS, and we
were paying that cost, the refiners on the West Coast were not
passing that along to California gasoline consumers. They were
putting it into their bottom line. What appears to be happening
today at the FTC is that they are afraid that the State of Alaska
may be able to enjoy higher crude oil prices and they are concerned
about protecting the margins of West Coast refiners. If that is
true, we think it is illegitimate and the FTC should step back and
reevaluate where the national interest is.
TAPE 00-7, SIDE A
Number 001
I don't think that the State of Alaska benefits by aiding and
abetting what may be an effort by the FTC to protect or increase
the margins of West Coast refiners. I mean as Dr. Leitzinger
pointed out, it's a world crude market. It's an argument that's
not even a rational concern on their part. Obviously something is
going on there and that's why we had Dr. Leitzinger here today to
talk to you.
CHAIRMAN HALFORD asked what the current differential is of ANS to
other West Coast refiners.
MR. PULLIAM replied the ANS to WTI differential today is about $1.
AN UNIDENTIFIED SPEAKER said the differential has averaged about
$1.50 over the past year.
MR. PULLIAM said he thought Saudi is also priced off WTI so he
imagines that relationship would be relatively easy to establish.
CHAIRMAN HALFORD asked if that is just a little bit less than it
has been for a long time.
MR. PULLIAM replied ANS prices have stayed in a very narrow ranges
on the West Coast at least since 1995 which is about the time ANS
became deficit to West Coast refiners.
CHAIRMAN HALFORD said, "But even before that it was $1.50 to $2
maximum.
MR. PULLIAM agreed it was closer to $2 below WTI before that time.
ASSISTANT ATTORNEY GRIFFIN pointed out a report issued by the
Governmental Accounting Office (GAO) in June or July of 1999 noted
the decrease in the differential between ANS and other world market
crudes that occurred in the 1995 time frame. The GAO concluded
that the rise in the ANS price at that time was not passed along to
West Coast gasoline consumers.
Another federal agency along with the federal Department of Energy
concluded that the price of ANS on the West Coast is not a
California consumer issue.
CHAIRMAN HALFORD stated, "But that works the other way. That was
a rise."
ASSISTANT ATTORNEY GENERAL GRIFFIN said that was a rise in the
price of ANS and, although he does not know what FTC members think,
if what has been reported in the press about the FTC's concerns is
accurate, the FTC must be concerned about a price rise in ANS. A
price rise concern is the only thing that could drive what is being
reported about the FTC.
He indicated there may be a question of the State of Alaska's
credibility among some of the FTC staff because they know that
Alaska benefits when the price of ANS rises. The fact that ANS may
go up is not something that Alaskans should fear, but for a number
of reasons, the FTC should also not fear it.
Number 82
MR. LOEFFLER made the following comments to "connect the dots"
between statements made by Dr. Leitzinger, David Boies, and the
FTC's alleged concerns. If the FTC wants to maintain a case based
on this alleged impact on California consumers, it will run into
testimony similar to Dr. Leisinger's that there is no retail
consumer impact. The FTC is really trying to protect the margins of
California refiners which several federal reports have said those
margins to be the highest in the country or, indeed, the world.
The FTC has difficulties with its case, if that is its complaint.
The FTC may have thought it could slow this merger through
attrition in the absence of this sustainable legal theory.
ASSISTANT ATTORNEY GENERAL GRIFFIN introduced Dr. Warren-Boulton
who examined the upstream fitting issues from the State's
perspective.
DR. WARREN-BOULTON made the following points. First, given the
current State leasing practices, even a merger to monopoly would
not be expected to have a systematic effect on the acreage leased,
the exploration efforts, or production and hence, on state revenues
and royalties or taxes. A merger to monopoly would, however,
significantly reduce revenue from bonus bids. For that reason, he
has concentrated on the effects of this merger on state revenue
from bonus bids.
He repeated Mr. Boies' statement that the relevant antitrust market
here is not production but leasing. The critical issue from the
point of view of state revenues is the market for state leasing and
the issue is whether or not this merger will significantly increase
concentration amongst potential buyers of state leases.
DR. WARREN-BOULTON said a third potential market is affected by
this merger which is the gasoline market in California. He
repeated the critical issue is the effect of the merger on the
market for leasing of State lands. To the extent that the Charter
is involved in issues of production, the goal is not to create
competition in production, but rather to create units that are
capable of becoming effective bidders. The ultimate goal is to
increase the competitors in the market for bidding on State leases.
DR. WARREN-BOULTON informed committee members that he constructed
a fairly complex econometrics model to determine the value of
winning bids. He calibrated that model using a very extensive data
set provided by the State on all tracts leased on the North Slope.
That model was then used to determine the effect on winning bids
and on State revenues. Two variables exist; the first affect the
competitive or true value of the oil under the tract, such as the
price of oil, the amount of reserves and the cost of recovery. The
second set of variables are variables such as the number and nature
of competing bidders which determine the share of the value that
goes to the State. That model is then used to simulate the effect
of the merger on state revenue and to estimate the potential
effects of the merger combined with the Charter.
DR. WARREN-BOULTON explained the prediction of the model, in terms
of the effect of the BP-ARCO merger absent the Charter, is a
reduction of competition for leases and a reduction of state
revenue on bonus bids. He estimates that historically, the
elimination of competition between BP and ARCO would have reduced
total bonus bids to the State by about 19 percent. That number is
a reasonable one to use in looking forward as to the impact of the
merger, absent any other provisions such as the Charter, on the
estimated revenue of the State from bonus bids in the future.
DR. WARREN-BOULTON said he analyzed the level of bidding activity
that would be needed on the part of two new firms whose entry was
induced by the Charter to more than offset the effects on bonus
bids of the merger and compared the entrants to existing firms on
the North Slope. The analysis reveals what hurdle the Charter will
have to overcome in order to offset the anti-competitive effects of
the merger. The model concluded that the entry of two moderately
active firms would counteract the effect on bonus bid revenue of
the merger. For example, if two entrants with the past bidding
characteristics of Union Texas, which ranks fifth in bidding
frequency, and Murphy Oil, which ranks about eighth, that would
just balance out the effects of the merger of BP and ARCO. If the
Charter resulted in the entry of an Amerada clone, which is
seventh, and a Murphy Oil clone, that would not be sufficient to
counteract the effects of the merger and bonus revenues would fall
about three percent. On the other end, if two firms, such as
Unocal, which ranks ninth, and Anadarko, which ranked fourth, the
net effect would be an increase in bonus revenue by about two
percent.
DR. WARREN-BOULTON explained that since the merger is expected to
generate significant efficiencies downstream, it follows that if
the Charter is successful in counteracting the anti-competitive
effects of the merger on the leasing market, the state will be
better off in terms of revenue with the merger and the Charter than
without the merger.
Number 225
REPRESENTATIVE GREEN asked how the model compares his analysis of
two potential buyers with the continuation of ARCO as is.
DR. WARREN-BOULTON said that is exactly what the model does. The
model looks at the entire pattern of ARCO bidding and its effect
over time, not only on the bid leases but also on its presence on
the bids by BP and others. The model looks at what the effects
would be if there was no competition between BP and ARCO. The
effects are quite substantial; about a 20 percent reduction. The
model was also constructed to ask what the effect of bidding by
Union Texas and all other bidder firms was. He was then able to
combine BP and ARCO and ask how large and aggressive the entrants
would have to be to offset the anti-competitive effect of the
merger. The answer is, assuming that the Charter is effective in
introducing two firms, that the effects on bonus revenue of the
merger could be counteracted.
REPRESENTATIVE GREEN asked Dr. Warren-Boulton if he has checked his
model against the last couple of lease bids in which the
combinations did not rise to the top in getting bids.
DR. WARREN-BOULTON answered the model uses all data from the entire
leasing period since leasing began in Alaska. He asked whether
those relationships have changed over time to re-estimate the model
for different time periods and got substantially the same effect.
REPRESENTATIVE GREEN clarified that he was asking if Dr. Warren-
Boulton compared the findings of his model regarding off-setting
the anti-competitive possibility of the Charter and the merger with
the real picture in which Anadarko did not win the leases that ARCO
did.
DR. WARREN-BOULTON replied the presence of firms bidding affects
the winning bid even if they don't win. For example, one of the
things he found was the presence of ARCO had a significant impact
on the bid by BP even when BP was the winning bidder. The
potential competition from ARCO had a significant impact on the
winning bids even on tracts that ARCO did not bid on because firms
do not know who will bid.
REPRESENTATIVE GREEN expressed concern that something is not right
with the model.
Number 363
REPRESENTATIVE WHITAKER asked if Dr. Warren-Boulton's model is
available for review.
DR. WARREN-BOULTON asked to take a look at that question but
surmised that until the outcome at the FTC is known, the model is
probably not available.
REPRESENTATIVE WHITAKER expressed concern that the committee's
inability to validate substantial conclusions presented by the
Administration is problematic.
REPRESENTATIVE GREEN said Assistant Attorney General Griffin noted
he was not surprised that BP's previous attempts to find a single
operator for the North Slope failed. He said he presumes those
attempts failed because of a problem with ownership of proprietary
information and asked if that is correct.
ASSISTANT ATTORNEY GENERAL GRIFFIN replied that he has no direct
personal knowledge of what considerations entered into the
discussions of the parties in negotiations. From looking at the
Prudhoe Bay field and the separate participating areas for the oil
revenue gas cap, his guess is that an inability to agree on the
value of the gas played a substantial role. He noted that since
the inception of Prudhoe Bay, they have not been able to do it even
though it makes sense to have a single operator for that field.
REPRESENTATIVE GREEN asked Assistant Attorney General Griffin if he
said the value that the various estimators made on the gas cap may
have had an effect on the bids for other leases.
ASSISTANT ATTORNEY GENERAL GRIFFIN clarified he was responding to
the question of why does the Administration think the owners at
Prudhoe Bay have not been able to align their interests to date.
ASSISTANT ATTORNEY GENERAL GRIFFIN offered to address further
questions about the fiscal report prepared by Dan Dickenson for
Commissioner Condon.
CHAIRMAN HALFORD asked Assistant Attorney General Griffin to
elaborate on the last paragraph of the conclusion.
ASSISTANT ATTORNEY GENERAL GRIFFIN read the paragraph as follows.
The goal of the Charter for development of the Alaska
North Slope was to keep North Slope competition alive in
the long term and create replacement barrels for the
fields that drive our current production. It will be
many years before our forecast will begin to reflect
whether that attempt was successful or not.
He said he believes there is a question of whether there is going
to be additional production in the short term over what we have
predicted and would be expected to predict in the absence of thee
merger. Hypothetically, if the FTC was to block the merger, the
Charter would disappear and none of the efficiencies hoped for
would occur at Prudhoe Bay. The long term intent of the Charter
was to create competitors for future North Slope lease sales. It
will be years before it is known whether the creation of new
operators and new competitors on the North Slope will ultimately
produce more barrels of oil than we might have otherwise seen
through a single operator across the North Slope.
Number 363
REPRESENTATIVE KERTTULA asked, in the best of all worlds, whether
the group believes it would be better for the long term picture of
Alaska to go back and have ARCO as it was or to have the Charter.
ASSISTANT ATTORNEY GENERAL GRIFFIN stated a lot of people really
respected ARCO. People liked that ARCO was aggressive in some
areas of developing the North Slope while BP was more aggressive in
other areas. BP and ARCO brought two sets of eyes and skills to
the North Slope and tried different things. In that sense,
reverting to the way things were sounds good. He does not believe
that is any longer a realistic view, however, and the
Administration is not articulating an anti-trust argument that ARCO
is a failing company. He agrees with the market's perception that
the combined companies would be a lot stronger. In the long term,
combining the interests of Prudhoe Bay, achieving some cost synergy
in other areas of the North Slope, and creating new competitors in
Alaska, the State will be better off in terms of the total numbers
of barrels produced. He maintained that ARCO was a great company
but the bottom line is that the State will be better off as a
consequence of the new arrangement.
REPRESENTATIVE KERTTULA asked if he approached this issue with the
view that the merger would happen.
ASSISTANT ATTORNEY GENERAL GRIFFIN replied when the proposed merger
was announced, it took everyone by surprise. The Administration
did not start its investigation with any preconceived notion of
"the right answer." They looked at the law and the facts and
adopted an approach that appropriately reflects how government
should react when it sees a situation like this.
REPRESENTATIVE WHITAKER indicated one part of AS 45.55.068 says
that a substantial lessening of competition may not develop from an
acquisition or merger. He asked Assistant Attorney General Griffin
to justify the Charter agreement with regard to AS 45.55.068.
Number 415
ASSISTANT ATTORNEY GENERAL GRIFFIN replied that particular statute
is an analog of the federal Clayton Act. The legal standards that
Mr. Boies spoke about would, more likely than not, apply in the
interpretation to the state's law as well. The question is not
only about competition, it is about the sort of competition that
the antitrust laws are designed to protect. He asked committee
members to keep in mind whether the merger creates a viable
antitrust case and whether the law would even apply.
REPRESENTATIVE WHITAKER asked if he is referring to Mr. Boies'
comments regarding the upstream versus consumer issues on the
downstream issue.
ASSISTANT ATTORNEY GENERAL GRIFFIN said yes.
REPRESENTATIVE WHITAKER asked if Mr. Boies' concern is with the
downstream.
Number 438
ASSISTANT ATTORNEY GENERAL GRIFFIN thought Mr. Boies' was saying
the traditional antitrust analysis would focus on consumers. He
added that the Administration did take a look at competition and
that is precisely what they asked Dr. Warren-Boulton to look at on
the upstream. They asked him to address what the loss of ARCO as
a competitor at the lease sale stage would mean to the State.
Regardless of whether all antitrust experts would agree that Alaska
has a case, the Administration felt it was important to exercise
the State's responsibility to protect the public interest to create
a competitive environment on the North Slope.
REPRESENTATIVE WHITAKER thought that would lead to a negation of
Mr. Boies' contention that the upstream competitive issue really is
not an issue.
ASSISTANT ATTORNEY GENERAL GRIFFIN responded that one could argue
that the upstream competition issue is not an antitrust issue. The
Administration never took that position in its negotiations.
DR. WARREN-BOULTON added they would have said the leasing market is
an antitrust market and that the State of Alaska is standing in as
a consumer. There is no difference between a merger that increases
monopoly that raises prices to consumers or a merger that creates
monopoly power that reduces prices paid to input suppliers. The
Antitrust Division merger guidelines regards the two as equal. His
conclusion, however, is there is risk of litigation even when one
is on the right side. In his analysis the issue comes down to the
fact that it is pro-competitive if it leads to more revenues and it
is anti-competitive if it leads to less revenues to the State of
Alaska in exactly the same way that a merger in an output market is
pro-competitive if it leads to lower prices to consumers and anti-
competitive if it leads to higher prices to consumers. The
litigation risk arises in the distinction between what one would
argue and what one believes and persuading the court.
REPRESENTATIVE WHITAKER said he understands that argument in part.
He asked Assistant Attorney General Griffin to elaborate on point
number 2.
ASSISTANT ATTORNEY GENERAL GRIFFIN said assuming the broader
interpretation of the statute is correct, the Administration looked
at the competition issue and then developed the solution necessary
to address the competitive problems they saw. One of the tenets of
the application of the antitrust laws is that in evaluating a
proposed agreement between two private parties, the government can
step in and take that contract away if the public interest in
preserving competition requires it. Taking the contract and
ripping it up is the most egregious form of government reaction.
It is incumbent upon the government to look at the agreement and
ask itself whether there is a less drastic remedy which is what the
Administration did. They looked at the Charter and developed a
structure that would guarantee competitors in future North Slope
lease sales on both state and federal lands.
REPRESENTATIVE WHITAKER asked if he could justify the substantial
lessening of competition concerns of AS 45.55.068.
ASSISTANT ATTORNEY GENERAL GRIFFIN said the Charter satisfies any
concerns under the state's antitrust laws by creating one, and
possibly two, new operators on the North Slope who have the
production, right to operate, and additional exploration leases
necessary to form the basis of a company that will step into ARCO's
shoes and bid.
REPRESENTATIVE WHITAKER commented if that is the case, he finds it
curious that there is a necessity in the Charter under the heading
of Number 3, Alaska's Commitment. The last sentence of that
paragraph reads:
The State accordingly agrees that in exchange for
BP/ARCO's fulfillment of their obligations under this
merger, it will not seek to enjoin the merger to seek
additional orders or judgments under AS 45.55.080 related
to a claim that the merger is unlawful under AS
45.55.068.
He repeated that if it is so clear that the Charter answers the
antitrust concerns under its merits, it seems strange that it need
be specifically precluded from prosecution under that statute.
ASSISTANT ATTORNEY GENERAL GRIFFIN commented that the sentence read
by Representative Whitaker is the consideration the state gave in
return for forcing BP to agree to divest between $3 and $4 billion
worth of assets. It is the standard response of the enforcement
agency that if the parties being investigated agree to your terms,
you will not sue them under the antitrust laws alleging that the
merger they propose is unlawful. He emphasized that provision is
very unremarkable.
REPRESENTATIVE CROFT asked whether the Administration had the
information about the merger costing the state money if it was
anti-competitive and that income tax could be less even though
profits were higher when negotiating the Charter agreement.
ASSISTANT ATTORNEY GENERAL GRIFFIN said the Administration did not
have the document at the time but it knew that the combination of
ARCO and BP would have a number of effects on the corporate income
tax. The Administration knew the efficiencies that the companies
were claiming were attributable to the merger of their interests
and should serve to increase the worldwide income that the State of
Alaska would look to in calculating the Alaska income tax. The
Administration also knew the apportionment factors would change.
Mr. Dickenson's report indicated one cannot predict with any
certainty where the numbers would fall out. Certain factors
suggest an increase in the taxable income, other aspects of the tax
regime suggest the combination may affect the size of the slice
that Alaska takes when it apportions income for tax purposes. The
Administration knew of the potential effect but it also knew there
was no definite way to quantify those effects.
DR. WARREN-BOULTON stated there are three ways the efficiencies can
be passed through to the State of Alaska. The first group is the
extent to which those efficiencies are retained by the firm and
there is a profits tax. Second, if the efficiencies result in
reducing the initial cost of extraction, a larger quantity of oil
will result in more royalties. Finally, to the extent that
efficiencies are carried forward to the future in terms of
exploration on new land, the more efficient the firm, the higher
the reservation bid price. Efficiencies will have a positive
impact on state revenues through state income tax, royalties, and
bonus bidding.
TAPE 00-07, SIDE B
Number 001
REPRESENTATIVE CROFT stated the Administration's argument is that
as corporate profits increase, the state will benefit from
increased production that will result from efficiency.
DR. WARREN-BOULTON replied in addition to the direct accounting
effects through the income tax, if the efficiencies result from
larger production at Prudhoe Bay, royalty revenue will increase due
to quantity even though the royalty rate remains the same. To the
extent that those efficiencies mean that new prospects look more
profitable in the future, the bids will go up.
Number 579
REPRESENTATIVE KERTTULA asked for an explanation of the dangers of
monopsony are in general.
DR. WARREN-BOULTON replied a monopsony can be as dangerous as a
monopoly. People see monopolies as creating a transfer of wealth
from consumers to producers and they restrict output. Monopsony
has the same effect. One buyer results in two things: first a
transfer of income from the producer to the buyer occurs, and
second, a monopsony usually drives down the price by being
[indisc.]. He said if all steel firms were merged into a monopsony
so that they were the only buyer of iron ore, the end effect would
be a higher steel price. In many cases, monopsony power can occur
where the output effect is fairly small. He pointed out a reserve
clause is used in professional sports contracts in which a player
can play for only one team. That clause does not result in lower
ticket prices.
REPRESENTATIVE GREEN said his series of comments pertained to basic
assumptions that went into the modeling and the group's approach.
For example, there was a question of whether ARCO would continue to
exist if the merger does not occur. ARCO spent almost $500 million
last year and is going to its Board of Directors next week to
request another huge expenditure. BP will make no commitment in
that same regard. There is concern that without the merger
efficiencies will not be realized, yet efficiencies in charter
flights, drilling, warehousing, and personnel have already taken
place. He asked what assumptions went into the modeling.
DR. WARREN-BOULTON replied the model estimates what the effects of
things really were. He explained the value of the winning bid on
tracts, and the amount of revenues the state gets on state tracts,
is very sensitive to the price of oil.
REPRESENTATIVE GREEN clarified he was concerned about the groups'
attitudes and how much those attitudes affected the outcome.
DR. WARREN-BOULTON asked Representative Green to elaborate on the
groups' attitudes.
REPRESENTATIVE GREEN said he is hearing that it is far more
favorable to the State of Alaska, both now and in the future, that
this merger continue as outlined in the Charter. That belief was
most likely predicated on the result of modeling or analysis by the
Administration's experts. He expressed concern that some of the
input used in the model one year ago may no longer be applicable or
valid.
Number 518
ASSISTANT ATTORNEY GENERAL GRIFFIN asked Dr. Warren-Boulton if the
price of oil affects his model, and if so, how.
DR. WARREN-BOULTON replied the price of oil plays a very important
role in the model. He surmised that Representative Green is asking
whether the conclusion of what the State needs, regarding new
entrants, is sensitive to the price of oil. Regarding whether the
burden on the Charter is greater if the price of oil is low, the
answer is "no." If one is just looking at offsetting the effect of
the merger on revenues, two new entrants of the seventh and eighth
rank would be sufficient.
REPRESENTATIVE GREEN maintained that answer says the assumptions,
as well as the price of oil used, would not change the results now.
DR. WARREN-BOULTON indicated any model is an attempt to learn from
history.
CHAIRMAN HALFORD asked if the FTC must prove damage from increased
monopoly power or whether it has to prove that increased monopoly
power will exist as the result of the merger.
Number 484
MR. BRADLEY LUI replied the FTC would have to prove that it is
likely the merger would substantially lessen competition.
CHAIRMAN HALFORD asked if the FTC proves the merger would
substantially lessen competition, whether it has to prove any
specific consumer damage from the lessening of competition.
MR. LUI replied the FTC would have to show that the merger is
likely to result in a substantial lessening of competition and that
is the consumer harm.
CHAIRMAN HALFORD clarified he is trying to separate out the two
questions. If the FTC proves a substantial lessening of
competition is likely to occur, must the FTC then prove that will
impact price, leasing, or something else or does the FTC have to
prove a substantive affect on somebody.
MR. LUI answered, as Mr. Boies pointed out, there is an argument
that the FTC must prove a merger would have a substantial effect on
consumers. If the State were to litigate, it would not take that
position, however there is a litigation risk associated with that
position.
CHAIRMAN HALFORD asked about case law on that question.
MR. LUI replied that most merger cases are settled so no definitive
law exists. He felt the companies do have an argument that the FTC
would have to prove consumer effect.
CHAIRMAN HALFORD asked if the FTC chooses to enjoin the merger,
whether it would enjoin the original merger. He asked whether the
Charter is before the FTC to act on.
MR. LUI explained if the FTC seeks to get a preliminary injunction
in federal court, the FTC will argue that it take the transaction
as originally proposed by the parties. The parties will probably
argue the merger is the merger plus the Charter.
CHAIRMAN HALFORD noted the Charter is an agreement between BP and
the State of Alaska. He questioned whether BP can amend the merger
agreement to include the provisions of the Charter so that the
entire package is before the FTC.
MR. LUI replied the Charter is a binding agreement between the
companies and the State of Alaska so that it is the contract before
the FTC. Whether the FTC decides to accept the Charter is within
its authority.
CHAIRMAN HALFORD asked if another agreement was added between the
companies and the State of California, whether the FTC would
consider the merger, plus Charter, plus the agreement with the
State of California.
MR. LUI said that would depend on the agreement itself but,
assuming it is a binding contract that is enforceable by the State
of California, then the FTC should consider it. He thought a court
would.
Number 422
REPRESENTATIVE GREEN asked how the FTC would go about stopping the
merger after reviewing the price of ANS in California.
MR. LUI answered typically the FTC would go to federal court, seek
a preliminary injunction and enjoin the merger.
SENATOR PEARCE asked if the model assumed the same acres would be
leased, just changing the bid price.
DR. WARREN-BOULTON answered that the model doesn't ask the question
regarding bidders. It asks given the acreage and all the
provisions of the Charter which are intended to create an active
bidder, how active does that bidder have to be. It doesn't ask how
the provisions of the Charter result in an active bidder. It can't
answer the question.
SENATOR PEARCE referred to page 2 of Mr. Dickenson's memo, point
one, where he assumes production volumes from known resources will
not be affected by the merger on one hand and on the other hand,
Mr. Holt asserts that the merger should improve production
efficiency on the North Slope. She asked why Mr. Dickens came to
his conclusion of no increase in production because of those
efficiencies.
ASSISTANT ATTORNEY GENERAL GRIFFIN answered that the memo is the
director's explanation to the Commissioner regarding why the
revenue forecast doesn't reflect any change attributable to the
merger. It's slightly different than asking about whether the
Charter will increase production. Mr. Dickens did not include
anything that suggests the merger will affect production, because
he was operating under the same sort of uncertainties Mr. Campbell
alluded to when he was asked what BP's spending commitment was
going to be. Mr. Dickens didn't know if the merger was going to go
through. He was making relatively conservative assumptions about
what the world was going to look like.
The question should be what production do you anticipate seeing as
a consequence of creating new operators who ultimately they expect
to see bidding on new prospects or on State land and bring those
ultimately into development.
Number 282
SENATOR PEARCE said on page 1, it says, "based on his analysis, the
Division concludes the most likely effect from the merger the
revenue sources would be immaterial." This was the response to
what happens to the revenues under the Charter.
ASSISTANT ATTORNEY GENERAL GRIFFIN answered that until new
investments tell them there will be a bump in production, it's too
early to include that bump in an estimate on the effect the merger
will have.
CHAIRMAN HALFORD noted that there was about 15 minutes before
everyone had to leave to catch airplanes and asked what everyone
wanted to do. People indicated they would continue.
SENATOR PEARCE referenced page 4 and 5 that a theory says the
merger might reduce costs in Prudhoe Bay in the short term, but
because of the combination of the two largest players, there would
be less competition leading to less competition in the long term.
She asked how smaller economic players could replace ARCO's
competitive presence completely.
DR.WARREN-BOULTON answered that if they are looking at the effects
of the merger on the states revenues, they would not have to create
two small firms that are collectively as large as ARCO to counter
balance the effects of the merger.
SENATOR PEARCE asked if two smaller companies could replace ARCO's
competitive presence.
DR. WARREN-BOULTON answered that he didn't think there was a
concern from an economic, antitrust, or a state revenue point of
view having firms compete in production. Where competition is
important is in the bidding process. Once a tract is leased,
production takes place by a single firm. Firms don't compete in
the exploitation of a particular tract and therefore, the reason
why there is so much emphasis on creating multiple firms that
produce is not because economic theory says we are better off
having many different firms performing their function, but that
having a firm with those resources means they have the information,
knowledge, and ability to bid more effectively on new tracts. Once
you lease those tracts from the State's point of view, they are
gone. All you care about is the volume of production that comes off
those tracts.
SENATOR PEARCE asked if two smaller companies could be expected to
gain the same efficiencies of scale as ARCO and, therefore, have
the same level of production.
DR. WARREN-BOULTON answered that you could always joint venture a
production operation, if two little companies are less efficient.
SENATOR PEARCE asked if the Charter didn't specifically disallow
companies A and B from combining.
ASSISTANT ATTORNEY GENERAL GRIFFIN answered that under the Charter
there could be a single purchaser of the Kuparuk and the Alpine
packages.
CHAIRMAN HALFORD commented that single purchasers would be almost
half as big as ARCO.
ASSISTANT ATTORNEY GENERAL GRIFFIN answered with 175,000 barrels of
production, yes. From the State's perspective of capturing the
benefits at Prudhoe Bay, they required divestiture of close to all
the production that was outside of Prudhoe Bay today under ARCO's
control.
Number 215
SENATOR TAYLOR recapped that we have a merger announced that
violates certain state laws of antitrust, that too much of our land
is to be leased by one company. The Governor put a deal together
and now we found out that we're not going to make any money, but
they are going to make $140 million net. That's just off of what
they are telling us which makes it conservative at best. Now we're
going to force this new company to go out on the market and sell $3
billion - $5 billion worth of assets. We have no control over how
that sale occurs other than they divest themselves in the market.
ASSISTANT ATTORNEY GENERAL GRIFFIN responded that the State has the
ability to object to a purchaser or purchasers of the packages. If
they object, the sales cannot go through unless BP goes to court
and gets a court order saying it's O.K.
SENATOR TAYLOR asked on what basis the State might object.
ASSISTANT ATTORNEY GENERAL GRIFFIN answered if packages were put
together that did not reflect the terms of the Charter - the amount
of production, acreage, infrastructure, and the right to operate.
A sale could not be consummated unless they went to the court and
said even though they weren't creating new operators, they were
divesting the production. They would not win that case.
SENATOR TAYLOR responded that for this we have given up the State's
right to exercise what are our existing State laws.
ASSISTANT ATTORNEY GENERAL GRIFFIN said he would agree with that.
SENATOR TAYLOR said in Rome that was called dispensation or paying
for sinning.
ASSISTANT ATTORNEY GENERAL GRIFFIN explained when the companies
acceded to the State's demands and entered the settlement agreement
they felt was necessary to alleviate concerns created under that
statute, the State, as any other enforcement agency would do, once
they had gotten what they needed to address their concerns, they
agreed they would not sue to enjoin the merger. Once BP agreed to
the conditions the State set to make the merger acceptable, it was
incumbent upon us to let BP know we weren't going to file a lawsuit
the next day claiming the merger violated state law.
SENATOR TAYLOR went on to say that part of the deal didn't have
anything to do with oil or future production. It had a lot to do
with someone who wanted to play Santa Claus. He asked if there was
any money in there for the University.
ASSISTANT ATTORNEY GENERAL GRIFFIN answered that there was an
unenforceable commitment by BP to increase its charitable givings.
SENATOR TAYLOR asked, "Unenforceable?"
ASSISTANT ATTORNEY GENERAL GRIFFIN replied if the merger goes
through and the Charter is implimented, and BP were to say they
changed their minds about the charitable commitment, the State
could not sue to enforce that.
CHAIRMAN HALFORD asked if there was a private right of action under
the anti-trust act.
ASSISTANT ATTORNEY GENERAL GRIFFIN replied, "Yes, there is."
CHAIRMAN HALFORD asked if someone else could sue even though the
State didn't.
ASSISTANT ATTORNEY GENERAL GRIFFIN replied if there was a person in
the State that suffered an anti competitive injury as a consequence
of the actions of these companies, they have the right to bring
their own lawsuit alleging violation of the anti-trust laws.
SENATOR TAYLOR asked if they could bring a lawsuit not only against
the companies, but against the State, itself. He asked, "Aren't we
a party at this point?"
Number 116
ASSISTANT ATTORNEY GENERAL GRIFFIN answered, "No, they couldn't
bring an anti-trust lawsuit against the State. No actions of the
State would create competitive harm to others affected by this
industry."
SENATOR TAYLOR said he was confused about who and what was going to
the FTC. At first it was the merger; then it became merger plus
Charter. He asked if this Administration is also advocating
acceptance of this merger to the FTC.
ASSISTANT ATTORNEY GENERAL GRIFFIN answered that the Administration
addressed the FTC and informed it that in their view the Charter
satisfied any legitimate anti-competitive concerns with respect to
the upstream. They have also expressed the view that they didn't
see the effect on the price of gasoline in California as being
attributable to the merger. Taken together, it could be
interpreted as urging the FTC to accept the deal. They have done
everything they could to explain the Charter to the FTC.
SENATOR TAYLOR asked if there were any obligations or liabilities
the State has incurred through taking these positions relative to
this deal.
ASSISTANT ATTORNEY GENERAL GRIFFIN replied that he would say not.
This is a contract between the State and the companies. It
expressly does not create a third party right of action in any of
its provisions.
SENATOR TAYLOR asked about an action by the companies against us.
He asked what if the Legislature after these hearings makes a
decision that they don't like the merger, to the extent BP was made
to do things they didn't want to do. He asked if the Legislature
had liability within the contract.
ASSISTANT ATTORNEY GENERAL GRIFFIN answered that the State has an
obligation under the contract which is that we will not sue to
enjoin their merger if the comply with the terms of the agreement.
Anything the Legislature does, for example, passing a resolution
objecting to the Charter, that wouldn't constitute a violation of
the Charter.
SENATOR TAYLOR reiterated the question that there was nothing the
Legislature could do.
ASSISTANT ATTORNEY GENERAL GRIFFIN reiterated not with respect to
the State's obligations under the Charter. The executive branch is
charged with enforcement of the anti-trust laws, but the agreement
says that the executive branch is not going to sue to enjoin the
merger assuming the companies live up to their end of the bargain.
It does not purport explicitly or implicitly to limit in any way
any of the legitimate powers of the Legislature.
REPRESENTATIVE GREEN said a December 13, 1999 letter from
Commissioner Shively to the various owners ...
TAPE 00-08, SIDE A
Number 001
ASSISTANT ATTORNEY GENERAL GRIFFIN responded for example, if a
working interest owner at Kuparuk tried to exercise preference
rights in a way that defeated the intent of the Charter
(essentially prohibited BP from complying with its terms, because
it could not meet the level of production and obligation to
relinquish operatorship), Commissioner Shively is saying he would
take that into consideration in his best interest analysis.
CHAIRMAN HALFORD said he thought it was worded stronger than that.
REPRESENTATIVE GREEN said he had done reservoir modeling of Prudhoe
in his other life and knew they could be "tweaked." He asked if
the analysis was predicated completely on bidding affects or
bidding affects and subsequent operations, since bidding represents
only less than five percent of the revenue the State receives from
oil operations. He wanted to know how far their model went.
DR. WARREN-BOULTON said the short answer was no. He said the
statistic returns are very robust and you don't make variables
become significant or insignificant depending on how you specify
it.
REPRESENTATIVE GREEN asked if the model dealt with the bonus
effect.
DR. WARREN-BOULTON answered they just dealt with the bonus effects,
but he wanted to clarify why they are obsessed with bonus revenues
because they are such a small share of the total. First of all,
the effects are true in Alaska, but not generally true anywhere
else. Anywhere else, bonus share is a very high share of the
revenue. It is extraordinarily low in Alaska.
The second reason is all the impact of the merger is going to have
a magnified effect on the bonus. Even though the bonus revenue may
be a small percentage of the total, the effect of the merger on the
bonus revenue is quite large. The bonus is everything you get
above the base.
Number 60
SENATOR TAYLOR asked, if as part of these negotiations, was any
commitment, pledge or promise made concerning the future tax
revenues or royalties of this State.
ASSISTANT ATTORNEY GENERAL GRIFFIN answered, "Absolutely not. All
of the State's commitments in its entirety can be found on page 12
of the Charter, paragraph 3, section 3. It's a recognition that
the companies will abide by the divestitures mandated in the
agreement and the State will not block their merger.
SENATOR TAYLOR said he had asked the Administrative consultants, if
they attempted any calculation of the net worth of ARCO assets at
the time of acquisition (proposed last spring) and how that would
differ from their worth now - in stock value for instance and he
was told no.
He should have asked, when you sell the assets that used to be ARCO
to another company, what's the difference between the depreciated
value and the market value for ARCO or BP. Through this forced
divestiture, are we forcing them to run out and make a huge profit
based on what they are selling the assets for. He guessed with
today's $25 a barrel oil, it sells higher than it would have last
spring.
Number 146
ASSISTANT ATTORNEY GENERAL GRIFFIN responded that a more
traditional view would hold that when you force companies to divest
billions of dollars of assets at no minimum value, you are unlikely
to be forcing them into making deals with an excess profit. BP and
ARCO will get whatever they can for those assets, but he didn't
know what it would be.
MR. LOEFFLER added that regulated assets have to be sold for rate
making purposes at their depreciated value. They can't build that
stepped up cost into the rates once they are sold to a new owner.
The law is different for regulated assets [than for private
industry].
Someone said that the pipeline rate can't change based on the sale
price.
SENATOR TAYLOR agreed and said that doesn't mean they can't be paid
a bonus for the percentage they are selling if it's worth it. He
wasn't concerned if this was just an exchange between the two
companies and done on a stock swap, but none of the assets will go
back to the State to sell. The State has no control over that. We
get to monitor a little bit, but he didn't think our supervision
had anything to do with market value and whether they sold at a
good price or a bad price was probably proprietary information we
would not have access to. He was wondering if there were any
computations done in light of the significant increase in the oil
values that have occurred in the last nine months.
DR. WARREN-BOULTON responded if the goal is creating more revenue,
then the thing to do is make sure BP sells these assets for the
highest price they can get to take advantage of the opportunities
and future exploration. The person who is going to be most active
in exploring is going to be the one who is going to pay the most
for the assets. Any concern with these kinds of divestitures in
cases is that the selling firm might deliberately go out and sell
to someone other than the highest price - simply because they
wouldn't compete with them.
He thought the State should try to make sure the assets are sold to
the highest possible bidder because that is their best indication
of the kind of bidder who is going to take advantage of the
opportunities to explore rather than just sit there pump and sell
the oil.
SENATOR TAYLOR said that seemed backwards to him. If the cost of
production has anything to do with the value invested into the
assets acquired or to develop that production (if we're at $9 or
$10 per barrel) forcing the market high would seem to force up the
investment value within the cost of production.
Number 175
DR. WARREN-BOULTON commented that as an economist, what you pay for
an asset is water under the bridge. The question is are you going
to be an efficient operator of those assets. The best way to do
that is to find who is willing to pay the most. It's not that
you're charging more for it; it's that by selling to the highest
bidder, you have located the person who is going to make the most
money by running that asset (Dr. Warren-Boulton used the analogy of
buying a factory.) You want an efficient effective competitor who
will bid vigorously on new tracts that are offered on the Slope.
The best indication of that is someone who is willing to pay an
awful lot for those assets.
SENATOR PEARCE said she wanted a letter stating the note from
Commissioner Condon was a fiscal note for the Charter and if it
wasn't, the Committee wanted one.
CHAIRMAN HALFORD announced an at-ease from 6:00 - 6:25p.m.
MR. MACLEOD commented that the most important disagreement they had
today was the statement from Mr. Boies that the antitrust laws
would not apply if we are not dealing with consumers in the
traditional sense or if we are thinking of Alaska or producers. He
said the Supreme Court had resolved that a long time ago; the
antitrust laws apply equally to impacts on producers selling to
anticompetitive markets just as they apply to consumers buying from
an anticompetitive market. Dr. Boulton's factory analogy was a
good one there.
MR. MACLEOD said he heard a good deal about the efficiencies of the
merger, but he didn't hear why the merger was necessary to achieve
the efficiency of unification of Prudhoe. This is an issue they
haven't been able to agree on before. They were not the
efficiencies antitrust laws typically recognize. As a matter of
fact, the merger itself required a valuation of the opportunities
each side had in unifying their operations, because the merger is
valuation of asset improvement - of the assets all around the
companies including the value that was represented by the operation
of Prudhoe Bay. If BP could increase efficiency by virtue of
unification, they ought to be able to do it as a joint venture or
by agreement. He thought that was how the antitrust authorities
would look at it.
Number 200
The market reaction was used sometimes by the Administration's
consultants as an indicator that this was a good deal, but the
market reacts to the profitability prospects of the companies; it
doesn't react as to whether those prospects are results of
procompetitive or anticompetitive practices. If Coke and Pepsi
were to propose merging tomorrow, he thought the market would
applaud that because they could make a lot more money by not
competing with one another. But that market doesn't tell us whether
a deal like that is good for consumers. It seems the answer to
whether the deal is good for Alaska goes back to the basic
assumption that Alaska has to deal with a post ARCO world and that
they are not a viable entity here in Alaska. He didn't hear
anything like that. He didn't see why the State had to chose just
between the merger, the merger with the Charter, and nothing else.
The State should be able to choose between those alternatives and
the alternative of an ARCO in the form it was in before the merger
was announced.
DR. SCHEFFMAN said he has sat on situations like this with the FTC
and it's not easy to negotiate a settlement to an antitrust issue.
He agreed with much of what Dr. Warren-Boulton said, but he thought
the problem was that the analysis of theoretical reasons stops
short of where the real issue is. The real action is not in the
lease bids, it's in the exploration and development expenditures
afterwards. We know the reality of who would spend most of the
money.
It's an economist's theoretical assumption that it doesn't make any
difference what happens afterwards on leased acreage once someone
bids. He knows that's not true; ARCO and BP are uniquely important
and the competition between them is important. The efficiency
claim makes that very clear. The claim is that they have to do a
merger because the if the hats of the parties involved in Prudhoe
were different, we wouldn't have this problem. The identity of the
parties and the uniqueness of ARCO is particularly important in
what happens in Alaska in the development of resources. All the
evidence points to that conclusion. A theoretical model that
predicts what would happen to bidding doesn't answer the really
important question here.
DR. SCHEFFMAN said the Charter is an unprecedented reorganization
of the critical assets of the State of Alaska. He wasn't part of
the negotiations and maybe that's the best the State could do. In
his view, it is a very difficult thing for a government entity to
do.
Number 300
MR. BONESS said it seems to him that the State's approach to the
antitrust issues is that the law is a very powerful tool and he
heard a very narrow definition of the antitrust problem without
regard to the large number of intangibles. Then the narrow
conclusion of bidding as solving the problems with the econometric
model. He thought the Committee should contrast that with
Commissioner Shively's December 13th letter which looks at the
State's rights under statutes approving assignments of lease.
Instead of narrowly defining the rights, it stretches them in order
to tell companies that have legitimate contract preference rights,
if they try to exercise those rights, because it could conflict
with the Charter, the Commissioner would take a very expansive view
of those rights to protect the broad State interest.
The contrast between that approach with respect to the exercise of
preference rights and the narrow definition of our rights under
antitrust laws is unfortunate. The greater state's interest lies
in the ability to exercise the rights we have under the antitrust
laws to protect the full range of interest.
Number 479
REPRESENTATIVE PORTER said he heard them saying the highest portion
of the $140 million savings was going to come out of the single
operatorship of the Slope and that there had been great difficulty
in having that occur without this degree of ownership switch. He
asked Mr. MacLeod if he could speculate why the savings was not
able to be done prior to or without this much of a merger.
DR. SCHEFFMAN said the State should look at that question and see
whether their regulatory powers could bring about those savings
that the companies themselves are unwilling to do.
MR. MACLEOD answered that someone at the top of those companies was
unwilling to take the action that they needed to take to save the
money. It's an economic decision. He said they really don't see
a reason, but they also don't see why a merger would suddenly would
make possible the $140 million savings. This is the question that
has to be answered in order to justify the merger.
CHAIRMAN HALFORD said he didn't want to break off the discussion,
but airplanes were flying now. He adjourned the meeting at 6:40
p.m.
| Document Name | Date/Time | Subjects |
|---|