Legislature(2005 - 2006)SENATE FINANCE 532

07/27/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV


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Audio Topic
09:18:46 AM SB3001 || SB3002
09:18:46 AM Start
09:28:53 AM Mark Hanley, Anadarko
09:34:15 AM Karol Lyn Newman, Morgan, Lewis & Bockius, Counsel to Anadarko
10:54:46 AM Bob Loeffler, Morrison & Foerster, Counsel to the Governor
11:40:27 AM Jim Clark, Chief Negotiator, Office of the Governor
12:00:33 PM Ken Griffin, Deputy Commissioner, Department of Natural Resources
01:38:02 PM Wendy King, Conocophillips
01:53:30 PM Bill Mcmahon, Commercial Manager, Exxonmobil
01:57:18 PM David Van Tuyl, Bp
02:08:52 PM Brad Keithley, Jones Day, Counsel to Bp
02:52:23 PM Gross Versus Net Tax || Dr. Pedro Van Meurs, Consultant to the Governor
04:27:32 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB3001 OIL/GAS PROD. TAX TELECONFERENCED
Heard & Held
+= SB3002 STRANDED GAS AMENDMENTS TELECONFERENCED
Heard & Held
                       ALASKA STATE LEGISLATURE                                                                               
          SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT                                                                 
                             July 27, 2006                                                                                      
                               9:18 a.m.                                                                                        
                                                                                                                                
   MEMBERS PRESENT                                                                                                            
                                                                                                                                
   Senator Ralph Seekins, Chair                                                                                                 
   Senator Lyda Green                                                                                                           
   Senator Gary Wilken                                                                                                          
   Senator Con Bunde                                                                                                            
   Senator Fred Dyson                                                                                                           
   Senator Bert Stedman                                                                                                         
   Senator Lyman Hoffman                                                                                                        
   Senator Thomas Wagoner                                                                                                       
   Senator Ben Stevens                                                                                                          
   Senator Kim Elton                                                                                                            
                                                                                                                                
   MEMBERS ABSENT                                                                                                             
                                                                                                                                
   Senator Donny Olson                                                                                                          
   Senator Albert Kookesh                                                                                                       
                                                                                                                                
   OTHER LEGISLATORS PRESENT                                                                                                  
                                                                                                                                
   Senator Gary Stevens                                                                                                         
   Senator Charlie Huggins                                                                                                      
   Senator Hollis French                                                                                                        
   Representative Ralph Samuels                                                                                                 
   Representative Paul Seaton                                                                                                   
                                                                                                                                
   COMMITTEE CALENDAR                                                                                                         
                                                                                                                                
   SENATE BILL NO. 3001                                                                                                         
   "An Act relating  to the  production tax on  oil and  gas and  to                                                            
   conservation surcharges on  oil; relating  to criminal  penalties                                                            
   for  violating  conditions  governing   access  to  and  use   of                                                            
   confidential  information   relating  to   the  production   tax;                                                            
   amending the definition  of 'gas' as  that definition applies  in                                                            
   the  Alaska  Stranded  Gas  Development  Act;  making  conforming                                                            
   amendments; and providing for an effective date."                                                                            
        HEARD AND HELD                                                                                                          
                                                                                                                                
   SENATE BILL NO. 3002                                                                                                         
   "An Act  relating to  the Alaska  Stranded Gas  Development  Act;                                                            
   relating to municipal impact money received under the terms of  a                                                            
   stranded gas fiscal contract;  relating to determination of  full                                                            
and true value of property and required contributions for                                                                       
education in municipalities affected by stranded gas fiscal                                                                     
contracts; and providing for an effective date."                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB3001                                                                                                                  
SHORT TITLE: OIL/GAS PROD. TAX                                                                                                  
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
07/12/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
07/12/06       (S)       NGD                                                                                                    
07/13/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/13/06       (S)       Heard & Held                                                                                           
07/13/06       (S)       MINUTE(NGD)                                                                                            
07/14/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/14/06       (S)       Heard & Held                                                                                           
07/14/06       (S)       MINUTE(NGD)                                                                                            
07/24/06       (S)       NGD AT 1:30 PM SENATE FINANCE 532                                                                      
07/24/06       (S)       Scheduled But Not Heard                                                                                
07/25/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/25/06       (S)       Heard & Held                                                                                           
07/25/06       (S)       MINUTE(NGD)                                                                                            
07/26/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/26/06       (S)       Heard & Held                                                                                           
07/26/06       (S)       MINUTE(NGD)                                                                                            
07/27/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
                                                                                                                                
BILL: SB3002                                                                                                                  
SHORT TITLE: STRANDED GAS AMENDMENTS                                                                                            
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
07/12/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
07/12/06       (S)       NGD                                                                                                    
07/13/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/13/06       (S)       Heard & Held                                                                                           
07/13/06       (S)       MINUTE(NGD)                                                                                            
07/14/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/14/06       (S)       Heard & Held                                                                                           
07/14/06       (S)       MINUTE(NGD)                                                                                            
07/24/06       (S)       NGD AT 1:30 PM SENATE FINANCE 532                                                                      
07/24/06       (S)       Heard & Held                                                                                           
07/24/06       (S)       MINUTE(NGD)                                                                                            
07/25/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/25/06       (S)       Heard & Held                                                                                           
07/25/06       (S)       MINUTE(NGD)                                                                                            
   07/26/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                   
   07/26/06       (S)       Heard & Held                                                                                        
   07/26/06       (S)       MINUTE(NGD)                                                                                         
   07/27/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                   
                                                                                                                                
   WITNESS REGISTER                                                                                                           
                                                                                                                                
   MARK HANLEY, Public Affairs Manager in Alaska                                                                                
   Anadarko Petroleum Corporation                                                                                               
   Anchorage, AK                                                                                                                
   POSITION STATEMENT:  Commented on the proposed contract and                                                                
   answered questions during the hearing on SB 3001 and SB 3002.                                                                
                                                                                                                                
   KAROL LYN NEWMAN                                                                                                             
   Morgan, Lewis & Bockius LLP                                                                                                  
   Counsel to Anadarko Petroleum Corporation                                                                                    
   Washington, DC                                                                                                               
   POSITION STATEMENT:  Answered questions during the hearing on                                                              
   SB 3001 and SB 3002.                                                                                                         
                                                                                                                                
   DONALD SHEPLER                                                                                                               
   Greenberg Traurig, LLP                                                                                                       
   Consultant to the Legislature                                                                                                
   Alaska State Capitol                                                                                                         
   Juneau, AK  99801-1182                                                                                                       
   POSITION STATEMENT:  Answered questions during the hearing on                                                              
   SB 3001 and SB 3002.                                                                                                         
                                                                                                                                
   BOB LOEFFLER                                                                                                                 
   Morrison & Foerster LLP                                                                                                      
   Counsel to the Governor                                                                                                      
   Office of the Governor                                                                                                       
   PO Box 110001                                                                                                                
   Juneau, AK  99811-0001                                                                                                       
   POSITION STATEMENT:  Answered questions during the hearing on                                                              
   SB 3001 and SB 3002.                                                                                                         
                                                                                                                                
   JIM CLARK, Chief Negotiator                                                                                                  
   Office of the Governor                                                                                                       
   PO Box 110001                                                                                                                
   Juneau, AK  99811-0001                                                                                                       
   POSITION STATEMENT:  Answered questions during the hearing on                                                              
   SB 3001 and SB 3002.                                                                                                         
                                                                                                                                
   KEN GRIFFIN, Deputy Commissioner                                                                                             
   Department of Natural Resources                                                                                              
   400 Willoughby Avenue                                                                                                        
Juneau, AK  99801-1724                                                                                                          
POSITION  STATEMENT:   Answered questions  during the  hearing on                                                             
SB 3001 and SB 3002.                                                                                                            
                                                                                                                                
WENDY KING, Director of External Strategies                                                                                     
ANS Gas Development Team                                                                                                        
ConocoPhillips Alaska, Inc.                                                                                                     
PO Box 100360                                                                                                                   
Anchorage, AK  99510                                                                                                            
POSITION STATEMENT:  Testified and  answered questions during the                                                             
hearing on SB 3001 and SB 3002.                                                                                                 
                                                                                                                                
S.A. (BILL) McMAHON JR., Commercial Manager                                                                                     
Alaska Gas Development                                                                                                          
ExxonMobil Production Company                                                                                                   
Houston, TX                                                                                                                     
POSITION STATEMENT:  Testified during  the hearing on SB 3001 and                                                             
SB 3002.                                                                                                                        
                                                                                                                                
DAVID VAN TUYL, Commercial Manager                                                                                              
Alaska Gas Group                                                                                                                
BP                                                                                                                              
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Testified and  answered questions during the                                                             
hearing on SB 3001 and SB 3002.                                                                                                 
                                                                                                                                
BRADFORD G. KEITHLEY                                                                                                            
Jones Day                                                                                                                       
Counsel to BP                                                                                                                   
Dallas, TX                                                                                                                      
POSITION STATEMENT:  Testified and  answered questions during the                                                             
hearing on SB 3001 and SB 3002.                                                                                                 
                                                                                                                                
DR. PEDRO VAN MEURS                                                                                                             
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  00911-0001                                                                                                          
POSITION  STATEMENT:   Discussed  gross  versus  net tax  systems                                                             
during the hearing on SB 3001 and SB 3002.                                                                                      
                                                                                                                                
SENATOR HOLLIS FRENCH                                                                                                           
Alaska State Legislature                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Asked questions  and relayed concerns during                                                             
the hearing on SB 3001 and SB 3002.                                                                                             
                                                                                                                              
   ACTION NARRATIVE                                                                                                           
                                                                                                                                
   CHAIR RALPH  SEEKINS  called  the  Senate  Special  Committee on                                                           
   Natural Gas Development meeting to order at 9:18:46 AM.   Present                                                          
   at the call  to order were  Senators Fred Dyson,  Con Bunde,  Kim                                                            
   Elton, Bert Stedman, Lyda Green, Ben Stevens, Thomas Wagoner  and                                                            
   Chair Ralph  Seekins;  Senators  Gary Wilken  and  Lyman  Hoffman                                                            
   arrived soon thereafter.  Also  in attendance were Senators  Gary                                                            
   Stevens, Charlie Huggins and  Hollis French, and Representatives                                                             
   Ralph Samuels and Paul Seaton.                                                                                               
                                                                                                                                
                       SB 3001-OIL/GAS PROD. TAX                                                                            
                    SB 3002-STRANDED GAS AMENDMENTS                                                                         
                                                                                                                                
   9:18:46 AM                                                                                                                 
   CHAIR SEEKINS opened the hearing on SB 3001 and SB 3002.                                                                     
                                                                                                                                
   SENATOR  WAGONER  requested  a  presentation  next  week  by  the                                                            
   legislative consultants  on issues  addressed previously  by  the                                                            
   Federal Energy Regulatory  Commission (FERC), including  capacity                                                            
   and so-called basin control.                                                                                                 
                                                                                                                                
   CHAIR SEEKINS  acknowledged that.   He  welcomed  representatives                                                            
   from Anadarko Petroleum Corporation.                                                                                         
                                                                                                                                
   ^Mark Hanley, Anadarko                                                                                                       
   MARK  HANLEY,  Public   Affairs  Manager   in  Alaska,  Anadarko                                                             
   Petroleum  Corporation,   introduced   Karol  Lyn   Newman,   the                                                            
   company's FERC counsel from Washington,  D.C.  He drew  attention                                                            
   to Anadarko's handout containing:   1) a cover letter dated  July                                                            
   24, 2006,  to Governor  Frank Murkowski,  copied to  Commissioner                                                            
   Bill Corbus of the Department  of Revenue (DOR) and  Commissioner                                                            
   Mike Menge of the Department  of Natural Resources (DNR), and  2)                                                            
   Anadarko's comments on the proposed  fiscal contract for the gas                                                             
   pipeline.  Noting Anadarko has  had pipeline-access issues for a                                                             
   number of years  and that then-U.S.  Senator Frank Murkowski  was                                                            
   helpful in passing  legislation relating to  FERC's open seasons                                                             
   and providing some  protections for pipeline  access, Mr. Hanley                                                             
   said there are a number of things the governor has done.                                                                     
                                                                                                                                
   MR. HANLEY emphasized Anadarko's desire to see this gas  pipeline                                                            
   built as quickly as possible.  While things might not be perfect                                                             
   from its perspective,  Anadarko wants  this gas line  as much  as                                                            
   anybody.  Its  gas-prone acreage in  Alaska isn't worth  anything                                                            
if  the gas  cannot  get  to market.    He  suggested looking  at                                                               
comments  during  the public-comment  period  in  the context  of                                                               
changes that could benefit everyone.                                                                                            
                                                                                                                                
He  turned to  page 8  of the  handout, "B.  The Contract  Should                                                               
Reflect The  Design of The  Project Described In  The Application                                                               
And  The Preliminary  Findings And  Determination."   Mr.  Hanley                                                               
said most explorers probably won't  be ready to nominate gas from                                                               
the Foothills,  for instance, if  an initial open season  is held                                                               
in the  next two  years.   Thus the pipe  design is  critical for                                                               
explorers to feel comfortable that they  can get their gas into a                                                               
pipeline.   He read  from page  10, a  quotation from  the fiscal                                                               
interest findings (FIF) of the contract that stated:                                                                            
                                                                                                                                
     Building a  52-inch line is riskier  and more expensive                                                                    
     than building a  smaller line, and for  this reason the                                                                    
     pipeline companies that state  officials talked to said                                                                    
     that they would build a  smaller-diameter line.  Not so                                                                    
     the sponsor group.  They  were willing to take this 52-                                                                    
     inch risk  in order  to take  maximum advantage  of the                                                                    
     economies  of  scale  associated  with  gas  pipelines.                                                                    
     This large-diameter  pipeline not  only allows  a large                                                                    
     volume of gas to be  transmitted through the line while                                                                    
     limiting  fuel loss,  it also  allows for  a relatively                                                                    
     inexpensive   and   attractive   large   increment   of                                                                    
     expansion.  In fact, the  average capital cost per unit                                                                    
     decreases  for an  almost 50  percent expansion  of the                                                                    
     line.    This  decreasing   cost  function  means  that                                                                    
     expansions not  only will be  in the  pipeline entity's                                                                    
     best interest  (through more tariff revenue),  but will                                                                    
     also  benefit existing  shippers as  well as  expansion                                                                    
     shippers through  lower per-unit  tariffs.   Apart from                                                                    
     the  FERC  access  regulations, or  the  SGDA  contract                                                                    
     provisions, the  52-inch decision is a  concrete way of                                                                    
     telling explorers  that if the  gas is there,  the pipe                                                                    
     capacity will be there to take it to market.                                                                               
                                                                                                                                
MR. HANLEY said while Anadarko  agrees and finds such design work                                                               
comforting,  nothing in  the contract  says it  will happen.   In                                                               
fact, comments  indicate the pipe  size hasn't been  decided yet.                                                               
Although FERC regulations  say the pipe design can  be changed if                                                               
there isn't  enough initial  capacity or  ability to  expand, the                                                               
producers  have  challenged  FERC's  rules  in  court.    If  the                                                               
challenge  is  successful,  FERC  might  not  have  authority  to                                                               
require  a  design change  if  the  pipe  is  too small  for  the                                                               
capacity necessary for explorers.                                                                                               
                                                                                                                                
   He therefore  highlighted  a key  recommendation  from  Anadarko:                                                            
   Somewhere in the contract, require that the pipeline be  designed                                                            
   to allow a significant amount of in-field compression expansion,                                                             
   which is inexpensive  compared with  looping.   Mr. Hanley  noted                                                            
   this essentially  mimics  what is  in  the  FIF as  well  as  the                                                            
   producers' applications.                                                                                                     
                                                                                                                                
   9:28:53 AM                                                                                                                 
^Karol Lyn Newman, Morgan, Lewis & Bockius, Counsel to Anadarko                                                                 
   KAROL LYN  NEWMAN,  Morgan,  Lewis  &  Bockius  LLP,  Counsel  to                                                            
   Anadarko  Petroleum  Corporation,  in  response  to  Senator  Ben                                                            
   Stevens, observed that Mr. Hanley's remarks were directed to  the                                                            
   design concept,  rather  than  exactly  when  that  determination                                                            
   needs to be made.  Such  a determination must be made before  the                                                            
   open season  because  FERC  regulations  require  that  the open                                                             
   season itself  specify the  design and  the expansion  capability                                                            
   for the pipeline.                                                                                                            
                                                                                                                                
   SENATOR  BEN  STEVENS  distributed  proposed  revisions  to   the                                                            
   commission's regulations as  submitted by  Anadarko and  received                                                            
   by FERC 12/17/04.  He noted  Appendix C says that no open  season                                                            
   for initial capacity on the pipeline  shall be held prior to  six                                                            
   months before the date the  pipeline must close on its  financing                                                            
   arrangements.  Inquiring  how financing arrangements  can be put                                                             
   together on a  proposed pipeline at  specified capacity with  six                                                            
   months remaining, he also asked:  If you can't go to open  season                                                            
   until you  know the  capacity,  how can  you  get to  closing  on                                                            
financing until you have an open season that FERC has approved?                                                                 
                                                                                                                                
   MS. NEWMAN replied  that these were  early comments by  Anadarko,                                                            
   in 2004.  Since then, there  have been many comments to FERC  and                                                            
   lots of activity at the agency.   In addition, FERC issued  final                                                            
   rules that say it won't dictate when the open season should take                                                             
   place, and  indicated it  will look  at the  pipeline design  and                                                            
   require that the project  sponsors include, in their  open-season                                                            
   package, detailed information on  the pipeline that the  shippers                                                            
   will bid on.  That isn't unusual for a pipeline open season.                                                                 
                                                                                                                                
   She specified  that in  its comments  on the  contract,  Anadarko                                                            
   hadn't taken the position that there must be an open season at  a                                                            
   particular time.    Highlighting  the importance  of  the  pipe's                                                            
   size, Ms. Newman noted Mr. Hanley had spoken to that issue.   She                                                            
   requested clarification, since  there are  two different  points,                                                            
   one related to open-season timing.                                                                                           
                                                                                                                                
   SENATOR BEN STEVENS agreed they  go to two different points,  but                                                            
   said the  topics in  Appendix C, received  by FERC  in 2004,  are                                                            
similar to  comments received by  the commissioner in  July 2006.                                                               
While the main  one is a request that there  be no premature open                                                               
season, there  is talk about capacity  also.  He asked:   How can                                                               
capacity be defined on a project until there is an open season?                                                                 
                                                                                                                                
MS.  NEWMAN  suggested that  speaking  to  the open-season  point                                                               
would  clarify   some  of  the   confusion.    She   deferred  to                                                               
Mr. Hanley.                                                                                                                     
                                                                                                                                
9:34:15 AM                                                                                                                    
MR. HANLEY explained  that Anadarko doesn't want  the open season                                                               
held any sooner  than necessary to build the  pipeline; it hasn't                                                               
placed any timelines.   There are three  recommendations.  First,                                                               
the contract should require that the  open season not be held any                                                               
sooner than the Alaska Oil  & Gas Conservation Commission (AOGCC)                                                               
rules for determining how much gas  can be taken off from Prudhoe                                                               
Bay  and Point  Thomson.   While  it seems  AOGCC  would set  the                                                               
maximum amount, it also seems  appropriate to wait at least until                                                               
then.    Second, FERC-required  engineering  work  for the  open-                                                               
season  process needs  to  be  done.   Third,  veto authority  on                                                               
timing should  be given  to the  state so  the open  season isn't                                                               
held too early.   The state is the most  likely party to advocate                                                               
for explorers  and to  look out  for their  interests, Mr. Hanley                                                               
opined, and Anadarko doesn't want  a specific time set because it                                                               
doesn't have the necessary information.                                                                                         
                                                                                                                                
He turned  to the design for  capacity, noting this will  be done                                                               
by the pipeline applicants.   He interpreted the quotation to say                                                               
the state partially  predicated this contract upon  the idea that                                                               
the  producers would  take  additional risk  to  make that  extra                                                               
billion cubic feet (Bcf) of  capacity available for explorers and                                                               
cheap expansion increments.  Mr.  Hanley emphasized that if it is                                                               
being sold as expandable, it should be in writing.                                                                              
                                                                                                                                
9:38:20 AM                                                                                                                    
MS. NEWMAN added  that this pipeline is a bit  different from one                                                               
in the Lower  48 or where the  producers don't own it.   Most gas                                                               
to be  initially committed will  come from Prudhoe Bay  and Point                                                               
Thomson.   The producers - the  project sponsors -   indicated in                                                               
their initial comments  to FERC that in order to  develop the gas                                                               
fields for  this pipeline, all  owners of  a field must  align on                                                               
the field-development  plan.  After  field offtake is  agreed to,                                                               
AOGCC has to  approve it.  Thus the sponsors  will have agreed to                                                               
the field offtake  to propose to AOGCC for Prudhoe  Bay and Point                                                               
Thomson.   By the time the  pipeline entity is created  and holds                                                               
an open season, they'll know  what they're requesting for offtake                                                               
- 3 Bcf a day, for instance -  and thus what can be committed for                                                               
   the pipeline.    Otherwise,  it  would  be  risky  to  commit  to                                                            
pipeline capacity or reserves they couldn't take off the field.                                                                 
                                                                                                                                
   MS. NEWMAN explained  that a "normal"  pipeline - not  affiliated                                                            
   with the producer  group that's in  competition with explorers  -                                                            
   has every incentive  to build  the pipeline  to be  accommodating                                                            
   and to hold its  open season when it  can get the most  shippers,                                                            
   within the necessary constraints under  its project plan.  Given                                                             
   that timeline, someone  would go to  the market and  try to  find                                                            
   anybody willing to ship on the pipeline.                                                                                     
                                                                                                                                
   She cautioned  that  such  an  incentive might  not  exist  in  a                                                            
   producer-owned pipeline.   Ms.  Newman highlighted  concern that                                                             
   this can  drive the  timing of  the  open season  in a  way  that                                                            
   wouldn't occur for an independent  pipeline.  She noted for  this                                                            
   pipeline,  however,  the  reason   for  the  open  season   isn't                                                            
   necessarily to locate all shippers.                                                                                          
                                                                                                                                
   She said the producers' comments raise some concern because  they                                                            
   talk about the open season as the means for allocating  capacity,                                                            
   which suggests there is a finite number on the design.  Pointing                                                             
   out that Anadarko doesn't know  that number, Ms. Newman  reminded                                                            
   members that the  proposal said 4.0  to 4.5 Bcf  a day, with  52-                                                            
   inch pipe, expandable to 6.0.                                                                                                
                                                                                                                                
   She further explained that if there is a finite number,  capacity                                                            
   will need  to  be allocated  and  there'll be  incentive  by  the                                                            
   initial shippers or the Prudhoe  Bay and Point Thomson producers                                                             
   to hold  an  open  season  when there  is  no  need  to allocate                                                             
   capacity.  For those  reasons, Anadarko would  like the State  of                                                            
   Alaska to play  a role in  determining when that  open season  is                                                            
 held - which Ms. Newman said they hadn't seen in the contract.                                                                 
                                                                                                                                
   SENATOR  BEN  STEVENS   voiced  appreciation,   but  said   AOGCC                                                            
   commissioned a  study  in  December  2005  and  thus  is  already                                                            
   analyzing offtake  from  Prudhoe Bay  and  Point Thomson,  to  be                                                            
   completed by  year-end.   He  recalled it  will  be at  least  18                                                            
   months before an open season begins; there is a 180-day  process.                                                            
   He said he  was trying to  understand why the  state needs to  be                                                            
   involved when he believes the issues are being mitigated.                                                                    
                                                                                                                                
   9:44:49 AM                                                                                                                 
   MR. HANLEY  replied that  the suggestion  is to  just ensure  the                                                            
   open season isn't  done before AOGCC  issues its recommendation.                                                             
   If it is at the end of  this year, fine.  He reiterated that  the                                                            
   state should have  some say  about when the  open season  occurs.                                                            
   The state can look at other  factors and decide whether it is  an                                                            
appropriate time.   The state is an owner that  Anadarko views as                                                               
looking  out for  explorers  as well  as  existing producers;  it                                                               
should have the ability to  determine when the open season occurs                                                               
because there  is some  risk, in Anadarko's  view, that  it could                                                               
diminish explorers' ability to have access to the pipeline.                                                                     
                                                                                                                                
MS. NEWMAN clarified that although  there is an opportunity for a                                                               
latecomer to the open-season process  - after the open season has                                                               
closed, but  before the pipeline is  at its final design  state -                                                               
FERC has indicated  it wants the pipeline to  entertain bids from                                                               
interested  shippers  who've  now developed  reserves  that  they                                                               
could commit  to the pipe.   That's because FERC  anticipates and                                                               
has heard there will  be a gap of four to  five years between the                                                               
close  of the  open  season  and the  final  design  or when  the                                                               
pipeline is  ready to  be built.   It isn't a  sure thing.   It's                                                               
something  the pipeline  must consider,  and  the commission  has                                                               
standards  it would  look at  if the  pipeline refused.   But  it                                                               
isn't something the pipeline is required to do.                                                                                 
                                                                                                                                
SENATOR   BEN    STEVENS   expressed   appreciation    for   that                                                               
clarification.                                                                                                                  
                                                                                                                                
9:48:13 AM                                                                                                                    
CHAIR SEEKINS asked how that would be written into the contract.                                                                
                                                                                                                                
MR. HANLEY  surmised some  of the state's  decisions would  be in                                                               
the limited liability  company (LLC) that has control  over a lot                                                               
of  this.   He  reiterated the  need  for the  state,  even as  a                                                               
minority-interest owner,  to have veto authority  over the timing                                                               
of the initial open season for the pipeline.                                                                                    
                                                                                                                                
MS.  NEWMAN  added  that  certain issues  are  critical  to  each                                                               
partner  individually, in  many  LLC partnerships.   Anadarko  is                                                               
concerned that the  only disinterested party at the  table is the                                                               
state.   Although couched in terms  of giving the state  the veto                                                               
power, this could  be accommodated in a number of  ways that work                                                               
for  the LLC  entity.   For example,  the contract  could require                                                               
that  the LLC  say the  following:   Any owner  has the  right to                                                               
determine that the open season is premature.                                                                                    
                                                                                                                                
9:50:08 AM                                                                                                                    
SENATOR  BEN STEVENS  questioned why  the state  would argue  for                                                               
veto authority  to delay the  project when it wouldn't  receive a                                                               
benefit until the point of first revenue.                                                                                       
                                                                                                                                
MS. NEWMAN  responded with an  example where the proposal  in the                                                               
open season is  only enough capacity, at  full pressurization, to                                                               
   handle offtake  from Prudhoe  Bay  and Point  Thomson.   In  that                                                            
   case, the state might ask why it should be done then.                                                                        
                                                                                                                                
   SENATOR BEN  STEVENS, after  referring to  recent testimony  from                                                            
   Mr. Cupina  of  FERC,  asked  why the  sponsor  group  would  put                                                            
   together a package  that potentially  inhibits competition, when                                                             
   FERC has said  if the  project doesn't meet  the requirements  of                                                            
   the federal Act, that  application will be changed  by FERC.  He                                                             
   recalled presentations that it will be  built at 4.3 to 4.5  Bcf,                                                            
   expandable to 5.9 or 6.0.                                                                                                    
                                                                                                                                
   MS. NEWMAN clarified that FERC  rules don't dictate a  particular                                                            
   size or design; its rule says it will look at that as one  factor                                                            
   in determining  whether  any proposal  for  the pipeline  in  any                                                            
   application - or any  proposal for an  expansion - complies  with                                                            
   what  FERC  believes  the  Act  requires  as  sufficient  design                                                             
   capacity to accommodate expansion and all shippers.  This is  the                                                            
   very issue the project sponsors have  taken to the U.S. Court  of                                                            
   Appeals for the District  of Columbia Circuit; they've  suggested                                                            
   FERC  doesn't   have  the   authority  to   second-guess   design                                                            
   determinations, and that case's outcome is  yet to be seen.   But                                                            
   designing it a  particular way isn't  a violation of  rules.   So                                                            
   there'd be  no enforcement  action as  the result  of a  pipeline                                                            
   design that purports to be what others might consider too small.                                                             
                                                                                                                                
   SENATOR BEN STEVENS  opined that  the demonstration  to move  the                                                            
   project forward  as  outlined  in the  Project  Summary  -  under                                                            
   criteria set out by FERC and Congress - is pretty well laid  out.                                                            
   Because of the size and  scrutiny, he questioned why any  project                                                            
   sponsor would knowingly  take anticompetitive  action that  would                                                            
   end up  in litigation  and  thus cause  delay.   He  referred  to                                                            
 presentations about building it to 4.3 Bcf, expandable to 5.9.                                                                 
                                                                                                                                
   MR. HANLEY responded, "If  they build it  that way, we're  happy.                                                            
   And if they say they're going  to build it that way, then  commit                                                            
   to it."    He  noted  FERC  regulation  157.37  says  this:    In                                                            
   reviewing any  application for  an  Alaska natural  gas pipeline                                                             
   project, the commission will consider the extent to which it  has                                                            
   been designed to  accommodate the needs  of shippers who've  made                                                            
   conforming bids  during open  season, as  well as  the extent  to                                                            
   which the  project can  accommodate low-cost  expansion, and  may                                                            
   require  changes   in  project   design  necessary   to  promote                                                             
   competition and offer a reasonable opportunity for access.                                                                   
                                                                                                                                
   He surmised this ability  to look at  low-cost expansions is  the                                                            
   provision referred  to by  Senator  Ben Stevens.   "It  gives  us                                                            
   comfort that we can go to  FERC and have somebody look at  that,"                                                            
he  explained.   Referring to  the court  case by  the producers,                                                               
Mr. Hanley  indicated the  producers'  brief could  ask that  the                                                               
court find 157.36 and 157.37  invalid, since that is exactly what                                                               
they're trying to eliminate.                                                                                                    
                                                                                                                                
MR.  HANLEY told  members this  is why  there are  red flags  for                                                               
Anadarko  about  whether  they're  actually going  to  build  the                                                               
project they  assert they'll build  - taking away the  ability to                                                               
go to FERC  and say this hasn't met the  criteria.  He emphasized                                                               
that the  producers should  put their  intentions in  writing and                                                               
not challenge FERC's authority to ensure it happens that way.                                                                   
                                                                                                                                
9:58:18 AM                                                                                                                    
SENATOR  WAGONER  asked  if smaller  explorer-producers  such  as                                                               
Anadarko,  Chevron  or  Pioneer  were offered  ownership  in  the                                                               
pipeline  or tried  to buy  any part.   He  surmised these  items                                                               
wouldn't be under discussion if they'd had a seat at the table.                                                                 
                                                                                                                                
MR. HANLEY recalled public statements  five or six years ago that                                                               
there might  be an open season  within six months.   Anadarko had                                                               
scrambled, researching  past issues  and producing a  white paper                                                               
after identifying  access concerns.  Anadarko  had approached the                                                               
three  producers to  discuss participation  in  the $125  million                                                               
study  talked about  in their  findings.   At the  time, Anadarko                                                               
wasn't  into pipeline  ownership -  which isn't  what independent                                                               
companies typically do  - but thought it important to  get a seat                                                               
at the table  by paying a share.  Although  Anadarko even offered                                                               
to buy a part of the pipeline, the producers weren't interested.                                                                
                                                                                                                                
He reported that  Anadarko then went to  Washington, D.C.; talked                                                               
to then-Senator  Frank Murkowski, who  helped with some  of these                                                               
new FERC language requirements; and  was successful in bidding on                                                               
the state's  royalty-in-kind (RIK)  gas to protect  its interests                                                               
by being  able to nominate  at the  initial open season  and have                                                               
capacity.     Mr.  Hanley  indicated  that   contract  was  never                                                               
finalized.  Highlighting  that his company has worked  for a long                                                               
time  to address  access  to this  pipeline,  Mr. Hanley said  he                                                               
didn't know  whether other companies  had been  offered ownership                                                               
interests or  had approached  the producers on  this matter.   In                                                               
response to Chair Seekins, he offered to obtain the exact dates.                                                                
                                                                                                                                
10:02:39 AM                                                                                                                   
CHAIR SEEKINS observed that Anadarko has grown a lot since 2001.                                                                
                                                                                                                                
MR.  HANLEY  agreed  it  has been  substantial,  from  perhaps  a                                                               
$4 billion or $5 billion market cap in  1998 to about $23 billion                                                               
today.                                                                                                                          
                                                                                                                                
   CHAIR SEEKINS asked  about a purchase  or merger involving  Kerr-                                                            
   McGee.                                                                                                                       
                                                                                                                                
   MR. HANLEY answered that  it hadn't been  finalized yet; he  also                                                            
   mentioned Western Gas.   In  further response  about North  Slope                                                            
   holdings, he said  Anadarko has about  2 million net  exploration                                                            
   acres and  is a  22 percent  partner with  ConocoPhillips in  the                                                            
   Alpine field production.                                                                                                     
                                                                                                                                
   SENATOR BEN STEVENS offered  to distribute information about  the                                                            
   acreage holders for the North Slope.                                                                                         
                                                                                                                                
   CHAIR SEEKINS  noted  he  hears  different  characterizations  of                                                            
   Anadarko with  respect  to  size  and  acreage.    He  read  from                                                            
   Anadarko's handout,  beginning at  the bottom  of page  2,  which                                                            
   stated in part:                                                                                                              
                                                                                                                                
        Therefore, the  pipeline can  be built  to  accommodate                                                                 
        only   the    project    developers'    reserves,    at                                                                 
        deliverability  levels  that  are  determined  by   the                                                                 
        pipeline developers.    Therefore, even  if  there  are                                                                 
        expectations that  reserves available  to the  pipeline                                                                 
        by the in-service  date would  justify a 4  or 5  Bcf/d                                                                 
        pipeline, the project sponsors might decide to build  a                                                                 
        3  BCF/d  pipeline.     The  pipeline   would  not   be                                                                 
        undersubscribed, but it would be undersized.                                                                            
                                                                                                                                
   He asked  whether  the concern  is  this:   The  producers  might                                                            
   decide to build only  the size necessary  to get their  currently                                                            
   known reserves to market, rather  than what is anticipated to  be                                                            
   available  on  the   North  Slope,  not   only  from  their   own                                                            
   production,  but   also   from  production   of   another   major                                                            
leaseholder such as Anadarko, thereby exercising basin control.                                                                 
                                                                                                                                
   MR. HANLEY affirmed that in general.                                                                                         
                                                                                                                                
 CHAIR SEEKINS asked:  Would it be to their benefit to do that?                                                                 
                                                                                                                                
   MR. HANLEY answered it  could be.  He  indicated if someone else                                                             
   controls access  to a  pipeline, assets  won't be  available for                                                             
   commercialization.                                                                                                           
                                                                                                                                
   CHAIR SEEKINS asked whether the only  way to preclude that is  to                                                            
   have the fiscal-terms contract  or LLC say  the pipeline must  be                                                            
   capable of carrying 4.2 Bcf with expandability up to 40  percent,                                                            
   as heard previously.                                                                                                         
                                                                                                                                
MR.  HANLEY  replied that  it  isn't  the  only  way; it  is  the                                                               
suggested way.   "We'd just  match what the statements  have been                                                               
of what they  are going to build," he specified,  noting it was a                                                               
suggestion  taken from  both the  application and  the governor's                                                               
statements in the FIF.                                                                                                          
                                                                                                                                
CHAIR SEEKINS asked  Ms. Newman why there isn't  an incentive for                                                               
a  producer-owned pipeline  to  build in  the  capability that  a                                                               
privately owned pipeline would have.                                                                                            
                                                                                                                                
MS. NEWMAN  replied there could be  any number of reasons.   This                                                               
has  been  a  concern  for   30  years,  starting  with  the  U.S                                                               
Department  of Justice  analysis of  what anticompetitive  issues                                                               
might arise for  a producer-owned pipeline from  the North Slope.                                                               
An independent  pipeline exists to  transport gas and  make money                                                               
from its transportation volume.  To  the extent it can expand its                                                               
pipeline   economically   and   capture  whatever   is   in   the                                                               
marketplace, the pipeline and its shareholders make more money.                                                                 
                                                                                                                                
CHAIR  SEEKINS noted  this is  the  same incentive  the State  of                                                               
Alaska has in this ballgame.                                                                                                    
                                                                                                                                
MS. NEWMAN  acknowledged that, saying  the idea is  to capitalize                                                               
on the asset  and make the most money  possible within regulatory                                                               
restrictions.   Because it  is a monopoly,  it will  be regulated                                                               
and  a maximum  amount  can be  earned  on the  FERC  tariff.   A                                                               
producer-owned  pipeline has  business  aspects  that may  create                                                               
different  prioritization.    She  gave examples,  calling  it  a                                                               
business  decision.   She noted  people have  been concerned  for                                                               
years that business motivations on  the production side might far                                                               
outweigh those on the pipeline side.   Because there might not be                                                               
the same incentives to do  what an independent pipeline might do,                                                               
there have  been greater regulatory  controls over  this pipeline                                                               
as it becomes clear that it might well be producer-owned.                                                                       
                                                                                                                                
10:10:41 AM                                                                                                                   
SENATOR  BEN  STEVENS referred  to  Anadarko's  handout, page  7,                                                               
"A.3.   A  Premature  Open  Season Will  Restrict  Access To  The                                                               
Pipeline."   He  paraphrased a  sentence, "Anadarko  is currently                                                               
planning to drill its first  natural gas exploration wells in the                                                               
Foothills  Region  of Alaska's  North  Slope  this winter."    He                                                               
recalled  an excellent  presentation  from Mr.  Hanley this  year                                                               
saying one great  challenge that participants on  the North Slope                                                               
face is the lead-time from exploration to production.                                                                           
                                                                                                                                
   He also  referred  to  Anadarko's 10-K  report  and  comments  by                                                            
   Ms. Newman about  priorities.    Noting he  was  making  his  own                                                            
   assumptions, Senator Ben  Stevens said  of 655  wells drilled  in                                                            
   2005, 7 were in Alaska; of $2 billion in investment budgeted for                                                             
   2006, Alaska has  the largest  undeveloped lease-holding  acreage                                                            
   in the company's portfolio; and capital expenditures for 2006  in                                                            
   Alaska totaled $70  million, whereas  $800 million  was spent  in                                                            
   the Gulf of Mexico, $450 million in Canada and so forth.                                                                     
                                                                                                                                
   SENATOR  BEN  STEVENS  acknowledged  Anadarko's  right  to   make                                                            
   business decisions, but said while there is concern about  access                                                            
   to a pipeline from a company that has the largest lease holdings                                                             
   of any independent company on the North Slope, there is no focus                                                             
   on proving those reserves.   At the same  time, he asserted, the                                                             
   company is requesting delay of the open season on a project that                                                             
   everyone is depending  on.  He  said FERC has  made all kinds  of                                                            
   concessions and criteria to allow future explorers and expansion                                                             
   of a line when that gas is available, but it may be six or seven                                                             
   years before it is  actually known how much  the company can put                                                             
   in the pipeline.  He said he didn't understand the rationale.                                                                
                                                                                                                                
   MR. HANLEY replied that Anadarko won't take the full  development                                                            
   step until comfortable that there is access to the pipe - a  real                                                            
   potential restriction.  While  becoming more comfortable through                                                             
   the process involving FERC and the contract, Anadarko is  raising                                                            
   issues here  that would  provide  a greater  comfort level.    He                                                            
   reminded members that a few  years ago even the producers  didn't                                                            
   believe gas  prices were  high  enough to  build a  pipeline,  so                                                            
   there wasn't the interest.                                                                                                   
                                                                                                                                
   He reported that  Anadarko has done  significant seismic work  in                                                            
   the Foothills  and  has drill-ready  prospects;  it has  taken  a                                                            
   certain amount of  risk already  and invested some  money in  the                                                            
   hope that a gas  line will come to  fruition.  Anadarko is  ready                                                            
   and planning with its partners  to potentially drill a well  this                                                            
   winter.  However, it likely will get into the expansion phase of                                                             
   any pipeline  because it  is hard  to invest  money until  it  is                                                            
   known that a  pipeline is  going forward.   After  a pipeline  is                                                            
   going forward, if the company  drills its first well there  still                                                            
   won't be the  knowledge to  commit until after  the open  season.                                                            
   Mr. Hanley acknowledged this is a bit of a Catch-22.                                                                         
                                                                                                                                
   MR.  HANLEY  characterized   this  as  a   "long-term  play"  in                                                             
   Anadarko's  portfolio.    Reminding  Senator  Ben  Stevens  of  a                                                            
   computer presentation in  the Senator's  office about  Anadarko's                                                            
   process in Alaska, he said  Anadarko is looking for  anchor-field                                                            
   opportunities, larger-type fields for gas or oil that tend to  be                                                            
farther  from infrastructure,  more  frontier  and riskier;  they                                                               
also  take longer  to develop.    Noting the  commercial side  is                                                               
often greater than the noncommercial  side - the geologic risks -                                                               
he noted the ability to get gas to market is a crucial issue.                                                                   
                                                                                                                                
He emphasized  the desire to  see the gas  line go as  quickly as                                                               
possible.   Mr.  Hanley specified  that Anadarko's  suggestion on                                                               
the open  season isn't to  delay the project.   Rather, it  is to                                                               
make sure  that the open  season is not held  prematurely, before                                                               
it's necessary for  progress of the project.  Nor  is the company                                                               
trying to suggest  a time when the open season  should be held or                                                               
delayed.  Because  the state probably has  more aligned interests                                                               
with the explorers, Anadarko believes  that giving the state some                                                               
say over timing would provide more comfort for explorers.                                                                       
                                                                                                                                
10:18:36 AM                                                                                                                   
SENATOR  WAGONER provided  his understanding  that currently  the                                                               
three  major  producers  are  the   only  companies  with  proven                                                               
reserves on  the North  Slope.  Noting  Anadarko and  Chevron are                                                               
partial owners  in that, he  asked whether any  independents have                                                               
proven gas reserves on the North Slope in any quantity.                                                                         
                                                                                                                                
MR. HANLEY  answered that  he believes  Chevron is  a significant                                                               
owner  at  Point Thomson,  for  example,  and there  are  smaller                                                               
owners in some fields, though he wasn't familiar with those.                                                                    
                                                                                                                                
10:20:03 AM                                                                                                                   
SENATOR  BEN   STEVENS  asked  which   would  better   raise  the                                                               
attractiveness of  Alaska for  Anadarko's portfolio:   1) opening                                                               
the basin  for a gas line,  but not revising the  oil tax; 2) the                                                               
oil tax proposal  before the committee, but with  no pipeline; or                                                               
3) a combination of revising the oil tax and opening the basin.                                                                 
                                                                                                                                
MR. HANLEY noted  Anadarko has testified the latter  would be the                                                               
most  advantageous; has  testified in  support of  the governor's                                                               
20/20 [20 percent tax on oil,  with a 20 percent credit] proposal                                                               
and  suggested  it  would  increase   investment;  and  has  said                                                               
Anadarko wants the gas pipeline built.                                                                                          
                                                                                                                                
CHAIR SEEKINS asked about the  10-K report, observing it says the                                                               
results  of  the  seven  wells  drilled in  Alaska  are  held  as                                                               
confidential for competitive reasons.                                                                                           
                                                                                                                                
MR. HANLEY opined that in  Alaska information about certain wells                                                               
can be kept confidential for two  years, and statutes say who can                                                               
get the information;  for example, the department  can receive it                                                               
on a  confidential basis, and  rules relate  to its release.   To                                                               
   his belief, certain information  can be kept confidential  beyond                                                            
   that period;  the state  has  developed a  policy for  when  that                                                            
   information is released.   While suggesting most companies  would                                                            
   prefer it never be released, for competitive reasons, Mr. Hanley                                                             
   offered to obtain  more precise  information.  As  for the  seven                                                            
   wells, they're  on  the  North Slope,  largely  in  the  National                                                            
   Petroleum Reserve-Alaska  (NPR-A), where  Anadarko partners  with                                                            
   ConocoPhillips, which he  believes is  the operator  for most  of                                                            
   those.  The location of the wells is public information.                                                                     
                                                                                                                                
   CHAIR SEEKINS observed the high success rate in Louisiana,  Texas                                                            
   and Western  states, for  example,  in contrast  to Alaska.    He                                                            
   expressed curiosity about wells shown in footnote 2.                                                                         
                                                                                                                                
   MR. HANLEY  responded that  they're frontier  exploration  wells.                                                            
   In the Lower 48, some are in or around existing fields; a lot  of                                                            
   gas  wells  are  drilled  and  come  online  quickly  in   fairly                                                            
   identified areas.    Referring  to  the  federal  Securities  and                                                            
   Exchange Commission (SEC)  rules, Mr.  Hanley noted  that what  a                                                            
   company is  allowed to  say  in such  reports is  fairly  tightly                                                            
   controlled; Anadarko  follows the  statutes and  SEC rules.    In                                                            
   Alaska, the success  rate is substantially  lower; Anadarko goes                                                             
   into more frontier-related  areas with higher  risk, looking for                                                             
   larger-type prospects than it might elsewhere.                                                                               
                                                                                                                                
   10:25:06 AM                                                                                                                
   SENATOR STEDMAN highlighted the  idea that the  state would be  a                                                            
   20 percent  owner of  a project  like this  and then  not try  to                                                            
   maximize the  benefit for  its  people, particularly  for  issues                                                            
   like sizing  the pipe  for  volume, basin  access and  trying  to                                                            
   extend the  basin life  for  30-50 years  or  longer.   He  asked                                                            
   whether Anadarko  thinks  the  State of  Alaska  doesn't  have  a                                                            
   vision of maximizing the life of Prudhoe Bay.                                                                                
                                                                                                                                
   MR. HANLEY  opined  that Anadarko  is  aligned with  the  state's                                                            
   interests, and that  the state  is most aligned  with respect  to                                                            
   Anadarko's interests.    Agreeing  the state  will  maximize  its                                                            
   interests, he remarked,  "I don't disagree  with anything you've                                                             
   said."  He noted the question  becomes whether the state has  the                                                            
   ability, through the contract - and particularly through the  LLC                                                            
   agreements -  to  actually  influence  some  of  those  decision.                                                            
   While the state, as  a 20 percent owner,  would typically have a                                                             
   say, it may get outvoted - which is the concern.                                                                             
                                                                                                                                
   SENATOR  STEDMAN   recalled   FERC  testimony   about   its   own                                                            
   independence in deciding the size of the pipe.  He also recalled                                                             
   questions by Senator Wagoner about  having two pipes versus  one,                                                            
with FERC's response being that  FERC would make that decision at                                                               
the proper time.   Senator Stedman said they  didn't mention that                                                               
litigation  in  the courts  might  block  them from  making  that                                                               
decision,  but  had  said  they'd  make  the  size  of  the  pipe                                                               
applicable to the  goal of opening that basin  and harvesting the                                                               
natural resources for the benefit of Alaskans and Americans.                                                                    
                                                                                                                                
MS. NEWMAN surmised Robert Cupina  of FERC, the head of projects,                                                               
is well  aware of the court  appeal.  She recalled  his testimony                                                               
that FERC  would look  at the  size and  ensure the  pipeline was                                                               
properly  sized  to  allow  for  expansion,  and  that  it  would                                                               
accommodate what FERC  felt was important in terms  of sizing and                                                               
design.    Ms.  Newman  said  that authority  of  FERC  has  been                                                               
challenged by  the project  sponsors.  They  are asking  the U.S.                                                               
Court of  Appeals for  the D.C.  Circuit -  in a  review petition                                                               
filed from  the FERC rule  making with  respect to what  rules it                                                               
would follow in acting on an  application for expansion or for an                                                               
initial certificate - to decide  FERC doesn't have that authority                                                               
and  power,  and to  vacate  those  aspects of  its  regulations.                                                               
Until the court decides that case, the issue is unresolved.                                                                     
                                                                                                                                
SENATOR  STEDMAN  voiced hope  that  Congress  would step  in  to                                                               
protect Americans' interests if something like that occurred.                                                                   
                                                                                                                                
10:29:30 AM                                                                                                                   
SENATOR  STEDMAN noted  concern that  there could  be substantial                                                               
manipulation  by the  industry  to diminish  the state's  revenue                                                               
share, affecting  the federal government  as well, since  it gets                                                               
roughly  half the  government take.   He  asked:   If a  publicly                                                               
traded company aggressively  manipulated expenditures to increase                                                               
its income  and hence falsified its  10-K report and so  on, what                                                               
ramifications would be faced with respect to the SEC?                                                                           
                                                                                                                                
MR. HANLEY replied that Anadarko isn't  going to break the law or                                                               
try to  manipulate things  in that way,  which would  have severe                                                               
ramifications.  He noted companies  go out of business because of                                                               
manipulation and  illegal activities, and  people get fired.   He                                                               
reiterated support for the governor's original 20/20 proposal.                                                                  
                                                                                                                                
SENATOR STEDMAN  clarified that he  was using the  opportunity to                                                               
speak  to it  because of  having in  his hands  a 10-K,  a report                                                               
filed  with  SEC  on  corporate  activity  including  income  and                                                               
expenditures.                                                                                                                   
                                                                                                                                
10:34:50 AM                                                                                                                   
SENATOR   BEN  STEVENS   pointed   out  that   the  comments   on                                                               
Article 8.7,  state-initiated   expansion,  on  pages   16-20  of                                                               
   Anadarko's handout,  conclude  it  would  be  best  to  eliminate                                                            
   Article 8.7 entirely.  Opining  that Anadarko makes a  compelling                                                            
   case from its perspective,  he requested a roundtable  discussion                                                            
   to learn what advantages the administration sees in Article 8.7.                                                             
                                                                                                                                
   10:37:07 AM                                                                                                                
   MR. HANLEY addressed  Article 8.7.   He acknowledged the  state's                                                            
   intent to provide  another avenue  for expansion.   However,  the                                                            
   criteria make it  more onerous than  even the federal  mandatory-                                                            
   expansion program  under  FERC  for this  pipeline;  the  federal                                                            
   program has 8 criteria, to his belief, that the state adopted in                                                             
   essence,  adding  10  or  12   more  that  diminish  the  value.                                                             
   Mr. Hanley said Anadarko couldn't foresee a scenario in which  it                                                            
   would use the  state process.   If it couldn't  meet the  federal                                                            
   process, it wouldn't be able to  meet the state process with  its                                                            
   additional onerous provisions.                                                                                               
                                                                                                                                
   He discussed limitations.   First, the state-initiated expansion                                                             
   proposal cannot be  used until  commencement of  the pipeline,  a                                                            
   limitation Anadarko  doesn't believe  makes sense;  if a  company                                                            
   finds enough gas  and wants  to propose an  expansion before  the                                                            
   pipeline actually  starts operations,  Mr. Hanley  said  normally                                                            
   that can be done.   Another limitation  is restricting the  state                                                            
   process to every five years.  A further limitation suggests  that                                                            
   even if  someone  goes through  the  process and  meets  all  the                                                            
   conditions, the certificate  shall be rejected  if FERC issues  a                                                            
   certificate that has different conditions than applied for.                                                                  
                                                                                                                                
   He indicated BG Group, one  of Anadarko's partners, had prepared                                                             
   comments including  an analysis  of concerns  about Article  8.7;                                                            
   Mr. Hanley  noted these  comments are  public, though  he  didn't                                                            
   know if  they'd been  submitted.   He  opined  that it  would  be                                                            
   harder to restructure what  exists with Article  8.7 and come  up                                                            
   with something that might work than to eliminate it and then add                                                             
   other criteria  specified in  Anadarko's proposal.   Although  he                                                            
   offered to work with  the state in this  regard, Mr. Hanley said                                                             
   it was difficult  to see how  to salvage it;  there are too  many                                                            
   restrictions  on  the  expansion  capability,  and  it  would  be                                                            
   ineffective.  Thus the suggestion is to remove it.                                                                           
                                                                                                                                
   SENATOR BEN STEVENS asked  whether the state-initiated expansion                                                             
   is categorized by FERC as a voluntary expansion.                                                                             
                                                                                                                                
   MS. NEWMAN  noted it's  an interesting  question.   She gave  her                                                            
   understanding  that  FERC  hasn't  opined  what  this  would  or                                                             
   wouldn't be.   There are  two ways  to look at  it:   1) Yes,  it                                                            
   would be a  voluntary expansion  because it would  be a  proposal                                                            
filed  by the  pipeline with  FERC,  as opposed  to an  expansion                                                               
initiated  by an  unhappy shipper  who'd tried  unsuccessfully to                                                               
get   capacity,  or   2)  FERC   regulations  define   "voluntary                                                               
expansion"  as  an expansion  made  voluntarily  by the  pipeline                                                               
entity, and  it isn't known  how that  would be portrayed  by the                                                               
pipeline entity  when it found  itself making that filing.   Thus                                                               
it possibly could be either answer.                                                                                             
                                                                                                                                
CHAIR  SEEKINS  acknowledged that  attendees  seemed  to wish  to                                                               
comment on that point.                                                                                                          
                                                                                                                                
MR. HANLEY  indicated Anadarko hadn't  gone through  each section                                                               
today to  explain each  concern, but  could do  so.   He referred                                                               
members to the concerns described  in Anadarko's comments as well                                                               
as BG Group's comments, which  add clarity to the concerns raised                                                               
in this particular section.                                                                                                     
                                                                                                                                
10:43:33 AM                                                                                                                   
SENATOR STEDMAN asked:   If Anadarko, as  the largest independent                                                               
company,  doesn't participate  in the  initial open  season, will                                                               
other independents likely participate?                                                                                          
                                                                                                                                
MR.  HANLEY replied  Anadarko  may or  may not.    It depends  on                                                               
whether  it  has  reserves.    There will  be  a  large  monetary                                                               
commitment to  transport gas  for a  significant amount  of time.                                                               
He didn't know  whether other independents had found  a gas field                                                               
from which to nominate.                                                                                                         
                                                                                                                                
SENATOR BEN STEVENS asked whether  it is accurate that Anadarko's                                                               
recommended term for commitment has consistently been 20 years.                                                                 
                                                                                                                                
MS. NEWMAN noted Anadarko took  the position that there should be                                                               
a cap of 20 years, but FERC didn't accept that proposal.                                                                        
                                                                                                                                
SENATOR  BEN STEVENS  asked:   When  FERC does  the revision  and                                                               
approves the tariff rate, does it set the term?                                                                                 
                                                                                                                                
MS.  NEWMAN replied  FERC  doesn't set  the  term for  contracts.                                                               
That  is done  by  private  agreement.   There  will  be an  open                                                               
season, and FERC has indicated  it won't dictate the maximum term                                                               
for purposes of doing a  net-present-value calculation in an open                                                               
season, if the possibility of  capacity allocation is faced.  She                                                               
recalled  FERC  also  indicated  it  will look  at  it;  if  FERC                                                               
believes it  is unduly anticompetitive,  it could raise  an issue                                                               
and suggest that if somebody bid  for 50 years, for example, that                                                               
would be inappropriate.   But FERC hasn't indicated  there is any                                                               
time limit it would set for purposes of a contract term.                                                                        
                                                                                                                                
   10:46:28 AM                                                                                                                
   ^Donald   Shepler,   Greenberg   Traurig,   Consultant   to   the                                                            
   Legislature                                                                                                                  
   DONALD  SHEPLER,  Greenberg  Traurig,  LLP,  Consultant  to   the                                                            
   Legislature, concurred.   He noted the  following suggestion was                                                             
   made  on  behalf  of  the  legislature:    For  purposes  of  bid                                                            
   evaluation on the open season, FERC should cap the bid period at                                                             
   20 years, since FERC  typically approves a net-present-valuation                                                             
   methodology to determine the  value of the bids.   As Ms. Newman                                                             
   had said,  concern  was  expressed  that  someone  might  bid  an                                                            
   excessively  long  period  to  increase   the  value  of  a  bid                                                             
   unnecessarily in  order to  win capacity.   While  FERC  rejected                                                            
   that proposal by  the legislature as  well, Mr. Shepler  reported                                                            
   that FERC said it will  observe and withhold judgment,  depending                                                            
   on the length of contract term bids in the open season.                                                                      
                                                                                                                                
   ^Bob Loeffler, Morrison & Foerster, Counsel to the Governor                                                                  
   BOB LOEFFLER, Morrison & Foerster  LLP, Counsel to the  Governor,                                                            
   agreed with  Mr. Shepler.   "We urged  that position,"  he  said,                                                            
   indicating it  places  some  limit  on the  length  of  the  firm                                                            
   transportation (FT) commitment.   "We  struggled with  describing                                                            
   what the  expected  length of  the  FT  would be  in  the  fiscal                                                            
   interest finding," Mr.  Loeffler explained,  indicating it  could                                                            
   be 10 to 20 years or longer.                                                                                                 
                                                                                                                                
   He  noted  the  other  party  in  this  arena  is  the  financial                                                            
   community, which  looks  at  those commitments  as  part  of  the                                                            
   overall financing  scheme,  and which  will  have a  large  voice                                                            
   because it is security for  the whole financing of the  pipeline.                                                            
   Characterizing it  as  a  tug-of-war,  Mr.  Loeffler  said  if  a                                                            
   company bids for too long, it  pays for capacity it doesn't  have                                                            
   gas to  fill;  it's  an  extra  financial  liability.    Thus  he                                                            
   suggested  the  financial  community  might  want  as  heavy  an                                                             
   FT commitment as possible, or might want it shorter.  This  plays                                                            
 out in constructing the financing plan and in the open season.                                                                 
                                                                                                                                
   SENATOR BEN STEVENS summarized  that it is  to be determined,  as                                                            
   for many questions raised here.  He asked:  For the open  season,                                                            
   will the terms be a requirement?  Or will each individual bidder                                                             
   bid for the length and term and capacity?  How can the  financial                                                            
   world put together  its term sheets  until the project  has a  FT                                                            
   commitment that,  to his  belief, would  have a  consistent  term                                                            
   among all shippers, even though the volume would vary?                                                                       
                                                                                                                                
   MS. NEWMAN gave  her understanding  of the normal  process in  an                                                            
   open season  for  capacity.    The  pipeline  frequently  sets  a                                                            
minimum bid term.   It can place its own cap, and  some set it at                                                               
10  years.    It  also  can  place  a  minimum  length  of  time.                                                               
Evaluation  of the  bids  is  done by  the  pipeline entity,  the                                                               
project sponsor.   If somebody believes bids  have been evaluated                                                               
improperly, a complaint can be made to FERC.                                                                                    
                                                                                                                                
SENATOR BEN STEVENS surmised the  whole project would be reviewed                                                               
by FERC before the issuance of the certificate.                                                                                 
                                                                                                                                
MS.  NEWMAN  explained  that for  this  particular  pipeline  the                                                               
commission will  review the  terms that  go into  the open-season                                                               
packet.   As  to what  information will  be provided,  she didn't                                                               
know yet  whether it would  match identically what FERC  has said                                                               
the open-season package  must contain or would  be less specific.                                                               
It will  be seen  at the  time.  After  FERC reviews  that, there                                                               
will be an  open season.  Anybody can file  a complaint following                                                               
an open season if it is believed something was done improperly.                                                                 
                                                                                                                                
She reported  that FERC has  agreed this will be  fast-tracked if                                                               
there is  a complaint so  the process  isn't unduly delayed.   If                                                               
there are no complaints, a  certificate application will be filed                                                               
using the precedent  agreements executed as a result  of the open                                                               
season  itself.   That becomes  part  of the  package filed  with                                                               
FERC, and  it is pretty much  the last opportunity for  people to                                                               
object  to  what is  going  on  in the  certificate  application.                                                               
Ms. Newman said  FERC will look again  at that point.   She noted                                                               
as a result of the Alaska  Natural Gas Pipeline Act (ANGPA), FERC                                                               
promulgated  rules on  open seasons  that differ  from those  for                                                               
Lower 48 pipelines.  She elaborated about the latter.                                                                           
                                                                                                                                
SENATOR BEN STEVENS asked whether  the following is correct:  The                                                               
criteria for  the open  season will  be reviewed by  FERC.   If a                                                               
potential bidder  has a grievance,  that can be filed  during the                                                               
open  season  and it  will  be  fast-tracked and  thus  addressed                                                               
during that period of time.                                                                                                     
                                                                                                                                
MS. NEWMAN replied  that the exact timing of  the complaint isn't                                                               
specified.  Theoretically, someone could  file a complaint at any                                                               
point if something improper were perceived in the open season.                                                                  
                                                                                                                                
10:54:46 AM                                                                                                                   
MR. HANLEY  turned to comments  on Articles  8.1, 8.2 and  8.3 of                                                               
the proposed gas  contract, beginning on page 20  of the handout.                                                               
He indicated  he'd discussed this  previously in relation  to the                                                               
Regulatory  Commission of  Alaska (RCA)  and the  regulatory gap.                                                               
He recalled  that all parties  want to go  to FERC and  seek FERC                                                               
jurisdiction over  these facilities, but  there is a  question of                                                               
   whether FERC will  grant it.   Even if FERC  grants it, as  heard                                                            
   the other  day,  there  is  a question  of  whether  it  has the                                                             
   authority, and there are related court cases.                                                                                
                                                                                                                                
   He explained that Anadarko is concerned that the contract  limits                                                            
   the state's ability  to request  or support  RCA jurisdiction  to                                                            
   the extent  it  may  exist.    Mr. Hanley  recommended  that  the                                                            
   requirement that everybody request FERC jurisdiction remain, but                                                             
   the other portions  of these  provisions be  removed.   Recalling                                                            
   that  Shell's  comments  suggest  RCA  should  regulate  if  FERC                                                            
   doesn't, he noted there'd been  discussion since then.   Anadarko                                                            
   therefore recommends the following:   Remove sections that  limit                                                            
   the state's authority, and then  everyone go jointly to  Congress                                                            
   to ensure FERC has authority to regulate these things.  Then the                                                             
   question will  be  moot,  since they'll  be  regulated  by  FERC.                                                            
   Mr. Hanley deferred to Ms. Newman to address Anadarko's concerns                                                             
 with capacity-management issues in Article 10 of the contract.                                                                 
                                                                                                                                
   The committee took an at-ease until 11:06:05 AM.                                                                           
                                                                                                                                
   MS. NEWMAN  referred to  pages  11-14 of  the handout.    Calling                                                            
   Article 10 lengthy and complex, she explained Anadarko's concern                                                             
   that it is  extremely restrictive  as to  the state's  particular                                                            
   rights, and may  interfere with  the normal  process of  capacity                                                            
   release and the  availability of capacity  in a secondary  market                                                            
   for this pipeline.  This may  become important down the road  for                                                            
   people without capacity  who are looking  for released capacity,                                                             
   from time to time, from those who have capacity in the line.                                                                 
                                                                                                                                
   She said it isn't at all  clear that FERC rules would permit  one                                                            
   shipper to bid  for another  shipper such  that Shipper A  shares                                                            
   information about its  bid with Shipper B.   Normally, the  open-                                                            
   season  process  contemplates   individual  bids  by   individual                                                            
   shippers; it doesn't  contemplate the  shippers getting  together                                                            
   to decide how to formulate a bid, even though they may have  some                                                            
   common  relationships.    Ms.  Newman  opined  it  would  require                                                            
   special FERC approval, if FERC were to give it at all.                                                                       
                                                                                                                                
   She raised  a second  issue:   Article  10 seems  to  contemplate                                                            
   there will  be  terms  and  conditions of  service  that  may  be                                                            
   negotiated in  a precedent  agreement  following an  open season                                                             
   that could differ from shipper to shipper.  Ms. Newman said FERC                                                             
   rules  don't  allow  differences  in  terms  and  conditions  of                                                             
   service, but only  allow differences  in price,  other than  some                                                            
   inconsequential terms and conditions.                                                                                        
                                                                                                                                
She  made  a third  point:    It  appears  the state's  right  to                                                               
forecasts  of  monthly production  information  -  which, to  her                                                               
belief, is in Article 10.4  - appears somehow contingent upon the                                                               
state's agreeing  to all of  Article 10.   While this may  not be                                                               
intended, Ms. Newman  said it  appears to read  such that  if the                                                               
state didn't agree to all  capacity-trading provisions of Article                                                               
10,  perhaps  it  wouldn't   receive  the  necessary  information                                                               
required with respect to its RIK gas.                                                                                           
                                                                                                                                
MS. NEWMAN said Article 10  also seems to contemplate prearranged                                                               
releases of capacity  at rates perhaps other  than the pipeline's                                                               
maximum  tariff   rate.    This  isn't   permitted  under  FERC's                                                               
capacity-release rules,  which only allow a  replacement contract                                                               
to  be executed  in a  prearranged capacity-release  deal if  the                                                               
rate is  at the maximum  tariff rate -  not the rate  the initial                                                               
shipper is  paying.  If  the rate is  lower, Ms. Newman  said, it                                                               
must be  put out for  bid.  If  higher, it must  require specific                                                               
FERC approval.                                                                                                                  
                                                                                                                                
She also said the commission  tries to ensure initial capacity of                                                               
a pipeline is  available to all shippers, and it  tries to ensure                                                               
that those  who obtain initial  capacity don't use  their control                                                               
over  it to  extract  monopoly rents  from  nonshippers who  seek                                                               
capacity  in the  capacity-release market.   The  object of  that                                                               
rule -  the restriction on the  maximum tariff rate -  is to keep                                                               
that  in check.   Thus  Ms.  Newman said  it isn't  clear that  a                                                               
predetermined  capacity-release  arrangement   will  pass  muster                                                               
under  existing rules.    Furthermore, as  this  is structured  -                                                               
looked  at across  the board  among  all the  producers who'd  be                                                               
shippers, as  well as the  state's interest with respect  to each                                                               
producer's  leasehold -  it appears  if these  articles apply  to                                                               
every  one  of them  and  to  potentially  every shipper  on  the                                                               
pipeline,  there will  be  a real  restriction  in the  capacity-                                                               
release market.                                                                                                                 
                                                                                                                                
11:11:50 AM                                                                                                                   
MS. NEWMAN  raised concern that  Article 10 seems  to contemplate                                                               
shipper-to-shipper  transactions  without  participation  of  the                                                               
pipeline.    But  the  capacity-release  programs  at  FERC  work                                                               
through the pipeline,  which is therefore in the  middle of these                                                               
transactions.   There  can  be a  replacement  shipper, but  that                                                               
person then  must execute  a contract with  the pipeline.   While                                                               
perhaps this is contemplated to be  done after the fact, when the                                                               
tariff  is  written, it  appears  to  deviate from  current  FERC                                                               
requirements and thus requires special FERC approval.                                                                           
                                                                                                                                
   She also expressed  concern that it  appears to restrict  trading                                                            
   and capacity.  If Anadarko were looking for additional  capacity,                                                            
   the state couldn't decide on its own to sell its excess capacity                                                             
   to Anadarko, but  would have to  first give its  capacity to  BP,                                                            
   ConocoPhillips or ExxonMobil, which could then decide whether to                                                             
   release it to Anadarko.   Conversely, if  the state wanted  extra                                                            
   capacity  and  Anadarko  had  some,  the  state  couldn't  go  to                                                            
   Anadarko and buy it  - even if Anadarko  were willing to  provide                                                            
   it at half price.   Instead, the state  would have to go  through                                                            
   BP, ConocoPhillips or ExxonMobil and obtain the capacity  through                                                            
   them at whatever price they negotiated.                                                                                      
                                                                                                                                
   MS. NEWMAN  concluded that  Article 10  seems unduly  restrictive                                                            
   and perhaps  unnecessary.   She  acknowledged perhaps  the  state                                                            
   believes it needs  some protection  from a  leaseholder having  a                                                            
   better price or getting a better deal in an open season than  the                                                            
   state could get.   However, she opined that  the state should be                                                             
   able to  cure  that  with  something  akin  to  a  "most  favored                                                            
   nations" clause with respect to  the transportation price on the                                                             
   pipeline -  because it  is the  state, has  royalty interests  to                                                            
   protect and needs  to get the  same price for  its production  as                                                            
the producers do.  She surmised that would pass muster at FERC.                                                                 
                                                                                                                                
   11:14:36 AM                                                                                                                
   SENATOR  BEN  STEVENS  said  he  finds  this  interesting,  since                                                            
   Anadarko says it is aligned  with the state's interests and  yet,                                                            
   to his  recollection, the  capacity-management in  Article 10  is                                                            
   Mr. Clark's pride and joy.   He recalled testimony that this  was                                                            
   designed to provide offtake in  Alaska without a penalty for  not                                                            
   meeting the capacity  requirements with  the group  as an  owner.                                                            
   He asked  to  hear  from  Mr.  Clark,  recalling  he'd  heard  in                                                            
   presentations since  May that  Article 10  is favorable  for  the                                                            
   state and  that  there  were  many  concessions  from  the  other                                                            
   sponsor applicants.                                                                                                          
                                                                                                                                
   He turned to Mr. Cupina's  testimony earlier in the week,  noting                                                            
   Ms. Newman had been present then.  Senator Ben Stevens read  from                                                            
   page 13 of Anadarko's  handout, which said in  part:  "In short,                                                             
   Article 10 attempts to remove the trading of interstate  pipeline                                                            
   capacity on  the Alaska  pipeline  from FERC's  jurisdiction  and                                                            
   have it governed,  instead, by private  contract."  Offering  his                                                            
   recollection that Mr. Cupina had  said the contract cannot usurp                                                             
   FERC jurisdiction, Senator Ben  Stevens asked:   Do you have  any                                                            
   question  about  FERC's  ability   to  interpret  the  capacity-                                                             
   management program, with the statement that Mr. Cupina made?                                                                 
                                                                                                                                
   11:17:13 AM                                                                                                                
MS. NEWMAN  expressed confidence that  FERC will have to  look at                                                               
Article  10  and  the   entire  capacity-management  program  and                                                               
determine whether  it can allow  it.   Nor did she  disagree that                                                               
the  contract  cannot  override  FERC  regulations  in  terms  of                                                               
capacity  trading on  this pipeline.    She gave  her reading  as                                                               
follows:  It purports  to try to do that by  setting up a private                                                               
contractual  arrangement  through which  the  parties  can go  to                                                               
arbitration  to  resolve  disputes, and  they're  precluded  from                                                               
raising issues  with regulatory agencies.   Ms.  Newman clarified                                                               
that it appears  the contract tries to do  something she believes                                                               
it cannot do.                                                                                                                   
                                                                                                                                
11:18:00 AM                                                                                                                   
SENATOR  BEN STEVENS  surmised  that would  be  based on  dispute                                                               
arbitration involving the LLC members, not another shipper.                                                                     
                                                                                                                                
MS.  NEWMAN concurred.   The  arbitration  provisions only  apply                                                               
among the  contracting parties, but  still require  FERC approval                                                               
to even  engage in  the transactions  in Article  10.   Only FERC                                                               
could  have jurisdiction  over whether  the provisions  that FERC                                                               
allows  in  terms  of   the  capacity-release  arrangements  were                                                               
properly addressed.   She  said she doesn't  believe that  can be                                                               
removed from the FERC arena  and put into a private-dispute arena                                                               
or  into a  private  contracting arrangement  without prior  FERC                                                               
approval.   It  is a  regulated contract.   That  aspect of  this                                                               
contract is a regulated contract arrangement.                                                                                   
                                                                                                                                
SENATOR  BEN  STEVENS noted  Article  10  had been  presented  as                                                               
protecting  the  state's interests  in  the  event it  takes  its                                                               
royalty and tax gas in kind and becomes an FT participant.                                                                      
                                                                                                                                
11:20:39 AM                                                                                                                   
CHAIR SEEKINS read from page 13 of the handout, which said:                                                                     
                                                                                                                                
     But if the  State is to commit to take  its gas in kind                                                                    
     and,   therefore,  to   purchase  firm   transportation                                                                    
     capacity on  the Alaska  Pipeline in  its own  name, it                                                                    
     cannot, by private  contract, grant itself preferential                                                                    
     terms and  conditions to  eliminate the  business risks                                                                    
     faced by all other  shippers in committing to long-term                                                                    
     firm capacity on the pipeline.                                                                                             
                                                                                                                                
He asked whether this says FERC won't allow it.                                                                                 
                                                                                                                                
MS.  NEWMAN replied  she believes  FERC won't  allow it,  but she                                                               
can't say  what FERC would  do.   She surmised FERC  wouldn't let                                                               
any shipper  receive preferential  treatment for  offsetting risk                                                               
   for signing up for capacity.   Every shipper would like  internal                                                            
   arrangements that  allow simply  moving capacity  back and  forth                                                            
   among other  shippers  in  order  to  offset  lows  or  highs  in                                                            
   production at  any  point;  however, that  isn't  how  it  works.                                                            
   Ms. Newman added,  "That's what  the capacity-release  system is                                                             
   for, to have  excess capacity  available in the  open market  for                                                            
   anyone to bid on who might need it and not just restrict it to a                                                             
   single individual unless,  again, it's been  done at the  maximum                                                            
   tariff rate, in which case there's no point to bid."                                                                         
                                                                                                                                
   11:22:32 AM                                                                                                                
   CHAIR SEEKINS asked whether other  FERC attorneys, in looking  at                                                            
 this, generally agree it probably wouldn't be allowed by FERC.                                                                 
                                                                                                                                
   MS. NEWMAN answered that she'd  discussed this with Mr.  Loeffler                                                            
   as well as ConocoPhillips, whose consensus, to her recollection,                                                             
   was a belief that these  provisions are permissible because  they                                                            
   fall within  the scope  of the  capacity-assignment or  capacity-                                                            
   release provisions  allowing for  prearranged deals.   She  noted                                                            
   her response was  this:  That  would be true  if the  prearranged                                                            
   deals were set  at the  maximum tariff  rate; in  that case,  all                                                            
   that would be required is posting of the transaction on the Web,                                                             
   for  example.     It  wouldn't   be  true,   however,  if   those                                                            
   transactions were at less or higher than the maximum rate.                                                                   
                                                                                                                                
   She noted  she didn't  recall  discussing the  permissibility  of                                                            
   Shipper A bidding for Shipper B, even if the latter is the state                                                             
   royalty owner.  Ms.  Newman said she also  didn't know that FERC                                                             
   had ever addressed that question; she opined it would have to be                                                             
   presented to  FERC  to  determine  permissibility.    Ms. Newman                                                             
   surmised other counsel present would agree.                                                                                  
                                                                                                                                
   CHAIR SEEKINS asked  whether Ms. Newman  believes the provisions                                                             
   of Article 10 aren't in the best interests of the state.                                                                     
                                                                                                                                
   MS. NEWMAN offered  the view  that the  state shouldn't  restrict                                                            
   itself  in  terms  of  how  it  can  release  capacity.     While                                                            
   understanding the state's concern  - not to be  long or short  on                                                            
   capacity -  she suggested  in  the long  run  there are  ways  to                                                            
   manage it without the restrictions imposed by this article.   She                                                            
   acknowledged she couldn't judge that for the state.                                                                          
                                                                                                                                
   11:25:29 AM                                                                                                                
   SENATOR  BEN  STEVENS  suggested  Article  10  is  in  the   best                                                            
   interests of the state but not Anadarko, and thus the attempt to                                                             
   eliminate it.                                                                                                                
                                                                                                                                
MS.   NEWMAN  replied   she  doesn't   believe   Article  10   or                                                               
restrictions  in the  secondary market  are beneficial  to anyone                                                               
but the  original capacity holders;  if Anadarko were  an initial                                                               
capacity holder, perhaps it would  like this provision.  However,                                                               
every  shipper  should  be  free to  release  capacity  into  the                                                               
market, which  is part  and parcel  of FERC's  open-access rules.                                                               
"Putting  restrictions on  yourself,  even if  it  seems like  it                                                               
might be good, might in  the end not work," Ms. Newman cautioned.                                                               
"But I can't judge that for  the state."  Returning to an earlier                                                               
concern, Ms. Newman explained:                                                                                                  
                                                                                                                                
     As I  read Article 10,  the state  is going to  have to                                                                    
     bid  in  the open  season  for  its capacity  in  three                                                                    
     pieces.   And it will  have to balance and  manage that                                                                    
     capacity  in those  discrete three  pieces:   the piece                                                                    
     that  comes   from  BP,  the  piece   that  comes  from                                                                    
     ExxonMobil    and   the    piece   that    comes   from                                                                    
     ConocoPhillips  - and  maybe a  piece  that comes  from                                                                    
     somebody else. ...                                                                                                         
                                                                                                                                
     Being able and  being flexible to use  your capacity to                                                                    
     its  maximum sometimes  requires that  you have  it all                                                                    
     packaged together.  And while  I'm not an expert on how                                                                    
     you manage  and balance  capacity, sometimes that  is a                                                                    
     preferable arrangement.  And  I don't think anybody was                                                                    
     really  clear  how  the  state was  going  to  use  its                                                                    
     capacity  once it  derived it  in these  three separate                                                                    
     pieces.  And so it struck  me that it was very complex.                                                                    
     And perhaps there would be  an easier way to accomplish                                                                    
     something the  state wanted  to accomplish  without the                                                                    
     complexities of Article 10.  It was just a suggestion.                                                                     
                                                                                                                                
SENATOR BEN STEVENS  highlighted that Article 10  gives the state                                                               
the option of  either managing it itself -  whether internally or                                                               
by hiring  a contract capacity  manager - or having  the producer                                                               
of the  gas, which the  state now  would own, manage  capacity on                                                               
behalf of  the state.  He  opined that deleting Article  10 would                                                               
eliminate  choices that  protect  the state  and  that provide  a                                                               
variety  of mechanisms  to  maximize the  state's  return and  to                                                               
allow efficiency in management.                                                                                                 
                                                                                                                                
11:29:32 AM                                                                                                                   
CHAIR SEEKINS  turned to the suggested  change on page 14  of the                                                               
handout, which read in part:                                                                                                    
                                                                                                                                
     Eliminate  the capacity  management program.   Instead,                                                                    
     the State should  bid on its own capacity,  and, to the                                                                    
        extent  that   it  is   concerned  that   it  will   be                                                                 
        disadvantaged vis-à-vis  the  producers which  own  the                                                                 
        leases from  which  its  royalty gas  derives,  it  can                                                                 
        insist on a  most favored nations  clause with  respect                                                                 
        to that particular producer's bid.                                                                                      
                                                                                                                                
   He asked what is meant by a "most favored nations" clause.                                                                   
                                                                                                                                
   MS. NEWMAN noted it's what she'd  alluded to earlier.  The  state                                                            
   has the interests  of its citizens  at stake, and  also has  laws                                                            
   requiring it  to  obtain  certain  value  for  its  royalty  gas.                                                            
   Therefore, it could request a "most favored nations" clause  that                                                            
   would  say  the  following:     If  the  leaseholder  obtains   a                                                            
   transportation rate lower than the one the state obtains, and  if                                                            
   the state's royalty  gas in  that instance is  derived from  that                                                            
   leaseholder's property, then  the state  gets the  same rate  for                                                            
   the shipment  of its  gas  as does  the  producer who  holds the                                                             
   leasehold interest.                                                                                                          
                                                                                                                                
   She suggested this is necessary  to ensure that the  differential                                                            
   in the transportation rate  doesn't adversely impact the  netback                                                            
   price that  the  state  receives  for  its  gas.    Without  such                                                            
   assurance, it  won't be  the same  price in  the end,  since  the                                                            
   leaseholder -  as a  larger shipper  - may  be able  to obtain  a                                                            
   lower rate  than the  state could.   Ms. Newman  opined that  the                                                            
   state should  be  able  to effectively  argue  for  and  possibly                                                            
   obtain from FERC such a provision; that approval is needed.  She                                                             
   related her  belief  that  it would  resolve  the  pricing  issue                                                            
   without the complications of the rest of this.                                                                               
                                                                                                                                
   MR. HANLEY indicated there were a  couple of other points in  the                                                            
   written comments that he believed to be self-explanatory.                                                                    
                                                                                                                                
   11:32:31 AM                                                                                                                
   SENATOR WILKEN recalled recent testimony about the FERC hotline.                                                             
   Inquiring whether Anadarko has worked  under a hotline system in                                                             
   the U.S., he  asked to  what extent Anadarko  believes a  hotline                                                            
concept should be relied upon to protect the state's interests.                                                                 
                                                                                                                                
   MR. HANLEY deferred to Ms. Newman, Anadarko's FERC counsel.                                                                  
                                                                                                                                
   MS. NEWMAN  recalled earlier  this  week Mr.  Keithley  explained                                                            
   that the hotline is available  for simpler issues.  For  example,                                                            
   a shipper may call  a pipeline and ask  to interconnect, and the                                                             
   pipeline may refuse to  discuss it.  The  shipper then calls the                                                             
   hotline person,  who  contacts  the pipeline  and  suggests  this                                                            
   needs to be discussed.   If it is  relatively clear and no  legal                                                            
issue is involved, or if the  FERC attorney at the hotline sees a                                                               
clear answer,  such issues sometimes  get resolved.  If something                                                               
needs  to be  addressed by  the commission,  however -  including                                                               
contract provisions such as this -  it isn't an issue the hotline                                                               
even considers.                                                                                                                 
                                                                                                                                
She  noted if  the parties  persist  after hotline  help, then  a                                                               
complaint must  be filed and  it will go to  settlement mediation                                                               
or even litigation.  In  further response, Ms. Newman opined that                                                               
the hotline has existed perhaps ten years.                                                                                      
                                                                                                                                
11:35:35 AM                                                                                                                   
SENATOR  BUNDE recalled  discussion  of a  window of  opportunity                                                               
such that if  the window closes, Alaska's gas will  be stranded a                                                               
long time.  He requested Anadarko's perspective.                                                                                
                                                                                                                                
MR. HANLEY offered  to get an answer.  Noting  there are numerous                                                               
reports, he  remarked, "We've read  them all."   He said  some of                                                               
those  suggest Alaska's  gas is  needed regardless,  while others                                                               
say liquefied  natural gas  (LNG) will come  in.   Mentioning the                                                               
timing  of permitting  for  LNG facilities  to  import those,  he                                                               
suggested  the  need  to ask  someone  in  Anadarko's  commercial                                                               
department.   He also said the  sooner this pipeline can  go, the                                                               
better.    Noting  Anadarko  has acreage  it  wants  to  develop,                                                               
Mr. Hanley stressed the  urgency.  He recalled  discussion of how                                                               
it  would  likely help  Prudhoe  Bay,  the Trans-Alaska  Pipeline                                                               
System (TAPS) and explorers in  Alaska, in order to keep momentum                                                               
going.  Mr. Hanley surmised it  would be in the best interests of                                                               
Anadarko, probably Alaska and all the producers as well.                                                                        
                                                                                                                                
CHAIR SEEKINS  thanked Mr. Hanley  and Ms. Newman.   He indicated                                                               
the need to build a pipeline  as quickly as possible; to hold the                                                               
producers' feet  to the fire  to keep  moving; and to  ensure the                                                               
ability of companies like Anadarko to  get into an open season in                                                               
order to  get whatever  gas they may  have into  the marketplace.                                                               
He invited participation in a  roundtable forum to address topics                                                               
discussed this morning.                                                                                                         
                                                                                                                                
11:39:28 AM                                                                                                                   
^Jim Clark, Chief Negotiator, Office of the Governor                                                                            
JIM CLARK, Chief  Negotiator, Office of the  Governor, lauded the                                                               
roundtable discussions  for getting  information to members.   He                                                               
asked that Mr. Loeffler address some issues as a precursor.                                                                     
                                                                                                                                
11:40:27 AM                                                                                                                   
MR. LOEFFLER  referred to Anadarko's  comments, saying  he wished                                                               
many had been  carefully conformed to what  the contract actually                                                               
   does.   While  appreciating  the emphasis  on  not  delaying  the                                                            
   project, he noted  page 4 of  the handout says  in part, "If  the                                                            
   Contract is  executed this  fall, an  open season  could be  held                                                            
   before year-end 2008, which seems to  be premature."  He said  he                                                            
   cannot reconcile those two positions.                                                                                        
                                                                                                                                
   He indicated the  comments also  say FERC  regulations require  a                                                            
   lot of information relating to front-end engineering and design.                                                             
   Mr. Loeffler remarked, "You  can't comply with those  regulations                                                            
   unless that work is done. ... You'll be out of compliance if  you                                                            
   try to have an  open season prematurely.   I don't think we  need                                                            
   to get into that."   He also said a  set of regulations lays  out                                                            
   detailed information  on  what  is  required  for  open  seasons,                                                            
   including bid  methodology.   This takes  time to  do,  including                                                            
   fieldwork and engineering.                                                                                                   
                                                                                                                                
   MR.  LOEFFLER  opined  that  the  premature  open  season  isn't                                                             
   possible.  He surmised the state will be inside the LLC, talking                                                             
   about the open-season notice and  construction of it, as well  as                                                            
   the engineering work.  The state will have a voice.  Discounting                                                             
   the  idea  that  the   state  needs  veto   power  on  this,   he                                                            
   acknowledged that may  or may  not happen, depending  on how  the                                                            
   voting provisions turn out.  He questioned whether it is a  real-                                                            
   world concern and reread the quotation from page 4.                                                                          
                                                                                                                                
   He interpreted the comments to also say Anadarko isn't ready,  at                                                            
   the earliest,  until 2009  or 2010.   Mr.  Loeffler  acknowledged                                                            
   Anadarko may have good reasons for itself, but said it sounds as                                                             
   if Anadarko wants to delay the  project.  Noting some people  are                                                            
   pushing to start  the project  tomorrow, he  remarked, "You  just                                                            
   sort of can't have it both ways."                                                                                            
                                                                                                                                
   11:44:32 AM                                                                                                                
   MR. LOEFFLER touched on  Anadarko's opening comments, indicating                                                             
   Anadarko said the Project Summary  information should be part  of                                                            
   the contract.   He noted  Article 4.1  of the  contract says  the                                                            
   project consists of  pipeline and  related facilities  consistent                                                            
   with the Qualified  Project Plan,  which is defined  on page  49.                                                            
   He asked, "Where's the beef?"                                                                                                
                                                                                                                                
   He  turned   to   the  capacity-management   article,   recalling                                                            
   discussions  with  Anadarko   that  this  is   a  novel  clause,                                                             
   anticipated to be submitted to FERC early, as stated in the FIF,                                                             
   to decide  whether it  is permissible.   Mr. Loeffler  opined  it                                                            
   puts the state on  equal footing with  the producers because  the                                                            
   state doesn't get information that Anadarko, Chevron or BP  would                                                            
   get  as  a  producer  except   by  virtue  of  this   contractual                                                            
provision.   He offered the  view that  this is needed  to reduce                                                               
risk  to  the  state,  to  manage  its  capacity.    Mr. Loeffler                                                               
continued:                                                                                                                      
                                                                                                                                
     The suggestion of a "most  favored nation" clause would                                                                    
     seem  to   imply  the  exact  sort   of  discriminatory                                                                    
     treatment that  is criticized as part  of the capacity-                                                                    
     management  clause.   And there  is a  difference here.                                                                    
     Anadarko's  criticisms of  the  contract,  save in  the                                                                    
     capacity-management  clause, are  really criticisms  of                                                                    
     the other three companies.   In this clause, the way we                                                                    
     read  it, Anadarko  is  looking at  it  as a  potential                                                                    
     competitor to  the state in the  sale of its gas.   And                                                                    
     they're trying to  remove what they see,  I believe, as                                                                    
     a competitive  advantage.   We see it  as an  effort to                                                                    
     level the playing field.                                                                                                   
                                                                                                                                
He reported  it took  enormous effort  to negotiate  this clause,                                                               
perhaps 31 days straight last year.                                                                                             
                                                                                                                                
11:48:25 AM                                                                                                                   
MR.  LOEFFLER asserted  there  are  at least  ten  points in  the                                                               
capacity-management  clause that  the comments  ignore; he  cited                                                               
Articles  10.2, 10.3  and 10.4,  acknowledging he  and Ms. Newman                                                               
disagree  here.   He  indicated FERC  has  jurisdiction and  will                                                               
provide an answer,  and the state will have to  deal with it once                                                               
there is an answer.   Stating  the intention of going to FERC for                                                               
clarity and  confirmation, Mr. Loeffler  opined that FERC  has an                                                               
ample toolkit for almost every issue raised this morning.                                                                       
                                                                                                                                
He   said  while   the   written   comments  express   Anadarko's                                                               
apprehension  that the  state  capacity will  be  bundled by  the                                                               
three producers  to increase the  value of their bid,  that isn't                                                               
what the  contract language provides.   Rather, it  provides that                                                               
each  producer capacity  holder  requires capacity  if the  state                                                               
wants -  it's an option with  respect to its share  of associated                                                               
state gas.   Mr. Loeffler opined that the contract  answers a lot                                                               
of  the  criticisms.    Noting FERC  has  an  entire  enforcement                                                               
division,  he  said  while  the   hotline  clearly  handles  some                                                               
disputes, there  are many other  enforcement tools,  discussed by                                                               
Mr. Pease previously.                                                                                                           
                                                                                                                                
He turned  to the "most favored  nation" clause as it  relates to                                                               
royalty in value  (RIV) and royalty in kind  (RIV).  Mr. Loeffler                                                               
opined if  the state operated in  an RIV world, the  "old netback                                                               
world," and  didn't need  to market its  own gas,  the producers'                                                               
bids would be that much larger  because they'd have all their gas                                                               
   plus the associated state  royalty gas, which  would be RIV  gas.                                                            
   That  isn't   the  case,   however.     Article  10.1,   capacity                                                            
   management,  says  that  if  asked,  the  producer  will  acquire                                                            
   capacity for the state  in the state's own  name - not a  bundled                                                            
   name.  Thus he said the criticism isn't fair with respect to  the                                                            
   contract language.  He deferred to Mr. Clark and Mr. Griffin.                                                                
                                                                                                                                
   11:52:26 AM                                                                                                                
   MR. CLARK discussed  the state's policies  and the reasoning  for                                                            
   what was done.   He agreed  this was a  hotly contested  article,                                                            
   because taking  gas in  kind raises  concerns about  the  state's                                                            
   risk, concerns that  are critical  to mitigate.   To the  maximum                                                            
   extent, the  desire  was  to  mimic the  RIV  world,  with  three                                                            
   principal objectives:   1)  Never  be short of  pipe, and  always                                                            
   have  enough  capacity  to  get  the  gas  to  market;  2) be  in                                                            
   essentially  the  same  position  as  now  with  respect  to  the                                                            
   percentage of  empty space  on the  line, and  don't have  excess                                                            
   ullage; and 3) make  these adjustments on  a 30-day basis,  which                                                            
   producers don't do among themselves.                                                                                         
                                                                                                                                
   He said  the state  also has  the benefit  of information  coming                                                            
   from each producer that reveals where the gas is coming from and                                                             
   where the  capacity is  being used  - information  the  producers                                                            
   don't get from one another,  which will level the playing  field.                                                            
   Mr. Clark noted, with respect to  the second item, that DNR   has                                                            
   developed a  highly innovative  system that,  like most  of  this                                                            
   article, is new  and creative  in how  it protects  the state  by                                                            
   mitigating the impacts of taking gas in kind.                                                                                
                                                                                                                                
   He predicted Alaskans  will view  this article  later as  putting                                                            
   the state as close as possible  to the RIV world while  achieving                                                            
   the benefits of gas in kind; those benefits include in-state  use                                                            
   and reducing  disputes.    Mr. Clark  voiced  belief  that  those                                                            
   policy  objectives  were  met  through  hard-fought  negotiation.                                                            
   Acknowledging the need to  have FERC look at  it, he opined that                                                             
   it  fits  closely  enough  with  FERC  policies  -  particularly                                                             
   relating to  Alaska  - to  receive  approval.   Lauding  DNR  for                                                            
   fantastic job  on  behalf  of  the  state,  Mr.  Clark  commended                                                            
   Mr. Griffin in particular.                                                                                                   
                                                                                                                                
   11:57:27 AM                                                                                                                
   ^Ken  Griffin,   Deputy  Commissioner,   Department  of   Natural                                                            
   Resources                                                                                                                    
   KEN  GRIFFIN,   Deputy   Commissioner,  Department   of   Natural                                                            
   Resources,  began  by  saying  that  under  the  administration's                                                            
   concept a company must  accept the terms  of Article 10 in  order                                                            
   to obtain contractual  fiscal certainty.   If Anadarko chose  not                                                            
to accept  Article 10, for  instance, it  wouldn't be a  party to                                                               
the  upstream uniform  fiscal  contract  or the  fiscal-certainty                                                               
provisions, at least under the administration's current concept.                                                                
                                                                                                                                
SENATOR  BEN  STEVENS   asked:    When  a  shipper   signs  a  FT                                                               
commitment, is it also part of Article 10?                                                                                      
                                                                                                                                
MR. GRIFFIN  answered no.  He  explained that the signing  of the                                                               
FT  commitments and  so  forth  is subject  to  FERC, which  will                                                               
ultimately accept  or approve the  rules under which it  is done.                                                               
Rather, the  current discussion is at  the fiscal-contract level.                                                               
The three  producers that intend  to deliver gas to  this project                                                               
will  have  the  opportunity  to sign  this  contract,  or  other                                                               
producers  will  be able  to  sign  the uniform  upstream  fiscal                                                               
contract, which will provide  similar upstream fiscal provisions.                                                               
In  signing  that  contract, they  receive  the  fiscal-certainty                                                               
provisions,  but  also  make  certain   commitments.    One  such                                                               
commitment is being bound by the provisions of Article 10.                                                                      
                                                                                                                                
12:00:33 PM                                                                                                                   
SENATOR BEN STEVENS  posed a scenario in which  an explorer comes                                                               
in  later through  an expansion,  and the  shipper has  a certain                                                               
amount of  volume of which he  presumed the state would  have the                                                               
same 20 percent approximately.                                                                                                  
                                                                                                                                
MR. GRIFFIN noted  it would depend on whether it  came from state                                                               
acreage.                                                                                                                        
                                                                                                                                
SENATOR  BEN STEVENS  asked:   When  that new  producer signs  an                                                               
FT commitment,  is it  piggybacking on  the state  volume, or  is                                                               
that state volume absorbed in the state's capacity agreement?                                                                   
                                                                                                                                
MR. GRIFFIN  answered in  two parts.   First,  if a  new producer                                                               
comes in and  doesn't sign the uniform  upstream fiscal contract,                                                               
the   lease  provisions   prevail.     That  producer   would  be                                                               
responsible  for obtaining  capacity for  all the  gas, including                                                               
the state's share.  The state  would take RIV, and taxes would be                                                               
paid  under the  tax statutes.   The  entire capacity  commitment                                                               
would be that new producer's responsibility.                                                                                    
                                                                                                                                
SENATOR  BEN  STEVENS suggested  it  is  an  option for  the  new                                                               
shipper  to   sign  the  upstream   agreement  or   maintain  the                                                               
status quo.                                                                                                                     
                                                                                                                                
MR. GRIFFIN replied he'd assume so, yes.                                                                                        
                                                                                                                                
   SENATOR  BEN  STEVENS  asked  whether  that  is  along  with  the                                                            
   capacity agreement.                                                                                                          
                                                                                                                                
   MR. GRIFFIN explained it is an  all-or-nothing deal.  To get  the                                                            
   benefits  of   fiscal  stability,   a  company   must  take   the                                                            
   commitments in the  contract or  in the  uniform upstream  fiscal                                                            
   contract that go  with it.   He turned to  the second  situation,                                                            
   where a  new producer  comes  in and  signs the  upstream  fiscal                                                            
   contract; in that case, Article 10 requires the producer and  the                                                            
   state to  come up  with  their FT  commitments, which  are  bids.                                                            
   Provisions in Article 10  that don't quite  mesh with FERC's  way                                                            
   will  have  to  be  worked   out.    He  surmised,  from   FERC's                                                            
   standpoint, that the producer would have  to show up with a  bid,                                                            
   as would the state.   From that point  forward, Article 10 would                                                             
   take over.  If  production changed, there'd  be balancing of  the                                                            
   throughput and ullage between that producer and the state.                                                                   
                                                                                                                                
   The committee took an at-ease from 12:05:15 PM to 1:13:09 PM.                                                            
                                                                                                                                
   MR. GRIFFIN emphasized that  this capacity-management article is                                                             
   novel, to rebalance risk with  the producers in order to  address                                                            
   a novel situation in which  a royalty owner is taking  long-term,                                                            
   serious  financial  transportation  commitments  without  control                                                            
   over the upstream.                                                                                                           
                                                                                                                                
   He also noted capacity issues  are subject to FERC approval,  and                                                            
   the state fully intends to bring this before FERC.  The contract                                                             
   contemplates  that  the  capacity   issue  will  be  under   FERC                                                            
   regulation.   If  this  cannot  be approved  by  FERC,  then  the                                                            
   contract says  the  producers  and  the  state  will  attempt  to                                                            
   negotiate a substitute.  Mr. Griffin expressed hope that  there'd                                                            
   be enough  FERC guidance  in such  a case  to figure  out how  to                                                            
   craft  a  provision  to  accomplish   this  and  then  meet   any                                                            
   regulatory hurdles.  "We have acknowledged and accepted the  FERC                                                            
   jurisdictional issues," he added.                                                                                            
                                                                                                                                
   1:16:04 PM                                                                                                                 
   MR. GRIFFIN highlighted side rails to the scope of this  article:                                                            
   the  capacity  commitments  sought  by  a  producer  plus  those                                                             
   commitments  sought  by  the  state  for  production  from  that                                                             
   producer.  If 80  percent of the  commitments are the  producer's                                                            
   and 20 percent the state's, that 100-percent capacity commitment                                                             
   is a side rail; there are separate side rails for each producer.                                                             
   Neither the producer nor the state has the opportunity to  expand                                                            
   under Article 10; rather, they have the right and  responsibility                                                            
   to balance  the  capacity  commitments within  that  100  percent                                                            
between  the  two,  based  on the  throughput  coming  from  that                                                               
producer's properties.                                                                                                          
                                                                                                                                
He  said there  is  no interaction  between  the producers  under                                                               
Article  10.   There  is  no  transfer  of capacity  between  the                                                               
producer and  the state beyond what  is dictated by the  share of                                                               
production  flowing to  the  state  and to  the  producer.   Thus                                                               
Mr. Griffin said  the state  has the opportunity  to get  all the                                                               
gas produced  by that producer  that is owed  to the state.   The                                                               
state  can  get  all that  gas  off  the  North  Slope as  it  is                                                               
produced.   Conversely, if  the pipe isn't  kept full,  the state                                                               
bears  no more  than its  share  of the  empty pipe  costs -  the                                                               
ullage costs  - related to  that producer's production.   That is                                                               
an absolute side rail written into Article 10.                                                                                  
                                                                                                                                
1:18:17 PM                                                                                                                    
MR. GRIFFIN offered an example in  which Anadarko goes to an open                                                               
season  to  obtain capacity  for  production  from its  share  of                                                               
Alpine production, 100 million a  day, of which 20 percent is the                                                               
state's gas under  the contract.  Anadarko seeks  capacity for 80                                                               
million  a  day,  and  the  state for  20 million  a  day.    The                                                               
provisions of  Article 10 would  need to  dovetail with  the FERC                                                               
requirements; this remains  to be done.  The  commitments are for                                                               
20 years.   If  Anadarko's Alpine  production declines,  since 90                                                               
percent of  its acreage is  on non-state  land, it could  pick up                                                               
the remaining production from non-state  land.  Hence the state's                                                               
share of the  gas might be 7 percent.   It's tax gas  - the state                                                               
has no royalty  there.  Thus Anadarko would be  motivated to keep                                                               
its 80  million a day full,  for the life of  that FT commitment.                                                               
If  production flowed  completely to  the non-state  acreage, the                                                               
remaining 13 million of  empty pipe would be  state capacity, and                                                               
the state would bear responsibility for it.                                                                                     
                                                                                                                                
He  explained that  Article 10  would  automatically correct  for                                                               
such a situation,  shifting 93 percent of the empty  pipe back to                                                               
Anadarko  because the  company chose  to move  the production  to                                                               
non-state acreage.  The state would  still bear some of the empty                                                               
pipe capacity,  in the same  proportion Anadarko has.   But under                                                               
what was  proposed in Anadarko's  comments, the state  would bear                                                               
the  entire  cost of  that  empty  pipe.    This is  exactly  the                                                               
scenario   the  state   fought   to   prevent  with   Article 10,                                                               
Mr. Griffin emphasized.                                                                                                         
                                                                                                                                
He posed another situation, emphasizing  that, in both cases, the                                                               
risk is  entirely on  the state  unless Article  10 is  in place.                                                               
Thus Mr. Griffin  said he  was appalled  that Anadarko  would say                                                               
its interests  are aligned with  the state's and that  Article 10                                                               
   should be removed.  He stressed  that this is one of the  biggest                                                            
   factors in  the  contract  to ensure  the  state's  risks  aren't                                                            
 disproportionate to those of the other producers and shippers.                                                                 
                                                                                                                                
   1:22:35 PM                                                                                                                 
   MR.  LOEFFLER  informed  members  he  would  look  at  Anadarko's                                                            
   comments and  respond as  part of  the FIF.   Turning  to  state-                                                            
   initiated expansion, he  reported that in  comments from four  or                                                            
   five independents, only Anadarko  raised detailed comments about                                                             
   Article 8.7, whereas one made some comment and two said  nothing.                                                            
   Mr. Loeffler suggested balancing what  was heard and what  wasn't                                                            
   heard, but he  also acknowledged  there are  some good  technical                                                            
   points in Anadarko's comments  on state-initiated expansion that                                                             
   might lead to changes.                                                                                                       
                                                                                                                                
   He emphasized that clause's beneficial  purpose was to provide  a                                                            
   third tool in  the toolkit -  although it is  the second tool  in                                                            
   terms of timing, since voluntary  expansion must be gone  through                                                            
   first, which will  be in the  LLC.  Saying  Article 8.7 would  be                                                            
   looked at, but  that he  wasn't ready  to drop  it, Mr.  Loeffler                                                            
   posited  that  there  might  be  procedural  advantages  -  which                                                            
   Anadarko doesn't agree  with thus far  - that would  result in  a                                                            
   faster resolution than from FERC, including the dispute-                                                                     
   resolution terms under the contract.                                                                                         
                                                                                                                                
   MR. LOEFFLER turned  to RCA,  noting everyone  who has  commented                                                            
   agrees they  want  FERC  to have  jurisdiction.    Pointing  out,                                                            
   first, that RCA is  excluded from the  definition of "state,"  he                                                            
   said RCA's  jurisdiction -  whatever it  is -  continues  intact.                                                            
   Second, there is  talk in  the comments  that non-owner  shippers                                                            
   are at the mercy of competitors.  However, these concerns  relate                                                            
   to  Shell,   with  a   market  cap   of  $127 billion;   Chevron,                                                            
   $149 billion; and  Anadarko,  $19  billion.    These  are  smart,                                                            
   astute corporations,  Mr. Loeffler  told members,  and they  know                                                            
   how to  use  the legal  and  legislative processes,  and  how  to                                                            
   access RCA, which has its jurisdiction intact.                                                                               
                                                                                                                                
   1:25:47 PM                                                                                                                 
   MR. SHEPLER said  Anadarko's comments  had highlighted something                                                             
   he hadn't  seen  in  Article  10,  that  the capacity-management                                                             
   provisions  are  the  only  means  by  which  parties  under  the                                                            
   contract - including those with  an upstream contract - can  move                                                            
   capacity back and forth.  He asked whether Mr. Loeffler  believes                                                            
   that is a correct characterization and, if so, what the basis is                                                             
   for this being  exclusive, as opposed  to Anadarko, for  example,                                                            
   being able to take a capacity release from the state or sell  gas                                                            
   to the state for use in its capacity.                                                                                        
                                                                                                                                
MR. LOEFFLER deferred to Mr. Griffin.                                                                                           
                                                                                                                                
MR. GRIFFIN  first provided a  general answer, saying  FERC rules                                                               
are  established  for  selling  or  seeking  capacity,  with  the                                                               
following sideboards:   The state's  share of production  from an                                                               
individual producer  is likely to  shift over time, while  at the                                                               
same time that  producer and the state have  FT commitments, with                                                               
the  associated financial  burden.   Within that  100 percent  of                                                               
capacity  sought  by  the  producer  and by  the  state  for  the                                                               
production associated  with that  producer, as  the share  of the                                                               
state's production  shifts - whether  up or down -  the financial                                                               
commitments for that 100 percent capacity shift proportionately.                                                                
                                                                                                                                
He noted  if the capacity article  is in place, the  state has no                                                               
right to  seek capacity  outside its terms.   The  producer does,                                                               
however,  and  must  do  so  under  FERC  rules,  in  which  case                                                               
Mr. Griffin  surmised the  producer's  gas would  have state  gas                                                               
associated with  it.  The  capacity article would fall  back into                                                               
play, and identical capacity would  have to provided to the state                                                               
in that  proportion so  that the  state's gas  could get  off the                                                               
North Slope.  With respect to  going out and finding capacity for                                                               
a  new  field,  however,  Mr.   Griffin  said  it  would  be  the                                                               
producer's purview to initiate,  and then Article 10 would ensure                                                               
the state was dealt with proportionately.                                                                                       
                                                                                                                                
1:29:31 PM                                                                                                                    
MR. GRIFFIN explained  that any producer that doesn't  sign on to                                                               
the fiscal contract  will be subject to the lease  and to the tax                                                               
statutes, and  thus will provide  royalties.  That  producer will                                                               
have to make long-term FT commitments.   But it won't want to if,                                                               
every 60 days, the state can  switch back and forth as to whether                                                               
it takes its gas  in value or in kind.  The  producer will need a                                                               
commitment  from the  state for  one or  the other.   As  long as                                                               
Article 10 is  in place, the state has no  right to seek capacity                                                               
outside  its  terms; the  gas  must  be  taken  in value.    Thus                                                               
Mr. Griffin said  the producer  must seek  capacity for  the full                                                               
100 percent  and then take  the capacity costs off,  in adjusting                                                               
the RIV value, as happens today.                                                                                                
                                                                                                                                
He  gave the  following  reasons.   The  producer doesn't  obtain                                                               
fiscal certainty under the uniform  upstream fiscal contract.  If                                                               
a producer  wants certainty under  that contract, it  will commit                                                               
to Article 10, and  the state will want to take  its gas in kind.                                                               
If the state wants  to market part of it, it  needs to market all                                                               
of it.   Mr. Griffin  reported the producers were  concerned that                                                               
if the  state could  seek capacity  independently, it  could tilt                                                               
   the playing  field  in  the  state's favor  along  with  all  the                                                            
   benefits under Article 10.  Therefore, it was decided that  under                                                            
   Article 10 the state  has no independent  right to seek  capacity                                                            
   outside the terms of that article.                                                                                           
                                                                                                                                
   MR. GRIFFIN  reiterated  that  the  basis of  Article  10  is  to                                                            
   maintain parity between the state and each producer with  respect                                                            
   to risk and  the ability  to get  gas off  the North  Slope.   He                                                            
   emphasized that the state has the unilateral right, at any  time,                                                            
   to terminate Article 10.  Ten or fifteen years down the road  the                                                            
   state might find that getting active independently in that  arena                                                            
   is to the state's advantage, for example, and could do so.                                                                   
                                                                                                                                
   CHAIR SEEKINS thanked the participants and invited the producers                                                             
   to testify.                                                                                                                  
                                                                                                                                
   1:34:29 PM                                                                                                                 
   ^Wendy King, ConocoPhillips                                                                                                  
   WENDY KING, Director of External Strategies, ANS Gas Development                                                             
   Team, ConocoPhillips Alaska,  Inc., said when  it comes to  terms                                                            
   regarding   access   for   explorers   to   the   gas   pipeline,                                                            
   ConocoPhillips offers  a unique  perspective and  a strong  track                                                            
   record on the forefront of  North Slope exploration.  While  many                                                            
   believe  BP,  ConocoPhillips  and  ExxonMobil  are   commercially                                                            
   motivated and aligned  in a  similar fashion,  many times  during                                                            
   negotiations they didn't see eye-to-eye.                                                                                     
                                                                                                                                
   She referred  to  Article 10  and  Mr.  Griffin's  discussion of                                                             
   varying state equity across the North  Slope.  Ms. King said  the                                                            
   producers also  have varying  interests  in those  fields, which                                                             
   creates complications when  trying to find  a balance that  works                                                            
   for all parties.  Similarly, Anadarko has a unique portfolio.                                                                
                                                                                                                                
   MS. KING  emphasized  she is  pleased  to see  alignment  between                                                            
   Anadarko and ConocoPhillips  in wanting to  see the gas  pipeline                                                            
   project  advanced,  and  to  see  Anadarko's  sense  of  urgency                                                             
   regarding this project.   Ms.  King noted Anadarko  said, in  its                                                            
   opening comments, that  one of  its top Alaska  priorities is  to                                                            
   have a gas line built as  soon as possible, which will  stimulate                                                            
   new  gas  exploration  and  improve  oil  exploration  economics.                                                            
   However, she expressed concern  that some of Anadarko's  comments                                                            
   seem to contract the opening remarks.                                                                                        
                                                                                                                                
   She informed members that  ConocoPhillips, with others including                                                             
   Anadarko as a minority partner,  has been exploring in NPR-A  and                                                            
   the Alpine area successfully for gas as well as oil; she offered                                                             
   to provide  copies  of  three press  releases.    Ms. King  noted                                                            
ConocoPhillips  was  mindful   during  negotiations  that  having                                                               
common fiscal  terms for assets  like NPR-A would  facilitate its                                                               
ability to  advance potential projects there.   ConocoPhillips is                                                               
a supporter  and believes the  upstream model contract  will help                                                               
create that aligned  position to allow continuing  to advance its                                                               
activities in those regions, Ms. King told members.                                                                             
                                                                                                                                
MS.  KING also  reported  that ConocoPhillips  sees the  upstream                                                               
model contract  as key to  motivating its exploration  efforts to                                                               
fill the gas  pipeline, which she anticipates  will require about                                                               
15 Tcf of  additional gas, and more if the  pipeline is expanded.                                                               
If those  additional volumes are found  in commercial quantities,                                                               
ConocoPhillips   is   confident    that   expansion   and   other                                                               
opportunities  will exist  on this  pipeline to  get that  gas to                                                               
market.   ConocoPhillips also believes  there is a  possibility -                                                               
which FERC  policy requires -  that any interested party  can bid                                                               
in  the open  season,  since it  is an  open-access  line.   Thus                                                               
volumes beyond  Prudhoe Bay and  Point Thomson may  possibly show                                                               
up at the initial open season.                                                                                                  
                                                                                                                                
1:38:02 PM                                                                                                                    
MS. KING turned  to ConocoPhillips' role as  a potential shipper,                                                               
highlighting  the commitment  to  continuing to  prepare for  the                                                               
open season  in order  to make appropriate  decisions -  with the                                                               
working-interest  owners  in  those respective  assets  and  with                                                               
AOGCC -  to have each  field ready  for the approved  offtake and                                                               
development.   Not all parties to  the assets are parties  to the                                                               
proposed fiscal contract.  Thus  ConocoPhillips needs to work, as                                                               
a shipper,  with the working-interest owners  in those respective                                                               
fields to get those assets ready for the open season.                                                                           
                                                                                                                                
She  highlighted   Anadarko's  concern  that  this   would  be  a                                                               
producer-affiliate-owned pipeline;  that a premature  open season                                                               
could be proposed to shut out  explorers; and that an open season                                                               
before year-end  2008 would seem  premature.  Ms.  King indicated                                                               
the existing Project  Summary, a public document, as  well as the                                                               
Qualified  Project   Plan,  also  a  public   document  with  her                                                               
company's stranded-gas application, both  estimate an open season                                                               
won't  occur until  18  months to  two years  from  the start  of                                                               
project planning.  Ms.  King said  this timing is consistent with                                                               
Anadarko's estimate of  year-end 2008 if the  fiscal contract can                                                               
possibly be executed  in 2006, and she doesn't believe  this is a                                                               
premature open season.                                                                                                          
                                                                                                                                
She  said  ConocoPhillips  believes  this  project  needs  to  be                                                               
diligently   pursued;  adding   further   delays   to  wait   for                                                               
exploration  success is  an unnecessary  burden  on the  project.                                                               
   Ms. King noted FERC Orders 2005 and 2005-A, regarding timing  for                                                            
   that initial open season, are to ensure adequate notice is  given                                                            
   to all prospective  shippers.  In  addition, ConocoPhillips will                                                             
   update the Project  Summary annually, so  people will have  other                                                            
   ways to know how the project is progressing.                                                                                 
                                                                                                                                
   MS.  KING  emphasized  that   project  planning  and  pre-permit                                                             
   application activities  are  real,  both from  a  shipper  and  a                                                            
   pipeline company perspective; a  number of pipeline company  work                                                            
   activities will need  to be pursued  in those phases.   The  open                                                            
   season needs to be orchestrated  for both U.S. and Canada,  since                                                            
 there are issues such as the Alberta-to-Lower 48 offtake plan.                                                                 
                                                                                                                                
   1:40:26 PM                                                                                                                 
   MS. KING  explained  that some  of  this  work will  be  done  by                                                            
   shippers and some by the  pipeline company.  The affiliate  rules                                                            
   will be  "stepping in,"  and the  very rules  ConocoPhillips  and                                                            
   FERC have  talked  about will  ensure  the companies  keep  their                                                            
   different hats on during preparation.                                                                                        
                                                                                                                                
   She expressed  surprise at  some  references about  the pipeline                                                             
   needing to  take  actions with  respect  to what  AOGCC  decides,                                                            
   because she said those are  shipper issues - getting the  shipper                                                            
   ready for the open season.   MS. King noted the pipeline will  be                                                            
   thinking about  what it  needs to  do to  get ready  for an  open                                                            
   season from a pipeline perspective.                                                                                          
                                                                                                                                
   MS. KING asserted that delaying the open season beyond 2008  only                                                            
   delays  the   project,   which   isn't  in   the   interests   of                                                            
   ConocoPhillips or the state.   Potential shippers have had years                                                             
   to get  ready  for  an  open  season;  since  2002,  the  project                                                            
   sponsors have been indicating their  desire to get the  necessary                                                            
   government frameworks in place.                                                                                              
                                                                                                                                
   She said ConocoPhillips has  been actively driving these  efforts                                                            
   at state and federal levels.   Delaying development of the  known                                                            
   resource  in  exchange  for  unpredictable  exploration  programs                                                            
   seems a high risk for the  state and the pipeline.   Furthermore,                                                            
   slowing the  project is  inconsistent with  Article 5,  the  work                                                            
   commitments, which require diligent advancement.  An open  season                                                            
   is necessary to  finalize the  project design and  to meet  those                                                            
   permitting requirements.                                                                                                     
                                                                                                                                
   She  referred  to  previous  discussion,  noting  one   potential                                                            
   solution to a concern  was advanced by  the producers during  the                                                            
   FERC  open-season-rules   process:     allow  a   pre-open-season                                                            
   commitment process, which allows base  shippers to commit to the                                                             
project  and  allows  an  open  season at  a  final  later  date.                                                               
However,  Ms. King  recalled,  the   state  and  Anadarko  argued                                                               
against  this proposal,  which she  asserted would  have been  in                                                               
everybody's  interest, with  the  result that  FERC issued  rules                                                               
that  would  have  prorated  down  only  the  original  shippers,                                                               
effectively eliminating this option.                                                                                            
                                                                                                                                
1:42:30 PM                                                                                                                    
MS. KING countered  the idea that someone must find  gas in order                                                               
to show up  at the initial open season.   If parties' exploration                                                               
efforts haven't been  successful in the last few  years, they can                                                               
still consider showing up and  taking out a FT commitment on some                                                               
"risk exploration" volumes.   There'd be seven to  eight years to                                                               
continue   the   exploration  appraisal-and-development   program                                                               
before  commercial  operations commenced.    It  is a  risk-based                                                               
commercial decision each party can make.                                                                                        
                                                                                                                                
She addressed  the comment that  the contract should  reflect the                                                               
design of  the project  described in  the application.   Ms. King                                                               
noted  Article 4.1  already says  this will  be a  large-diameter                                                               
pipeline.   She  said the  specifics of  project rates  cannot be                                                               
committed to because  there hasn't been an open  season, and thus                                                               
it's premature to dictate the rates for the initial open season.                                                                
                                                                                                                                
She turned to the design,  indicating she believes there has been                                                               
confusion  about  ConocoPhillips'  ongoing  petition  with  FERC,                                                               
submitted June 2006, which  challenges the commission's assertion                                                               
of  authority in  Sections 157.36  and 157.37  to mandate  - long                                                               
after  the open  season has  ended  - increased  capacity for  an                                                               
Alaska  gas pipeline  project or  expansion, and  to dictate  the                                                               
amount   of  unsubscribed   capacity/unused  expandability   that                                                               
initial project must  build in.  Ms. King told  members, "That is                                                               
specific to the petition we're pursuing right now."                                                                             
                                                                                                                                
MS. KING  read another  quotation from  that petition  which says                                                               
the  commission has  adopted regulations  that jeopardize  timely                                                               
permitting and construction of an  Alaska natural gas pipeline in                                                               
contravention of  Congress's intent  in enacting  ANGPA.   By the                                                               
time the  commission acts upon  an application for  a certificate                                                               
of public convenience and necessity,  a project sponsor will have                                                               
spent  several   years  and  hundreds  of   millions  of  dollars                                                               
developing  the  optimal  project  design,  conducting  the  open                                                               
season and preparing the certificate application.                                                                               
                                                                                                                                
She went on to say that  design changes imposed by the commission                                                               
as conditions for  receipt of a certificate  could either scuttle                                                               
the  project  entirely  or  require   that  additional  time  and                                                               
   resources be spent revising  the project.   This could delay  the                                                            
   project that Congress,  through ANGPA, sought  to expedite.   "We                                                            
   are focused on  that issue  in that  ongoing petition,"  Ms. King                                                            
   concluded.                                                                                                                   
                                                                                                                                
   1:45:13 PM                                                                                                                 
   MS.  KING   turned   to   the   capacity-management   provisions.                                                            
   Concurring with  Mr. Griffin  about the  challenges faced  during                                                            
   lengthy negotiations,  she  highlighted  efforts  to  have  those                                                            
   provisions be consistent  with FERC policy  and to replicate  how                                                            
   capacity would have  been handled if  the state were  in the  RIV                                                            
   world.   "We believe  we  have been  successful in  doing  that,"                                                            
   Ms. King told members,  noting provisions also  say that if  FERC                                                            
   finds inconsistency  with its  policy, there  will be  good-faith                                                            
   negotiations towards an alternative.                                                                                         
                                                                                                                                
   She said ConocoPhillips stands  behind the provisions negotiated                                                             
   with the  state  on  capacity.   Many  of  Anadarko's  criticisms                                                            
   relate to provisions negotiated to  provide the state the  option                                                            
   "to  follow  the  decisions  that  we  will  make  regarding  our                                                            
   capacity management,  which  means  the state  is  going  to  see                                                            
   confidential information," Ms.  King added.   As to whether  this                                                            
   precludes parties from putting capacity  on the open market, she                                                             
   said Article 10.3(b) has  provisions such that if  ConocoPhillips                                                            
   - in  its  relationship  with  the state  as  a  shipper  on the                                                             
   pipeline for its volumes - finds  it no longer has enough gas  to                                                            
   fill those, the company  is obliged to notify  the state that it                                                             
   will go to the market to post its capacity.  Ms. King explained:                                                             
                                                                                                                                
        When we go  to the  market to post  that capacity,  the                                                                 
        state has  the option  to pursue  that as  well,  which                                                                 
        means we are giving them confidential information  that                                                                 
        we're about to go to the market, to give the state the                                                                  
        option to  follow  in  that  transaction.    There's  a                                                                 
        reason why  we have  those confidential  provisions  in                                                                 
        there, but we ... do  believe that those provisions  do                                                                 
        allow that capacity to get to  the market if it is  not                                                                 
        being used  by  the  gas volumes  associated  with  the                                                                 
        state and ConocoPhillips and our relationship.                                                                          
                                                                                                                                
   1:47:19 PM                                                                                                                 
   MS. KING gave a technical  perspective to emphasize a point  made                                                            
   by Mr.  Loeffler.    She  said it  wasn't  anticipated  that  the                                                            
   producer's bid would be volume-inflated  by the state's bid;  the                                                            
   contract doesn't say that.   Rather, the  state will provide  the                                                            
   paperwork to the producer, which will submit the bid  independent                                                            
   of the producer's  bid.   This is a  change from  the RIV  world.                                                            
With respect to  the capacity provisions, she  indicated there is                                                               
concern  that  the   producer  would  get  that   capacity.    If                                                               
ConocoPhillips  discovered a  new  field in  NPR-A, for  example,                                                               
obligations in here  ensure the state has the  ability to receive                                                               
value for its gas if it needs capacity on this pipeline.                                                                        
                                                                                                                                
MS. KING reported that a  concern of ConocoPhillips had been that                                                               
the state  could take  that 20 million  a day  ConocoPhillips had                                                               
acquired and  turn around and  give it to somebody  else, posting                                                               
it  on the  market,  and  then come  back  to ConocoPhillips  and                                                               
request  more capacity  for  the  field the  state  was about  to                                                               
develop.   ConocoPhillips could continually have  to get capacity                                                               
that was  being spun off  to others.   Thus some  protections are                                                               
written into the capacity-management provisions.                                                                                
                                                                                                                                
1:48:37 PM                                                                                                                    
MS. KING  noted she wouldn't raise  some points, to give  time to                                                               
her colleagues.  She emphasized  that ConocoPhillips supports the                                                               
public-comment  process   outlined  in  the  Stranded   Gas  Act,                                                               
believing it is  important for the public and  the legislature to                                                               
ask such  questions.  However,  ConocoPhillips believes it  has a                                                               
responsibility to  respond when  those concerns  are inconsistent                                                               
with  the  company's understanding  of  FERC  policy; the  fiscal                                                               
contract drafted May 24; and how mega-projects should work.                                                                     
                                                                                                                                
She  related   ConocoPhillips'  belief  that  making   one  party                                                               
subsidize  another's  access  to   the  pipeline  is  a  problem.                                                               
Existing  shippers  shouldn't  have  to  subsidize  expansion  or                                                               
access for  others.   Existing shippers  could include  the three                                                               
project sponsors  - BP, ConocoPhillips  and ExxonMobil -  and the                                                               
state, but  also Alaskan local  distribution companies  (LDCs) or                                                               
other  explorers  that  show  up  at  the  initial  open  season.                                                               
ConocoPhillips also believes FERC  is the appropriate adjudicator                                                               
of  rate treatment  in defining  what a  subsidy is,  and that  a                                                               
pipeline  company  should have  the  right  to propose  the  rate                                                               
treatment  in its  FERC filing  that it  deems appropriate  for a                                                               
particular  expansion.   Ms.  King  said  provisions are  in  the                                                               
contract so any party can protest that as a shipper.                                                                            
                                                                                                                                
She highlighted  ConocoPhillips' commitment to trying  to develop                                                               
Alaska's gas  resources.  Between  2001 and  2006, ConocoPhillips                                                               
drilled 47 wells - 19 in  2001 alone, mostly on the western North                                                               
Slope.  It  frequently partners on those  wells with independents                                                               
and other new  entrants, and it partnered with Anadarko  in 24 of                                                               
those 47 wells.   The company is steadily  moving its exploration                                                               
to the west, Ms. King noted, with two NPR-A wells in 2005.                                                                      
                                                                                                                                
   MS.  KING  reported  that   ConocoPhillips  is  reviewing  those                                                             
   comments on  the  proposed  fiscal  contract  for  which  it  has                                                            
   received  copies;   she  and   the   team  will   review   those.                                                            
   ConocoPhillips is commitment  to working with  the producers and                                                             
   the state to  complete the LLC,  and to finding  a solution  that                                                            
   hopefully will work for  all parties to  the fiscal contract  and                                                            
   will facilitate legislative approval of the contract.                                                                        
                                                                                                                                
   1:51:13 PM                                                                                                                 
   SENATOR ELTON asked why  there would be  reluctance to add  other                                                            
   sponsors to  the project;  he  suggested other  testifiers  could                                                            
   address this also.  He  gave his understanding that Anadarko  has                                                            
   an interest  in  participating  in  the  pipeline  project.    He                                                            
   surmised spreading risk  as broadly as  possible makes sense;  it                                                            
   is one argument for the state's participation.                                                                               
                                                                                                                                
   MS. KING  answered that  she wasn't  aware of  some meetings  and                                                            
   conversations  referenced   earlier,   although   some   of   her                                                            
   colleagues have been involved longer.   For any party that  wants                                                            
   to participate in the project, it is a commercial decision to be                                                             
   brought to the project sponsors for discussion.                                                                              
                                                                                                                                
   1:52:42 PM                                                                                                                 
   ^Bill McMahon, Commercial Manager, ExxonMobil                                                                                
   S.A.  (BILL)  McMAHON   JR.,  Commercial   Manager,  Alaska   Gas                                                            
   Development,  ExxonMobil   Production   Company,   recalled   the                                                            
   formative stages of this project in 2001, when it was decided to                                                             
   have only three participants;  they were still  trying to see  if                                                            
   there was a  commercially viable  project.   He said  there is a                                                             
   practical limit to  the number  of parties involved.   He  agreed                                                            
   with Ms. King that once the  fiscal contract is approved and  the                                                            
   project moves forward, nothing prohibits commercial  transactions                                                            
   that could include others in the process.                                                                                    
                                                                                                                                
   1:53:30 PM                                                                                                                 
   ^David Van Tuyl, BP                                                                                                          
   DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP,  echoed                                                            
   those comments,  adding that  once  BP is  confident there  is  a                                                            
   project - for which approval of a fiscal contract is a first  and                                                            
   essential step - BP  has said it  would welcome participation  of                                                            
   others that  can  add  value  to the  project  and  take  on the                                                             
   necessary   risks,   advancing   the   project   and   associated                                                            
   obligations.  The key is getting to that place.                                                                              
                                                                                                                                
   He turned to Anadarko's comments,  on page 18, that perhaps  some                                                            
   specifics should be mandated about  the project design.  Mr. Van                                                             
   Tuyl expressed concern  that this would  preempt the open  season                                                            
process,  putting  the cart  before  the  horse.   He  emphasized                                                               
getting the design right, a  fundamental tenet of the open-season                                                               
process during  which customers come  together and meet  with the                                                               
pipeline  company  to  get the  project  designed  appropriately.                                                               
While BP  anticipates building a large-diameter  pipeline, likely                                                               
in  the 48-  to 52-inch  range, BP  doesn't want  to preempt  the                                                               
open-season  process.   Stipulating  the design  or diameter  may                                                               
actually  cause  damage  by  limiting   sources  for  steel,  for                                                               
instance.  Thus BP believes it  should stay with the FERC process                                                               
and allow that open-season process to run its course.                                                                           
                                                                                                                                
MR.  VAN TUYL  drew attention  to Anadarko's  concerns about  the                                                               
AOGCC  process in  setting the  offtake rates  at fields  such as                                                               
Prudhoe  Bay and  Point  Thomson,  and that  those  needed to  be                                                               
authorized  before the  open season.    Indicating BP  has had  a                                                               
series of meetings and hearings  with AOGCC about that topic, Mr.                                                               
Van Tuyl said analysis of  the appropriate offtake rates at those                                                               
fields has been underway for over a year.                                                                                       
                                                                                                                                
He  reported  that the  three  individuals  before the  committee                                                               
today provided  testimony before  AOGCC multiple  times regarding                                                               
the timing of the offtake-rate  decision; its potential impact on                                                               
the  project;  and  how  that   dovetails  with  the  open-season                                                               
process.   As a  result, a process  was established  jointly with                                                               
AOGCC  to ensure  they  could complete  the  technical work  that                                                               
needed  to  be  done  within  the timeframe  in  order  to  avoid                                                               
impacting  the project.   Mr.  Van Tuyl  said he  thinks it  is a                                                               
valid concern,  and it is work  that needs to be  done, but there                                                               
is already a  process identified to meet those  objectives and to                                                               
establish those rates.                                                                                                          
                                                                                                                                
He  noted concern  that the  preliminary engineering  wouldn't be                                                               
completed before the  open season occurs.  Mr.  Van Tuyl surmised                                                               
the Gantt chart  in BP's Project Summary might not  be clear, but                                                               
suggested the  associated wording  is.   He said  the preliminary                                                               
engineering - front-end  engineering and design (FEED)  - will be                                                               
completed before the open season.   A design must be submitted as                                                               
the basis for one's certificate application.                                                                                    
                                                                                                                                
1:57:18 PM                                                                                                                    
MR.  VAN TUYL  recalled  Anadarko's statement  about planning  to                                                               
drill  its  first  gas-exploration  well in  the  Foothills  this                                                               
winter.  He  commended this because the  project needs additional                                                               
exploration volumes:  35 Tcf of  known resource is a great start,                                                               
but more  is needed to  keep the  pipeline full for  its expected                                                               
duration.   However,  he recalled  hearing similar  statements in                                                               
previous  years  from  Anadarko.     In  2001,  as  part  of  the                                                               
   $125 million joint study, a  preliminary information session was                                                             
   conducted for all interested potential shippers on the pipeline;                                                             
   at the time, Anadarko said there may not be  carbon dioxide (CO)                                                             
                                                                  2                                                             
   associated with its gas that may  be found in the Foothills,  and                                                            
   thus had requested that  the CO-removal  service be unbundled  in                                                            
                                  2                                                                                             
   the gas  treatment  plant (GTP)  and  that there  be  a  separate                                                            
   compression service and CO service.                                                                                          
                             2                                                                                                  
                                                                                                                                
   He indicated BP heard that concern, now reflected in Article  8.5                                                            
   of the contract where it  specifies the GTP will offer  unbundled                                                            
   service.   Mr. Van  Tuyl  explained that  BP disagrees  with  the                                                            
   assertion that,  because of  Anadarko's  decisions not  to  drill                                                            
   exploration  wells,  an  open  season  in  two  years'  time   is                                                            
   premature.   He added  that BP  wants  to see  pursuit of  a  gas                                                            
   pipeline project for Alaska as soon as possible.                                                                             
                                                                                                                                
   MR. VAN TUYL  also disagreed  with the  suggestion on  page 3  of                                                            
   Anadarko's  comments  that  the  producers  might   intentionally                                                            
   design  a  smaller  system  specifically  to  exclude  explorers.                                                            
   Noting BP  has moved  to  larger diameters  to make  the  project                                                            
   economics work, he said it makes no sense to build an uneconomic                                                             
   pipeline just to exclude  others.  Nor is  that BP's intent.   In                                                            
   addition, FERC would  ensure that  didn't happen as  part of  the                                                            
   open-season process.   He  highlighted the  need for  exploration                                                            
   volumes for this project, whether at day one or later.                                                                       
                                                                                                                                
   2:00:08 PM                                                                                                                 
   MR.  VAN  TUYL   turned  to   capacity  management,   reiterating                                                            
   Mr. Griffin's point  that the  state has  the option  to  operate                                                            
   under Article 10.  The state can obtain capacity on its own  from                                                            
   day one, operating under  Article 10, or later  can decide it no                                                             
   longer wants  to operate  under that  article, at  which time  it                                                            
   would  provide  notice.    The   state  just  doesn't  have   the                                                            
   flexibility to  operate under  both  at the  same time,  for  the                                                            
   reasons discussed.                                                                                                           
                                                                                                                                
   He agreed that  BP, ConocoPhillips  and ExxonMobil  hold most  of                                                            
   the known gas resource on the North Slope; that is because those                                                             
   companies  have  made  the  billions  of  dollars  of  investment                                                            
   necessary to define and  develop those resources.   Mr. Van  Tuyl                                                            
   also agreed with Mr. Loeffler  that it is difficult to  reconcile                                                            
   some of  Anadarko's statements.   One  is that  Anadarko  doesn't                                                            
   want to delay  the project and  wants a gas  pipeline as soon  as                                                            
   possible, but doesn't want an  open season until ready,  whenever                                                            
   that is.  Mr. Van  Tuyl remarked that BP  can't dictate the pace                                                             
   at which  others  choose to  explore,  and doesn't  think  Alaska                                                            
   should continue to  wait for  a gas  pipeline.   He concluded  by                                                            
saying BP wants  to continue to support advancing  the project as                                                               
soon  as this  body  authorizes  the contract.    He deferred  to                                                               
Mr. Keithley for FERC-related issues.                                                                                           
                                                                                                                                
2:02:00 PM                                                                                                                    
^Brad Keithley, Jones Day, Counsel to BP                                                                                        
BRADFORD G. KEITHLEY, Jones Day,  Counsel to BP, informed members                                                               
he would offer  points from having worked on  other projects, one                                                               
being  BP's Baku-Tbilisi-Ceyhan  (BTC)  project,  from which  the                                                               
following was learned:   Don't try to tie down  a large number of                                                               
detailed provisions  at the outset,  but let those evolve  as the                                                               
project occurs.   In that  project, the partners  and governments                                                               
involved weren't overly  detailed at the outset  about design and                                                               
other requirements.   They allowed the study to  go forward; from                                                               
the study  they designed the  pipeline; and from the  design they                                                               
determined  various  rules,  regulations  and  rates  that  would                                                               
apply,  in   the  normal  course.     Referring   to  yesterday's                                                               
testimony,  he conveyed  BP's pride  that this  highly successful                                                               
project came  to fruition.  Noting  this Alaska project is  in an                                                               
early  stage, he  cautioned that  imposing restrictions  now will                                                               
reduce needed flexibility as the project becomes more defined.                                                                  
                                                                                                                                
He turned  to Anadarko's concern about  potential mistreatment of                                                               
nonaffiliates.    While  agreeing   such  concerns  are  serious,                                                               
Mr. Keithley said  FERC regulations already provide  remedies for                                                               
all  those.   There really  are no  independent pipelines  in the                                                               
Lower  48; instead,  almost all  have either  affiliated producer                                                               
companies or affiliated  marketing companies.  As  a result, FERC                                                               
has  extensive  rules for  affiliate  treatment.   He  referenced                                                               
recent  testimony about  Order 2004;  Order 670,  which prohibits                                                               
any  action   for  the  purpose  of   impairing,  obstructing  or                                                               
defeating  an  honest  and well-functioning  market;  and  FERC's                                                               
enforcement  powers.   Mr. Keithley  said  all  those powers  and                                                               
rules  come  into  play, providing  Anadarko  with  an  effective                                                               
remedy down the road if the concerns come to fruition.                                                                          
                                                                                                                                
He  opined that  Anadarko  has  shown it  knows  how  to use  the                                                               
process.    Recalling  its  participation  in  the  congressional                                                               
process   that  resulted   in  ANGPA,   Mr.  Keithley   predicted                                                               
participation  in the  FERC  process.   He  surmised Anadarko  is                                                               
trying, through the contract, to  preempt the FERC process and to                                                               
impose its preferred  remedies in advance.   For reasons outlined                                                               
by Mr. Loeffler  and Ms. King, he said those  instances - if they                                                               
occur down the road - should  be left to FERC enforcement, rather                                                               
than contemplating such possible problems now.                                                                                  
                                                                                                                                
   MR. KEITHLEY also  opined that because  of the state's  ownership                                                            
   interest, this  project  will  have  more  enforcement  than any                                                             
   project ever in the Lower 48  or internationally.  The state  can                                                            
   play an  important role  through its  ability to  complain as  an                                                            
   owner - both  internally, if unfair  or discriminatory interests                                                             
   are seen, or externally with FERC.                                                                                           
                                                                                                                                
   He suggested while  the hotline  isn't the only  FERC remedy,  it                                                            
   will  probably  play  a  more   important  and  useful  role   in                                                            
   connection with this project than in the Lower 48, again  because                                                            
   of the state's  ownership interest.   If  producer-owners try  to                                                            
   direct the  pipeline  in a  way  that  results in  an  unfair  or                                                            
   discriminatory advantage, there will  be an opportunity to  raise                                                            
   those issues.  Although the  hotline doesn't always have all  the                                                            
   information needed to  deal with  allegations of  discrimination,                                                            
   here the state will  be an internal policeman  of sorts that can                                                             
   provide that information immediately to  FERC and the hotline if                                                             
   an unfair  advantage  is  perceived.   This  will  reinforce  the                                                            
   hotline's  ability   to   moderate   the   pipeline's   behavior,                                                            
   Mr. Keithley predicted.                                                                                                      
                                                                                                                                
   2:08:52 PM                                                                                                                 
   MR. KEITHLEY,  in  response to  Senator  Wagoner about  Lower  48                                                            
   pipelines, referred to previous  testimony about the preamble  to                                                            
   FERC Order 2004.  Mr. Keithley said he believes 16 pipelines are                                                             
   affiliated with  producers,  and  6  of  those  carry  more than                                                             
   60 percent  of  the  throughput.    Probably  all  pipelines  are                                                            
   somehow affiliated  with marketing  companies, which  buy gas  in                                                            
   the field  from  producers  and then  transport  it  through  the                                                            
   pipelines and sell it in competition with independent marketers.                                                             
   Those  pipelines  have  the  same  incentives  as  producer-owned                                                            
   pipelines  to  bias  the  rules  in  favor  of  their   marketing                                                            
   companies.     Thus  FERC   developed  this   extensive  set   of                                                            
   regulations to deal with affiliate  relationships.  It is a  rare                                                            
   exception that a Lower 48 pipeline  is affiliated with neither  a                                                            
   producer nor a marketing company.                                                                                            
                                                                                                                                
   SENATOR  WAGONER  asked  whether  "affiliated"  means  they  have                                                            
   contracts with the producers to ship.  He recalled being told in                                                             
   the Senate  Resources Standing  Committee months  ago that  there                                                            
   basically are no producer-owned pipelines transporting gas.                                                                  
                                                                                                                                
   MR. KEITHLEY specified  it means  ownership:   the pipeline  owns                                                            
   the marketing company,  the marketing company  owns the pipeline                                                             
   or a  holding company  owns both.   There  aren't many  pipelines                                                            
   owned by producers, but almost all are affiliated with  marketing                                                            
   companies. He  noted FERC  found that  pipelines affiliated  with                                                            
marketing companies are as likely to  be biased in favor of those                                                               
companies as  pipelines affiliated  with producers are  likely to                                                               
be  biased  in  favor  of  the  producers;  thus  FERC  developed                                                               
regulations.                                                                                                                    
                                                                                                                                
CHAIR  SEEKINS surmised  ownership  is the  common  thread.   The                                                               
marketing company  owns the gas it  ships to market, just  as the                                                               
producer owns the gas it ships.                                                                                                 
                                                                                                                                
MR.  KEITHLEY affirmed  that.   He reiterated  earlier points  in                                                               
response to Senator Stedman.                                                                                                    
                                                                                                                                
2:14:44 PM                                                                                                                    
SENATOR  ELTON asked:   Given  Governor Murkowski's  comments, as                                                               
well as  the presumption  of many  that this  pipeline will  be a                                                               
certain size -  over 4.0, expandable to somewhat less  than 6.0 -                                                               
and  the opportunity  later to  change the  project plan  as more                                                               
things become known, why not  have a starting presumption, with a                                                               
later change in the project plan if necessary?                                                                                  
                                                                                                                                
MR.  VAN TUYL  replied that  the contract  refers to  the Project                                                               
Summary,  which outlines  the base  design, referencing  a large-                                                               
diameter  pipeline  and  the 2001-2002  study  wherein  the  base                                                               
design  consisted  of  a  52-inch  pipe.    The  reason  for  not                                                               
stipulating in the  contract that the design  includes a specific                                                               
diameter or  turbine driver, for  example, is there  isn't enough                                                               
information  today.    Technology could  change.    High-strength                                                               
steel might be applicable, for  example, enabling a design change                                                               
to  save  money.    Offtake   might  not  be  guessed  correctly.                                                               
Additional volumes  may become  available and thus  be bid  at an                                                               
open season.   The desire is to avoid  mandating limitations that                                                               
might  result  in  a  suboptimal system,  which  wouldn't  be  in                                                               
anyone's best interests.                                                                                                        
                                                                                                                                
SENATOR  ELTON surmised  a  reference in  the  contract isn't  as                                                               
strong as having it in the contract itself.                                                                                     
                                                                                                                                
MR. VAN TUYL emphasized the  Project Summary is a living document                                                               
that  the contract  requires to  change from  time to  time.   It                                                               
didn't  seem efficient  to  impose the  burden  of requiring  all                                                               
parties  to  execute a  written  amendment  whenever there  is  a                                                               
design change.   The  Project Summary  and the  Qualified Project                                                               
Plan are therefore  separate from the contract,  but the contract                                                               
requires updating  of those periodically  and allows  the project                                                               
itself to be executed efficiently.                                                                                              
                                                                                                                                
2:20:26 PM                                                                                                                    
   MR. McMAHON stated agreement  with everything said  so far.   For                                                            
   Senator  Wagoner  he   listed  seven  producer-owned   pipelines:                                                            
   Maritimes-Northeast,  Discovery,  Green  Canyon,  Destin,  Garden                                                            
   Banks, Nautilus  and  the  new Rockies  Express  that  is  moving                                                            
   forward; he also mentioned the  Alliance pipeline from Canada to                                                             
   Chicago.                                                                                                                     
                                                                                                                                
   He returned to another matter, in order to put the appeal of  the                                                            
   FERC order in  context.   Mr. McMahon explained  that FERC  wrote                                                            
   itself the unprecedented right to mandate a design change in  the                                                            
   pipeline.  This  puts undue  risk on  the initial  shippers.   If                                                            
   FERC requires a higher-volume pipe built just in case  additional                                                            
   volumes are found, it requires overbuilding the pipeline without                                                             
   additional  underpinning  for  the  extra  capacity.    If  those                                                            
   volumes don't materialize,  the initial shippers  bear the cost.                                                             
   The pipeline always recovers its costs.                                                                                      
                                                                                                                                
   MR. McMAHON further  explained, "That's why  we're fighting that                                                             
   unprecedented  right.    It's  not  to  try  to  find  a  way  to                                                            
   manipulate this pipeline.  It is to make sure that we can  design                                                            
   the pipeline to match  the results of the  open season, which we                                                             
   think is the prudent thing to  do."  He said while pipelines  can                                                            
   build additional capacity  on speculation, it  isn't prudent for                                                             
   this risky,  high-cost pipeline.    The desire  is to  match  the                                                            
   open-season commitments with the project design, and to build  in                                                            
   the appropriate amount  of expandability  for the  future.   Thus                                                            
   the initial shippers will know what they're signing up for.                                                                  
                                                                                                                                
   CHAIR STEVENS  thanked the  testifiers and  invited the  Anadarko                                                            
   representatives back to the witness table.                                                                                   
                                                                                                                                
   2:22:34 PM                                                                                                                 
   SENATOR BEN STEVENS  recalled speculation  as to  when a  company                                                            
   could actually book its  North Slope gas reserves.   He gave his                                                             
   understanding that  those  aren't  bookable  until  the  time of                                                             
   project sanctioning, authorization  for expenditure and  issuance                                                            
   of a certificate of public convenience.   He asked Anadarko:   Do                                                            
   you have  proven  gas  reserves?    When  would  your  discovered                                                            
   reserves be bookable?   Would you have  to have a  FT commitment,                                                            
   or would  it just  be  a transportation  system  to market?    He                                                            
   requested  an  answer  at  some  point  for  Anadarko  and  other                                                            
   explorers.  He  also asked:   At that time,  are other  companies                                                            
   that have reserves on the North Slope allowed to book it because                                                             
   there is a transportation mechanism,  or does the SEC require  an                                                            
   FT commitment to be able to book it?                                                                                         
                                                                                                                                
MR. HANLEY  offered to get an  answer, noting he doesn't  work in                                                               
that  area  but that  there  are  guidelines  on the  timing  for                                                               
booking reserves.                                                                                                               
                                                                                                                                
MS. NEWMAN said she didn't know and wasn't an SEC lawyer.                                                                       
                                                                                                                                
MR. HANLEY  interpreted as follows:   If a pipeline is  built, if                                                               
somebody explored  and found gas, does  there have to be  a full-                                                               
time commitment, or is it just because there's a pipeline?                                                                      
                                                                                                                                
SENATOR  BEN  STEVENS  said  he didn't  know,  suggesting  it  is                                                               
blurred.     They're  not  bookable   now  because   there  isn't                                                               
transportation  capacity to  market.   But  if  that exists,  can                                                               
somebody   then  convert   undeveloped   resources  to   bookable                                                               
reserves, benefiting everybody?                                                                                                 
                                                                                                                                
SENATOR  STEDMAN  suggested  perhaps asking  the  consultants  to                                                               
guesstimate the  values of the  producers' bookable  reserves for                                                               
the aforementioned.                                                                                                             
                                                                                                                                
The committee took an at-ease until 2:26:46 PM.                                                                               
                                                                                                                                
MS. NEWMAN asked:   If the offtake isn't known  and other factors                                                               
are ambiguous,  why not hold a  nonbinding open season to  see if                                                               
there is something  else out there or if it  is realistic?  While                                                               
FERC requires  specifying the pipe  design, and perhaps  30 other                                                               
items,  for  a  binding  open   season,  most  pipelines  hold  a                                                               
nonbinding open season first, to  determine market interest; they                                                               
may even  hold a  second one.   They may  present a  scenario and                                                               
inquire  about  interest and  what  people  are willing  to  pay.                                                               
People respond, and it goes back to the drawing board.                                                                          
                                                                                                                                
She  noted this  pipeline  has  been studied  for  years, with  a                                                               
$125 million study concluding the  design isn't economic.  Giving                                                               
some  history, Ms. Newman  recalled  that pre-subscriptions  were                                                               
opposed by  many and yet  FERC allowed  them, saying it  might be                                                               
suspect if  the design only  suited pre-subscriptions.   If there                                                               
isn't  enough  capacity  when  the  real  open  season  is  held,                                                               
therefore, FERC  might require proration  of the  capacity signed                                                               
up for  in advance of  everyone else.   As a matter  of fairness,                                                               
FERC then  agreed if somebody signs  up under the same  terms and                                                               
conditions  as  the  pre-subscription,   that  is  prorated  too.                                                               
Ms. Newman noted pre-subscriptions could be signed up today.                                                                    
                                                                                                                                
MS. NEWMAN  emphasized that affiliate  rules don't kick  in until                                                               
there is  an affiliate,  which doesn't  happen until  the project                                                               
entity is formed.   Thus there is no issue  until then, and there                                                               
   is no enforcement policy  at FERC for this.   It will get  sorted                                                            
   out when  the  open  season  occurs,  because  nothing  has  been                                                            
   violated.  However, the problem arises before the rules kick  in.                                                            
   A nonbinding open  season should be  held if there  is a need  to                                                            
   figure out what is going on.                                                                                                 
                                                                                                                                
   She asked:  Why  should the state object  to having authority to                                                             
   decide it's a little early for  a binding open season?   Anadarko                                                            
   wants a pipeline, Ms.  Newman explained, but  doesn't want to  be                                                            
   disadvantaged by  having everything  etched in  stone before  the                                                            
   open season.  If the playing field is level, it isn't a problem.                                                             
                                                                                                                                
   2:32:12 PM                                                                                                                 
   MR. KEITHLEY remarked  that FERC Order  2005 specifies affiliate                                                             
   rules will apply from the time  of planning for the open  season;                                                            
   as BP interprets it, this is from the date the project entity  is                                                            
   formed -  soon after  the  fiscal contract  is  passed.   In  the                                                            
   Lower 48, by  contrast, the  rules don't  apply until  after  the                                                            
   pipeline is certificated by  the commission.   Order 2005 has  an                                                            
   exception for the Alaska  pipeline because of heightened  concern                                                            
   about affiliate relationships.                                                                                               
                                                                                                                                
   MS. NEWMAN suggested  she and  Mr. Keithley  don't disagree,  but                                                            
   have different perspectives.  She concurred that the rules  don't                                                            
   apply until the project entity  is created.  Until that  happens,                                                            
   there is  no affiliate  to apply  a rule  to, regardless  of  how                                                            
   early the planning process is begun.                                                                                         
                                                                                                                                
   MR. KEITHLEY added  that the  project entity  being discussed  is                                                            
   the LLC, which he predicted would be formed very soon.                                                                       
                                                                                                                                
   The committee took an at-ease from 2:34:07 PM to 2:45:06 PM.                                                             
                                                                                                                                
   ^Gross versus Net Tax                                                                                                        
   ^Dr. Pedro van Meurs, Consultant to the Governor                                                                             
   DR. PEDRO VAN  MEURS, Consultant to  the Governor, discussed  the                                                            
   fundamentals of  a  gross versus  net  tax, giving  a  PowerPoint                                                            
   presentation with an  accompanying handout dated  July 25, 2006.                                                             
   He highlighted  common ground  and differences  between  HB 3004,                                                            
   proposed by  Representatives  Berkowitz  and Gara,  and  his  own                                                            
   proposal made to  then-Governor Knowles  on April 29,  2001.   He                                                            
   said this goes to the heart  of gross versus net.  Like  HB 3004,                                                            
   his 2001  proposal  completely  modified  the  outdated  economic                                                            
   limit factor  (ELF),  since  the field  and  production  formulas                                                            
   needed to be adjusted.  It  had a strongly progressive tax  based                                                            
   on price, with much higher tax  rates under high prices and  zero                                                            
tax  when low,  and it  had incentives  for heavy  oil.   The big                                                               
difference from HB 3004 was significant tax credits.                                                                            
                                                                                                                                
He explained  that he'd proposed  a strongly  price-sensitive tax                                                               
because  of a  good experience  with clients  two years  earlier,                                                               
when oil prices were declining -  the best time to propose such a                                                               
tax; one  client now  is highly  satisfied with  its oil  and gas                                                               
revenues, a royalty equivalent to  40 percent.  However, Governor                                                               
Knowles  hadn't  accepted  his   similar  proposal,  not  feeling                                                               
politically  that it  was the  right moment  for such  a dramatic                                                               
change; if  he had, the  state would be $6 billion  richer today.                                                               
Dr.  van  Meurs  noted  these  gross taxes  have  a  short  life.                                                               
Whenever it  is discovered  that the formula  is outdated,  it is                                                               
costly and difficult to adjust.  Revenues are lost meanwhile.                                                                   
                                                                                                                                
2:52:23 PM                                                                                                                    
DR. VAN MEURS focused on  revenues versus structure, beginning on                                                               
page 5 of his presentation.   He highlighted three fiscal options                                                               
that  create equal  revenues, two  based on  tax credits  and one                                                               
based  on minor  or no  credits.   The former  included a  system                                                               
based  on   statewide  revenues   like  the   proposed  petroleum                                                               
production tax (PPT), as well as  his 2001 proposal that is based                                                               
on  gross revenue  per field  with no  deductions for  capital or                                                               
operating costs.   The latter  was similar to  HB 3004, primarily                                                               
based on  the gross structure in  the fields.  For  two key North                                                               
Slope fields  that produce  50 million  and 150  million barrels,                                                               
revenues would  be equal under  those options, as shown  on pages                                                               
8-9 of his presentation.                                                                                                        
                                                                                                                                
He said  these fields are  typical of what oil  companies believe                                                               
will  be the  next generation  of more  difficult, more  viscous,                                                               
somewhat  heavier  oil that  will  be  encountered on  the  North                                                               
Slope.  If he'd used fields  with much lower costs, the PPT would                                                               
look much better because deductions would be less.                                                                              
                                                                                                                                
DR.  VAN  MEURS explained  that  pages  10-12 describe  how  he'd                                                               
modified each  of the three  options to result in  equal revenue.                                                               
For  the PPT  variation, he'd  used 20/20,  adding a  progressive                                                               
feature based  on net,  starting at $35  a barrel  and increasing                                                               
0.2 percent for every dollar, with  a maximum rate of 50 percent;                                                               
it didn't  include a  corporate allowance of  $12 million  in tax                                                               
credits or  a $73 million  deduction as it  had originally.   His                                                               
2001  proposal had  a flat  rate  of 15  percent; investment  tax                                                               
credits of 40 percent, applicable  to all capital expenditures; a                                                               
price-adjustment factor  starting at  $50 a  barrel based  on ANS                                                               
divided by 50; and a maximum  rate of 40 percent.  He highlighted                                                               
the similarity to Senator Wagoner's recent gross-tax proposal.                                                                  
                                                                                                                                
   2:59:21 PM                                                                                                                 
   DR. VAN MEURS, in response to Senator Wilken with respect to the                                                             
   flat nominal  rate of  15 percent,  specified it  is gross  after                                                            
   deduction of  the royalties.   In  addition to  being in  Senator                                                            
   Wagoner's proposal, it was in HB 3004, as he recalled.                                                                       
                                                                                                                                
   SENATOR  WAGONER  clarified   he'd  done   his  proposal   before                                                            
   receiving copies from Dr. van Meurs.                                                                                         
                                                                                                                                
   DR. VAN  MEURS  noted  page  12 of  his  presentation  shows  the                                                            
   HB 3004 variation  for  comparison.    He'd  taken  the  existing                                                            
   nominal rates  and  ELF, using  a  minimum rate  of  6.5 percent,                                                            
   compared with  5.0 in  HB 3004;  a rate  reduction below  $35  by                                                            
   6 percent so that by  $20 per barrel the  rate becomes very low,                                                             
   whereas HB 3004 lowers it by that point to 12; a similar concept                                                             
   to HB 3004  for  the price-adjustment  factor,  but using  $35  a                                                            
   barrel as a basis,  rather than $20, taking  ANS and dividing by                                                             
   35; an extra  percentage, like  HB 3004, but  not as  aggressive,                                                            
   using 3  percent  more between  $70  and  $120 a  barrel;  and  a                                                            
   maximum rate of  40 percent, similar  to HB 3004.   Referring  to                                                            
   all three  scenarios,  Dr. van  Meurs  said the  whole  curve  of                                                            
   revenues can be  matched for  a particular field.   This  filters                                                            
   out the revenue  aspect, which  allows concentrating  on what  is                                                            
important:  the structural differences between these proposals.                                                                 
                                                                                                                                
   He turned  to  pages  13-17  of his  presentation,    "Impact  on                                                            
   Investors,"  related  to  the  three  options.    Dr.  van  Meurs                                                            
   explained that for the two examples with 40 percent tax  credits,                                                            
   the rate of return is significantly  higher than for the HB  3004                                                            
   variation.   Page  14  discusses  the  $150-million-barrel  case,                                                            
   showing a significant drop  in the rate of  return even with the                                                             
   same revenues  to the  state.   Page 15  shows expected  monetary                                                            
   value  (EMV),  a   main  indicator  of   the  attractiveness  of                                                             
   exploration, since it  is the  net present value  at 10  percent,                                                            
   adjusted for the geological  risk.  This shows  "EMV 10" is much                                                             
   lower without tax  credits or  within minor  ones.   The same  is                                                            
   shown on page 16.  For  a bigger field, the differences are  less                                                            
   because there is more value.                                                                                                 
                                                                                                                                
   3:05:02 PM                                                                                                                 
   DR. VAN  MEURS explained  how the  government's revenues  can  be                                                            
   equal and yet the rate of return and economics for the companies                                                             
   can be so much better under  one proposal than another.  Page  17                                                            
   shows no reduction  of PPT if  investors invest $1 million  under                                                            
   the HB 3004 variation,  without tax credits.   With a  40 percent                                                            
   tax credit  - or  a 20 percent  deduction and  20 percent  credit                                                            
under the PPT - investors  perceive that investment as a $600,000                                                               
expenditure because they'll receive  $400,000 back from the state                                                               
in tax credits.                                                                                                                 
                                                                                                                                
He  addressed pages  18-34, "Fiscal  Structure,"  noting page  18                                                               
shows the aforementioned is achieved  by first giving investors a                                                               
tax savings  when investing, and  then taking more tax  later on.                                                               
Dr.  van  Meurs  pointed  out   that  when  giving  tax  credits,                                                               
governments   first   grab   more  revenues   and   then   reward                                                               
reinvestment  in that  jurisdiction,  rather  than simply  giving                                                               
what was intended in the first place.                                                                                           
                                                                                                                                
3:09:16 PM                                                                                                                    
SENATOR BUNDE indicated he'd read  this morning that the court of                                                               
appeals,  in  the  Como  case,  found an  Ohio  tax  scheme  that                                                             
benefited a  local business  unconstitutional under  the commerce                                                               
clause.   Noting  that  proposals here  involve  tax credits,  he                                                               
asked if  those also could  be found unconstitutional  under that                                                               
clause, and whether Dr. van Meurs was familiar with that case.                                                                  
                                                                                                                                
DR.  VAN MEURS  replied he  wasn't familiar  with the  case.   He                                                               
suggested  it is  a constitutional  legal  question perhaps  best                                                               
reserved for  the lawyers.   He added  that the PPT  proposal was                                                               
reviewed in  depth by the  attorney general's team.   He surmised                                                               
the issue isn't at stake here.                                                                                                  
                                                                                                                                
3:10:33 PM                                                                                                                    
SENATOR  ELTON  referred  to  page  18 and  prior  pages  of  the                                                               
presentation that  discuss internal rates  of return.   He asked:                                                               
Can't  that  be  accomplished  with   a  gross  tax  and  then  a                                                               
"clawback"  provision, as  discussed earlier  with PPT?   Doesn't                                                               
that  also have  the  net effect  of  encouraging investment  and                                                               
lowering  the tax  rate so  there is  a higher  internal rate  of                                                               
return?                                                                                                                         
                                                                                                                                
DR. VAN MEURS answered yes,  the "two-for-one" proposal - if that                                                               
is  what Senator  Elton is  referring to  - has  the same  effect                                                               
because  it is  a  method  of providing  tax  credits.   What  is                                                               
attractive to  investors in Alaska  that already  have production                                                               
and are benefiting  from the two-for-one proposal is  this:  They                                                               
get a tax credit  on top of a tax credit  under the PPT proposal,                                                               
which makes the rate of return even higher than the base PPT.                                                                   
                                                                                                                                
SENATOR  ELTON interpreted  this  to mean  the  internal rate  of                                                               
return can be  increased for a company with a  gross that applies                                                               
a clawback.   The result would  be the same kind  of curves shown                                                               
in the earlier graphs.                                                                                                          
                                                                                                                                
   DR. VAN MEURS  agreed.   He recalled that  when Governor  Knowles                                                            
   originally requested review of  the existing production tax,  the                                                            
   political guidance  was  to see  what  could be  changed  in  the                                                            
   current system, based on gross,  to increase the rate of  return.                                                            
   Dr. van Meurs had proposed there  could be work on gross as  long                                                            
   as  these  tax  credits  were  included;  the  effect  would   be                                                            
   identical to  net  in terms  of  investment.   Referring  to  the                                                            
   graphs on  page  17  and  previous  to  that,  he  said  from  an                                                            
   investment-encouragement standpoint, a 40  percent tax credit is                                                             
   what counts.   Had HB 3004  included this credit  on all  capital                                                            
   expenditures, its  impact on  the attractiveness  for investment                                                             
   and the  incremental  rate  of  return  would  have  equaled  the                                                            
   PPT proposal.                                                                                                                
                                                                                                                                
   CHAIR SEEKINS asked  whether the difference  between the PPT  and                                                            
   the  clawback  is  that  the   latter  is  strictly  on   capital                                                            
   expenditures (CAPEX) and not operating expenses.                                                                             
                                                                                                                                
   DR. VAN MEURS replied yes.  The 20 percent tax credit in the  PPT                                                            
   and the clawback only relate  to capital expenditures.  The  cost                                                            
   deductions that exist in  order to arrive  at net revenues  apply                                                            
   to both  capital  and  operating expenditures.    The  difference                                                            
   between  his  earlier  proposal  to  Governor  Knowles  and  the                                                             
   proposal on the  table now is  this:  Under  the former  concept,                                                            
   there was no deduction for  operating costs.  From an  investment                                                            
   rate-of-return  point  of  view,  however,  the  numbers  can  be                                                            
   tweaked so it comes out the same for a particular field.                                                                     
                                                                                                                                
   3:15:14 PM                                                                                                                 
   SENATOR DYSON  recalled that  the major  thing that  doesn't  get                                                            
   taken care  of with  a  gross production  tax is  deductions  for                                                            
   "challenged" oil.  He asked Dr.  van Meurs to remind members  why                                                            
   using the traditional  way for challenged-oil  royalty relief is                                                             
   suboptimal for the state.                                                                                                    
                                                                                                                                
   DR. VAN MEURS opined that the Alaska royalty concept - that if  a                                                            
   field provides uneconomic under the agreed loyalty in the  lease,                                                            
   the commissioner  can  be  petitioned for  royalty  relief  -  is                                                            
   sound.   It is  common  worldwide.   Most governments  realize  a                                                            
   royalty could make  a field  uneconomic.   Thus there  is a  gray                                                            
   area in which a  government is interested  in granting relief  to                                                            
   get the development.   From an investor  point of view,  however,                                                            
   it doesn't do very much.                                                                                                     
                                                                                                                                
   SENATOR DYSON suggested it's unpredictable.                                                                                  
                                                                                                                                
DR. VAN  MEURS concurred.  He  said it is an  essential component                                                               
of  a  royalty framework,  but  isn't  a fundamental  concept  to                                                               
encourage investment.                                                                                                           
                                                                                                                                
3:18:53 PM                                                                                                                    
SENATOR  DYSON referred  to  heavy  oil on  the  North Slope  and                                                               
asked:   Do other jurisdictions  allow asking for  royalty relief                                                               
in  advance  of  making  the  investment, in  order  to  get  the                                                               
assurance necessary?                                                                                                            
                                                                                                                                
DR. VAN  MEURS noted his  presentation would address  this later.                                                               
Light  oil  clearly  is  on  its  way  out.    Many  nations  are                                                               
considering  changing  their  fiscal  structures  to  accommodate                                                               
heavy oil,  and many jurisdictions  have already done that.   For                                                               
example, Alberta  addressed its  large reserves  of heavy  oil by                                                               
scrapping  the  royalty  in  favor   of  a  profit-based  system;                                                               
although  called  a  royalty,  it   is  equivalent  to  the  PPT.                                                               
Governments  have concluded  that once  they get  to heavy  oils,                                                               
gross systems  don't work well.   The  costs aren't known.   Thus                                                               
they go to a net system  like Alberta's or else they predetermine                                                               
a lower  royalty level, as  Venezuela, Columbia  and Saskatchewan                                                               
did.  Some countries have a scale directly related to gravity.                                                                  
                                                                                                                                
SENATOR DYSON  recalled hearing about the  difficulty in defining                                                               
heavy oil and  a mixture of heavy, light and  medium oils in some                                                               
formations.                                                                                                                     
                                                                                                                                
DR.  VAN  MEURS  agreed,  noting  his  presentation  today  would                                                               
address that.  There is a  big difference between Alberta and the                                                               
North Slope.   Alberta's heavy  oil is in a  limited geographical                                                               
area, Cold Lake; thus it was  easy for the government to design a                                                               
new fiscal system for that area.                                                                                                
                                                                                                                                
CHAIR SEEKINS asked  how many other countries  deposit 25 percent                                                               
of the royalty into a permanent fund.                                                                                           
                                                                                                                                
DR. VAN  MEURS replied  that some  nations, including  Norway and                                                               
Kuwait,  have   similar  but  not  identical   funds  for  future                                                               
generations.                                                                                                                    
                                                                                                                                
CHAIR  SEEKINS   surmised  a  scheme  reducing   the  royalty  to                                                               
accommodate additional  costs for heavy  oil would have  the same                                                               
effect on the permanent fund as  on royalty revenue - reducing it                                                               
25 cents  for every dollar.   He suggested  if a system  could be                                                               
designed to  look at  operating expenses  as a  deduction, rather                                                               
than  a royalty  reduction,  it would  self-adjust  as there  are                                                               
   technological improvements  or higher  costs for  the  challenged                                                            
oil, but it wouldn't shortchange the permanent fund in the end.                                                                 
                                                                                                                                
   DR. VAN MEURS agreed.  He  said royalties are the perfect  gross-                                                            
   revenue concept.  The PPT was designed to be highly flexible and                                                             
   leave royalties alone.   In an  extreme condition, however,  with                                                            
   ample justification - and if there  is a clear choice between  no                                                            
   production and some - then the  DNR commissioner can step in  and                                                            
   lower the  royalty.   He  noted  a fund  for  future  generations                                                            
   happens particularly  in nations  with limited  populations  that                                                            
   realize the need to set aside  for the future when a large  share                                                            
   of wealth derives from  oil and gas.   He emphasized the need  to                                                            
   protect the  royalty  system,  calling  it  the  deep,  long-term                                                            
   future of the State of Alaska.                                                                                               
                                                                                                                                
   SENATOR WAGONER asked  what keeps  Alaska from coming  up with  a                                                            
   separate tax structure for heavy oil.                                                                                        
                                                                                                                                
   3:27:33 PM                                                                                                                 
   DR. VAN MEURS clarified that the problem with the North Slope is                                                             
   that everything is mixed together in the same geographical  area.                                                            
   Additionally, there  are shallow  formations so  cold that  light                                                            
   oil becomes as viscous as heavy  oil.  It isn't possible to  make                                                            
   separate arrangements  based  on groups  of  leases.   Any  lease                                                            
   could produce any mixture  of light and  heavy crudes, even  from                                                            
   the  same  reservoirs.     While   a  sliding   scale  could   be                                                            
   constructed, as  he'd done  in  2001, it  doesn't have  the  same                                                            
   guarantee for  the  state with  respect  to getting  the  maximum                                                            
   benefit from the resource.                                                                                                   
                                                                                                                                
   SENATOR WAGONER asked  whether the primary  cost will be  capital                                                            
   expenses or operating expenses  when heavy-oil production begins                                                             
   in earnest, and in what percentages.                                                                                         
                                                                                                                                
   DR.  VAN  MEURS  recalled   that  when  he'd  realized   Governor                                                            
   Murkowski was willing to go beyond slight adjustments, he'd  then                                                            
   offered a far  better proposal, a  full-scale net-revenue basis.                                                             
   That was the reason for developing  the PPT.  The reasoning  goes                                                            
   to the heart  of Senator Wagoner's  question.  A  scale based  on                                                            
   cash flow would be pie-in-the-sky,  since nobody knows the costs                                                             
   of heavy oil.  It  is far better to  say the costs aren't  known.                                                            
   If costs  are low  under a  net system,  a lot  is collected;  if                                                            
costs are high, less is collected.  That is the concept of net.                                                                 
                                                                                                                                
   He further explained  that a  net system  effectively deals  with                                                            
   future uncertainty and is  far more stable  than a gross  system,                                                            
   as  other  nations   have  discovered.     Thus  he'd  made   the                                                            
recommendation, and the governor had  agreed to go forward with a                                                               
system  in line  with  the international  practice,  with an  eye                                                               
toward investment.   Dr. van  Meurs expressed pride that  the PPT                                                               
proposal is now in front of the legislature.                                                                                    
                                                                                                                                
He  turned   to  pages   19-20,  "International   Framework"  and                                                               
"Reinvestment  or No  Reinvestment."   Dr.  van Meurs  emphasized                                                               
that taking more tax and then  giving something back if a company                                                               
reinvests  in the  jurisdiction provides  the same  revenues, but                                                               
investors  are   happy  because  they  perceive   it  as  getting                                                               
40 percent of their money back.   A company that doesn't reinvest                                                               
pays more tax.                                                                                                                  
                                                                                                                                
He  reported  that  all  governments   in  the  Organisation  for                                                               
Economic  Co-operation and  Development (OECD)  outside the  U.S.                                                               
that  have important  oil and  gas production  have figured  this                                                               
out,  including  Norway;  Denmark; the  Netherlands;  the  United                                                               
Kingdom; Australia;  and Alberta, Newfoundland and  the Northwest                                                               
Territories  in  Canada.   Another  60 developing  nations use  a                                                               
concept related  to profits.   Dr. van Meurs cautioned  that this                                                               
is  the   world  Alaska   is  competing   with,  and   in  Alaska                                                               
reinvestment isn't rewarded now.                                                                                                
                                                                                                                                
3:38:49 PM                                                                                                                    
DR.  VAN MEURS  explained  why he'd  strongly  recommended a  net                                                               
system to  Governor Murkowski.   Pages 23-30 of  his presentation                                                               
show difficulties  with a gross system  with tax credits:   1)  a                                                               
relatively short  shelf life for  gross formulas, 2)  that gross-                                                               
based systems require definition of a  field or unit to which the                                                               
system applies and 3) the heavy-oil provisions just discussed.                                                                  
                                                                                                                                
He  addressed shelf  life,  noting  Alaska's sound  royalty-based                                                               
system  provides  half  its revenues.    If  another  gross-based                                                               
system is added,  a very large amount would relate  to gross.  In                                                               
1989  there was  great justification  for  the ELF  formula.   If                                                               
gross is  added to gross,  however, there is concern  about small                                                               
marginal fields and  highly profitable ones.  The  concern is how                                                               
to make  the ELF more  flexible.  The  ELF is based  on technical                                                               
information, which Dr. van Meurs said changes quickly over time.                                                                
                                                                                                                                
DR. VAN  MEURS noted after ten  years, by 2001, Alaska's  ELF was                                                               
no longer appropriate.   However, it took five  more years before                                                               
there  was enough  political momentum  to change  it.   A  lot of                                                               
money  was lost.    After five  or ten  or  fifteen years,  gross                                                               
formulas must  be changed because of  rapid technological changes                                                               
in the  oil industry.  Dr.  van Meurs said a  net-based system is                                                               
much simpler.   Other nations have found if there  is a net-based                                                               
   system and technology lowers  the costs relative to  assumptions,                                                            
   deductions go down and there is more tax.                                                                                    
                                                                                                                                
   He turned to defining "field."   Dr. van Meurs told members if  a                                                            
   gross system is to  be flexible from field  to field, there must                                                             
   be a definition  a field.   While 20 years  ago Alaska had  well-                                                            
   defined units  and fields,  for  the North  Slope today  it's  no                                                            
   longer possible to come  up with a clear  definition.  This is  a                                                            
   fundamental problem with a gross-based system.                                                                               
                                                                                                                                
   He noted today's new investment  opportunities are in shallow or                                                             
   deeper  reservoirs  or  extensions  of  reservoirs  or  satellite                                                            
   fields, for example.   While generating  enormous amounts of  new                                                            
   reserves, they  cannot  be called  "new  fields."   However,  the                                                            
   system is  based  on  fields.    This  creates  immense  tension.                                                            
   Although it  can  be done,  Dr.  van  Meurs said  there  will  be                                                            
   constant struggle  and  lack  of  equilibrium  among  incremental                                                            
   investment in  something that  is  already a  unit or  field  and                                                            
   something that is a  new field.   Thus it is  so much simpler to                                                             
   junk all of  this and base  it on something  that makes far  more                                                            
   sense - which all other nations are doing.                                                                                   
                                                                                                                                
   DR. VAN MEURS discussed heavy oil.  Probably the biggest  problem                                                            
   of defining a gross-based  system is what to  do with heavy  oil.                                                            
   While more leniency is needed,  there is no sound economic  basis                                                            
   for doing  that.   It is  an immense  problem because  5  billion                                                            
   barrels of the new oil  to be produced is  heavy oil.  If  future                                                            
   economics for heavy oil  cannot be identified,  how can a  gross-                                                            
   based  system  be   designed  for   it?     A  net-based   system                                                            
   accommodates the  situation:   more  is collected  if  technology                                                            
   progresses  and  costs  are  low,   but  less  is  collected  if                                                             
   technology doesn't progress and costs are high.  Thus Alberta  is                                                            
   using a  net-based system  for its  Cold Lake  oil deposits,  for                                                            
instance, and Newfoundland and some nations are doing the same.                                                                 
                                                                                                                                
   3:47:32 PM                                                                                                                 
   DR.  VAN   MEURS  offered   conclusions,  pages   30-31  of   his                                                            
   presentation.  Alaska  has progressed in  its mature development                                                             
   of the North Slope, after 30 years of development.  Old rules  no                                                            
   longer apply.   He urged  thinking about how  other nations  deal                                                            
   with similar situations.  The North Slope no longer lends  itself                                                            
   to a  gross-based  system,  even if  there  are  significant  tax                                                            
   credits, as he'd originally proposed.   While it can be done,  it                                                            
   isn't the best solution.  Thus he'd recommended the PPT.                                                                     
                                                                                                                                
   He said  while governments  everywhere  worry about  the  serious                                                            
   issue  of  cost  control,  he  believes  the  issue  is  somewhat                                                            
overblown in  Alaska, perhaps because Alaskans  aren't yet really                                                               
familiar  with net-based  systems  and feel  the  system will  be                                                               
gamed.  Dr. van Meurs acknowledged  things will slip through in a                                                               
net-based system.  He offered  his experience in other countries,                                                               
but conveyed  his firm belief that  horrible conditions elsewhere                                                               
in the  world don't  apply in  Alaska.  He  lauded the  state for                                                               
having honest individuals  who do a splendid job.   There already                                                               
is auditing done, for example.                                                                                                  
                                                                                                                                
He  turned to  page 33,  posing a  situation in  which the  whole                                                               
industry puts  in a fraudulent  claims for 30 percent  more costs                                                               
than actually  occurred.  Highlighting  what that  would require,                                                               
Dr.  van Meurs  said  leases  in Alaska  are  owned by  different                                                               
companies.  Auditors  would quickly discover if  one company were                                                               
charging  double.   To  create  30  percent  fraud, all  the  oil                                                               
companies  would  have  to  get together  and  agree  to  produce                                                               
thousands  of  fraudulent  invoices,  hoping  the  Department  of                                                               
Revenue  wouldn't   notice,  and   then  they'd  have   to  claim                                                               
30 percent more in costs.                                                                                                       
                                                                                                                                
DR. VAN  MEURS asked:   What  if they got  away with  it?   At an                                                               
average cost of $6.00 a barrel,  he pointed out, 30 percent would                                                               
be $1.80.  They'd save 20  percent of that on cost deductions, or                                                               
$0.36.   On  half they'd  also save  the 20  percent tax  credit,                                                               
another  $0.18.   Thus with  massive  fraud they'd  save $0.54  a                                                               
barrel,  whereas a  barrel is  now worth  $30.00 to  $60.00.   He                                                               
questioned how  serious a problem  that would be; said  that kind                                                               
of  fraud doesn't  occur;  and suggested  if  the occasional  oil                                                               
company slips something  through, it will be  caught by auditors.                                                               
He opined that there won't  be statewide, massive fraud among all                                                               
the  oil  companies,  which  have to  work  together  as  working                                                               
partners on their leases.                                                                                                       
                                                                                                                                
3:55:21 PM                                                                                                                    
DR.  VAN MEURS  summarized, saying  he believes  the cost-control                                                               
problem is overblown.   To be absolutely sure,  however, when the                                                               
PPT law was  designed he'd gone through the list  of countries he                                                               
termed  "total  basket  cases"  for  which  he'd  had  to  design                                                               
procedures, making a long list  of nondeductible costs so that if                                                               
there is even  a minor audit they  can be picked out.   All these                                                               
nondeductible costs are  items where companies play  games.  Thus                                                               
he'd gone  to his basket-case  list and applied that  scenario to                                                               
Alaska as  if it were a  basket case too  - which it isn't.   Dr.                                                               
van Meurs noted page 34 showed the list.  It read:                                                                              
                                                                                                                                
                        Fiscal Structure                                                                                        
                      PPT and Cost Control                                                                                      
                                                                                                                                
        Nevertheless, Section 25 of the PPT bill provides for                                                                   
        a long list of non-deductible costs, including:                                                                         
                                                                                                                                
        1. Depreciation, depletion, amortization                                                                                
        2. Financing charges and cost of raising equity                                                                         
        3. Acquisition costs of leases                                                                                          
        4. Cost for arbitration, litigation                                                                                     
        5. Partnership JV, and other organizational costs                                                                       
        6. Any expenditures in excess of fair market value                                                                      
        7. Expenditures to purchase another company or business                                                                 
        8. Certain abandonment costs                                                                                            
        9. Losses and damages of oil discharges.                                                                                
                                                                                                                                
   DR. VAN MEURS highlighted what is left:  real costs for drilling                                                             
   wells and putting in  a facility or gathering  lines, as well as                                                             
   real operating  costs.   There  is no  overhead.   Asserting  all                                                            
   loopholes are closed,  Dr. van  Meurs opined that  this PPT  bill                                                            
   protects well against possible misuse of the net-revenue system.                                                             
   While there  would  be  misuse,  as  human  nature  dictates,  it                                                            
   wouldn't cause severe damage to  Alaska.  That is the  experience                                                            
   of countries that have done this successfully for 30 years.                                                                  
                                                                                                                                
   He closed by  saying he  works in  these other  countries and  is                                                            
   absolutely convinced this will work  in Alaska as well.   Dr. van                                                            
   Meurs expressed  pleasure that  the governor  wanted to  do more                                                             
   than tinker with the  existing ELF system  - building Alaska  for                                                            
   the future  and  considering  how the  North  Slope  actually  is                                                            
   today, using  the international  experience  to get  the  maximum                                                            
   benefit for the state.                                                                                                       
                                                                                                                                
   4:00:45 PM                                                                                                                 
   SENATOR HOLLIS FRENCH, Alaska  State Legislature, asked how  many                                                            
   oil-producing nations still collect on the gross.                                                                            
                                                                                                                                
   DR. VAN MEURS replied  this is an important  point.  He'd done  a                                                            
   survey of about 140 nations  that are oil producers or  potential                                                            
   producers.   Of  those,  approximately  100  have  some  type  of                                                            
   royalty like Alaska's.   Since it is easy  to collect, audit and                                                             
   verify, a gross-based royalty concept  - taking up to 20  percent                                                            
   of gross in royalties  - is immensely  popular around the  world.                                                            
   The vast majority  do that.   However, the concept  of "gross  on                                                            
   gross" is only  in the  U.S., as mentioned  in earlier  hearings.                                                            
   If a production  tax on gross  using some formula  is added to  a                                                            
   royalty, that combination doesn't exist  in other nations.  Thus                                                             
   the concept of a severance concept is uniquely American.                                                                     
                                                                                                                                
SENATOR  FRENCH  asked whether  nations  with  higher takes  than                                                               
Alaska take it all just with royalty.                                                                                           
                                                                                                                                
DR.  VAN  MEURS answered  no;  it  is  the  opposite.   With  the                                                               
exception  of Venezuela,  which recently  increased royalties  to                                                               
30 percent,  as  well  as  Texas  state  lands  offshore,  nobody                                                               
charges a  royalty higher than  20 percent  of gross.   The first                                                               
cut is always  modest.  The range worldwide is  10 to 20 percent.                                                               
Nations realize if too much is  built on gross, it makes too many                                                               
fields uneconomic.   Thus many  nations start with a  royalty, as                                                               
Alaska is  doing - an  excellent policy.   A significant  part of                                                               
the income is based on gross.                                                                                                   
                                                                                                                                
He  highlighted  the next  step:    Perhaps  120-126 of  the  140                                                               
nations have corporate  income tax; because Alaska is  a state of                                                               
the  United States,  it is  difficult  to get  a large  corporate                                                               
income tax.  Most nations  put something in between royalties and                                                               
corporate  income tax,  always a  profit-based system.   Dr.  van                                                               
Meurs explained  that the economics  of fields among  the nations                                                               
vary too much to make a  simplified formula.  While the foregoing                                                               
encompasses  the  general  rule,  there  are  exceptions.    Some                                                               
countries have done away with  royalties altogether, for example,                                                               
including Norway and Great Britain, which use net completely.                                                                   
                                                                                                                                
SENATOR  FRENCH recalled  that  one example  cited  to those  who                                                               
advocate a  net system  is the leases  at Kuparuk,  which haven't                                                               
shown a profit  after decades in operation, although  this is the                                                               
second-largest oil  field in North  America.  He asked  why there                                                               
is such trouble with those leases.                                                                                              
                                                                                                                                
DR.  VAN MEURS  suggested asking  DNR, since  he wasn't  familiar                                                               
with the details of each  lease; in fact, those are confidential.                                                               
He  surmised  one  important  factor  is  that  oil  prices  only                                                               
recently  increased significantly;  netbacks at  the North  Slope                                                               
were  very low  until three  years  ago.   If there  is a  profit                                                               
feature after a royalty, for  example, on a field-by-field system                                                               
such as used for the  net-profit-sharing leases, there could be a                                                               
period of three to five years during which nothing is collected.                                                                
                                                                                                                                
4:06:52 PM                                                                                                                    
SENATOR FRENCH  inquired about delayed  maintenance on  the North                                                               
Slope.  He  recalled BP recently had a flow  line that was choked                                                               
with sand,  developed a leak  and will have  to be replaced  at a                                                               
high  cost; there  may be  many similar  situations on  the North                                                               
Slope.   He voiced  concern about  granting deductions  for costs                                                               
that accumulated  over many  years through  neglect.   This could                                                               
add up to  the 50 cents a barrel mentioned by  Dr. van Meurs with                                                               
   respect to a  30 percent  overrun or inflation  factor -  perhaps                                                            
   $400,000 a  day for  800,000 barrels  a day,  or $100  million  a                                                            
   year.  He asked for Dr.  van Meurs' thoughts about finding a  way                                                            
   to not incentive such costs.                                                                                                 
                                                                                                                                
   DR. VAN MEURS  responded that there  are already two  protections                                                            
   in the PPT bill  proposal.  First, losses  and damages caused by                                                             
   oil discharges,  such  as  occurred with  BP,  aren't  deductible                                                            
   expenses.  Second, an important provision is that if an asset is                                                             
   replaced - an old compressor, for  example - the sale of the  old                                                            
   one has to be credited against  the cost.  Thus the concept  that                                                            
   certain assets would be renewed or  replaced is taken care of  to                                                            
   a degree in the bill.                                                                                                        
                                                                                                                                
   He added that in every oil  field which becomes mature and  older                                                            
   than 30 years, occasional equipment must be replaced.  That's  in                                                            
   the interest of the nation  because it means oil production  will                                                            
   continue safely and adequately.  Dr.  van Meurs said it could  be                                                            
   an important  deduction in  an oil  field over  the coming  20-30                                                            
   years.  Internationally, those are considered legitimate capital                                                             
   costs, provided that  if a  replaced item can  be sold  or has  a                                                            
   salvage value, that is deducted.                                                                                             
                                                                                                                                
   SENATOR FRENCH questioned  the value  of an  old flow  line.   He                                                            
   said he expects  the work to  be done when  it is needed,  rather                                                            
   than having it accumulate and  suddenly generate a windfall  with                                                            
   respect to taxes.                                                                                                            
                                                                                                                                
   DR. VAN  MEURS  replied that  he  wouldn't call  it  a  windfall.                                                            
   Internationally,  what  Senator   French  mentioned  are   really                                                            
   maintenance capital expenditures.   In making  a forecast of  the                                                            
   economics of an oil  field, typically these  are about 2  percent                                                            
   of the total capital expenditures spent in creating the field  in                                                            
   the first place.   If  someone invested $1  billion, after  10-20                                                            
   years there could  be an  expectation of  $20 million  a year  in                                                            
   maintenance  capital   expenditures;   that's   true   worldwide.                                                            
   Governments sometimes insist on better practices, and oil fields                                                             
   may have to be remodeled for environmental reasons.  It could  be                                                            
   3 percent, or somewhat lower.                                                                                                
                                                                                                                                
   4:12:15 PM                                                                                                                 
   SENATOR BEN  STEVENS  suggested the  inclusion  of a  gas  regime                                                            
   would transform  the  North Slope  from  a mature  stage  into  a                                                            
   developing stage for both gas and oil.                                                                                       
                                                                                                                                
   DR. VAN  MEURS agreed,  noting what  he means  by "mature  stage"                                                            
   relates to only the traditional state leases with respect to  oil                                                            
production.  The Arctic National  Wildlife Refuge (ANWR) would be                                                               
a whole new ballgame, as would NPR-A  to a large degree.  The gas                                                               
project, as explained  by Roger Marks, will give  North Slope oil                                                               
production an entirely new lease  on life, generating a whole new                                                               
cycle of development, for these  reasons:  1) operating costs can                                                               
be shared  in many fields  between oil  and gas, so  suddenly the                                                               
operating costs allocated  to oil become less; 2)  new gas fields                                                               
will have  50 barrels a day of  associated condensates, providing                                                               
a whole new  cycle of condensate production; and 3)  in trying to                                                               
find new resources to fill a gas  line, it is likely that new oil                                                               
fields, particularly in NPR-A, may be discovered.                                                                               
                                                                                                                                
SENATOR BEN STEVENS commented that  while some working reservoirs                                                               
might be at a mature stage, in  his mind the North Slope is still                                                               
in the  development stage, if not  the discovery stage.   He then                                                               
asked  for  comments  on  a  tax  on  gross  for  gas  production                                                               
internationally, and how  that might be structured.   He surmised                                                               
the  take  would be  high  on  the  high  side, but  he  recalled                                                               
Dr. van Meurs had said  Canada has higher taxes on  the high side                                                               
but no tax on the low side.                                                                                                     
                                                                                                                                
DR. VAN  MEURS reiterated  that gas  development creates  a whole                                                               
new cycle.   The gas project,  if the contract is  approved, will                                                               
be underpinned  for the first 15  years by two large  gas fields:                                                               
Prudhoe  Bay   and  Point   Thomson,  new   fields  from   a  gas                                                               
perspective.   In this  particular case,  since the  economics of                                                               
the  fields are  known, it  was  possible to  identify the  "7.25                                                               
percent of  gross" in  order to create  a total  package allowing                                                               
the state to take approximately 20 percent of the gas in kind.                                                                  
                                                                                                                                
He cautioned that 30 to 50  years in the future, however, if it's                                                               
in  a mature  stage, there  must be  far more  care with  systems                                                               
based on gross.   There'll be the same situation  as now for oil:                                                               
all  kinds of  different small  gas pools,  and an  Alberta-style                                                               
situation   wherein  some   pools  are   marginal  or   have  low                                                               
productivity.  The type of  stranded-gas contract submitted today                                                               
wouldn't fit in such an environment;  the system would need to be                                                               
based more  on net.  For  the current case, however,  because the                                                               
two gas fields are relatively  economical, Dr. van Meurs said the                                                               
state can afford  to have the royalty plus "another  slice on the                                                               
gross" in order to create the total gas in kind.                                                                                
                                                                                                                                
4:19:48 PM                                                                                                                    
SENATOR BEN STEVENS expressed  appreciation for that distinction.                                                               
He asked  Dr. van  Meurs whether his  earlier testimony  was that                                                               
other regions have a  tax on gross, but it varies  so there is no                                                               
tax when the price is low.                                                                                                      
                                                                                                                                
   DR. VAN MEURS affirmed that.   Recalling his previous  discussion                                                            
   before this  committee,  he  said in  principle  there  could  be                                                            
   progressivity for gas as well as oil with respect to price.   But                                                            
   while Canada has  a progressive  system on gas  in the  Mackenzie                                                            
   Valley, for  example,  it  views progressivity  as  removing  the                                                            
   government take if gas prices fall;  that system is based on  the                                                            
   rate of return.  At very  low prices, the maximum the  government                                                            
   will collect is a 5 percent royalty - no severance tax, property                                                             
   taxes or additional state income tax.   If prices are higher,  it                                                            
   goes to a profit-sharing scenario.  It's progressivity downward,                                                             
   not upward.                                                                                                                  
                                                                                                                                
   He added that because there is so much stranded gas today around                                                             
   the  world,  economic  rules  are  different  for  gas  and  oil.                                                            
   Progressivity for gas  means less government  take if prices  are                                                            
   low, rather  than  more government  take  if prices  are  higher.                                                            
   There is too  much competition  around the  world to  get gas  to                                                            
   market, which puts governments that  like to market large  blocks                                                            
   of gas in a weak bargaining position.                                                                                        
                                                                                                                                
   DR.  VAN  MEURS  closed  by  giving  his  opinion  that  what  is                                                            
   currently in front  of this legislature  is the absolute  optimal                                                            
   package.   It  has  the  maximum  on  oil,  which  is  where  the                                                            
   bargaining power  is, since  oil is  running out  and  government                                                            
   takes on oil are  rising.  He also  mentioned a sensible package                                                             
   on gas, saying the  total results in  maximum development.   That                                                            
   is exactly what is on the table today.                                                                                       
                                                                                                                                
   CHAIR SEEKINS thanked Dr. van Meurs and held SB 3001 and SB  3002                                                            
   over.                                                                                                                        
                                                                                                                                
   The committee took an at-ease from 4:25:02 PM to 4:25:22 PM.                                                             
                                                                                                                                
   There being no  further business  to come  before the  committee,                                                            
   Chair Seekins adjourned the  Senate Special Committee on  Natural                                                            
   Gas Development meeting at 4:27:32 PM.                                                                                     

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