Legislature(2001 - 2002)

08/14/2001 01:47 PM NGP

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
            JOINT COMMITTEE ON NATURAL GAS PIPELINES                                                                          
                        Anchorage, Alaska                                                                                       
                         August 14, 2001                                                                                        
                            1:47 p.m.                                                                                           
SENATE MEMBERS PRESENT                                                                                                        
Senator John Torgerson, Chair                                                                                                   
Senator Pete Kelly                                                                                                              
Senator Johnny Ellis (via teleconference)                                                                                       
Senator Donald Olson, alternate                                                                                                 
SENATE MEMBERS ABSENT                                                                                                         
Senator Rick Halford                                                                                                            
HOUSE MEMBERS PRESENT                                                                                                         
Representative Scott Ogan                                                                                                       
Representative John Davies                                                                                                      
Representative Hugh Fate, alternate                                                                                             
Representative Reggie Joule, alternate                                                                                          
HOUSE MEMBERS ABSENT                                                                                                          
Representative Joe Green, Vice-Chair                                                                                            
Representative Brian Porter                                                                                                     
Representative Mike Chenault, alternate                                                                                         
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Gary Wilken                                                                                                             
Representative Jim Whitaker                                                                                                     
COMMITTEE CALENDAR                                                                                                            
NATURAL GAS PIPELINE PRESENTATIONS                                                                                              
Update on the report required by SB 158                                                                                         
Alaska Oil & Gas Conservation Commission                                                                                        
Department of Law                                                                                                               
Gas Pipeline Office                                                                                                             
Testimony - North Slope Borough Assembly                                                                                        
Alaska Highway Natural Gas Policy Council (rescheduled from                                                                     
Public Testimony                                                                                                                
Legislative Legal Counsel (scheduled but not heard)                                                                             
WITNESS REGISTER                                                                                                              
Mr. Wilson L. Condon                                                                                                            
Department of Revenue                                                                                                           
P.O. Box 110400                                                                                                                 
Juneau AK  99811-0400                                                                                                           
Mr. William S. ("Bill") Garner                                                                                                  
Petrie Parkman & Co.                                                                                                            
(No address provided)                                                                                                           
Ms. Cammy Oechsli Taylor                                                                                                        
Alaska Oil & Gas Conservation Commission                                                                                        
Department of Administration                                                                                                    
333 West 7th Avenue, Suite 100                                                                                                  
Anchorage AK  99501-3539                                                                                                        
Ms. Julie M. Heusser                                                                                                            
Alaska Oil & Gas Conservation Commission                                                                                        
Department of Administration                                                                                                    
333 West 7th Avenue, Suite 100                                                                                                  
Anchorage AK  99501-3539                                                                                                        
Mr. Jack Griffin                                                                                                                
Assistant Attorney General                                                                                                      
Oil, Gas & Mining Section                                                                                                       
Civil Division (Anchorage)                                                                                                      
Department of Law                                                                                                               
1031 West 4th Avenue, Suite 200                                                                                                 
Anchorage AK  99501-1994                                                                                                        
Mr. William G. Britt, Jr.                                                                                                       
State Pipeline Coordinator                                                                                                      
Department of Natural Resources                                                                                                 
411 West 4th Avenue, Suite 2C                                                                                                   
Anchorage AK  99501                                                                                                             
Mr. Mike Aamodt                                                                                                                 
North Slope Borough Assembly                                                                                                    
North Slope Borough                                                                                                             
P.O. Box 69                                                                                                                     
Barrow AK  99723                                                                                                                
Mr. Jim Sampson                                                                                                                 
Alaska Highway Natural Gas Policy Council                                                                                       
1000 Bennett Road                                                                                                               
Fairbanks AK  99712                                                                                                             
Mr. Charlie Cole, Chair                                                                                                         
Federal/International Action Subcommittee                                                                                       
Alaska Highway Natural Gas Policy Council                                                                                       
Law Offices of Charles E. Cole                                                                                                  
406 Cushman Street                                                                                                              
Fairbanks AK  99701                                                                                                             
Mr. Ken Freeman                                                                                                                 
Special Assistant                                                                                                               
Gasline & Business Development                                                                                                  
Office of the Governor                                                                                                          
550 West 7th Avenue, Suite 1700                                                                                                 
Anchorage AK  99501                                                                                                             
Mr. Keith Hand                                                                                                                  
Fairbanks Natural Gas                                                                                                           
3408 International Way                                                                                                          
Fairbanks AK  99701                                                                                                             
ACTION NARRATIVE                                                                                                              
TAPE 01-9, SIDE A                                                                                                             
CHAIRMAN JOHN TORGERSON called the  Joint Committee on Natural Gas                                                            
Pipelines meeting to  order at 10:47 p.m.  Members  present during                                                              
the   meeting  were   Senators   Torgerson,   Kelly,  Ellis   (via                                                              
teleconference),  and  Olson, and  Representatives  Ogan,  Davies,                                                              
Fate  (alternate),  and  Joule  (alternate).    Other  legislators                                                              
present were Senator Wilken and Representative Whitaker.                                                                        
CHAIRMAN  TORGERSON  confirmed  that on  teleconference  were  the                                                              
Juneau and Anchorage  Legislative Information Offices  (LIOs).  He                                                              
then informed  members that there  would be public  testimony from                                                              
the  North Slope  Borough at  approximately 5:30  p.m., with  more                                                              
than the  stated three-minute limit  being allowed.   In addition,                                                              
the  Alaska   Highway  Natural  Gas   Policy  Council   was  being                                                              
rescheduled  from the following  day.   Furthermore, U.S.  Senator                                                              
Stevens may be an addition to the agenda for August 15 at 5 p.m.                                                                
NATURAL GAS PIPELINE PRESENTATIONS                                                                                            
Update on the report required by SB 158                                                                                       
Number 02.21                                                                                                                    
CHAIRMAN  TORGERSON  reminded members  that  SB  158 directed  the                                                              
Department  of Revenue  to look  into potential  ownership of  the                                                              
pipeline - either  partial or total - by the State  of Alaska.  He                                                              
mentioned  a  possible  port  authority   concept  or  a  possible                                                              
corporation whereby  Alaskans could buy  some of it,  for example.                                                              
Commissioner  Condon has  selected two companies  to proceed  with                                                              
that study;  a representative  from one  of those companies  would                                                              
speak today along with Commissioner Condon.                                                                                     
Number 03.34                                                                                                                    
MR. WILSON CONDON, Commissioner,  Department of Revenue, discussed                                                              
the work  the department  has undertaken with  respect to  SB 158,                                                              
enacted during the  last legislative session.   That bill directed                                                              
the Department  of Revenue  to undertake  a fairly detailed  study                                                              
with respect  to possible  state financial  participation  or some                                                              
other form of  state assistance in the financing  of a project for                                                              
the commercialization of North Slope gas.                                                                                       
COMMISSIONER CONDON  told members that as he reported  in the July                                                              
hearing, [the  department] was in  the final stages  of completing                                                              
contract  negotiations with  CH2M Hill  and Petrie  Parkman &  Co.                                                              
("Petrie  Parkman").  Those  negotiations  are completed,  and the                                                              
companies have  commenced work.   The  department is assisting  in                                                              
some of  the legwork,  but doesn't  yet have  anything to  report,                                                              
other than that "we're doing the work."                                                                                         
COMMISSIONER  CONDON said  "we" have  talked  with some  committee                                                              
members  about  some specific  aspects  of  the project  and  have                                                              
interviewed a  number of Alaskan  leaders about the pros  and cons                                                              
of state ownership.  He introduced  Bill Garner of Petrie Parkman,                                                              
an investment  banking firm specializing  in the  energy industry,                                                              
and pointed out a company resume [in packets].                                                                                  
Number 07.26                                                                                                                    
MR. WILLIAM S.  ("BILL") GARNER, Petrie Parkman &  Co., offered to                                                              
describe the  firm and then provide  his own background,  since he                                                              
will be the  lead person on this  project.  In addition,  he would                                                              
discuss the  requirements of SB 158  and how Petrie  Parkman, CH2M                                                              
Hill, and the  commissioner's office will proceed  to prepare that                                                              
MR. GARNER pointed  out that although Petrie Parkman  doesn't have                                                              
a  presence in  Alaska,  it is  the world's  leading  oil and  gas                                                              
investment and banking  specialist; that is all  the company does,                                                              
which differentiates it from other  investment banks.  It provides                                                              
a  full  suite  of  services  including   divestiture  and  merger                                                              
advisory  services, strategic  advice, equity  research, sales  of                                                              
securities, underwriting, private  placement, bankruptcy services,                                                              
and advising governments on energy-related initiatives.                                                                         
MR. GARNER  informed members  that Petrie  Parkman was  founded in                                                              
1989 by the former  lead investment bankers from  The First Boston                                                              
Corporation ("First Boston") who  left First Boston when it merged                                                              
with Credit Suisse.   Today Petrie Parkman has  offices in Denver,                                                              
Houston, and London.   The capital markets operations  are handled                                                              
exclusively  in Denver,  including research,  IPO (initial  public                                                              
offering)   activities,   writing   research  reports   on   other                                                              
companies,  providing high-level  strategic  advice, and  handling                                                              
financial aspects  for companies.   The Houston office,  where Mr.                                                              
Garner is based,  handles mergers and acquisitions,  transactions,                                                              
and advice  to governments.  The  company has about  35 specialist                                                              
professionals;  about   half  are  from  the   investment  banking                                                              
business and about half, including  Mr. Garner, are from industry.                                                              
MR. GARNER  noted that in  the past 12  years, Petrie  Parkman has                                                              
closed  more  than  $35  billion   of  oil  and  gas  mergers  and                                                              
acquisitions  in more than  250 separate  transactions, making  it                                                              
one  of the  most active  firms  in the  world  in this  business.                                                              
Named the Best Energy Research Boutique  by Institutional Investor                                                            
magazine on numerous occasions, in  2001 Petrie Parkman was called                                                              
by  Petroleum  Economist  magazine  one  of  the  world's  leading                                                            
investment banks  in terms  of the monetary  value of oil  and gas                                                              
transactions it has closed.                                                                                                     
Number 09.15                                                                                                                    
MR.  GARNER turned  attention  to two  of  Petrie Parkman's  major                                                              
projects  for  governments.    First,   it  represented  the  U.S.                                                              
Department of Energy under the Clinton  Administration in the sale                                                              
of  the  Elk  Hills  Strategic  Naval   Petroleum  Reserve,  which                                                              
resulted in the  largest monetary privatization in  the history of                                                              
the U.S.  Second,  Petrie Parkman is currently the  advisor to the                                                              
Kingdom  of Saudi  Arabia in  the largest  natural gas  investment                                                              
project in the world, the Natural Gas Initiative.                                                                               
MR. GARNER  explained that the  kingdom is, in  essence, reversing                                                              
many  years of  policy:   rather than  developing its  hydrocarbon                                                              
reserves itself,  it is  now encouraging  the world's largest  oil                                                              
and  gas  companies   to  invest  approximately   $20  billion  in                                                              
integrated natural  gas projects within the kingdom  over the next                                                              
ten years.   This  includes not only  exploration and  production,                                                              
but  also the  construction of  pipelines, processing  facilities,                                                              
petrochemical plants,  power plants, and desalination  plants; the                                                              
fuel for each  facility would be natural gas, and  Saudi Arabia is                                                              
believed to have  some of the largest natural gas  reserves in the                                                              
world.   Having begun that project  two years ago,  Petrie Parkman                                                              
is "in  the thick  of it"  now; it  announced the  winners of  the                                                              
bidding  rounds  and  signed  the   first  agreements  with  those                                                              
companies in  June, and is now  assisting the kingdom  in drafting                                                              
definitive documents for that investment.                                                                                       
MR. GARNER  reported that  Petrie Parkman has  been active  in the                                                              
Lower 48 in various  transactions.  A major project  this year was                                                              
defending  Barrett [Resources]  in a hostile  takeover attempt  by                                                              
Shell Oil, which eventually led to  an acquisition by the Williams                                                              
Companies.   He noted that  the handout delineates  other projects                                                              
the firm has worked on.                                                                                                         
MR. GARNER informed  members that both Mr. Petrie  and Mr. Parkman                                                              
will assist  [on the Alaskan  project].  Mr. Petrie's  involvement                                                              
is primarily  in advising the  chairmen of companies  on strategic                                                              
matters and in directing research  activities.  A graduate of [the                                                              
U.S. Military  Academy at]  West Point  and a  past member  of the                                                              
board  of  directors  of the  National  Association  of  Petroleum                                                              
Investment Analysts,  Mr. Petrie has  served as president  of that                                                              
organization;   has  served   on  the   Securities  and   Exchange                                                              
Commission's  Advisory  Board  on  Oil  and  Gas  Accounting;  has                                                              
delivered  a  number  of  technical   papers  to  the  Society  of                                                              
Petroleum  Engineers  on  the  subjects  of  petroleum  valuation,                                                              
merger  and  acquisition  trends, and  energy  policy;  frequently                                                              
appears in the media, including being  interviewed on a variety of                                                              
energy policy matters on television  programs such as "Wall Street                                                              
Week" and "The McNeil Lehrer News  Hour" and on CNBC and Fox News;                                                              
and has been quoted frequently in  Barrons magazine, including the                                                            
[July 27, 2001] issue.                                                                                                          
MR.  GARNER  reported that  Mr.  Parkman,  who heads  the  Houston                                                              
office, began his career in the industry  and later became head of                                                              
the  oil and  gas mergers  and acquisitions  operations for  First                                                              
MR.  GARNER offered  his own  credentials.   He  heads the  firm's                                                              
international practice and is "the  pipeline guy."  His background                                                              
is  in  natural gas  pipelines,  and  he  was the  former  general                                                              
counsel of the fourth-largest natural  gas pipeline company in the                                                              
world in  terms of miles  of pipe, K  N Energy, Inc.  (which since                                                              
has merged  with Kinder  Morgan, Inc.); he  noted that  neither of                                                              
those firms  has been active  in Alaska.   Following that,  he was                                                              
appointed head of the international  group at K N Energy, Inc.  He                                                              
began work  with Petrie Parkman  approximately 18 months  ago, and                                                              
primarily works on pipeline projects and international projects.                                                                
Number 13.58                                                                                                                    
MR.  GARNER  turned  attention  to   SB  158.    He  told  members                                                              
preliminary work  has begun with  the commissioner's office.   The                                                              
first process  is talking  to the stakeholders.   It  is critical,                                                              
before addressing  details, to get a better understanding  of what                                                              
citizens,  legislators,  proponents,  and  opponents have  to  say                                                              
about  this   idea;  therefore,  CH2M   Hill  and  staff   of  the                                                              
commissioner's office have undertaken  those interviews in Alaska.                                                              
Those  at  Petrie Parkman  will  talk  to  the companies  and  the                                                              
proposed project developers  because it is important  to get their                                                              
sense about these requirements.                                                                                                 
MR.  GARNER told  members the  remaining part  of the  examination                                                              
will be  undertaken following that.   This includes  examining the                                                              
history  of  state  participation  in  the  Trans-Alaska  Pipeline                                                              
System (TAPS) and  other natural gas pipeline  proposals that have                                                              
come  before the  state;  determining the  current  status of  the                                                              
various gas  pipeline proposals;  identifying and quantifying  key                                                              
uncertainties   associated  with   project  development   such  as                                                              
construction  costs,  operating costs,  tariffs,  and  throughput;                                                              
examining available financial participation  options of the state,                                                              
such  as full  or  partial  ownership  through public  or  private                                                              
corporations or other  entities; looking at sources  of funds such                                                              
as  the permanent  fund  earnings  reserve or  the  constitutional                                                              
budget  reserve  fund;  looking at  debt  alternatives,  including                                                              
revenue bonds, general obligation  bonds, and so forth; looking at                                                              
the  feasibility  of  the state's  guaranteeing  private  debt  or                                                              
guaranteeing debt  in general; and  looking at other  alternatives                                                              
such  as state  ownership  not  of the  pipe  itself,  but of  the                                                              
capacity within the pipe.                                                                                                       
MR. GARNER reported that following  that, evaluation criteria will                                                              
be developed  regarding what will be  in the best interest  of the                                                              
state.  These include determining  what kinds of returns the state                                                              
should  be  looking at;  what  the  impact  criteria are  for  the                                                              
state's  cash flow  and bond  rating; what  the impact  is of  the                                                              
availability  of  state  credit to  fund  other  essential  public                                                              
services; looking  at conflicts of interest and  issues associated                                                              
with  state  ownership  in  such  a  project  versus  the  state's                                                              
obligation to  regulate various aspects;  and looking  at economic                                                              
development generally  in the state and the impact  of the natural                                                              
gas  pipeline regarding  project  costs,  the feasibility  of  the                                                              
project,  the project timing,  and the  project participants,  for                                                              
example.  Then  the various options will be evaluated  against the                                                              
evaluation criteria,  and recommendations  will be arrived  at, as                                                              
required in SB  158.  That work will continue  through the autumn;                                                              
the report  is due to  the legislature  no later than  January 31,                                                              
2002.   Mr.  Garner stated  his understanding  that  [Commissioner                                                              
Condon] would be making periodic progress reports as well.                                                                      
Number 17.41                                                                                                                    
CHAIRMAN  TORGERSON  asked whether  Mr.  Garner  is familiar  with                                                              
other governments, particularly in  the U.S., that are part owners                                                              
of lines.   He also asked  whether there are similar  studies that                                                              
might be looked at for comparison.                                                                                              
MR. GARNER replied  that in the U.S., early in the  history of the                                                              
development of the natural gas industry,  there were situations in                                                              
which   this   occurred,   primarily   as   economic   development                                                              
initiatives;  states and  local governments  would participate  in                                                              
projects primarily  as a means  to either stimulate  investment or                                                              
to  meet some  other  political  or  environmental concern.    For                                                              
example, when Denver got natural  gas, one issue related to taking                                                              
the community  off of coal,  because of air-pollution  issues, and                                                              
putting it on natural gas; there  was a lot of state and municipal                                                              
activity at that stage.  Mr. Garner added:                                                                                      
     We're  going to examine  where that  might exist  today,                                                                   
     but  it's ...  certainly  not a  common  feature in  the                                                                   
     development    of   the    industry    today.       Now,                                                                   
     internationally it  is.  Certainly in the  case of Saudi                                                                   
     Arabia,   where  we're   working,   the  Saudi   Arabian                                                                   
     government   intends   to  take   equity   participation                                                                   
     interest  in certain of  the projects.   And the  reason                                                                   
     they're going  to do that would be their  perceived rate                                                                   
     of return, security issues for  the kingdom itself; they                                                                   
     hate  to turn  over  certain  strategic parts  of  their                                                                   
     infrastructure ... to non-Saudi entities.                                                                                  
     And you  see these kinds of  activities in ... a  lot of                                                                   
     places  where  you  have  state-owned  oil  companies  -                                                                   
     Mexico,  for example, Indonesia,  places like that.  ...                                                                   
     But it's a  different situation than ...  what you have.                                                                   
     There  probably [are]  ... some  analogies  that can  be                                                                   
     drawn, and maybe some ideas  that can be drawn here, but                                                                   
     typically  in   those  countries  you're   dealing  with                                                                   
     different problems altogether than what you have here.                                                                     
Number 20.34                                                                                                                    
REPRESENTATIVE  DAVIES asked  Mr.  Garner to  comment on  rate-of-                                                              
return issues.   He noted that for a company  investing, there are                                                              
different  rate-of-return considerations  than for  a state.   For                                                              
example, a state might take the point  of view that infrastructure                                                              
development may be an adequate return on the investment.                                                                        
MR.  GARNER replied  that  it will  be examined  as  part of  this                                                              
report.   These companies, however,  are for-profit  entities, and                                                              
have to  make a return  for their shareholders;  how they  look at                                                              
this  project  will   be  different  from  how   the  state  will.                                                              
Furthermore,  it   will  be  regulated   by  the   Federal  Energy                                                              
Regulatory  Commission  (FERC); a  lot  of  these issues  will  be                                                              
regulated by  the federal government  in terms of  maximum allowed                                                              
rates of return.  He pointed out  that in a regulated pipeline, an                                                              
opportunity  for huge rates  of return  generally don't  exist; it                                                              
will be in the 10-15 percent range,  and probably on the lower end                                                              
of that.                                                                                                                        
REPRESENTATIVE DAVIES  responded that  he was thinking  more about                                                              
when the issue  is being evaluated as to whether  the state should                                                              
take ownership.   In that regard,  what rate of return  should the                                                              
state be  looking at,  as a state,  not as a  private entity?   He                                                              
asked whether there has been consideration of that issue yet.                                                                   
MR. GARNER  said not yet.   It is an important  question, however,                                                              
because states  get involved in these  kinds of projects  for lots                                                              
of strategic  reasons other than  necessarily to make a  high rate                                                              
of return for their own income purposes.                                                                                        
Number 22.26                                                                                                                    
REPRESENTATIVE  FATE  referred  to  Mr. Garner's  mention  of  the                                                              
state's obligation to regulate the  pipeline.  He asked Mr. Garner                                                              
whether  he  anticipates  looking  in  depth at  what  effect  any                                                              
federal  regulation may  have upon  those  state regulations,  and                                                              
whether  that may influence  it to  the extent,  perhaps, that  it                                                              
will be impossible  for the state  to either regulate it  or enter                                                              
into any financial agreement.                                                                                                   
MR. GARNER answered:                                                                                                            
     I think only indirectly, sir.   I think that that pretty                                                                   
     much exceeds  what we're  trying to do.   I think  we're                                                                   
     going to focus more on ... the  things we know the state                                                                   
     will have to regulate.  And  some of these areas, I just                                                                   
     think it's  probably going to  exceed the scope  of this                                                                   
MR. GARNER suggested that others could comment on that better.                                                                  
CHAIRMAN  TORGERSON informed  Representative Fate  that the  issue                                                              
likely would  be touched upon at  the next day's  discussions with                                                              
FERC, Bob Loeffler, the Department  of Law, and [Legislative Legal                                                              
Services] personnel.                                                                                                            
Number 24.03                                                                                                                    
COMMISSIONER  CONDON noted  that Chairman  Torgerson had  provided                                                              
him  a list  of topics  to cover;  he  read item  2, which  stated                                                              
[original punctuation and capitalization provided]:                                                                             
     Representatives of the LNG Sponsor  Group testified that                                                                   
     the  Port Authority  concept  provides  little, if  any,                                                                   
     economic benefit  to its project.  [The  Alaska Gasline]                                                                   
     Port  Authority   has  stated  that  its   structure  is                                                                   
     available   to  the   producers  and   it  can   provide                                                                   
     significant  economic benefits  to a  project.  What  is                                                                   
     your Department's current view?   Additionally, the Port                                                                   
     Authority's   route  would   cross  lands  outside   the                                                                   
     participating  municipalities'  borders.   What is  your                                                                   
     view of the Port Authority's  jurisdiction outside their                                                                   
     respective municipalities' borders?                                                                                        
COMMISSIONER CONDON told members:                                                                                               
     We're not ready to answer either  of those questions.  I                                                                   
     can  tell you that  we are  looking at  ... a  structure                                                                   
     like the Port Authority as one  of the models that we'll                                                                   
     be analyzing to  see whether it makes sense.   And so we                                                                   
     will have  a view  on that issue,  and I simply  haven't                                                                   
     turned my  attention to the  question of whether  or not                                                                   
     the  Port  Authority  can  construct  a  project  that's                                                                   
     partly  outside the  physical boundaries  of the  member                                                                   
CHAIRMAN TORGERSON  informed members that  he had written  most of                                                              
the  testifiers  a  letter,  posing  questions.    He  noted  that                                                              
Commissioner  Condon  would  be before  the  committee  again  the                                                              
following  day to  answer questions  relating to  taxes and  other                                                              
issues.   Recalling  testimony  that  "they" would  be  tax-exempt                                                              
outside  their jurisdictions,  outside the  City of Fairbanks,  he                                                              
commented, "I  don't see  where they would  be, but that's  what I                                                              
was hoping you would  have an answer for.  But  that's a difficult                                                              
question apparently."                                                                                                           
COMMISSIONER  CONDON replied that  he didn't  know whether  it was                                                              
difficult or not.  He apologized for not addressing it.                                                                         
Number 26.26                                                                                                                    
REPRESENTATIVE  DAVIES  referred  to Mr.  Garner's  testimony  and                                                              
commented that the  sale of Elk Hills and [Petrie  Parkman's] role                                                              
in Saudi  Arabia both  "move in the  direction of  privatization."                                                              
He asked  Mr. Garner, "Would you  characterize your firm  as being                                                              
biased in  that direction of privatization,  or are you  ... going                                                              
to take a look at this from a fairly evenhanded point of view?"                                                                 
MR. GARNER answered:                                                                                                            
     Definitely  evenhanded;  that's  what  our firm  is  ...                                                                   
     known  as.  In  fact, some  people would  say we're  too                                                                   
     evenhanded.  ... We are  not in  the pockets of  anyone.                                                                   
     We just  [are] presented projects  and look at  them and                                                                   
     give people the  answer, whether they want  to hear that                                                                   
     answer or not.   In those particular projects,  that was                                                                   
     just the nature of the assignments.   There's nothing to                                                                   
     be drawn from there.                                                                                                       
     And in  fact, interestingly  enough, I remember  sitting                                                                   
     in  Riyadh,  Saudi Arabia,  literally  a year  ago  this                                                                   
     week,  debating some  of  the same  issues  [in] a  very                                                                   
     generic  sense [that] I  think you  will be debating  in                                                                   
     the  legislature  next year  about  the proper  role  of                                                                   
     governments  in these kinds  of projects.   And so,  ...                                                                   
     even Saudi  Arabia I  wouldn't necessarily  characterize                                                                   
     as a privatization.  It's more  of a situation where the                                                                   
     kingdom legitimately is trying  to do the best thing for                                                                   
     its  country to  increase  employment,  to ...  increase                                                                   
     revenues  available  to  the   country,  and  exploit  a                                                                   
     valuable resource in the kingdom in a proper manner.                                                                       
CHAIR TORGERSON surmised that the  commissioner has made available                                                              
to Mr. Garner the  past reports and studies done  on this; he said                                                              
this isn't the first time [the legislature] has looked at this.                                                                 
MR. GARNER responded in the affirmative.                                                                                        
CHAIR TORGERSON  added that  he isn't sure  what has  changed from                                                              
the last time, other than the will  to look at it again.  He asked                                                              
whether there were further questions; none were offered.                                                                        
CHAIR TORGERSON announced  an at-ease at 2:15 p.m.   He called the                                                              
meeting back to order at 2:31 p.m.                                                                                              
Alaska Oil & Gas Conservation Commission                                                                                      
MS.  CAMMY  OECHSLI   TAYLOR,  Commissioner,  Alaska   Oil  &  Gas                                                              
Conservation  Commission,   Department  of  Administration,   came                                                              
forward to give  a PowerPoint presentation in  response to written                                                              
questions posed to her earlier by  Chairman Torgerson.  [The first                                                              
six minutes  of Ms.  Taylor's testimony were  not recorded  on the                                                              
tape.   The questions and the  printed versions of  the PowerPoint                                                              
slides  are available  in  committee packets,  and  text from  the                                                              
presentation   is   provided  here;   original   punctuation   and                                                              
capitalization are provided, but formatting may be changed].                                                                    
[The first slide showed a map of the Alaska North Slope.]                                                                       
                 Outline of Testimony [slide 2]                                                                               
     Overview of AOGCC Role                                                                                                     
     Conservation Orders Affecting North Slope Gas Sales                                                                        
     Evaluation Process for Major Gas Sales                                                                                     
          Overview of Contractor Scoping Study                                                                                  
      Alaska Oil and Gas Conservation Commission [slide 3]                                                                    
     Independent, quasi-judicial agency                                                                                         
     Established  under the Alaska  Oil and Gas  Conservation                                                                   
     Act (AS 31).                                                                                                               
     Regulatory authority - outlined  in Title 10, Chapter 25                                                                   
     of the Alaska Administrative Code                                                                                          
     Protect the public interest in oil and gas resources.                                                                      
     The Oil  and Gas Conservation  Act requires all  oil and                                                                   
     gas drilling, production and  measuring operations to be                                                                   
     conducted in  a manner that  prevents physical  waste of                                                                   
     the  resource, promotes  greater  ultimate recovery  and                                                                   
     affords  all  owners of  oil  and  gas rights  an  equal                                                                   
     opportunity   to  recover  their   fair  share   of  the                                                                   
                 AOGCC Function [slides 4 and 5]                                                                             
     PREVENT PHYSICAL WASTE OF THE RESOURCE                                                                                   
     Technical evaluation  of proposals for major  gas sales,                                                                   
     enhanced oil recovery, and gas cap liquids recovery.                                                                       
     Evaluate  drilling   programs  to  ensure   proper  well                                                                   
     design, construction and well control equipment.                                                                           
     Inspect   wells   and  drilling   projects   to   verify                                                                   
     compliance  with  approved regulations,  procedures  and                                                                   
     safety   requirements   for  drilling   and   production                                                                   
     PROTECT CORRELATIVE RIGHTS                                                                                               
     Provide   all  owners   of  oil  and   gas  rights   the                                                                   
     opportunity to recover their  fair share of the resource                                                                   
     through  well  spacing provisions,  permit  review,  and                                                                   
     pooling authority.                                                                                                         
     ADJUDICATE DISPUTES BETWEEN OWNERS                                                                                       
     Provide  a  pubic  forum  to  resolve  disputes  between                                                                   
     ENSURE GREATER ULTIMATE RECOVERY                                                                                         
     Analyze production  data, including reservoir  pressure,                                                                   
     gas-oil  ratios,  water  cut,   etc.,  to  ensure  these                                                                   
     variables fall within the accepted  parameters necessary                                                                   
     to provide for greater ultimate recovery.                                                                                  
     Review  and  approve  development  proposals,  including                                                                   
     plans for enhanced oil recovery operations.                                                                                
     INDEPENDENTLY ASSESS OIL AND GAS DEVELOPMENT                                                                             
     Independently audit/verify that  oil and gas exploration                                                                   
     &  development  proposals  are in  compliance  with  the                                                                   
     purposes and intent of Title 31.                                                                                           
     PROTECT ALASKA'S UNDERGROUND SOURCES OF DRINKING WATER                                                                   
     Provide  engineering   and  geological  review   of  all                                                                   
     activities  that affect  potential  sources of  drinking                                                                   
                AOGCC PRIMARY SERVICES [slide 6]                                                                              
     Regulate, monitor and inspect  all subsurface activities                                                                 
     directly  related   to  oil  and  gas   exploration  and                                                                   
     production including the design  and integrity of wells,                                                                   
     well   control  procedures   and  equipment,   reservoir                                                                   
     management  plans  and  proposed  underground  injection                                                                   
          Issue pooling rules and conservation orders.                                                                          
          Approve    and   monitor   plans   for    reservoir                                                                   
          development and enhanced oil recovery.                                                                                
          Approve permits for initial drilling, re-drill,                                                                       
          sidetrack, and remedial well operations.  This                                                                        
          includes the evaluation and approval of proposed                                                                      
          designs for drilling fluids, well control, casing,                                                                    
          cementing and well completion operations.                                                                             
          Inspect drill rigs and wells to [ensure]                                                                              
          compliance with AOGCC regulations.                                                                                    
          Witness safety valve, mechanical integrity, and                                                                       
          blowout preventer tests.                                                                                              
          Witness meter-proving, calibration, and oil                                                                           
          quality tests.                                                                                                        
          Enforce well spacing rules, monitor production                                                                        
          rates, injection well pattern, gas/oil/water                                                                          
          ratios, and pressure maintenance efforts.                                                                             
          Monitor and evaluate gas flaring.                                                                                     
          Collect and maintain all oil and gas production                                                                       
          Collect and maintain all well history files and                                                                       
          well log records.                                                                                                     
          Administer Alaska's Underground Injection Control                                                                     
          (UIC) program and the annular waste disposal                                                                          
                 Powers and Duties of Commission                                                                              
              Related to Major Gas Sales [slide 7]                                                                            
     Investigate to determine whether  or not waste exists or                                                                   
     is imminent.                                                                                                               
     Require plans of reservoir development  and operation in                                                                   
     order  to prevent  waste,  [ensure] a  greater  ultimate                                                                   
     recovery  of  oil  and  gas,   and  protect  correlative                                                                   
     Regulate  for  conservation  purposes the  quantity  and                                                                   
     rate of the production of oil and gas.                                                                                     
     See AS 31.05.030.                                                                                                          
[Tape recording begins here]                                                                                                    
MS. TAYLOR discussed the following slide:                                                                                       
                         Waste [slide 8]                                                                                      
     In addition to its ordinary meaning includes                                                                               
          The inefficient, excessive, or improper use of, or                                                                    
          unnecessary dissipation of reservoir energy;                                                                          
          Operating or producing in a way that reduces the                                                                      
          amount of oil or gas recovered under operations                                                                       
          conducted in accordance with good oil field                                                                           
          engineering practices.                                                                                                
     See AS 31.05.170(14).                                                                                                      
MS. TAYLOR informed listeners that gas currently is reinjected                                                                  
for pressure maintenance  in Prudhoe Bay.  If gas  is sold instead                                                              
of being reinjected,  the state needs to know whether  the loss of                                                              
reservoir energy will result in reduced  oil recovery.  It is also                                                              
important to  know what alternatives  may be available  that could                                                              
mitigate the loss of that reservoir energy.                                                                                     
MS. TAYLOR turned attention to the next slide, which read:                                                                      
            Applicable Conservation Orders [slide 9]                                                                          
       Pool Rules for the Prudhoe Oil Pool - Conservation                                                                     
     Order 341C Consolidated Pool Rules for Prudhoe Oil Pool                                                                    
     Rule 9  Pool Maximum Gas and Oil Offtake Rates                                                                           
       Maximum 2.7 billion standard cubic feet per day of                                                                       
          gas offtake (BSCFD)                                                                                                   
               Contemplated a 2 BCFD pipeline sales rate                                                                        
               (salable product)                                                                                                
               Gas offtake from PBU has always been well                                                                        
               below this set limit                                                                                             
               Rule 9 written in 1977.                                                                                          
     Rule 12  Prudhoe Bay Miscible Gas Project                                                                                
       Operator to maintain the reservoir pressure at 250                                                                       
          psi above the minimum miscibility pressure.                                                                           
MS.  TAYLOR  explained  that  one   specific  question  asked  [by                                                              
Chairman Torgerson] related to the  applicable conservation orders                                                              
that  currently exist.    In 1994,  she  reported, the  commission                                                              
undertook  a consolidation  of  the numerous  conservation  orders                                                              
that had been  written with respect to Prudhoe  Bay; amended twice                                                              
since then,  it is referred  to as Conservation  Order 341C.   Two                                                              
rules  within that  conservation  order specifically  address  the                                                              
impact of gas offtake from Prudhoe  Bay.  As noted above, [rule 9]                                                              
is the pool maximum gas offtake rate,  set at 2.7 billion standard                                                              
cubic  feet  per   day  of  gas  offtake;  written   in  1977,  it                                                              
contemplated a 2  billion cubic feet (BCF) [a  day] pipeline sales                                                              
rate.   The  other, rule  12, is  sometimes referred  to by  AOGCC                                                              
staff  as the  "pressure  decline  speed limit";  it  specifically                                                              
requires the  operator to maintain  the reservoir pressure  at 250                                                              
psi  [pounds  per  square  inch]  above  the  minimum  miscibility                                                              
MS. TAYLOR  reported that separate  and aside from gas  sales, the                                                              
operator is  currently involved in  a pressure studies  initiative                                                              
and has begun an initial information  exchange with the commission                                                              
on its plans.                                                                                                                   
MS. TAYLOR turned attention to the following slide:                                                                             
                    Current Status [slide 10]                                                                                 
          Fundamental assumptions upon which rule 9 was                                                                         
     established are not valid.                                                                                                 
     PBU Gas Offtake rules must be based upon                                                                                   
          Current knowledge                                                                                                     
          Sound reservoir management                                                                                            
      PBU Operators have stated to AOGCC that gas sales may                                                                     
     have a detrimental effect on oil recovery.                                                                                 
        The AOGCC has not yet been provided with current                                                                        
     technical information regarding Major Gas Sales                                                                            
MS.  TAYLOR  told  members  that the  commission  believes  it  is                                                              
important  to  recognize  that  rule 9  was  written  on  pre-1977                                                              
information.   The perception of  that reservoir  is significantly                                                              
different from  how it  was perceived when  [rule 9]  was created.                                                              
The AOGCC  believes a gas  offtake rule  must be based  on current                                                              
knowledge and sound reservoir management;  however, the timing for                                                              
a  hearing  to  revisit  the offtake  rule  depends  on  acquiring                                                              
relevant data or an application from the operator.                                                                              
MS. TAYLOR  noted that the  operators have consistently  stated to                                                              
the AOGCC, over the years, that they  would expect early gas sales                                                              
to have  a detrimental  effect on  oil recovery.   Currently,  the                                                              
AOGCC  hasn't   been  provided  with  any   technical  information                                                              
regarding  major gas  sales or  an  application that  specifically                                                              
addresses  timing or  volumes.   The AOGCC  anticipates a  hearing                                                              
with a BP reservoir  group, however, within the next  two to three                                                              
weeks, for a more detailed discussion  on the types of information                                                              
that  the  AOGCC  expects  to  receive  in  order  to  evaluate  a                                                              
proposal; it is  expected that a schedule will be  set out at that                                                              
meeting  for   when  the  AOGCC   can  anticipate   receiving  the                                                              
MS.  TAYLOR indicated  AOGCC staff  had  asked her  to relate  the                                                              
following:   in  the  context of  reservoir  performance being  so                                                              
significantly  different   from  that  in  the   late  1970s,  the                                                              
incremental  recovery  from  Prudhoe  Bay  of  the  3.5  [billion]                                                              
barrels of  recoverable oil  is the  largest addition to  reserves                                                              
since  Prudhoe  Bay  was  discovered.    The  second  largest  was                                                              
Kuparuk.  The 3.5 billion barrels is a significant amount.                                                                      
MS. TAYLOR turned attention to the following slide:                                                                             
          AOGCC Gas Sales Evaluation Process [slide 11]                                                                       
     Scoping Study                                                                                                              
     Technical evaluation                                                                                                       
MS. TAYLOR explained that the AOGCC,  in preparation for what will                                                              
subsequently  be a  major  gas sale,  has  prepared a  two-pronged                                                              
process.  She addressed the next slide:                                                                                         
               Gas Sales Scoping Study [slide 12]                                                                             
     Consultant Review                                                                                                        
     Blaskovich Services, Inc. June 2001                                                                                        
       [Identify] conservation issues associated with gas                                                                       
          sales from the Prudhoe Oil Pool.                                                                                      
          Identify technical issues affecting ultimate                                                                          
          hydrocarbon recovery                                                                                                  
         Consider multiple complex interactive recovery                                                                         
       Provide    alternatives    for   AOGCC    technical                                                                      
MS.  TAYLOR emphasized  that the  scoping study  was completed  in                                                              
June 2001  by Blaskovich  Services, Inc.   The objectives  of that                                                              
review  are  listed   above,  with  an  additional   objective  of                                                              
providing the AOGCC with a range  of costs [for the alternatives].                                                              
MS. TAYLOR  brought attention to  the following slide,  specifying                                                              
that it relates to the conclusions from Mr. Blaskovich's report:                                                                
            Conclusion - Consultant Review [slide 13]                                                                         
     Oil Recovery Impact                                                                                                      
      Oil and Condensate Recovery likely to decrease under                                                                      
     Gas Sales                                                                                                                  
          Unless delayed until later into field                                                                                 
     However, if carefully planned and managed Gas sales                                                                        
          Can extend field life                                                                                                 
          Potentially increase total Hydrocarbon Recovery                                                                       
     Maximum Recovery vs. Owner Economics                                                                                     
     Industry Precedents                                                                                                      
     Few industry precedents for early gas withdrawal                                                                           
       Field management difficult, but does not mean this                                                                       
     endeavor will be unsuccessful                                                                                              
     Independent Studies                                                                                                        
     Critique and peer Review of owner studies                                                                                  
     Work directly on Owner project teams                                                                                       
MS.  TAYLOR, addressing  oil  recovery  impacts  discussed in  the                                                              
slide,  told  members the  AOGCC's  mission  and challenge  is  to                                                              
evaluate  how  [gas  sales]  are   managed  and  to  look  at  the                                                              
alternatives  being proposed for  maintaining reservoir  pressure.                                                              
She noted  that the report pointed  out a natural  tension between                                                              
the  state's  desire  to maximize  hydrocarbon  recovery  and  the                                                              
owners'  economics.   Furthermore,  Mr.  Blaskovich  had  reviewed                                                              
literature  available in the  public domain,  as well as  industry                                                              
precedents,  and  found  few industry  precedents  for  early  gas                                                              
withdrawal  before  the  end  of   field  life  in  oil  recovery.                                                              
Although   field  management   might  be   difficult  with   these                                                              
proposals, however, he believes the  endeavor could be successful.                                                              
MS.  TAYLOR informed  members that  Mr.  Blaskovich's report  also                                                              
reviewed   a  number  of   options,  broken   down  into   general                                                              
categories;  they included doing  completely independent  studies,                                                              
doing a  critique and  peer review of  owner studies,  and working                                                              
directly on the owner project teams.                                                                                            
MS. TAYLOR presented the next slide:                                                                                            
                 Recommended Approach [slide 14]                                                                              
     Independent Analysis and Critique                                                                                          
     Smaller, Mechanistic Models to study processes                                                                             
         Focus on Technical issues of greatest impact on                                                                        
          Do a credible job                                                                                                     
        Concurrent with Owner Studies (potentially ahead)                                                                       
          Use WIO data whenever possible                                                                                        
               Rely on basic data, avoid debates about                                                                          
               detailed models                                                                                                  
     Serious critique of WIO data & results                                                                                     
          Credibility high if right questions are asked                                                                         
          (based upon work above)                                                                                               
        Avoid endless debate about who has the best model                                                                       
         This is a Combination of Options 1C and 3 from                                                                         
     Blaskovich Study                                                                                                           
MS. TAYLOR explained that the ultimate  recommendation made by Mr.                                                              
Blaskovich,  in   conjunction  with  his  discussions   with  [the                                                              
AOGCC's]  technical  staff,  is a  hybrid  between  two  extremes:                                                              
having  the  state   do  a  full  field  model   that  essentially                                                              
duplicates companies' efforts, and  just accepting the information                                                              
provided  by the operators  to the  commission.   She deferred  to                                                              
Commissioner  Heusser to  provide a description  of the  technical                                                              
aspects of that recommendation.                                                                                                 
MS. JULIE M. HEUSSER, Commissioner,  Alaska Oil & Gas Conservation                                                              
Commission,  Department  of Administration,  reiterated  that  the                                                              
current  approach  is two-pronged,  a  hybrid that  avoids  either                                                              
extreme.    The AOGCC's  current  thinking  is  that the  type  of                                                              
evaluation that would provide the  most value to the AOGCC and the                                                              
state would  be a combination  of an  independent analysis  plus a                                                              
critique of the working-interest owner data and results.                                                                        
MS. HEUSSER explained  that one clear message  in Mr. Blaskovich's                                                              
scoping  study is  that recovery  from  the Prudhoe  Bay field  is                                                              
complex, with  a variety  of connected, interdependent  mechanisms                                                              
in a delicate  balance; withdrawing gas  in the form of  major gas                                                              
sales would interrupt that balance.   The AOGCC therefore plans to                                                              
use  smaller, mechanistic  models  to understand  how fluids  move                                                              
through  the reservoir;  this will  allow  the AOGCC  to focus  on                                                              
technical  issues  that  will  have the  greatest  impact  on  the                                                              
decisions.   "We won't look at  everything, but we'll look  at the                                                              
important ones,"  she remarked.    She  reiterated that  there has                                                              
been little industry  experience with major gas sales  from an oil                                                              
reservoir that  has not finished  producing oil;  therefore, there                                                              
is no place that the AOGCC can go to look at actual experience.                                                                 
MS. HEUSSER mentioned the timing  of the gas sale; the question of                                                              
what the pressure maintenance needs  are; and the question of what                                                              
the ramp-up  rates and timing will  be.  She also  mentioned optic                                                              
points, commenting that right now  it appears that most of the gas                                                              
could come from what used to be called  the oil-rim wells.  Should                                                              
there be a need  for an increased gas sales rate,  she asked, what                                                              
is the effect  of taking gas off  of the gas cap?   The AOGCC also                                                              
wants to look  at the effect of gas withdrawal  from the reservoir                                                              
on  the management  of  the  existing  "water flood  enhanced  oil                                                              
recovery projects."                                                                                                             
MS. HEUSSER  told members  the AOGCC's  goal is  to do a  credible                                                              
job, which requires evaluating not  only the gas cap, but also the                                                              
reservoir  and  the  gravity  drainage  areas, as  well  as  areas                                                              
involved in  water flood  and EOR  [enhanced oil recovery],  which                                                              
all interact  with each other:   when fluids are removed  from one                                                              
portion, fluids move  in from another portion, and  there may be a                                                              
loss  in  oil recovery,  or  condensate,  associated  with  moving                                                              
fluids around.                                                                                                                  
MS. HEUSSER  informed the committee  that the ideal is  to perform                                                              
AOGCC's  evaluation   concurrently   with  the  owners'   studies;                                                              
however,  the  AOGCC  understands  that the  owners  already  have                                                              
started their reservoir studies.   While the AOGCC may be a little                                                              
behind, it is believed  the AOGCC can proceed at  a pace that will                                                              
allow  it  to not  impede  any  gas-sales  decisions in  the  near                                                              
future.   Ideally, the AOGCC  also could use the  working-interest                                                              
owner data wherever  possible; this is necessary  to independently                                                              
validate  the data,  to ensure  that the  results are  believable.                                                              
The AOGCC wants  to know what data is going in,  and wants to make                                                              
sure the data is representative of  what the commissioners believe                                                              
the  reservoir to  be; that  way,  the commission  will have  more                                                              
confidence in the results.                                                                                                      
MS.  HEUSSER  noted that  the  AOGCC also  has  proposed  to do  a                                                              
critique of  the data  and the results,  which is, effectively,  a                                                              
peer review.   "The credibility of our evaluation  will be high if                                                              
we study and ask the right questions,"  she told listeners.  "That                                                              
will allow us  to feel comfortable that what is  being proposed by                                                              
the working-interest owners really  is in the best interest of the                                                              
state, to ensure greater ultimate hydrocarbon recovery."                                                                        
MS. HEUSSER turned attention to the next slide:                                                                                 
                          Timing Issues                                                                                       
     AOGCC approvals dependent upon:                                                                                            
          Access to Operator information.                                                                                       
          Availability of agency Staff.                                                                                         
          Access to specialized expert(s) training in and                                                                       
          familiar with large scale compositional reservoir                                                                     
          modeling techniques.                                                                                                  
MS.  HEUSSER  told  members  the  AOGCC has  no  fixed  answer  to                                                              
Chairman  Torgerson's question  regarding timing.   [That  written                                                              
question asked  the presenters to  address the length of  time the                                                              
AOGCC anticipates  it will  take to  approve any action  necessary                                                              
for the development  and production of Prudhoe Bay  gas for sale.]                                                              
Instead, she offered the following:                                                                                             
     Basically,  with our  current  recommended approach,  we                                                                   
     believe that it's  going to take about a year  ... to do                                                                   
     the  reservoir evaluation  of the effects  of major  gas                                                                   
     sales.     The   actual  approval   process  is   pretty                                                                   
     straightforward.   Once  we  receive a  package and  our                                                                   
     evaluation  is done,  we put  out a  public notice,  and                                                                   
     with ...  30 days to respond,  will hold a  hearing, and                                                                   
     then  we have  30 days  to issue  a  decision after  the                                                                   
     hearing.  So that's basically how the process works.                                                                       
     Now, there  are some potential  slow-downs to  this, and                                                                   
     that   is   access   to  operator   information.      As                                                                   
     Commissioner  Taylor mentioned, we  have a meeting  that                                                                   
     is currently  scheduled for sometime in the  next two to                                                                   
     three  weeks   to  meet  with  representatives   of  the                                                                   
     working-interest   owners  and  to  provide   them  with                                                                   
     additional clarification on our information requests.                                                                      
     Also, it's  going to be  dependent upon availability  of                                                                   
     agency staff.   As most of you are aware, we  have had a                                                                   
     very   difficult  time   recruiting   and  filling   our                                                                   
     technical staff  positions.   We were very fortunate  to                                                                   
     obtain legislative  approval for  salary increases.   We                                                                   
     have  filled one of  our outstanding  positions, but  we                                                                   
     are  in the  process  of  accepting applications  for  a                                                                   
     second  position.    However, ...  our  staffing  levels                                                                   
     never  really reflected  the need  to do  the major  gas                                                                   
     sales  reservoir evaluation  at this  time.  We've  been                                                                   
     told  that it was  always five  years down  the road  or                                                                   
     seven  years  down the  road.    So  there may  be  some                                                                   
     additional staffing  needs that we'll need  to consider.                                                                   
     Now, whether  that be permanent employees or  whether or                                                                   
     not we use contractors, that  would be something that we                                                                   
     would need to  evaluate [to] make sure that  we're doing                                                                   
     the right thing.                                                                                                           
     Also,  we need  to have  access  to specialized  experts                                                                   
     that are both  trained in and familiar  with large-scale                                                                   
     compositional  reservoir modeling  techniques.  This  is                                                                   
     basically  because in order  for us  to be effective  in                                                                   
     our  critique of  the  working-interest  owner data  and                                                                   
     results,  these  are the  type  of models  that  they're                                                                   
     using;  they're  very  sophisticated,  and  ...  they're                                                                   
     fairly  new within  the last  ten-fifteen  years or  so.                                                                   
     And  it takes  ... specialized  experience  in order  to                                                                   
     evaluate their results.                                                                                                    
MS. TAYLOR added  that one question asked [by  Chairman Torgerson]                                                              
related  to the  status of  any discussion  with  the Prudhoe  Bay                                                              
lessees regarding what orders or  permits they will need [from the                                                              
AOGCC] in  order to  develop and  produce gas  for sale  [from the                                                              
Prudhoe Bay reservoir], including  the volume of gas available for                                                              
sale at  the startup  of a  gas pipeline  and the commencement  of                                                              
full blowdown of the gas cap.  She  noted that the information the                                                              
AOGCC  has received  in discussions  with the  operators has  been                                                              
general, consisting  of a general  outline of when they  expect to                                                              
be reviewing certain things, but without any specific data.                                                                     
TAPE 01-9, SIDE B                                                                                                             
MS. TAYLOR expressed hope that following  the meeting scheduled in                                                              
the next two to  three weeks, the AOGCC will have  a better layout                                                              
of the "roadmap" ahead.                                                                                                         
MS. TAYLOR  referred  to the last  written question  asked  of the                                                              
presenters,  which  requested  an  explanation of  how  the  AOGCC                                                              
intends to  fund, on a  program receipt  fee basis, the  study for                                                              
which  the AOGCC  previously  had  requested $500,000  in  general                                                              
funds, as well as  an explanation of the scope of  the study.  She                                                              
told listeners  the scope  of the  study, as Commissioner  Heusser                                                              
had  described,   is  somewhat  dependent   on  what   the  actual                                                              
parameters will  be once  the operators come  to the AOGCC  with a                                                              
specific proposal and timing.  It  will be within the model of the                                                              
two-pronged hybrid described by Commissioner Heusser.                                                                           
MS.  TAYLOR reported  that  the AOGCC  funding  request that  went                                                              
through the  legislature last  year was made  part of  the overall                                                              
gas line  package.  It is  the AOGCC's understanding now  that the                                                              
Department  of   Natural  Resources  (DNR)  will   enter  into  an                                                              
agreement with the  producers, and will collect  from them through                                                              
its  statutory designated  program receipt  authority; through  an                                                              
RSA [reimbursable services agreement],  that will go to the AOGCC.                                                              
Number 01.70                                                                                                                    
MS.  TAYLOR offered  to answer  questions and  invited members  to                                                              
come to the AOGCC's offices for any further information.                                                                        
CHAIRMAN TORGERSON  asked whether  the AOGCC needs  an application                                                              
from the producers before going forward.                                                                                        
MS. TAYLOR answered that with respect  to revisiting rule 9, which                                                              
currently sets a gas limit for offtake,  for a number of years the                                                              
commission  has  felt  that  rule  is  no  longer  current.    The                                                              
commission  has not moved  to reevaluate  it, however,  until such                                                              
time  as the  AOGCC either  has an  application  or more  specific                                                              
information  about  the reservoir  and  about proposed  plans,  in                                                              
order to  "make a better-informed  rule about  what amount  and at                                                              
what time gas could be taken from  the reservoir."  She added that                                                              
it would also depend upon what alternatives  the operators had for                                                              
reservoir energy replacement.                                                                                                   
CHAIRMAN  TORGERSON referred  to timing  issues and asked  whether                                                              
those depend  on whether the AOGCC  gets the information  from the                                                              
MS.  TAYLOR asked  whether  that  is with  respect  to the  actual                                                              
technical review.                                                                                                               
CHAIRMAN TORGERSON answered in the affirmative.                                                                                 
MS. TAYLOR replied that the recommendation  for the kind of hybrid                                                              
review described  by Commissioner  Heusser  is dependent  upon the                                                              
information that would be provided by the operators.                                                                            
CHAIRMAN TORGERSON  asked whether  the AOGCC  needs that  to amend                                                              
rule 9.  He specified, "Do you need  Commissioner Heusser's report                                                              
... for the data you need to make  a decision on amending rule 9?"                                                              
MS. TAYLOR replied,  "To do it intelligently.   Otherwise, I think                                                              
that you  could just delete the  rule and wait until  someone came                                                              
with a proposal and further information."                                                                                       
CHAIRMAN TORGERSON asked, "You said  it'd take a year to do this -                                                              
a year after what?"                                                                                                             
MS.  TAYLOR  answered, "A  year  after  we receive  some  detailed                                                              
information from the working-interest owners."                                                                                  
CHAIRMAN  TORGERSON  offered  his  understanding  that  the  AOGCC                                                              
theoretically would  get this information from the  operators, and                                                              
then would  make sure it is  correct somehow, by hiring  the right                                                              
people, for example.                                                                                                            
MS. TAYLOR responded in the affirmative.                                                                                        
CHAIRMAN TORGERSON  suggested that  is assuming the  AOGCC doesn't                                                              
need any additional data.                                                                                                       
MS.  TAYLOR  replied,  "That  is our  best  understanding  at  the                                                              
moment.   The more information  that we're provided,  perhaps that                                                              
timeframe  would be  shorter.  But  based on  the hybrid  approach                                                              
that we'd like to take, we're estimating a year."                                                                               
CHAIRMAN TORGERSON  commented that he  finds it a little  odd that                                                              
the producers  aren't addressing  the AOGCC, in meetings  upfront,                                                              
regarding whether rule  9 will even be amended.   He asked whether                                                              
this is an assumption  on the part of the producers  that they can                                                              
pump the 6 billion  [cubic] feet a day out of  the field, and that                                                              
the AOGCC will  approve that.  He requested Ms.  Taylor's opinion,                                                              
then  said she  didn't  have to  answer that;  he  noted that  the                                                              
producers aren't sharing information on many aspects.                                                                           
CHAIRMAN TORGERSON  then asked whether the economics  to the state                                                              
treasury  are driving  the decision.   Noting  that the  economics                                                              
involve the  loss of  oil versus  the increase  in gas,  he asked,                                                              
"How do you weigh that?"                                                                                                        
MS. TAYLOR replied:                                                                                                             
     Actually,   Title  31  doesn't   provide  us  with   any                                                                   
     opportunity to  balance the economics  of it.   Title 31                                                                   
     directly  addresses hydrocarbon recovery.   And  so that                                                                   
     comparison   or  that  evaluation   is  left  to   other                                                                   
     departments and  the legislature.  Our evaluation  is to                                                                   
     look ... at  avoiding waste and promoting  that ultimate                                                                   
     recovery, within  reason and,  of course, to  the extent                                                                   
     that we're not doing it blindly of what the costs are.                                                                     
CHAIRMAN  TORGERSON  asked  whether  a  10  percent  loss  of  oil                                                              
production is something the AOGCC  would or would not approve.  He                                                              
also asked  whether that  meets the  AOGCC's criterion  of maximum                                                              
hydrocarbon recovery.                                                                                                           
MS. TAYLOR responded:                                                                                                           
     I don't  think there's  a magic answer.  ... One  of the                                                                   
     things that I think people find  most surprising is that                                                                   
     when you  have a pool of  oil in the ground  and someone                                                                   
     is developing  that, they don't  recover 100  percent of                                                                   
     that.   And  perhaps  Ms. Heusser  can  address ...  the                                                                   
     specifics  of what's  normally expected  and where  this                                                                   
     fits   in.     So  I   think  there's   an  element   of                                                                   
     reasonableness  and  an  element  of  sound  engineering                                                                   
MS. HEUSSER added:                                                                                                              
     This is a  difficult question to answer,  about what's a                                                                   
     reasonable amount of oil to  give up in exchange for ...                                                                   
     major  gas  sales  at  Prudhoe   Bay.    Previous  pubic                                                                   
     testimony by both operators  and working-interest owners                                                                   
     [has] suggested  that the oil  loss is at least  ... 500                                                                   
     million  barrels.  ... That's  a  chunk  of oil.    What                                                                   
     percentage  ... is  it  of the  original  oil in  place?                                                                   
     Well, in the grand scheme of  things ... it is less than                                                                   
     10 percent.   The 500 million barrels of  potential lost                                                                   
     oil and  condensate, that  is a  low-end number that  we                                                                   
     have heard testimony on before.                                                                                            
     Is  a 10  percent loss  reasonable?   1  percent?   [10]                                                                   
     percent  of  ... the  current  recoverable  reserves  at                                                                   
     Prudhoe  Bay is ...  about 1.4  billion barrels; it's  a                                                                   
     lot.   So 5  percent is  700 million  barrels.  So  that                                                                   
     just kind of ... gives you some points of reference.                                                                       
     We don't know at this time ...  what a reasonable figure                                                                   
     is for  loss of oil and  condensate reserves.   There is                                                                   
     oil in the  gas cap, what's called relic oil.   When you                                                                   
     start taking  gas off, you get fluids moving  around, so                                                                   
     you  lose oil  because you've  moved  them further  away                                                                   
     from  where they were  originally deposited.  ...   That                                                                   
     will be  a point  of discussion:   what is a  reasonable                                                                   
CHAIRMAN TORGERSON,  on another subject, said it  sounded from Ms.                                                              
Taylor's testimony  as though perhaps another agency  can override                                                              
the AOGCC's decisions.   He suggested the legislature  is one such                                                              
entity, then asked  whether anybody can veto the  AOGCC's decision                                                              
and OK a gas sale.                                                                                                              
MS. TAYLOR answered, "I guess ...  our position right now would be                                                              
that without authorization  from the commission, they  would be at                                                              
least in violation of Title 31."                                                                                                
CHAIRMAN TORGERSON asked  whether DNR has a say in  what limits of                                                              
hydrocarbons  are   recoverable,  for  example,  or   whether  the                                                              
governor can call and say to make it work.                                                                                      
MS. TAYLOR replied:                                                                                                             
     There is  no one out  there who  could call us  and tell                                                                   
     us,  "Make it  work."   DNR  can certainly  appear as  a                                                                   
     party in front of the commission  and provide testimony.                                                                   
     ... I'd  also like  to add that  part of the  evaluation                                                                   
     that  is part of  this difficult  question about  what's                                                                   
     lost  and  what's  not  is  also  a  challenge  for  the                                                                   
     commission to evaluate what  other alternatives might be                                                                   
     out there  with respect to  mitigating that loss  of oil                                                                   
     recovery  when the gas  is taken for  sale.  And  that's                                                                   
     part of this  process of evaluation, and it's  part of -                                                                   
     I'm  fairly  certain  -  what  the  companies  are  also                                                                   
     looking at.                                                                                                                
CHAIRMAN TORGERSON asked how much information is confidential.                                                                  
MS. TAYLOR answered:                                                                                                            
     The commission's  confidentiality provisions  generally,                                                                   
     with  respect to  subsurface  information on  particular                                                                   
     wells,   is   governed   by,   generally,   a   24-month                                                                   
     confidentiality.   So  the subsurface  information  that                                                                   
     relates  to  a  particular well,  24  months  after  ...                                                                   
     they've  completed  the  well,  is  available  publicly.                                                                   
     There is  some technical  information that, if  provided                                                                   
     voluntarily  under Title 31,  can be held  confidential.                                                                   
     The other general aspect is  under the general statutory                                                                   
     trade   secret  requirements.      And   some  of   that                                                                   
     information, they  have to meet a certain  standard, but                                                                   
     if   they   meet   that,   that    can   be   maintained                                                                   
REPRESENTATIVE   DAVIES   referred   to  the   Blaskovich   study,                                                              
suggesting  it  said two  apparently  contradictory  things:   oil                                                              
recovery is  likely to decrease,  and if it is  carefully planned,                                                              
it  could extend  the  life and  increase recovery.    He said  it                                                              
sounds as if  Mr. Blaskovich's assumption was that  it wouldn't be                                                              
carefully planned.   He asked, "In reading that study,  ... do you                                                              
agree that there are things that  we could do that, with carefully                                                              
planned gas  recovery, would actually  enhance oil recovery?   And                                                              
what are those things?"                                                                                                         
MS. HEUSSER replied:                                                                                                            
     One  of the  provisions of  Conservation  Order 341C  is                                                                   
     that the  working-interest owners  continue to  evaluate                                                                   
     pressure  maintenance  options.   One  of  their  recent                                                                   
     proposals  to us has  been called  the pressure  support                                                                   
     initiative, which is basically  gas-cap water injection.                                                                   
     That is one way that pressure  decline can be mitigated.                                                                   
     There [is] also optimizing your  field production rates.                                                                   
     Where you physically take your  reservoir fluids from is                                                                   
     another  means  that can  be  used to  manage  reservoir                                                                   
     pressure  decline or  reservoir energy  decline.   There                                                                   
     are a number of things that could be done.                                                                                 
REPRESENTATIVE DAVIES  asked, "So  do you ... fundamentally  agree                                                              
with that  statement that ... a  carefully planned gas  sale could                                                              
increase total hydrocarbon recovery?"                                                                                           
MS. HEUSSER answered:                                                                                                           
     There's  a timing  question.   So, in  essence, that  is                                                                   
     correct.   The  timing  of the  gas  sale,  if it's  ...                                                                   
     somewhere off in the future,  gives you more opportunity                                                                   
     to  recover  your  hydrocarbons  and to  cycle  gas  and                                                                   
     recover additional  hydrocarbons from your gas  cap.  So                                                                   
     there's the timing issue, carefully planned.                                                                               
     And there's the pressure or  reservoir energy mitigation                                                                   
     issues that  can help  maintain the reservoir  pressure,                                                                   
     maintain the reservoir energy,  and allow you to recover                                                                   
     -- I'm  not saying  it's necessarily  more oil, but  ...                                                                   
     you would lose less.                                                                                                       
REPRESENTATIVE  DAVIES  asked whether  500  million  is the  right                                                              
order of  magnitude, and  whether that is  for Prudhoe Bay  or the                                                              
entire North Slope.                                                                                                             
MS.  HEUSSER  said that  number  is just  for  Prudhoe  Bay.   She                                                              
deferred to Ms. Taylor, noting that a range has been quoted.                                                                    
MS. TAYLOR responded, "I think the  range we've heard historically                                                              
has been  400 to  500 [million],  but ... in  the context  that we                                                              
have heard,  it has been very  loosely used, with  no identifiable                                                              
date  at  which  that  gas  would   begin  to  be  taken  off  the                                                              
REPRESENTATIVE  DAVIES   asked  whether  that  is   for  a  year's                                                              
MS. TAYLOR answered, "Based on the  current production rate, yes."                                                              
REPRESENTATIVE OGAN  inquired about the total reserves  in Prudhoe                                                              
MS.  TAYLOR replied  that Prudhoe  Bay's  total current  estimated                                                              
recoverable oil reserves are "about 13 billion."                                                                                
REPRESENTATIVE OGAN  said that differs  from what BP just  put out                                                              
in its statistical  review of U.S.  energy in 2001, which  was 4.9                                                              
billion barrels.                                                                                                                
MS.  HEUSSER asked  whether this  is comparing  apples to  apples,                                                              
however.    In   response  to  a  further  question,   she  added,                                                              
"Estimated recoverable  oil reserves  are ... in  the neighborhood                                                              
of 13 billion; there was, like, 23  billion oil in place, and they                                                              
expect to recover something on the order of 13 billion of that."                                                                
REPRESENTATIVE OGAN  asked whether the 500 million  loss touted in                                                              
the past was based on a draw of 2  BCF.  He asked whether the fact                                                              
that   now  people   are  talking   about  4   [BCF]  affects   it                                                              
MS. HEUSSER replied:                                                                                                            
     The  500-million  barrel  potential loss  came  with  no                                                                   
     qualifiers, except that rule  9 does allow for gas sales                                                                   
     of 2  BCF per day, which  equates to something  like 2.7                                                                   
     BCF per day offtake.  So ...  if you're comparing apples                                                                   
     to apples, we believe that's the correct context.                                                                          
REPRESENTATIVE  OGAN said he  isn't a  petroleum engineer,  but it                                                              
seems  that if  twice  as much  gas  is drawn  down  as that  rule                                                              
allows, there will be more of a loss, faster.                                                                                   
MS. HEUSSER responded:                                                                                                          
     When  you take  out  twice as  much  gas, your  pressure                                                                   
     decline  does  accelerate.     And  oil  recovery  is  a                                                                   
     function of  pressure decline.   So is it linear?  ... I                                                                   
     don't know the answer to that.                                                                                             
     And  I just had  a note  from Mark  Myers:  what  you're                                                                   
     seeing  in your  report  right there  is  BP is  quoting                                                                   
     remaining  reserves.  And  what I  quoted you was  total                                                                   
     reserves.  So  ... they are pretty much saying  the same                                                                   
REPRESENTATIVE OGAN said he would  be curious to see how the total                                                              
loss would "pencil out" with a 4 BCF draw.                                                                                      
MS. HEUSSER  replied, "That is one  of the things that  we will be                                                              
taking a look at,  the effect of gas offtake or  gas sales rate on                                                              
the various recoveries."                                                                                                        
SENATOR KELLY  asked how  much water will  be able to  replace the                                                              
gas that  might  be removed.   He also  asked whether  that  is an                                                              
unknown technology.                                                                                                             
MS. HEUSSER  answered that  it isn't an  unknown technology.   She                                                              
acknowledged that  she would have to "talk around"  this question,                                                              
then stated:                                                                                                                    
     The pressure support initiative  will put gas in the gas                                                                   
     cap  area,  and  that  will  be  a  means  to  help  the                                                                   
     reservoir  pressure decline  - level  off.  However,  in                                                                   
     the water  flood areas  where we're currently  injecting                                                                   
     water,  our voidage,  our oil  and  water produced  from                                                                   
     those  areas,  is more  than  the  water and  gas  being                                                                   
     injected  into those  areas.   And ...  the very  simple                                                                   
     reason behind  that is reservoir  management:   when you                                                                   
     overinject,  you move  fluids from  one area to  another                                                                   
     and you  have the potential  to lose recovery.   So it's                                                                   
     not so simple as ... "you take  one barrel of fluid out,                                                                   
     or  equivalent gas,  and put  one barrel  of water  in."                                                                   
     It's never that  easy.  It's a function of  where you do                                                                   
     it and how you manage your reservoir.                                                                                      
SENATOR KELLY stated his understanding,  then, that water is never                                                              
going to  be able to replace  gas, although in  some circumstances                                                              
it could be used.                                                                                                               
MS. HEUSSER replied, "I hate to use the word 'never.'"                                                                          
SENATOR  KELLY asked  whether there  are other  reasons why  water                                                              
wouldn't be used, such as environmental reasons.                                                                                
MS. HEUSSER answered:                                                                                                           
     I am not  really the person  to address that.  I  am not                                                                   
     familiar  with  any  environmental  reasons  that  would                                                                   
     preclude  [it], except ...  there may  be some limit  on                                                                   
     the amount  of seawater that  can be taken  from Prudhoe                                                                   
     Bay and  be available  for gas-cap  water injection.   I                                                                   
     understand their  plans are to use seawater,  as opposed                                                                   
     to produced water.                                                                                                         
MS. TAYLOR added:                                                                                                               
     I  think that  with respect  to  the areas  in which  we                                                                   
     regulate   the  underground   injection  of  water   for                                                                   
     purposes of enhanced recovery,  there aren't any as long                                                                   
     as  the proposal  is done  according  to our  regulatory                                                                   
     criteria.    And  I'm  not  aware  of  there  being  any                                                                   
     difficulties in the Prudhoe  area ... mechanically, with                                                                   
     respect  to environmental regulations.   And that  deals                                                                   
     with  the  potential sources  of  drinking  water.   And                                                                   
     we're not aware of any.                                                                                                    
REPRESENTATIVE  DAVIES returned  to the  question of  timing.   He                                                              
asked when  the AOGCC can  begin the  study.  He acknowledged  the                                                              
need  to  have  data  and  a  more   specific  idea  of  what  the                                                              
development  plan will  be before  a study  will be  optimal.   He                                                              
asked, however,  whether there are  other things the AOGCC  can be                                                              
doing now,  following  on the scoping  study,  to prepare to  move                                                              
ahead and to jump-start  the process in order to  keep the time to                                                              
a year.                                                                                                                         
MS. TAYLOR replied:                                                                                                             
     Absent information  - any sort  of technical data  - one                                                                   
     of the reasons  for the recommendation that  we actually                                                                   
     use the technical  data provided by the operator  - that                                                                   
     they  use to  build their  models  - was  so that  you'd                                                                   
     [have] some consistency.                                                                                                   
     A  lot  of  technical information  is  provided  by  the                                                                   
     operator to  the state.  The  time it would take  to put                                                                   
     that information  in a useful  fashion, to do  that same                                                                   
     exercise,  would be fairly  overwhelming at this  point.                                                                   
     Our  hope is  to  actually move  forward  on a  decision                                                                   
     about  how to proceed  with this  evaluation so that  we                                                                   
     can actually  begin the procurement process  in terms of                                                                   
     getting  an RFP [request  for proposals]  out there  and                                                                   
     finding  out more  specifically what  it would cost  and                                                                   
     who's out there  available to do this kind  of work, and                                                                   
     hopefully  that can be  lined up ahead  of time.   We'll                                                                   
     have a better indication in  the next two to three weeks                                                                   
     when we actually meet with the  reservoir group at BP to                                                                   
     hear more specifically about  what their timing schedule                                                                   
     looks like.                                                                                                                
MS.  HEUSSER added,  "Using the  working-interest  owner data  and                                                              
quality checking that basically eliminates  disagreements.  It ...                                                              
streamlines the whole process."                                                                                                 
REPRESENTATIVE  DAVIES  asked,  "Can  you  request  that  data  in                                                              
advance of an application?"                                                                                                     
MS. HEUSSER answered yes.                                                                                                       
REPRESENTATIVE DAVIES further asked,  "Can you anticipate the sort                                                              
of data you're going to need and then just simply request it?"                                                                  
MS. HEUSSER replied:                                                                                                            
     Yes.   In fact, we have done  that.  We have  written to                                                                   
     the  operator  and  specifically outlined  the  type  of                                                                   
     information that  we're looking for, and  requested from                                                                   
     them confirmation on the timing  that we could expect to                                                                   
     have  that information.   And that  is what's  prompting                                                                   
     this meeting in approximately two to three weeks.                                                                          
REPRESENTATIVE  FATE commented  that  in several  hearings it  was                                                              
stated, by  the owners, that 4 BCF  a day would have  little or no                                                              
effect on oil  production.  He expressed concern  about the timing                                                              
issue, saying  [legislators]  have been  under the illusion  "that                                                              
they've been doing a study" and that  there will be at least 4 BCF                                                              
a day, or even 6 BCF a day.  He stated:                                                                                         
     Here we  are now, backing up,  talking about rule  9 and                                                                   
     what has  to be  done ... to  confirm either whether  or                                                                   
     not 2.7 billion a day is going  to decrease or 4 billion                                                                   
     is  going to decrease  the production  of the  remaining                                                                   
     oil in Prudhoe  Bay.  And to me, Mr. Chairman,  ... it's                                                                   
     backing  up the cart  here, when we  need to go  forward                                                                   
     with  it.     And  we've  been  discussing   4  billion.                                                                   
     Apparently,  it's been  an illusion.   Is that  correct?                                                                   
     Is this an illusion?                                                                                                       
MS. TAYLOR answered:                                                                                                            
     We're not  privy to  the information about  the 4  BCF a                                                                   
     day.   Are you hearing that  the 4 BCF are to  be coming                                                                   
     from the  Prudhoe field, or  are they coming  from other                                                                   
     places as well?                                                                                                            
REPRESENTATIVE FATE responded:                                                                                                  
     We understand  the Prudhoe  field, because that's  where                                                                   
     most of  the gas will  be coming  from.  And we've  been                                                                   
     told  this.    So we  just  took  it  - or  at  least  I                                                                   
     certainly  took  it  -  to mean  that  there  had  been,                                                                   
     certainly,  studies on  whether or  not 4  BCF would  in                                                                   
     fact diminish the production of the oil.                                                                                   
MS. TAYLOR replied:                                                                                                             
     I guess we  would be hopeful, then, that  if the studies                                                                   
     have already been done when  we meet with them in two to                                                                   
     three weeks,  we would anticipate receiving  information                                                                   
     relatively quickly.                                                                                                        
CHAIRMAN TORGERSON responded:                                                                                                   
     I don't  know if  they've really  finished the  studies,                                                                   
     but I  do know that  we've plugged different  numbers in                                                                   
     for loss  of oil in  certain economic models  that we've                                                                   
     been running  ... on the  production, and most  of those                                                                   
     come from conversations with  the producers ... or other                                                                   
     places that would show a loss.                                                                                             
CHAIRMAN  TORGERSON  added  that   he  understands  Representative                                                              
Fate's  displeasure with  finding out  that there  are a lot  more                                                              
hoops to  jump through  to sell gas.   He  said there are  certain                                                              
steps  that it  seems  would be  done  first, and  one  is to  get                                                              
approval to sell  it before spending $100 million  "to even see if                                                              
you want to do it."  He indicated  that is one reason he wanted to                                                              
hear from the AOGCC, to address concerns  the committee has heard.                                                              
REPRESENTATIVE OGAN  surmised that  the AOGCC's decision  could be                                                              
litigated and overruled by the courts.                                                                                          
MS. TAYLOR  affirmed that,  specifying that  any decision  made by                                                              
the commission can be appealed to the superior court.                                                                           
CHAIRMAN TORGERSON  thanked the presenters and said  he would take                                                              
them up on the offer to visit the  AOGCC.  He asked that they call                                                              
his  office after  the  upcoming  meeting in  order  to provide  a                                                              
briefing.   He  noted that  the next  scheduled  meeting for  this                                                              
committee  will  be in  September,  and  he  suggested it  may  be                                                              
worthwhile  to address  the AOGCC's  upcoming meeting  as part  of                                                              
that agenda.                                                                                                                    
CHAIRMAN TORGERSON called  an at-ease at 3:30 p.m.   He called the                                                              
meeting back to order at 3:33 p.m.                                                                                              
Department of Law                                                                                                             
MR. JACK  GRIFFIN, Assistant Attorney  General, Oil, Gas  & Mining                                                              
Section,  Civil  Division  (Anchorage), Department  of  Law,  came                                                              
forward,  noting that  he is  the head  of the Oil,  Gas &  Mining                                                              
Section.  He  presented answers to the written  questions posed to                                                              
him earlier  by Chairman  Torgerson.   He suggested the  questions                                                              
about overlifting were  prompted at least in part  by SCR 10; that                                                              
dealt with a proposal by an entity  called Netricity, which had an                                                              
interesting idea for a gas development  project on the North Slope                                                              
involving an Internet "server farm."                                                                                            
MR. GRIFFIN paraphrased the introduction  to his written response,                                                              
which read [original punctuation and capitalization provided]:                                                                  
     INTRODUCTION AND GENERAL COMMENTS                                                                                          
          What is overlifting and underlifting?                                                                                 
          "Overlifting" and "underlifting" are terms used in                                                                    
     agreements among  two or more parties with  interests in                                                                   
     production  that describe situations  where one  or more                                                                   
     of the parties has, in a given  production period, taken                                                                   
     more  or less  production  than that  party's  allocable                                                                   
     share.   If a party  takes more  than its share,  it has                                                                   
     overlifted its production; if  less, it has underlifted.                                                                   
     Generally  speaking,   when  one  party   overlifts  its                                                                   
     production,  one or more  of the  other parties will  be                                                                   
     underlifting  - that is, receiving  less than  the share                                                                   
     of production to which it is entitled.                                                                                     
          For an example let us assume two parties, A and B,                                                                    
     have  equal production  interests  in a  field, so  that                                                                   
     each  month  each  party  is  entitled  to  50%  of  the                                                                   
     hydrocarbon stream  sold or removed from the  field.  If                                                                   
     A  incurs  marketing  or transportation  problems  in  a                                                                   
     month,  he may find  at the  end of  that month that  he                                                                   
     lifted only 45%  of the field's production,  while B has                                                                   
     lifted 55%.   A has underlifted his production,  while B                                                                   
     has overlifted his.                                                                                                        
           The parties with interests in production often                                                                       
     agree  in  advance  to the  terms  and  conditions  that                                                                   
     govern the  reconciliation that must occur  in the event                                                                   
     of overlifting  or underlifting  by the parties.   These                                                                   
     are sometimes  called balancing  agreements.   Balancing                                                                   
     may occur  in a  number of different  ways, but  perhaps                                                                   
     the  most common  are  by (1)  adjusting  the amount  of                                                                   
     production each party is entitled  to lift in subsequent                                                                   
     production periods, or (2) making cash payments.                                                                           
          In our example, balancing could occur by having A                                                                     
     take 55%  of the next  month's production while  B takes                                                                   
     45%.    Assuming  the production  for  both  months  was                                                                   
     equal, A and B each would have  received their 50% share                                                                   
     over  the  two-month period.    Alternatively,  B -  the                                                                   
     overlifter -  could simply pay  A the cash value  of the                                                                   
     extra 5% of production that  it had received that month.                                                                   
          The causes of overlifts and underlifts may                                                                            
     include, but are not limited  to:  marketing problems of                                                                   
     one or  more party; governmental  action in the  form of                                                                   
     legislation  or  regulation;  disruption or  absence  of                                                                   
     facilities for accepting an  owner's share of production                                                                   
     for  some period  of  time; inability  or  refusal of  a                                                                   
     purchaser  to  take  delivery  of an  owner's  share  of                                                                   
     production  for  some  period   of  time;  unanticipated                                                                   
     cessation  or  decline  or   production;  drainage;  and                                                                   
     variations    among   parties    as   to    information,                                                                   
     expectation,  and  risk  aversion.    See  Williams  and                                                                   
     Meyers, 11th ed., p. 78.                                                                                                   
          While overlifts and underlifts often occur because                                                                    
     of unforeseen  circumstances or  slight hiccups  in day-                                                                   
     to-day  operations, they  can  also be  planned for  and                                                                   
     expressly  negotiated.     For  example,   parties  with                                                                   
     varying interests in production  from several pools in a                                                                   
     field may use overlifts and  underlifts, instead of cash                                                                   
     payments,  to align  their equity  interests across  the                                                                   
     field.   That is  essentially what  happened at  Prudhoe                                                                   
     Bay, among  most of the  working interest owners  there,                                                                   
     following the  BP-ARCO merger and Phillips'  acquisition                                                                   
     of ARCO's Alaska assets.                                                                                                   
          What is the State's interest in production at                                                                         
     Prudhoe that might be overlifted or underlifted?                                                                           
          The State, of course, has an interest in                                                                              
     production  from its North Slope  leases.  With  respect                                                                   
     to  gas, those  leases give  the  State the  right to  a                                                                   
     royalty  share of the  gas that  is "produced and  saved                                                                   
     and  sold or used  off [the  lease] ...."   Gas that  is                                                                   
     used  for repressuring  the reservoir,  or for  enhanced                                                                   
     oil recovery,  is not subject  to a royalty  obligation.                                                                   
     At Prudhoe Bay, the State's  royalty interest [under the                                                                   
     leases] is generally 12.5%.                                                                                                
MR.  GRIFFIN  presented  the  first  question  posed  by  Chairman                                                              
Torgerson and his own answer, which read:                                                                                       
     I.   OVERLIFTING                                                                                                           
          1)   Are there any statutory provisions that are                                                                      
     relevant?  If so, what are they and why?                                                                                   
          There    are   no    statutory   provisions    that                                                                   
     specifically  address the  State's  ability to  overlift                                                                   
     oil or gas.  Consistent with  the general powers granted                                                                   
     under  the Alaska  Land Act,  AS 38.05,  we believe  the                                                                   
     Commissioner   of   Natural   Resources   has   inherent                                                                   
     authority to  negotiate an overlifting agreement  with a                                                                   
     producer  or group of  producers where the  Commissioner                                                                   
     concludes such an agreement  furthers the best interests                                                                   
     of  the State.   Assuming  the  Commissioner intends  to                                                                   
     commit  the overlifted  gas to a  royalty in-kind  (RIK)                                                                   
     sale, AS 38.06.055(a)  becomes relevant, as  it provides                                                                   
     that  the   RIK  contract  must   be  approved   by  the                                                                   
MR.  GRIFFIN went  over the  underlifting  and overlifting  basics                                                              
again  at a  members'  request.   In  response  to  a question  by                                                              
Representative  Davies regarding  whether the  state would  attach                                                              
the royalties based on what should  have been the right amount, he                                                              
said in most  circumstances when the overlifts  and underlifts are                                                              
"the  little ...  blips  in production"  [the  state] doesn't  pay                                                              
attention  to  that.    If  someone has  a  30  percent  share  in                                                              
production, for example, the royalty  will be based on that share,                                                              
rather  than  looking  at  slight overlifts  or  underlifts  in  a                                                              
particular  month.   However, if  the parties  have negotiated  to                                                              
overlift  or underlift  for an  extended period,  the state  would                                                              
probably look  at that arrangement,  ask how the  royalty interest                                                              
should apply,  "and then go  talk to them  about it."  He  said it                                                              
might go either way.                                                                                                            
REPRESENTATIVE DAVIES noted that  the state might have a different                                                              
interest in the different shares.                                                                                               
MR.  GRIFFIN agreed,  adding,  "That's  why we  might  look at  it                                                              
differently."  [Ends mid-speech because of tape change].                                                                        
TAPE 01-10, SIDE A                                                                                                            
MR.  GRIFFIN concluded  by saying  a number  of different  factors                                                              
must  be  considered.    Except  for  a  negotiated  underlift  or                                                              
overlift,  he  reiterated,  most  of those  little  overlifts  and                                                              
underlifts "we look the other way on."                                                                                          
CHAIRMAN  TORGERSON asked  whether  the balancing  agreement  that                                                              
"was  because  of  the  merger  between  Phillips  and  ARCO"  was                                                              
MR. GRIFFIN  replied that  he would need  to check to  be certain,                                                              
but  his  understanding  is  that  the  overlifts  and  underlifts                                                              
necessary to accomplish  the realignment among the  major working-                                                              
interest owners has, in fact, ended.                                                                                            
CHAIRMAN  TORGERSON   said  he  was  interested   in  the  overall                                                              
agreement; he  asked whether it was  finalized and signed  off on,                                                              
with the different provisions in it.                                                                                            
MR. GRIFFIN answered yes.                                                                                                       
REPRESENTATIVE OGAN  asked whether Chevron had been  the "sticking                                                              
point" in that realignment, and whether  that had been worked out.                                                              
MR.  GRIFFIN remarked  that  perhaps he'd  misunderstood  Chairman                                                              
Torgerson's question.  He then stated:                                                                                          
     There isn't  complete alignment  at Prudhoe Bay.   Right                                                                   
     now,  my  understanding  is  that  not all  of  the  ...                                                                   
     working-interest  owners  at  Prudhoe Bay  have  aligned                                                                   
     their interests.   The agreement  I was thinking  of was                                                                   
     the -- there is an agreement  among some of the working-                                                                   
     interest  owners to  align their  interests  as much  as                                                                   
     possible;  that  agreement has  been  signed.   But  the                                                                   
     alignment at Prudhoe Bay is not complete.                                                                                  
CHAIRMAN TORGERSON asked what that means [for the state].                                                                       
MR. GRIFFIN replied:                                                                                                            
     What it means  might depend on the particular  question.                                                                   
     I think that in terms of how  the three largest working-                                                                   
     interest  owners at  Prudhoe Bay  look at  things, in  a                                                                   
     sense,  they've been  simplified.   Now,  the fact  that                                                                   
     there hasn't  been complete  realignment means  that the                                                                   
     ...  Prudhoe  Bay Operating  Agreement,  in  all of  its                                                                   
     complexity,  is  still out  there  and still  ...  being                                                                   
     followed - at least that's my understanding.                                                                               
CHAIRMAN TORGERSON asked, "You're not negotiating that or in on                                                                 
the negotiations with the balancing agreement?"                                                                                 
MR. GRIFFIN said no.                                                                                                            
CHAIRMAN TORGERSON asked who is handling that.                                                                                  
MR. GRIFFIN answered:                                                                                                           
     Right now, that is a commercial  matter among the owners                                                                   
     at Prudhoe Bay.   Once they have been able  to negotiate                                                                   
     a complete alignment, they'll  come to the Department of                                                                   
     Natural Resources and request  permission for the cross-                                                                   
     assignment  of leases  to ...  reflect the  realignment,                                                                   
     and  the department  will consider  that request on  its                                                                   
CHAIRMAN TORGERSON asked, "Is our 12.5 percent a party to that?"                                                                
MR. GRIFFIN replied, "We'll get our 12.5 percent no matter what                                                                 
CHAIRMAN TORGERSON asked whether the state is a signer on the                                                                   
MR. GRIFFIN answered:                                                                                                           
     The  state  would  not  be a  signer  on  the  agreement                                                                   
     between  the companies,  but the  Department of  Natural                                                                   
     Resources  has  to approve  any  assignment  of a  lease                                                                   
     interest.   So in  that sense,  it can't happen  without                                                                   
     the  Department  of  Natural Resources'  blessing.    My                                                                   
     understanding  would be that  the Department of  Natural                                                                   
     Resources  supports   ...  the  companies'   efforts  to                                                                   
     realign the interests at Prudhoe Bay.                                                                                      
SENATOR KELLY asked whether, with the agreement not finalized,                                                                  
everything could go back to "square one."  He also asked whether                                                                
there is just one holdout that needs to be addressed.                                                                           
MR. GRIFFIN replied:                                                                                                            
     My understanding  of the arrangements that  are in place                                                                   
     to date would be that we'd never  go all the way back to                                                                   
     square one.   I think  there are actually  two companies                                                                   
     ... that  have not agreed  to a complete realignment  of                                                                   
     their  interests -  I  think Chevron  and  Texaco.   ...                                                                   
     There  may  be arrangements  with  one  or both  of  the                                                                   
     companies  that I'm  not aware  of,  but they  certainly                                                                   
     haven't  come to  the  Department of  Natural  Resources                                                                   
     with  signed agreements  reflecting  the  fact that  ...                                                                   
     everyone has  aligned their interests.  But  ... over 90                                                                   
     percent  of  the  interests  at Prudhoe  Bay  have  been                                                                   
     realigned, and the fact that one or two ...                                                                                
SENATOR  KELLY  interjected, asking  whether  that  90 percent  is                                                              
"carved in stone."                                                                                                              
MR. GRIFFIN answered:                                                                                                           
     The  department  has approved  the  cross-assignment  of                                                                   
     lease  interests ... for  those working-interest  owners                                                                   
     at Prudhoe  Bay who have  aligned their interests.   So,                                                                   
     in that  sense, it  is ...  carved in  stone.  It's  not                                                                   
     carved  in stone  in the  sense that  they could  always                                                                   
     come  back to  the Department  of  Natural Resources,  I                                                                   
     suppose, and ask  to do something different.   But ... I                                                                   
     would doubt that very much.                                                                                                
CHAIRMAN TORGERSON returned attention to the presentation.                                                                      
MR. GRIFFIN again paraphrased portions  of the written response to                                                              
question 1 regarding overlifting [text provided previously].                                                                    
CHAIRMAN  TORGERSON surmised  that  basically the  state could  do                                                              
that with the permission of the producers.                                                                                      
MR. GRIFFIN said it would be a negotiation.                                                                                     
CHAIRMAN TORGERSON  mentioned Netricity,  which would take  gas in                                                              
advance of having  a pipeline; it totally would  be overlifting by                                                              
the state,  he suggested,  because there wouldn't  be any  line at                                                              
all.  Chairman  Torgerson remarked that he isn't  sure legislation                                                              
isn't needed.   If, for  example, the  producers say the  route is                                                              
not  economical  "or  we get  beat  out  by  some of  their  other                                                              
projects around the world that they're  working on," the state may                                                              
want to take  its 12.5 percent royalty  in advance.  He  also said                                                              
he wasn't sure it followed the examples laid out by Mr. Griffin.                                                                
MR.  GRIFFIN pointed  out  that  subsequent answers  [to  Chairman                                                              
Torgerson's written questions] would address that.                                                                              
MR. GRIFFIN paraphrased question 2 and the response, which read:                                                                
          2)   Are there any lease provisions that are                                                                          
     relevant?  If so, what are they and why?                                                                                   
          The lease provisions that create the State's                                                                          
     royalty  interest  in gas  and  its  right to  take  its                                                                   
     royalty  gas in-kind  are relevant,  in  the sense  that                                                                   
     they  describe the  production  interest  that would  be                                                                   
MR. GRIFFIN addressed the third question, which read, along with                                                                
the response:                                                                                                                   
          3)   Is there an explicit right in any of the                                                                         
     provisions?  If not, is there an implied right?                                                                            
          There is no express or implied "right" under the                                                                      
     leases  for  the State  to  overlift gas  produced  from                                                                   
     Prudhoe Bay.                                                                                                               
MR. GRIFFIN  specified that there  is no express or  implied right                                                              
in the leases  for the state to unilaterally decide  that it wants                                                              
to  take more  than  its royalty  share of  what  is produced  and                                                              
removed or sold from the lease.                                                                                                 
MR. GRIFFIN turned attention to question 4, which read, along                                                                   
with the response:                                                                                                              
          4)   Has the Prudhoe Bay Unit Agreement or any                                                                        
     other  agreement  between the  state  and the  producers                                                                   
     modified any of our rights?                                                                                                
          Nothing in the Prudhoe Bay Unit Agreement or any                                                                      
     other agreement between the  State and the producers has                                                                   
     created a right  for the State to overlift its  gas.  If                                                                   
     anything,  these  agreements  reinforce  the  conclusion                                                                   
     that the State has no "right"  to unilaterally decide to                                                                   
     take a  quantity of gas  that exceeds its  royalty share                                                                   
     of the gas  stream that is currently being  sold or used                                                                   
     outside of the Unit.                                                                                                       
MR. GRIFFIN paraphrased question 5 and the response, which read:                                                                
          5)   Assuming that under the current agreements or                                                                    
     applicable  law, there is a  questionable right  to take                                                                   
     royalty  in-kind before  a major  gas sale,  is there  a                                                                   
     legislative fix that you could recommend?                                                                                  
          The Department of Law cannot recommend a                                                                              
     legislative  fix  at  this  time.   The  State  has  not                                                                   
     decided  that  taking  a large  volume  of  gas  in-kind                                                                   
     before  a  major  gas  sale   is  in  the  State's  best                                                                   
     interests.   Moreover,  the producers  have indicated  a                                                                   
     willingness  to discuss  the  terms of  a gas  balancing                                                                   
     agreement  with the  State  in the  event  it wishes  to                                                                   
     pursue  an actual  sale of gas  to Netricity.   For  its                                                                   
     part, Netricity  has also been talking to  the producers                                                                   
     about  purchasing  gas, and  our understanding  is  that                                                                   
     Netricity  is  currently  working  on  a  more  detailed                                                                   
     proposal  that  addresses  some   of  the  issues  their                                                                   
     initial  proposal  left unaddressed.    The question  of                                                                   
     whether the  State should pursue the  Netricity proposal                                                                   
     alone therefore may become moot.                                                                                           
          Finally, while this may go without saying,                                                                            
     legislation  that would attempt  to force the  producers                                                                   
     to provide the  State a right under its leases  that was                                                                   
     not  part of  their original  bargain is  likely to  run                                                                   
     afoul  of the  Impairments of  Contracts  clause of  the                                                                   
     United States Constitution.                                                                                                
MR. GRIFFIN emphasized  that should the Netricity  scenario occur,                                                              
the state  would have to discuss  how to make the  producers whole                                                              
later.  For example,  would there be a cash payment  or a trade in                                                              
production?   And if the  latter, at  what time would  that occur?                                                              
All these would  have to be talked about, as well  as the physical                                                              
steps necessary to take the gas from  the field and "get it to our                                                              
potential   customer."      Mr.   Griffin  added   that   to   his                                                              
understanding, Netricity  has been talking to the  producers about                                                              
purchasing gas.  He explained:                                                                                                  
     They  came  to  us  and  talked to  us.    I  think  the                                                                   
     Department   of   Natural   Resources   expressed   some                                                                   
     curiosity about  why, if this was such a  good deal, the                                                                   
     producers didn't  seem interested.  And I  think at that                                                                   
     time Netricity just hadn't spoken with the producers.                                                                      
     I understand  that since that time Netricity  has spoken                                                                   
     with the producers  and, in fact, is ...  in the process                                                                   
     of putting together a more detailed  proposal, to answer                                                                   
     some of  the questions  that were  presented to it  that                                                                   
     they weren't  prepared to answer  at their first  set of                                                                   
     So I  guess the  point of that  is, we  may not have  to                                                                   
     enter  this  negotiation  over   what  a  gas  balancing                                                                   
     agreement  is  going  to  look  like.   We  may  not  be                                                                   
     pursuing that option on our own.                                                                                           
MR.  GRIFFIN emphasized  that  if the  legislature  was trying  to                                                              
alter the  terms of the deal  that the producers struck  when they                                                              
first  signed  the leases  with  [the  state],  there would  be  a                                                              
potential  problem under  the Impairments  of Contracts clause  of                                                              
the  U.S. constitution.   There  are many  ways to  get a  result;                                                              
however,  the  state  probably shouldn't  think  about  trying  to                                                              
change  the  terms  of  [producers']  agreements  with  the  state                                                              
through legislation.                                                                                                            
MR. GRIFFIN turned attention to question 6, which read, along                                                                   
with the response:                                                                                                              
          6)   In   any   event,    what   action   has   the                                                                   
     administration taken to reach  a voluntary gas balancing                                                                   
     agreement  with the  producers so that  the state  could                                                                   
     take its royalty gas in-kind before a major gas sale?                                                                      
          As indicated above, the producers have expressed a                                                                    
     willingness  to  discuss  such  an  agreement  with  the                                                                   
     State.  However, my understanding  is that Netricity has                                                                   
     informed DNR  that it wishes to pursue its  options with                                                                   
     the  producers.   As  a consequence,  it  has asked  the                                                                   
     State not to take any additional  actions in furtherance                                                                   
     of its  initial proposal  at this  time.  This  suggests                                                                   
     that the  need for  a gas balancing  agreement with  the                                                                   
     producers may never materialize.                                                                                           
MR. GRIFFIN added that consistent with that, "we haven't been                                                                   
pushing the producers for a gas balancing agreement."                                                                           
MR.  GRIFFIN turned  attention to  underlifting.   He pointed  out                                                              
that because  underlifting is the  corollary to overlifting,  some                                                              
answers  would be parallel  to the  previous ones.   He  addressed                                                              
question 1, which read, along with his response:                                                                                
     II. UNDERLIFTING                                                                                                           
          1)   Are there any statutory provisions that are                                                                      
     relevant?  If so, what are they and why?                                                                                   
          AS   38.05.180(l)   specifically    addresses   the                                                                   
     Commissioner's   authority  to  negotiate   underlifting                                                                   
     agreements.  It provides:                                                                                                  
          Subject  to the  provisions of  AS 31.05,  the                                                                        
          commissioner  has discretion to enter  into an                                                                        
          agreement  whereby, with  the  consent of  the                                                                        
          lessee, the  state's royalty share of  oil and                                                                        
          gas  production may be  stored or retained  in                                                                        
          storage  by the  lessee,  or the  commissioner                                                                        
          may enter  into an agreement with one  or more                                                                        
          of the  affected field lease holders  to trade                                                                        
          current royalty production  from a field for a                                                                        
          like  amount,  kind,  and  quality  of  future                                                                        
          production,  on the condition  that the  state                                                                        
          receives  back its  stored  or traded  royalty                                                                        
          share during  the first half of  the estimated                                                                        
          field  life or  no later than  15 years  after                                                                        
          start of production, whichever is sooner.                                                                             
          That statutory provision was adopted after the                                                                        
     State  negotiated   the  Prudhoe  Bay   Unit  Agreement.                                                                   
     During  the negotiation  of  that agreement,  the  State                                                                   
     sought to  include an express  provision allowing  it to                                                                   
     underlift Prudhoe Bay production.   The State ultimately                                                                   
     dropped that request.                                                                                                      
MR.  GRIFFIN noted  that  AS 38.05.180(l)  addresses  underlifting                                                              
without actually using that term,  and indicated AS 31.05 contains                                                              
the conservation  statutes.   He pointed out  that the  statute in                                                              
question  reflects   a  preference   for  balancing   with  future                                                              
production, as  opposed to  balancing with cash  payments.   As to                                                              
why that statute exists, he told members:                                                                                       
     This statute  was adopted soon  after we negotiated  the                                                                   
     Prudhoe  Bay  Unit Agreement.    And  in the  course  of                                                                   
     negotiating that  unit agreement, the state  was in fact                                                                   
     trying  to  include, within  the  confines  of the  unit                                                                   
     agreement, a  specific provision that would  allow it to                                                                   
     underlift  ... oil and  gas.   And ultimately the  state                                                                   
     did  not   succeed  in  getting   that  into   the  unit                                                                   
     agreement.  At  some point, we dropped ...  the request.                                                                   
     ... The legislative  history is a little  bit unclear on                                                                   
     this, but ...  the most natural reading of  the history,                                                                   
     I suppose, is  that this ... particular provision  was a                                                                   
     natural  outgrowth or consequence  of not including  the                                                                   
     underlifting provision ... in the unit agreement.                                                                          
MR. GRIFFIN turned attention to question 2, which read, along                                                                   
with his response:                                                                                                              
          2)   Is there an explicit right in any of the                                                                         
     [lease] provisions?  If not,  is there an implied right?                                                                   
          As with overlifting, there is no express or                                                                           
     implied  "right"  under  the  leases for  the  State  to                                                                   
     underlift gas produced from Prudhoe Bay.                                                                                   
MR. GRIFFIN addressed question 3, which read, along with his                                                                    
          3)   Has the Prudhoe Bay Unit Agreement or any                                                                        
     other  agreement  between the  state  and the  producers                                                                   
     modified any of our rights?                                                                                                
          Nothing in the Prudhoe Bay Unit Agreement or any                                                                      
     other agreement between the  state and the producers has                                                                   
     created a right for the State  to underlift its gas.  As                                                                   
     previously indicated,  the State sought to  include such                                                                   
     a  right in  the  Prudhoe Bay  Unit  Agreement, but  was                                                                   
     unsuccessful.  If anything,  the State's agreements with                                                                   
     the producers  reinforce the  conclusion that the  State                                                                   
     has  no  "right"  to  unilaterally   decide  to  take  a                                                                   
     quantity of gas  that differs from its royalty  share of                                                                   
     the  gas stream  that is  currently being  sold or  used                                                                   
     outside of the Unit.                                                                                                       
MR. GRIFFIN turned attention to question 4, which read, along                                                                   
with his response:                                                                                                              
          4)   Assuming that under the current agreements or                                                                    
     applicable  law,  there  is  no right  to  delay  taking                                                                   
     royalty  in-kind after  a  major gas  sale,  is there  a                                                                   
     legislative fix  that you [the Department of  Law] could                                                                   
          The legislature adopted the appropriate fix when                                                                      
     it  enacted  AS 38.05.180(l).     As  with  overlifting,                                                                   
     legislation  that would attempt  to force the  producers                                                                   
     to provide the  State a right under its leases  that was                                                                   
     not  part of  their original  bargain is  likely to  run                                                                   
     afoul  of the  Impairments of  Contracts  clause of  the                                                                   
     United States Constitution.                                                                                                
MR. GRIFFIN added  that in the department's view,  AS 38.05.190(l)                                                              
was the appropriate  fix to the extent  a fix was necessary.   The                                                              
caution about not changing the leases  through legislation applies                                                              
to unit agreements and other agreements, he noted.                                                                              
MR. GRIFFIN next addressed question 5 and the response, which                                                                   
          5)   Would a gas balancing agreement between the                                                                      
     state and  the producers be  necessary for the  state to                                                                   
MR. GRIFFIN turned attention to question 6, which read, along                                                                   
with the response:                                                                                                              
          6)   Has the state ever entered into a gas                                                                            
     balancing agreement with a producer?                                                                                       
          Not on the North Slope and not to our knowledge in                                                                    
     the  Cook  Inlet.    However,  we  are  still  reviewing                                                                   
     historical  records of  oil  and gas  production in  the                                                                   
     Cook  Inlet to  see if the  State ever  entered such  an                                                                   
MR.  GRIFFIN  turned  attention  to the  next  set  of  questions,                                                              
relating to  lease termination in the  event that there  is no gas                                                              
pipeline.   He paraphrased  question 1 and  the first part  of the                                                              
response, which read:                                                                                                           
     III. LEASE TERMINATION                                                                                                     
          1)   If the Producers assert that a gas line                                                                          
     cannot be  built and [as  a consequence] fail  to market                                                                   
     the gas, can  the state terminate the leases  for breach                                                                   
     of contract?                                                                                                               
          At Prudhoe Bay, where there are ongoing oil and                                                                       
     gas  production   operations,   the  answer  is   almost                                                                   
     certainly not.                                                                                                             
          The question that has been posed really has two                                                                       
     parts.  The  first is whether the producers'  failure to                                                                   
     build a gasline and market the  gas constitutes a breach                                                                   
     of their leases or other agreements  with the State.  If                                                                   
     so,  the  second  part is  whether  termination  of  the                                                                   
     leases is the appropriate remedy for that breach.                                                                          
          A decision by the [producers] not to build a                                                                          
     gasline is unlikely to be a  breach unless the State can                                                                   
     show  that  the producers  failed  to  exercise  prudent                                                                   
     business  judgment  in  reaching that  decision.    This                                                                   
     standard is  also referred to  as (or perhaps is  a sub-                                                                   
     part of)  the reasonable prudent operator  standard, and                                                                   
     generally  requires the  lessee  to act  in good  faith,                                                                   
     exercise  competence in making  business judgments,  and                                                                   
     give   due  regard   to  the   lessor's  (the   State's)                                                                   
REPRESENTATIVE  OGAN  asked whether  "prudent  business"  includes                                                              
prudent  business within  the state  or  would have  to include  a                                                              
worldwide  scope.    He  pointed   out  that  there  are  projects                                                              
competing  with Alaskan  gas.   He  offered  Point  Thomson as  an                                                              
example, saying it has never really  been developed and is "pretty                                                              
much a gas field."                                                                                                              
MR.  GRIFFIN  answered  that  he believes  it  is  an  interesting                                                              
question.  To  his knowledge, he said, that has  never really been                                                              
addressed in  any of the  cases.  He  offered his belief  that the                                                              
state could well  take the position that "the  lessee's agreements                                                              
are with  us; that's what  establishes our relationship;  we don't                                                              
have a relationship with their other  business dealings throughout                                                              
the  world, and  so the  duty that  is  owed us  is a  reasonable,                                                              
prudent judgment based  on the merits of our project,  and not how                                                              
our  project necessarily  compares to  other projects  ... in  the                                                              
world."   Mr. Griffin added that  he doesn't know that  the courts                                                              
would  accept that  argument,  but said,  "I  acknowledge that  it                                                              
could be an argument that we might raise."                                                                                      
MR. GRIFFIN noted  that the second part of question  1 is what the                                                              
appropriate remedy  is, if it can  be shown that there  has been a                                                              
breach.   Would termination  be the appropriate  remedy?   He told                                                              
members that at Prudhoe Bay, he believes  the answer is no.  There                                                              
are substantial  investments at  Prudhoe Bay,  as well  as ongoing                                                              
oil and  gas production operations.   He paraphrased a  portion of                                                              
his written response, which read:                                                                                               
          Assuming for the moment that the State could show                                                                     
     that a  decision not to build  a gasline was  the result                                                                   
     of something  other than prudent business  judgment, the                                                                   
     question  of the appropriate  remedy arises.   Generally                                                                   
     speaking, whether  termination of  an oil and  gas lease                                                                   
     is an appropriate  remedy will depend on  the particular                                                                   
     facts in  a given case.   The general rule,  however, is                                                                   
     that a court will avoid remedies  like termination where                                                                   
     damages are  adequate to redress the harm  occasioned by                                                                   
     the breach.   A court is  highly unlikely, in  our view,                                                                   
     to consider termination an appropriate  remedy where, as                                                                   
     at Prudhoe  Bay, there  are substantial investments  and                                                                   
     ongoing  production operations  by the  lessees.  It  is                                                                   
     also  improbable,  in our  view,  that the  State  would                                                                   
     consider termination  of the leases  there to be  in its                                                                   
     best interests.                                                                                                            
MR. GRIFFIN  emphasized  his belief  that a court  is unlikely  to                                                              
terminate  unless  it can  be  shown  that  an award  of  monetary                                                              
damages  is somehow  inadequate.   He  doesn't  believe the  state                                                              
would  be able  to  say  that the  failure  to  build a  gas  line                                                              
requires that  the leases at Prudhoe  Bay be terminated,  and that                                                              
there is no other adequate remedy.                                                                                              
MR. GRIFFIN  read question 2  and paraphrased the  response, which                                                              
together read:                                                                                                                  
          2)   Are there any other provisions in the lease                                                                      
     which the state  can use to terminate the  leases if the                                                                   
     Producers declare the gas uneconomic to market?                                                                            
          Putting aside the question of whether termination                                                                     
     is the  appropriate remedy  if the  State could in  fact                                                                   
     show a  breach, there are  several implied covenants  in                                                                   
     the  leases  that  might be  invoked  under  appropriate                                                                   
     circumstances  [in  defense   of  the  state's  rights].                                                                   
     These  include   the  implied  covenant   to  reasonably                                                                   
     develop the leases, the implied  covenant to market, the                                                                   
     implied covenant  of diligent and proper  operation, and                                                                   
     the implied covenant of good faith and fair dealing.                                                                       
MR. GRIFFIN read question 3 and paraphrased the response, which                                                                 
          3)   Assuming that the state does not approve the                                                                     
     Producer's plan  of development for Prudhoe  Bay because                                                                   
     it is  not in the state's  best interest, can  the state                                                                   
     terminate the Unit Agreement  and the leases within that                                                                   
          If the producers' fail to comply with a DNR-                                                                          
     approved  plan of  development at Prudhoe  Bay, DNR  may                                                                   
     declare the  Unit in default.   11 AAC 83.374.   At that                                                                   
     point  it would  be  incumbent upon  the  State to  seek                                                                   
     appropriate  relief from  the courts.   For the  reasons                                                                   
     already  articulated,  the  courts  probably  would  not                                                                   
     consider  termination  of the  Unit and  the  underlying                                                                   
     leases an appropriate remedy.                                                                                              
MR. GRIFFIN explained that for each  field on the North Slope, the                                                              
producers are  required to  submit a plan  of development  to DNR.                                                              
That is  reviewed by the department  and then, usually  after some                                                              
give and  take, approved by DNR.   The operator then  continues to                                                              
produce  oil and/or  gas from the  field in  accordance with  that                                                              
plan.  This question  asks what happens if an  agreement cannot be                                                              
reached and the department does not approve a plan.                                                                             
MR. GRIFFIN  again emphasized  that  at Prudhoe  Bay it is  highly                                                              
unlikely the remedy  chosen by the courts would  be termination of                                                              
leases.  He added:                                                                                                              
     Again, it  strikes me  as ... at  least hard to  imagine                                                                   
     that  we  would   think  that  would  be   in  our  best                                                                   
     interests, but  it would be a situation [in]  which we'd                                                                   
     present arguments  to the court,  and it'd be up  to the                                                                   
     court  to accept those  arguments or  choose some  other                                                                   
     appropriate  remedy,  assuming,  again, that  the  state                                                                   
     could show a breach.                                                                                                       
CHAIRMAN TORGERSON  asked what would happen if  [the state] showed                                                              
it had  another customer  ready to  go forward  with some  sort of                                                              
high-volume usage,  although not  necessarily a pipeline,  and the                                                              
analysis by the  producers was that it isn't economical.   He said                                                              
he would  think the  producers could  certainly  make a deal  with                                                              
that other  person, and that if they  refused to do so,  the state                                                              
would have a cause.  He asked what Mr. Griffin thought.                                                                         
MR. GRIFFIN answered:                                                                                                           
     Well, I  guess my  personal view is  that a scenario  in                                                                   
     which  we  would  think  it'd be  in  the  state's  best                                                                   
     interests  to go forward  with a  project like that  and                                                                   
     the producers  would not - and then the  producers would                                                                   
     not  go  the next  step  of  trying to  accommodate  our                                                                   
     interest in  pursuing that proposal - would  be somewhat                                                                   
     unlikely.      But   I   guess    I   acknowledge   your                                                                   
     "hypothetical,"  and  I  think   that  under  the  right                                                                   
     circumstances  you could, in  fact, allege a  breach and                                                                   
     try and pursue some ... remedy there. ...                                                                                  
     I think, to be fair to the producers,  they - believe it                                                                   
     or not  - are interested  in making  money.  And  if you                                                                   
     could  make  money  off a  proposal  like  that,  they'd                                                                   
     probably be interested.                                                                                                    
     Now, there may be a situation  in which, for example, we                                                                   
     don't  think  we need  to  make  as  much money  as  the                                                                   
     producers  feel they  need to  make.   Well, then,  then                                                                   
     we're going to have a situation  in which we're going to                                                                   
     ask the producers  to help us out on what  to them would                                                                   
     be money-losing  proposition.  But  they say OK.   So we                                                                   
     enter into the  arrangements and we have  a situation in                                                                   
     which we're  selling gas at  a price that is  lower than                                                                   
     the producers  would be willing  to accept on  behalf of                                                                   
     their shareholders.                                                                                                        
     Now, presumably the reason the  producers would conclude                                                                   
     that  that  price  is  too   low  is  that  they've  got                                                                   
     something  else  in  mind.     And  so  let's  take  the                                                                   
     hypothetical  further and say  that what they've  got in                                                                   
     mind is  a major gas  sale.  And  then they'd  build the                                                                   
     gas project.  And lo and behold,  the price that they're                                                                   
     getting is,  in fact, much  higher than the  price we've                                                                   
     committed to in our agreement  with Netricity. ... We've                                                                   
     created  a rather  unfortunate situation  in which  they                                                                   
     are going  to be, probably,  a lot of hard  feelings all                                                                   
     around, and the  producers ... might feel  that we might                                                                   
     take  it out on  them because  ... they  weren't ...  as                                                                   
     forthcoming  with  us  as  they   should  have  been  in                                                                   
     describing just how unprofitable  this particular scheme                                                                   
     was, or whatever.  ...                                                                                                     
     What we  generally try and do  is find ways  of aligning                                                                   
     ourselves with  ... the producers.  And if we  come to a                                                                   
     point  that  we really  want  to  do something  and  the                                                                   
     producers really don't, ...  we'll be talking a lot with                                                                   
     them, and  we may be  talking a  lot with you,  as well.                                                                   
     But  we  haven't  reached that  point  yet.    Netricity                                                                   
     hasn't come  forward with a  proposal that is  something                                                                   
     that  is  detailed  enough to  justify  the  unqualified                                                                   
     support of either the state or the producers.                                                                              
CHAIRMAN TORGERSON responded:                                                                                                   
     Or  me,  as far  as  that  goes.   I'm  not  necessarily                                                                   
     looking  at Netricity,  but there are  other things  out                                                                   
     there.   And  I'm  not saying  either  one  of them  are                                                                   
     better.  I'm  not trying to give you names  of different                                                                   
     projects  that may or  may not be  a little bit  better.                                                                   
     But  the facts  are, the producers  sat on  this for  27                                                                   
     years, haven't done much, and  we have a lot of interest                                                                   
     in moving  this.   And they're  looking at a  particular                                                                   
     thing.  And  the question looms that if  their project's                                                                   
     uneconomical and  they refuse to sell to  somebody else,                                                                   
     then what  position are  we in,  in ... terminating  the                                                                   
     lease or doing other things?                                                                                               
MR. GRIFFIN replied, "Right.  And  with any luck, we won't have to                                                              
face ... that particular scenario.  But if we do, we do."                                                                       
REPRESENTATIVE  DAVIES  followed  up, specifying  that  he  wasn't                                                              
talking about  the Netricity model,  but a situation in  which the                                                              
state is  willing to develop for  a return on the  investment that                                                              
is considerably less than the companies  might be willing to do it                                                              
for.  For example, a company could  go through its "due diligence"                                                              
and conclude  that the return on  investment at 10 percent  is too                                                              
low,  and that  a better  return on  the capital  can be  obtained                                                              
elsewhere in  the world, not even  necessarily with gas;  it would                                                              
be a perfectly valid business decision.   However, the state might                                                              
be willing  to build a pipeline  and finance it for  an investment                                                              
return  of 5  percent, and  would see  that as  a perfectly  valid                                                              
investment because it would develop  infrastructure and get gas to                                                              
the citizens,  for example.   He asked, "Where  are we then?"   He                                                              
also asked, "How do we get the gas?"                                                                                            
MR. GRIFFIN answered:                                                                                                           
     Well, we  ask them for it. ...  If they say no,  I guess                                                                   
     there  are  probably  a  number   of  hammers  that  the                                                                   
     legislature could wield.  The  power to tax is the power                                                                   
     to  destroy; you've  got the  biggest  hammer there  is.                                                                   
     And perhaps  that's one reason  why they are  willing to                                                                   
     talk to us,  if that's really what we want to  do. ... I                                                                   
     suppose  from their  perspective, they'd  look at it  as                                                                   
     ... if  we want  to hang ourselves,  they'd sell  us the                                                                   
     rope. ...                                                                                                                  
     As  long as  we're  willing  to pay  for  what we  want,                                                                   
     there's  relatively little  reason for  them to say  no,                                                                   
     except,  again, perhaps  this  fear of  what's going  to                                                                   
     happen down the  line. ... Let's take your  example:  We                                                                   
     sell gas with  the expectation of a 5 percent  return on                                                                   
     investment;  they develop a  gas project and  are making                                                                   
     17.5 percent.   Well, we're  going to be paying  ... for                                                                   
     the gas that  we overlifted to earn 5 percent  with 17.5                                                                   
     percent  gas.  We're  not going to  be very happy  about                                                                   
     that.  Or ... someone's going  to make a deal today, and                                                                   
     then  ten years  from  now it's  payback  time, and  the                                                                   
     people  who made  the deal  aren't going  to be  around.                                                                   
     And the folks who are judging  the deal ... are probably                                                                   
     not  going to  be  very happy.   I  think  that sort  of                                                                   
     scenario makes the producers a little bit nervous.                                                                         
     I think  they would  like to be  aligned with us  on gas                                                                   
     development  projects.    And   alignment  generally,  I                                                                   
     think, is what's  contemplated in the leases  and in the                                                                   
     unit agreements.   But  I'd say we  talk first;  I think                                                                   
     that will probably  take care of it.  And  if it doesn't                                                                   
     take care of it, I think that  the state does have other                                                                   
     options at  its disposal, as  unsavory as those  options                                                                   
     might be.                                                                                                                  
REPRESENTATIVE  OGAN asked  what  happens if  the "something  else                                                              
[that producers have]  in mind" is to warehouse  [the gas] another                                                              
27 years.   He also  asked whether that  would give the  state the                                                              
legal ability  to call it  a breach of  contract.  He  mentioned a                                                              
paper  written  by  Bob  Bartlett  at  the  Alaska  constitutional                                                              
convention  about giving a  property right  to a corporation  that                                                              
will warehouse it  until such time as the corporation  sees fit to                                                              
market it; Representative Ogan commented that it was prophetic.                                                                 
MR. GRIFFIN responded,  "I think from the  companies' perspective,                                                              
they would not warehouse gas ..."                                                                                               
REPRESENTATIVE OGAN interjected, "They have been."                                                                              
MR. GRIFFIN replied:                                                                                                            
     That presumes  that ... it would have  been commercially                                                                   
     reasonable to develop  the gas before now.   And I think                                                                   
     that  based  on  the  work  that  we've  done  with  our                                                                   
     consultants,  the work  that the  Department of  Revenue                                                                   
     has   done,  we   could  not   conclude   that  it   was                                                                   
     unreasonable  of them to  not build  a gas pipeline  and                                                                   
     enter a major gas sale before now.                                                                                         
     Because  a dollar  today  is  worth a  lot  more than  a                                                                   
     dollar  27  years  from  now,  I  think  that  if  these                                                                   
     companies  could profitably develop  the gas today,  ...                                                                   
     that's what they would choose  to do.  I don't think, as                                                                   
     a state,  we would  want them to  develop the gas  if it                                                                   
     couldn't  be  done  profitably.     We  want  a  royalty                                                                   
     interest.  We  want there to be a slice of  the pie that                                                                   
     we can tax.  That's how we benefit  from these projects.                                                                   
     ...  The project  would benefit  us very  little if,  in                                                                   
     fact, it was a money-losing proposition.                                                                                   
CHAIRMAN TORGERSON informed the committee  that Mr. Jack Chenoweth                                                              
[legal counsel  from Legislative Legal Services]  wouldn't testify                                                              
that afternoon.   He had asked  Mr. Chenoweth and Mr.  Griffin the                                                              
same questions, he  pointed out, but had also  asked Mr. Chenoweth                                                              
to  respond  to   some  questions  he  had  asked   FERC  and  the                                                              
Washington,  D.C., attorneys.   However,  Mr.  Chenoweth had  only                                                              
responded  to the latter  questions.   Therefore, Mr.  Chenoweth's                                                              
written responses  to the FERC-related  questions would  be handed                                                              
out at the following day's hearing.                                                                                             
MR. GRIFFIN  turned attention  to the next  section.   Question 1,                                                              
along with the response, read:                                                                                                  
     IV. PRUDHOE BAY UNIT AMENDMENTS                                                                                            
          1)   Have there been changes in those agreements                                                                      
     which affect  the Producers'  obligation to develop  gas                                                                   
     resources in Prudhoe Bay?                                                                                                  
          No.  The producers have always had the obligation                                                                     
     to develop Prudhoe Bay gas,  assuming it is commercially                                                                   
     reasonable  to  do  so,  and  that  obligation  has  not                                                                   
MR. GRIFFIN discussed question 2, which read, along with the                                                                    
          2)   Were there any provisions in older versions                                                                      
     of  those  agreements that  were  an impediment  to  gas                                                                   
          I assume you are referring here to the disparate                                                                      
     ownership interests held by  the working interest owners                                                                   
     in the Oil Rim and Gas Cap of  the Sadlerochit Reservoir                                                                   
     in Prudhoe  Bay.   My understanding  and belief is  that                                                                   
     these disparate ownership interests,  and the agreements                                                                   
     establishing  these interests  and the  manner in  which                                                                   
     they would be operated, created  no economic impediments                                                                   
     to a major gas sale.                                                                                                       
          More specifically, the Department of Revenue                                                                          
     analyzed  this question  at  length and  concluded  that                                                                   
     there  were  no  provisions  in  those  agreements  that                                                                   
     created  an   economic  disincentive  for   any  working                                                                   
     interest  owner  at Prudhoe  to  develop a  gas  project                                                                   
     capable  of supporting  a major  gas  sale.   If such  a                                                                   
     project  is  economic,  Revenue   concluded  that  every                                                                   
     working  interest  owner  would  have  an  incentive  to                                                                   
     participate in it.                                                                                                         
          It is nevertheless true that the source of each                                                                       
     working  interest owner's  incentives varied,  depending                                                                   
     upon  that owner's  relative  interests in  the Oil  Rim                                                                   
     versus the  Gas Cap.   Speaking in  very rough terms,  a                                                                   
     Gas  Cap  owner's  incentives come  primarily  from  the                                                                   
     revenues  generated by  a major  gas sale.   An Oil  Rim                                                                   
     owner,  however, derives  many of  its benefits  another                                                                   
     way:  once there is a major  gas sale, some of the costs                                                                   
     of running the field are shifted  from Oil Rim owners to                                                                   
     Gas Cap  owners.  Nevertheless,  at the end of  the day,                                                                   
     the  incentives  of  these  owners  were  aligned,  even                                                                   
     though their  ownership interests were not.   Of course,                                                                   
     the analysis becomes complicated,  because every working                                                                   
     interest  owner at  Prudhoe owns interests  in both  the                                                                   
     Oil Rim and the Gas Cap.                                                                                                   
MR.  GRIFFIN  added  that  the  cost-shifting  happens  under  the                                                              
agreements.  Therefore, an oil rim  owner also has an incentive to                                                              
pursue a  major gas sale.   He concluded  that the  incentives are                                                              
aligned, but  the source  of the  incentives comes from  different                                                              
parts of the agreements.                                                                                                        
MR.  GRIFFIN turned  attention to  question 3,  which read,  along                                                              
with the response:                                                                                                              
          3)   Have those impediments been removed?                                                                             
          As indicated above, the claim that such                                                                               
     impediments  existed  is  not   really  accurate.    The                                                                   
     substantial  realignment  of  interests at  Prudhoe  Bay                                                                   
     has, however, greatly simplified  the analysis.  It has,                                                                   
     moreover,  created   a  situation  where   the  economic                                                                   
     incentives of the major producers  are not only aligned,                                                                   
     but also spring from exactly the same source.                                                                              
MR.  GRIFFIN added  that the  producers  are all  "looking at  the                                                              
picture  the   same  way,"  which   is  a  real  benefit   to  the                                                              
realignment,  even though  it didn't  really  change the  economic                                                              
question or answer.                                                                                                             
MR. GRIFFIN addressed  the fourth and final question,  which read,                                                              
along with the response:                                                                                                        
          4)   If impediments remain, can the State                                                                             
     terminate  the  leases  unless the  Producers  agree  to                                                                   
     remove those impediments?                                                                                                  
          Again, we do not agree that the term "impediments"                                                                    
     is   accurate.     To  the   extent   that  there   were                                                                   
     "misalignments"  attributable   to  disparate  ownership                                                                   
     interests  in  the  Gas  Cap  and  the  Oil  Rim,  those                                                                   
     misalignments  did not create  an economic  disincentive                                                                   
     for a  major gas sale.   In addition, the  Department of                                                                   
     Natural  Resources  approved   the  disparate  ownership                                                                   
     interests between  the Oil Rim  and the Gas cap  as part                                                                   
     of  the Prudhoe  Bay Unit Agreement.   It  would not  be                                                                   
     appropriate  to seek  termination of  the leases  simply                                                                   
     because  the lessees have  not completely realigned  the                                                                   
     interests that DNR previously approved.                                                                                    
REPRESENTATIVE  OGAN turned  to  the issue  of  gas balancing  and                                                              
posed  a  hypothetical  situation.   There  is  no  gas  balancing                                                              
agreement,  and  the  three  major  producers  are  looking  at  a                                                              
project.   One wants it  to go one way,  but the other  two prefer                                                              
another way.   He asked whether lack of a gas  balancing agreement                                                              
doesn't give that  minority owner a "pocket veto,"  in essence, if                                                              
that one owner  doesn't agree to  a route.  He asked  whether that                                                              
could  be used  as leverage  in negotiating  with  the other  two,                                                              
because  if there  is no  gas balancing  agreement,  then the  gas                                                              
cannot be commercialized.                                                                                                       
MR. GRIFFIN  responded that  a gas  balancing arrangement  is just                                                              
one of  a number  of commercial  arrangements  that would have  to                                                              
take place among the working-interest owners.  He added:                                                                        
     I  don't  think  that  the   lack  of  a  gas  balancing                                                                   
     agreement today would necessarily ...                                                                                      
TAPE 01-10, SIDE B                                                                                                            
     ... inhibit  commercial development if two  out of three                                                                   
     working-interest  owners  wanted to  go  their own  way.                                                                   
     I'm  going  to  have  to review  the  Prudhoe  Bay  Unit                                                                   
     Operating  Agreement again,  but  essentially ...  there                                                                   
     are balancing  arrangements already  in place among  the                                                                   
     working-interest  owners. ... And  it would probably  be                                                                   
     more appropriate  ... for someone from the  companies to                                                                   
     answer this  question.  But  I think that to  the extent                                                                   
     you're referring specifically  to the existence of a gas                                                                   
     balancing agreement  - as I understand that  term - that                                                                   
     agreement  may  already  exist  in  Article  39  of  the                                                                   
     Prudhoe Bay Unit Operating Agreement.                                                                                      
REPRESENTATIVE OGAN  recalled that in testimony  this year [before                                                              
the House  Special Committee  on Oil and  Gas] the companies  said                                                              
there isn't  a gas balancing  agreement.   He again asked  whether                                                              
that could be used as leverage regarding  the choice of a route if                                                              
the three producers didn't agree.                                                                                               
MR. GRIFFIN replied:                                                                                                            
     I personally don't  see how that could be used  as a ...                                                                   
     real lever  in the discussions among the  companies. ...                                                                   
     The companies  may have different views ...  today about                                                                   
     ... how particular aspects of  gas development should be                                                                   
     treated.   But I  think at  the end  of the day  they're                                                                   
     going to  try and align themselves.  ... I guess  I just                                                                   
     don't  foresee the existence  or lack  thereof of  a gas                                                                   
     balancing  agreement preventing  them  from ...  getting                                                                   
     together,  because ultimately  they  will get  together,                                                                   
     one way or another.                                                                                                        
REPRESENTATIVE  OGAN remarked  that  he has  talked directly  with                                                              
people who have been around the industry  for a while, and who are                                                              
directly involved with the "majors"  who feel that that is a major                                                              
factor.  He said he was trying to  determine Mr. Griffin's take on                                                              
it, and whether he had firsthand knowledge.                                                                                     
MR. GRIFFIN specified that he didn't have firsthand knowledge.                                                                  
SENATOR  OLSON  asked,  "If  there are  changes  in  agreements  -                                                              
realizing that the  district I represent is the North  Slope - are                                                              
there any significant  negative effects to the local  people up on                                                              
the North Slope if some of these agreements are to be changed?"                                                                 
MR. GRIFFIN replied:                                                                                                            
     The  agreements  I'm  thinking   of  generally  are  the                                                                   
     Prudhoe  Bay  Unit  Agreement,   the  Prudhoe  Bay  Unit                                                                   
     Operating Agreement, and perhaps  the Point Thomson Unit                                                                   
     Agreement  and the  Point Thomson  Operating  Agreement.                                                                   
     ... I don't see that changes  to any of those agreements                                                                   
     should have  negative effects on  the people ...  of the                                                                   
     North  Slope.    Those  changes  will  ...  address  the                                                                   
     relative interests  in each lease or  participating area                                                                   
     that  the  working-interest owners  have.    It'll be  a                                                                   
     shuffling of interests.                                                                                                    
     Of course, once  a gas project is built, or  ... as it's                                                                   
     being  built,  ...  there's  going  to be  a  number  of                                                                   
     effects on  the people on the  North Slope, and  I'm not                                                                   
     really prepared to address those effects.                                                                                  
CHAIRMAN TORGERSON  asked whether  Mr. Griffin's understanding  is                                                              
that the balancing agreements that  were negotiated because of the                                                              
ARCO-Phillips merger are public documents.                                                                                      
MR. GRIFFIN answered that he doesn't believe they are.                                                                          
CHAIRMAN TORGERSON  asked if  Mr. Griffin  would venture  to guess                                                              
why that is.                                                                                                                    
MR. GRIFFIN replied:                                                                                                            
     The reason I  have them and they are not  public is that                                                                   
     I obtained  them under the  investigative powers  of the                                                                   
     attorney general,  as part of the merger  investigation.                                                                   
     And    there   are    fairly   strict    confidentiality                                                                   
     requirements  that attach to  investigations like  that.                                                                   
     ...  As a  rule,  private  companies don't  share  their                                                                   
     commercial   negotiations  and   ...  their   commercial                                                                   
     arrangements publicly.                                                                                                     
CHAIRMAN TORGERSON expressed his understanding that the                                                                         
legislature has a request in, from Mr. Jack Chenoweth, for                                                                      
copies.  He stated:                                                                                                             
     Initially  we were  told it was  confidential, and  then                                                                   
     were told later  that they'd get us one Xeroxed  copy of                                                                   
     it so that we could review those  ... as to how they may                                                                   
     affect the old agreements versus  the new ones, because,                                                                   
     quite honestly,  this is like a mysterious  document out                                                                   
     there that nobody wants to talk about.  ...                                                                                
     I  can't   tell  you  if  the  state's   interests  were                                                                   
     protected  or  not,  and neither  can  you,  apparently,                                                                   
     because  you've ...  conflicted yourself  out by  saying                                                                   
     [they're]  confidential.   So ... if  you obtained  them                                                                   
     that way,  I'm assuming  you can't  speak about them  or                                                                   
     what's  in  them  to  any degree  ....    I  think  it's                                                                   
     important that  our Legislative Legal [Services]  review                                                                   
     those  documents, which  I understand  are six  volumes,                                                                   
     versus the  Prudhoe Bay Unit  Agreement was  one volume,                                                                   
     and that  was negotiated however  many years ago.  ... I                                                                   
     can't believe  it's the  same information and  nothing's                                                                   
     changed ....  I believe we do  have a request in, to get                                                                   
     those documents.                                                                                                           
MR. GRIFFIN  replied, "I  think you  should review  those.   I was                                                              
under  the impression  that  the legislature  had,  in fact,  been                                                              
privy to some  of that information during the  merger, but perhaps                                                              
I'm wrong."                                                                                                                     
CHAIRMAN TORGERSON responded:                                                                                                   
     Well,  they  probably  were,  but  the  people  on  that                                                                   
     committee  were  conflicted out  also.   They  signed  a                                                                   
     confidentiality  agreement that  lasts beyond life.  ...                                                                   
     Whoever  drafted that one  was a  dandy, but I  wouldn't                                                                   
     [sign]  it myself  because it would  just [prevent]  you                                                                   
     from being able  to discuss it ... in any  event, at any                                                                   
     time, in  any case,  the way I read  the thing.  ... But                                                                   
     I'm  not  looking  for  that to  be  presented  to  this                                                                   
     committee  in a confidential  form,  because I won't  do                                                                   
     that.   I don't  think it needs  to be confidential,  or                                                                   
     nothing  that I  [am] going  to  review is  going to  be                                                                   
     confidential, from my point of view.                                                                                       
REPRESENTATIVE DAVIES said to Mr. Griffin:                                                                                      
     In  answer to  one of  the questions  earlier, you  said                                                                   
     that  the  state's  interest  - I  think  ...  you  were                                                                   
     talking about  alignment with the industry  ... and that                                                                   
     our  interest was,  I took  you to  be saying,  entirely                                                                   
     within  our ability to  tax and  to get severance  taxes                                                                   
     and royalties off the development of the gas. ...                                                                          
     I  wanted to  ask you  to broaden  the consideration  to                                                                   
     lower energy  costs for citizens if gas  were available,                                                                   
     and   the   possible   development    of   petrochemical                                                                   
     industries  and those  kinds of  things, and  how do  we                                                                   
     balance those interests of the  State of Alaska with the                                                                   
     severance  taxes  and  royalties.   Clearly,  there  are                                                                   
     scenarios  where  ...  it would  be  in  our  collective                                                                   
     interest  to ... have  a lower  wellhead value and  have                                                                   
     the gas produced,  because of these other  benefits. ...                                                                   
     What's  the   calculation  that  we  do  to   make  that                                                                   
MR. GRIFFIN answered:                                                                                                           
     That's a good  question.  I didn't mean to  suggest that                                                                   
     ... the legislature's only power  in this regard applied                                                                   
     to its  tax regime. ... I  was speaking in terms  of ...                                                                   
     what  the  appropriate  mechanism  is ...  in  which  to                                                                   
     accomplish   particular   objectives,   and   what   the                                                                   
     objectives  are,  I think,  as  a policy  choice  that's                                                                   
     given  to  the  legislature.     And  I  think  you  can                                                                   
     certainly  make  tradeoffs between  wellhead  value  and                                                                   
     other  interests  - gas  to  local communities  and  the                                                                   
     Again, I was just suggesting  that you don't want to try                                                                   
     and accomplish  those objectives  by changing the  terms                                                                   
     of the  leases that  the state  has with the  producers.                                                                   
     You  want to  pick  other mechanisms  for  accomplishing                                                                   
     those objectives,  and there may be many  different ways                                                                   
     of  accomplishing  those objectives.  ...  There may  be                                                                   
     ways in which we take our royalty  in kind and devote it                                                                   
     to ... the interests you've  described, or we create tax                                                                   
     incentives for certain types  of conduct that accomplish                                                                   
     the legislature's  goals.   I think it  is up to  you to                                                                   
     come up  with what the  appropriate goals are,  and then                                                                   
     there  are  a number  of  different ways,  probably,  to                                                                   
     accomplish those goals.                                                                                                    
     Personally, though,  in any sort of tradeoff  like that,                                                                   
     ... I don't  like trading wellhead value  unless someone                                                                   
     can show  me that ... when  you add the benefits  of the                                                                   
     jobs and  the benefits  of the local  gas use, that  you                                                                   
     come out  with greater economic  benefit than  you would                                                                   
     get from just taking that wellhead  value and paying for                                                                   
     the  gas or paying  for the  jobs yourself.   So ...  we                                                                   
     want  to be  careful,  when  we start  trading  wellhead                                                                   
     value for something,  to make sure that we  actually get                                                                   
     what we're paying for.                                                                                                     
CHAIRMAN  TORGERSON thanked  Mr. Griffin  and asked whether  there                                                              
were further questions; none were offered.                                                                                      
CHAIRMAN TORGERSON called  an at-ease at 4:47 p.m.   He called the                                                              
meeting back to order at 5:03 p.m.                                                                                              
Gas Pipeline Office                                                                                                           
CHAIRMAN TORGERSON  reminded members that although  Mr. Bill Britt                                                              
had given  a lengthy presentation  at the July  committee meeting,                                                              
he had been invited  to update the committee on the  status of the                                                              
memorandums  of  understanding  (MOUs)   with  the  producers  and                                                              
Foothills Pipe Lines,  as well as anything else that  may be going                                                              
on with the [Gas] Pipeline Office.                                                                                              
MR. WILLIAM G. BRITT, JR., State  Pipeline Coordinator, Department                                                              
of Natural Resources,  came forward, noting that he  was tasked by                                                              
Administrative Order  187 with setting up the office  that will be                                                              
responsible  for permitting  natural gas  pipelines to move  North                                                              
Slope  gas   to  market,  and   for  overseeing   construction  of                                                              
pipelines.   He offered a  list of activities and  accomplishments                                                              
[in  committee  packets].    The   first  section  read  [original                                                              
punctuation and capitalization provided]:                                                                                       
                       Gas Pipeline Office                                                                                      
                 Activities and Accomplishments                                                                                 
     Project Proponent Relations                                                                                                
   - We began work planning with Foothills Pipe Lines on                                                                        
     July 26.  Follow-up will occur on August 16 and 17.                                                                        
   - Work planning with the producers' consortium will begin                                                                    
     on August 23.                                                                                                              
   - DFG [Department of Fish and Game] approved the                                                                             
     producers' consultants' fish collection permit.                                                                            
   - Meetings have occurred with representatives of El Paso,                                                                    
     Williams, and Anadarko.                                                                                                    
MR. BRITT  turned attention  to the  second portion  of the  list,                                                              
which read:                                                                                                                     
     Federal Relations                                                                                                          
   - BLM [Bureau  of Land Management]  assigned a  liaison to                                                                   
         the GPO [Gas Pipeline Office].  Discussions are                                                                        
       underway with MMS [Minerals Management Service] for                                                                      
     assignment of a liaison.                                                                                                   
   - The GPC  [Gas Pipeline Coordinator]  and BLM  liaison to                                                                   
     GPO were briefed on DOI/DOE/FERC cooperative efforts on                                                                    
     August 9.                                                                                                                  
   - Travel  to DC [by  Mr. Britt]  is tentatively  scheduled                                                                   
     for mid-September to attend the North American Natural                                                                     
     Gas Forum and to coordinate with FERC and DOE staff.                                                                       
MR.  BRITT  explained that  the  liaison  assigned  by BLM  is  an                                                              
engineer  with a  petroleum pipeline  background.   He also  noted                                                              
that  there is  an  ongoing relationship  with  MMS  in the  State                                                              
Pipeline Coordinator's  office because  of the "Liberty  project."                                                              
He  reported that  the Gas  Pipeline Coordinator  is himself,  and                                                              
said  DOI/DOE/FERC  refers  to  a  task  force  among  the  [U.S.]                                                              
Department of  the Interior, the  Department of Energy,  and FERC,                                                              
formed pursuant  to the  President's energy  policy to  figure out                                                              
how to cooperate on a variety of  issues including a gas pipeline.                                                              
He pointed out  that in his travels to Washington,  D.C., he plans                                                              
to  have   staff-level  interactions   with  both  FERC   and  the                                                              
Department of  Energy; at that  point, he will  have relationships                                                              
going with all of the major federal  agencies that he believes the                                                              
state needs to cooperate with.                                                                                                  
MR. BRITT addressed the next portion of the list, which read:                                                                   
     Legislative Relations                                                                                                      
   - The  GPC provided  testimony at the  Joint Committee  on                                                                   
     Natural Gas Pipelines on July 17 and August 14.                                                                            
   - The   GPC   and  the   DFG   and  DEC   [Department   of                                                                   
         Environmental Conservation] liaisons to the GPO                                                                        
      provided testimony at the Alaska Highway Natural Gas                                                                      
     Policy Council on August 2.                                                                                                
MR. BRITT turned attention to the next portion, which read:                                                                     
     Media Relations                                                                                                            
   - The GPC  was interviewed by  the Journal of  Commerce on                                                                   
     July 19.                                                                                                                   
   - The  GPC was  interviewed by  Petroleum  News Alaska  on                                                                   
     July 27.                                                                                                                   
MR.  BRITT  commented,  "Fortunately,   I  believe,  we  have  not                                                              
received a  great deal of media  relations, so we've been  able to                                                              
concentrate on other things.  A couple  of folks have picked up on                                                              
the opening  of the  office and the  signing of the  reimbursement                                                              
MOUs, and so I've conducted a couple of interviews."                                                                            
MR. BRITT turned attention to the next portion, which read:                                                                     
   - LB&A [Legislative  Budget and Audit Committee]  approval                                                                   
     for the  Chairman [Therriault]  to release funds  to DNR                                                                   
     occurred  on July  17.   Commissioner Pourchot  received                                                                   
     Senator   Therriault's   letter  approving   the   first                                                                   
     expenditures of general funds on July 18.                                                                                  
   - The  reimbursement  MOU with  Foothills  Pipe Lines  was                                                                   
     signed on July 18.                                                                                                         
   - The reimbursement  MOU with the producers was  signed on                                                                   
     August 1.                                                                                                                  
   - RSA forms for state agencies  were completed the week of                                                                   
     July 30.  Detailed attachments have been completed for                                                                     
     DEC and DFG.                                                                                                               
   - Collocation  codes  have been  established  for all  GPO                                                                   
MR.  BRITT  clarified  that the  state  agencies  mentioned  above                                                              
regarding  RSA  forms   are  the  other  agencies   that  will  be                                                              
participants  in   the  Gas  Pipeline  Office.     The  accounting                                                              
functions have been set up with those  agencies to track the money                                                              
and make sure everything stays straight.                                                                                        
MR. BRITT turned attention to staffing, noting that the GPO has                                                                 
begun to staff up, although it is still relatively small in                                                                     
numbers.  That portion of the list read:                                                                                        
     GPO Staffing                                                                                                               
   - Liaisons  from DEC and  DFG have been  hired and  are on                                                                   
     the job.                                                                                                                   
   - The  DFG  Design and  Permitting  Coordinator  has  been                                                                   
     hired and is on the job.                                                                                                   
   - The DFG Field Inspection and  Compliance Coordinator has                                                                   
     been hired and is on the job.                                                                                              
   - Recruitment for DFG Habitat  Biologists III is underway.                                                                   
   - Recruitment  for the DOT  [Department of  Transportation                                                                   
     and Public Facilities] liaison should begin soon.                                                                          
   - Recruitment  for  the  DGC   [Division  of  Governmental                                                                   
     Coordination] liaison should begin soon.                                                                                   
   - The GPO Administrative  Manager has been hired  and will                                                                   
     begin work soon.                                                                                                           
   - Recruitment  for the  Deputy GPC is  underway.   Display                                                                   
     ads ran in Anchorage, Fairbanks, and Juneau papers last                                                                    
   - Two Assistant  Attorneys General  have been assigned  to                                                                   
     assist the GPO on an as-needed basis.                                                                                      
MR. BRITT concluded  by informing members that the  GPO moved into                                                              
its temporary  offices  in the Atwood  Building  on August  10 and                                                              
will be there for the next four and a half months or so.                                                                        
CHAIRMAN  TORGERSON  said he  has  been  hearing rumors  that  the                                                              
producers may have reduced their  scope of work.  He asked whether                                                              
there is any truth to that.                                                                                                     
MR. BRITT  answered  that he hadn't  heard that,  and hadn't  seen                                                              
much evidence of it, so he didn't know.                                                                                         
REPRESENTATIVE OGAN expressed concern  with the appropriation that                                                              
was approved,  saying it creates  new divisions of bureaus.   Once                                                              
this  work is  done, he  asked, are  these positions  going to  go                                                              
away?   He acknowledged  that Mr. Britt  couldn't speak  for other                                                              
portions  of the administration,  but asked  whether these  people                                                              
are being  told they are  going to work  themselves out of  a job,                                                              
for example.                                                                                                                    
MR. BRITT replied:                                                                                                              
     The Gas  Pipeline Office  has always  been viewed  as an                                                                   
     entity  with a sunset  clause.   And the  administrative                                                                   
     order speaks to it, and I believe,  and I've said it out                                                                   
     loud:  The  Gas Pipeline Office's purpose in  life is to                                                                   
     permit the  project and to oversee construction;  when a                                                                   
     gas  pipeline  is operational,  it  will return  to  the                                                                   
     Joint Pipeline  Office, which is  where the rest  of the                                                                   
     operational  pipelines exist,  and that's exactly  where                                                                   
     it should go.                                                                                                              
REPRESENTATIVE  OGAN asked, "What  if it  takes another  27 years?                                                              
Will  you  be   coming  to  the  legislature  next   year  for  an                                                              
appropriation, and the year after, and the year after?"                                                                         
MR. BRITT answered,  "I'll stop somewhere before 27  years. ... At                                                              
the  point  that  the  majority of  our  funding  is  not  through                                                              
reimbursement, I would  expect the patience with  the Gas Pipeline                                                              
Office to wear fairly thin, fairly fast."                                                                                       
REPRESENTATIVE  FATE asked why  there must be  a new hire  for the                                                              
Alaska Department of Fish and Game  habitat biologist, rather than                                                              
recruiting someone interdepartmentally.                                                                                         
MR. BRITT responded  that the liaison came from  within the Alaska                                                              
Department  of Fish  and Game.   He  added that  he believes  both                                                              
those  positions were  filled  by people  from  within the  Alaska                                                              
Department of Fish  and Game; they are new positions  because that                                                              
department's resources  were such that  it couldn't simply  move a                                                              
position from another  program and short-hand that  other program.                                                              
Mr. Britt offered his belief that  the DEC liaison, recruited from                                                              
outside of state government, may  be the only current GPO employee                                                              
who wasn't  already a state  employee at  the time of  accepting a                                                              
position there.                                                                                                                 
CHAIRMAN TORGERSON reminded members  that at the last meeting he'd                                                              
raised concern  about the  administration's and the  legislature's                                                              
going down  parallel courses and  not talking much to  each other.                                                              
He noted  that right before coming  to Fairbanks, he'd  received a                                                              
letter from  Commissioner Pourchot  saying he  wants to  work with                                                              
the  legislature and  this  committee; Commissioner  Pourchot  had                                                              
also  asked Chairman  Torgerson for  suggestions on  how he  might                                                              
communicate better.   Chairman Torgerson  asked Mr.  Britt whether                                                              
he does  weekly updates for the  public, for example,  and whether                                                              
he could include the committee.                                                                                                 
MR. BRITT answered:                                                                                                             
     I'm  not doing that  right now,  Senator Torgerson,  but                                                                   
     I'm at  the point where the  activities are such  that a                                                                   
     weekly  update wouldn't  be too  short and  boring.   So                                                                   
     it's probably  time to begin preparing  periodic updates                                                                   
     for a variety of folks, and  I'd be happy to include you                                                                   
     on the list.                                                                                                               
CHAIRMAN TORGERSON  replied that  he appreciated that,  but wasn't                                                              
quite  sure what  the best  way to  interact  would be.   He  said                                                              
information is not  free-flowing, and that needs  to be addressed.                                                              
Whether  it  is what  Mr.  Britt  proposed  for every  office,  he                                                              
indicated, he wasn't  sure, but he suggested that  wouldn't be too                                                              
MR. BRITT responded:                                                                                                            
     No,  I don't think  so.   My expectation  was, with  the                                                                   
     general funds from LB&A, that  I would be in as frequent                                                                   
     a contact  with Senator  Therriault as  he wished  to be                                                                   
     briefed  on what  was going  on  and how  the money  was                                                                   
     being  spent.   And  I would  certainly  offer the  same                                                                   
     thing to you or any other member  of this committee.  If                                                                   
     you  ever would  like a status  report on  any of  these                                                                   
     topics or anything else within  the Gas Pipeline Office,                                                                   
     please give me a call.                                                                                                     
CHAIRMAN TORGERSON  asked whether there were further  questions or                                                              
comments;  none  were offered.    He  thanked  Mr. Britt  for  the                                                              
Testimony - North Slope Borough Assembly                                                                                      
MR.  MIKE AAMODT,  Member,  North  Slope Borough  Assembly,  North                                                              
Slope Borough, came forward to testify as follows:                                                                              
     My name is  Mike Aamodt.  I've lived on  the North Slope                                                                   
     for 29 years,  and I've been on the North  Slope Borough                                                                   
     Assembly  for  14 years.  I  am currently  the  Assembly                                                                   
     Thank  you  for the  opportunity  to address  the  Joint                                                                   
     Committee  on Natural Gas  Pipelines.   For more than  a                                                                   
     quarter  of a  century, the  people of  the North  Slope                                                                   
     have  played an  active  role in  Alaska's  oil and  gas                                                                   
     development.    Ever since  the  first oil  flowed  from                                                                   
     Prudhoe  Bay,  North  Slope  residents  have  worked  in                                                                   
     partnership with the state and  the industry to expedite                                                                   
     development and  at the same  time protect the  land and                                                                   
     wildlife  that feed the  people that  I am married  into                                                                   
     and form the spiritual core of Inupiat culture.                                                                            
     We believe  natural gas development is the  next logical                                                                   
     step in the North Slope resource  extraction.  We salute                                                                   
     the legislature  and the governor for firm  support of a                                                                   
     highway route in delivering  gas to market.  The highway                                                                   
     route  makes a  lot of  sense because  it increases  the                                                                   
     potential  for in-state use  of gas.   This can  help to                                                                   
     create   new  industries  along   the  route  and   keep                                                                   
     communities  viable,  especially  in rural  areas  where                                                                   
     energy costs are so high.                                                                                                  
     Most important  to residents of the North  Slope Borough                                                                   
     is that the  highway route makes the  best environmental                                                                   
     sense.  By using the existing  pipeline corridor instead                                                                   
     of  the  ice-choked  Beaufort  Sea,  the  highway  route                                                                   
     minimizes  damage  to  the  land  and the  risk  to  the                                                                   
     wildlife.  From  our perspective, putting a  pipe out in                                                                   
     the Beaufort Sea is just asking for trouble.                                                                               
     When the Alaska Highway Natural  Gas Policy Council held                                                                   
     a  hearing  in Barrow  a  few  weeks ago,  many  whaling                                                                   
     captains  and elders  showed  up to  tell the  committee                                                                   
     about  the current  and wind-driven  forces of ice  that                                                                   
     they've seen out  in the ocean. It's going  to take more                                                                   
     than a few  feet of ocean floor to protect  the pipeline                                                                 
     in  the  Beaufort  Sea.  That's   why  the  North  Slope                                                                   
     Borough,  the  Alaska  Eskimo  Whaling  Commission,  the                                                                   
     whaling   captains   association,    and   other   local                                                                   
     organizations  have expressed  opposition  to the  over-                                                                   
     the-top route.                                                                                                           
     In  the short  term,  any summer  construction  activity                                                                   
     will   disrupt  the  bowhead   whale  migration   around                                                                   
     Kaktovik,  Nuiqsut and  Barrow.   This is  unacceptable.                                                                   
     In   the  overall   scheme   of  things,   three   small                                                                   
     communities  are  probably  meaningless  when  the  cost                                                                   
     savings of  the northern route  is considered.   But for                                                                   
     the  people  dependent on  that  resource,  the loss  is                                                                   
     beyond value.                                                                                                              
     Apart  from the concern  over where  the pipeline  goes,                                                                   
     there  is also the  political and  economic question  of                                                                   
     how to make it happen.  The  North Slope Borough took an                                                                   
     early  interest  in  the  possibility  of  public-sector                                                                   
     involvement in financing the gas line.                                                                                     
     As a  member of  the Alaska  Gasline Port Authority,  we                                                                   
     explored finance options as  mechanisms for lowering the                                                                   
     effective cost to industry and  maximizing the return to                                                                   
     the state  and communities  all over  Alaska.  The  port                                                                   
     authority  has sponsored  some good  discussion and  has                                                                   
     brought  consultants  with  relevant  expertise  to  the                                                                   
     However, now that your committee  and the governor's gas                                                                   
     policy  council  have commenced  hearings,  the  borough                                                                   
     believes  it should defer  to both  groups and wait  for                                                                   
     the results of these hearings.                                                                                             
     The  North  Slope  Borough   will  remain  open  to  all                                                                   
     development  scenarios  under  consideration,  including                                                                   
     the port authority.  We also  want to see the results of                                                                   
     industry  efforts through the  Consortium Group  and the                                                                   
     Sponsor Group.                                                                                                             
     We feel  so strongly about  [this] that the  North Slope                                                                   
     Borough  Assembly has passed  resolution 44-2001  to put                                                                   
     our position  on the record.   That resolution  says, in                                                                   
     part: ...                                                                                                                  
          1.  The  North  Slope  Assembly  supports  the                                                                        
          administration's   current   efforts   to  use                                                                        
          borough  participation  in the  port authority                                                                        
          as  one means  of encouraging  the development                                                                      
          of North Slope natural gas resources;                                                                                 
          2.  The   Assembly  believes   it  is  in  the                                                                        
          borough's   best   interests   for   the  port                                                                        
          authority, at  the present time, not to expand                                                                        
          its  role until  other  development strategies                                                                        
          are fully explored; and                                                                                               
          3. The  Assembly supports the administration's                                                                        
          continued  effort  to  take  into  account the                                                                        
          entire  political picture  and pursue  ... and                                                                        
          support  the natural gas  development strategy                                                                        
          which  will  best  protect  the  borough's tax                                                                        
          base  and method  of taxation,  and ensure the                                                                        
          continued   vitality   of  the   economic  and                                                                        
          political   structure   of  the   North  Slope                                                                        
     I need to make one comment about  resource revenues.  We                                                                   
     have  been  approached by  the  producers and  asked  to                                                                   
     consider support  for the over-the-top route.   While we                                                                   
     are  predisposed  not  to grant  that  request,  we  are                                                                   
     getting  such mixed messages  from the legislature  that                                                                   
     it's hard to tell where the greater danger lies.                                                                           
     It is fitting that our testimony  is given in Fairbanks,                                                                   
     because  on the one  hand, the  legislature wants  us to                                                                   
     join  in   promotion  of  the  highway  route   so  that                                                                   
     Fairbanks and  other parts of the Interior  can benefit,                                                                   
     but at  the same time the  North Slope Borough  is under                                                                   
     intense   and  very   pointed   attack  from   Fairbanks                                                                   
     legislative   leaders  over   our  method  of   resource                                                                   
     taxation and  our ability to  issue bonds.  That  is not                                                                   
     exactly the  kind of gesture  you make to  a development                                                                   
     In  the  meantime,  our interests  and  concerns  remain                                                                   
     constant.   We support the  statewide effort  to develop                                                                   
     our   natural  gas   resources.     We  strongly   favor                                                                   
     transportation down  the existing pipeline  corridor and                                                                   
     the  Alaska  Highway.    This  is  consistent  with  our                                                                   
     preference  for onshore development,  instead of  taking                                                                   
     unnecessary  risks out  in the unstable  icepack of  the                                                                   
     Beaufort Sea.   Also, it  will ... occur largely  within                                                                   
     the existing  resource development area, which  helps to                                                                   
     confine the impacts to our land  and wildlife.  Finally,                                                                   
     gas  development  will help  to  sustain the  state  and                                                                   
     local revenue stream.                                                                                                      
     After all, we are partners in  resource development, and                                                                   
     the borough  looks forward to working together  with you                                                                   
     for the good of Alaska.  We  look forward to the results                                                                   
     of  your work  in this  committee and  to the  continued                                                                   
     partnership  in   the  reasonable  development   of  the                                                                   
     resources we've  been blessed with.  We are  all in this                                                                   
     together,  and through  mutual respect,  we can  achieve                                                                   
     the goals of all Alaskans.                                                                                                 
MR. AAMODT concluded by saying that is the report from the                                                                      
borough's administration and the assembly.  It may not represent                                                                
his own feelings completely, but represents the group.                                                                          
REPRESENTATIVE  OGAN inquired  about  Mr.  Aamodt's comment  about                                                              
receiving mixed messages  from the legislature.   He remarked that                                                              
he  doesn't believe  there has  been  any mixed  message from  the                                                              
legislature about the route.                                                                                                    
MR. AAMODT responded:                                                                                                           
     The mixed messages  I'm referring to are  attacks on our                                                                   
     taxing authority  and our ability  to sell bonds.   It's                                                                   
     becoming a  little bit difficult  to sustain our  way of                                                                   
     existence with  the way the  legislature has come  at us                                                                   
     in the  past.  I don't  think that's going  to continue,                                                                   
CHAIRMAN TORGERSON thanked Mr. Aamodt for his testimony.                                                                        
REPRESENTATIVE JOULE  commented that with  the effort to  open the                                                              
Arctic National Wildlife Refuge (ANWR)  [to development], he would                                                              
like to thank the people of the North  Slope for their active role                                                              
in  that  endeavor.   He  concluded,  "It's  greatly  appreciated,                                                              
because we are being partners in a lot of ways."                                                                                
CHAIRMAN TORGERSON agreed with Representative  Joule and related a                                                              
story about  being in Washington,  D.C., mentioning two  women who                                                              
had done an excellent job of lobbying on behalf of opening ANWR.                                                                
Alaska Highway Natural Gas Policy Council                                                                                     
MR.  JIM SAMPSON,  Co-Chair,  Alaska  Highway Natural  Gas  Policy                                                              
Council, came forward to provide  an update, noting that the other                                                              
co-chair is  Mr. Frank Brown.   He informed members that  with him                                                              
were    Mr.   Charlie    Cole,    who   chairs    the    council's                                                              
Federal/International  Action subcommittee,  and Mr. Ken  Freeman,                                                              
special assistant to the governor,  who also provides staff to the                                                              
MR. SAMPSON  reported that  since the last  time the  council came                                                              
before the committee, it has continued  public hearings throughout                                                              
the state on  the issue of a  gas pipeline.  Public  hearings have                                                              
been  held in  Barrow (July  19) and  Juneau (August  2), and  the                                                              
final meeting is scheduled in Valdez (August 23).                                                                               
MR. SAMPSON reported that the council's  subcommittees continue to                                                              
meet,  looking at  issues important  to  the commercialization  of                                                              
Alaska's natural gas.  Those efforts  are led by five subcommittee                                                              
chairs:  Mr.  Cole chairs the Federal/International  Action group;                                                              
Mr.  Bill  Corbus  heads  the State  Pipeline  Ownership  and  Tax                                                              
Structure group; Mr. Mike Navarre  heads the Alaska Hire/Buy/Build                                                              
group;  Ms. Peg  Tileston leads  the Environmental  Considerations                                                              
group; and Mr. Ken Thompson leads  the Access for In-State Gas Use                                                              
and Future Opportunities group.                                                                                                 
MR. SAMPSON  expressed hope that in  the next four or  five weeks,                                                              
subcommittee   chairs   will   start  putting   on   paper   their                                                              
recommendations   on    issues   they've   been    discussing   in                                                              
subcommittee.  It  is hoped that the first draft  of the council's                                                              
report will be completed between  the first and middle of October,                                                              
with a final report  to the governor by November  30.  Mr. Sampson                                                              
deferred  to   Mr.  Cole  to   discuss  issues  relating   to  his                                                              
MR. CHARLES  E. COLE,  Chair, Federal-International  Subcommittee,                                                              
Alaska Highway  Natural Gas Policy Council, informed  members that                                                              
the meeting in  Barrow was "very successful."   From that hearing,                                                              
the council learned of the intense  opposition to a pipeline route                                                              
across the  Beaufort Sea.   He  noted that  he had encouraged  the                                                              
administration  to transcribe that  testimony so  that it  will be                                                              
available for anyone who wishes to  look at it.  He added, "It was                                                              
dramatic and telling."                                                                                                          
MR.  COLE   reported  that   he'd  arranged   a  meeting   of  his                                                              
subcommittee  at  which  Mr.  John   Katz  and  Mr.  Bob  Loeffler                                                              
testified;  he'd recorded  that testimony  and had it  transcribed                                                              
[copy in packets.]  Important was  testimony from Mr. Katz and Mr.                                                              
Loeffler  about  [draft]  legislation  provided  to  U.S.  Senator                                                              
Murkowski and  perhaps other members  of the U.S. Senate  from the                                                              
producers.   [That  draft legislation,  dated July  19, 2001,  and                                                              
titled "Alaska Natural Gas Pipeline  Act of 2001, is also included                                                              
in committee packets.]                                                                                                          
MR. COLE  further reported that when  [Mr. Katz and  Mr. Loeffler]                                                              
were  asked whether  the  proposed legislation  is  route-neutral,                                                              
they said no, in their view.  He  suggested that committee members                                                              
may  want to  use  that  transcribed  testimony to  further  their                                                              
interrogation of Mr. Katz and Mr.  Loeffler at the following day's                                                              
hearing.    [He   noted  that  Ms.  Esther  Wunnicke's   name  was                                                              
misspelled  in  the  transcript,  and  that  Representative  Ethan                                                              
Berkowitz was inadvertently referred to as the Speaker.]                                                                        
MR. COLE  also noted that discussed  was the effect of  the treaty                                                              
between the United  States and Canada regarding  the ANGTS [Alaska                                                              
Natural Gas Transportation  System] route; he indicated  the views                                                              
of  Mr.  Katz and  Mr.  Loeffler  on  that  are contained  in  the                                                              
transcript as well.                                                                                                             
MR.  COLE informed  members  that at  his  suggestion, Mr.  Rigdon                                                              
Boykin  had   drafted  another  version  of   federal  legislation                                                              
[provided  in packets]  that proposes  to just  amend [the  Alaska                                                              
Natural  Gas  Transportation Act  of  1976  (ANGTA)] to  clear  up                                                              
problems  it poses  to  a highway  route now.    By contrast,  the                                                              
producers' legislation is designed  to favor a Beaufort Sea route.                                                              
Mr. Cole  concluded by  emphasizing the need  to cooperate  and by                                                              
offering any information that the council is able to generate.                                                                  
MR. COLE noted that he had comments  to make on other testimony as                                                              
well.   He  recalled  about ten  years ago  [when  he himself  was                                                              
attorney general]  that he and Commissioner Harold  Heinz [of DNR]                                                              
looked at the producers' implied  obligation to develop the gas at                                                              
Prudhoe  Bay; the principal  consideration  they talked about  was                                                              
whether  that   gas  was  needed   economically  to   further  the                                                              
extraction  of oil  from  Prudhoe  Bay.   He remarked,  "Well,  it                                                              
raised such  a hue  and cry when  we even  mentioned that  we were                                                              
looking at  it, that for  some reason  or other the  whole subject                                                              
was dropped."                                                                                                                   
MR. COLE  suggested it might be  good for the legislature  to look                                                              
aggressively  at the  implied obligation  to  develop, "because  I                                                              
have the  sense, to the extent  that that obligation  exists, that                                                              
... a lessee of  oil and gas leases ought not to  be able to defer                                                              
the development of those reserves  essentially in perpetuity until                                                              
the lessee  concludes,  'Well, I've  got a bonanza  here now,  and                                                              
it's time to do something,' and to  remain sort of silent up until                                                              
that time."   He said there  must be a  lot of law on  that point,                                                              
and an able  legal scholar might  be helpful to this  committee in                                                              
looking at those cases.  He added,  "If you find ... they pass the                                                              
'red face'  test, then you  can write  that letter and  say, 'Hey,                                                              
... it's  time ...  to put  up or shut  up or  say goodbye.'   And                                                              
that's  pretty bold  talk, but,  ... it's  gone on  for years  and                                                              
years, and something has to happen."                                                                                            
MR. COLE also commented that as he  looks at the statutes and what                                                              
happens  with respect  to Alaska's  oil lands,  so often one  runs                                                              
across this  confidentiality; many  times, citizens of  this state                                                              
just can't find  out what's going on with respect  to their prized                                                              
reserves.   [Not on  the tape but  recorded in  the log  notes was                                                              
that he believes the best government  is when the people have full                                                              
knowledge of what is going on with their resources.]                                                                            
TAPE 01-11, SIDE A                                                                                                            
MR.   KEN  FREEMAN,   Special   Assistant,   Gasline  &   Business                                                              
Development, Office of the Governor, told members:                                                                              
     One of  the interesting things  we learned in  Southeast                                                                   
     Alaska,  actually,  is  how   much  Southeast  sees  the                                                                   
     potential benefits  from a highway project as  well.  We                                                                   
     heard  from  the  cities  of   Haines  and  Skagway,  in                                                                   
     particular, who see themselves  as a very important link                                                                   
     in terms  of moving people  and materials up  Lynn Canal                                                                   
     and into Canada. ... They're  taking this very seriously                                                                   
     in  terms  of  maybe  even   potentially  expanding  the                                                                   
     facilities at their docks.                                                                                                 
     We also  heard from the  Juneau Chamber of  Commerce and                                                                   
     Southeast  Conference   on  even  Juneau's   perception,                                                                   
     hopefully,  that  they  would even  have  some  economic                                                                   
     benefits  also of  materials and people  moving up  Lynn                                                                   
     Canal.    And interestingly  enough,  ...  we've  talked                                                                   
     about  potential  linking  of   other  opportunities  in                                                                   
     Anchorage  and Valdez  off  an Alaska  Highway  project;                                                                   
     Haines also  sees an opportunity  for itself to  have an                                                                   
     LNG [liquefied natural gas] facility.                                                                                      
     Bill  Corbus's committee  met  all day  yesterday -  the                                                                   
     state  ownership and  tax structure  committee  - and  I                                                                   
     think  he's  making  some good  progress  and  wants  to                                                                   
     interface with this group as  much as possible, in terms                                                                   
     of   how   he   starts  to   formulate   some   of   his                                                                   
     And lastly, I just wanted to  mention:  I think the last                                                                   
     meeting we discussed a trip  we made to Austin, Texas, a                                                                   
     couple of  the gas policy  council members; we  met with                                                                   
     their division of lands, learned  a little bit about how                                                                   
     Texas  takes its  gas, in kind  versus in  value.   They                                                                   
     take about  half their gas in  kind, and about  half the                                                                   
     time make  more money  on it than  they would in  value.                                                                   
     We've  invited an individual  up from  Texas to join  us                                                                   
     September 17th,  and we'd like to make him  available to                                                                   
     you if you have an interest in that.                                                                                       
MR. SAMPSON  commended  Chairman Torgerson  and the committee  for                                                              
the leadership  role in  the legislature on  the issue of  oil and                                                              
gas,  noting that  there will  be  a lot  of expertise.   He  also                                                              
commended members for going to Canada,  saying he believes it will                                                              
be worthwhile.   He said the  council looks forward  to continuing                                                              
to  work with  the committee  as it  finalizes its  report to  the                                                              
CHAIRMAN  TORGERSON thanked  council members  for their  comments,                                                              
noting that Mr. Bill Corbus had called  him and invited him to the                                                              
meeting; however, he was in Fairbanks,  so it didn't work out.  He                                                              
added, "We  are going  to exchange data  and information  back and                                                              
forth."  He noted  that Commissioner Condon would  go through some                                                              
of  that  at  the  following  day's  hearing.    Furthermore,  the                                                              
administration  has made  Mr.  Pedro van  Meurs  available to  the                                                              
committee,  beginning with  a teleconference  on the 18th  between                                                              
mainly Mr.  Van Meurs  and Chairman  Torgerson, "setting  down the                                                              
groundwork on where  we're going to go on the  severance taxes and                                                              
some of the other things."  He added,  "Most everything that I do,                                                              
if not all of it, I want to make  public."  He offered to interact                                                              
in any way possible with the council.                                                                                           
CHAIRMAN  TORGERSON asked  whether  there  were further  comments;                                                              
none were offered.                                                                                                              
Public Testimony                                                                                                              
CHAIRMAN  TORGERSON  announced  that   the  committee  would  hear                                                              
further public testimony.                                                                                                       
KEITH  HAND,  Fairbanks  Natural  Gas, came  forward  to  testify,                                                              
noting that Fairbanks  Natural Gas is a certificated  utility.  He                                                              
explained that  there is, indeed,  natural gas in  Fairbanks, with                                                              
LNG being trucked  up from Cook Inlet.  He said  Fairbanks Natural                                                              
Gas has been widely accepted with  enthusiasm from a lot of people                                                              
in the  community; he mostly  supports the committee's  worthwhile                                                              
efforts, and would offer statements  that he believes to be common                                                              
and generally  representative of  most residents of  Fairbanks and                                                              
the Interior.                                                                                                                   
MR. HAND  referred to  gas available  for Alaskans,  not only  for                                                              
heat  but  also for  electricity.    He  reported that  the  local                                                              
utility,  Golden Valley  Electric  Association  (GVEA), obtains  a                                                              
substantial  amount of  its power  from "Cook  Inlet gas, ...  the                                                              
intertie."  Future ancillary industries  are very important to the                                                              
Interior,  he  said,  and  are being  studied  by  a  plethora  of                                                              
entities;  he  cited  Williams [Companies]  and  El  Paso  [Energy                                                              
Corporation] as two.                                                                                                            
MR. HAND brought up a second point:   availability at an equitable                                                              
price  via  netback  pricing, tariffs,  and  perhaps  royalty  gas                                                              
tagged for in-state use; he suggested  those might be solutions to                                                              
dampen any price spikes caused by Lower 48 energy crises.                                                                       
MR. HAND  encouraged infrastructure  development  prior to  when a                                                              
gas line  becomes available  to the people.   If a  pipeline comes                                                              
through town and  there is no infrastructure to  support it, there                                                              
will be no benefit from that pipeline  for several years.  Just as                                                              
the pipeline  will demand a high  amount of "labor and  brains" to                                                              
build it, so, too, will the infrastructure  require that expertise                                                              
in pipeline capabilities.  He concluded by saying the following:                                                                
     I'd just  like to leave you  with the goal to  unite and                                                                   
     conquer.     Currently,  there   are  three   government                                                                   
     entities ... focusing on the  pipeline:  ... yourselves,                                                                   
     ...  the governor's  policy council,  and the ...  three                                                                   
     mayors of Valdez, North Slope,  and Fairbanks - powerful                                                                   
     mayors -  have also had their  own group in  the [Alaska                                                                   
     Gasline] Port  Authority; of course, they have  ... kind                                                                   
     of  a  different  agenda.   But  obviously  these  three                                                                   
     groups  should have  the common  goal of  the top  three                                                                   
     points I've  identified.  And these government  entities                                                                   
     really  should  stand  together, I  believe,  provide  a                                                                   
     united  front with  one another,  and  one strong  voice                                                                   
     championing the  best interests of the State  of Alaska,                                                                   
     its  communities, and  its residents,  because  everyone                                                                   
     should be  sharing the same  goals [rather than]  having                                                                   
     three  weaker  voices  and  three  different  groups  to                                                                   
     approach ....  Each time, it  seems a bit redundant, and                                                                   
     I think  if everyone pooled  their interests, it'd  be a                                                                   
     better product, a faster result, and a stronger group.                                                                     
CHAIRMAN  TORGERSON  thanked Mr.  Hand  and  asked if  there  were                                                              
questions; none were  offered.  He then asked  whether anyone else                                                              
wished to  testify; there was no  response.  He closed  the public                                                              
CHAIRMAN TORGERSON reminded members that there was a reception                                                                  
sponsored by the Fairbanks North Star Borough and the Fairbanks                                                                 
Chamber of Commerce that evening at 6 p.m.                                                                                      
CHAIRMAN TORGERSON thanked participants and adjourned the meeting                                                               
at 5:46 p.m.                                                                                                                    

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