JOINT SENATE AND HOUSE SPECIAL COMMITTEE ON OIL AND GAS March 2, 1993 2:05 p.m. SENATE MEMBERS PRESENT Senator Loren Leman, Chairman SENATE MEMBERS ABSENT Senator Rick Halford Senator Bert Sharp Senator Judith Salo Senator Al Adams HOUSE MEMBERS PRESENT Representative Joe Green, Chairman Representative Harley Olberg Representative Jerry Sanders Representative Jerry Mackie Representative Gary Davis Representative Joe Sitton HOUSE MEMBERS ABSENT Representative Pete Kott COMMITTEE CALENDAR Presentation by Julian Darley, President BP Exploration AK WITNESS REGISTER Julian Darley, President British Petroleum ACTION NARRATIVE TAPE SENATE 93-4, SIDE A Number 001 REPRESENTATIVE GREEN called the Joint Senate and House Special Committee on Oil and Gas meeting to order at 2:05 p.m. saying the Senate members would join the Committee when the floor session adjourned. He introduced Julian Darley, President, British Exploration Petroleum AK, to give his presentation. Number 039 JULIAN DARLEY, said they have had a major transformation for the better in their business in Alaska. He said it is continuing as he speaks, and will continue to evolve and develop for the foreseeable future in Alaska. Just a few years ago the outlook for their Alaska business was decidedly not very attractive. But through their major efforts, they changed their outlook for the better. He said they are working very hard to produce 1,150,000 barrels a day at Prudhoe which is nearly 25% off peak. The costs of operating in that field are climbing at an alarming rate, both in terms of dollars per barrel and the total amount of money BP is spending. He explained they are producing more water and gas along with the oil which costs money to handle and earns them nothing. BP decided to try to save their business in Alaska by doing business better. This decision required a transformation in performance. First they aimed at eliminating duplication by sharing common services with ARCO, the other North Slope operator, and this has been successful. Secondly, they radically increased the effectiveness of what BP people were doing. Thirdly, they formed business alliances with vendors and suppliers. Fourthly, they looked at existing leases in active exploration in other areas of the North Slope. He said BP is trying to build an ethic of continuous improvement. It is improving its effectiveness by drawing the collective goals and objectives of the people into greater alignment with the needs of their businesses. Number 181 They have introduced a program called gain sharing where they set specific targets in each of the major measures of their business performance - safety, operating costs, capital projects, environmental protection, and production. They try to match incentives with specific performance targets for each multidisciplinary team within the company. They are working to introduce a new style of working with suppliers which is collaborative or being open about their planning and having close working relationships. MR. DARLEY said their contractors and vendors have to learn with them to act smarter and with incentives and to earn their rewards by earning less of BPs money. Number 309 He said they can't do much to change the oil prices, but they have done a lot to slow down decline in production at Prudhoe. These improvements have been delivered by extremely talented people who have assessed actual field performance and identified ways to produce them more effectively and with the vital followup of spending money where it's going to generate more oil to build on the good ideas. Number 333 They have set themselves the target of keeping the operating cost per barrel flat for the next years even though decline will continue. BP now takes a very positive view of its Alaska business. Last January he announced that BP plans to resume exploratory drilling on the North Slope this year. They plan on drilling three wells and participate in a fourth. This program ends a hiatus in their drilling. It is, in fact, the largest drilling program they have had since 1985 in state. Yesterday they announced an agreement with Petrofina in which BP will take over the operation of the Bardarmi Discovery. BP plans to stay in Alaska as a producer, and investor, explorer, and operator, he reiterated. By the end of this year the second gas handling project in Prudhoe Bay, GHX 2 should be installed and operating. This will help them maximize all recovery production from that field. They are paying half the $1.3 billion cost. They expect the GHX 2 to increase their ability to handle the gas that comes with the oil from 5.3 billion cubic feet per day to 7.5 billion cubic feet per day. It is the gas handling capacity that limits how much oil they get up. They expect to increase oil production by 100,000 barrels per day. This is about the equivalent of a whole year's decline at the current rate. Number 387 Other investments are ongoing like development drilling, workover of existing wells, and expansion of secondary and tertiary oil recovery programs. MR. DARLEY said in the year 2000, 60% of production will be from investments not yet made and in place. He used a graph to illustrate his point. He said there is nothing to alter the fact that oil production at the end of the decade is going to be below today's levels. Although by most standards it will still be handsome. Number 483 At Governor Hickel's Economic Summit earlier this year, the most important lesson he learned is that there is still time for Alaska to choose from a number of options over a period of time to get fiscal stability without a great deal of pain and dislocation. The choices need to be made and acted upon. Number 498 MR. DARLEY said that his real concern was that Alaska would choose to raise oil taxes instead of taking other measures to balance its budget. There is no doubt that raising taxes would hurt their business. He believes it would be counterproductive to the state. The rich oil days of the early 80s and late 70s are past. He said his business projections are based on stability and oil taxation. The attractiveness of new investments must compete with other opportunities throughout the world. They are exposed to changes in the economic environment, to bad investment, etc. Each investment decision they make stands on its own and a raise in taxes would have a chilling affect on their attitude. TAPE SENATE 93-4, SIDE B Number 570 REPRESENTATIVE GREEN thanked him for his very good speech. SENATOR LEMAN asked if him to comment on the proposed changes in exploration leasing. Mr. Darley said they are happy with the frontier basins type of approach. He didn't think that large tract leasing was helpful for such areas as the North Slope. Confining his remarks to the Canning and Colville areas he said the current system of licensing has served the state well and that drilling has taken place in a reasonable amount of time. REPRESENTATIVE MACKIE commented that looking at the long term interests of Alaskans, he thought the partnership he was talking about needed to expand to include the legislature and other branches of government. He asked him what chance ANWR had of being opened under the current administration. MR. DARLEY responded that the U.S. has gotten used to importing a large portion of its oil and unless something makes the nation uncomfortable with that, it will not be in a great hurry to go into areas a large part of political constituency would prefer to have closed. He said they should work to make sure that area is not shut off as a wilderness and hopefully get people up here to see how we do business and to visit the Native communities and see what their expectations are and what is needed to deliver them. Number 482 REPRESENTATIVE GREEN asked what he thought about the state's strong position in keeping the 90% - 10% split of royalties with the federal government. MR. DARLEY said they are trying to stay out of that political issue. Number 473 REPRESENTATIVE DAVIES asked if they were making a tradeoff with natural gas in keeping oil production up. MR. DARLEY said there is no trade off. The gas doesn't get wasted. REPRESENTATIVE GREEN asked if reducing the competition wouldn't ultimately turn around and result in higher prices. MR. DARLEY said they will maintain competition. The real prize comes from having suppliers work with them to do business better - working more efficiently and learning each others business. REPRESENTATIVE DAVIES said in Alaska there are a lot of small innovative companies which might go out of business if BP works with suppliers capable of handling large contracts. Number 410 MR. DARLEY said they are still contracting with a lot of different people with expertise. They don't have cause to think there is the kind of problem he mentioned. Number 387 REPRESENTATIVE GREEN thanked him for joining the Committee and said he had to attend another meeting and turned the gavel over to Senator Leman. SENATOR LEMAN asked for questions or comments from the audience. There were none and he adjourned the meeting at 3:10 p.m.