HOUSE SPECIAL COMMITTEE ON OIL AND GAS April 10, 1997 8:05 a.m. MEMBERS PRESENT Representative Mark Hodgins, Chairman Representative Scott Ogan Representative Joe Ryan Representative Tom Brice Representative J. Allen Kemplen MEMBERS ABSENT Representative Norman Rokeberg Representative Con Bunde COMMITTEE CALENDAR Trans-Alaska Gas Line Participants Van Meurs Report - Suggested Legislative Action PREVIOUS ACTION No previous action to record WITNESS REGISTER WILSON L. CONDON, Commissioner Department of Revenue P.O. Box 110400 Juneau, Alaska 99811-0400 Telephone: (907) 465-2300 POSITION STATEMENT: Presented Administration's recommendations for legislative action and time line for Trans- Alaska Gas System (TAGS) line. PAUL FUHS, Lobbyist for Yukon Pacific Corporation 10652 Porter Lane Juneau, Alaska 99801 Telephone: (907) 790-3030 POSITION STATEMENT: Gave presentation on behalf of Yukon Pacific Corporation. PETER DeMAY, Senior Vice President of Engineering Engineering Department Yukon Pacific Corporation 1049 West 5th Avenue Anchorage, Alaska 99501 Telephone: (907) 265-3100 POSITION STATEMENT: Gave presentation on behalf of Yukon Pacific Corporation. MARK BENDERSKY, Commercial Manager for Gas BP Exploration (Alaska) Incorporated P.O. Box 100360 Anchorage, Alaska 99501 Telephone: (907) 263-4939 POSITION STATEMENT: Gave presentation on behalf of BP Exploration (Alaska) Incorporated. ACTION NARRATIVE TAPE 97-16, SIDE A Number 0001 CHAIRMAN MARK HODGINS called the House Special Committee on Oil and Gas meeting to order at 8:05 a.m. Present at the call to order were Representatives Hodgins, Ogan, Ryan and Kemplen; there was a quorum. Representative Brice arrived at 8:32 a.m. Sites on teleconference included Anchorage, Kenai, Houston, San Antonio, Chicago and Calgary. Trans-Alaska Gas Line Participants Van Meurs Report - Suggested Legislative Action Number 0090 CHAIRMAN HODGINS announced the committee would hear the Administration's time line on the Alaska North Slope gas project. He said they would be talking in generalities and looking at a plan that may become a little more flexible. The committee had been charged with being a facilitator to the producers, the Administration and the people of Alaska who ultimately own 12-1/2 percent of the royalty oil on the North Slope. CHAIRMAN HODGINS advised that first to speak would be Commissioner Condon of the Department of Revenue, presenting the administration's recommendations for legislative action and a time line for the Trans-Alaska Gas System (TAGS) line. They would also hear from some parties interested in participating in the project. Number 0203 WILSON L. CONDON, Commissioner, Department of Revenue, testified that he had been assigned by the Governor to spearhead the Administration's efforts in looking at issues related to the proposed project to market Alaska North Slope gas in the Far East. He stated, "And what you have is a one-page paper which is our proposed work plan to ... investigate matters which we believe we ought to be looking at now, working towards the possibility of making a proposal of a substantive nature to the legislature. And if it makes sense to do that, this work plan would, we hope, put us in a position to do that next year during the next legislative session." COMMISSIONER CONDON said this set of tasks stems from working from Dr. Pedro van Meurs' report as a base. Questions include whether there should be modifications to the fiscal regime that would be imposed on the project today as a consequence of the state contractual relationship with the producers; he mentioned the state tax regime that would be imposed on the producers and the pipeline, as well as local taxes that would be imposed on the producers, the pipeline and liquefaction plant owners. Number 0385 COMMISSIONER CONDON said "issue number one" is whether at this juncture it makes sense to put enabling legislation in place to facilitate moving forward over the next year to address the issues that need addressed; whether the executive branch will propose such legislation is still under consideration. The substantive issues that then must be addressed are: Should there be modifications to any of the tax and royalty arrangements currently in place? If yes, how should they be changed? He stated, "And this sets out a time line for considering those issues and for presenting them to the legislature next year, if we can work our way through those issues that quickly." COMMISSIONER CONDON continued, "The next set of issues is: What about dealing with the federal fiscal system? A point we try to make over and over again is that if this project is constructed, the major beneficiary fiscally, of all of the interested entities, is going to be the United States Treasury. If this project is built in the United States, it will supply a niche in the Far East market, and the revenues that are achieved as a consequence of marketing this gas in the Far East would inure to the producers of the gas, the owners of the transportation facility, the state of Alaska and the federal government." COMMISSIONER CONDON continued, "If this project is not constructed, it's not a project that's going to be constructed somewhere else in the United States. There's not going to be an LNG facility in Coos Bay, Oregon. If this project doesn't get a niche in the market, that niche is going to be taken by someone producing gas in Sakhalin or Indonesia or Abu Dhabi or Cotter. And in each and every one of those instances, those projects would be configured fiscally so the United States government didn't get a share, the economic rent that would be created by the project." Number 0580 COMMISSIONER CONDON continued, "So this is a win for the United States if, in fact, the project is constructed. It's the better part of $30 billion, in nominal dollars, for the federal treasury. And, to make the project economic, in the range of project costs as we've eyeballed them today, and in the marketing situation as it exists today with energy price levels where they are, making this project economic would be aided immensely if the federal government were willing to make some modifications to their own fiscal system. In fact, they could quite easily have a much bigger effect on the economics of this project than state and local governments here in Alaska. And they would be the big winners if they were to do that. And so the question is: Is there a constructive way that we could approach the federal government and persuade them to look at this project and see it as the benefit that it would be to them?" Number 0674 COMMISSIONER CONDON said the third set of issues relates to fiscal certainty. If constructed, the project would likely require a substantial portion of the life of the project, with earnings as projected today, to be economic. Requiring a long pay-out, in order to attract investors it might require them to believe there will be a stable fiscal and tax system, without major changes in tax rates. COMMISSIONER CONDON said, "And the question is: Is there a way that the state, under the constitutional arrangements that apply to the taxing authority of the people of the state of Alaska as expressed through their legislature, that ... some kind of fiscal certainty can, in any way, be assured or guaranteed? We don't believe that it's possible to provide an absolute guarantee. But there may be some vehicles available which would make investors feel comfortable that they'd made a deal with the state of Alaska which would survive. So that's that set of issues, and those issues would necessarily be addressed contemporaneously with a review of ... the overall state and local fiscal system." Number 0818 COMMISSIONER CONDON discussed "regulated industry issues" relating to how the federal and state governments regulate pipelines as franchised businesses, almost in some instances as utilities. He said if constructed, the pipeline may be a common carrier. If so, what kind of regulation would apply? And what kinds of changes might be appropriate with respect to the possibility of new gas being discovered and the producers of that gas displacing gas that was committed to the Far East market through this project? COMMISSIONER CONDON stated, "And, obviously, there's a very remote chance that somebody's going to find another reservoir up there the size of the Prudhoe Bay reservoir and bring it over and hook it up to this project once constructed and say, `you know, since we have the same amount of gas you do, we've got to split the capacity fifty-fifty. And, you know, we're going to take our half to California.' The constructors of this project have to believe that the chances of something like that happening are zero in order to put themselves in the position of committing the kind of resources that this project would require. And so the whole set of issues that pertain to the way the government, through the Public Utilities Commission here in the state of Alaska and the Federal Energy Regulatory Commission at the federal level, would certificate and regulate the pipeline in terms of what we call economic regulation." Number 0960 COMMISSIONER CONDON discussed the next set of issues, particular items the state must consider in terms of what it does with the pipeline as it focuses on whether it ought to proceed, and if it proceeds, with the kind of arrangements being discussed here. First is a socioeconomic study. He stated, "Obviously, where you're talking about possibly putting a fiscal system in place that is back-end-loaded, that might alter the property tax and remove that as a source of revenue for local governments during construction, the question is going to arise: Well, if we do this and all of the impacts that come with it in terms of social displacement, need for additional schools and on and on, is it worth it in terms of finding some way to endure that kind of displacement and pay the social costs that go with it for the public revenue and other economic benefits that would come with the project? And that's a question that ought to be asked and answered at this time." COMMISSIONER CONDON suggested state participation should be looked at during the next year. He said the question of taking in-kind and in-value should be examined at the front end of this project. He stated, "If the producers build a project and enter into contracts to take 2 billion cubic feet of gas to the Far East and find customers there who sign up for long-term contracts and make those arrangements, and then a couple of years into the project the state decides to take its one-eighth's share, 250 million cubic feet a day, and market them in the Cook Inlet, then you will not have a project sized to meet the customer demand that the project was built for. And so the state, at the front end, is going to have to figure out ... what it's going to do with its option. And is it going to commit itself, rather than trying to keep its option open as a means of providing the kind of certainty that this project requires?" Number 1133 COMMISSIONER CONDON said although legislation that requires Alaska hire would not pass constitutional muster, there are many things the state might do to facilitate Alaska hire on this project in terms of training, recruiting, and so forth; those might be matters to address legislatively at this time. COMMISSIONER CONDON stated, "We put down `other important issues.' If the form that this package took at its conclusion was a contractual arrangement between the state, the producers and the other owners of the pipeline, there's a lot of what we usually refer to as boiler plate that does not/would not go to the heart of the fiscal arrangements - royalty rates, tax rates, and so on - but nevertheless are important. And those are matters ... which we should take up sooner rather than later." COMMISSIONER CONDON said finally, there is a question of how to involve all the various interests that will want input. This is something the public should care a lot about, and they need to stay in touch with the public throughout the process. Local governments have a special interest because any fiscal package to facilitate this project would likely modify the state's ability to collect revenues under the 20-mill property tax while the project is under construction and perhaps during its ramp up. COMMISSIONER CONDON concluded, "At the end of the day, doing something like we are looking at doing here is a legislative policy determination. And the legislature either will or will not enact legislation that will accomplish this or put a package like this into operation. And so, keeping the legislature informed and involved, both while they're in session here and on an interim basis, is something which it's going to be very important for us to do." He offered to answer questions. Number 1336 REPRESENTATIVE JOE RYAN expressed enthusiasm for this project. However, concessions might be requested. He stated, "Dr. van Meurs, in his report, talked about the difficulty of unitizing these fields, that BP would lose approximately 400 million barrels of oil which they wouldn't recover. Mr. Campbell, in an interview the other day, was rather disparaging about ... the prospects of this project. I hear a lot of `ifs' coming down as to what we're going to do. And I'm willing to put a lot of work into this to make this thing happen, but I'm not willing to waste my time if it's already predetermined that it's not economically feasible, that we don't have the ability to access this window, that the Japanese markets are telling us in reports that we should have been there already and we should have done the negotiations, that we're a day late and a dollar short. And, you know, if there's the enthusiasm behind this, and if this thing is going to really work the way it is, why are we hearing a lot of these disparaging things from people that make it look like the state of Alaska is going to have to really make some big concessions to get this, and therefore, everybody else's bottom line is going to go up a little bit and we're going to accept the work of the (indisc.) and perhaps not the revenues we should get?" Suggesting he was perhaps being too cynical, he asked for the commissioner's opinion on his comments. Number 1426 COMMISSIONER CONDON replied that in a sense, legislators are paid to be cynical in looking at projects such as this. If the state makes concessions, they must ensure they are not hoodwinked. He said even if they are able to put a package like this together, and the legislature acts on it, it is possible that even with changes, the project still won't be economic. He stated, "And we won't know that until we do it and see what happens. It's going to be close. We know that, and yet the potential benefits that are there, I think, make it worth trying. But that's a judgment. I mean, there are going be people who look at this and say, `When I see the kind of changes we have to make, which is moving our revenue from the front end to the back end and so on, it's just not worth it to me.' And that will be a policy choice that everyone that's an important actor in it will have to make as we work through the project. But there are no guarantees now. There are no guarantees that we'll do a good job. We'll pledge we'll try to do it, and I believe we will. And there are no guarantees that if we do a good job, the project will be built." Number 1530 CHAIRMAN HODGINS commented that the committee, the state and the producers are trying to determine whether this is feasible. He stated, "And in this determination, we need to look at a lot of different aspects that will possibly get the price of this gas line and this project down 15 to 20 percent from what it's projected right now. So we're looking at all of the ramifications that the state, the federal [government], the producers and the technology that's coming forward to build this line -- at this moment, I don't believe we have a single customer for a single BTU of gas." CHAIRMAN HODGINS continued, "What we have to do, and this is the role of this committee, is to bring forward the issues and to bring forward a single voice, a single protocol, ... as you'd mentioned last time, Representative Ryan, to go forward to our customers with one voice. And that's what we're trying to facilitate now. And there's a lot of very deep questions that we're going to have to ask, and this is a very appropriate time to ask them, to establish whether we are actually going to go forward with this. I know that the producers have formed a steering committee, and they're working amongst themselves trying to figure out if this is even feasible economically. We need to appreciate the fact that they need to make a profit to make this happen. The state of Alaska needs to get some revenue off this. The people of the state of Alaska need to get some revenues off this. So we're all working the same direction on that. It's just how we sort it out at this point. And it's very important that we're all fairly vocal at this point to establish our ground, our parameters for what's important for our people, the state of Alaska, and the people that are going to invest in this line." Number 1623 REPRESENTATIVE J. ALLEN KEMPLEN said, "This took a lot of work. Now we're doing the budget for next year, providing the resources for the various agencies, an operating budget. And it's been my experience that when you have a project, if you want to shorten the time frame on that project, you can add additional resources in order to get more work out of a limited period of time." Referring to the chart provided by the commissioner, he asked whether there were opportunities to shorten the time frame if additional resources were provided to the Department of Revenue either for in- house or contract work. COMMISSIONER CONDON responded, "At some point along the way, I'm sure that we will request funding for this effort. There is a level of effort that is appropriate to getting this work done. Throwing a lot more people into the effort above and beyond that, I think, might actually slow it up rather than speed it up. And so, the long and the short answer to your question is: We do need some additional resources to be able to do this, but I caution against throwing too much at it because I don't think the schedule can be accelerated substantially by doubling up on the amount of people you have working on it." Number 1741 REPRESENTATIVE KEMPLEN asked, "What's your time line for a budget for this project?" COMMISSIONER CONDON said that is still under consideration by the Governor. Number 1761 REPRESENTATIVE SCOTT OGAN stated, "Our trade representatives in the Pacific Rim that we contract with through the Department of Commerce gave a presentation to us here a while back, and one of the gentlemen that was speaking emphasized that we're perceived as - not to use the word `dysfunctional,' but I think it's probably an appropriate word as far as how we deal ... with the Pacific Rim. ... There's not one voice from producers or Yukon Pacific. And he emphasized, very strongly, that that needs to happen this year, you know, that the market window is 2005 and that there are other people that are competing for this." He asked Commissioner Condon to evaluate that statement. COMMISSIONER CONDON said he agrees with the observation that the trade representative made; having different entities from Alaska, or associated with Alaska, talking about different proposals to market North Slope gas in the Orient is confusing. He said the executive and legislative branches of state government have made major efforts towards going to the market with one voice. "We're not there yet, but that still an objective that we'd like to achieve," he added. Number 1870 REPRESENTATIVE OGAN stated, "It was my perception that the perception of the Pacific Rim was maybe further exacerbated by the fact that during the MOU [memorandum of understanding] that the parties that were signing the understanding to work together wouldn't even sit down at the same table and sign the understanding together. To me, and you don't have to answer this, but to me, that's a statement that we need to work together." He said "we" was the state, including the legislature and the Administration, as well as the producers and the "pipeline people." He concluded, "This is a little hard but it seems disingenuous to me." COMMISSIONER CONDON commented, "The MOUs between the state and the producers, and between the state and Yukon Pacific, are not quite the same because they have somewhat different interests. Yukon Pacific doesn't yet have any gas. And the producers obviously have an interest in an enormous amount of gas and are affected differently by the fiscal system." He said there was a signing ceremony that included everybody. He suggested one could look at the glass being 7/8 full or 1/8 empty; he would like to emphasize the former. Number 1950 REPRESENTATIVE OGAN concurred that much progress had been made in the last year. He said, "And I'm looking forward to further progress when everybody's sitting down at the same table and everybody shows up at the same table in the market and says, `Okay, we're ready for business.'" He said that was his point. COMMISSIONER CONDON expressed understanding of that and said they were working hard to "get the other eighth into the glass." Number 1979 REPRESENTATIVE OGAN noted that there had been speculation lately on the gas-to-liquids approach. He asked whether that is feasible within the time frame of the market window at this point. COMMISSIONER CONDON replied, "I don't know the answer to that question for sure, and in some sense, nobody else does either. The question of whether technology, technological advances, inventions, if you will, are made that change how that process might work, ... may or may not happen. Today, based on what's publicly available, it looks like marketing this gas by taking it to tide water and turning it into liquid methane and moving it to market to liquid methane is the most economical thing to do. But we do see large projects that look like they're going to be constructed where we're turning methane, ethane, and propane into more complex hydrocarbon molecules and making -- and those would be transportable through the existing TAPS pipeline if you could make them economically on the North Slope. And it would be silly for ... the interested parties not to continue to look at that. If there is a huge breakthrough, it would be marvelous for all of us. It hasn't happened yet, but it could." Number 2069 REPRESENTATIVE KEMPLEN asked how the time line put together by the Administration matches up against those of the competition. COMMISSIONER CONDON replied, "I don't know what the precise time line is with respect to the other projects that we're really competing head-to-head with, in terms of going through and doing this sort of work. It is something that I could get for you. This is really the best I think we can do right now in terms of what it is going to take to just get the work done. And that's all we can do, in terms of the competition here, is to do our best." Number 2145 REPRESENTATIVE RYAN referred to Alaska hire and the inability to directly legislate such practices. He said he represents a group of people who desperately need work and who have, according to the 1990 census, the lowest household income in Anchorage. He stated, "I plan on doing something about that. My personal feeling is that we should have 80 to 85 - perhaps 90 - percent local hire by ... contractual agreements similar to what we've done on Northstar. And ... particular conditions can be made in contracts that can't be made in statute. We know this from labor agreements. I realize the need for multi-national companies to run their operations and have people with particular knowledge and expertise that can't be obtained locally, but I'm also interested in people in Alaska not only receiving work but receiving job training so they can develop skills, that after the oil fields are done, we do have in place a skilled work force. And that's one of the things for which I will be pressing very much as a contractual arrangement. You have had some experience with this through the Northstar. What are your thoughts?" COMMISSIONER CONDON replied, "All I can do at this point is pledge to do as much as possible to try to make sure that we have done all we can to qualify Alaskans to be able to do this work, and then once qualified, that we do everything we can to make sure they get hired. We want to make sure we don't get ourselves into another constitutional fight about all this, but there's a lot we can do that is perfectly legal and that will give Alaskans the best chance they can possibly have to get good jobs here." Number 2249 REPRESENTATIVE OGAN asked whether Commissioner Condon believes it would be helpful or appropriate at this time to work legislatively on issues such as a tax deferral and a property tax deferral scheme. He then asked whether it would be more helpful to wait and do more of a comprehensive approach. He suggested if worked on now, it could be rolled into more comprehensive legislation later. He mentioned getting some of the issues on the table, especially with local governments that will be affected by a tax deferral scheme, for example. COMMISSIONER CONDON responded, "I think that taking a comprehensive approach to this makes the most sense right now." Number 2288 CHAIRMAN HODGINS noted that the state, which will be a 12-1/2 percent owner of the gas through its royalty program, is one of the players. He asked how the state negotiates with private enterprise and how that has been done in the past. Referring to sensitive areas, he asked whether those are negotiated in the open and how the state should plan on negotiating as a player. COMMISSIONER CONDON said it depends on how the state decides to proceed. If it is going to take any of its royalty share of this gas in kind and sell it, there are legislatively established procedures for conduct of those negotiations, subsequent entering into contracts and contract approvals. He noted that the Department of Natural Resources (DNR) has statutory authority to conduct those negotiations and explained, "They have the authority to do that in a way that people generally negotiate commercial deals, and that is, sit down and trade drafts and ideas. In some instances, the state is required to conduct competitive sales. It doesn't always have to do it if certain hurdles are met." COMMISSIONER CONDON pointed out that the state can do it competitively, in which case it offers and takes bids on a contract. It can also do it noncompetitively; in that case, a set of standards must be met, and noncompetitive contracts are negotiated like any other contract. He stated, "There's a process for public review, both at a board level - the Alaska Oil and Gas Royalty Development Advisory Board - and then the statutes call for legislative approval of those contracts. The question of whether the legislature has the authority to compel that kind of review has been something that the executive and legislative branches have disagreed about in terms of what the legislature can make the executive do; but the executive has always wanted to present those contracts for legislative review in any event, in every instance. And so that's the process." TAPE 97-16, SIDE B Number 0010 CHAIRMAN HODGINS asked, "If the state of Alaska becomes a partner in the gas line or any of the infrastructure, is that a different set of rules?" COMMISSIONER CONDON said currently there is no explicit set of rules that would apply, as there is with respect to royalty sales. Number 0025 CHAIRMAN HODGINS thanked Commissioner Condon. He announced the next segment of the hearing would include testimony, some via teleconference, from Jeff Lowenfels of Yukon Pacific Corporation; Beverly Mentzer of Exxon Company, U.S.A., from Houston; Mark Bendersky of BP Exploration (Alaska) Incorporated in Anchorage; Jim Johnson of Phillips, from Houston; and Ed Patton of Southwest Research, from San Antonio. Others were listening on teleconference. In addition, there was a letter from Mobil to this committee that said they have an interest and would like to establish that interest in the gas pipeline. CHAIRMAN HODGINS emphasized that they are still trying to facilitate this project, which is not a certainty at this point. The project must have economic feasibility. They are in the "finding stage to develop whether this project is going to be economically feasible." He said there are competitors they will have to bring together. The oil industry has fierce competitors, and the federal government will compete with the state for tax dollars, as will local governments. He stated, "So we're having a very difficult and arduous process to go through to get everybody talking one message." CHAIRMAN HODGINS said he hopes everyone has sufficient patience to see this through. It will be a long and expensive process to bring competitors together from the oil industry, the taxation side and the government side and to come forward with one unified message. He stated, "And we must do that in order to satisfy our customers in the Pacific Rim that will look with disfavor and some concern if we don't have a unified voice. And that's the process that we need to establish at this point. As I'd mentioned earlier, there is quite a bit of activity on the steering committee level with BP, Exxon, Arco and others that are going forward and trying to determine whether this project is even feasible." CHAIRMAN HODGINS continued, "It's my understanding that there has to be a reduction in the cost of this of approximately 20 percent from what is projected at this point. I am hoping that everybody gets a real sharp pencil and takes a look at where they're sitting and where we're going. And with that in context, it's our job as a committee to facilitate the communications between all of these individuals. And I hope that in our zeal to see this pipeline constructed that we don't forget that we need to be patient and this needs to be profitable. And the jobs that Representative Ryan talked about are very, very forefront in the minds of all of us." He said this is the "next gigantic project" that will put a lot of Alaskans to work and bring a lot of revenues into the state's coffers in order to fund the programs they would like to fund. Number 0183 CHAIRMAN HODGINS called on Peter DeMay and Paul Fuhs to make a presentation on behalf of Yukon Pacific Corporation. Number 0193 PAUL FUHS, Lobbyist for Yukon Pacific Corporation, offered to introduce Mr. DeMay. He reported that Jeff Lowenfels and Wayne Lewis were in Asia collecting additional information from the market; therefore, he and Mr. DeMay would make the presentation. He said Mr. DeMay was the chief project manager for the Trans- Alaska Oil Pipeline and worked for Exxon Corporation for 25 years. When he left Exxon, he was in charge of half of their world-wide projects. Mr. DeMay is currently Senior Vice President of Engineering for Yukon Pacific Corporation on the gas line. MR. FUHS said this project is critical to the future of Alaska. He stated, "And I think you've all recognized that through the resolutions that you've passed. And it's also recently been recognized by the mayors of the pipeline corridor who met yesterday in Fairbanks ... to form an organization called Trans-Alaska Gasline Now - and these are the mayors from the North Slope to Valdez - to help work on promoting this project. The benefits are in jobs, state revenues and especially in-state use of the gas." MR. FUHS continued, "This project could change Fairbanks and allow them to use natural gas like Anchorage has enjoyed for many years. I think the urgency of this was also reflected in the recent objections that were filed to the Phillips Petroleum Kenai LNG plan for the export license for exporting LNG from Kenai in the years 2004 to 2009. Apparently there is a question about how much gas supply is available in Cook Inlet. So, even if it isn't that 2004- to-2009 period, it's not much long after that where Southcentral Alaska is going to need additional gas reserves in order to be able to supply residential customers and industrial users." Number 0274 MR. FUHS continued, "Mr. Chairman, today we're going to be announcing some new initiatives that have not been put on the table before that we hope will help move this project forward. We know that there's a market for it; we've heard in our discussions, our trips to Asia, and also in testimony that's come before this committee." Referring to page 4 of a handout, he mentioned a report in the Legislative Digest about the "representatives of OIT that were here." He stated, "We also have heard from Pedro van Meurs, who reported to you that this project could be nibbled to death by other projects, and if that were to happen, that this project might never occur. We also heard from Senator Ted Stevens, who addressed a joint session of the legislature and reported that after his visit to Sakhalin, that if we don't get our act together and get going, that Sakhalin could displace the Alaska gas line project." MR. FUHS continued, "Yukon Pacific holds the major permits that are necessary for this project. And those are listed on page 3. And, Mr. Chairman, this project cannot proceed without these permits to meet the time line of 2005 or any reasonable period after that. At the same time, we realize that the project cannot go forward without a gas supply and the cooperation of the producers on the North Slope, in both the Prudhoe Bay units and the Point Thomson units. In other words, we need each other to move this project forward. It's going to take a lot of cooperation to put together a $12-to-$15-billion project, which is the largest private project in the history of North America." MR. FUHS continued, "So, what are the next steps? What is the most important next step to this? And we feel that is the formation of an initial project structure for this. And that's how the Kenai LNG plant was put together. That's how the Trans-Alaska oil pipeline was put together. And, today, we are offering an invitation to the oil producers to join with us to form this initial project structure, to put together the funding to take the next steps which will prepare us to go to the market. Everything that we should be doing, we should be asking ourselves the question: How does this move us closer to being [able] to make an offer to the market? Until we do that, we won't know if we have a project that's economically viable. We can do a lot of economic analysis, but at some point we have to go to the market." Number 0377 MR. FUHS continued, "As we would see this happening, the Yukon Pacific would bring its permits to the project. We're not going to charge for the permits, although the company has made a substantial investment in those. Those would be brought to the project, just as we would see ... some of the gas handling facilities on the North Slope brought to the project, some of the facilities that could be used in common on the Alyeska pipeline system brought to the project to help make this happen in this initial structure." MR. FUHS continued, "Now, the best case would be to have all the oil companies involved in Prudhoe Bay and in Point Thomson, but if for some reason some of those don't want to participate in the pipeline, they can declare their intention to make their gas available and the project can move forward. We form this initial project structure. Then we've got a way for people to come into it. We're aware of Japanese trading companies that want to invest in this project, but there's no structure for them to do that." Number 0417 MR. FUHS said although they have thus far called the project "TAGS" for Trans-Alaska Gas System, that is a generic term for the project. They foresee the formation of a new limited partnership that would have a new name. He stated, "What Yukon Pacific would see in that would be an investment by CSX Corporation in 10 to 25 percent of the equity of the investment in this project. In other words, we would be a minority owner of the project. We would see other equity investors as holding the majority of the equity position in it, and then we go for the debt to make the loans to put together the financing for the rest of the project. CSX has the capability to make these kind of commitments. They recently put together a $10 billion deal to purchase ConRail, to perform a merger with ConRail. They own Sealand Corporation, Burlington Northern. They're a big company that can make these kind of commitments and are prepared to do that." MR. FUHS continued, "As far as the question of whether this project is economic, we believe that it is economic. We've read the Pedro van Meurs report, and I would just say that we've also performed our own economic analysis through a corporation called Credit Swiss First Boston Bank." Referring to page 5 of the handout, which lists some of the credentials of that company, he said, "The one that stands out to me is this company is number one in capital raising for the oil and gas industry in the world in 1995: $6.8 billion raised. This is a substantial company in the oil and gas business, and we asked them to do an economic analysis and also to help put together a financing plan for the project. And this is the report that you have in front of you." Number 0509 MR. FUHS referred to page 6 of the handout, which addresses projected rates of return. He said, "And even on the right-hand side of the chart, with an approximately 50-cents-per-1,000-cubic- feet cost at the wellhead paid to the producers, for those who don't want to participate in the pipeline project, which is a number that meets with about what Pedro van Meurs put in his report, this project is still profitable and economic with about a 14 percent rate of return on equity, which for our corporation is enough for us to invest in this project. And I think it will be for others also." MR. FUHS asked, "Now, what's the difference between this study and the Pedro van Meurs study? The main difference is in the ramp up. Pedro van Meurs said 2.5 million tons a year from the first year throughout. If we were to approach the project on that basis, we would never build it, and we would never invest in a project that only started out with 2.5 million tons a year. That's an impossible theoretical projection of the economics of this project. What our market information shows us is starting the project with about 5 to 6 million tons a year and 2.5 to 3 million tons additional in the years till you get up to about 15 million metric tons. That makes the project work. And so that's the main difference between the Pedro van Meurs study and our study on the economics of this." MR. FUHS continued, "Is this project competitive with other projects? I'd like to ask you to turn to page 7 of this handout, where you'll see a comparison of some of the other projects in terms of the capital required to bring on a million tons per year of these projects. And even TAGS at a $15 billion cost is equal to Qatargas, which was the last project that was placed, at 6 million metric tons, into the Asian market. And when you look at Natuna, a project that's often stated as one of the competitions for an Alaska natural gas project, it's about 50 percent more expensive than the Alaska project." Number 0608 MR. FUHS continued, "Well, why is that project being pushed? The main reason is because if it's not developed, the leases are going to be taken back. These leases were already taken back once from Phillips in Indonesia when they didn't develop the project, and they have a little bit different way of doing their leases there. If you don't produce them, ... they take it back. So I think that's partly what's driving that project. This idea that Alaska's project is not competitive compared to these other projects is just not true. The fact is, it's not that we're not competitive; we're not competing. We're not going to the market with a unified proposal." MR. FUHS continued, "I also want to say that in addition to ... just the straight costs of the project, there are some other intangibles that help bring benefits to this project and help us sell it. Balance of trade payments, stability and diversity of supply in the Asian market is [sic] very important for these other countries that are looking for a supply of their energy. The other thing that I want to point out is that this project has the capacity for total capacity of about 25 million tons per year. And we're going to amortize this pipeline and the gas handling facilities and the liquefaction plant on 14 or 15 million tons. That next 10 million tons is going to be very economic. That will be some of the most competitive gas in the world. It's at that time also when state revenues substantially go up. The wellhead goes up. The profits for the company go up. So, it's not just the 15-million-ton project. It's a potential 25-million-ton project." Number 0677 MR. FUHS continued, "The last thing I want to address before I turn it over to Peter on some of the engineering is the issue of taxes. As Commissioner Condon said, we agree the largest beneficiary of this entire project is the federal government, at $26 billion in taxes on this. Now, they recently passed a tax bill to help bring on line the deep water drilling in the frontier areas in the Gulf of Mexico. And it would be similar-type legislation that would allow us to ... improve the economics of this project. Depreciation schedules, tax credits from federal corporate income tax, those are the kind of things. And, Mr. Chairman, I hope that this committee and the legislature will recommend to our congressional delegation that they take up these actions in this congressional session to help this project." MR. FUHS continued, "In terms of the state, one of the most important aspects to the construction of the pipeline are [sic] the property taxes. And they're charged during the construction phase before there's any revenue. If anything can be done there, that's probably one of the most important. I think it's good for this work to go ahead together and look at wellhead values and severance and ad valorem and all of those. But I just want to caution you that when you get into that, the same problems - because of different ownership patterns on the North Slope, of the oil and the gas - you're going to run into that again in the tax situation there, and it's going to affect each company differently. That's going to be a very difficult prospect to put together." MR. FUHS continued, "And the last thing I want to say is I don't think Alaska should be expected to give up all its benefits from this project. We think the economics of the project are strong enough that Alaska can get some tax benefits from this, and we're going to need it because there are going to be some impacts from this project that ... need to be dealt with. In any case, we don't need to wait on going ahead with these others - the project structure, the engineering work, ... preparing our proposal to the market - while we look at the tax issue. Those should go on concurrently. So, Mr. Chairman, I'd like to turn it over now to Peter DeMay to discuss the next steps for engineering, and what those costs would be, and what it's going to take us to get our cost figure together to be able to go to the market and also the kind of cooperation we're going to need with the producers in analyzing those cost reductions." Number 0792 PETER DeMAY, Senior Vice President of Engineering, Engineering Department, Yukon Pacific Corporation, said they had been looking at this project for a long time; he himself had worked on it for seven years. They had prepared a work plan in comprehensive detail that covers what is needed not only for engineering but also for every aspect required to move the project forward, including marketing, financing, permitting and legal aspects. MR. DeMAY said, "And you might ask: Well, if you've got the work plan, why haven't you used it? And why aren't you proceeding with it? Well, the answer is very simple. It's that when we approach the market, the market always comes back at us, and they talk about what they call the LNG links, the chain, what it takes to bring a project to fruition. And what they expect from people who are discussing projects with them are to demonstrate that they have the gas reserves and that they have ample gas reserves for a 20- or 25- year contract term. They also request that we show that we have the permits and we can build the project. They also want to be sure that we have the approval of the government to export the gas to the markets. And finally, they want to be sure that the consortium has the financial resources to bring the finances to the project." MR. DeMAY continued, "Now in order to get into meaningful discussions with them, that's what you have to start with. And we weren't able to do that. ... In our work plan, really, before we get into the phases that need to be followed, the first thing that needs to be done is to bring the parties together to form this consortium that could bring that strength to the project and to the market. And so that's where I'll start, on the basis that the first thing we do is form this consortium and bring these parties together." MR. DeMAY continued, "Once these parties are brought together, they should all bring the results of their studies and their knowledge of the project. We know that they've been studying the project. We have been studying the project. So, there's an awful lot of information to be brought together. And then we should digest that information and optimize it and take the advantages of all of these studies and anything that will reduce the cost of our project. For instance, as regards the producers at the slope, they certainly are more knowledgeable of what facilities are required to condition the gas at the slope. It would be prudent on their part to do the preliminary design of the facilities that are required there. In fact, it would be better if they would go further and say that they not only would design these facilities but they would operate and maintain them. They have all of the operational and maintenance facilities available at the slope. And we could even go so far as to suggest that they actually own the facilities and sell conditioned gas to the project. And that, I think, will even be more economic for the project." Number 0958 MR. DeMAY continued, "We should also be talking with Alyeska. As far as Alyeska goes, we have an agreement with Alyeska to share technical information. We have full access to all the geotechnical data that they have, their source settlement test work, and whatever other information that is available. And again, we should go further. We should be talking to them about using their infrastructure, using the access ways that they have and the work paths and the Yukon River bridge and even their pump stations that they're decommissioning, that they have decommissioned and will be decommissioning over the next few years. So there presents a number of opportunities to include these improvements in our project." MR. DeMAY continued, "And then also there have been technological advances that have occurred since we suspended our activities. These are related to the fact that there are in use today larger gas turbines and gas compressors. Our design was based on the size of equipment that was available at the time we were doing our studies. Today, instead of building four 3.5-million-metric-tons- a-year LNG plants to get 14 million metric tons, we know that we can build three plants of 5 million metric tons each for 15 million metric tons a year. That not only decreases costs, but it also gives us another ton of LNG." MR. DeMAY continued, "And, also, technical advances have been made in pipeline materials. The steels are now stronger, higher stresses. This will allow us to increase the pressure in the pipeline. And there are current gas pipelines at higher pressures than the one that we have included in our design. Our design is for 2,200 pounds per square inch. Pipelines today are running at 3,000 pounds per square inch. If we can take advantage of that technology, we could reduce the diameter [of the] pipeline and, consequently, the cost as well. So there are all of these opportunities to reduce the cost of the project, at least initially, for the initial phase of our activities." Number 1070 MR. DeMAY said the real thrust of what they call their phase one activities was to confirm the project viability, getting the cost down as much as they can. He stated, "And our goal would be to obtain commitments from the consortium members and the market to pursue the development of a financeable cost estimate, which is required if there's going to be financing of the project from the commercial community. So after these initial optimization studies that we suggest, we would then agree on what is our plus-or-minus- 25-percent cost estimate. This is not a financeable quality estimate, but it is the best estimate that can be produced on the basis of the information that's available." MR. DeMAY continued, "And then we should seek from the producers a start date and their best guess of a net-back price for the gas supply. And then, concurrently with all this activity, we should be developing an LNG pricing strategy or a package with which to go to the LNG buyers. And ultimately we hope to obtain from them their best commitment, which would be a form of a letter of intent or a letter of understanding, which would address the volumes of LNG they will be buying, the start-up of when the LNG would be required by the market, and the timing and the ramp-up rate. Now, if that can all be accomplished, then we would have hard information from the buyers as [to] what ... the start-up rates are and the period of ramp up and many of the things that we find from all the studies, the various studies; the various opinions that people have would be meaningless because we would now have real, hard information from the market." Number 1179 MR. DeMAY continued, "Now, what would it take to do all of these steps? We have concluded that this activity could be completed in about a six-month period and at a cost of about $7 million. Now, if we find out at the end of this study that there is no market, then obviously you wouldn't go any further. But on the basis that we get these letter of intent and letters of understanding from the marketplace, we would then proceed to the next phase of our work plan, and that would be to produce a financeable cost estimate and to obtain commitments for the purchase of LNG from the buyers and also get commitments from the companies that own the gas." MR. DeMAY continued, "And the key steps here would be to complete the preliminary engineering and a detailed execution plan for the project, which really defines how the project is going to be executed, and prepare a financeable estimate, and that is an estimate that has an accuracy of plus-or-minus 15 percent. In our business, that's traditional to have an estimate of that quality and the need to complete the preliminary engineering." MR. DeMAY continued, "In addition to doing the preliminary engineering, in order to meet the target of 2005 for delivery, we also believe that we need to do a bit of detailed accounting, particularly for the long-delivery items, and also for the critical contracts for the initial front-end activities of the project. We know that the delivery of the main heat exchangers on the LNG plants - we had actual quotes for these - are 40 months, 40 months from the date of order. And we know that the LNG turbines and compressors are of the same order of magnitude of delivery. So, you're looking at ... three and a half years before that equipment arrives on site." MR. DeMAY continued, "The most critical path on our project will be the terminal, the LNG marine terminal at Valdez. The problem here is that the site must be prepared. And we will be moving 7 or 8 million cubic yards of material, not only once but perhaps twice. And we have to get access to that site. We would have to design the construction dock so that we could move equipment and people to the site. And we also immediately have to start building temporary facilities to house the employees and the support facilities for all of that effort. It is a real difficult project. If you saw the site, you'd really understand why it's critical. So -- and then we would also have in place the draft contracts for the engineering and procurement contractors. And the design for the site preparation at the terminal would all have to be complete. So in reality, we'll be doing more than just preliminary engineering. We'd be doing a bit of detail design." Number 1357 MR. DeMAY said during this phase the tax regime would have to be finalized and the project labor agreement in place. There are insurance matters to settle, and financing would have to start being put into place. He said, "And we would also have to convert our state right-of-way from a conditional status to a final status. And then we would have to walk away and convert these buyers' letters of intent to contracts for the gas purchase from the producers as well as the LNG prices for the LNG in the marketplace. Now, what would it take to do all this work? We have estimated that it would take 24 months to complete this activity and that the cost of this activity would be $80 million." MR. DeMAY referred to the time line on page 2 of the handout; he said although it is a simple schedule, it tells the story they want to tell. Phase one, a six-month effort, would be completed by the end of 1997. Phase two, the preliminary engineering and the financeable quality estimate, would take 24 months, going to the beginning of the year 2000. At that point in time, assuming they were successful in negotiating all the contracts with the buyers and sellers of the gas, they would initiate the detailed engineering and construction. However, that absolutely would require having the buyer and seller commitments. The phase three chart shows that it takes five years to get to 2005, when the first liquefied natural gas (LNG) deliveries would be made to the marketplace. MR. DeMAY stated, "Also you'll see on that line procurement and long-delivery items and award of critical contracts. You see that box. That means that we have to initially award all of those. And if you look at that five-year period and consider it takes three and a half years to get the delivery of those items, that only allows a year and a half after we get the delivery to put that equipment in operation. And that's a very short period of time." MR. DeMAY noted that the bottom line shows a four-year ramp up. However, if they have negotiated their contracts, they will know the actual ramp-up period, which may be three years instead of four, for example. This is their best schedule for this job to meet the 2005 date. Any delay along the line can affect that date. There is little slack in this schedule. It is extremely critical from every aspect, particularly the equipment delivery aspect and the initial activities that must occur at the terminal. Number 1568 MR. FUHS stated, "Well, Mr. Chairman, I hope that answers your questions from your letter. And I just want to say that we're prepared to cooperate with the people who want to work together on this. And we're ready to get to work." REPRESENTATIVE RYAN indicated his desire to ask some of the producers, as they testified, a "particular question about unitizing that field." Number 1640 REPRESENTATIVE KEMPLEN referred to the phase one design and said he was comparing the chart produced by the commissioner to the critical path chart put together by Yukon Pacific Corporation. He noted that some critical issues must occur at the same time. In addition, some fairly significant costs must be incurred by someone before this project is nailed down in terms of a final commitment; so there is an element of risk involved by whoever will absorb those costs. He asked, "Could you explain to me how you see those costs being paid? Who's going take the risks?" Number 1708 MR. FUHS replied, "Through this consortium. And that's how all these projects are put together. You get an initial consortium, and they agree amongst themselves who's going to put up the money. We're willing to put up part of the money with the consortium members. And then those costs that are put in on the front end are generally paid back to those people when the project goes through. It's just part of the overall financing package, engineering and all of that. So you get paid back eventually. But you're correct: You do have to put some risk out on the front end. And we're prepared to do that." Number 1749 REPRESENTATIVE OGAN asked Mr. DeMay what areas are critical to improve the relationship between Yukon Pacific Corporation and the producers, to send a unified message. He asked what would greatly facilitate that and is perhaps the first thing that could improve in that area. MR. DeMAY replied that they have been talking to the producers for years. "All of us have," he added. He said all of those who are aware of and willing to take the financial risk associated with developing this project must come together and form an organization; obviously, there will be different ownership percentages for all the parties. He stated, "And I think once that occurs, then an organizational structure will fall out of that. And Yukon Pacific may not be the leader in that. I mean, whoever is going to put up the most money will probably have the most influence as to how that proceeds. And I see that's the only way to get that together, to go to the market and say, `Hey, we're together and we can do this project.'" Number 1852 REPRESENTATIVE OGAN asked, "Would it be a fair characterization that maybe we should use the term `fish or cut bait' right now or cut a lot of bait, you know, and so maybe identify those players that are willing, that are actually going to fish and then go from there?" MR. DeMAY said yes. CHAIRMAN HODGINS thanked them for their presentation and called upon Mark Bendersky. Number 1931 MARK BENDERSKY, Commercial Manager for Gas, BP Exploration (Alaska) Incorporated, testified via teleconference from Anchorage. He stated, "BP is committed to work with the state towards a sound energy future for Alaska. As Alaska's number one investor, we continue to demonstrate this with our involvement in, for example, Badami, Northstar and our ongoing successful exploration program. While we are not the major owner of gas on the North Slope, we recognize the desire of the state to develop these resources. We believe that a North Slope LNG scheme is uneconomic currently. We would like to emphasize that modifications to the state's fiscal regime, by itself, is insufficient to make a North Slope LNG project a reality, but it would be an important and significant step. Potential modifications to the federal fiscal regime, significant cost reductions, formation of a project structure and favorable market conditions are all also required. Our signing of the MOU last month set forth a framework for future discussions." MR. BENDERSKY continued, "We need to ensure that the many opportunities for gas usage on the North Slope are captured so as to maximize liquids production from old and new fields, TAPS throughput, and revenue generation today. For instance, BP is continuing its work on gas-to-liquids research which could offer interesting options for the future." MR. BENDERSKY continued, "BP has worked with the state Administration in developing the state's 1997-to-1998 target work plan that Commissioner Condon has just discussed. We believe that the state's plan has the appropriate scope of work, and we plan to participate in these important discussions. The state's plan's target time frames are very ambitious. You can see that there are a large number of important issues that must be worked, discussed and agreed." MR. BENDERSKY continued, "BP views the word `contract,' as shown in the plan, as a means to enhance fiscal certainty for potential project sponsors. The contract would include changes to both the state's tax and royalty structure to improve the economic feasibility of a North Slope gas project and, to the fullest extent permitted by the state's constitution, that the state be bound by these contract terms. This contract would reduce the risk to an investor that fiscal terms could change during the life of the contract. As such, the contract sets a framework within which any project ... could operate if it proceeds forward. We commit to work with the state on defining fiscal terms to maximize the value of North Slope gas and to that end support Commissioner Condon's efforts." Number 2183 CHAIRMAN HODGINS referred to Richard Campbell, President of BP Exploration, recently quoted in the Anchorage Daily News as saying this project was a bit of a dinosaur. Chairman Hodgins stated, "I would sincerely hope that he was talking about where the oil originally came from and he isn't talking about that this is a project that isn't going to go forward. He mentioned that there were small, low-cost projects that could possibly displace this. And if that's the case, I would like to know from BP, concerning that statement in the newspaper, what BP's intention is with this project. Is it to sell their gas at wellhead, or is it to be an actual participant in this? And I understand that ... these kind of statements to the press ripple throughout the world to our potential customers. And I find it very difficult to hear ... these kinds of statements come out. And if you're going to be a player, be a player. And if you're not, ... please don't send the wrong message to our potential customers in the Orient. Would you care to respond?" He then asked whether there were questions from the committee while Mr. Bendersky thought about that. Number 2311 REPRESENTATIVE RYAN referred to the Pedro van Meurs report and unitization of the field; he said it showed that by selling the gas, BP had a potential loss of 400 million barrels of oil. He said, "And I'd like to know what value you put on the oil versus the amount of gas you would get and whether this shows that you folks are going to make or lose money on this project and whether you think it's particularly feasible, that the oil is worth more than the gas. And what would be your intentions in that respect?" MR. BENDERSKY replied, "I believe the estimated figure of close to 400 million barrels of oil losses was from the field entirely. And BP would have the largest share of that oil loss; it's about half. Those oil losses ... would be small initially, and they would tend to get larger in the later years of project life. And when we pencil in the economics of those future oil losses against the more near-term gas revenue, if there is an economic project, then the near-term gas .... [Cut off mid-speech by end of tape] TAPE 97-17, SIDE A Number 0006 MR. BENDERSKY continued, " ... its future options with regard to participation in an LNG option. It's also continuing to evaluate how to get the maximum value of using gas on the North Slope in enhanced oil recovery projects, producing natural gas liquids for sale down TAPS and other new technologies. We're interested in maximizing the value of gas on the North Slope, and we believe ... our interests are aligned with the state in this regard. And we are keeping are options open. And I hope you will view this as good news in that we are not solely focused on one potential option that has significant hurdles in its future, but we are trying to find what's the best way to do it." Number 0099 REPRESENTATIVE RYAN responded, "Well, I can understand that people are evaluating options. And knowing the investment that the producers have at present in the field and future investments that will be required, I would think that somewhere along this line, someone has made some evaluations. I can't imagine after all these years up on the North Slope, and knowing the values and considering that these will probably be future contracts and what the market may bear, that there weren't some more concrete figures, that we're still in the stage of evaluation at this point. It makes it very difficult to imagine this project could go forward if the producers haven't fairly well penciled in some rather firm ballpark figures. I mean, are you still in the evaluation stage? And what period of time do you think it's going to take you to come up with a ballpark figure whether it's worth your while to participate in this project?" MR. BENDERSKY replied, "I don't have a good answer for that. The world is constantly changing. We're constantly updating our evaluations and strategy, and the project isn't yet economic. We are working hard to make it so. We're looking at other options, and it's just an ongoing process. Number 0218 REPRESENTATIVE RYAN commented that people from the north of the United Kingdom have a tradition of having a posture of a rather dour nature. He said, "... you have to realize that statements such as that press interview by Mr. Campbell have given some folks here in the legislature thought as to whether we should revisit some of the things that we previously have made some agreements [on], because we thought we were operating in a good-faith nature, and now we see that perhaps things aren't quite what we expected. So I think you may pass that on. And perhaps a little caution in the future would be appropriate." Number 0290 CHAIRMAN HODGINS called an at-ease at 9:40 a.m. He called the meeting back to order at 9:48 a.m. CHAIRMAN HODGINS asked Mr. Bendersky whether he was ready to respond. Number 0333 MR. BENDERSKY stated, "I'd like to first explain what I think the dinosaur comment was all about. It's not a point about the dinosaurs being extinct. It's a point about large animals or large amounts of gas being slow to move and very, very difficult to put into the market. It's been our recent analysis that the smaller projects are more attractive to the market. It's a smaller risk for buyers to absorb those projects, and the buyers have told us smaller is better. They use the words `more digestible.' I don't think you should also believe that we're not optimistic. I think you should look at our track record. The projects we are doing in Alaska have always been in the state and legislature's best interests, and we intend to try and maximize North Slope gas resources. And to that end, I think we're working towards the same goal." Number 0452 REPRESENTATIVE OGAN, continuing his fishing analogy, said, "You know we've been cutting a lot of bait, and we know the fish are there, the fish being the market. And we know where they're going be and when they're going to be there. ... And there's other people that are participating in the fleet, that have their bait cut and their hooks are baited and their lines are in the water. And we haven't even put our lines in the water yet. Why don't we participate in that, you know, get past the talking stage here a little bit and be willing to let the market decide? I mean, I've clearly heard that they're very interested in Alaska gas, not just because the market is not too big for them, but they like to diversify their market. And certainly the United States of America is politically very stable. And, you know, let's let the market decide that. But I just don't think we have any lines in the water. Until we get lines in the water, ... we're not going to hook any up." MR. BENDERSKY replied, "BP has been working for several years now on evaluations of this project, working very closely with Arco and Exxon. We've maintained very close contact and continue to [maintain] very close contact with the market. We intend to continue our ... joint efforts with Arco and Exxon through the end of this year. We have a detailed program of work through the end of this year. And we're open-minded about how ... future efforts may evolve." Number 0598 REPRESENTATIVE OGAN said, "And I recognize that there's been a lot of movement, and I don't want to discount that at all. And I appreciate your comments. But I still feel that I guess I share some of the chairman's concerns about comments like that in the press." MR. BENDERSKY replied, "I'd just like to say that some of the most optimistic people I know come from the British Islands." Number 0642 CHAIRMAN HODGINS announced they would adjourn the meeting for a House floor session. He thanked participants and held the meeting over until 8:00 a.m., Tuesday, April 15. ADJOURNMENT Number 0701 CHAIRMAN HODGINS adjourned the Special Committee on Oil and Gas meeting at 9:53 a.m.