JOINT SENATE/HOUSE RESOURCES STANDING COMMITTEE February 24, 1997 3:44 p.m. SENATE MEMBERS PRESENT Senator Rick Halford, Chairman Senator Lyda Green, Vice Chair Senator Loren Leman Senator Bert Sharp Senator Robin Taylor Senator Georgianna Lincoln SENATE MEMBERS ABSENT Senator John Torgerson HOUSE MEMBERS PRESENT Representative Scott Ogan, Co-Chairman Representative Bill Hudson, Co-Chairman Representative Ramona Barnes Representative Irene Nicholia Representative Fred Dyson Representative William K. ("Bill") Williams Representative Reggie Joule HOUSE MEMBERS ABSENT Representative Beverly Masek Representative Joe Green COMMITTEE CALENDAR Oil Industry Progress Report - George From, Manager - Materials, Purchasing & Contracts, ARCO Alaska - Eric Luttrell, Vice President, BP Exploration (Alaska) Incorporated - Dwight Perkins, Special Assistant, Office of the Commissioner, Department of Labor - Chris Miller, Research and Analysis, Division of Administrative Services, Department of Labor ACTION NARRATIVE SENATE TAPE 97-13, SIDE A Number 0001 CHAIRMAN RICK HALFORD called the Joint Senate/House Resources Standing Committee meeting to order at 3:44 p.m. He said the committee would receive a progress report on legislation passed last session with regard to Northstar and Badami, as well as general comments about where we are on local hire and construction. GEORGE FROM, Manager - Materials, Purchasing and Contracts, ARCO Alaska, said along with partners Anadarko and Union Texas Petroleum, they discovered the Alpine Field in 1994. After two years of delineation drilling and seismic study, they announced a commercial discovery late last year. He said it is a brand new reservoir for Prudhoe Bay, not just an extension of Kuparuk or Prudhoe. MR. FROM read the Alpine Development Overview to the committee. He added that the Alpine Field has slightly less volume than the Point MacIntyre Field that they discovered in 1988. It contained proven and potential reserves of 250-300 million barrels in a 60,000- square-mile reservoir. The oil in Alpine Reservoir is a high quality, high gravity crude, higher in quality than either Prudhoe or Kuparuk Fields. Peak production is estimated at 60,000 barrels per day. Development of this project is estimated at $700 - $800 million, 30 percent less than traditional Northstar costs. MR. FROM outlined the project scope for the committee, referencing his handout. He said the footprint for Alpine will be approximately 85 acres, less than 0.2 percent of the 40,000-acre field. They will accomplish this by limiting the number of wells and by using long-reach horizontal drilling technology. He noted one unique feature of their development is a horizontally drilled river crossing under the main channel of the Colville River. MR. FROM presented the committee with a graph of the major cost categories and their development schedule. They plan to complete construction in three winter seasons. Number 0200 MR. FROM stated some of their major challenges are to minimize the environmental and cultural impacts on the village of Nuiqsut and protect the Colville River Delta. He said they had minimized the size of the development, eliminated the road, and are doing construction only in the winter season. They are currently limited to a single load limit of 350 tons to cross an ice bridge on the Colville River. He said they are working with the natives of Nuiqsut to lessen impact on them. They are offering the village gas or electricity, jobs and matching scholarship funds. MR. FROM reviewed the permit status and said they had started this process in June 1995. He said their intent is to maximize the Alaskan content through capacity, capability and competitiveness. He listed their alliance companies: ASRC/Parsons Engineering Ltd., Alaska Petroleum Contractors, Houston Contracting Company, Nuiqsut Constructors, Michael Baker, and Tri-Ocean Engineering Ltd. CHAIRMAN HALFORD asked whether Michael Baker and Tri-Ocean were outside companies. MR. FROM answered yes, but he thought Michael Baker had been here for some time. Number 0270 REPRESENTATIVE RAMONA BARNES asked whether ASRC/Parsons Engineering Ltd. was also an outside company joint venturing with ASRC; whether Michael Baker has an office in Alaska with a business license; and whether Tri-Ocean Engineering was in Canada. MR. FROM answered yes to all three. He said their purchasing strategy is to build the Alpine project in Alaska. Throughout the project, they will use competitive Alaskan suppliers and fabricators where they can. He said Alaskan suppliers will compete for project orders, and bids will be evaluated on life-cycle cost basis that will include service, quality and the willingness to meet their project goals as well as costs. MR. FROM said they would utilize their current ARCO Alaska supplier agreements both for identifying candidates for major project orders and for orders not large enough to require a formal bidding process. They currently have 28 master agreements with Alaskan suppliers, and they have done business with 500 Alaskan suppliers within the last year. Most of the major processing and mechanical equipment will be purchased directly from manufacturers. MR. FROM said Ken Thompson's slogan, "No decline after '99," is now their plan. He said it brings two new oil companies to Alaska - Anadarko and Union Texas Petroleum. He said the Alpine development will bring to Alaska 850 construction jobs, approximately 50 full- time jobs, approximately 50 drilling jobs for the first five years, and $1 billion in state and local revenues. REPRESENTATIVE BARNES asked Mr. From how long he has been in Alaska. MR. FROM answered that he has been here this time since 1988. CHAIRMAN HALFORD asked what royalty rate the Native lands received, to compare private sector with state royalties. MR. FROM said he didn't know. REPRESENTATIVE BARNES said she was very interested in the answer also. SENATOR LINCOLN asked whether it was going to be an easy task to get the modules to where they are going. MR. FROM answered that it is relatively easy. They have built modules up to 5,000 tons, and this whole project has a total of 7,000 tons of modules. He said the modules are in the conceptual stage right now. Number 0364 SENATOR LINCOLN asked why he added "where possible" to mitigating the impacts on Nuiqsut. MR. FROM explained that they are building on gravel in places along the Colville River, and that is "where possible" because they will be in the subsistence hunting area. He said they are working with the village on this issue. SENATOR LINCOLN asked whether the Alaska suppliers were going to compete amongst themselves for orders or with outside sources. MR. FROM replied it just depends on the type of commodities they are looking for. He said where the Alaskan companies are competitive in price, service, and the ability to supply the goods, they will utilize them to the maximum extent possible. REPRESENTATIVE BILL HUDSON asked whether it was his intention to build the modules in Alaska. MR. FROM answered that was his intention, although they hadn't selected a site yet. CHAIRMAN HALFORD asked Mr. From to provide the committee a breakdown of the approximate $1 billion in state and local revenues in terms of what sources that comes through. SENATOR BERT SHARP asked him to provide a map of the private and state ownership pattern within the area to be explored. REPRESENTATIVE BARNES asked: Since we know Alpine is next to the National Petroleum Reserve, and since the State of Alaska gets none of the funds - the 50 percent goes to the Native villages - how is the gas to come from the National Petroleum Reserve and run through the line they build for Alpine? MR. FROM said he would get that information. REPRESENTATIVE BARNES asked what interface he had with the new module building industry in the Port of Anchorage, relating specifically to Northstar. She wanted to know specifically what ARCO was doing to make that a reality. MR. FROM replied that they had toured the Port of Anchorage and looked at the facilities, and now the project team is looking at other facilities around Alaska. They will be built in Alaska, but not necessarily at the Port of Anchorage. Number 439 ERIC LUTTRELL, Vice President, BP Exploration (Alaska) Incorporated, said this report is pre-lawsuit; he presented the committee with a location map and a schematic overview of the Northstar project. He said they still have a small working partner with Murphy Oil and Gas. Last year they thought the reserves were going to be 130 million barrels and that the costs were going to be about $350 million; so both the reserves and costs have subsequently gone up. MR. LUTTRELL said one of their statutory requirements was to sanction Northstar by May of 1997; they acquired funding in October 1996 and expect first oil to come mid-1999. The second requirement was to report quarterly on Alaskan residencies and hiring statistics, which they sent to the Department of Labor recently. He said the supplement royalty at the current price would be 26.41 percent, more than twice the average royalty on the North Slope. MR. LUTTRELL said they made the commitment to try and build Northstar in Alaska to the degree they thought it possible and help create a new fabrication industry. He said they are using VECO and APC in Anchorage to build fabrications. As a result of all the commitments, he estimated they would spend $225 million in Alaska. He reviewed a pie graph of the Alaskan content of the project. CHAIRMAN HALFORD asked what vessel fabrication is. MR. LUTTRELL replied that in order to separate oil and gas, you need to build very large vessels that are big tanks with valves and other things attached to them. It is very specialized, and no one ever expected it to be done in Alaska. REPRESENTATIVE BARNES asked him why big tanks could not be built in Alaska. MR. LUTTRELL said very specialized equipment was needed to roll the steel in a big circle. REPRESENTATIVE BARNES said it seemed to her that if we can build modules, we could buy material in big strips and fabricate them in Alaska. MR. LUTTRELL said the Alaskan content will not change relative to the lawsuit; he reviewed the current status with the committee, saying they deferred fabrication on 2/13/97. The consequence is that they will delay the sea-lift, which they intend to do in the summer of 1998-1999. REPRESENTATIVE BARNES asked for the status of Duck Island. MR. LUTTRELL replied that the Endicott Field is in the Duck Island unit. In most cases, the field and the unit have the same name. CHAIRMAN HALFORD asked whether there is anything they could do in terms of timing or anything else to encourage the Northstar development to get back on track. MR. LUTTRELL said he has been advised to let the courts take their normal course. CHAIRMAN HALFORD asked: If the state is successful at the superior court level and it is appealed, would they wait for the appeal to be decided before there is action? MR. LUTTRELL said they will make decisions as they go along. SENATE TAPE 97-13, SIDE B Number 0006 MR. LUTTRELL answered a question from Representative Hudson, saying they had deferred their position in line for things like compressors and turbines. REPRESENTATIVE HUDSON asked whether the compressors and things of that nature were available in the U.S. or overseas. MR. LUTTRELL said he didn't know, but he thought most of it was in the U.S. REPRESENTATIVE BARNES asked whether the technology they are trying to develop at the Port of Anchorage would be picked up at the point that Northstar comes back on line. MR. LUTTRELL said they have a lease and will scale back up when they are in the position to go forward. He said BP is going forward on Badami. The long-lead items have been ordered, they have the permits, and they are moving gravel on the Slope as he speaks. Drilling should start on Badami in September. He wanted to make it clear that they will not seek royalty relief for this project. He said they are working very closely with their partner, FINA. He reviewed a pie chart of the Alaskan content of Badami. CHAIRMAN HALFORD said he noticed the fabrication is in the non- Alaskan block. MR. LUTTRELL explained that the fabrication is actually in two parts, with equal parts in Alaska and Canada. He said they are spending a total of $14 million in Canada. REPRESENTATIVE FRED DYSON asked where in Canada the fabrication would take place. MR. LUTTRELL responded that it would be built in Calgary and move up the river for some additional work around the Hay River, and the rest will come down the MacKenzie. Number 0490 SENATOR LINCOLN asked whether Alaska hire statistics had gone up from 1995 for BP. She said she wanted to hear more about what their goals were in this area, for example, working with contractors and vocational schools. MR. LUTTRELL said he would get those details for her. CHAIRMAN HALFORD said he wanted to know from the Department of Labor what is an acceptable percentage. SENATOR SHARP asked for more information about their partner. MR. LUTTRELL said FINA is a Belgian Company that has extensive Lower 48 production and has had leases in Alaska for 10 or 12 years. It was a partner with CONOCO on the original Badami discovery, and they are very excited about working with them. SENATOR LOREN LEMAN asked whether the engineering portion being done in Canada was primarily associated with the fabrication being done there or whether there was some other unique capability in Canada in addition to that. MR. LUTTRELL replied they selected Colt Engineering when they first put Badami together because they had the greatest amount of Arctic experience. SENATOR LEMAN asked whether they were working with any Alaskan engineering companies too. MR. LUTTRELL answered that he understood they are trying to put together a joint venture with an Alaskan firm, but it's not part of what they are doing with Badami. REPRESENTATIVE BARNES asked whether it was true when that firm was selected, with all their expert Arctic experience, they proposed drilling an underwater line that didn't work and now have to go over-ground. MR. LUTTRELL responded that the original conceptual work identified the possibility of burying a line, but as they worked on it in more detail with all the firms, they concluded that was probably not the best or cheapest way; they now have an above-ground line. DWIGHT PERKINS, Special Assistant, Office of the Commissioner, Department of Labor, read information on industry Alaska hire statistics in a letter from Commissioner Cashen to the committee. CHAIRMAN HALFORD asked for an explanation of the sources of a statement in the letter. CHRIS MILLER, Research and Analysis, Division of Administrative Services, Department of Labor, replied that they used the total wages, from clerk to president, reported by those firms for all employees to come up with a standard statistical mean. The $100,000 is the oil majors and the $50,000 figure is everyone in the oil industry. MR. PERKINS continued reading the letter. REPRESENTATIVE BARNES asked for a copy of all the work documents this working group has, including studies, notes on studies, and anything related to the question of his report. In addition, she wanted to know if there are qualified oil field engineers in Alaska. MR. PERKINS said he couldn't say, but Mr. Miller tracks that research and could get a round number. REPRESENTATIVE BARNES said she always hears about engineering work for new projects on the North Slope going out-of-state and out-of- country, as well. She said the question "why" needs to be answered. She said she believed we have qualified engineers in Alaska. SENATOR ROBIN TAYLOR asked which operations were owned by Alaskan corporations. MR. PERKINS said he didn't know. MR. MILLER said the ownership is on the tax file from which they extracted information for their research. SENATOR TAYLOR said he was shocked that some companies that advocated very strongly for Alaskan hire have some of the highest numbers for nonresident employees. He asked whether there wasn't some sort of number the Department of Labor was aiming for in Alaska hire. MR. PERKINS replied that he thought we had seen the peak of nonresident hire, and there has been a lack of new-hire jobs. CHAIRMAN HALFORD said he thought there should be some public policy regarding a goal for a number for Alaska hire. REPRESENTATIVE REGGIE JOULE said his experience is that companies keep the same employees from contract to contract for job security. SENATOR LINCOLN noted that all the companies weren't on the list. MR. PERKINS said they just took a sampling of the top 20. He thought it would be important for the legislature to have a benchmark. SENATOR LINCOLN asked how we are encouraging nonresidents to become residents. MR. MILLER responded that in permanent fund information they have looked at, 14 percent of the folks they have determined to be nonresidents in one given year have turned up being residents the next time they look. SENATOR LINCOLN asked for their definition of an Alaskan resident. She also asked how much material Representative Barnes had asked for. MR. PERKINS said he hadn't attended those meetings, but he would get together with Mr. Andrews and find out. SENATOR LEMAN noted that page 3 mentions a pilot project to measure Alaskan hire and asked if that was done in response to HB 548 reporting to the legislature. MR. MILLER replied that the pilot project was a way to speed reporting in an electronic format using the Unemployment Insurance (UI) data reporting process. CHAIRMAN HALFORD said he thought the Department of Labor should set a standard for Alaska hire and in the process tell them what is the correlation between companies, between union and non-union, et cetera. REPRESENTATIVE BARNES asked him to include a definition of what an Alaskan business is, and she hoped it meant something other than you have to have a business license hanging on the wall. REPRESENTATIVE IRENE NICHOLIA asked whether industry personnel claiming residency could have the destinations for their two-week breaks documented and made available as public information. CHAIRMAN HALFORD said he assumed if the permanent fund dividend eligibility is really enforced, that would probably catch it. He told Mr. Perkins he wanted a definition and a base-line on Alaska hire from the Department of Labor. MR. PERKINS responded affirmatively. SENATOR SHARP said he was still concerned that of all the contractors identified in the Alpine BP project, they have the worst record of Alaska hire, and he hoped that had changed in the last year. CHAIRMAN HALFORD said they await their responses and adjourned the meeting at 5:15 p.m.