HOUSE SPECIAL COMMITTEE ON WORLD TRADE AND STATE/FEDERAL RELATIONS April 13, 1999 5:00 p.m. MEMBERS PRESENT Representative Ramona Barnes, Chair Representative John Cowdery, Vice Chair Representative Beverly Masek Representative Gail Phillips Representative Joe Green Representative Ethan Berkowitz MEMBERS ABSENT Representative Reggie Joule OTHER HOUSE MEMBERS PRESENT Representative Brian Porter Representative Jim Whitaker Representative John Harris Representative Scott Ogan Representative Beth Kerttula COMMITTEE CALENDAR OVERSIGHT HEARING: PROPOSED PURCHASE OF ARCO, INC. by BP-AMOCO PREVIOUS ACTION No previous action to record. WITNESS REGISTER JOHN SHIVELY, Commissioner Department of Natural Resources 400 Willoughby Avenue, 5th Floor Juneau, Alaska 99801-1724 POSITION STATEMENT: Discussed Alaska's oil development history. PATRICK COUGHLIN, Deputy Director Division of Oil & Gas Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, Alaska 99503-5948 Telephone: (907) 269-8779 POSITION STATEMENT: Answered questions. JACK (JOHN) GRIFFIN, Assistant Attorney General Oil, Gas & Mining Section Department of Law 1031 West 4th Avenue, Suite 200 Anchorage, Alaska 99501-1994 Telephone: (907) 269-5100 POSITION STATEMENT: Discussed the current fiscal regime and how the merger may ultimately affect Alaskans. BRUCE BOTELHO, Attorney General Department of Law PO Box 110300 Juneau, Alaska 99811-0300 Telephone: (907) 465-2133 POSITION STATEMENT: Discussed the merger. ACTION NARRATIVE TAPE 99-10, SIDE A Number 0001 CHAIR RAMONA BARNES called the House Special Committee on World Trade and State/Federal Relations meeting to order at 5:08 p.m. Members present at the call to order were Representatives Barnes and Cowdery. Representatives Masek, Phillips, Green and Berkowitz arrived as the meeting was in progress. Representative Joule was not present. Representatives Porter, Whitaker, Harris, Ogan and Kerttula were also present. [Tape commences with Commissioner Shively's testimony.] CHAIR BARNES announced that the committee's agenda today was to begin an oversight hearing of the proposed purchase of ARCO, Inc. by BP-Amoco. JOHN SHIVELY, Commissioner, Department of Natural Resources, stated that he would review the history of Alaska's oil development in order to understand the role oil development has played in Alaska, even before statehood. The first oil claims were staked in Alaska in 1896 around Catalla (ph) which is near Cordova. There was a discovery there in 1902 and production occurred until the facility burned. There was a fair amount of exploration in the state during the 1920s which increased in the 1930s and 1940s, particularly in the National Petroleum Reserve-Alaska (NPR-A). In the 1950s oil development started to get very serious in Cook Inlet. People such as Bob Atwood, Elmer Rasmuson, Lot Jacobs, and Jack Roderick, and companies like Richfield (which eventually became part of ARCO), Marathon, and Unocal promoted oil development. In 1955 they formed the Swanson River unit where ARCO announced a discovery two years later. In 1957 Chevron bought into that also. "At that time, there were over 100 companies active in the state." Of course, Alaska became a state shortly afterwards. Commissioner Shively believed that the revenues from that area did play a role in Congress's determination that Alaska could survive as a state as well as Alaska's ultimate survival once statehood was achieved. COMMISSIONER SHIVELY continued with the 1960s during which there was a fair amount of activity in Cook Inlet. Chevron opened a refinery in 1963. Shell set the first offshore platform in 1964 which was the same year the Tyonek Indian reservation sold leases on its reservation. Offshore production in Cook Inlet started in 1967 and in 1968 Unocal's fertilizer plant began operation. Tesoro's refinery and the LNG (liquefied natural gas) plant that Phillips/Marathon operated began in 1969. Commissioner Shively emphasized that 1969 was a critical year in the oil industry because the governor left in that year to start Grizzly Burger. If he had stayed, Alaska might have a little different oil history. Commissioner Shively moved forward to 1990 in Cook Inlet when Unocal started buying up Amoco, ARCO, Chevron, and Texaco's oil interests in Cook Inlet. In 1994 UTP, who was ultimately purchased by ARCO, came to Cook Inlet. In 1996 ARCO and Anadarko signed an agreement, and Anadarko became active in oil in Alaska as did Forcenergy. That brings us to where Cook Inlet is today. Number 0484 COMMISSIONER SHIVELY acknowledged that the North Slope developed later. In 1958 BP and Sinclair first teamed up to explore North Slope acreage and in 1959 BP opened its first office in Alaska. In January of 1964 the state selected the area that encompassed Prudhoe Bay. He noted that there was criticism by some politicians concerned with the state acquiring a bunch of wetlands well north of the Brooks Range. However, it turned out to be a relatively good decision. The first sale was in 1964 and netted the state a little over $5 million. A second sale occurred in 1965, but the state did not lease all the tracts around Prudhoe Bay. In 1968 Atlantic Richfield and Humboldt announced the discovery of Prudhoe Bay and ARCO, BP, and Exxon formed what became the Alyeska Pipeline Service Company. At that time, BP and Standard of Ohio also became partners and BP drilled a confirmation well. COMMISSIONER SHIVELY noted that the pipeline was officially proposed in 1969. During September of that same year the state held, probably its most famous lease sale, the $900 million lease sale. Other companies such as Amerada Hess, Phillips, Mobil and Unocal joined in the Trans-Alaska Pipeline System (TAPS) effort in 1969. That same year Sinclair and BP discovered Kuparuk, Atlantic Richfield acquired Sinclair, Conoco discovered Milne Point, and ARCO and BP agreed to a joint operation of Prudhoe Bay. As the 1970s began, the pipeline itself was slowed down through litigation over environmental issues and Native claims. In 1971 the Alaska Native Claims Settlement Act was passed. In the following year, 1972, the legislature began "debates on the pipeline with a variety of different proposals, including one from then-Governor Egan that the state actually owned the pipeline. Ultimately, ..., in 1969 the Governor and the Attorney General negotiated a compromise with the oil industry that basically set the framework for the right-of-way leasing laws and severance tax and property taxes that are, more or less, in effect today." The pipeline was authorized by Congress in 1973. During that same time, Congress did not ban any export of North Slope oil. In the following year, 1974, the haul road began. The pipeline was completed in 1977. That year, Unocal drilled for the first man-made ice island in the Beaufort Sea and Exxon also drilled its first well at Point Thomson. The next year BP discovered Endicott. Commissioner Shively noted that 1979 was the first year that oil reached $10 a barrel. "So, the fact that we now think that going below that is a catastrophe, in 1979 it was the record." Kuparuk started up in 1981. BP drilled Mukluk in 1984 at a cost of over $100 million which was probably the biggest disappointment, in terms of expense, in the state's oil development history. That year Texaco and Getty merged. Chevron purchased Gulf Oil in 1985. Number 0750 COMMISSIONER SHIVELY informed the committee that oil prices went from $24 to $12 in 1986 and Conoco shut in Milne Point. The following year, 1987, Endicott started up. "In '88 Pt. McIntyre was discovered. In '89 Milne Point was reopened. In '92 ARCO drilled the Cooglam (ph) well. In '94 BP bought Milne Point from Conoco and Chevron. In '95 Amerada Hess sold its Prudhoe Bay interests. In '96 we, with the help of the chairman and others, negotiated a deal on Northstar with BP. That was also the year they confirmed the Liberty field discovery. And in '97 ARCO, Anadarko, and UTP announced the discovery of Alpine." There have been a variety of players on the slope and in Cook Inlet over the years. Commissioner Shively commented, "So, the fact that there is change is nothing new. But, I think what is significant is we've never seen a situation where one company would exert as much control, in terms of both ownership and economics, as we'll see if this merger proceeds." CHAIR BARNES recalled a place called Duck Island. COMMISSIONER SHIVELY said that he believed Duck Island is part of Endicott development; it's either one of the participating areas or one of the units. PATRICK COUGHLIN, Deputy Director, Division of Oil & Gas, Department of Natural Resources, testified via teleconference from Anchorage. He explained that Duck Island is the unit which contains the Endicott field. Number 0905 JACK (JOHN) GRIFFIN, Assistant Attorney General, Oil, Gas & Mining Section, Department of Law, testified via teleconference from Anchorage. He said that the recent announcement of the proposed BP ARCO merger has caused the state to begin re-examining the principles underlying the way oil and gas on the North Slope is leased, produced, transported, and marketed. Some feel that the proposed merger "has pitted the paradigms of diversity and competition against claims of economic benefits attributable to greater efficiency." The state must weigh those competing claims and choose the path best satisfying the mandates of Alaska's Constitution regarding that the state's resources be used, developed, and conserved in a manner which maximizes the benefits of those resources for Alaskans. Mr. Griffin indicated that an understanding of the current fiscal regime would be helpful in understanding how this proposed merger might ultimately affect Alaskans. The state's fiscal regime, as it applies to North Slope oil and gas development, has the following four principal parts: the severance tax, the property tax, the oil and gas corporate income tax, and the royalty obligation. MR. GRIFFIN explained that the property tax is an annual tax of 20 mills on oil and gas property in the state. He noted that municipalities may also impose a property tax on such a property within their borders. "To the extent that municipalities do impose such a tax, it is a credit that the oil and gas property owners can take against the state property tax." Therefore, practically speaking, most of the state's property tax flows directly to the municipality. Alaska also imposes a 9.4 percent corporate income tax on income earned from business activities that are taxable in the state. Mr. Griffin pointed out that oil and gas corporations are taxed a bit differently from other corporations in Alaska. He noted the use of worldwide combined reporting. He explained that the Department of Revenue first determines the worldwide income of an oil and gas corporation. Then the department reviews the income of the corporation's affiliate. The portion of that worldwide income subject to state tax is determined by using apportionment factors which compare the oil and gas corporation's sales, property, and barrels produced in the state with its sales, property, and barrels produced everywhere. MR. GRIFFIN moved to the principal aspects of the fiscal regime as it applies to oil and gas development which are severance taxes and royalties. The two differ in some significant ways. The two are administered by different agencies. "With respect to the royalties, the principal difference is that the producer's obligations there are first contractual which is to say they are defined principally by the terms of the leases and, ultimately, the unit agreement that the user signs with the state. The severance tax, on the other hand, is an exercise of the state's sovereign taxing power." Although these are significant differences, that should not "cloud the fact" that these two aspects of the fiscal regime have substantial similarities. Both severance taxes and royalties are based on the taxable value. Mr. Griffin explained that the taxable value and the value for royalty purposes of ANS (Arctic North Slope) is determined by the netback basis which means the state reviews the value of the crude at the point at which it reaches its destination market. He cited the United States' West Coast as an example. On the West Coast the principal measure of the value of ANS, for royalty and tax purposes, is the publicly reported ANS spot price. He indicated that the importance of that may become more apparent later on. Once the destination value has been determined, the state tracks the cost of transporting the oil from the North Slope. Those costs generally fall into the categories of TAPS or marine transportation. MR. GRIFFIN turned his discussion to leasing. He informed the committee that "Outside of units, oil and gas corporations in the state can hold a maximum of 500,000 acres in onshore state oil and gas leases. The same 500,000-acre limitation applies to offshore oil and gas leases." With regard to the BP-ARCO merger, the combined company would have over 870,000 acres in onshore oil and gas leases which is 370,000 more acres than currently allowed by law. Offshore there is not the same problem as the combined company would have approximately 351,000 acres of oil and gas leases that are not within units. Mr. Griffin stated that his materials sent to the committee contain a number of graphs illustrating the current ownership percentages in the various units in the state. Number 1458 MR. GRIFFIN referred to the pie chart entitled "PBU (Prudhoe Bay unit) Oil Rim." The PBU as a principal reservoir. The Sadlerochit reservoir within the Prudhoe Bay unit is divided into two participating areas: the oil rim and a gas cap. He noted that the oil in the Sadlerochit reservoir is divided differently from the way gas is divided among the various owners. The "PBU Oil Rim" graph, the pre-merger graph, provides the percentages of oil from the oil rim that are currently held by companies doing business on the slope. That graph points out that BP owns a little over 51 percent of the oil rim, and ARCO owns approximately 22 percent of the oil rim. Therefore, after the merger the new BP will own over 73 percent of the Prudhoe Bay oil rim. Mr. Griffin moved on to the "PBU Gas Cap" graph which illustrates that currently BP only owns 13.8 percent of the gas cap, while ARCO owns almost 43 percent of the gas cap. Therefore, after the merger BP's interests will be over 56 percent. Mr. Griffin moved to the Kuparuk River Unit of which ARCO currently owns 39 percent and BP owns 55 percent. After the merger, BP would own over 90 percent. He noted that he did not have a Kuparuk River Unit post-merger graph. MR. GRIFFIN stated that he did not intend to go through every graph, unless the committee so desires, because the information illustrates the nature of ownership on the North Slope if the merger moves forward. He continued with the "Lisburne P.A." graph which illustrates that BP owns 20 percent and ARCO owns about 40 percent. After the merger BP would own 60 percent of the Lisburne participating area. Mr. Griffin then directed the committee to the "Pt. McIntyre - Post Merger" graph which illustrates that BP would move from an ownership of approximately 32 percent to over 62 percent. He then discussed the newest and closest to production field on the North Slope, Alpine. He informed the committee that his graph, "Alpine - Post Merger," contained an error because Union Texas is now a part of ARCO. Therefore, Union Texas should be added into ARCO's share which would mean that after the merger, BP would have 78 percent of the Alpine field. Number 1648 MR. GRIFFIN pointed out that along with the ownership of the field comes ownership of the facilities that are used to strip water and separate gas from the oil and get the oil into pipeline quality. He indicated that the state needs to examine what it means for one company to have that much control over the facilities producing the state's oil and gas resources on the North Slope. With regard to production, he noted that he would be utilizing the Department of Natural Resources' production numbers in its latest oil and gas consumption booklet. He said, "BP ships approximately 40 percent, including NGLs (natural gas liquids) and royalty and value oils, of the barrels that move down TAPS. And we know that ARCO ships approximately 28 percent. TAPs throughput today is approximately 1,160,000 barrels a day." He roughly estimated that BP ships 470,000 barrels of oil a day from the North Slope, while ARCO currently ships approximately 325,000 barrels a day. That oil is transported through TAPS. Mr. Griffin noted that the committee should have several graphs relating to TAPS. MR. GRIFFIN pointed out that in 1985 when the TAPS settlement agreement was signed, BP owned 17 percent of TAPS, although his outline says 34 percent. Currently, BP owns 50 percent of TAPS. If the merger proceeds, BP would own and control 72 percent of TAPS and its feeder pipelines as well. He said that BP owns 57 percent of Endicott which would not change after the merger. At Milne Point BP owns 91 percent of the pipeline which also would not change after the merger. However, at Kuparuk BP currently owns 38 percent and ARCO owns 57 percent which would result in BP owning 95 percent of that pipeline after the merger. "The [indiscernible] pipeline is a pipeline that transports NGLs from Prudhoe Bay to Kuparuk for enhanced oil recovery. Today that pipeline is owned 100 percent by ARCO. Tomorrow that pipeline may be owned 100 percent by BP." Once the Alpine pipeline is complete, ARCO would likely own 100 percent of that pipeline and if the merger proceeds, BP would own 100 percent of that pipeline. Mr. Griffin believed that to be important. MR. GRIFFIN said the same situation exists with the ANS tanker fleet. He informed the committee that Jones Act tankers must be used in the transfer of oil from Valdez to the West Coast, but there are not that many Jones Act tankers available for the ANS trade. "Currently, by tonnage, BP owns 41 percent of those tankers. ARCO owns 32 percent, and Exxon owns 21 percent. After the merger, BP would own approximately 73 percent of that tanker capacity." He reiterated that if an oil company is thinking about doing business on the slope, it is important to think about access to facilities, to pipelines, and to tankers in order to get the oil to market. Here again, BP's control becomes a factor that the state needs to examine. Number 1922 REPRESENTATIVE PORTER inquired as to tanker capacity. He noted that during a discussion with Mr. Doug Webb, Mr. Webb indicated that a company had been formed which would result in BP only owning 25 percent of that. He asked if Mr. Griffin was familiar with that. COMMISSIONER SHIVELY explained that federal law confines BP's ownership of any tanker company that owns tankers that would operate and carry North Slope crude to 25 percent or less. He believed that there are other major owners such as Keystone and Overseas Transportation which are the other two American-owned firms. Originally, the company was established by BP to run its tanker traffic and look for other customers. That company will take over the ARCO tanker fleet also. He noted that includes ownership of the three millennium tankers ARCO is currently contracted to build. COMMISSIONER SHIVELY explained, in response to Chair James, that he understood the Jones Act to require the use of a U.S.-built ship with U.S. crews for shipping between two American ports. He felt that most people would feel, if the lowest cost producer was used, those ships and those crews would be non-competitive; however, it is a federal law. CHAIR BARNES commented that for many years Alaska crude was not allowed to be shipped out because of the Jones Act, but an amendment to that Act allowed us to do that a few years ago. REPRESENTATIVE WHITAKER informed the committee, based upon a conversation he had with Mr. Webb yesterday, that his impression was that the current ARCO tankers probably will not be sold to the Alaska Tanker Company, the new company, but rather will be leased. It would still be owned, potentially, by BP. COMMISSIONER SHIVELY said that he was not positive about that. However, Commissioner Shively did not believe BP could actually own those tankers because it is a foreign company and the Jones Act has certain restrictions on foreign ownership. He deferred to BP or Mr. Webb on that issue. REPRESENTATIVE COWDERY commented that he thought foreign bottom boats could not be utilized, but American bottom boats could be utilized no matter who the owner was. Number 2053 BRUCE BOTELHO, Attorney General, Department of Law, offered to provide a definitive answer later or, as Commissioner Shively indicated, that question could be posed directly to either BP or Alaska Tankers. He understood, as did Commissioner Shively, that the following three criteria must be met: U.S. built; American crews, and foreign interests cannot exceed 25 percent. CHAIR BARNES indicated agreement with Attorney General Botelho. MR. GRIFFIN continued his discussion noting that BP does not internally refine its ANS nor does BP take its ANS to its own refineries. BP sells its ANS to third parties and most of BP's ANS, perhaps the vast majority, goes to the U.S. West Coast market. Some of BP's ANS is sold in Alaska while some is shipped to Hawaii and Asia. CHAIR BARNES interjected that BP ships ANS to Taiwan and Mainland China also. MR. GRIFFIN noted that ARCO, on the other hand, has two refineries on the West Coast. The publicly reported, combined capacity of these refineries is approximately 457,000 barrels per day which is approximately 140,000 barrels per day more than ARCO's current estimated production. Therefore, some rough conclusions can be drawn from these numbers. "Of BP's estimated combined post-merger production of today, 790,000 barrels per day, approximately 460,000 barrels of that could be internally refined. And thus instead of selling 470,000 barrels per day to third parties, BP might have only 330,000 barrels per day, or so, available to sell to third parties." CHAIR BARNES asked if BP used those two ARCO refineries to refine 460,000 barrels internally, could that service the service stations that ARCO owns on the West Coast. She also inquired as to the effect that would have on the barrels of oil that Alaska sells every day. Number 2171 MR. GRIFFIN understood if the merger happens, BP would acquire not only the refineries but the other aspects of ARCO's current downstream operation. He believed ARCO does use the products that are refined at its West Coast refineries in its own service stations which he presumed BP would do also. He noted that he did not have any independent or proprietary knowledge to that effect. COMMISSIONER SHIVELY stated, in response to the second part of Chair Barnes' question, that the oil available to Alaska would not be affected because that is set as part of the state's royalty percentage. The royalty percentage would stay the same, assuming the valuation system stays the same which is an issue that will be before us. REPRESENTATIVE WHITAKER recalled that BP had a West Coast refinery, until recently. MR. GRIFFIN replied that he did not know. He commented that BP has not had a refinery since he has been with the Department of Law. REPRESENTATIVE WHITAKER said that he would provide more information on that to the committee. He informed the committee that BP had retail outlets on the West Coast until relatively recently. He asked Mr. Griffin if he was familiar with that. MR. GRIFFIN replied that he was not familiar with BP's downstream operation. Mr. Griffin continued his presentation. He said, "Based on these facts, it is apparent that if the merger goes through, it will have significant affects on how Alaska leases, produces, transports, and markets ANS. If nothing else, it's clear that this merger would place BP in a position of dominance over all aspects of ANS development. So, I think that's something that the state has to examine very closely." Number 2295 ATTORNEY GENERAL BOTELHO commented that Mr. Griffin has highlighted the areas of concern. In a meeting with the legislative leadership, the Governor highlighted four general areas of special concern for the state with regard to this merger. "First, with regard to the question of the competitive environment in the state. That is to look at what this acquisition would do to Alaska's being open for business and available for other entrance into the Alaska oil and gas arena both production and other upstream issues in the state. Second, to take a look at its impact on a fair source of revenues for state government. Third, looking at continued concerns for the environment, and fourth, the concern about Alaska hire, about supplying Alaska and companies participating fully as citizens in the state in their respective communities." The Governor has directed himself, Commissioner Shively, Commissioner Wil Condon of the Department of Revenue, and John Katz, legislative director in Washington, D.C. and former Commissioner of Natural Resources, to undertake a review. That has begun and six areas have been identified for which task forces were established in order to specifically examine the acquisition. TAPE 99-10, SIDE B Number 0001 ATTORNEY GENERAL BOTELHO said, "...our historic reliance on spot pricing that BP has undertaken and which has served the state well in valuing for both taxes and royalties. Marine transportation. The Trans-Alaska Pipeline. There are a series of issues related to tariffs. What we have identified as our facilities focus on accessibility or access to facilities. Generally, natural gas development on the North Slope. And finally, leasing issues. What they all have in common is the recognition that we be open for business, to seek competition, and maximizing the state's resources to encourage other companies to engage in leasing." He noted that there are several choke points along the way any one of which can, potentially, serve as a major deterrent to future investment in the state. "If there is not ready access to new entrants, it is a discouraging factor in whether they will make the decision to participate in our competitive lease sales." He pointed out that there are several common carriers; however, for regulatory purposes there are several different pipelines. There is an opportunity for mischief with BP acquiring a total of 72 percent of that pipeline. Although he is not suggesting there would be mischief, it is a factor that others looking at Alaska will take into account when determining whether they want to be here for the long term. ATTORNEY GENERAL BOTELHO addressed marine transportation. He recognized that it is only profitable to be in Alaska if there is the ability to market oil and take it to a distant market. Therefore, there is a focus, over all, on the transportation system, not only with TAPS but the tanker fleet as well. Attorney General Botelho commented that one of the top priorities for Alaska is regarding the future of natural gas on the North Slope. Number 0250 ATTORNEY GENERAL BOTELHO stressed that the goal is to, as quickly as possible, review each of these issues in detail. The intent is to accomplish this review through the use of staff as well as outside experts in order to provide an evaluation of these issues. This issue is not solely of concern to the State of Alaska, although Alaska will feel the impacts of this acquisition over any other. "It is a matter of national magnitude. As a consequence, it is a merger or acquisition that requires the approval of the Federal Trade Commission (FTC) and could well require approvals from other states that see an interest here." Consequently, there will be meetings with representatives of the FTC in Juneau next Monday. Representatives of the antitrust divisions of the states of Washington, Oregon, and California have all expressed interest in reviewing this acquisition and will also be present. Attorney General Botelho hesitated to be much more committal about a specific time line, but noted this is a $26 billion dollar deal with major impacts for the state. He expressed the need to study this merger very carefully and methodically. Time is of the essence here, but there is no room for shortcuts. He expected this to be a several month process. REPRESENTATIVE PHILLIPS asked if the group had determined a time line on returning with responses in those six categories. ATTORNEY GENERAL BOTELHO said that the group is still identifying all the questions that need to be answered. He informed the committee that the deadline being aimed for is this Friday. With regard to having answers, he thought that would probably take a minimum of another six weeks. REPRESENTATIVE PORTER mentioned that a certain percentage of the information being gathered will be used to formulate a strategy for the state to use to respond to this merger. All of this information would seem to have a great bearing on Alaska's finances and would not be public, for obvious reasons. He asked if there has been consideration regarding the mechanism to be utilized to receive this information and work with the legislature. ATTORNEY GENERAL BOTELHO commented that Representative Porter raises a very important question which is still being sorted out. The legislature has a major role to play, and in order to execute that role the legislature needs to be provided information. He explained that in working with the FTC, document sharing takes place, but in order to access that information a confidentiality agreement must be signed which will constrain what information can be shared with others. "They generally take the view that they will only deal with those who are in a direct, what they would characterize as a law enforcement role. That's how they see the antitrust area." Therefore, access would be limited to a certain extent. However, he noted that there are clearly antitrust issues, but there are also lease administration issues and tax administration issues for Alaska. Those issues have been shared between the legislative and executive branches, oftentimes under our own agreements of confidentiality. Attorney General Botehlo stated that the Governor has made his wishes very clear; the Governor wants the group to work with the legislature as closely as the law would permit recognizing that everyone has a common interest in achieving the best result for the State of Alaska. Number 0650 CHAIR BARNES commented that if there is a point at which an executive session is utilized to acquire this information, she hoped that there will be a sign-in sheet and people have to swear to keep the information confidential. ATTORNEY GENERAL BOTELHO said that he appreciated Chair Barnes' sensitivity to the confidentiality concerns which will be a constraint for everyone. He understood that the legislature has retained the services of outside counsel which the Governor applauds as did he. To a certain extent, working on parallel tracks makes sense. REPRESENTATIVE OGAN acknowledged that he is very unfamiliar with laws dealing with mergers and antitrust. He asked what will the FTC review? He recognized that the FTC would review the large picture and the consumer end. Will the FTC be a factor in Alaska on the North Slope with regard to the issues of competition and antitrust on the production end, including delivery and transportation? ATTORNEY GENERAL BOTELHO noted that this is a topic which has been of great interest. He believed it would be fair to say that the FTC has seldom, if ever, dealt with upstream issues when it has dealt with oil and gas mergers. Normally, the focus would be at the retail level, which for the most part will not be present in this acquisition because the downstream is fairly geographically dispersed. He informed the committee that the FTC's associate director responsible for mergers in petroleum has indicated to him that the primary focus will be on Alaska, the impacts on the North Slope, the transportation corridor which is viewed as one of national import, and on competition. He said, "I suspect that a part of this has to do with the fact that the state, as a sovereign, has a major interest. But I think we should not overlook the fact that the other sovereign who may be impacted by this is the federal government itself." REPRESENTATIVE PHILLIPS asked if under the leasing component, there would be review of new leases in addition to the disposal of overage acreage? ATTORNEY GENERAL BOTELHO deferred to Commissioner Shively. COMMISSIONER SHIVELY stated that there will be review of both. Number 0874 REPRESENTATIVE GREEN asked if there is any severability or is it an all or nothing type of antitrust? ATTORNEY GENERAL BOTELHO said that the commission and the Antitrust Division of the Department of Justice are frequently involved in antitrust matters. With regard to separating upstream from downstream, he did not believe it is done explicitly; it is not all or nothing in the sense that you either have a deal that passes muster or you don't and it gets disapproved. He identified the most frequent occurrence as a conditional approval. "That is the direction for divestiture of some assets, ownership interests, whatever it takes from the regulatory agency's view to make sure there is not a substantial lessening of competition." Therefore, there they have fairly broad powers and wide latitude in working out agreements and most of the time those issues are not litigated. He noted that very few cases are actually turned down. REPRESENTATIVE GREEN asked if there is the possibility that the FTC and the state may have divergent views on a monopoly or an interest. He also asked if there would be primacy. ATTORNEY GENERAL BOTELHO said that there is the possibility that there are divergent interests which is certainly the case internally. For example, the state has a strong interest in a very high spot price and to have transactions measured that way. He indicated that it would not be a surprise for the FTC and other states to be interested in the lowest price to the extent that there would be a lower price at the tank. Attorney General Botelho emphasized that Congress has refused to preempt state antitrust law, therefore both the FTC and states have concurrent jurisdiction and both are free to act. This would result in the company having to satisfy both. However, it is somewhat unclear when the two reach diametrically opposed conclusions about a specific asset. "For that reason, the trend has been for the FTC to work directly with the states through the entire process ... or at least that there is an ongoing exchange of information." He cited Carrs-Safeway as an example of such. Similarly, there is a multi-state task force along with the FTC regarding the Exxon-Mobil merger and Alaska is participating in that as well. Number 1140 REPRESENTATIVE GREEN recognized that there are other actions in front of the FTC. He asked if there is a first-in, first-out type of situation or are actions run concurrently? ATTORNEY GENERAL BOTELHO replied that the process is not a first-in, first-out situation. He explained that the action is divided into sections which deal with particular subjects. The schedule is driven by the demand for documents, the timeliness of receipt of those documents, and the complexity of the issues in which there are overlapping interests. First notification to the FTC does not indicate that action will be the first one with the answer. REPRESENTATIVE COWDERY understood that, with regard to the retail side, BP has sales as well as ARCO, although none of them are here in Alaska. He was sure that would be reviewed in the light of the antitrust. With regard to the earlier comments that BP primarily sells to others and it does not really refine, ARCO seems to be the opposite. How would that work? He said, "If they sell crude to someone else and sell it to their own refinery once they merge, that would be a little bit of a balance. Wouldn't it? I mean, somebody else is going to pay them. You know, talking about spot prices and competition ... You would establish some guideline for value rather than selling it to your ... If you understand where I'm going there on that." ATTORNEY GENERAL BOTELHO commented that Representative Cowdery's question seems to have a couple of parts to it. Firstly, the merger would create a different creature than that existing six months ago with simply BP. With regard to the FTC side, there will be a whole retail system that would primarily be East Coast based, which would be complemented by the ARCO portion which is focused as the primary retailer on the West Coast. Attorney General Botelho stated that it is difficult to predict BP's stance regarding spot pricing or where it will deliver its crude. It would be logical for it to feed the refineries it now owns. However, he recognized that there will be competing internal pressures, depending on what part of the company or which subsidiary one is addressing. The refiner part of the company is going to want the lowest price possible, while the marine transportation portion will presumably want the highest price possible for shipping. Currently, it is uncertain as to how that will work. Number 1367 CHAIR BARNES noted that when the negotiated oil tax settlements were present she understood that ARCO negotiated one level, while BP negotiated another level as it relates to tariffs. She said that BP pays Alaska less money for those tariffs than does ARCO which under the merger, would result in Alaska receiving less money for its oil. ATTORNEY GENERAL BOTELHO believed Chair Barnes was referring to the Amerada Hess litigation, a royalty settlement, which resulted in the development of three different methodologies for each of the following companies: Exxon, ARCO, and BP. In terms of pricing, all were based on slightly different mixes. He indicated that was a conscious decision by the state to have a diversified portfolio, thus not relying on one particular methodology. He commented that he did not want to characterize one methodology as more advantageous than another. REPRESENTATIVE PHILLIPS asked whether those payments would be treated as liens and would have to be dealt with before the merger proceeds. ATTORNEY GENERAL BOTELHO clarified that those do not act as liens; they are methodologies which remain in place as long as each company is separate and until the merger goes through. Attorney General Botelho pointed out that this is an area that will be specifically reviewed due to the potential consequences for the state. REPRESENTATIVE BERKOWITZ asked if the merger does not proceed, would the state's relationship with the entities remain the same as it was prior to the merger. ATTORNEY GENERAL BOTELHO acknowledged that there will inevitably be some tensions during the process as information is requested. Furthermore, there will be some hard negotiating in order to achieve what is believed to be in the best interest of the state. He noted that Commissioner Shively has repeatedly made an important point regarding whether the state will be able to return to the status quo. Number 1582 COMMISSIONER SHIVELY said he believed that to be the base of the issue here. He suggested that most people in the state would support the status quo, if there were a choice between the status quo and the merger. Commissioner Shively indicated that even without this merger, he thought Alaska would have seen one operator at Prudhoe Bay which would have certainly reduced jobs. More importantly, most people reviewing the energy industry believe that ARCO was ripe for a takeover or buy out. He pointed out that clearly ARCO's North Slope assets would be of value to BP. If the state was in a different situation in which there would not be such an overwhelming ownership as in this merger, the buyer of ARCO could have still not been interested in Alaska and took resources from existing development. With regard to whether there is a way to keep the status quo, Commissioner Shively did not believe that to be an option. He stressed, "That's not necessarily to say that the state has, at this point, concluded that this is the best option. It clearly will not be the best option unless we can reach some agreements with BP about some of the issues that the Attorney General and others have talked about here today." CHAIR BARNES emphasized that the commissioner has a constitutional responsibility, as do legislators, to ensure that the state's resources are used to the maximum ability and to receive the maximum amount of money from the sale and use of those resources. REPRESENTATIVE BERKOWITZ commented, "It seems to me it would be very difficult to go home again. In the sense that the fact that this merger has been approached has forever changed some of the material terms of the relationship between the state and both ARCO and BP, regardless of whether BP emerges as the single entity afterwards." REPRESENTATIVE OGAN echoed earlier comments that the relationship is defined in statute and would certainly remain the same. Representative Ogan noted that he had dinner with a couple of the leaders of BP and ARCO as well as the chairman of the oil and gas committee. During that dinner, he discussed that all involved parties have a fiduciary responsibility to its board of directors and stockholders which for the state are the people of the State of Alaska. Representative Ogan expressed the need to define the relationship between the legislature and the Administration in that negotiation. Number 1783 ATTORNEY GENERAL BOTELHO reiterated that he believes the Governor is committed to close consultations. If laws need to be changed, the executive and legislative leadership has to be part of the mix, although there are constraints. Foremost among those constraints relate to the extent to which we wish to work with the FTC which he believed to be in the state's interest to do so. He said, "It [the FTC] will view its interaction with the state [as] being with the state executive or what, in a more narrow sense, they would define as the law enforcement agency." He reiterated the desire to work with the leadership and the legislature in as close a manner as the law would permit as well as in a way that is responsible to the state. However, he noted that there are also obligations with respect to BP Amoco and ARCO as major corporate citizens of the state. At times, balancing those will put us to the test, but at this point he did not foresee a specific problem. Attorney General Botelho suggested that it would not be helpful for us, as we work through this process early on, to be constantly in hearings offering our view of what needs to be negotiated. "We've got to do our homework. And we need to do it, I think, outside of the public limelight. And to the extent that there is coordination in hearings, that would be a very helpful step from my perspective. Our folks can spend their time focusing on getting the information together, analyzing that information and helping to formulate a plan. For our part, we will work with your designated leadership and certainly the counsel that you have retained and try to make sure that there is as good a flow of information as we can have. And I guess I would also expect that, as you do your fact finding and fact gathering, that in itself will be a very helpful adjunct to what we're trying to do, particularly to the extent that you have direct relationships with the citizens of the state, and they wish to explain to you what they think government should be doing and what they think the impacts are. I think your independent ability to gather facts is a very important coordinate activity as we go forward." CHAIR BARNES informed everyone that it is the intention of this committee to move forward, to hold hearings, and to acquire public input. She explained that first she intended to hear from the government officials charged with the task of reviewing the state's current position as well as its future position as was heard in this meeting. As this process of acquiring information continues, there may be a point at which those present today will need to return or other oil and gas experts will need to be present. Number 1940 CHAIR BARNES announced that she intended to recess from meeting to meeting. There will be a couple of meetings with the private sector in order for the oil industry to hear the concerns of those in the private sector. The committee will hear from the industry itself as well. She felt it important to be able to discuss these issues in order that everyone has an idea of where we're at and where we're going. "Certainly there is nothing more important, as it relates to the resources of our state and to the funds that come into our state, than is Prudhoe Bay. Prudhoe Bay and all of its many facets whether it is the pipeline, or the tankers, or selling on the spot market--it all has an effect upon the resources of the people of this state and how we manage those. So, we're going to be looking to acquire information." She emphasized that she would not attempt to acquire information that would, in any way, compromise the governmental officials or the oil industry. Chair Barnes intended for these to be friendly, fact finding meetings until otherwise necessary. ATTORNEY GENERAL BOTELHO agreed with Chair Barnes' sentiment. "Again, we have a common, very important purpose and objective. We have not seen anything, at this stage, that suggests that we are doing anything other than walking in the same steps." CHAIR BARNES announced that this meeting would be recessed until 5:00 p.m. on Thursday, at which point people from the private sector that will be available to share their knowledge. REPRESENTATIVE OGAN informed the committee that he has maps of the production facilities and the latest maps of the leases, available to anyone interested. ADJOURNMENT There being no further business before the committee, the House Special Committee on World Trade and State/Federal Relations meeting was recessed to 5:00 p.m. Thursday, April 15, 1999.