HOUSE SPECIAL COMMITTEE ON WORLD TRADE AND STATE/FEDERAL RELATIONS April 15, 1999 5:08 p.m. MEMBERS PRESENT Representative Ramona Barnes, Chair Representative Beverly Masek Representative Gail Phillips Representative Ethan Berkowitz Representative Reggie Joule MEMBERS ABSENT Representative John Cowdery, Vice Chair Representative Joe Green OTHER HOUSE MEMBERS PRESENT Representative Scott Ogan Representative Sharon Cissna Representative John Harris COMMITTEE CALENDAR OVERSIGHT HEARING: PROPOSED PURCHASE OF ARCO, Inc. by BP-AMOCO (* First public hearing) PREVIOUS ACTION See the House Special Committee on World Trade & State/Federal Relations minutes dated 4/13/99. WITNESS REGISTER WALTER HICKEL, Ex-Governor of the State of Alaska No address or telephone provided. POSITION STATEMENT: Commented on the proposed merger. CHARLIE COLE, Former Attorney General of the State of Alaska 406 Cushman Street Fairbanks, Alaska 99701 Telephone: (907) 452-1124 POSITION STATEMENT: Commented on the proposed merger. JIM PLAQUEK Fairbanks Operating Engineers, Local 302 1444 2nd Avenue Fairbanks, Alaska 99701 Telephone: (907) 456-4423 POSITION STATEMENT: Supported the merger. JERRY McCUTCHEON PO Box 241623 Anchorage, Alaska 99524 Telephone: (907) 277-3076 POSITION STATEMENT: Stated that Alaska should buy ARCO. KAREN COWART, General Manager Alaska Support Industry Alliance 4220 B Street, Number 200 Anchorage, Alaska 99504 Telephone: (907) 563-2276 POSITION STATEMENT: Viewed the merger as a business decision responding to a changing global environment. RICHARD FINEBERG PO Box 416 Ester, Alaska 99725 Telephone: (907) 479-7778 POSITION STATEMENT: Discussed how the state could acquire and manage the pipeline. RANDY RUEDRICH, Arctic E&P Advisors 1210 E 16th Avenue, Number 21 Anchorage, Alaska 99501 Telephone: (907) 277-3031 POSITION STATEMENT: Discussed the merger and the oil and gas industry in general. KEITH HAND, CFO Fairbanks Natural Gas 3408 International Way Fairbanks, Alaska 99701 Telephone: (907) 452-7111 POSITION STATEMENT: Testified on behalf of Ray Latchem, President of Fairbanks Natural Gas. ACTION NARRATIVE TAPE 99-11, 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, Masek and Phillips. Representatives Joule and Berkowitz arrived at 5:10 p.m. and 6:04 p.m. respectively. Representatives Ogan, Cissna, and Harris were also present. Representatives Cowdery and Green were not present. [Tape begins mid-speech] Number 0128 WALTER HICKEL, Ex-Governor of the State of Alaska, said, "... had to happen, but we both feel that this issue may be so big that you might have to call a special session to deal with this topic." He noted that the merger must be approved by the federal government. He indicated that the first responsibility is to ensure that the lands of Alaska that Alaska decided to produce are produced. There are two ways to profit from North Slope production; first is produce it and sell it, second is to transport it. If one is both a producer and a transporter, he/she may have an advantage over someone else who just wants to produce. That point should be reviewed and there should be assurances that the new people on the North Slope can be competitive. He compared the merger to the Safeway and Carr's buy out during which, "They finally said you had to sell some of the stores so it could remain competitive, and that's one of the big things." He mentioned the North Slope natural gas and his dealings with BP officials who have indicated that they do not believe that Alaska's O&G would be competitive, maybe for the next 20 years, against reserves that BP has in China, the Northwest Shelf Australia, Indonesia and other places. Perhaps, those claims are correct. Mr. Hickel indicated the need to review those claims and suggested that an independent effort to market and transport this gas may possibly happen. Representative Whitaker's proposal is probably worth review. MR. HICKEL discussed a ruling that occurred during the constitutional convention before statehood from Alaska's then delegate to Congress, U.S. Senator Bartlett. Senator Bartlett knew Alaska was going to become an owner-state and he warned the convention that Alaska may face two types of exploitation. One type of exploitation would be taking everything and leaving nothing, and another, worse, type of exploitation would be promising to take and not taking. This warning is applicable to gas in that Alaska must ensure that production does not occur simply because producers may have conflicting interests elsewhere. He offered the services of himself, Ex-Governor Hammond, and others such as Commonwealth North. In conclusion, Mr. Hickel noted that he had faxed most of the concerns to members of the legislature. REPRESENTATIVE MASEK mentioned that she had read Mr. Hickel's April 4th article in the Anchorage Daily News. She commented that she would like to see his continued involvement in this issue. Any plan proposed has to be one that Alaskans can support. Number 0762 CHARLIE COLE, Former Attorney General for the State of Alaska, testified via teleconference from Fairbanks. He said that the BP ARCO merger is a "cataclysmic event" for Alaska which will have consequences far into the future. Therefore, the legislature should fully investigate the consequences of this merger, spending whatever time and funds necessary to investigate and evaluate all of those consequences. In this situation, Mr. Cole believed that the legislature may have greater weapons than the executive branch. REPRESENTATIVE PHILLIPS inquired as to what Mr. Cole would view as the key components to be concerned about and working on. MR. COLE said that he would investigate what affect this merger would have on "chilling the opportunity of other oil companies to expend funds to explore, to investigate, to acquire leases, properties on the North Slope." Perhaps, it may be necessary to inquire of the thoughts of other oil companies and other experts in the field. He noted that the merger, as he has been told, could result in BP holding 70 percent interest in the Trans-Alaska Oil Line which would mean that BP would control Alyeska. He reiterated the need to review the consequences. When a good sense of the potential consequences is acquired, then decisions could be made as to what the legislature and the executive branch can do to alleviate the perceived adverse consequences of this merger. Number 1054 JIM PLAQUEK, Fairbanks Operating Engineers, Local 302, testified via teleconference from Fairbanks. "The merger between BP, Amoco, and ARCO, we feel will be good for the State of Alaska and for organized labor in the State of Alaska." He noted that organized labor has had many Prudhoe Bay projects with BP, including the 200 plus workers from Fairbanks who constructed the 28-mile ice road pipeline from Endicott to Bodami last year. He informed the committee that this winter 50 workers from Fairbanks spent the entire winter building the ice road to the North Star Island only to have U.S. Fish and Wildlife deny the permit to construct the gravel island. That resulted in the loss of work for 120 workers which amounted to a loss of $10,000 per worker in lost wages. Mr. Plaquek pointed out that oil industry jobs have provided needed employment for Fairbanks workers to support their families which in turn, through tax dollars, sustain local businesses, schools, hospitals, and other essential community services. Many Fairbanks families have enjoyed the benefits provided by the oil industry over the years. He said, "BP-Amoco has committed to invest $5 billion in North Slope development over the next five years. Economically, Alaska and its residents need this continued investment from the oil industry. BP-Amoco has committed to use Alaskan contractors and suppliers and build modules in Alaska. And most important to hire Alaskans first on their pipeline projects." Alaskan workers appreciate and applaud BP-Amoco's commitments because it means jobs to support our families. He indicated that this merger will result in BP-Amoco having the expertise and financial resources to ensure a long and successful future for Alaskan oil industry workers. In conclusion, Mr. Plaquek thanked BP-Amoco for being such a good corporate citizen and for hiring Alaskan workers whom he indicated would continue to foster good relations with BP-Amoco. CHAIR BARNES clarified that the Alaska House of Representatives working with the Department of Natural Resources secured the commitment that Alaska contractors and workers would be used on these North Slope projects that Mr. Plaquek identified. REPRESENTATIVE HARRIS asked if Mr. Plaquek has had any assurances, especially from organized labor, that after the merger there would continue to be such jobs. He noted that in the past ARCO and BP have worked against each other and, at times, with each other. MR. PLAQUEK stated that BP-Amoco has made a commitment to hire Alaskans first. "It only makes sense and they understand when they hire organized laborers, they're hiring Alaskans, so that's their commitment to us, to hire Alaskans first." Number 1295 REPRESENTATIVE JOULE asked if Local 302 has been able to consider anything else other than jobs. Representative Joule said that he was looking at the longer term, beyond the $5 billion over five years, that this takeover may result in other companies feeling that they might not be able to participate in Alaska's development. If that participation does not occur, then there are potential jobs that are also gone. MR. PLAQUEK asked if Representative Joule was referring to other oil companies coming into the state. REPRESENTATIVE JOULE replied, partially. He understood Mr. Plaquek's testimony to be in favor of the merger because of the jobs that this proposed merger would provide through capital investments. He asked if Mr. Plaquek had looked at anything else in this merger other than jobs. MR. PLAQUEK clarified that he represents workers, for which jobs are the top priority. He stated that he was looking at jobs and the investment in the state. REPRESENTATIVE JOULE commented that he would hope that it would mean jobs for Alaskans regardless of location. REPRESENTATIVE OGAN informed everyone that he has received some letters from various people who assert that a week-on-week-off schedule is more conducive to Alaskan residents whereas there tend to be more non-resident Alaskans working when there is a two-weeks-on-two-weeks-off schedule. He asked if Mr. Plaquek would concur with that assessment. MR. PLAQUEK said that he was not familiar with those schedules, but noted that work on the Trans-Alaska Pipeline at Prudhoe Bay is on a four and two week schedule. REPRESENTATIVE OGAN commented that was "probably the non-union folks up there." However, that should be reviewed. CHAIR BARNES commented that the legislators have received much correspondence regarding the use of out-of-state workers, especially when there are fewer jobs on the slope and in the oil industry. She reiterated Representative Ogan's comments regarding the correspondence that says a two-and-two week schedule is more conducive for out-of-state workers, allowing them to be able to fly out of state while Alaskans go without jobs. Chair Barnes asked when Mr. Plaquek had the conversations with BP-Amoco regarding the $5 billion enhancement. MR. PLAQUEK specified, "That's your commitment that I've read several places." CHAIR BARNES asked if Mr. Plaquek meant he had read that in the newspaper. MR. PLAQUEK answered that was correct. CHAIR BARNES surmised then that Mr. Plaquek had no one-on-one conversations with BP-Amoco. MR. PLAQUEK replied, no. Number 1550 JERRY McCUTCHEON, testifying via teleconference from Anchorage, informed the committee that he has fought the gas line for almost 25 years. Mr. McCutcheon believed the BP ARCO merger will result in a "colossal screwing of Alaskans." He said, "The shotgun wedding of Amoco and BP moved BP up into a class with Roy Dutch Shell and Exxon." Shell and Exxon have lost interest in and have withdrawn from Alaska because Alaska has matured and no longer fits the corporate resources and political power of Exxon and Shell. Minimal Exxon personnel are maintained in Alaska in order to keep ARCO honest in overseeing ARCO's production of the Exxon/ARCO leases. MR. McCUTCHEON stated that Alaska has been BP's cash cow which has allowed BP to envelope Amoco and others and now ARCO. ARCO is a company which fits Alaska and a company which needs Alaska's oil for ARCO's West Coast refineries for the present and the future. ARCO used Alaska as a cash cow, but ARCO got into trouble on the world stage and lost it's ability to handle small prospects. He commented that ARCO has learned its lessons and would have survived nicely had the prolonged depression of the oil price not been more than it apparently wanted to withstand. "The State of Alaska should buy ARCO. ARCO is almost a perfect fit with Alaska's need for an oil company large enough to undertake Alaska's projects and small enough to pursue Alaska's smaller prospects, but not its smallest projects." Mr. McCutcheon said the ARCO sale is not a done deal. He suggested that Alaska would not have to manage ARCO like the Alaska Railroad or the Alaska Ferry System. The state could function as a shareholder, and he felt it best if Alaska did not own all of ARCO. Furthermore, it would be far better to own a profitable oil company that is strapped for cash such as ARCO, than become an owner in a gas line "whose prospects for profitability are so bleak that the owners of the gas do not want to construct the gas line." He continued, "Even with the state giving up the state's royalty gas and severance taxes; forcing the cities along the proposed route to forego their taxes which the cities will need to pay for the increased cost of government due to the construction of the gas pipeline. Cash for an ARCO acquisition has never been cheaper." He said that buying ARCO is a far simpler acquisition than an unprofitable gas line. He predicted that BP will leave Alaska and, using a decision tree and Monte Carlo analysis, milk Alaska for all its worth. He likened this to the last days of the canned salmon industry, only much worse. Mr. McCutcheon said, "BP's oil pipeline screwing of Alaska cost Alaska $5 billion by 1987 and will cost Alaska $40 billion by the year 2010. BP, et al. gut and run tactics almost wrecked Prudhoe Bay in the late '70s except for the fact they got caught, recover would have dropped to 5 billion barrels. BP did wreck Badami. I don't know what role BP played in the Lisburne formation. BP staged the construction of the North Star modules, which they never intended to complete, to fool the public. It was very successful at it and it was with the help of the press and a phony baloney lawsuit. BP lied to Alaskans about the producibility of Prudhoe Bay, BP told Alaskans it would produce 9.6 billion barrels without a gas line, but told Congress 15 billion barrels without a gas line. Public Document 95-73, page 570. With the cooperation of the press and the legislature BP continues to fool, maybe not now, the only too willing public. That producibility has risen to 17 billion barrels by 1989, and with 1970's technology. And if the current rumors are correct about the OOIP, producibility is now 20 billion barrels." MR. MCCUTCHEON commented that one must come in with the same kind of expertise. He informed the committee that in 1977 Chancy Croft put up the money for a three-dimensional model of Prudhoe Bay. He said, "... -- once the state got it, never turned it on to find out how much Prudhoe Bay would produce, never bothered to find out how best to purchase Prudhoe Bay. A half a million bucks right down the drain." Number 1993 KAREN COWART, General Manager, Alaska Support Industry Alliance, testified via teleconference from Anchorage. She informed the committee that the Alliance membership includes nearly 350 businesses which contract directly with producer companies to provide products and services in support of oil and gas activity. The Alliance's mission is to advocate safe and environmentally sound petroleum exploration, development and production for the benefit of all Alaskans. She noted that she was present at the request of the committee in order to provide the oil and gas contractor community's perspective on the BP-Amoco/ARCO merger. She said that she would not comment on royalties and taxes which would best be addressed by the state. She explained that she would discuss the concerns of the support industry with regard to competitive downsizing to one major operator/producer and what that means in terms of contracts and jobs. MS. COWART stated, "The Alliance does not have an opinion on the specifics of the merger." The Alliance believes it is prudent to gather facts and therefore, the Alliance applauds the Governor's initiative to form a team to gather critical information regarding impacts to Alaskan hire, Alaskan buy, investor competition, environmental protection and state revenues. Furthermore, the Alliance appreciates these committee hearings which provide citizens an opportunity to voice their questions. "The Alliance does not view the proposed merger as a crisis. We do, however, recognize it as a profound turning point, changing the landscape of Alaska's oil and gas industry." She pointed out that the notion of one main operator on the North Slope is not new. However, the biggest surprise of the merger announcement is that it would leave the state with not only one operator, but also one main producer on the North Slope. She commented that the Alliance is waiting to hear what the merger would mean to operations in Cook Inlet since BP does not currently have a presence in this area. There is also concern that the number of support industry contracts will shrink with one major operator. She predicted that initially, there will be further job losses in the support sector due to the consolidation of administrative functions. "Support industry businesses will likely respond to demand changes by streamlining their own operations, and perhaps negotiating their own mergers and consolidations." MS. COWART said, "Competition is critical to successful leasing programs in the National Petroleum Reserve-Alaska, the Outer Continental Shelf and possibilities in ANWR." The Alliance agrees with the Governor; it is time to aggressively market Alaska. She noted that the image of instability created by Alaska's $1.2 billion fiscal gap is a weakness for the state. "Closing the gap remains our top priority. We cannot stress enough the importance of closing the gap this year." She acknowledged that the Alliance has questions regarding the merger, but it believes there is room for optimism in the long term. "If the merger makes the resulting company more competitive under increasingly difficult business conditions, as BP and ARCO say it will, then the Alliance believes this bodes well for Alaska's future in petroleum development. Weakened companies simply cannot afford to operate in remote, expensive locations like the North Slope, especially when oil prices are low." MS. COWART indicated that as BP-Amoco and ARCO consolidate their operations, efficiencies will undoubtedly be realized. Such savings may be spent on exploration and production activity which would result in jobs and contracts for support industry businesses. "We also believe that BP-Amoco will make full use of the assets it acquires from ARCO. A company would not sensibly spend $25 billion to acquire facilities, land and assets and then allow them to sit idle. BP-Amoco's commitment to spend $5 billion on North Slope development over the next five years indicates that Alaska's potential is viewed as long-term." She said that the Alliance is encouraged by other commitments BP-Amoco has made, both to the public and in direct conversations with Alliance members. The Alliance believes those commitments will eventually result in dollars for the state and work for the support sector. She informed the committee, "BP-Amoco has said it will pursue ways to commercialize Alaska's vast natural gas reserves. We welcome the pledge to continue the ARCO's natural gas sponsor group, and we're encouraged by initial plans to fund a gas-to-liquids plant on the North Slope. These projects will give contractors an opportunity to use the skills, tools and facilities that came with the advent of module fabrication in Alaska. Without such projects, this new module industry may fade." With regard to the merger's impact on environmental protection, the Alliance is confident that the industry will continue to excel. BP's worldwide corporate philosophy is focused on development that does not compromise environmental protection or employee safety. "As contractors, we have been witness to, and players in, upholding this commitment." MS. COWART said the oil and gas industry has proven its resiliency by surviving lean times with ingenuity and sound decisions. She pointed out that both producers and support businesses have lowered production costs through advanced technologies and the elimination of redundant services while consolidating resources and assets to remain competitive. If the industry had maintained the status quo, it would have failed. The Alliance views the merger as a business decision that is responding to a changing global environment. "The status quo will not work now to the benefit of Alaska's oil, and gas industry, nor will 'business as usual' in state government work to the benefit of Alaska's people." Number 2283 RICHARD FINEBERG, testifying from Fairbanks, informed the committee that he was speaking on his own behalf. He noted that he has submitted a paper on behalf of the Alaska Public Interest Research Group, Oilwatch Alaska, and the Alaska Forum for Environmental Responsibility. CHAIR BARNES confirmed that the committee has Mr. Fineberg's paper. MR. FINEBERG recalled Commissioner Shively's testimony regarding the history of the North Slope. There seemed to be a persistent pattern in the changes on the North Slope as described by Commissioner Shively. Between 1991 and 1997 six major oil companies left ... [tape ends mid-speech] TAPE 99-11, SIDE B MR. FINEBERG continued "[tape begins mid-speech] ... might be using the pipeline to drive out their competitors. There was only one exception to the pattern and that was a producer [indisc.] North Slope production to a smaller company [indisc.]." Since 1997 there has been a trend toward consolidation. He indicated that Alaska has the opportunity to buy the pipeline and the paper he submitted to the committee specifies the way the numbers would work in broad terms. Mr. Fineberg did not believe that virtual divestiture of the pipeline is likely to work because that results in the status quo which created the current situation. He reiterated that Alaska could acquire the pipeline as laid out in Table 4, page 15, of his paper. The pipeline could be acquired without an outlay of state revenue and the pipeline could operate on a nonprofit basis which would reduce tariffs, and thereby significantly increase state revenue in royalties and severance. He suggested that some of the pre-collected DR&R funds could be utilized to fulfill the capital repayment, as necessary, and specific environmental tasks. The lower tariffs and state management could ensure that the pipeline does not stifle other competition. He said the pipeline revenue could be guaranteed for the pipeline communities without the annual fight to preserve the property taxes in the Fairbanks, the North Slope, and the Valdez Boroughs. He noted that "we" could escrow which would remove the state from the policy straight jacket it faces in the long run. The pipeline would be operated on a nonprofit basis which would provide the lower count. The paper before the committee lays out the numbers, the background, and history that led Mr. Fineberg to this proposal submitted on behalf of the aforementioned organizations. Mr. Fineberg hoped that this proposal would receive serious consideration. REPRESENTATIVE OGAN inquired as to Mr. Fineberg's background. MR. FINEBERG informed the committee that he is an independent consultant. He noted that he was a journalist during the pipeline. Mr. Fineberg has been in Fairbanks for probably 30 years now, in Juneau for 12 years, in the Governor's Office for about six years, and in Oil and Gas [indisc.] for Governor Cowper for three years. He said that he did a number of reports to the state legislature in the early 1990s. He has been an independent consultants for the government and nonprofit groups, primarily. In 1997, Mr. Fineberg did a report for Oilwatch Alaska which was entitled, "The Big Squeeze: Trans-Alaska Pipeline and the Departure from the North Slope of Oil Companies Who Found Oil There." In 1996, he did a report for the Alaska Forum entitled "Pipeline in Peril," and in 1998, he did a report for Oilwatch Alaska "How much is Enough?", which he believed "is the first independent analysis and broad, comprehensive public analysis of North Slope profitability since one was done for the Department of Revenue in 1989 that had the misfortune to come out one week before the Exxon Valdez spill, and it was quickly forgotten." Number 0735 RANDY RUEDRICH, Arctic E&P Advisors, testified via teleconference from Anchorage. He informed the committee that he has been associated with the Alaskan petroleum industry for approximately 30 years. He has worked and managed aspects of drilling, production, transportation and research organizations in the United Sates, Europe, and the Middle East. He began his testimony with regard to operations. He characterized the petroleum industry as ever changing. "The exploration, discovery, development, depletion and abandonment phases are required changes in a successful operation." The classic commodity business no longer exists and low cost operations are mandatory in a competitive world oil market. "The successful commodity producer must only have one mission throughout the life of the field, and that is to maximize production while minimizing cost at each step of the way." He pointed out that petroleum law encourages efficient business practices in the formation of a unit to blend together all interests. The unit operator is responsible for the design, construction, drilling and production of the asset. In large fields, there have been several in Alaska, the working interest owners have agreed to have multiple unit operators. As the fields have matured, multiple operations or unit operators in the early days of Cook Inlet have changed to a single operator in a field or in an area as did Mobil, Amoco, ARCO, Marathon and Unocal when they turned over platforms and related facilities to remaining operators in the Cook Inlet. MR. RUEDRICH pointed out that Prudhoe began as a similar consolidation drive when the work declined. In 1992, drilling, construction and aviation services were shared, but no operator left. As mentioned earlier, the Alaska oil field service community adjusted to those changes as it had to the Cook Inlet changes. "Shared services and related ARCO and BP operational changes reduced total production costs and gave us a very favorable event, a very high level of growing capital investment from 1994 to 1998." That resulted in a higher production rate from Prudhoe than had been previously anticipated which was good for the service community, individual Alaskans, and the state. He said that a single operator for Prudhoe or shared services would historically have followed as field production declined. The timing would be dependent upon the marketplace and the field decline rate. Therefore, the current combination of the two simply accelerates that consolidation. He suggested that if savings are realized through the reduction of operating costs, that should result in increased oil production. Therefore, Mr. Ruedrich viewed this as a positive event for Alaska and the North Slope oil fields. Number 0900 MR. RUEDRICH turned to the ownership side. He pointed out that, realistically, everyone who owns something will attempt to maximize their rate of return. He believed that the elimination of ARCO's interest may be a positive impact, "because our fields are more profitable to produce, BP will invest more capital, that will be a plus to us here in Alaska." He turned to the exploitation of additional reserves in existing units which produces oil quickly at a reasonably low cost. He stressed that this work must continue at its current rate or at an accelerated rate, which he advocated. One way to close Alaska's financial gap, is to improve the production rate from the Arctic. He recalled Ken Thompson's, the previous ARCO Alaska President, comment that there were 50 or more prospects in the existing units which is a tremendous workload for BP to follow up on. With regard to what the state should do, Mr. Ruedrich advocated review of some type of exploitation well tax credit; a tax credit for significant increases in exploitational wells drilled to look for reserves. He posed a situation in which a well cost $3 to $5 million and 25 million barrels of reserve were added, as reported a couple weeks ago; that would be significant to the state's tax revenue. MR. RUEDRICH continued with discussion of the exploitation of the new fields: North Star, Liberty, Sourdough, and the continuing exploitation of Alpine. He believed it important for the state to simplify its permitting process. He informed the committee that he has participated in projects down south where the cost of the well may be only slightly greater than the cost of permitting an exploratory well in Alaska. He offered to work on this issue. Alaska is pricing itself out of the marketplace. Helping operators get permitted places more oil in the pipeline sooner, and makes Alaska a place that is truly friendly for capital investment. "And this will make our future open Alaska acreage sales more valuable to the state." With regard to exploration plans for new reserves, Mr. Ruedrich commented that BP should be allowed ample time to sell the balance of its onshore acreage as defined by state law. "The benefits to Alaska are very simple." He explained that new exploration efforts with different concepts would be applied on BPA's lowest priority acreage which would be a very big plus. He reiterated the need for the state to provide BP with ample time to market this large acreage so that new concepts, independent financial resources, and more importantly independent dry hole budgets will be attracted. Therefore, if anyone is successful, one or more significant companies may be added to the Alaskan economy. Number 1157 MR. RUEDRICH turned his discussion to gas development. He informed the committee that he has served on the Alaska Petroleum Engineering Advisory Committee for several years, and has advocated for Alaska to become a leader in the new Gas to Liquid (GTL) technology. He believed it imperative to pursue this. A well-defined tax regime should be constructed and GTL production started. The GTL plants could be built in Anchorage or Kenai and shipped to the Slope over a multi-year construction period. This would be a win-win plan for Alaska providing active Alaskan construction contractors and Alaskan jobs in construction and field operations. There would also be several tankers of white crude leaving Valdez each week. All of this would be great for Alaska's economy and the state's treasury. He pointed out that white crude will keep the TAPS pipeline operational for many extra years in order to ship billions of extra barrels of crude oil from discovered and undiscovered North Slope oil fields. REPRESENTATIVE PHILLIPS referred to Mr. Ruedrich's statement regarding the trend of shared services and a single operator. She asked if he meant that scenario would have been likely in the foreseeable future anyway just in an attempt to bring down costs. Number 1255 MR. RUEDRICH replied yes. He noted that shared services was already implemented in 1992 as part of the business plan on the Slope. Therefore, shared services would have continued or a complete integration would have occurred. He indicated that the merger, in one step, combines Prudhoe, Endicott, Milne Point, Kuparak, Badami, and Alpine, all at one time. He acknowledged that it probably creates a little more stress, as mentioned by Ms. Cowart. However, in the long run, it provides a very stable operating environment for our contractors and hopefully will reduce the cost of business enough that those in business in 2001 to 2005 will be substantially more prosperous than if we went through this in a piece-meal process. He reiterated that this one major step would result in an incredibly positive event. REPRESENTATIVE PHILLIPS inquired as to Mr. Ruedrich's recommendation regarding marketing the reserve leases that would be put on the market. MR. RUEDRICH said that BP ranks their most desirable places in their portfolio as well as in the acquired ARCO portfolio. Then it would be determined if there is a lot of acreage that does not have anything very appealing on it, and most likely the bottom end of that portfolio would be marketed. He pointed out that a different scenario could result if a couple of dry holes are drilled. This is a very subjective business and until one drills, nothing is definite. Therefore, having more people review the acreage would be beneficial to BP and would create incremental exploration drilling for Alaska on prospects that BPA might not conceptually fantasize for a number of years. REPRESENTATIVE PHILLIPS inquired as to Mr. Ruedrich's reaction to the earlier statement that one ownership controlling the majority of the properties on the Slope would keep other companies from becoming interested. MR. RUEDRICH said that from the standpoint of field ownership he did not see any impact at all. Number 1480 CHAIR BARNES asked Mr. Ruedrich to repeat his comment regarding the need to work for the profitability of the companies. MR. RUEDRICH noted that comment was in conjunction with his comment about exportation. He clarified that if the state, as proposed in his handout, would consider a tax credit for incremental exportation wells drilled, the production rate could potentially increase by tens of thousands of barrels a day from several of these fields which is a lot of oil. He posed the scenario in which there is a tax credit for a significant increase, such as more than eight wells and the state may pay a portion of the ninth and tenth wells in terms of tax credit. If the number of discoveries could be increased by one per year, and if those discoveries are 25,000 barrels a day, over time that would create a very significant asset for Alaska that BP would be producing. CHAIR BARNES commented that she would not be inclined to consider tax breaks for anybody. MR. RUEDRICH said that he did not view this as a tax break. Number 1611 KEITH HAND, CFO, Fairbanks Natural Gas, testified via teleconference from Fairbanks. He informed the committee that he was speaking on behalf of Ray Latchem, President of Fairbanks Natural Gas. He expressed concern regarding the BP-Amoco purchase of ARCO with respect to the effect on the current and future gas supply contracts Fairbanks Natural Gas has with ARCO, as well as the impact this buy-out will have on the development of the North Slope Gas. Fairbanks Natural Gas has developed relationships with ARCO which has led to the acquisition of a desirable gas supply agreement for Cook Inlet gas which is liquefied, transported, and distributed to the residents of Fairbanks. "Prior to this acquisition, BP-Amoco did not have a presence in natural gas development in Cook Inlet. Therefore, it is undetermined what the new combined company's interest in Cook Inlet gas will be and the willingness of future Cook Inlet gas development and production." He stressed that there is a more immediate impact regarding the effect this purchase may have on the current gas supply contract of Fairbanks Natural Gas. He realized that currently, the Interior residents are a small consumer of the overall gas demand in the state. However, the future of the Fairbanks Natural Gas project depends on this contract. "This contract was and remains a critical component of our utility permit as issued by the Alaska Public Utilities Commission." MR. HAND commented that the merger would also reduce the natural gas producers by one major entity, resulting in future competition being more weighted to the producer's side of the table. "Less suppliers equates to less bargaining power for consumers, whether it is us acting as the gas utility or when it is passed through to our customers." Fairbanks Natural Gas, a small entity, without the benefit of the ARCO relationship may find it difficult to negotiate a renewal to it's existing contract on such favorable terms, especially with one less supplier in the marketplace. MR. HAND addressed the future of North Slope gas. He pointed out that construction of the natural gas pipeline would create a substantial reduction of energy bills for Fairbanks residents. It is estimated that current home heating prices will be reduced by one-half of the current price. Mr. Hand noted that ARCO, BP, and Exxon are majority owners of the gas on the North Slope and ARCO is one of the key members of the Alaska North Slope Gas project sponsor group which is researching the feasibility of a natural gas pipeline feeding a LNG plant. Although ARCO has been very active in the development of a natural gas pipeline, BP has been silent and has focused on a natural gas to liquids process which would utilize the existing oil pipeline. Both companies previously agreed that there is enough North Slope gas for both projects, BP-Amoco has already announced an alternative that it is pursuing, the GTL plant. "Once combined, one must wonder if the BP-Amoco will stay committed to its statement in the papers claiming to continue the dedication of resources to the gas pipeline and LNG support group it has rebuffed up to this point. If history speaks, BP-Amoco will probably not promote the deliver of cheap gas supplies to the residents of the Interior." CHAIR BARNES asked if anyone either via teleconference or in the room wanted to testify. There being no one, she announced that next Tuesday members of the support industries will be testifying. On Friday, the president of BP, the president of ARCO, and other oil companies of a much smaller nature will be present. She indicated that Exxon has been asked to join that hearing as well. Chair Barnes commented that there is nothing more important in Alaska, other than balancing our budget, than what is going on with the North Slope which is the lifeblood of this state. Chair Barnes believed any amount of resources and time necessary must be devoted to this issue in order to ensure that the interests of the state and its people are protected. ADJOURNMENT There being no further business before the committee, the House Special Committee on World Trade & State/Federal Relations meeting was adjourned at 5:00 p.m.