HOUSE SPECIAL COMMITTEE ON WORLD TRADE AND STATE/FEDERAL RELATIONS April 20, 1999 5:06 p.m. MEMBERS PRESENT Representative Ramona Barnes, Chair Representative John Cowdery, Vice Chair Representative Gail Phillips Representative Joe Green Representative Ethan Berkowitz Representative Reggie Joule MEMBERS ABSENT Representative Beverly Masek OTHER HOUSE MEMBERS PRESENT Representative Beth Kerttula Representative Scott Ogan Representative Brian Porter COMMITTEE CALENDAR OVERSIGHT HEARING: PROPOSED PURCHASE OF ARCO, Inc. by BP-AMOCO (* First public hearing) PREVIOUS ACTION See House Special Committee on World Trade & State/Federal Relations minutes dated 4/13/99 and 4/15/99. WITNESS REGISTER DAVID COBB, Mayor City of Valdez PO Box 307 Valdez, Alaska 99686 Telephone: (907) 835-4313 POSITION STATEMENT: Urged the committee to review the merger for Alaska's shareholders and the bottom line. BILL ALLEN, Chairman and Founder VECO 813 West Northern Lights Anchorage, Alaska 99503 Telephone: (907) 264-8101 POSITION STATEMENT: Indicated that if the merger is to happen, BP is the best company to be involved. MAYNARD TAPP, President Hawk Construction Consultants Member, Alaska Support Industry Alliance 200 West 34th Avenue, Number 809 Anchorage, Alaska 99503 Telephone: (907) 278-1877 POSITION STATEMENT: Testified as a concerned member of the Alaska Support Industry Alliance. CARL MARRS, President and CEO Cook Inlet Region, Incorporated PO Box 93330 Anchorage, Alaska 99509 Telephone: (907) 274-8638 POSITION STATEMENT: Believed Alaska's long-term best interest is to preserve the status quo even if it results in the reduction of production and revenue. DAVID GOTTSTEIN Address and telephone not provided. POSITION STATEMENT: Discussed growth as the only solution to Alaska's long-term fiscal gap. KEITH BURKE, Vice President Business Development Natchiq, Incorporated 6700 Arctic Spur Road Anchorage, Alaska 998518 Telephone: (907) 267-3177 POSITION STATEMENT: "Natchiq is supportive of the merger given that BP-Amoco is committed to local hire and Alaska buy, recognition of local expertise and abilities, continued aggressive exploration and field development in the North Slope and Cook Inlet, reinvestment in Alaska of savings realized from this merger." MARY SHIELDS, General Manage Northwest Technical Services 3330 Arctic Boulevard, Suite 201 Anchorage, Alaska 99503 Telephone: (907) 562-1633 POSITION STATEMENT: Discussed concerns with the merger. STEPHEN LEWIS, CEO PetroStar, Incorporated Arctic Slope Regional Corporation 201 Arctic Slope Avenue, Suite 200 Anchorage, Alaska 99518 Telephone: (907) 344-2661 POSITION STATEMENT: Supported the decision of ARCO and BP to move forward on the merger. MATTHEW FAGNANI, President Work Safe, Incorporated Nana Development Corporation 341 West Tudor, Suite 106 Anchorage, Alaska 99504 Telephone: (907) 563-8378 POSITION STATEMENT: Testified that he did not view "this merger as a crisis, but rather an indication of a changing global environment that makes a company reduce costs to provide greater benefits to shareholders." JACK LAASCH, President and General Manager Alaska Petroleum Contractors 6700 Arctic Spur road Anchorage, Alaska 99518 Telephone: (907) 267-3104 POSITION STATEMENT: Supported the proposed BP-Amoco ARCO merger. KEN FREEMAN, Executive Director Resource Development Council 121 West Fireweed Lane, Number 250 Anchorage, Alaska 99503 Telephone: (907) 276-0700 POSITION STATEMENT: Stated that RDC has not developed an official position on the merger, but does not view it with doom and gloom. THERESA OBERMEYER 3000 Dartmouth Anchorage, Alaska 99508 Telephone: (907) 278-9455 POSITION STATEMENT: Opposed the proposed BP-Amoco ARCO merger. ACTION NARRATIVE TAPE 99-12, SIDE A Number 0001 CHAIR RAMONA BARNES called the House Special Committee on World Trade and State/Federal Relations meeting to order at 5:06 p.m. Members present at the call to order were Representatives Barnes, Cowdery, Phillips, Green and Joule. Representative Berkowitz arrived at 5:20 p.m. Representative Masek was not present. Number 0243 DAVID COBB, Mayor, City of Valdez, testified via teleconference from Valdez. He commented that the proposed merger has been described by some people as a cataclysmic development. The proposed merger rivals the construction of the Trans-Alaska Pipeline and the Exxon Valdez oil spill. While others, including the oil industry, describe the proposed merger as the best thing for Alaska. He, as a small-town mayor, did not believe either characterization to be accurate. "We as the state and as citizens can only conclude that this merger is a major change in whether the oil industry will do business in Alaska." There are not enough details known to offer either positive or negative criticisms. Therefore, he expressed the need for this committee, the legislature, and the Governor's office to uncover those details and do what is best for the State of Alaska. Furthermore, the critical issues to the state and to local government must be identified. MAYOR COBB stated, as the mayor of a pipeline corridor community, that he has several concerns. "First and foremost is the question of ad valorem property taxes to pipeline corridor communities. Instead of negotiating with four one hundred pound gorillas, I'm now going to have to negotiate with one 720 pound gorilla that owns over 70 percent of the bananas. Now that BP-Amoco may be the only producer on the Slope, can I be assured that there will not be an accelerated attempt to devalue the pipeline for tax purposes that will adversely affect my community?" He also expressed concern that the state and the legislature do not treat this issue lightly. There should be review of the proposed merger through an open and frank discussion with BP, Amoco, and ARCO in order to make an educated and informed decision. BP, Amoco, and ARCO did so for its shareholders as well as evaluating the bottom line. It is appropriate for this committee, the full legislature, and the Governor to do the same for Alaska and its shareholders. Number 0496 BILL ALLEN, Chairman and Founder of VECO, informed the committee that he started in business with ARCO in the Cook Inlet 31 years ago, and is probably the oldest Alaskan service company. He commented that he has known the ARCO people from the first chairman, Robert Anderson, to the present chairman, Mike Bowlin [ph] as well as those down to the production operators and they are all good people. "BP is a good company. I think if this is going to happen, they're the best ones to do it. They already have the most invested in Alaska and have the money to develop the rest." He indicated that BP's $26.5 billion investment for ARCO should provide BP more incentive to keep investing and developing the Slope and other places in Alaska. He pointed out that BP has committed to $5 billion over the next five years which is more than what would have been spent. Furthermore, BP will bring in its gas expertise and build a liquids-to-gas plant on the North Slope. Mr. Allen stated, "...they'll, one way or the other, develop the gas. ...they'll continue with the contractors that ARCO have. ...they've committed to work Alaskan companies and Alaskan people." Mr. Allen stressed that if the merger does not occur, ARCO will be weakened and BP will be disappointed. He predicted that ARCO would be purchased by some entity at a reduced price, and it would take time to make their deal with BP and the state which could delay things for quite awhile. Mr. Allen commented that he did not like to see ARCO go, but he believed it to be the best of all worlds. REPRESENTATIVE COWDERY pointed out that there is a statute regarding the limitations on the acreage of leases. Representative Cowdery believed they are over about 280,000 acres on the land side, but are within the limitations offshore. He asked Mr. Allen if he had any suggestions on how that should be addressed. MR. ALLEN indicated that a new rule or a new law, whatever it takes, should be developed in order for development to progress. He noted that ARCO has already leased it and therefore, he said he would not hinder that. He reiterated, "They've got the money to do it, and ... with the other $26.6 billion that they're putting in here, they're going to have to make this place go." REPRESENTATIVE COWDERY asked whether an exemption on this in the statutes in order to assure the development of that in a time certain would be appropriate. MR. ALLEN replied yes. Number 0816 REPRESENTATIVE GREEN inquired as to Mr. Allen's thoughts regarding the attitude of such a large conglomeration of wealth on the North Slope and activity in the services industry. Will the merger help, hinder, or change that since one large conglomerate will own all the infrastructure? MR. ALLEN said that he did not believe it would hurt; the larger it is the more there is to maintain. He believed it would be good for the contractors that are present. REPRESENTATIVE GREEN expressed concern with sole sourcing. At Prudhoe, sole sourcing was a big concern for cost saving. He asked whether a larger company with the same attitude, perhaps on other areas, would work to diminish the competitiveness of service industries there. MR. ALLEN answered that he did not think so. "You know, essentially they -- quite awhile back, they picked up the contractors they wanted, both ARCO and BP. And that's the contractors that have got the infrastructure and got the time in. And I think they'll be fine." REPRESENTATIVE PHILLIPS inquired as to Mr. Allen's thoughts regarding the impact of this merger on the current independents as well as bringing in more independents to Alaska since the competitor owns so much of the pipeline and the fields. MR. ALLEN commented that the pipeline is the secret. He eluded to the need to be close to the pipeline whatever fields one would develop which could afford an advantage. Mr. Allen noted, "BP says if somebody wants to buy some of the pipeline they can." REPRESENTATIVE PHILLIPS surmised that Mr. Allen did not think the merger would hinder independents from being interested in Alaska. MR. ALLEN acknowledged that independents may take a closer look before entering Alaska. He stated that for an independent to participate on the Slope it needs to be large; it takes large sums because it takes such a long development time before there is a return on the investment. He reiterated Richard Campbell's, BP's, comment that BP will sell any part of the pipeline however, the independents may not have the money to purchase it. He believed it would be a major player that enters the Slope. Number 1195 MAYNARD TAPP, President, Hawk Construction Consultants; Member, Alaska Support Industry Alliance, testified next via teleconference from Anchorage. He informed the committee that he is not speaking for the Alliance, but as one of its concerned members. Mr. Tapp stated that in order for his company to continue business in Alaska, Alaska must remain competitive in a worldwide oil market. He recognized that changes in the oil market and Alaska are inevitable and it is only a matter of time until the North Slope will be operated by one company. "The one company scenario is somewhat frightening only because we are unfamiliar with its operation. Hopefully, the scenario will offer competitive opportunities for all Alaskan suppliers and contractors. BP, Amoco, ARCO have been good citizens to the state in the past, and I believe they will be in the future." He cited their announcement regarding higher capital expenditures for the next five years as well as the development of gas-to-liquids technology on the North Slope as a positive indicator as well as the ongoing work being performed by the ARCO sponsored LNG task force. He believed it important to continue all efforts to promote commercialization of Alaskan gas. Mr. Tapp recognized that consolidation in Alaska will be painful for people in the merging organizations as well as for the contractor community. Such a change could lead to disruption of the contractors and the ARCO-BP organization. He expressed the need for Alaska to retain its brain trust which has developed in the oil industry over the years. "The State of Alaska needs to maintain vigilance protecting the people and natural resource wealth of the state." REPRESENTATIVE COWDERY commented that he has heard different views of the feasibility of the gas-to-liquids technology that BP is working on. Can that be economical? MR. TAPP said he believed there is a strong possibility. He hoped that the combination of the knowledge base of ARCO and BP would result in a synergy of ideas and possibly a technology leap which would make gas to liquids economically feasible. He informed the committee that the presentations by BP and ARCO that he has seen, have indicated there is room for both projects with the amount of gas that exists on the North Slope. Hopefully, the economic time available would allow development of both projects. CHAIR BARNES commented that it would have to be proven to her that both gas to liquids and the gasline are feasible at the same time. She pointed out that 50 million metric tons a year has to move into the marketplace to make the gasline economically feasible and furthermore, a certain amount of the gas is reinjected into the ground to lift oil. Number 1499 CARL MARRS, President and CEO of Cook Inlet Region, Incorporated, commented that this merger will present a fundamental change in the way the oil industry has historically operated in the state. Such a change presents unique challenges which may profoundly alter the way all Alaskans, including those in the construction and oil field support industry, view and deal with the oil and gas industry. Therefore, he believed the state should approach this matter with due deliberation, prudence and caution. However, one must keep in mind that some change is inevitable, and all change is not bad. MR. MARRS stated: As Alaskans and Americans we embrace the fundamental principles of capitalism and a competitive market economy will, notwithstanding rough spots and difficult times along the road, ultimately lead to the most efficient and effective distribution of resources for all Americans. In this case, ARCO, presumably operating in its own best economic interest, within the demands of the free market, has decided that it no longer makes economic sense to continue business as usual on the North Slope with two competing operators in the Prudhoe Bay Field, a situation many have long believed to carry inherent inefficiencies. ARCO's decision to seek a buyer for itself demonstrates that, in the professional judgment of ARCO's board and management, it does not make sense for a company its size with its economic future, to carry on alone. It is clear that the wave of consolidation is sweeping the industry. We as Alaskans cannot stop this trend. In considering the consequences of the proposed merger, then we also need to consider the alternative: If not ARCO-BP merger, then what? MR. MARRS believed, in an era of declining production and rising costs, Alaska's long-term best interest is to preserve the status quo even if it results in the reduction of production and revenue. He asked whether preservation of some form of the two-operator system will produce a bigger "pie" for all Alaskans or merely speed up the decline in the industry overall? The state should proceed cautiously. He believed, "The goal of the state in any effort to limit the potential negative effects of the merger should be to ensure that the 'cure' is not worse than the 'disease'." MR. MARRS expressed the importance of the history of the players in this situation. BP, which has a distinguished history of commitment to and knowledge of the state and the communities in Alaska, has operated in Alaska since the earliest days of Prudhoe Bay. Although BP has vowed to continue its commitment in this regard, Mr. Marrs was not convinced that a major divestiture of some new and unknown player would result in a net benefit to the state as a whole. He expressed concern about the impact of the merger on overall competition in the state, not only in connection with North Slope lease sales, but also in connection with the sales of goods and services to the industry as a whole. That is a matter of great importance to his industry, as well as all Alaskans, because of the revenues and jobs at stake. However, on the whole, he is cautiously optimistic that everyone may benefit from a stronger and more efficient industry in the years ahead. MR. MARRS commented, "ARCO has been a great supporter of the community and a great operation for businesses in Alaska and for Alaska itself." Mr. Marrs believed, for Alaska, BP to be the best company to acquire ARCO. He did not believe the merger would limit other potential mid-sized companies from coming in. He pointed out that the pipeline is tariff regulated pipeline. Therefore, if somebody else found oil on the Slope and wanted to produce it, the oil would be sent down the pipeline on a tariff basis as established by the state's tariff. In conclusion, Mr. Marrs indicated that Alaska does not have a choice and therefore, he believed BP to be in Alaska's best interest. REPRESENTATIVE BERKOWITZ asked whether Mr. Marrs felt that the dominance of the consolidated company would have any impact on the competitiveness of bidding for future leases. MR. MARRS believed, as Mr. Allen stated earlier, that the competitiveness of the Slope will continue. There are three major competitors in certain areas, of which CIRI is one. He did not believe the merger would be detrimental to CIRI in that industry. Number 1980 DAVID GOTTSTEIN testified via teleconference from San Francisco, California. He informed the committee that he is the President of Dynamic Capital Management, but he is testifying as a private citizen. Mr. Gottstein commented that the state has a long-term problem because of the transportation costs in and out of Alaska, Alaska's isolation and diversity, and the high labor and construction costs associated with conducting economic activities in the state. Those difficulties make it unlikely that the state will be able to draw from whatever economic vibrancy that can be generated over time in order to provide a level of state government service absent the resources from the North Slope. Mr. Gottstein predicted that if a large enough fund to provide income in perpetuity in the form of an annuity has not been developed by the time those resources terminate, Alaska will experience depressed levels of state government services. Therefore, growth is the only solution to Alaska's long-term fiscal gap. He identified the Permanent Fund as the most important asset of the state "and the most important way to grow that asset is to increase the asset allocation." He identified the next best alternative as monetizing the assets in the North Slope. MR. GOTTSTEIN continued saying that throughout history, most governments have played a role as facilitators in order to help private enterprise extract and exploit resources to their benefit, receiving taxes and jobs. However, Alaska seemed to decide, long ago, to take a different perspective. He explained that Alaska takes the view of an ownership state, in which the assets are "ours and we will put out to bid the right to outsource or subcontract the production and transmission of our resources to get to market." That is a very big difference. From that perspective, one must conclude that whatever collection of resources is necessary to accomplish that, in our own best interests, is what needs to be reviewed. Perhaps, the BP-ARCO merger will facilitate that process. MR. GOTTSTEIN informed the committee that he provided Representative Berkowitz with a 10-point plan outlining how Alaska can grow. The state may need to consider owning the gasline in order to get Alaska's gas to market because there are some serious economic advantages by doing so, which are detailed in another document. He emphasized the importance of the state deciding that getting the gas to market is critical toward building a fund large enough. In that regard, the interests of both parties must be defined. "Our interests then are to monetize those assets over the long term and to be able to part with some [indisc.] BP to satisfy their interests which are returns on capital. And we don't want anybody to unjustly exploit the other." Both parties need and deserve to be able to meet their goals and interests. He pointed out that BP-ARCO would be a subcontractor, which is of significance. Mr. Gottstein suggested that the process be slowed down, even taking whatever legal action necessary in order to stall the merger so that Alaska's interests can be defined. This would allow negotiation of a relationship with BP-ARCO in a manner that serves both of parties in the long run. He explained that because BP is buying rights to assets on the North Slope that can be monetized for BP over the long term, BP has an increased vested interest in getting North Slope gas to market. "That's a very good thing." However, if there is not a definition ahead of time that serves both parties, then Alaska will be at BP's mercy and the situation will become one-sided. Such an environment could place Alaska in a position such that Alaska cannot solve its problems even if dividends are lowered, taxes raised, et cetera. He did not believe that raising the asset allocation on the Permanent Fund, making the Anchorage International Airport a global logistic center, or other projects that deserve scrutiny will create enough economic base to satisfy long-term state revenue needs without monetizing the assets from the North Slope for the purpose of serving the state first and then other participants. Number 2293 REPRESENTATIVE COWDERY recalled Mr. Gottstein's testimony regarding the state owning the gasline. Representative Cowdery understood that some tax exemptions could possibly make it feasible for the state to own the gasline versus the private sector. However, it seems that the bottom line is the market. MR. GOTTSTEIN commented that there are things that only the state is capable of or in a position to accomplish because of the uniqueness of Alaska's position. He restated his goal, to increase the asset allocation on the Permanent Fund. Mr. Gottstein posed the following, "... let's take $5 million of money we've invested in U.S. treasuries, which would represent about $300 million a year in interest income and then revenue bonds remaining necessary, perhaps another $7-8 billion to construct the line." A lower cost of capital to build the line would result. Additionally, the state "would only need to charge transmission prices high enough to meet revenue bond payments, not enough to put full returns on capital to the gasline if other private enterprises owned it who weren't in the position to extract profits from other assets such that we have from the North Slope gas." Therefore, lowering the transmission price lowers the cost of getting it to market and proves the economics. Furthermore, the transmission prices can be raised as gas market prices allow. "But we can have it much lower in weak markets and lower the returns of volatility on capital for the producers on the North Slope by making sure that the gas transmission line costs are kept low because we've, in effect, decided it's in our best interest to do so." He indicated that just because it's a state-owned asset, does not mean all the other activities of operation, construction, and design could not be outsourced. BP and ARCO could build it and use it. The key for tax purposes is the ownership. State ownership could result in no federal taxes associated with the project. There are a variety of elements that might dramatically reduce the cost of bringing it to market and improve the overall global marketability of North Slope gas. REPRESENTATIVE PHILLIPS commented that she hoped Mr. Gottstein has had the opportunity to read the All Alaska Plan. MR. GOTTSTEIN answered yes, and noted that he has some concerns with the All Alaska Plan that he would be happy to share. REPRESENTATIVE PHILLIPS assured Mr. Gottstein that she would have some concerns with his report that she would share with him. CHAIR BARNES interjected that she has a plan as do many others. MR. GOTTSTEIN stressed that most of the plans are not growth plans. CHAIR BARNES requested that Mr. Gottstein reflect on the fact that there is an awful lot of gas in the world market, and new gas fields are being discovered all the time. It does not benefit Alaska to build this gasline, if Alaska is not able to get its gas into the marketplace prior to other projects such as ARCO's Tangoo(ph) project. She emphasized that has to be first and foremost. CHAIR Barnes stated, "Our effort is to make sure that whatever we do, that our gas does not get displaced in the world marketplace." Number 2425 KEITH BURKE, Vice President, Business Development, Natchiq, Incorporated, informed the committee that Natchiq is the third largest employer in Alaska and currently has 2300 employees in Alaska. Natchiq is one of the largest oil field support contractors in Alaska with $90 million of invested capital in its facilities and equipment in Alaska. Natchiq has been nationally ranked in the top 30 percent of the largest oil field service contractors in the United States for several years. He pointed out that Natchiq has had a very good working relationship, with both ARCO and BP for a number of years. "Natchiq is supportive of the merger given that BP-Amoco is committed to local hire and Alaska buy, recognition of local expertise and abilities, continued aggressive exploration and field development in the North Slope and Cook Inlet, reinvestment in Alaska of savings realized from this merger. It is generally our feeling that this merger will reduce the overall operating cost of the North Slope and place Alaska in a more competitive, positive growth picture for the future of Alaska." REPRESENTATIVE COWDERY inquired as to Mr. Burke's thoughts on gas to liquids; can it compete with the pipeline and the ownership of the pipeline? MR. BURKE noted that the producers and those working with the subjects of gas to liquids, a natural gas, or just a gas pipeline are struggling with that issue. He was confident that when it becomes economic through whatever methodology, assuming there is a market as the Chair has so noted, there will be a project. He said that whether it will be economic or not is beyond his personal capabilities. REPRESENTATIVE PHILLIPS asked if Mr. Burke felt that the merger will have an effect on independents that may want to invest in Alaska. MR. BURKE specified, as was previously stated, that it is expensive to get into the North Slope. One cannot do that, in his opinion, as a minor independent operator in a world economy, in a world market. This merger illustrates the economic picture in the oil industry today. In this case, it's taking BP $26 billion to stay competitive and remain in the business of oil development. Furthermore, it appears to be to ARCO's economic advantage to go with this merger to stay economic for its shareholders. It's very expensive to do business in Alaska, and extremely expensive to do business on the North Slope. With regard to Representative Phillips' question, Mr. Burke believed it's ruled by tariffs on the pipeline which is under scrutiny. He did not believe that the merger is going to place anybody at a disadvantage further than they have already been disadvantaged by the cost of doing business in Alaska. CHAIR BARNES understood that ARCO's problem was not in Alaska, but rather its holdings in other parts of the world. Number 2759 MARY SHIELDS, General Manager, Northwest Technical Services, testifying via teleconference from Anchorage, noted that she is a past President of the Alaska Court Industry Alliance. She informed the committee that Northwest Tech, as an employee support provider, employs between 120 to 200 people at any given time. Many of those work directly with the oil industry. Northwest Tech holds contracts with BP-Amoco, and with ARCO Alaska, Incorporated. Northwest Tech's relationship with both those companies is greatly valued. She noted that like many in Alaska, she watched "oil prices slide down the slippery slope last fall." Ms. Shields felt that unless there was a dramatic turnaround in prices coupled with the opening of the coastal plain, something would have to change. The status quo would not continue to work and efficiencies needed to be realized for Alaskan operators to continue to compete in a global market. "As we all know, the state of affairs contributed to the BP-Amoco merger which is now followed by the ARCO transaction. Do I hate to see this happen? Of course I do." She said that she has a high regard for the people in both companies many of which she has worked closely with for nearly 15 years. These people are very valuable to Alaska. However, she understood the necessity of the merger. Furthermore, she did not regret that BP-Amoco is the one that made the purchase. "BP has been involved in Alaska Petroleum, exploration and development since the beginning. Most of its employees as well as the ARCO employees are long-time residents of Alaska and have an understanding of Alaska's culture. They are committed to doing the job right, environmentally, safely, and economically." Ms. Shields said that ARCO and BP-Amoco have handled this transaction in a very straight-forward fashion, noting the timely conveyance of information to the Governor and state representatives as well as a special meeting with the Alaska Support Industry Alliance during which Richard Campbell of BP-Amoco and Kevin Maiers of ARCO Alaska, Incorporated answered any and all questions put before them. MS. SHIELDS expressed concern, as the manager of a contract employment firm, about the numbers of people who will be released from these companies as the merger moves forward. She also expressed concern about the status of "our" contract and how competition will be established as the process moves forward. These decisions will affect the health of Northwest Technical Services as well as the health of [indisc.] firm. She pointed out that BP-Amoco-ARCO addressed those concerns both in the newspaper and at the Alliance breakfast. As a citizen of Alaska, Ms. Shields specified, "... she is always concerned for the health of our economy. What will be the impact, not only on the lease sales, but also on the contributions to charitable and arts organizations? We have relied heavily upon BP and ARCO for their support over the last 20 plus years. I was delighted to hear that that support will also continue." She echoed Mr. Marrs' and Mr. Burke's testimony with regard to looking for Alaskan hire which she believed will happen. As a member of the Alaska community, both business and social, she applauded both the Governor and the legislature as they analyze the change in the business climate resulting from the merging of two of the state's biggest employers. TAPE 99-12, SIDE B Number 2981 STEPHEN LEWIS, CEO, PetroStar, testified via teleconference from Anchorage. He informed the committee that PetroStar is a wholly-owned subsidiary of the Arctic Slope Regional Corporation. PetroStar has maintained a long-standing business relationship, both with ARCO and BP over the past 15 years during which BP has been PetroStar's major crude supplier at the refinery. "PetroStar feels confident we will not be adversely affected by this merger, support the decision of ARCO and BP to move forward on the merger. It is our opinion that the merger should enable the cost per barrel produced to be reduced, thereby creating a better economic climate for BP to invest in Alaska and also to be competitive in the rest of the world." He believed this would be positive from the state's standpoint as further investments are made throughout the world. The merger should enhance the position of the producers. He believed the merger would produce oil cheaper, which would provide the companies with larger incentives to invest more money in the state. Mr. Lewis did not believe the merger would adversely affect the independents. He noted that he routinely talks with independents who are looking at the potential of doing business here. As has been stated, the cost of production on the North Slope is extremely high. Therefore, independents are probably reviewing areas where the cost of producing is lower. He indicated that as more fields, more production, and more gathering lines are built on the North Slope it should enhance the ability for those in smaller companies to invest in sales. Arctic Slope Regional Corporation certainly has a huge interest in the North Slope from a bidding standpoint. After discussions with BP and other companies, he did not feel the merger would adversely affect that. MR. LEWIS agreed with the comments of Mr. Marrs and Mr. Burke however, he did not agree with Mr. Gottstein's position that Alaska should interfere with the business process of this merger. Interference in that area would only send a very poor message to ARCO, BP, and the rest of the industry. However, he did believe it appropriate for the Governor as well as the legislature to look into and understand the merger as well as get assurances that they feel are appropriate. "From our standpoint, we support the business decision they've made." REPRESENTATIVE PHILLIPS asked Mr. Lewis, as a supplier, if he has been given assurance by BP that it will honor the contracts that he has with ARCO through the year or through the next five years. Number 2775 MR. LEWIS stated that BP is supplying "our" crude oil out of Prudhoe Bay, and we have been given assurances that nothing will change. He felt that it would not adversely affect any of their relationships with BP or their crude supply. He noted that his product sales are tied with the oil companies relative to production, and drilling activities. Therefore he felt that the combined companies should have more incentive to increase production and drilling activities. REPRESENTATIVE COWDERY recognized that Mr. Lewis, as did most who have testified today, supports the merger. However, as legislators, we have to review all the aspects, including antitrust, and scrutinize the contracts. The legislature is in the process of choosing a law firm that's expert in this area. He indicated that the Administration would probably do the same, if they don't already have such experts. Such review is good for the state, but he did not want to spend money unnecessarily. Representative Cowdery clarified that this process is merely prudent business, and is not against any oil company. MR. LEWIS agreed that it's prudent to review the merger, antitrust issues, et cetera. With regard to hiring a lot of consultants, Mr. Lewis believed that there are actual people who work with and in the industry, and are very closely aligned with the oil companies that could be utilized. He informed the committee that he has worked in the oil industry in Alaska for 25 years, and knows all the companies. Mr. Lewis said he is willing to share his opinions, and noted that there are many others with the same expertise. REPRESENTATIVE GREEN recalled that Mr. Lewis indicated that through the merger there would be an economy of scale, an efficiency of size. The concern for many seem to be regarding whether the merger would make such a large entity which would discourage any other competitor from entering that market. Number 2583 MR. LEWIS said that he did not believe it discourages Exxon, nor did he believe it would discourage the Chevrons and other large oil companies. "Certainly, there are a number of large oil companies out there that look at sales worldwide that are capable of competing with or against BP,...." The major problem with the North Slope is the cost of drilling wells and getting them into production. "So I don't know that independents or small people are going to have a hard time getting this -- doing this stuff up there regardless, but I do think that Royal Dutch Shell and those companies are more than capable of coming in and looking at bidding on the fields up there. We certainly have a high interest in the oil companies being competitive up there, and they're not looking at it negatively." Mr. Lewis commented that BP is a much better choice as a partner with ARCO than some unknown or some other companies such as Ramco(ph). REPRESENTATIVE GREEN commented that several years ago when Conoco left its operations at Milne Point, Conoco indicated that because of the high pipeline tariff the company could not compete on a barrel for barrel basis. He asked, "Does the pipeline ownership, in your estimation, give any deterrence other than just the fact that we're operating in a high cost area, do you think that the pipeline ownership would be such that there would be a competitive advantage in addition to the hostile environment?" MR. LEWIS replied that he did not think so and noted, "We've been involved for it seems like forever on [indisc.] issues, APUC issues relative to pipeline tariffs. They're highly scrutinized, almost [indisc.], I think every tariff filing was suspended. Burke(ph) looks it over carefully, the state certainly looks it over carefully, we do, all of the shippers." He indicated the need to keep in mind that the oil does not compete at Prudhoe Bay, but competes on the west coast and worldwide. Therefore, it's a net back pricing which Mr. Lewis did not view as negative. Certainly, there is opportunity for other people to invest in the pipeline as has been the case for some time now. Entering the pipeline is just not an attractive thing to do, unless you have production and can be assured to move your oil through the pipeline. He reminded everyone that the pipeline is, "in effect, a number of pipelines from a tariff standpoint." Number 2333 MATTHEW FAGNANI, President, Work Safe, Incorporated, testified next via teleconference from Anchorage. He informed the committee that Work Safe is a wholly-owned subsidiary of Nana Development Corporation and began business in Alaska in 1989. Work Safe has 10 full-time employees on staff, four of them being Nana shareholders. He explained that Work Safe is a "third-party drug program administrator offering work place drug and alcohol testing and random testing program management. ... Work Safe is considered a third tier vendor in the Alaskan Oil Patch." He noted that 66 percent of Work Safe's business is estimated to come directly from the support sector in Alaska's Oil Patch. ARCO and BP-Amoco have their own drug testing program. MR. FAGNANI informed the committee that this past January Work Safe purchased one of its competitors, Medical Specimen Services, which has made a significant difference in the bottom line and shareholder benefits. It was a good business decision and is an example of the positive aspects of mergers. Mr. Fagnani commented, "It is in all of our best interests to take measures that ensure that oil producers in the state are healthy and active. The recent oil price plunge has taken its toll on the industry overall. We have seen a significant reduction of activity and production on the North Slope, largely due to the drop in oil prices and production decline of mature fields." Currently, there are only three operating drilling rigs which is down from the projected 23. "When drillers aren't drilling, freight is not being hauled, security and maintenance are not being needed, and the Alaskan economy suffers. BP-Amoco and ARCO recognize the immediate need to tighten their belt." This was evident early in 1997 and in 1998 with the purely economic job force reduction within ARCO. Similar downsizing occurred at BP in January. "As BP-Amoco and ARCO consolidate their operations, they will undoubtedly realize efficiencies. Monies freed up from cost savings may well be spent on exploration and production activity, which would mean jobs and contracts to the support industry businesses." Mr. Fagnani echoed prior comments regarding BP-Amoco's commitment to invest $5 billion in North Slope development over the next five years which would exceed projected capital spending by ARCO and BP-Amoco combined. BP-Amoco also committed to continuing the ARCO-led gas sponsorship group, relocating its gas technology center to Alaska, and building a $70 million gas-to-liquids plant on the North Slope. He emphasized that those commitments clearly illustrate that BP-Amoco plans to heavily utilize their newly acquired ARCO assets. MR. FAGNANI did not view "this merger as a crisis, but rather an indication of a changing global environment that makes a company reduce costs to provide greater benefits to shareholders." Mr. Fagnani expressed faith in the legislature and the Administration to act in the best interest of all Alaska and Alaskans. It is critical that state leaders review the long-term impacts this merger may have for future generations. "One thing is certain, is things will continue to change." Number 2130 JACK LAASCH, President and General Manager, Alaska Petroleum Contractors (APC), stated that he was present to express his support for the BP-Amoco ARCO proposed merger. He commented that APC has had a very good, long-term working relationship with both BP and ARCO. Mr Laasch's support for the proposed merger is based on a number of reasons. Firstly, "one operator will provide a more cost-effective approach to oil production on the North Slope through a single management structure. ... Efficiencies will be realized in all areas of oil production, operation, maintenance, safety, quality, administration and many other areas of focus through the consolidation into Slope-wide procedures and processes. These efficiencies will benefit the State of Alaska through increased revenues as well as our own employees, the citizens of Alaska, with jobs and income." MR. LAASCH pointed out that secondly, BP has shown a strong commitment to Alaska hire in the past which he did not doubt would continue. He informed the committee APC has invested considerable time and capital into its Anchorage fabrication facility and Nikiski module assembly site. Therefore, BP's commitment to Alaska business development will ensure that this investment will be honored. He was optimistic that, as long as production of oil and gas in Alaska is economically attractive, BP-Amoco would, as any for-profit corporation, aggressively pursue development of new oil fields in Alaska as well as commercialization of North Slope gas. Both pursuits will keep APC's facilities busy and Alaskans employed. MR. LAASCH noted that BP has stated it will increase the amount contributed to charitable organizations. He commented that in his more than 20 years' experience with BP, BP has often demonstrated its commitment to enhancing the lives of those in the community with their efforts with Boys' and Girls' Clubs to their support for the arts. Alaskans must look to the future. He believed the merger to be a necessary change for future development in Alaska. He urged the committee to approve and endorse the merger. In conclusion, Mr. Laasch said the merger is right for Alaska, Alaskans, and for Alaska's contractors. REPRESENTATIVE PHILLIPS asked if Mr. Laasch had the understanding that long-term contracts with ARCO currently held by contractors and suppliers would be honored by BP. MR. LAASCH replied yes. The presentation that Richard Campbell and Kevin Maiers made guaranteed that in 1999 there will be no disruption to existing contracts, and that most of the contracts will be honored. REPRESENTATIVE COWDERY recalled a 1998 publication which predicted that such mergers would occur and that in the future there would be fewer oil companies due to mergers. He asked Mr. Laasch how many major oil companies might be in existence worldwide in three years. MR. LAASCH said that he believed the independents will be around. He said, "Survival in this game means that you have to be able to react to the economic conditions. The independents that can do that will survive." The independents could survive by merging with bigger oil companies or merging amongst themselves. The large players, such as Royal Dutch Shell, Exxon, and BP will definitely remain. Furthermore, he predicted that there will be room for probably a half a dozen other bigger oil companies. Even still, there will be a niche for the independents. REPRESENTATIVE COWDERY understood Mr. Laasch to mean that there would be six to eight large companies worldwide plus the independents. MR. LAASCH agreed with that understanding. Currently, it's extremely tough for independents to come to Alaska because of the cost to operate on the North Slope. Even with BP and ARCO present, it's difficult for independents due to the infrastructure required. He did not foresee that changing as a result of the merger. Number 1845 REPRESENTATIVE COWDERY inquired as to who Mr. Laasch would identify as the fiercest competitor to this merger worldwide. MR. LAASCH said he had not given that any thought. He just saw BP and maybe Exxon being present. If one has not been to Alaska before, it is intimidating. Basically, the big players develop oil where they know how to. BP, ARCO, and Exxon know how to do that. He noted that Exxon is the only one that is not currently an operator. Perhaps, Exxon would want to take a stronger role in the future. REPRESENTATIVE COWDERY commented that he would like Chair Barnes to invite Exxon for their comments on this merger. CHAIR BARNES said she would be happy to invite Exxon. REPRESENTATIVE OGAN understood that typically, in mature fields in the Lower 48, the independents that come in choose from the fields that the large companies have passed up. He also understood that the independents are a bit more innovative and aggressive in the development of marginal fields. Representative Ogan expressed concern that this merger could discourage that. MR. LAASCH pointed out that there is a difference in Alaska where independents can enter the market with lower overheads and lower infrastructure. Conoco is a good example. Mr. Laasch noted that he was present when Conoco was in Alaska. Conoco had to establish its own fire department, [indisc.] department, and develop its PSN procedures; drawing only from the resources at Milne Point. While, BP and ARCO had different fields from which they could benefit from the economies of scale, meaning they could draw on those resources from their different assets. He acknowledged that independents can come to Alaska and probably bring some very good cost savings ideas, but he did not envision their survival. CHAIR BARNES surmised then that there are two large players left on the Slope with the BP-Amoco ARCO buy out plus the Exxon buy-out of the other company as well. The third big player is Alaska. Chair Barnes asked then if Mr. Laasch would agree that the state needs to do what it can to protect its interest. MR. LAASCH replied yes, the state is a big player in this merger. He reiterated the importance of what the economy of scale means to be competitive which he believed BP has done out of necessity. He indicated that will ensure that there will be jobs for Alaskans and contractors in the future. Number 1605 KEN FREEMAN, Executive Director, Resource Development Council (RDC), testified via teleconference from Anchorage. He informed the committee that RDC is a non-profit, economic development organization with a broad statewide base and focus. The members of RDC range from individuals to leading companies throughout Alaska's basic resource sectors such as oil and gas, mining, timber, tourism, and fishing. The RDC membership also includes Native corporations, construction, labor, and a number of local communities. "All of these interests come together under RDC to work on common issues, issues which transcend all resource and economic sectors." MR. FREEMAN said that RDC applauds the committee, the legislature and the Governor for examining the proposed merger. Although there is much information to gather about this merger, once the information is compiled RDC trusts that there will be informed and objective decisions. As has been said, the merger will certainly result in change. He recognized the difficulty in immediately identifying all the potential changes. However, holding hearings and receiving the aid of technical experts in order to prepare a comprehensive analysis of the merger allows the legislature and Administration to make informed and thorough decisions. MR. FREEMAN noted that for some time, RDC has felt, "A merger between the North Slope's two major operators was likely inevitable, given declining production and the high cost of exploring, developing and producing oil in the Arctic." He echoed earlier comments that increasing worldwide oil production, declining Alaska production, and lower prices have forced the industry to seek new efficiencies and streamline operations. Therefore, to stay competitive in attracting new investment capital, Alaska producers must do the same which is one of the reasons ARCO officials have given for the merger. Although RDC has not developed an official position on the merger, RDC does not view it with doom and gloom. On the contrary, RDC prefers to believe the merger offers hope for reducing redundancies while increasing efficiencies. "If it makes a single operator on the North Slope more competitive, internationally, under an increasingly difficult global business environment, we believe this is good news for the State of Alaska." He indicated that the resulting company may end up with the competitive strength to sustain capital investments over the long term and take advantage of new development opportunities in Alaska. MR. FREEMAN pointed out that BP-Amoco has a long and proud record in Alaska. He reiterated comments regarding BP-Amoco's pledge of increased investment in North Slope development and continued efforts to commercialize North Slope gas. Those commitments will continue BP's role as a leading investor in Alaska. Mr. Freeman expressed confidence that a combined company will build on its good record and will not diminish its commitments to Alaskans. Furthermore, BP and ARCO have been leaders with environmental protection and safety in Alaska as well as worldwide. A combined company has the potential to obtain more experience and strength in achieving environmental and safety standards. He noted that a combined company must continue to follow the same environmental laws and regulations as were followed as two companies. MR. FREEMAN commented that the manner in which the merger comes together in Alaska and is handled by the state will be closely scrutinized by those in the oil and gas business as well as other resource sectors in Alaska and abroad that are facing similar economic realities. He expressed the need to do everything possible to provide competitive advantages for Alaska's projects in every resource sector. Alaska needs to recognize and respond to change and new realities. Mr. Freeman believed it critical for the legislature, Administration, and the public to understand what key issues should be considered during the acquisition discussion and he encouraged everyone to analyze all of the variables before arriving at final conclusions. Alaska is on the verge of a new millennium that will likely provide unparalleled challenges and opportunities to which Alaska must adapt. He urged, "the legislature to carefully but expeditiously study the proposal and weigh the impact to the state, especially from a long-term, open-minded and informed perspective to send a responsible signal to the entire business community, both here in Alaska and elsewhere." Number 1251 THERESA OBERMEYER testified via teleconference from Anchorage. She commented that it is election day in Anchorage and asked if everyone had voted. She announced that her main focus is love of country. She informed the committee that she lives down the street from BP and could recall when the building opened. She noted that she has not directly been involved in the oil industry, although her husband did work at Alyeska Pipeline for a short time. As Senator Murkowski noted, and as has been reported in the newspaper, these issues, will be part of the presidential campaign of the year 2000. Ms. Obermeyer indicated that the State of Alaska is the resource state for the future of the country and she was not willing to hand it over to any foreign entity. She said that she would always like to be labeled as the loyal opposition. She noted that she is an educator. Ms. Obermeyer stressed that she will not support this merger. She reiterated that she would always be someone that raises questions, although that is not allowed where she lives. CHAIR BARNES asked if there was anyone else who wished to testify. There being none, Chair Barnes expressed appreciation to everyone who shared their time with the committee this evening. She announced that the next meeting would be held on Friday, April 23, 1999, at 5:00 in the Finance Committee Room. At that time, the committee will here from the President of BP, Richard Campbell, and the President of ARCO, Kevin Maiers. In the very near future, Exxon will be invited to participate, as well as some of the other players on the Slope. ADJOURNMENT There being no further business before the committee, the House Special Committee on World Trade and State/Federal Relations meeting was recessed to the call of the Chair at 6:32 p.m.