JOINT SPECIAL COMMITTEE ON MERGERS November 18, 1999 1:35 p.m. MEMBERS PRESENT Senator Rick Halford, Chair Senator Drue Pearce Senator Johnny Ellis Representative Joe Green, Vice-Chair Representative Brian Porter (via teleconference) Representative Beth Kerttula Representative Jim Whitaker MEMBERS ABSENT All Present OTHER LEGISLATORS PRESENT Senator Pete Kelly (via teleconference) Senator Gary Wilken Representative Allen Kemplen Representative Eric Croft Representative Ethan Berkowitz Representative Norm Rokeberg Representative Jerry Sanders Representative Lisa Murkowski Representative Sharon Cissna Representative Scott Ogan (via teleconference) Representative Reggie Joule (via teleconference) Representative John Davies (via teleconference) COMMITTEE CALENDAR Presentations from the State of Alaska Administration, British Petroleum, ARCO, Alaska Gasline Port Authority PREVIOUS ACTION See the Joint Special Committee on Mergers minutes dated 6/11/99, 7/28/99, 9/24/99 and 9/25/99. WITNESS REGISTER Mr. Bruce Botelho, Attorney General Department of Law PO Box 110300 Juneau, Alaska 99811-0300 Telephone: (907) 465-2133 POSITION STATEMENT: Commented on merger agreement. Kevin Meyers, President ARCO Alaska, Inc. P.O. Box 100360 Anchorage, AK 99510 POSITION STATEMENT: Supported merger agreement. Mr.Richard Campbell, President BP Exploration Alaska, Inc. P.O. Box 996612 Anchorage, AK 99519-6612 POSITION STATEMENT: Supported merger agreement. Ms. Ann Drinkwater, President BP Pipeline P.O. Box 996612 Anchorage, AK99519-6612 POSITION STATEMENT: Commented on merger agreement. Commissioner John Shively Department of Natural Resources 400 Willoughby Avenue Juneau, Alaska 99801-1724 Telephone: (907) 465-3886 POSITION STATEMENT: Commented on merger agreement. Mr. Hank Hove, Chairman Alaska Gasline Port Authority P.O. Box 71267 Fairbanks, AK 99707 POSITION STATEMENT: Supported merger agreement. Mr. Bill Walker, Counsel Alaska Gasline Port Authority P.O. Box 71267 Fairbanks, AK 99707 POSITION STATEMENT: Supported merger agreement. Mr. Ken Konrad, Business Unit Leader Eastern North Slope BP Exploration Alaska, Inc. P.O. Box 996612 Anchorage, AK 99519-6622 POSITION STATEMENT: Supported merger agreement. Mr. John Griffin, Assistant Attorney General Oil, Gas and Mining Section Civil Division (Anchorage) Department of Law 1031 West 4th Avenue, Suite 200 Anchorage AK 99501-1994 POSITION STATEMENT: Commented on merger agreement. Mr. Bill Noble, Attorney BP P.O. Box 996612 Anchorage, AK 99519-6612 POSITION STATEMENT: Commented on merger agreement. Mr. Peter Leathard, President VECO Corporation 813 West Northern Lights Blvd. Anchorage, AK 99503 POSITION STATEMENT: Supported merger agreement. Mr. Mike Macy Backbone 1315 Hillcrest Drive Anchorage, AK 99510 POSITION STATEMENT: Commented on merger agreement. Mr. Steve Conn, Executive Director Alaska Public Interest Research Group (AKPIRG) P.O. Box 101093 Anchorage, AK 99510 POSITION STATEMENT: Supported merger agreement. Mr. Tim Wagner Innovative Developers Inc. P.O. Box 78 Anchorage, AK 99510 POSITION STATEMENT: Supported merger agreement. Mr. John McDonald Carlisle Enterprises 1800 E 1st Anchorage, AK 99501 POSITION STATEMENT: Supported merger agreement. Mr. Jack Lasch, General Manager Arctic Petroleum Contractors Natchiq 6700 Arctic Spur Rd. Anchorage, AK 99518 POSITION STATEMENT: Supported merger agreement. Mr. David Thomas 649 W 54th Anchorage, AK 99518 POSITION STATEMENT: Supported merger agreement. Alaska Interstate Construction 649 W 54th Anchorage AK 99518 POSITION STATEMENT: Supported merger agreement. Mr. Jim Udelhoven Udelhoven Oil Field Services, et al. 184 E 53rd St. Anchorage AK 99508 POSITION STATEMENT: Supported merger agreement. Mr. Harold Heinze 1336 Staubbach Circle Anchorage AK 99510 POSITION STATEMENT: Supported merger agreement. Mr. Richard Fineberg, Oil & Gas Consultant P.O. Box 416 Ester AK 99725 POSITION STATEMENT: Opposed merger agreement. Mr. Tom Maloney VECO Corporation 3215 Legacy Drive Anchorage, AK 99516 POSITION STATEMENT: Supported merger agreement. Mr. Terry Monaghan 333 M Street Anchorage, AK 99516 POSITION STATEMENT: Supported merger agreement. Mr. Maynard Tapp, President Hawk Construction Consultants 7240 East 21 Avenue, Apt 3 Anchorage AK 99503 POSITION STATEMENT: Supported merger agreement. Mr. Val Molyneux, President Operations and Maintenance Services VECO Corporation 18730 Petrel Circle Anchorage, AK 99516 POSITION STATEMENT: Supported merger agreement. Mr. Steve Stephens Alaska Interstate Construction 13154 Stephenson St. Anchorage AK 99515 POSITION STATEMENT: Supported merger agreement. Mr. Doug Smaker P.O. Box 402 Ft. Yukon, AK 99740 POSITION STATEMENT: Supported merger agreement. Mr. Tom Lakosh Peak Oilfield Service Co. P.O. Box 100648 Anchorage, AK 99510 POSITION STATEMENT: Opposed merger agreement. Mr. Vince Doran 923 W 11th Avenue, #411 Anchorage, AK 99501 POSITION STATEMENT: Supported merger agreement. Mr. Wade Schnabl 9329 Emerald St. Anchorage, AK 99515 POSITION STATEMENT: Supported merger agreement. Mr. Ken Yockey 24271 Platser Dr. Anchorage, AK 99567 POSITION STATEMENT: Supported merger agreement. Mr. Bill McLaughlin 2525 C Street Anchorage, AK 99503 POSITION STATEMENT: Supported merger agreement. Mr. Dave Scarbrough Air Logistics Alaska P.O. Box 220845 Fairbanks, AK 99522 POSITION STATEMENT: Supported merger agreement. Mr. John Dittrich Brooks Range Supply 9024 Snow Owl Circle Anchorage, AK 99507 POSITION STATEMENT: Supported merger agreement. Ms. Ruth Moulton 120 W 11th Anchorage, AK 99501 POSITION STATEMENT: Commented on the merger agreement. Mr. Bruce Weiler 1751 George Bell Circle Anchorage, AK 99515 POSITION STATEMENT: Supported merger agreement. Mr. Murray Walsh 2974 Foster Ave. Juneau, AK 99801 POSITION STATEMENT: Supported merger agreement. ACTION NARRATIVE TAPE 99-8, SIDE A Number 001 CHAIRMAN HALFORD called the Joint Special Committee on Mergers meeting to order at 1:35 p.m. All members were present except Representative Brian Porter who was participating via teleconference. Other legislators present were Representatives Kemplen, Croft, Berkowitz, Rokeberg, Sanders, Murkowski and Cissna. Other legislators participating via teleconference were Representatives Ogan, Joule and Davies, and Senators Pete Kelly and Wilken. CHAIRMAN HALFORD informed committee members that the agenda consists of a presentation by the Administration, followed by a presentation by the participating companies, and then followed by statements and questions from the public. The committee will then discuss a series of questions it prepared and distributed to the Administration and the participating companies. CHAIRMAN HALFORD asked Attorney General Botelho to begin the presentation. BRUCE BOTELHO, Attorney General, Department of Law, described the Administration's objectives during the negotiating process as follows. The Governor made clear in his speech to the Anchorage Chamber of Commerce that the Administration hoped to satisfy two categories of objectives: first, to obtain commitments to create a competitive environment to enhance competition in North Slope development; and second, to obtain civic commitments dealing with the environment, Alaska hire, and contributions to the community. The Administration's focus, regarding competition, was from an anti-trust standpoint. Alaska statutes make clear that the State has the power to intervene where it appears that an acquisition is likely to substantially lessen competition or lead to a monopoly in the relevant market. The Administration believes the proposed acquisition by BP Amoco of ARCO creates that risk. The Administration has been looking at remedies to ensure that competition is not lost in the leasing, development, and production end of things, and also in terms of a loss of diversity in exploration and development on the North Slope. The Administration engaged in a series of meetings over two months to negotiate, which resulted in the joint announcement by Governor Knowles and Rodney Chase, President and Deputy Chief Executive Officer of BP Amoco, of a draft charter for development of the Alaska North Slope. The Charter sets forth how BP will meet the objectives outlined by the Governor in his August 23rd speech. ATTORNEY GENERAL BOTELHO described the contents of the Charter. First, it provides for new production operators on the North Slope with regard to the Alpine and Kuparuk River units. The Charter allows for two separate operators, one on each unit, or a single operator operating both units. The Administration's primary focus on creating competition has been on the western North Slope, and in particular, Alpine, which is the gateway to the National Petroleum Reserve. The Charter also provides for the creation of at least three new exploration operators; one in NPRA, which must be a new production operator either at Alpine or Kuparuk; and at least two new exploration operators on state lands. An Alaska statute limits the amount of non-unitized state acreage which any company may possess. This will require BP Amoco-ARCO to divest itself of at least 320,000 acres. Under the terms of the proposed charter, 400,000 state acres would be relinquished and some 220,000 acres of land inside NPRA will also be relinquished. This divestiture will be built around blocks with significant development potential. Those blocks are referred to as "play fairways." ATTORNEY GENERAL BOTELHO explained that with respect to infrastructure divestiture, BP will be required to divest commensurate ownership interests in the Trans Alaska Pipeline Service (TAPS) and other feeder pipelines. The ownership interests divested will be commensurate with production, which is a requirement that at least 175,000 barrels of soon-to-be daily produced oil be divested. A share commensurate with that level of production must be divested to purchasers of producing properties. To the extent that the amount ultimately purchased does not equal 22 percent, BP will have a standing offer to sell the remaining interests up to that amount. BP is required to make excess tankers available for sale and a framework for facility access on reasonable terms has been included. BP has committed to binding third party arbitration if a dispute arises over the commercial reasonableness of facilities access. The agreement makes clear that the State maintains its authority to resolve any dispute that may arise with regard to facilities access on terms that are in the best interests of the State. ATTORNEY GENERAL BOTELHO explained that in the interest of encouraging both competition and interest in the North Slope, the Administration and BP Amoco-ARCO have reached agreement on data availability. The Charter requires BP to give up all proprietary BP and ARCO seismic and well data for purchase by anyone, whether new players or existing competitors. To the extent that they possess data in common with others, they will make a diligent, good faith effort to achieve agreement by other owners of divestiture or availability of that data. BP is also required to purchase oil, up to a total of 25,000 barrels per day, from companies with small volumes. The Charter also contains provisions for contracting for marine transportation. ATTORNEY GENERAL BOTELHO described the gas commercialization issue as one the Governor took input on before making his objective public. Under the language in the Charter, BP will make 1.2 billion cubic feet of gas available per day to a gas project until December 31, 2001. With respect to environmental issues, BP has committed to spend at least $10 million for cleanup of orphan sites. It has agreed to clean up abandoned barrels and inactive reserve pits. BP has also committed to clean up a list of contaminated BP and ARCO high priority sites by 2005, and other sites by 2007. BP and ARCO will support and go for funding of an independent North Slope oil spill response organization and will commit to a program of arctic spill response research and development. That funding level will be at least $200,000 per year for a ten year period. BP will work with the Alaska Department of Environmental Conservation (DEC) to develop a performance management program for review of corrosion practices on the non- common carrier pipelines on the Slope. Finally, BP has committed to make available $500,000 per year for ten years for additional orphan site clean up, spill response research and development, or expert advice on corrosion issues at the discretion and direction of DEC. ATTORNEY GENERAL BOTELHO stated that BP will commit to ARCO's plans to build new millennium-class double hulled tankers that will replace existing tankers one year earlier than otherwise required under the 1990 Oil Pollution Act (OPA). BP has commited to build double-hulled tankers which have enhanced safety features, such as redundant steering, propulsion and power. BP is directed to encourage its tanker operating company to develop a performance review program, including its safety practices. Federal law precludes BP from directing such a program, so the word "encourage" was used. With respect to Alaska hire, BP has commited to extend recruitment and hiring obligations on the North Star model, and BP has expressed support for training and recruiting Alaska Natives. In terms of substantive provisions, the agreement would establish a new charitable foundation to fund organizations and causes within Alaska based on a net overriding royalty provision of .02 percent which is based on the level of divestiture in this agreement at about $6 million per year. Thirty percent of that amount would be directed specifically to the University of Alaska Foundation. The Charter is a contract, and, in terms of the anti-trust aspect, it can be enforced at the state's election in either federal or state court. To the extent that there is a failure to divest, the powers of appointment of a trustee is established in the Charter. The Charter also contains a most favored nations clause so that the State may incorporate terms of any consent decree reached between the FTC and BP Amoco in the event that increased divestiture is required. CHAIRMAN HALFORD asked representatives from BP Amoco and ARCO to give their presentation. KEVIN MEYERS, President of ARCO Alaska, Inc., gave the following testimony. Unlike the Commissioners, and unlike Richard, I am not going to talk about the deal in terms of the terms and conditions. I think you'll hear a good enough summary from all of them. What I would like to do is talk to you about two things. I'm here today to urge you first and foremost to urge the members of the committee to support the merger of ARCO and BP-Amoco and the draft charter. Finalizing this merger will be a step forward for the companies, our employees, our shareholders, and the people of Alaska. Concluding the BP-Amoco ARCO merger will bring stability to what has been a year of change in the Alaskan oil industry. Since oil hit an all time low of $8.61 in December of last year, it's risen to $26 a barrel today. What a difference a year can make. We've seen during this time consolidation in the industry worldwide. And the merger of BP-Amoco and ARCO is a part of that consolidation and is critical to Alaska's future. The merger makes good business sense in the most basic form - economic survival and growth. With continued reductions in operating and development costs, access to exploration acreage, and a working partnership for the State, I see a positive - I say a very positive - long term future for the oil industry in Alaska. Aligning the forces of ARCO and BP- Amoco ensures investment, production, and the ability to survive during the trials and peaks of oil prices like we've seen during the last year. After months of negotiating, the State of Alaska and BP-Amoco have reached an agreement that addresses the concerns that have been raised about this merger. Most importantly, the Charter preserves most of the cost synergies and production growth the acquisition is expected to deliver in Alaska, while at the same time bringing one or more new major players into the State. In approving the merger, and approving the Charter and ratifying it, I would like to stress a very real sense of urgency. It's time to move forward with this approval. Alaskans benefit from a strong oil industry; one that can compete globally for the capital needed to develop Alaska's resources. Approval of this merger sends a message to the major players in the industry and the business community as a whole, and we want that to be a positive message. It tells them that Alaska is truly open for business and willing to work as partners with the industry for responsible development of the state's resources. Supporting the Charter agreement will also help end the short term uncertainty for investment plans in Alaska. With the uncertainty of the merger and now the added uncertainty of one or more new players in Alaska, it's been very hard to plan for the immediate future. Because we don't know who will ultimately own the assets, it's difficult to make new capital investment decisions. Timing is critical as the winter construction season approaches. This year's exploration and construction during the winter is the driver for new production that will come on in two to three years. Our Alaska contractors and vendors are anxiously awaiting the outcome of this merger. This uncertainty not only affects them, but also the Alaskan communities where their employees live. Finalizing the Charter agreement not only makes good economic sense, it makes sense to the men and women of ARCO Alaska - men and women who have been waiting for this merger to conclude since April 1. About 1400 ARCO Alaska employees, and 500 BP-Amoco employees in Alaska, are waiting to hear the outcome of this merger so they may plan the future for their families. To our employees and their families, timing is very critical. They feel a real sense of urgency. I'm very proud of what the men and women of ARCO Alaska have accomplished, especially this year, in the face of great uncertainty. I believe it's a testament to their abilities and what they will bring in their new roles to BP Amoco and the new operators that will be coming in. Our employees have played a very important role in helping to build this great state. Companies like ARCO and BP have been good neighbors while creating economic opportunity and a better quality of life for Alaskans. Let's get on with it, let's get back to work. Before I conclude, I want to get to the second point of my testimony. I would like to repeat a statement that I made in Fairbanks earlier this week because my response has been misquoted. I was asked, if given the rebound of oil prices, could ARCO survive if the merger were not approved. Let me state unequivocally, ARCO, as we know it today, would cease to exist if the merger were not approved. ARCO would be an acquisition or merger target for another company. Let's not forget, the senior management, the board of directors, and the shareholders have overwhelmingly approved our merger, our joining with BP-Amoco. If by some chance we were not acquired, ARCO would have to continue to repair its balance sheet while dramatically restructuring its operations worldwide. These changes would have negative impacts on our Alaskan operations. If we were acquired by another company, that company may not have the financial strength of BP-Amoco, or the long term commitment to Alaska, that BP has demonstrated over the past 40 years. Thank you and I'll be happy to answer your questions after Richard's comments. RICHARD CAMPBELL, President of BP Exploration (Alaska), Inc. gave the following testimony. Good afternoon Mr. Chairman, members of the committee, ladies and gentlemen. For the record, my name is Richard Campbell and I am the President of BP Amoco Exploration in Alaska. I'm here to testify in support of the Charter for Development of the Alaskan North Slope and to answer questions about the draft agreement. The agreement is short, written in plain language, and contains clear benchmarks by which to judge BP Amoco's performance. It is the product of seven months of information sharing and discussions with the state. By any standard, the Charter looks a lot like the outcome described early on by members of this committee and the Knowles Administration. It requires major reductions in BP Amoco's ownership of North Slope production and infrastructure. It ensures the presence of another major oil company or companies in Alaska. It sets the stage for increased North Slope investments, increased North Slope production, and increased state revenues. And finally, I believe it addresses concerns still being voiced by some Alaskans. In today's testimony I will try to address some of those concerns. They are control and the size of the required divestments, gas, enforceability and timing. Because no one has defined an "acceptable level of control" I will assume for the purposes of this discussion that the status quo is acceptable to most Alaskans. The fact is that while this agreement does allow an increase in BP Amoco's ownership of North Slope production and infrastructure, it does not deliver a corresponding increase in control. That's because the carefully drawn operating agreement that governs the Trans Alaska Pipeline System and North Slope oil fields remain intact. These agreements mandate shared control of these important assets. By design, major operating decisions, major capital investment decisions, major facility access decisions require the approval of almost every owner. BP Amoco and played an important and influential role in this shared control environment. As a company with an ownership interest in every major producing field, we have been involved in almost all of the development spending that has occurred on the North Slope and we have funded our proportionate share. The production and asset sales mandated by the Charter are, by any standard, very large. Acquiring these assets will require investment of billions of dollars. 175,000 barrels of oil a day is of a scale similar to the global oil production of companies familiar to Alaska, such as UNOCAL, Marathon or Phillips. The buyer, or buyers, of this production will play a major and very visible role in the Alaskan oil industry. Kuparuk, the second largest field in North America and Alaska, and Alpine, Alaska's newest oil field, will be operated by one, or possibly two, major oil companies. Together they could employ something between 400 to 500 people, perhaps more depending on how they staff their exploration, human resources and business support organizations. These new operators will be responsible for operating and maintaining these fields, ensuring environmental compliance, forging alliances with Alaskan contractors and suppliers, and developing plans for continued development of these world class assets. Because North Slope operating agreements generally require the agreement of companies owning 90 percent or more of a given reservoir, these new players will play a pivotal role in determining the level of forward investment in these fields. Under the Charter, operatorship of the Kuparuk field must go to a company with assets of more than $8 billion; Alpine to a company with assets of more than $3 billion. The new Alaska operators will be companies with major operations in other parts of the world. Even so, it is important to remember that the assets and production they require here will be among the largest in their global portfolios. Almost overnight, Alaska will become a core area in which to invest the human and financial resources necessary to grow reserves and production. The Charter ensures these new players will have a level playing field. We have agreed to sell buyers of North Slope production sufficient capacity in the TAPS and North Slope feeder pipelines to move their oil to market. We will also market TAPS capacity to finders of new fields if they want it. TAPS will remain an open access, common carrier pipeline that is required to carry production tendered by all North Slope producers at fair, government regulated rates. The tariff settlement methodology agreed with the state in the mid 1980's is working and remains intact. TAPS tariffs are lower today than they have ever been. Our goal is to keep tariffs low by keeping production up. To build exploration interest and encourage exploration activity, we will sell North Slope seismic and well data where we have the legal right to do so, and we will market 620,000 acres of highly prospective state and federal exploration acreage. We will work with the State to select and manage the sale of this acreage to drive exploration activity and to ensure that other companies end up as exploration operators. I would like to emphasize that the Charter guarantees companies the right to move forward alone if partners are unable or unwilling to proceed with exploration drilling. Concerns have also been voiced about how the Charter will affect efforts to achieve the sale of North Slope natural gas. Simply put, this agreement, I believe, will enhance those efforts. We are committed to making the commercialization of the North Slope's abundant gas resources a reality. After the acquisition, when our ownership of this resource increases from 20 percent to more than 50 percent, we will form a stand- alone business unit in Alaska to pursue all options for moving our gas to market. We are going to support these efforts by locating in Alaska BP Amoco's global gas technology center. The center will be staffed with scientists and engineers who are experts in high pressure pipeline construction, LNG plant design and operations, and the use of space age catalysts and membranes to make more efficient the production of so-called "white crude." The fact that we are locating it here should tell you something about how we view North Slope gas sales in the context of BP Amoco's global gas strategy. This committee is aware of our efforts, I believe, to develop competitive LNG and Gas to Liquids projects. A third option, a gasline to the Lower 48, is now on the table. New technologies and construction methods have been making long distance pipelines less expensive. And the northern expansion of the Canadian pipeline system would mean building a shorter pipeline to carry Alaskan gas. These costs savings, with growing natural gas demand in the United States - the largest natural gas market in the world - and a major opportunity becomes apparent. So apparent, that two separate groups have recently issued press releases about their plans to pursue development of gas lines to the Lower 48. It is important to remember that the gas sale options I've described - LNG, GTL, and pipelines to the Lower 48 are not mutually exclusive. We are pleased that other groups and other companies are pursuing their own ideas for the North Slope gas market. We won't stand in the way. In fact, after the acquisition we have guaranteed availability of up to 1.2 billion standard cubic feet of North Slope natural gas per day to any commercial project at a competitive net back price. Together with the State we've agreed on $1 per million BTUs indexed to price. Concerns have been raised about the enforceability of the Charter. The first half of the agreement - the section requiring sale of production, acreage, infrastructure and the relinquishment of field operator ships, is a binding contract. We either conclude the sales in the time allowed or a trustee is appointed to sell those assets for us. The requirements are clearly stated. It won't take a court long to resolve a dispute in the unlikely event that one should arise. Our goal is to identify buyers and conclude sales as quickly as possible. The community and environmental commitments are also clearly defined. Assessing our performance will be easy. Failure to deliver on our promises would mean loss of credibility with the Alaskan public and long term damage to valuable working relationships with the State, its regulatory agencies, and citizens oversight groups. That is a price that in my view is just too steep to pay. BP Amoco is a company that keeps its commitments. Four years ago we promised to build Northstar production facilities in Alaska. Despite lawsuits and permitting delays, those modules are under construction in Anchorage today. Finally, concerns have been raised about the time allowed Alaskans to review and comment on the charter. While the agreement has been on the street for only two weeks. this issue has been before us for seven months. The Knowles Administration brought in national experts and considered input from a broad cross section of Alaskans in formulating the state's position. That position was laid out for the public in a major speech last summer. It's no accident that the Charter looks like the agreement described at that time. Our goal is to complete this acquisition before the end of the year. I suggest today that this should also be your goal. There's a tremendous prize to achieve. The acquisition creates the potential to halt the decline of North Slope oil production over the next five years. Significant progress toward this prize can't occur until the production acreage and asset sales required under the Charter are completed. The participation of another major company is now required to achieve our goals. We need them here as quickly as possible. When this situation is resolved, we believe activity levels on the North Slope will pick up. It is time to end the uncertainty - for oil field service companies, for contractors and for ARCO and BP Amoco employees who are still waiting to know what their status is. It is time to go back to work. Mr. Chairman, that concludes my testimony. If you are wanting to go into questions at this time, I would like to introduce some of my colleagues who I brought with me here today in an effort to ensure that we address your questions in as detailed a form as possible. CHAIRMAN HALFORD noted Representative Ogan and Senator Wilken were participating via teleconference and that Senators Pearce and Ellis and eight Representatives, including all committee members except Representative Porter, were present. CHAIRMAN HALFORD asked Commissioner Shively and BP Amoco and ARCO representatives to join committee members at the table for questioning. MR. CAMPBELL introduced Ms. Ann Drinkwater, the President of BP Pipeline and Business Unit Leader for Pipeline and Shipping Activities; Mr. Ken Conrad, Business Unit Leader for the Eastern North Slope; and Mr. Tom Holt, Business Unit Leader for the Central North Slope. CHAIRMAN HALFORD asked Commissioner Shively to address the questions prepared by the committee. Number 568 COMMISSIONER JOHN SHIVELY, Department of Natural Resources (DNR), said, regarding whether the agreement creates a post-merger situation that approximates the current competitive significance of ARCO, that in the short run there is less production than ARCO has, but he believes that the divestiture will bring at least one major company of the size of ARCO, or larger, in because it will take such a company to purchase the Kuparuk pieces. He believes that company will also likely have exploration acreage and, over time, the company could become as big a competitor as ARCO in terms of production. Regarding the question of whether the divested assets will attract prospective buyers, COMMISSIONER SHIVELY stated that he has spoken with individuals from most major companies and he believes there is more interest in Alaska right now than in any time since 1969. No major oil company in the world will overlook the potential of 175,000 barrels per day in North America. That business might not go to just one company. At least four companies, the size of ARCO or bigger, are preparing proposals. TAPE 99-8, SIDE B COMMISSIONER SHIVELY responded, "You can't have it both ways, Mr. Chairman. If we wanted just efficiencies, we would have left the agreement alone. We chose not to do that. I think there will be synergies and efficiencies lost here, but we thought it was much more important and, also more importantly, in view of the state's law to provide for competition. We believe there are companies that can operate this size of field, and want to operate it, and will operate it. But there's no question that BP loses some of what they thought they were buying as a result of these divestitures." REPRESENTATIVE CROFT asked Mr. Campbell if he has an updated estimate of what the efficiencies savings from the merger will bring with the new conditions. MR. CAMPBELL replied that BP has a preliminary view of what efficiencies would go away with the divestitures. He estimated BP will lose $50 to $60 million of the original estimate of $200 million. Number 021 MR. MEYERS added that it is important to remember that cost efficiencies and synergies will result from having a single operator at Prudhoe Bay. MR. CAMPBELL indicated that another way to look at this issue is that ARCO currently operates two-thirds of the production while BP operates one-third of it. Most of the divestitures will result in BP operating two-thirds of the production while a new company will operate one-third of it. REPRESENTATIVE CROFT questioned whether efficiency means two people will not be doing identical jobs, or that two pipeline facilities will not be necessary, so that BP will be able to use one person and one facility. MR. MEYERS replied it is more a matter of removing redundancies in operations, not so much removing redundancies of facilities. Most of the benefit will be in terms of overheads, for example, two field managers will no longer be necessary. He added that a large number of industry costs are related to labor so that when costs are reduced, there are generally reductions in jobs. Number 046 COMMISSIONER SHIVELY addressed the next question, which asked whether the buyer of the Kuparuk and Alpine fields can be the same company. The answer is yes and regarding whether the Administration is encouraging one company to buy both, the option is totally open. At one point during the negotiations, the Administration was looking toward a single company because it felt that to provide for options for different sizes of companies it would be better to develop the divestiture this way. He noted he is not aware of whether the Administration has identified which companies are interested in which acreage, however it is common knowledge that Anadarko is interested in the Alpine field. CHAIRMAN HALFORD asked the amount of Anadarko's percentage in Alpine now. COMMISSIONER SHIVELY said it is 22 percent. Number 058 SENATOR PETE KELLY asked if BP has employed 34 people in exploration and ARCO has employed 50, and whether after the merger, BP-ARCO will employ 32. He also asked if ARCO had about $150 million in exploration and BP about $75, and after the merger that amount will be about $70 million. He questioned what kind of commitment BP-ARCO will make to exploration, and if an aggressive stance does not continue after the merger, that the bottom line is that less oil will flow through the pipeline in the future. COMMISSIONER SHIVELY replied that could happen, however every company interested in the Alaska fields that the Administration spoke with wanted two things: present production and future production. That is why the Charter requires a significant divestiture of exploration acreage. The Administration believes that any company that comes to Alaska will look at the acreage that is being divested on the exploration aspect and they will be driven to explore that acreage. Number 097 SENATOR PETE KELLY asked if the buyer of Kuparuk would only be covering its own demand or position from the oil they are already buying from BP. COMMISSIONER SHIVELY said a number of companies are not buying a barrel of oil from BP right now who are interested in the divestiture. He emphasized that every company the Administration spoke with stressed the need for an exploration piece. If that company sits on existing production, it is sitting on declining production. Any company that is going to invest enough to buy the divestiture will want a future, and the investment will be a commitment to that future. MR. CAMPBELL maintained, in response to Senator Kelly's question about the number of BP-ARCO employees post merger, that the numbers quoted by Senator Kelly are from an Anchorage Daily News article in which the data was totally garbled. He noted an apples and oranges comparison was made of the different organizations between BP Amoco and ARCO. He pointed out that a letter to the editor to clarify those numbers was not published. He indicated the number of exploration employees that will go forward after the merger will be about 50. MR. CAMPBELL also emphasized that the divestiture creates a tremendous opportunity for companies that want to do exploration work in Alaska. Six hundred and twenty thousand acres of prime exploration acreage will become available and strong competition for those areas exists. He believes a lot of wells will be developed on that acreage in the next few years. BP plans to put together deals for new companies to come in and operate its interest in ensuring that work will get done. In terms of production operators interested in exploration, they will want to look for the next discoveries, the next satellites, and the next barrels of oil to keep their facilities full. Number 121 COMMISSIONER SHIVELY noted the next set of questions are directed at how the divestiture will actually work, in terms of pricing and other things. Basically, BP will open its data to qualified companies. The companies will make offers. CHAIRMAN HALFORD asked if Commissioner Shively is referring to raw data or a complete three dimensional analysis. COMMISSIONER SHIVELY said it is both, and that it is traditional to allow companies to come in and work the data themselves. BP will evaluate those proposals and will probably narrow down a few and negotiate. He assumes the divestiture will occur through negotiated agreements, not through an auction or RFC. REPRESENTATIVE BERKOWITZ asked what the dollar value of that kind of data is. MR. CAMPBELL replied, "Millions, it certainly cost us millions to acquire it." COMMISSIONER SHIVELY added that BP has committed to sell no matter how low the best offer is. Regarding the question of whether the State can compel BP to select a buyer in the case that two buyers are interested and only one is aggressive about exploration, he pointed out the State does get the chance to review the agreements BP ARCO makes with the purchasers to ensure the buyer met the criteria set out in the Charter, however if the criteria was met, the State could not make the choice. He said he does not see that as a problem however, because the purchaser of the Kuparuk field will want to explore. COMMISSIONER SHIVELY indicated that he cannot assure that the company that buys will be as aggressive as ARCO was, and he does not feel that question is fair. He noted that BP has been a leader as well as ARCO, and what has bothered him the most about the acquisition is the loss of intellectual competition that could result from one company running everything. Bringing at least one more company into the arena will maintain that competition. COMMISSIONER SHIVELY stated that, in response to the question about the total acreage in each of the "play fairways," he did not have that information but could provide it to the committee. He noted that on the State "play fairways" the figures are not final. The Administration reserved the right to meet with BP once the merger is finalized to complete those things but he can probably calculate the acreage in the NPRA for the committee. COMMISSIONER SHIVELY explained that the Colville River unit is expected to be in production next summer. Production will begin at about 40,000 barrels and will increase to 80,000 after about one year. Regarding question 7, COMMISSIONER SHIVELY informed committee members that they are correct that the total divestiture for Buyers A and B does not equal the total of 175,000 barrels, but it was not intended to. The minimum divestiture was set at 175,000 barrels, and requirements were set for two fields. After the requirements for the two fields are met, if the 175,000 is met, BP is done. If not, BP could sell from any field, i.e. Prudhoe, Endicott or Milne. He added that different companies have different ideas about which pieces on the Slope they want so where the other oil might come from might be part of the negotiations. Number 179 VICE-CHAIR GREEN asked whether the 175,000 barrels constitutes the net or gross working interest. COMMISSIONER SHIVELY said what was negotiated is not what was written. The Administration negotiated for 175,000 gross barrels. He maintained that confusion will be rectified in the final agreement. REPRESENTATIVE SANDERS asked whether BP will maintain 60 percent interest in the Kuparuk and Alpine fields. COMMISSIONER SHIVELY answered about 10 percent of Kuparuk is owned by others and about 22 percent of Alpine is owned by Anadarko. If Anadarko is the purchaser of Alpine, technically BP could be at 60 percent. He explained that the 40 percent divestiture figure was derived as a result of discussions the Administration had with other companies about the minimum they felt they needed to have enough control. They might want more which is why there is flexibility in obtaining the 175,000 barrels. He guessed that whoever buys will want more than BP and they will buy more oil under the 175,000 to get there. If the company does not want to do that, it can amend the operating agreement so that it has the controls it needs, but no company is going to make the kind of investment it will take to buy Kuparuk without believing it has the ability to control the major decisions. CHAIRMAN HALFORD said if Anadarko buys Alpine, it will end up with 62 percent. COMMISSIONER SHIVELY said the way the agreement is written, Anadarko could add another 18 percent which would put them at 40 percent. CHAIRMAN HALFORD noted BP does not have to sell 40 percent so it is to BP's advantage to go to Anadarko because that will require a smaller divestiture. COMMISSIONER SHIVELY replied, " But Anadarko may not want to operate at 40. If it meets the technical part of the agreement I would guess that Anadarko would not want to stop at 40, but maybe they would. If they do they're going to write an operating agreement that gives them more control than a 40 percent owner would have. Number 207 CHAIRMAN HALFORD asked if another buyer that wants Alpine will have to get 40 percent while Anadarko only has to get 18 percent. COMMISSIONER SHIVELY said that is correct. CHAIRMAN HALFORD noted that would give Anadarko a substantial competitive advantage. COMMISSIONER SHIVELY pointed out that BP will look at all of the pieces and it will still have to sell 175,000 barrels, therefore in some ways selling to Anadarko will be disadvantageous. MR. CAMPBELL added it is in BP's interest to come out of this process with an aligned set of interests in the fields that will allow all of the activities to go forward and that is what it will be working toward during the divestment process. He repeated that the decisions in these fields about major expenditures are made by all parties. VICE-CHAIR GREEN asked if in the 175,000 barrel make-up that is now gross, assuming that Alpine will be producing the equivalent of 80,000 barrels of that, if Alpine comes out like Badami and it only produces 40,000 barrels per day, would BP only have to divest 135,000 barrels. COMMISSIONER SHIVELY replied yes, they will have sold that to the buyer as if the buyer was buying 40 percent of 80,000. If it does not produce that way, they will have sold less production. VICE-CHAIR GREEN asked, "If the agreement calls for selling 175,000 barrels, but only maybe 25,000 are left, does that relieve them of obligation or do they have to go back into the good stuff to make up that difference?" COMMISSIONER SHIVELY replied they have to go back and find something somebody wants to buy. MR. MEYERS remarked, "... we have real numerous penetrations out in Alpine, I don't know the exact count right now but it's probably in excess of 20. All those penetrations are equal to or better than our prognosis. We are confident that we are going to come on production at our expected rates. So there's no confusion here 12 months from now and everybody says what the heck happened, Alpine will only start up at 40,000 barrels a day because of the number of penetrations we will have in the reservoir at start up. We have a rig running year round out there. It will take about 12 months, as the Commissioner said, to ramp up to 80,000. I might also point out one thing too. We have already had a discovery next door to Alpine called Fiord. That discovery was announced earlier this year. Fiord has the potential to add another 10,000 barrels a day to Alpine production if it proves up commercial, and we're working through those right now. So, we already know of one highly prospective satellite sitting that will come through. It's just a few miles from the Alpine central facility so it will come through Alpine. So when I look at that and the potential of the Colville River Unit to deliver production, I think it's there - the potential is clearly there." COMMISSIONER SHIVELY noted the committee asked a couple of questions about whether the recent commitments will be changed under the new agreement, including the work agreements. He stated the answer is no and that the general authority within DNR and the AOGCC remains. Regarding excess acreage, normally DNR would give the company 90 days to dispose of the acreage. The company could sell small chunks to existing partners or give some back to the state. Under the Charter, the companies will give control of two play fairways which is a much more attractive proposal for the State and for operators and it will make for more aggressive exploration. In addition, they are divesting at least 20 percent more than what they were required to under existing law. Therefore instead of 330,000 acres they will have to divest 400,000 acres. Regarding the question about the process for BP to reacquire ownership of TAPS, regulatory commission approval is required. COMMISSIONER SHIVELY explained that under the Charter, BP Amoco agrees to participate in binding arbitration if a dispute over facilities access occurs. That arrangement gives the company in the field two choices: it can use binding arbitration or it can use the State's authority. He said he was asked about why different pipeline companies have different tariffs. He deferred to Ann Drinkwater to answer that question. COMMISSIONER SHIVELY explained that regarding the tanker transportation, the whole system is about to change over because OPA 90 requires the industry to build all new tankers beginning with the millennium class tankers. The larger new companies believe that they could make an agreement with the Alaska Tanker Company or another company, or more likely find their own transportation. There is some issue with smaller companies. As the production picture changes on the Slope, that will be reflected in the size of new tankers, which is why the Administration did not spend a lot of effort on the marine transportation issue. Number 323 REPRESENTATIVE PORTER asked if the State should be concerned about having an adequate number of tankers for future production. COMMISSIONER SHIVELY replied that past experience has shown that if you have the production, you will get the tankers. If several smaller, independent companies operate, that could be of concern because they are generally not in the tanker business. Another point that has tariff implications for the State is that the tankers are expensive, which will affect the well head price. REPRESENTATIVE PORTER indicated that only two shipyards in the United States build these tankers and questioned whether enough could be built in time even with an aggressive building schedule. MR. CAMPBELL asked Chairman Halford to revert to a discussion about tankers. CHAIRMAN HALFORD agreed to do so after Commissioner Shively finished addressing the committee. COMMISSIONER SHIVELY noted the Administration did raise the tariff issue with the FTC and they did not view it as a good antitrust tool at all, but divestiture was. He pointed out that we have to recognize that the State did lease the right to the gas to BP, ARCO and Exxon. If any company meets the criteria, BP must sell them the gas, even if BP thinks it can do better in a year or two. Also, there is nothing in the agreement that prevents BP and Exxon from making an agreement with another company at any price on any project. Regarding whether the period until December 31, 2001 is long enough, he pointed out that some people think it is too long, others think it is too short. The Administration believes it is reasonable to push something quickly under these standards. The 1.2 BCF per day does not include royalty gas. He did not know how much gas BP plans to use for its GTL project and suggested that committee members ask BP. Regarding partner approvals, none are needed because it was set up as BP's gas rather than field gas. The determination of the net back price caused more concern than any other issue. It is an aggressive price but the current State policy is for the Commissioner of DNR to maximize the economic benefit of our resources to the State. Also, the royalty contributes to the Permanent Fund. The price was set in conjunction with the State and the Administration is talking with the mayors about how to craft language that might be better for them. He repeated that nothing in the agreement precludes them from making a separate agreement. COMMISSIONER SHIVELY offered to answer further questions. VICE-CHAIR GREEN asked, " If this contract is for BP, does that mean that State gas is left in the ground?" COMMISSIONER SHIVELY said the Administration was looking at 2.2 BCF that the State would actually overlift to make up the difference. VICE-CHAIR GREEN asked if that is stated in the agreement. COMMISSIONER SHIVELY said it is not. He added if there is a project that meets the criteria and the company wants the State to overlift its gas, he believes it would be in the State's best interest to do it. MR. MEYERS replied that the unit operating agreement at Prudhoe allows any owner under very specified conditions, which are referenced in the agreement, to take the residual gas. Number 437 REPRESENTATIVE ROKEBERG expressed concern that the stipulated price is negotiated under most conditions and that to stipulate the price in a contractual obligation does not make good business sense. COMMISSIONER SHIVELY replied that if it was a different deal, BP would have to agree to it, but BP is being forced to sell the gas for two years if anyone meets the criteria in this agreement. Under those conditions, he believes it is appropriate to set a standard as part of a series of criteria that people could meet. CHAIRMAN HALFORD said the committee has heard the Charter will be amended in regard to the net 175,000 barrels versus the gross. He asked what technical changes have arisen during the last two weeks of review that are currently under consideration. COMMISSIONER SHIVELY replied one of the major changes has to do with the savings clause which is somewhat confusing regarding whether BP is being relieved of any of its legal responsibilities under existing law. That was not the Administration's intent nor BP's intent. MR. CAMPBELL asked if that clause would speak to the environmental concerns. COMMISSIONER SHIVELY said it would. Number 494 CHAIRMAN HALFORD called upon members of the Alaska Gasline Port Authority to give their presentation to the committee. HANK HOVE, Chairman of the Alaska Gasline Port Authority, made the following comments. The Port Authority has been engaged in the construction of a model for the benefit of the State of Alaska through the production of its vast gas resources on the North Slope. The Port Authority recently entered into a memorandum of understanding with Bechtel, Inc. for the purpose of first providing an engineering analysis which the Port Authority requires in order to develop construction costs estimates. Taylor-DeJongh, Inc., a world recognized financial analyst, especially in matters related to oil and gas around the world, has performed the financial analysis. [For the next portion of his presentation, Mr. Hove referred to a handout entitled "Alaska LNG Project Benefit Analysis.] The benefits to the oil companies through increased oil production will amount to $588 million per year, largely resulting from the increased production of NGLs as a byproduct of increased amounts of natural gas from the North Slope. Income from gas sales from the Port Authority to the producers would be in the amount of $349 million per year, so the total revenues to producers will amount to nearly $1 billion per year. Other benefits to the oil companies will be additional CO2 available for reinjection for repressurization of the field. Pproduction of gas at Point Thompson for inclusion in the gas flow from the field would result in their ability to finally extract oil from that significant crude oil deposit. The last page contains a comparison of benefits to the State of Alaska. Commissioner Shively said earlier it is his duty as the Commissioner of the Department of Natural Resources to maximize the benefit to the State from oil and gas activity. Commissioner Shively, however, is focusing on the revenue to the State from its traditional sources, that being from royalties and the severance tax. Under the Port Authority concept, the potential for greatly increased streams of revenue to the State could result from the existence of a port. Excess cash from the project would be deposited to the State's general fund to the extent of 60 percent of the Port Authority's cash flow. Thirty percent of its cash flow would be directly deposited with the communities of the State as a result of contributions made directly from the Port Authority to the communities. The benefits to the State of Alaska are demonstrably better under a Port Authority concept than any other. Assuming a Port Authority 30 cent price for the gas will result in a total of $472 million in benefits to the State from royalty, severance tax, corporate income tax and from the cash flow stream and that would be directly deposited to the State or to its residents. The private project would be exposed to federal income taxes TAPE 99-9, SIDE A Number 001 MR. HOVE pointed out that whether money comes from a severance tax, a royalty, interest or corporate taxes, the interests of the State and its residents truly remain the amount of money collected, not the means by which it is obtained. Offering this project for members' consideration, " he said the Port Authority believes the terms of Section J in the Charter are not conducive to natural gas development. It is their position that while the producers have suggested they have offers of $1 and $1.20 for gas, in reality those are not anywhere near firm offers. MR. HOVE noted one reason the Port Authority had delayed rolling out this model: they had gone to the trouble to retain widely acknowledged experts on oil and gas in the world, requesting as exact a model as possible, which took not only time but also a few million dollars. They did the work and held off until they felt comfortable with rolling it out to the committee and the State. They believe this is the best and perhaps the only opportunity for Alaska to capitalize upon its gas resource. Mr. Hove emphasized that the Port Authority is by no means "nationalizing" the gas resource in which the producers have a leasehold interest. However, they are cognizant that every Alaskan is an owner. Mr. Hove suggested it is analogous to renting out prime real estate where the lessee has agreed to pay a certain amount of money for all the economic activity to take place there, only never to have it developed and, therefore, to have no revenues flow from it. MR. HOVE continued, saying the time has come for the State to take control of its own destiny. He believes Alaska is looking to the legislature, to this committee and, more importantly at this time, to the Governor to provide the leadership that will ensure that this important resource, which Alaskans own, is brought to market and commercialized in such a way that it benefits everyone in Alaska. "We have waited far too long," he concluded. After thanking the committee, he added that the Port Authority does not object, on any specific level, to any terms of the Charter other than those that relate to the gas resource. Therefore, they had distributed to the committee a sheet highlighting the five areas in which they do have problems and for which they seek solutions. Number 043 REPRESENTATIVE CROFT indicated his understanding that Alaskans don't need to pay as much for the gas at the wellhead because they are owners or get some of the benefit of the project itself. MR. HOVE responded, "Under the Port Authority concept, you would participate in the profits." REPRESENTATIVE CROFT referred to the dollar price set. He voiced his impression that a lot of the controversy around the gas line in Dr. van Meurs' study related to the fact that selling the gas at traditional market rates to a traditional private entity is only marginally profitable. MR. HOVE affirmed that. REPRESENTATIVE CROFT continued, saying the idea of the Port Authority is a new approach that made it profitable. MR. HOVE concurred. REPRESENTATIVE CROFT suggested in effect, then, the new approach entails pricing on the old model, which only barely worked or about which there was disagreement as to whether it worked. MR. HOVE agreed, explaining that it essentially removes from the table as an ordinary cost of conducting one's business - in terms of return on equity, or return on investments - the marginal corporate tax rate. Assuming these companies are subject to the marginal tax rate, which Mr. Hove doesn't know to be the case, it would remove the tax burden to which Dr. van Meurs had referred repeatedly as "needing a fix." Taking that off the table would dramatically change the economics surrounding this gas issue, Mr. Hove pointed out, as can be seen by the figures. Number 059 MR. HOVE, in response to an inaudible question by Representative Kerttula regarding a tax exemption, answered: No, we haven't. We expect that we would have that within six or nine months. The IRS does not work at warp speed, as one might imagine. ... We don't anticipate any problem there. No one - absolutely no one - has suggested that that won't be forthcoming. In fact, in a meeting I had with Mr. Shively two weeks ago, he referred to it as a "slam dunk," to quote him. Number 069 REPRESENTATIVE WHITAKER asked if Attorney General Botelho was still online, then read a portion of Article I, Section 15, of Alaska's constitution, regarding prohibited State action: "No bill of attainder or ex post facto law shall be passed. No law impairing the obligation of contracts, and no law making any irrevocable grant of special privileges or immunities shall be passed." He asked Attorney General Botelho whether it is fair to say that the Charter is a contract. ATTORNEY GENERAL BOTELHO affirmed that. REPRESENTATIVE WHITAKER suggested, therefore, its terms are binding and cannot be undone. He asked whether it is correct that if we don't change the stipulations of the charter relating to gas now, we will be precluded from doing so in the future to allow a port authority concept or something similar. ATTORNEY GENERAL BOTELHO answered no, he doesn't think that is correct. This contract does not purport to bind BP in its dealings with third parties at all. REPRESENTATIVE WHITAKER, responding to a question by Representative Rokeberg, asked for confirmation that the contract binds the State. ATTORNEY GENERAL BOTELHO said by the terms of its contracts, yes. Number 090 REPRESENTATIVE CROFT noted that Section V, subsection D, of the Charter makes it binding on successors. He asked if that means a future governor can't change it or disagree with the finding in there that this is in the State's best interests. ATTORNEY GENERAL BOTELHO said that is correct. The contract, entered into by people authorized to do so, is just like any other contract that the State would enter into, and it becomes binding on successors. REPRESENTATIVE CROFT expressed his understanding that this agrees not to sue under the antitrust laws, and if a future governor tries to challenge it, it would be a violation of that contract. ATTORNEY GENERAL BOTELHO responded: No. Let me make clear what the agreement provides is that the State is not going to challenge this merger under its antitrust laws. It doesn't bind future governors or this one from bringing other antitrust actions for violation of the State antitrust law against BP or its successors. ATTORNEY GENERAL noted that it would be highly unlikely that another governor would have the opportunity to challenge the merger in any event. In response to further questioning, he clarified that this Charter doesn't purport to limit the State's ability to challenge other antitrust conduct alleged against BP or any other party in the future. It is an agreement to forego litigation on the terms of this merger. If a future governor were to take office during the coming months - which he doesn't believe is probable - that governor would be bound by the terms of this Charter with respect to this merger. Number 120 CHAIRMAN HALFORD pointed out that such a governor could still proceed under any of the other antitrust provisions including, but not limited to, those relating to monopoly control and predatory activities. However, that governor couldn't reverse the merger because it would have already taken place. ATTORNEY GENERAL BOTELHO agreed. REPRESENTATIVE CROFT noted that this says "the State accordingly agrees that in exchange it will not seek to enjoin." He asked whether that prohibits the legislature from doing so. ATTORNEY GENERAL BOTELHO responded by saying Article III, Section 16, of Alaska's constitution authorizes only the governor to bring lawsuits in the name of State. As to whether the legislature should choose to do so, he noted that it is certainly purporting to do so in other situations. Number 132 REPRESENTATIVE WHITAKER requested confirmation that the State wouldn't have an opportunity to rejoin this subject at a later date, specifically regarding gas and the provisions of the Charter. ATTORNEY GENERAL BOTELHO replied, "Not unilaterally." REPRESENTATIVE WHITAKER expressed his understanding that it would require British Petroleum to do that as well. ATTORNEY GENERAL BOTELHO affirmed that. Number 135 REPRESENTATIVE WHITAKER asked, "Mr. Mayor, would you conclude, then, that if we let this opportunity slip to negotiate what your group considers to be a fair market value, that the benefits that you've outlined will be precluded in the future?" MR. HOVE said that is his belief, and he believes this is the best opportunity to strike a deal that all - producers, State and port authority - can live with. "All others downstream are pretty much foreclosed once the agreement is effectuated," he added. REPRESENTATIVE WHITAKER asked whether, in Mr. Hove's opinion, it is our only opportunity. MR. HOVE affirmed that. Number 146 CHAIRMAN HALFORD asked through what format Mr. Hove believes the legislature can influence that. MR. HOVE replied: Last week I was thinking in terms of a special session. This week I'm not sure what I'm thinking. It seems my options have become fewer in number and less desirable as time progresses. ... You may yourselves feel much the same way. That's how I feel presently. CHAIRMAN HALFORD pointed out that the legislative branch hasn't been a party at the negotiation table, although they have certainly tried to keep track. MR. HOVE replied that in his view that is unfortunate, as things have turned out. He doesn't believe Governor Knowles has entered into an agreement as well as he could have on behalf of Alaska's residents, whom he is charged by law to serve, and whose interests he needs to retain paramount in his mind. Because "a significant portion of the State is disadvantaged therefrom," Mr. Hove said he looks to any and all players who can step up to the plate, including the legislature or this committee, which might have some standing "that would give us the ability to take care of those disadvantageous features of this Charter." Number 166 ATTORNEY GENERAL BOTELHO concurred with Commissioner Shively's earlier comment that the State has obviously identified the gas issue as a paramount concern. Attorney General Botelho said they are reevaluating it. He pointed out, however, that there hasn't been a price set. The obligation they are talking about is this: If a project that meets certain viability criteria comes forward and is prepared to pay $1 per million cubic feet (mcf), BP has no choice but to sell. It is not a situation of "the price that BP has to accept." Rather, it is simply a point where the discretion that BP otherwise would have evaporates. Attorney General Botelho concluded: Again, our purpose here was not to detract from, but hopefully advance, the gas commercialization in the State. Again, we may not have succeeded here, and we understand the criticism that we've heard. But, again, I want to reaffirm that our purpose was to try and advance the ball, and that is to create a situation where a major company was prepared, under conditions, to sell commercial quantities of gas on the North Slope. And it doesn't stand for anything beyond that. Number 187 MR. HOVE expressed appreciation for the offer of what appears to be increased flexibility in terms of determining what that price might be, if not a dollar. He then stated: But one has to look at what gas is truly worth, and gas is truly worth what a buyer will pay for it. Now, markets usually work efficiently. And I'm suggesting to you that the way to commercialize and monetize Alaska's gas resources is to fashion a method by which it can find a market and let that market tell us what it is worth. And we'll price it backward from there, subtracting all of the costs that are associated with this production, and that will determine its wellhead value, just as oil is. Oil does not have, by the way, any kind of a floor under it. Oil seeks market level; so should gas. And most gas sales around the world are somewhere in the neighborhood or range of between 25 and 50 cents; 50-cent gas would probably represent gas that is much closer to its ultimate market than 25-cent gas might be. In our case, we're quite a long way from any market ... that can [accept] this amount of gas from Alaska. And so we're suggesting that ... 30 cents is a pretty fair price, probably. But by no means can Alaska's gas be assumed to be worth a dollar. And what's more, until a pipeline is constructed, the gas ... has a present value in the ground of exactly zero to the State of Alaska. And so what is placing, therefore, a value on gas? What is creating value for Alaska's gas is the existence of the means of transportation from Prudhoe Bay to the marketplace. That is what we are proposing to build with our capital. We are not interested in asking for - or require - any capital contribution from any of the producers or anyone else except for the port authority itself. But one can make the argument that we are, in fact, the ones that are monetizing gas in Alaska. It is the existence and the application of our capital that is creating its value for our gas in Alaska. And without that means of transportation, that gas isn't worth much more than just trading back and forth ... among the producers for their field purposes. Number 217 REPRESENTATIVE BERKOWITZ asked Mayor Hove whether he'd had a chance to speak about his proposal with Attorney General Botelho, members of the Administration or BP representatives recently, since the Charter was first submitted to the State. MR. HOVE replied: We've had one meeting with Commissioner Shively, I believe; I did a one-on-one a couple of weeks ago. But that is all. We have met with BP. We have attempted to meet with ARCO. We've attempted to meet with Exxon. ... With the exception of British Petroleum, no one else will negotiate or engage in substantial discussions on this subject, which I find to be somewhat curious. ATTORNEY GENERAL BOTELHO responded, "Mayor Hove, I understand that Commissioner Condon met with your group on Monday." MR. HOVE affirmed that, apologizing for the oversight and saying he had been unavailable that day. Number 231 SENATOR PEARCE noted that the Port Authority is now a legal entity. She asked if they or their attorneys believe the Port Authority would have standing if they filed an antitrust suit in state court. MR. WALKER answered that their time to date has been spent totally on putting the economics of this together to present to the Administration. They really haven't spent any time on that option. Although he believes they would have standing, they hope they would not have to exercise it. Mr. Walker noted the attention on the terms of the gas and the price. He pointed out, however, that other terms are equally as challenging to a project. One, requiring it to become a truly viable project without access to gas, is a real challenge. Discussing some points set forth in the handout titled "Problems with Charter," he told members: The amount is 1.2 [billion cubic feet (bcf)], and really it's 2.5 [bcf] ... that our project is going to require. Allowing BP to retain the liquids once they get down to tidewater doesn't seem to be truly fair. ... That's the way we read the agreement, that they would be able to recover them after it's gone through a pipeline. The "take or pay" is very challenging; a requirements contract ... is certainly much more viable for a project. MR. WALKER emphasized that the timing is critical. In addition, they believe the three factors on the selection of which project is most viable should be based upon the following: the net benefit back to the State; the base case net back pro forma; and the project that has the earliest commercialization date to meet a market window that he believes exists right now. He added that the producers are actually competing in other parts of the world for the same market. He concluded by restating that five or six areas in that section are equally as challenging as the price of the gas that has been established. Number 262 REPRESENTATIVE ROKEBERG addressed Mayor Hove, recalling legislation passed two years ago to encourage sponsor groups. He believes its omission from the Charter is a glaring defect, he said. The terms in the Charter seem proscriptive and would, in his reading, preclude the Port Authority's operation from making any headway until after the termination date, December 31, 2001. He asked if Mayor Hove concurs, notwithstanding the Attorney General's seeming desire to have a little more flexibility. He added that it seems rather clear-cut to him. MR. HOVE replied that assuming the Port Authority can secure contracts for the supply of gas in quantities sufficient to meet their requirements, they can meet all time lines set forth in the Charter with difficulty; that is assuming they timely reach those agreements, within the 45 days. Number 284 REPRESENTATIVE ROKEBERG suggested perhaps his own question wasn't clear. He indicated his belief that as it stands now, the Port Authority would be precluded from going forward if they couldn't get a lower price. MR. HOVE disagreed. REPRESENTATIVE ROKEBERG countered, "That's what you're saying, I mean, notwithstanding the lower price. I mean, why even bother if you -- you are bringing yourself up as a potential sponsor group." MR. HOVE agreed. REPRESENTATIVE ROKEBERG continued, "You're saying this is running you out of business. That's why you're anxious for a special session, is that not?" MR. HOVE replied: The terms that Bill [Walker] just here referred to, together with the price, are difficult for us to live with, if not impossible. Yes. If we don't have substantial relief from those terms ... that you referred to in the Charter, we have a very uncertain life head of us. I won't say we're dead. But it would [be] extremely difficult, and it would be extremely uncertain. Number 297 REPRESENTATIVE ROKEBERG asked Attorney General Botelho, given the context of the legislation passed two years ago and signed by the Governor, if he doesn't believe this particular agreement goes against that legislation, which was to encourage sponsor groups to come together and so forth. He commented that to him this flies in the face of that existing state policy, and he asked Attorney General Botelho how he reconciles this agreement with that policy. ATTORNEY GENERAL BOTELHO indicated the transmission was breaking up because of papers moving. However, in essence he understood the question: Is this inconsistent with the legislation enacted a couple of years ago to foster gas commercialization? REPRESENTATIVE ROKEBERG affirmed that. ATTORNEY GENERAL BOTELHO answered that he thinks they are entirely consistent. He explained: Again, our point here was, for the first time, to get a commitment, irrevocable, from BP that with liability and this price they must make 1.2 billion cubic feet of gas available a day. I think Mayor Hove spoke earlier about the market value as a result of a willing buyer and a willing seller, and whatever price they agree. What you have here is a situation where we have perhaps removed the willing seller. ... You can describe the seller as either willing or unwilling, but under these circumstances, this is when they must sell; it does not preclude, in any way, BP or any other owner of gas on the North Slope from selling at whatever price it wishes to, and have a meeting of minds ... with purchasers. ATTORNEY GENERAL BOTELHO emphasized that the fundamental policy underlying this Charter is consistent with the State of Alaska, both the legislative and executive branches, in wanting to promote gas commercialization on the North Slope. Acknowledging that this is a matter of concern, he noted that there are several competing projects, all of which have views about the gas terms. "We've heard them in the public testimony thus far," he told listeners. "We expect to hear more of them. And we expect to spend some time at the drawing board. [I] don't know that we can answer all the questions, but we're going to give it a try, and it is, again, in the context of wanting to promote gas commercialization, not to inhibit it." Number 344 CHAIRMAN HALFORD asked whether he'd understood the Attorney General correctly that this is an area of potential modification in the Charter in the next few days. ATTORNEY GENERAL BOTELHO affirmed that. CHAIRMAN HALFORD advised participants that the committee would take public testimony after hearing from the companies; a sign-up sheet was provided. Number 394 MR. CAMPBELL noted that there seem to be questions regarding the section under transportation. CHAIRMAN HALFORD suggested returning to the beginning of the Charter and having Mr. Campbell and his colleagues go through areas that still require an answer, explanation or amplification. MR. CAMPBELL directed attention to page 1, paragraph 2. Noting a previous request for a general summary of the agreement, he voiced the assumption that the detail would be provided by the Administration. CHAIRMAN HALFORD responded that the committee would come back to the Attorney General on that question. MR. CAMPBELL next referred to the general questions section, saying his assumption is the first three questions would be addressed by the State, perhaps by the Attorney General. CHAIRMAN HALFORD asked if the third one was the termination date. MR. CAMPBELL affirmed that. As to the fourth question under the general questions section, he had requested clarification about its meaning, he said, so as to be able to address it properly. Number 433 REPRESENTATIVE KERTTULA recalled an announcement about keeping gas prices down in California. She asked about an analogy regarding ARCO's prices in some arenas that might be used in Alaska, and (indisc. -- poor sound quality) tax structure. She also asked about figures regarding the net back and pricing structure. MR. CAMPBELL replied that he believes [BP] has indicated in California - although he himself hadn't seen the detail of that - that it would adopt a business practice that is currently the practice of ARCO in that state, in terms of pricing structure. Referring to the second part of the question, he said if it was directed at the royalty agreements, not pricing agreements, for fields acquired by "BPXE," BPXE would adhere to its existing royalty settlement negotiated with the State. He added: A new party, we believe, acquiring an interest would likely adopt either a BP or an ARCO agreement. It could also enter into any new agreement ... that it completed with the State. That would be our sense. [REPRESENTATIVE KERTTULA responded briefly, but most of it was indiscernible.] MR. CAMPBELL said that is his understanding, although he suggested perhaps the State may wish to comment. Number 500 SENATOR PEARCE asked if Mr. Campbell was saying that former ARCO barrels being acquired by BP would, after the proposed merger, be treated as BP barrels under all the settlements and tax agreements for royalties, severance taxes and tariffs that have been entered into between BP and the State. MR. CAMPBELL deferred to Ken Konrad. Number 506 KEN KONRAD, Business Unit Leader, Eastern North Slope, BP Exploration (Alaska) Inc., noted that he heads up BP's merger team in Alaska. He answered that yes, the barrels would be subject to the BP royalty settlement agreement reached with the State however many years ago. In terms of a severance tax, that applies equally to all companies; hence, there is no difference. In terms of tariffs, Anne Drinkwater would answer questions when they got to that section, speaking to how, at various points in time, companies' tariffs may be higher or lower but tend to average out. Number 526 CHAIRMAN HALFORD called upon Attorney General Botelho. ATTORNEY GENERAL BOTELHO asked Jack Griffin to comment further, saying it really raises the issue of the "reopeners" that the State has had under its royalty agreements. JOHN GRIFFIN, Assistant Attorney General, Oil, Gas and Mining Section, Civil Division (Anchorage), Department of Law, said he would basically agree with Mr. Konrad: the tax structure is going to be the same, before and after the merger. He explained: We used an actual cost methodology under our tax regime to determine, in particular, the marine transportation. As I think most people know, we have reopened with both BP and ARCO on various issues under the royalty settlement agreements. ... If we just assume for the moment, which I believe is the case, ... a goal of the royalty settlement agreement is to come up with transportation deductions that reasonably reflect their actual costs, then what you should see after the merger - assuming BP is able to achieve ... the synergies that it expects (indisc.), or at least in the marine transportation component - you should actually see a higher overall average royalty value ... than you see today. Now, of course, the divestiture is going to change that equation somewhat. But the merger itself, in my view, is not going to have a significant effect on the royalty values ... that the State sees. Number 564 REPRESENTATIVE BERKOWITZ requested the dollar value to the State of combined BP-ARCO production from last year, as well as what that value would have been with the calculation described that day. MR. KONRAD responded that he didn't have the figures available. However, he agreed with Mr. Griffin that the marine costs before and after will be broadly the same; if anything, those costs hopefully would be lower. He added that the revenues should be broadly the same, except for the divestments, et cetera. Number 578 REPRESENTATIVE BERKOWITZ commented that he is a little uncomfortable with the terms "broadly" and "generally." To anyone from the Administration paying attention, he formally requested the dollar difference, which he suggested is significant information. In response to Attorney General Botelho's indication that the question didn't make sense, he then asked: How much money will we make, and how much money did we make? MR. KONRAD explained that currently BP doesn't transport barrels to the "short-run" Cherry Point (ph) refinery in Washington, and it is difficult to apply that under their formula. He added: We don't currently make the same runs to California. We make marine runs all over the world, so ... we will be making those similar runs post-acquisition, and hence the marine costs for those runs should be broadly similar or lower. But we're not currently doing that, so to come up with an exact number isn't physically possible. Number 601 CHAIRMAN HALFORD said the question was asked retrospectively. Although the answer is tied into a lot of confidential information, it should be available from the Department of Natural Resources (DNR) and the Department of Revenue, and he believes it could be "sanitized." He also believes it will probably show that retroactively there are tens of millions of dollars in loss. He said prospectively there probably isn't a lot of significant difference .... [ENDS MID-SPEECH BECAUSE OF TAPE CHANGE] TAPE 99-9, SIDE B Number 001 [REPRESENTATIVE BERKOWITZ responded, according to log notes, but his comments weren't on the tape.] CHAIRMAN HALFORD [BEGINS MID-SPEECH] referred to the relationship of previous ARCO barrels, under whatever the ARCO agreements, tariffs and costs were, to BP barrels, under whatever the BP agreements, tariffs and costs were. He asked what the difference would have been last year. ATTORNEY GENERAL BOTELHO said he understood that question, but even if the merger doesn't occur, the formulas are going to be different. CHAIRMAN HALFORD said he doesn't disagree, then suggested it may be legitimate for the legislative branch to ask the executive branch to produce the cost-benefit analysis of the merger. MR. GRIFFIN expressed the need to sit down and talk more about how the royalty settlement agreements work and how they will work after the merger. He emphasized that BP is substantially different from ARCO today, with the latter being a completely integrated operation. Whereas ARCO knows, generally speaking, exactly where it is going to bring all of its barrels, BP, generally speaking, does not; BP has to sell all of its barrels to third parties, and it is only natural to expect its marine transportation costs, in particular, to be different. Furthermore, after the merger BP will be substantially different from either BP or ARCO today. MR. GRIFFIN continued. In looking at the likely effects of the merger on the net back value of the ANS [Alaska North Slope], he said, and putting aside the question of the effect of requiring BP to divest barrels to another company that as of yet has not been identified, there would be no expectation of a substantial change in the net back value; that is because under the tax regime and the royalty agreement, the goal is to reflect each company's reasonable actual transportation costs. "And we believe that those agreements have been relatively successful in doing that," Mr. Griffin stated. He concluded by indicating his department would try to put together the requested information, which will help to illustrate this. Number 039 REPRESENTATIVE CROFT voiced his expectation that there were two different regimes: one going to a set location in California and the other shipping worldwide. Afterwards, those two elements would continue to work, so that ARCO's barrels, although now owned by BP, would go to that former ARCO refinery, using the same ships and at the same distance and price. Similarly, BP's barrels shipped all over the world would be under that agreement. It seems different to now characterize all of the barrels as BP's, Representative Croft concluded, saying he was under the impression it would have a significant fiscal impact. "And that's the question we're trying to get to," he added. MR. GRIFFIN concluded that over time, both settlement agreements can be expected to reflect the companies' actual marine transportation costs, as the State believes has happened over time in the past. If BP is correct that by merging these operations they will experience synergies in marine transportation operations, the average marine transportation cost for barrels carried by BP after the merger should go down. Number 064 MR. MEYERS responded that it is not the methodologies but the costs, which one would hope would come down as a result of the merger, divestitures notwithstanding because what gets divested is an unknown piece of the puzzle. Even if the methodologies were flip-flopped, the answer would be essentially the same, as the difference is the cost. He explained: We run, as been said, to the closest location in an integrated concept. By definition, you would expect our costs to be the lowest. That was going to change over time because, as someone has said earlier, we were bringing three new tankers into the fleet, three state- of-the-art tankers that were also (indisc.) to be more expensive than the tankers we have now, in terms of capital costs; so, over time, that would have caused a changed of methodology. We were, before the merger was announced, beginning discussions with the State about that fact, that ... the costs were going to have to be corrected because our tanker fleet was changing nature. So, again, it's the cost; it's not the methodology. And as long as the costs stay the same, or reduced, one would hope that it would be reflected in the wellhead value. MR. GRIFFIN pointed out that the average cost would be expected to go down. However, as Mr. Meyers had pointed out, the very expensive new tankers coming on line will be reflected in the actual marine transportation deductions. AN UNIDENTIFIED SPEAKER noted that those costs would be there whether or not the merger occurred. Number 079 REPRESENTATIVE GREEN noted that with the ARCO method, it is determined by the price of the oil, which varies. Somewhere, however, there is a "cross," at $16 or $17, for example, where the methods are about the same. He asked if that number is available. He further asked: When you go to supertankers, the ARCO method will go up, but won't we be ultimately shipping everything in these new millennium-class tankers? MR. MEYERS pointed out that the so-called millennium tankers are actually smaller in size than the average fleet because they are designed for service in Puget Sound. As to the crossover point, he said ARCO's formula is simplistic, meant to represent the cost at average oil prices. As to where the crossover with BP is, he could not say, as he doesn't know the accurate cost of BP's fleet. Number 099 ATTORNEY GENERAL BOTELHO suggested this is an area that the State is in a better position to answer because of access to the data on both sides. Number 113 ATTORNEY GENERAL BOTELHO noted the request, indicating his office would give it its best shot. REPRESENTATIVE CROFT mentioned the concept of negotiating an agreement that contains no provision guaranteeing ARCO-barrel or BP-barrel treatment. He suggested the question must have been asked and answered in the negotiations; if not, that was inappropriate, because it either has very little or a significant fiscal impact. "Before we let that not be a part of the contract, we should have known that," he concluded. ATTORNEY GENERAL BOTELHO replied: Our view and our approach in terms of the royalty reopeners was that there is an ongoing process that deals with valuing marine transportation, and that that would happen whether or not the merger took place, that it in itself did not raise an antitrust issue. Number 133 REPRESENTATIVE BERKOWITZ suggested perhaps there could be a fiscal note with a series of different possibilities attached. He said he would just like some information. People are coming to the legislature asking for its sanction or approval, and yet legislators aren't being given the same information that he believes the parties to the agreement had. He concluded, "If our approval is important to this Charter, then I think we're entitled to that kind of information, regardless of what alternatives ... you throw in the hopper. Just give me a matrix, but give me some data." AN UNIDENTIFIED SPEAKER indicated they would do their best. CHAIRMAN HALFORD returned attention to the list of questions, in particular, the Federal Trade Commission (FTC) process. He suggested the committee might be able to learn from the companies' perceptions. Number 140 MR. CAMPBELL in turn suggested the Administration would provide a commentary on the FTC process questions, then added: From our own perspective, and I'm not in touch on a day- to-day basis with ... our folks that are dealing with the FTC in Washington, but our time line with the FTC remains to conclude with them ... before the end of the year. I'm not conscious of any information that I've received from the FTC concerning the Charter. Number 148 ATTORNEY GENERAL BOTELHO addressed both the time line and the Charter itself, first discussing the attempted trigger of the 20- day notice requirement. That notice requirement contains a provision that once a party to a proceeding notifies the FTC that it has substantially complied with document requests, the FTC has 20 days within which to decide whether to approve or block the merger. On October 29, as he recalls, BP Amoco and ARCO provided the remaining documents and triggered the 20-day rule, which led to the Governor's notifying the FTC that unless that trigger date were rescinded, the State's position was that the FTC should block the merger; it was a communication directly from the Governor to FTC Chairman Pitofsky. ATTORNEY GENERAL BOTELHO explained that as a result of that notice, BP and ARCO in essence suspended that trigger and stipulated separately with the FTC and the State that they would not trigger the 20-day period unless one of two events occurred: the State and BP broke off negotiations and had concluded there would be no agreement on which to go forward or, in the alternative, the final agreement had been reached. In either event, BP would be free to trigger the 20-day clock. At this point, Attorney General Botelho noted, there is no statutory clock running regarding the FTC. Number 186 CHAIRMAN HALFORD noted that the last question in the FTC series was how the FTC generally requires divestiture to occur with regard to the timing of the approval of the merger. ATTORNEY GENERAL BOTELHO responded that it is typical for the FTC to require divestiture up-front. Although certainly the tendency, it is not a requirement of the FTC, however, and its practice has varied over the last several years. The primary purpose for that is to determine whether there are prospective buyers out there, because if there aren't, then divestiture perhaps is not an appropriate remedy. He indicated the State had examined that as well, coming to the conclusion that there are prospective buyers who have both the financial capacity and the stated commitment to provide the strong operatorship which the State is looking for, or participation, on the North Slope. For that reason, he indicated, the State was satisfied that its approach was appropriate. Number 200 CHAIRMAN HALFORD voiced his assumption that Attorney General Botelho is in contact with the California's Office of the Attorney General, at least regarding public information about timing on any recommendation. He asked if Attorney General Botelho has any information or ideas that are in the public domain. ATTORNEY GENERAL BOTELHO replied that although he can say Washington, Oregon and California have an active task force on this matter, he probably cannot say more about what action any of those states may undertake. He indicated those states have been in standing communication with the FTC, as has Alaska. CHAIRMAN HALFORD requested verification that Attorney General Botelho doesn't know anything more about timing from those states, particularly California. ATTORNEY GENERAL BOTELHO answered that he does not. Number 219 MR. CAMPBELL commented that Commissioner Shively had done a pretty good job of going through this section. He expressed willingness to address questions. CHAIRMAN HALFORD responded that he would ask for confirmation, noting that Commissioner Shively had mentioned at least four companies of ARCO's size or larger. MR. CAMPBELL asked whether Chairman Halford wished his company to run through this and comment. CHAIRMAN HALFORD suggested they hit those areas about which there were questions. MR. KONRAD referred to question 1 and stated: I think Commissioner Shively said, more or less, yes, and Richard [Campbell] said one-third, two-thirds in terms of (indisc.) barrels beforehand and afterhand. In terms of control, again, no difference whatsoever, but there's been some mention, I know, in talking to the community, about 51 percent or 50 percent control. I think Richard touched earlier on the fact that actually you need 80 or 90 percent votes ... to make any major decisions in any of these assets, and that dynamic does not change as a result of the transactions. So the answer to [question] 1 is yes. Based on our conversations with buyers, yes, there's a lot of interest, again confirming what (indisc.) said. Number 240 CHAIRMAN HALFORD suggested there was no need to go through every one of those on divestiture. He clarified that he wanted confirmation of Commissioner Shively's statement that there are at least four companies ARCO's size or larger that have shown an interest at this point. MR. KONRAD and MR. CAMPBELL affirmed that. CHAIRMAN HALFORD asked whether there were further questions regarding divestiture. Number 248 REPRESENTATIVE BERKOWITZ inquired whether, to anyone's knowledge, there are any "FTC consequences" if there is no interest in acquisition of the Trans-Alaska Pipeline System (TAPS). MR. KONRAD replied, "We have said we would sell the TAPS with the production." REPRESENTATIVE BERKOWITZ asked what would happen if the producer didn't choose to buy the TAPS. MR. KONRAD responded: Well, they would. ... That's the way we're marketing the assets. We're saying if you buy property A or B or whatever, that ... here's some TAPS that goes along with it. No one has said 'no' to date, so it's, I guess, a bit of a hypothetical. Of course, ... we're not through the process, either. Number 257 [REPRESENTATIVE ROKEBERG asked a question regarding marketing, TAPS and a return on equity, but it was mostly indiscernible.] MR. KONRAD replied: We're not telling them anything. We're giving them the "TSM" methodology, ... how tariffs are calculated, and what the approximate throughputs off the North Slope are. They know what oil they're buying, and they're doing their own production forecasts, so they'll be doing their .... REPRESENTATIVE ROKEBERG interjected, asking if Mr. Konrad knows the ball-park range. MR. KONRAD answered: It's irrelevant. They're going to be buying a cash flow stream, and they're going to pay for it at the -- what we say the return can or shouldn't be, it doesn't factor into it at all. They'll be buying a cash flow stream; that's all they care about. Number 268 SENATOR WILKEN spoke up via teleconference from Fairbanks. Referring to "your page 3," number 11, he indicated his understanding that a non-consent provision regards how an operator or owner would view a field. As this doesn't address a premium or percentage, he suggested there is no reason to reference a non- consent provision. Referring to Section I(D) of the Charter, he asked what the "non-consent" discussion gets Alaska regarding a commitment to explore the fields. MR. KONRAD explained that it says in the event BP elects not to participate in an exploration well, other parties are free to go ahead. Certainly all of BP's exploration agreements have non- consent provisions in them; they vary from area to area, but often result in a relinquishment of acreage or a penalty provision for production out of that tract, often in "several-hundreds-of- percent" penalties that are pretty steep. Mr. Konrad added, "We are not party to ARCO's exploration agreements." SENATOR WILKEN said he understood, then suggested the penalty or premium to be paid is an indication of the commitment to develop that particular acreage. However, the agreement only addresses a "non-consent provision"; it doesn't restrict or nail down the operators, indicating their degree of willingness to develop a particular tract. MR. KONRAD agreed, then said it speaks to exploration. Development is clearly within the purview of the DNR, which has a fair amount of statutory authority to create and enforce development. Number 297 MR. MEYERS suggested the essence of the question he is hearing is: If someone buys the acreage, even with these non-consent penalties, what is the motivation to develop it? The answer he would have, if he is hearing it correctly, is: "If you've just spent hard cash for acreage, you should be highly motivated to explore and, if you find something, to develop." He added: Again, from ARCO's perspective, we always very much are interested, when we're involved in properties, in non- consent penalties, because even if you own 60 or 70 percent of the acreage and you have an exploration prospect, and your partner may not be interested for whatever reason, that still means if you don't have those penalties, either you're going to end up carrying them - which dilutes your economics - or you won't do the well. By having non-consent, if you do the well and you have a discovery, you earn some share of their interest. It's, if you will, ... the enticement for you to go ahead without them, and ... they tend to work very well. They tend to get people to participate, both in terms of doing wells and it encourages people to join their partners (indisc.) to do wells. And the higher the premium, the more encouragement to participate ... before you drill. MR. MEYERS noted that there is a dynamic balance there, a knife that cuts both ways. "So, generally you look for that balance between what's a reasonable return if you're going to carry somebody," he noted. Number 312 SENATOR WILKEN referred to Section I(D) of the Charter. He again asked what the discussion of "non-consent" provisions gets the State, and why that wouldn't just be left out if a percentage weren't established at the time. MR. MEYER expressed his belief that part of the problem in establishing a percentage is many of these acreages have preexisting agreements with partners, which he believes must be honored. It would be difficult to specify a carte blanche number across all the various acreage between ARCO and BP. The many existing contracts, all with these provisions, are subtly different from area to area. Number 330 REPRESENTATIVE GREEN noted that without a divestiture, commonly one might relinquish some ownership of a tract to another operator in return for a commitment to drill some wells. He asked whether ARCO foresees some of that in this divestiture, and he indicated the answer might give the legislature a little better feel about anticipated exploration, at least. MR. KONRAD replied that it will depend, area by area, but it certainly would be one of the mechanisms they would try to use. It is dependent on the market and the buyers' interests. Number 345 CHAIRMAN HALFORD asked how the timing of the divestiture works regarding state laws. Noting that Commissioner Shively had touched upon that, he asked: If the merger is approved January 1, is that the trigger date when the two companies become one? Does it happen when the FTC approves it? Does the agreement actually extend the time to market excess acreage? Will there be legislation to extend that time, or is a grace period provided by existing statute? How does it actually play out in the time frame of actions? MR. KONRAD answered, "Well, if the merger closes January 1, that's when it closes, and that's when we would have acreage." He said the statute reads that 90 days from notification by DNR those divestments would take place. It would take DNR some period of time after the merger closed to assess the acreage and what is going on, he noted, indicating the company would work with the DNR in terms of a plan for that. Number 367 CHAIRMAN HALFORD suggested the question to ask DNR, then, is whether they are actually going to make that notification when the merger occurs, which would start that time frame. It would also substantially "pressurize" the process for the divestiture, one way or the other, or for negotiating, he noted. MR. KONRAD pointed out that some of the language in the Charter needs to be directly linked to the producing properties. By virtue of the Charter, 100,000 of the acres in NPR-A must go to either Buyer A or Buyer B, for example. AN UNIDENTIFIED SPEAKER noted that that isn't state acreage and therefore has nothing to do with the State. Number 380 SENATOR PEARCE requested confirmation that the divestiture of TAPS which goes with the divestiture of Kuparuk and Alpine ownership is somehow equal to, and tied to, the ability to do the throughput. She noted that for Alpine, the State doesn't yet know what the outflow, or the potential outflow, will be, although perhaps Kevin Meyers of ARCO may know. She then asked: How are you deciding what percentage of TAPS you're going to have go along with buying a percentage in Alpine? And is there, in this agreement, any divestiture of TAPS that goes along with the divestiture of not the production but the land on the North Slope which will be divested "for future hopeful production"? MR. KONRAD answered the first question: For Alpine, we will be assuming 80,000 barrels a day, which is the current operator's best estimate. There is a provision in the agreement that should their production increase, there are additional amounts of TAPS available to that party, or any party, for that matter, including the exploration operators or who picks up the exploration acreage. They probably wouldn't want to buy a share right now, because they're not sure whether ... they will be successful on the exploration acreage or not. If they are successful, then they have the opportunity to buy shares of TAPS at the valuation, which is effectively set by the State. SENATOR PEARCE mentioned a scenario where someone wanted to buy a portion of TAPS but wasn't asking for acreage on the North Slope. She asked if there is a portion for sale. MR. KONRAD replied, "In the Charter, yes." He specified it would be up to ARCO's share of TAPS. MR. CAMPBELL said it is up to a total of 22 percent. Number 419 SENATOR PEARCE asked whether that 22 percent is after BP's divesting of part of Kuparuk and part of Alpine. MR. KONRAD stated, "A total of 22 percent, yes." SENATOR PEARCE stated her understanding that it is not after, then, but a total. AN UNIDENTIFIED SPEAKER affirmed that. SENATOR PEARCE suggested BP would still hold at least 51 percent of TAPS. MR. KONRAD agreed, adding, "It's the same as our current." Number 425 CHAIRMAN HALFORD, still addressing divestiture, asked what BP's interest is and how it works regarding the sale of 18 percent of Alpine to Anadarko versus the sale of 40 percent of Alpine to another player. Noting that they would still have to get rid of the total barrels of production, he asked what the considerations are. MR. CAMPBELL replied that at the end of the day [BP] wants to be working in these fields on an aligned basis, so that the developments go ahead with the easiest possible format. The alignment interest is what the company is leaning toward. He deferred to Mr. Konrad. MR. KONRAD indicated BP would, in any event, divest 175,000 barrels a day. Although they don't know what the probabilities are, it depends on what buyers are interested, and what the assets are. For example, whether Anadarko actually is going to make an offer on Alpine, and whether that offer is going to be higher or lower, Mr. Konrad believes will be driven mostly by "the value we see being received for the assets, as opposed to ... any other principal driver." Number 453 CHAIRMAN HALFORD responded that Anadarko obviously can reach the 40 percent more easily than anyone else; however, they may want more than the 40 percent. They could also reach a majority percentage easier than anyone else, he noted. MR. KONRAD replied, "Well, certainly, if they offer us a higher amount for 40 percent than another buyer offers us for 40 percent, then we will choose that offer, ... most likely." CHAIRMAN HALFORD commented that in either case, the operator is not going to be BP. MR. KONRAD concurred. Number 453 CHAIRMAN HALFORD asked if there were further questions on the divestiture section. He then brought attention to the facilities access section. Referring to the memorandum of November 17, 1999, he asked if Attorney General Botelho had comments and recalled that Commissioner Shively had said something about it. ATTORNEY GENERAL BOTELHO specified that "in our view, it does not compromise the commissioner's ability or standing in the dispute." CHAIRMAN HALFORD next turned members' attention to transportation. Number 503 MS. DRINKWATER noted that one question revolved around why different pipeline companies have different tariffs, since all use the "TSM" mechanism. She affirmed that the TSM mechanism applies to all companies that are carriers in the TAPS system. Under that mechanism, she explained, a company has several different inputs: some are actual recorded numbers, whereas some are forecasts. A company goes through the process of figuring the tariff for the following year, which usually happens around October; that is when each company has to file an initial tariff with the State. As each company makes forecasts, those forecasts may differ. There is also a truing-up mechanism, which, after the event, adjusts forecasts with the actual numbers. Although over time a company's set of tariffs will differ, any high tariff one year will be compensated by a low tariff the next year. Looking back at tariffs over the last 15 years, there is never one company that is consistently high or consistently low; rather, there is a real variation. Number 544 MR. MEYERS pointed out that two factors with a high degree of uncertainty in forecasting tariffs are the estimated gross TAPS throughput and the estimated TAPS cost. CHAIRMAN HALFORD recalled that in going through the information, there were variations back and forth. However, taking a long-term average, ARCO's numbers pretty consistently were lower than BP's, although not to the degree found in the one month about which the committee asked a question initially. He said it sounded as if Mr. Meyers was saying that wasn't the case. MS. DRINKWATER explained that when she had referred to the last 15 years, she was looking across all of the companies that have interests in TAPS. Just looking at BP and ARCO, however, there has been a difference of only something like three cents to six cents for tariffs over the last four to five years. CHAIRMAN HALFORD said in the information the committee had gone through, it did seem that ARCO's costs were lower, he said, although the explanation was that ARCO was going to the closest place, and to one place, and not selling to a lot of other marketers, among other reasons. MS. DRINKWATER suggested there might be confusion among several different things here. She specified that she had just been referring to the tax tariff portion. TAPE 99-10, SIDE A Number 001 MS. DRINKWATER indicated the commissioner addressed discussions of a reduction in TAPS tariffs and said she was not a party to those discussions and therefore couldn't comment. She next moved to the issue of tanker transportation. MS. DRINKWATER told members the answer to whether there is a tanker capacity that could be leased from third parties is yes but the broader question is: does someone coming into Alaska, potentially as a new producer, have options to transport production to market? Ms. Drinkwater indicated such an entity could do a number of different things, including selling the production to in-state refineries. Number 011 CHAIRMAN HALFORD asked whether in-state refinery production is 50,000 or 60,000 barrels. MS. DRINKWATER replied that it is always difficult when looking at refining capacity. She uses a number of about 60 [thousand] for one refinery, for a total in-state capacity of just over 100,000 a day "if you take Fairbanks and also (indisc.)." However, she has been told theoretically that one refinery can go higher and take 75 [thousand] overall. CHAIRMAN HALFORD said that is still significantly less than the production that somebody is going to be buying, so it doesn't work as an answer. MS. DRINKWATER responded that it works as a partial answer, which is the value of having options. She explained companies other than BP can also procure a foreign-built tanker that qualifies as U.S.- flagged and export oil to the Far East. CHAIRMAN HALFORD asked if this actually works when all the changes in the Oil Pollution Act of 1990 (OPA 90) are applied. MS. DRINKWATER replied, "Yes, it does work, although I'm now wondering in what sense you asked the question." CHAIRMAN HALFORD said he was just trying to understand. He noted that the Jones Act doesn't apply but OPA 90 does. MS. DRINKWATER concurred. MR. MEYER commented that plenty of OPA 90-qualified tankers are available. MS. DRINKWATER agreed there are hundreds of double-hulled and foreign-built tankers available. She described another option allowed for in the Charter is the purchase of a separate tanker from BP Amoco. The final option, which any company has, is to procure Jones Act tankers from the shipping market for export to the West Coast. Ms. Drinkwater told members she was very interested in the remark made early in the discussion, "...where I think it was one of the commissioners had had discussions with potential purchasers, and they indicated that they would more likely find their own transportation." She suggested that perhaps bears out the fact that there are a lot of different options. Number 037 REPRESENTATIVE KERTTULA referred to the hundreds of OPA 90 tankers, and asked how readily available those are. MS. DRINKWATER answered they are readily available; the worldwide tanker market is going through a tremendous depression right now. Any time delay would be the result of meeting the necessary requirements to qualify to sail in Alaskan waters, including having a fully recognized (indisc.) plan and the necessary crew, plus other requirements. REPRESENTATIVE KERTTULA commented that it is a good reason to keep the Department of Environmental Conservation (DEC). Number 044 With no further questions about transportation, CHAIRMAN HALFORD asked if committee members had futher questions on natural gas. Number 050 VICE-CHAIR GREEN recalled asking the commissioner, on question 3, whether BP plans to use the amount that was to be made available to provide its own GTL. He suggested they perhaps hadn't heard a response. MR. CAMPBELL said if they are talking about the gas-to-liquids pilot plant, the amount of gas they can use is such a small amount that he believes it is irrelevant in the overall calculation. He added, "Let's say, for the sake of argument, that it's outside of the 1.2." VICE-CHAIR GREEN asked if that means, then, that the answer to the question would be "no." MR. CAMPBELL replied, "I don't know that we've actually come to a conclusion on it, but yes, you could take that 'no' from what I've said." He reaffirmed that his answer was for the pilot plant. VICE-CHAIR GREEN suggested the question cannot be answered either "yes" or "no," then. MR. CAMPBELL specified, "Unless you define it as the pilot plant." Number 064 MR. KONRAD clarified: We haven't decided what mechanism we're going to use to commercialize gas. It could be GTL. It could be LNG. It could be a pipeline to the Lower 48. Any commercial- scale project, either any of those three or a combination of the three, that gas could be used for any of those projects. VICE-CHAIR GREEN thought that GTL may be too specific. He pointed out the earlier part said BP would make up the 1.2 BCF per day available and the question in many people's minds is whether BP will make the 1.2 BCF per day available but then use it in its own processes. MR. KONRAD replied if BP comes up with the project that yields the highest value it will select its project. The highest value will depend on who has the best technology. Number 078 CHAIRMAN HALFORD brought up a question on gas which he believes came from the mayors. He asked why the mayors are concerned that BP not be allowed to retain the right to recover liquids downstream in Valdez, and whether it is just to make any kind of gas-to- liquids unworkable as potentially competitive to an LNG project or something else. MR. KONRAD replied, No, not at all. It is actually focused a little more on the Lower 48 pipeline option, as opposed to the LNG option but, in those cases, if you are transporting natural gas liquids, there is a petrochemical industry in Canada and in the U.S., that could potentially use that feedstock. We have operations there, and we would want to retain the right to use those liquids for the petrochemical business. In any event, the take point specified in the Prudhoe Bay Unit Operating Agreement is that the gas needs to come off the PGF (ph) outlet, and that's the base proposal for any of the three - GTL, LNG or pipelines, that that gas would not contain a significant amount of liquids in any event. Number 095 MR. MEYERS referred to Vice-Chair Green's earlier question about the ability to take gas and explained: The unit operating agreement gives you the ability to take the lean residual gas. No other approval is required; that is an owner's right to do. If you take anything other than that, you now have to go back into the working interest owners of Prudhoe Bay, and so it's impossible to make those commitments without getting those other owners' approval. So, the take point is, without other owners' approval, it is going to be the lean residual gas that Ken referred to - you can't offer any other take point and make that commitment without other peoples' agreement. MR. KONRAD said that is why that is in the Charter, and why it also says "unless otherwise agreed." It is what all the owners have agreed to for the past 20 years. CHAIRMAN HALFORD said he asked because he was not sure what it was trying to get at. MR. CAMPBELL said he has only just seen the document and that one interpretation is that they would want the value of the liquids to accrue to that project. Number 124 CHAIRMAN HALFORD said they would take up environmental questions and asked if anything in the Charter affects any existing statutes. MR. KONRAD asked to clarify one point on the gas issue in regard to what Commissioner Shively said. He noted that one-eighth of the 1.2 BCF per day (BP's working interest gas) is the State's gas. He said the State owns a significant amount of gas over and above that amount. CHAIRMAN HALFORD said he thought Commissioner Shively said the opposite. MR. KONRAD replied, "Well, it's both. The State owns one-eighth of the eight BCF per day I suppose, but, included in the 1.2, it's working interest gas, thus one-eighth of the 1.2 is state gas." CHAIRMAN HALFORD contended that Commissioner Shively said the oil was a gross figure and this was a net figure. VICE-CHAIR GREEN agreed. MR. KONRAD said he was just trying to clarify that question from BP's perspective. CHAIRMAN HALFORD noted there cannot be two perspectives in this agreement. MR. KONRAD indicated BP will sit with the Commissioner after the meeting to clarify this point, but he believes Commissioner Shively was referring to the gas in excess of the 1.2 BCF. ATTORNEY GENERAL BOTELHO said his interpretation was as the Commissioner presented it but he believes the Administration will need to confer with BP on that point. CHAIRMAN HALFORD asked if anything in the Charter affects any existing statute with regard to environmental obligations. MR. CAMPBELL answered Commissioner Shively addressed that question in part and indicated they might wish to include in the final Charter clarifying language. ATTORNEY GENERAL BOTELHO responded that all of the terms in the environmental section are in addition to current law; there is no compulsion for those items - for instance, the $200,000 for research development on spill participation and the $500,000 annually directed as the Commissioner would require for the specific monitoring. There is reference in the agreement to the tankers on station of a year ahead of the schedule. He emphasized that BP would still be expected to satisfy all existing State and federal environmental laws. Nothing in this would diminish those requirements. VICE-CHAIR GREEN asked if the annual $500,000 per year for a 10 year period was in conflict because they are scheduled to conclude three years earlier. ATTORNEY GENERAL BOTELHO explained the reason for the discrepancy is that the portion of the provisions of the agreement only pertain to the "competitive issues" of divestiture of assets, provision of data, and some gas issues - all of which will be completed well before 2008, if they were to occur. Issues like local hire are not enforceable. REPRESENTATIVE GREEN noted the date on page 1. ATTORNEY GENERAL BOTELHO said that data was a coincide date for OPA issues and TAPS, itself. Number 197 MR. BILL NOBLE, an attorney representing BP, added that they looked at what would be a reasonable period of time for all of the Section 1 commitments. Most of them happen in the first year, but in the TAPS section, additional amounts would be allowed to be sold over a period of time. This was meant to give a reasonable period of time for new explorers to find how much new oil they had and how much they would want. VICE-CHAIR GREEN asked if the agreement disbands, what would be the possible situation with a maturing field that is declining more than it does now. MR. NOBLE said there was a very extensive set of laws and regulators to deal with things that happen between now and 2008. All of those things will apply in 2010 since the event of the merger wouldn't be governing anything. He said it would be hard to make a set of public commitments that are more public than those in Section 2 regarding cleaning up the environment which have been published and circulated in every newspaper, on the radio, etc. MR. MEYERS added that the Charter doesn't have to address those type of things as there is a whole series of contract law and regulatory agencies that already exist to deal with these issues. These are not really merger issues. Number 263 SENATOR PEARCE asked if there was anything in the agreement that would stop BP and Amoco from turning around and purchasing the companies they have just sold the fields to. MR. MEYERS answered that U.S. and State anti-trust law would be in effect before and after the merger. SENATOR PEARCE asked Attorney General Botelho how the terms of the Charter would continue should there be further mergers on the North Slope. MR. GRIFFIN said he would answer for Mr. Botelho who had to leave. There is nothing in the Charter that would affect the future enforcement of the State's anti-trust laws. Secondly, the Charter specifically provides that BP Amoco may not reaquire in any fashion any of the assets they are required to divest as a consequence of this Charter. SENATOR PEARCE clarified that pertained to eight years, just the term of the contract. She asked what happens if someone acquired BP Amoco. MR. GRIFFIN responded that the State and federal anti-trust laws would still apply if the need arose. CHAIRMAN HALFORD noted there was a final request for a fiscal note. MR. CAMPBELL responded that more production would mean more revenues for the State. Under Alaska Clean Seas, he explained, is where companies agree to the allocation to various fields. MR. MEYERS commented that were firm commitments for the three tankers. SENATOR WILKEN asked if an analysis had been done under Section 2 (d) of a charitable giving before and after the merger, specifically regarding the University. He asked if charitable giving premerger will be the same as the aftermerger charitable giving with the addition of the money to the University. Number 326 MR. CAMPBELL answered the money that will flow to the University is certainly in excess to what contributions have been in the past - 30% or roughly $2 million. The charitable contributions would be at approximately the same levels as today with the addition of the estimated monies going to the University, depending on the price of oil. SENATOR WILKEN asked about the analysis by Preston Gates and asked when that report would be available. CHAIRMAN HALFORD said that was based on confidential information, but they were putting together a version that didn't include the confidential information based on this meeting. SENATOR WILKEN asked if they would hear from the Governor's consultants regarding the existing charter proposal. MR. JACK GRIFFIN answered they hadn't asked their experts to analyze the charter and hadn't intended to do so. Outside legal counsel has examined it. SENATOR WILKEN said he was interested in the Governor's fifteen consultants' analysis of the final package. Number 411 REPRESENTATIVE WHITAKER said he had contacted all 12 of the experts hired by the Administration and the overwhelming response was that they would not speak with the Legislature under instructions of the Attorney General. He requested the information from the Administration and had just received four boxes of biographies and published reports - some by the experts. He wanted to see each of the 12 reports that were provided to the Administration. CHAIRMAN HALFORD said they would make that request and announced a recess at 6:20 p.m. CHAIRMAN HALFORD called the meeting back to order at 6:30 p.m. MR. PETER LEATHARD, President, VECO Corp., asked them to move the process forward and conclude this deal. This is a good deal for BP and Alaska. During this uncertainty there is a period of minimum activity going on the North Slope. VECO Corporation has worked with the oil industry in Alaska for 32 years and need a vibrant oil industry to survive. They would not support any deal that would mess up the Alaska oil industry. The first deal from BP was good for the State; the present deal is also good even though it contains more uncertainty. We need BP to continue to invest its billions of dollars in Alaska and VECO trusts them as a partner. Low costs are critical to keep Alaska's oil competitive on the world market. MR. LEATHARD said that gas values are going up. He concluded by urging them to allow the deal to be concluded. REPRESENTATIVE CROFT asked if the deal should be approved without knowing the fiscal impact to the State. MR. LEATHARD answered no matter whoever we bring in, the oil still needs to be transported and would have to get the best price possible. He didn't think the fiscal impact would make any difference. REPRESENTATIVE SANDERS asked if the work that is being held up now on the North Slope was justified. MR. LEATHARD answered that they are continuing with work that has been committed, but waiting on everything else. Number 574 MR. MIKE MACY, Backbone, said Backbone has three general concerns. It wants protection from monopolies; it wants the value of our resources maximized as required by the Constitution; and it wants Alaska's political independence guaranteed. In addition, Backbone has six broad areas of concern: 1) access to North Slope facilities and infrastructure if the Charter fails; 2) access to TAPS for all operators on the North Slope (the Charter contains disincentives for additional development); 3) competition in leasing and production (the Charter fails to ensure competition); 4) commercialization of Alaska's vast quantities of natural gas; 5) environmental protection. TAPE 10, SIDE B Number 000 MR. MACY continued: and 6) substantial endowment to the University (the Charter fails to ensure that.) If Alaska's lifeblood is left in the hands of one company responsible to only its shareholders and not the public, our future is in grave peril, he said. This is the last time in the next 25 years that Alaska has leverage to protect our Permanent Fund and establish stable financial footing for the future. The agreement does not go far enough. The details do not support the strong goals the Governor outlined in August or the strong stand the Administration took in its letter to the FTC last week. The Charter does not resolve BP's monopoly on production facilities or TAPS. It contains no provision for tariff reduction which is the main barrier. Current language will also make a natural gas project impossible or exceedingly unlikely. This contract does not deal with BP's initially stated commitment to invest in Alaska ($5 billion along with an increase in production of 150,000 barrels per day.) MR. MACY said he thought the divestiture language prohibits future litigation on points of agreement or subsequent antitrust actions growing out of it. The lack of penalties and wiggle words invites BP to weasel. Everyone knows that everything in Section 2 is non- binding. They would like to see penalties so severe that BP would never contemplate weasling on the agreements. For instance, rights to oil and gas production in Anchorage should revert to the State if they are not divested according to the time table. The penalty should be permanent and not just eight years. They would like to see a competitive bidding process for Alaska's natural gas and enforceable guarantees that BP Amoco will pay Alaskan taxes on Alaskan production and shipping revenues without charging off losses in other parts of the world. They would like firm contractual language and targets for exploration and production that finds surrender of leases for non-compliance. He asked that the merger be delayed so he could conclude a deal with BP using technology that he has developed. He thought a good question would be how does the State keep BP's ownership at 49% so we have a majority control of our oil and gas. Why hasn't the State utilized all the consultants promised. Only three ever issued reports. The State's star antitrust consultant was not among them. He concluded requesting the Legislature to recommend a special session and ask the FTC for protection. MR. STEVE CONN, Executive Director, Alaska Public Interest Research Group, said they are against the merger wanting at least as much competition in the oil fields as we have now. They want ARCO to be sold to anyone but BP or EXXON and do not want to increase BP's monopoly control over our economic and political life. He suggested having a State generated report explaining the Charter as well as the Legislative review. He thought it mandatory that the Committee look out for Alaskans. The more he learns about this, the more he feels the State has abdicated its role as our representative to a private corporation who is educating and guiding us in a well designed media campaign. He encouraged the Committee to encourage the Legislature to file and antitrust action at this level or let the FTC block a merger that will result in more of a monopoly for us and other people in the U.S. REPRESENTATIVE KERTTULA said she felt the process was moving along too fast as they weren't involved in the confidential negotiations. MR. TIM WAGNER, Innovative Developers Inc., said he understands that BP has implemented a very efficient oil recovery process and that is the reason for the merger. He thought the State would benefit from the additional application of this process. There may be some contest as to who actually owns the technology, however. His work focuses on the utilization of the natural gas. The port authority has proposed a pipeline. He could sell the license to use certain technology to BP or BP/ARCO to transport natural gas from Prudhoe Bay to Valdez for about $50 million. Another $500 million would be needed for a liquification plant at Valdez for export. He originally developed his concept to help deliver natural gas to communities in Alaska. He has an additional process using a special vehicle that can export natural gas strictly from Prudhoe Bay to anywhere on the globe. He didn't need a pipeline. Number 315 MR. JOHN MCDONALD, Carlisle Enterprises, Anchorage, said he is one of five owners of Carlisle Enterprises, a transportation company. Until two months ago they employed about 360 people and they are now down to about 330. On behalf of his company and its employees he supported the Governor and the merger. He said it would help get his people back to work. From his personal experience he knows that BP is fair minded and an environmentally safe operator. MR. JACK LASCH, General Manager, Alaska Petroleum Contractors (APC),one of the Natchiq group of companies which is a wholly owned subsidiary of Arctic Slope Regional Corporation. They employ over 2,500 people world wide, 2,000 of which are in Alaska. He expressed support for the proposed acquisition of ARCO by BP Amoco. They have had a good working relationship with both companies. Consolidation of management would provide a cost saving approach to oil production in the Prudhoe Bay reservoir as there is considerable duplication between both companies. BP has shown a strong commitment to Alaska hire in the past and he thought this commitment would continue. Natchiq has invested considerable time and capital into its Anchorage fabrication facility and its Nakiski module assembly site. These facilities, in addition to others, have created a new industry in Alaska. As long as we make production of oil and gas in Alaska economically attractive, BP Amoco, like any other for-profit corporation, will aggressively pursue development of new oil fields in Alaska and commercialization of North Slope gas. BP has said that not only will they continue their community support, but will increase the amount they contribute to charitable organizations. In his over 20 years of experience with BP, they have demonstrated time and again their commitment to enhancing the lives of those in the community - from their efforts with boys and girls clubs to their support for the arts. Now we have the opportunity to realize expanded benefits from BP's commitment through their expanded support of the University of Alaska. The whole industry is going through major restructuring to maintain profitability while remaining competitive. He concluded by urging them to endorse the acquisition. MR. DAVID THOMAS, Alaska Interstate Construction (AIC), said the merger would get Alaskans back to work. These companies are taking major risks in Alaska and cannot be blamed for the slow down. We will feel the impacts of wasting 1999 three or four years in the future. BP Amoco has financial strength as it is in their best interest to develop Alaska's resources. They are a for-profit company. BP has always been honest with AIC and he didn't doubt they will be honest in the future. MR. THOMAS said he thought the benefits of a single operator was the natural progression of things. BP Amoco has always treated Alaskans fairly. MR. JIM UDELHOVEN, Udelhoven Oil Field Services et al., said he has a keen interest in Alaska's future. This merger would avoid a repeat of what happened in Alaska in the mid-80's. He said don't ask for more so that we end up with less. Only a large and powerful corporation can take on this level of risk as there is a fine line between success in businesses and it doesn't matter if it's a small business or a large business. It is extremely important that government doesn't penalize tomorrow things that are being done from the heart today, such as gift giving to the University and the United Fund. This deal needs to be taken before the FTC and be completed before the year's end. MR. HAROLD HEINZE, former ARCO executive and former Commissioner of DNR, supported the agreement. It appears to be a balanced negotiation, he said. He thought they were doing the right thing by having this review, but said they need to make a decision in a timely fashion. TAPE 99-11, SIDE A Number 001 MR. HEINZE said he was concerned that there is no commitment to hire Alaska workers or Alaska contractors. In looking at the benefits presentation today, there were two major problems. Two thirds of the claim benefits flow out of basically oil related effects that have to do with gas production, not with gas sales. As a former oil reservoir engineer, he has to ask where those numbers come from. Finally, it seems the Port Authority puts the State at risk in terms of its credit and the principle of the Permanent Fund. The Permanent Fund seems to transfer money to local governments in this agreement and he didn't think you could take royalty from the Permanent Fund and give it to local governments especially when they are talking billions of dollars. He wanted to see a real benefit analysis of the gas pipeline done by the Legislature. He said Alaska should pick good companies to come in and replace ARCO. CHAIRMAN HALFORD asked if would like to see the good companies occur before or after the fact. MR. HEINZE said he didn't care whether it was before or after, but he wanted the State to have some say in who they are. They would have to meet financial criteria, for instance. Maybe there should be an interview process so there would be a more conscious effort on behalf of the State. VICE-CHAIR GREEN asked if he were the CEO of PHILLIPS, would he go to his stockholders with this deal. MR. HEINZE answered that he couldn't visualize a better circumstance to make the deal under. He thought BP gave up something very significant by committing to divestiture and no one has really talked about that. The difference between selling an asset and selling an asset under order is a very different price; BP gave up that differential in agreeing to this. If he were Phillips, he would like to buy it under orders to sell. Number 97 MR. RICHARD FINEBERG, oil and gas development consultant, said the Committee's questions have raised two huge questions regarding the merger. The Charter lacks a savings clause and the drafters admit they chose to describe the 175,000 barrels of oil that are to be divested quite a treasure chest. He said the term "working interest ownership" has two legal definitions. He asked what the mergers teams had been doing for seven months. The fifth slide of the Governor's presentation contained a statement on the Governor's conditions of competition saying, "Tariff reduction or divestiture on TAPS was on a slide." "Or divestiture" was not in the Governor's August 23 speech and he thought this misled the public. He thought the divestiture we've got, partial divestiture, is not the right answer and is not going to work. This debate should have happened before and he is outraged. A producer-owned pipeline is an inadequate remedy that is not likely to work. TAPS is an example of it. First of all, it's very complex to do legally. If you could do it, it can't balance, because by definition the State is a shipper of royalty oil. So the solution of giving Chevron or Anadarko a piece of the pipeline isn't going to work. The result is that any prosepective developer is stranded, because he won't buy in without a share of the pipeline. He had three examples of where small producer ownership shares don't work. One is in the 1985 pipeline settlement where three small owners had to be granted a three cent per barrel subsidy to come into the settlement. MR. FINEBERG said he hoped they would report to the Legislature that this process has been totally inadequate to protect the future of the State and should be rejected. Number 241 REPRESENTATIVE KERTTULA asked if he tried to analyze whether or not the 5,000 barrels we lost per day where BP would have to buy the oil. MR. FINEBERG said he saw that a few hours ago and couldn't get to exhibit C, but he thought it was one of the few good things in the Charter. Number 254 MR. TOM MALONEY, VECO employee, said he is 100% for the acquisition and the reason is BP and their decision to go ahead with North Star resulted in a lot of jobs here in Alaska. The mixed module is an example which employed 200 Alaskans and created a whole new industry in Alaska. Local hire, procurement of goods and services, and contracting with people here in the State which BP has done creates a tremendous affect on the economy of Alaska. Second, he can think of no other company who has the same level of commitment to health, safety, and environmental issues. It has been an integral part of every contract we have had with BP for a number of years. Third, BP's community involvement is notable; apprenticeship programs, Native hire, etc. You have to get rid of uncertainty and get Alaska moving again. MR. TERRY MONAGHAN, Anchorage resident, encouraged support for this agreement immediately. He believed the merger is in Alaska's best interest. It provides for a robust economy and care of the environment. Alaska needs this merger to continue being the bright star it is. We all have a strong obligation to get this merger behind us so the oil industry can be in the same position of our neighbors in North America. MR. MAYNARD TAPP, Hawk Construction Contractors, said over 90% of his business comes from the oil companies. He assists them in constructing cost effective projects so they can be competitive participants in the world-wide oil market. In 1998, BP spent over $953 million in capital projects with 80% going to Alaska businesses. It was a good year. With the pending merger in 1999 he has lost half of his people and he knows his company is not alone. Talented people are a resource of Alaska. How can they hire in Alaska if the talent leaves. We need to figure out a way we can produce more oil and encourage companies with a stable economic environment. This is also a good deal for BP because they get a refining base and retail outlets in western U.S. They get a great place to live and do business. Once we establish the oil market, it is unlikely the refiners will want to retool to handle some other grade or quantity of oil. He said that BP had given up a lot of their potential revenue. BP and the oil industry pays for over 70% of our government costs, provide Alaskan jobs in their industries and those incomes go into the Alaskan economy. We can't wait another year or even a day. Number 428 MR. VAL MOLYNEUX said he had been in most management roles in the development of most of the oil fields over the past 27 years. He has worked for Veco for 20 of those years. Prudhoe Bay is the largest oil field in North America, Kuparuk is the second largest. Prudhoe Bay has produced in excess of 10 billion barrels of oil; the future prognosis is 4 - 5 billion barrels. It continues to decline at approximately 10% per year, a huge amount. To remain competitive, cost reductions are necessary. To have one operator in Prudhoe Bay makes good sense. BP and ARCO obviously recognize this need and have made the necessary steps to insure that Prudhoe Bay remains competitive on a global basis. MR. MOLYNEUX respectfully requested that this agreement get signed as quickly as possible. Delay would cause more confusion and loss of work and maybe a repeat of 1986. MR. STEVE STEPHENS, Alaska Interstate Construction, said he is a life-long Alaskan and he thought this merger would benefit not only the State, but the children of the State. They will benefit from all the benefits BP has made within the communities as well as the villages. MR. DOUG SMAKER, Fort Yukon, said he is a construction worker and supported the merger agreement as it would benefit the economy and all the people of Alaska. Unemployment is very high in Ft. Yukon, but since BP has started hiring locally there has been a large increase in employment. TAPE 99-11, SIDE B MR. VINCE DORAN urged everyone to sign the agreement and "get on with it." MR. WADE SCHNABL said he lived here about 25 years and supports the merger agreement. Both companies have been to him and his family over the years and it looks like BP has done a lot to prove their good intentions. MR. TOM LAKOSH said he thought this agreement just contains more of the same promises we got when the pipeline was being constructed. We were promised double hulled tankers back then and we didn't get a single one. The Governor said BP would replace existing tankers one year earlier than required by the Oil Pollution Act of 1990 and he thought this was curious because he would be signing an agreement that has already been breached as OPA requires that the Overseas Alaska be retired in December of this year. BP refuses to pay for recovery of Berth 3 and you can't ship oil without a berth. There is a 2001 deadline for Berth 3 to be closed because their waiver will expire for loading. So BP can't handle the throughput they have projected. He said that ARCO bought the designs for millennium- class tankers, but they are going to give us the lesser cape class tankers and won't commit to a number of replacement tankers. They also don't have vapor recovery. BP must have a firm commitment to build at least nine tankers by 2006 because of current projections. The millennium class of tanker is the best environmental tanker and he doesn't know why we should settle for less. If something is not legally binding on them, they will not follow through on it as in the situation of the double hulls. They would rather pay their lawyers than address the environmental concerns of the public. MR. SCHNABL said that it is abundantly clear that DNR has jurisdiction in this matter, but it has been usurped by the Governor who has hired outside lawyers. He concluded by saying that not having the tankers to get the supply of oil to the west coast is restraint of trade. This clearly should be addressed before this agreement can go past the FTC. Number 203 MR. KEN YOCKEY, Alaskan engineer, said that BP is a good corporate citizen and this is a good deal for Alaska. He would like to be able to support his family here in the future. As the pieces of the pie get larger, there is more money available for exploration and development. If government continues to stand in the way of development, all the money will go elsewhere. MR. BILL MCLAUGHLIN, Peak Oilfield Service Co., said he has lived here for 27 years and has worked in the oil industry his entire life. He hopes to retire here. He said we need to get Alaska back to work. At Peak, alone, they have laid off about 400 skilled employees over the last 12 months. Combining Prudhoe Bay under a single owner will remove one of the biggest obstacles in bring the smaller satellite fields into production. The biggest problem with satellites is coming to agreement on terms to share production facilities. It took five years to negotiate the first facility sharing at Prudhoe. He asked them to act on this agreement expeditiously. Number 284 MR. DAVE SCARBROUGH, Air Logistics of Alaska, supported the charter and the merger in general. They are in their 18th year as the helicopter transportation services vendor to Alyeska Pipeline Services Company and also provide helicopter support to BP and other oil industry firms on the North Slope. All of their current employees are Alaskan residents. They believe the merger is important so the North Slope resources are seen as competitive and predictable in international oil markets. He suggested using a portion of funding for industry, vocational, and technical programs that would help replace the graying employees of the oil industry. MR. JOHN DITTRICH, General Manager, Brooks Range Supply, said they are a core supplier to BP and the Prudhoe Bay oil fields with their store located in Dead Horse. Starting last spring they had to reduce their staffing from 10 to 5 employees because of spending decreases on the Slope. At least one company needs to become active again to get people back to work and money flowing back into the Alaskan economy. The merger agreement is a fair deal for the State and BP. MR. DITTRICH said he didn't think competition caused BP and ARCO to be the corporate citizens they are. Rather, they believe it's the right thing to do. He thought they would continue to honor their commitments even if it's not in the Charter. REPRESENTATIVE CROFT asked when the decline in BP contracting started. MR. DITTRICH answered about April and clarified that he meant there was a decline in activity on the Slope. CHAIRMAN HALFORD said he agreed that BP and ARCO had been good corporate citizens and putting a percentage into an agreement tying it in to social issues in the State cheapens the companies and the recipients which is a mistake. Number 455 MS. RUTH MOULTON said she thought this process has been much too brief. The testimony does not go into the details of the charter although it does go into other good topics like jobs. MR. BRUCE WEILER said he is employeed by BP and has been a resident of Alaska for nine years. He urged the Committee to approve the Charter as it stands. Consolidation on the North Slope should not surprise anyone as production is half of what it was at its peak. Costs have continued to escalate. Pressures on margins have been increasing exponentially. He thought the State's interests were more than adequately protected. TAPE 99-12, SIDE A MR. WALSH supported the merger and the "get on" message. He said if the oil industry gets out of line, the State has plenty of tools to deal with it. CHAIRMAN HALFORD thanked everyone for their testimony and adjourned the meeting at 9:00 p.m.