JOINT SPECIAL COMMITTEE ON MERGERS January 19, 2000 10:45 A.M. MEMBERS PRESENT Senator Rick Halford, Chairman Representative Joe Green, Vice-Chairman Senator Drue Pearce Senator Johnny Ellis Representative Beth Kerttula Representative Brian Porter Representative Jim Whitaker MEMBERS ABSENT All members present OTHER MEMBERS PRESENT Senator Mike Miller Senator Randy Phillips Senator Gary Wilken Senator Loren Leman Senator Robin Taylor Senator Jerry Ward Senator Lyda Green Senator Pete Kelly Senator Kim Elton Representative Lisa Murkowski Representative Harold Smalley Representative Bill Hudson Representative Eldon Mulder Representative Scott Ogan Representative Sharon Cissna Representative Eric Croft COMMITTEE CALENDAR Discussion of BP Amoco ARCO merger by BP Amoco Mr. Richard C. Campbell, President, BP Exploration (Alaska), Inc. Mr. Tim Holt, Senior Vice-President, BP Exploration(Alaska), Inc. and Business Unit Leader for the Central North Sea(Prudhoe Bay) Mr. Bill Noble, Senior attorney, BP Amoco Presentation by the Administration Mr. Jack Griffin, Assistant Attorney General Mr. David Boies, Boies and Schiller(teleconference) Mr. Bob Loeffler, Morrison and Foerster Mr. Bradley Lui, Morrison and Foerster Dr. Rick Warren-Boulton, MiCRA Mr. Barry Pulliam, Econ One Dr. Jeffrey Leitzinger, Econ One Closing comments by Committee Consultants Mr. Fred Boness, Attorney from Preston Gates and Ellis Mr. William MacLeod, Attorney, Collier, Shannon, Rill and Scott Dr. David Scheffman, Economist and Professor, Owen Graduate School of Management, Vanderbuilt University Mr. George Schink, Economist and Independent Consultant PREVIOUS ACTION See the Joint Special Committee on Mergers minutes dated 6/11/99, 7/28/99, 9/24/99, 9/25/99, 11/18/99, 11/19/99, 1/12/00, and 1/18/00. ACTION NARRATIVE TAPE 00-04, SIDE A Number 001 CHAIRMAN HALFORD called the Joint Committee on Mergers meeting to order at 10:45 a.m. and said the first presentation would be from Mr. Richard Campbell, President of BP Alaska. MR. RICHARD CAMPBELL, President, BP Alaska, introduced Mr. Tim Holt, Senior Vice President, BP Exploration Alaska and Business Unit Leader for the Central North Sea, and Mr. Bill Noble who was the lawyer involved in writing and negotiating the Charter. MR. CAMPBELL said the presentation would be simple and devoted to what they believe to be the most important elements of the merger and its benefits to the State of Alaska. "The main points are that the merger will make Alaska more competitive globally and more attractive for industry investment by lowering the cost base. This new and continued advancement will enhance production and significantly extend the productive life of the North Slope. This enhanced production will result in more activity and State revenues over a longer time than without the merger. Finally, we believe the central concerns expressed in Alaska about the companies have been fairly advanced by the Charter Agreement." MR. CAMPBELL said the advantage of the merger is no more complicated than that. It will lead to lower costs, more advancement, more production, more work, more jobs, and more State revenue for a longer period of time. Number 80 MR. HOLT said his presentation starts on page 3 of the booklet they handed to the Committee. The first point is that oil prices were at an all time low last year for the North Slope and Alaska was at risk of losing its position as an attractive place for investing exploration production capital. We risk becoming a subpar global prospect. The price of oil has gone from $9 to $25 today. Their long-term view is that oil prices will be in the mid-teens range and that is what they base their investment decisions. The global oil industry is quite competitive and volatile and one of the reasons for the big swing in prices is that there's excess supply of crude in the world. The OPEC countries have an estimated 6 million barrel spare capacity today. Over the past 12 months, OPEC has demonstrated a very high level of control which has benefited oil prices. This is a very fragile situation as their history is not of maintaining that discipline for extended periods of time. At this time last year, Alaska did not look very good on the global scale in terms of competition for capital. MR. HOLT said his second point would be how Alaska stacks up as an oil province and thirdly, he would talk about the Charter and how it represents a fair result and does a good job of striking a balance between global competition considerations and Alaska specific considerations. A fourth point is about the trend across the industry for consolidation and that Alaska is not isolated from what goes on in the rest of the world. Number 150 The market for exploration development capital is highly competitive and global with no one or two players that dominate the market. ANS crude is a relatively small part of the global crude market with production of 1.1 million barrels of oil per day. Total world-wide production is 70 million barrels per day. So Alaska is about 1 - 1.5% of overall crude. Looking at the combined proposed combination of BP Amoco and ARCO in terms of their relative share of the world oil market as measured in terms of crude oil reserves (a better indicator of longevity), the combined company would have just over one percent of global crude reserves. This "big" company would be a very small player in the overall market. There is a wave of consolidation going on as seen with the Exxon Mobil merger. Some of the countries with nationalized oil are starting to compete outside of their own countries. MR. HOLT referred to a chart showing capital investments in the oil industry in 1997 with over $60 billion invested all over the world. One of the more recent trends is that last year Western Europe, U.S., and Canada has taken the lion's share of the investment capital in the exploration production field. That capital is now starting to shift toward other parts of the world. The reason is prospectivity or the potential to find big accumulations. This is best demonstrated by the discoveries made in West Africa. The whole industry in Alaska in 1997 invested around $1.5 billion of capital, a relatively small slice of the overall exploration production capital. Number 208 On page seven the key point is that capital moves quickly following the areas or prospectivity like in the deep water Gulf of Mexico. Alaska competes in this global market. The industry competes for exploration funds on a world-wide basis. In Alaska over the last 10 years, two major players have left the State - Shell and Texaco. This was partially because of their perception of better opportunities in other parts of the world. The definition of prospectivity that he is using is a view of the potential for finding large oil fields and many oil fields. It's one of the key factors that determines where companies put their investment capital. There are four key factors: the first is what are the costs of finding, developing, producing, and transporting the oil to market for a particular area. Alaska has a relatively high cost base. The second factor is the size and number of potential fields. The third factor is the level of total government take - local, state, and federal. The fourth factor is the stability of the host government. The U.S. and Western Europe had a major advantage in stability in the last few years; but this is changing as other countries recognize the need to change their behavior. MR. HOLT explained that of these four factors, the only one they can control is first one. They can bring their technology and human resources to try to influence the cost. They can't do much about the other three factors. Number 241 He explained the graph comparing Alaska with some global competitors for cost per barrel prepared by the Cambridge Energy Research Associates (CERA). It's easy to see that Alaska is about double the cost on average of the other areas. Alaska does have significant undiscovered potential, but it's not significantly more than several other countries. Since this is a relatively high cost region, they have to work at being as efficient as they can be. Not only is Alaska high cost compared to the rest of the world, it is actually moving in the wrong direction. The fundamental reason for this is declining production in the Prudhoe Bay field. Production today is less than half of what it was 10 years ago. As oil production declines, the associated water and gas production has continued to increased more than two-fold. This is significant because it costs money to lift this associated gas and water and to separate and treat it and then reinject it. The costs are actually increasing on a per barrel basis. Again, he said, this is the only cost the oil industry can control and in Alaska it is going in the wrong direction. They have to look for opportunities to change that picture. This merger is such an opportunity. In reference to page 11, MR. HOLT said that Prudhoe Bay has been declining since 1989 and the North Slope overall has declined for the last 10 years. The existing owner companies and operators on the North Slope have been working very hard to control costs. Steps they have taken so far are sharing of service between companies such as the aviation service taking workers back and forth from Anchorage and Fairbanks to the North Slope. They have also reduced the size of the work force. They have not been letting cost saving opportunities go by. It's been one of their fundamental focuses for this last 10 years. Future opportunities for cost savings are limited. Mergers like this are step-change opportunities that provide a unique opportunity to take a major chunk out of costs that you can't get out of separate companies doing as much as they possibly can. There are legal constraints as to how far separate companies can go in terms of combining operations. Other things actually prevent companies from combining operations. Despite all their efforts at cost cutting, they have been heading the wrong way on a per barrel basis, MR. HOLT reiterated. The merger is a unique opportunity and would improve the attractiveness of Alaska on a world-wide basis. Number 319 When the merger was originally proposed, the figure of $1 billion a year on a global basis was communicated; $200 million would come from Alaska. That translates into approximately $.80 per barrel. This has been changed and some of the savings have gone away. One hundred and forty million has been preserved in the Charter and this is still a significant step-change reduction in cost. He knew of no other opportunities to make that sort of reduction in cost or they would have already taken them. The $140 million is significant and would have an influence on the per barrel earnings. If you're in a commodity business, if you can reduce the cost structure, you improve the economic attractiveness of incremental opportunities. You draw additional investment from all players. If you draw an incremental investment, you increase production. If you increase production, you increase revenues-to the players and to the State. "Increased production actually is one of the most powerful forces we have to control the unit cost per barrel for working on the North Slope. There is a very high fixed cost base and the more production we can get through the existing system, that includes the field processing facilities, pipeline facilities, tankers, the more efficient the whole system is." MR. HOLT reminded them that the pipeline has handled 2 million barrels per day in the past, about double of what they are handling today. Page 14 presents a picture of where the revenue goes in a $15- world which is the price CERA used to for this analysis. MR. HOLT reiterated that the investments the oil industry makes are long- lived. That is they invest money today and you generate a revenue stream that occurs over many years. You don't base that on today's prices; you base it on the long-term view. BP's view of long-term prices is this sort of range. Number 355 CHAIRMAN HALFORD asked if on this chart royalty was on the cost side or the tax side. MR. HOLT answered that it was on the tax side. CHAIRMAN HALFORD asked, "So, the combined total to the State is $3.33 in all taxes and royalties?" Mr. Holt indicated yes and explained that the $9.70 on the cost side represented development, production, and transporting the oil. The total government take is about $4, about 27 percent of the total pie; $9.70 is about 64 percent of the total pie. Earnings left for industry to reinvest represents the $1.28 which is just under 10 percent of the total revenues. He did not want to argue about how big the slices of the pie are exactly. The key point is that costs are by far the biggest slice and earnings is the smallest. If they can reduce the $9.70 by taking a chunk out of costs, part of that will flow into increased earnings. This will be reinvested in opportunities in Alaska. In addition to enabling a step-change in costs (page 15), there are some intangibles the merger would bring. One is improving the relative alignment of ownership interest in and around the Prudhoe Bay field. The Prudhoe Bay field is rather unique in that there are two sets of ownership interests - gas and oil. BP currently owns somewhere around 51 percent of the oil rim and somewhere around 14 percent of the gas cap. ARCO owns somewhere around 21 percent of the oil rim and 42 percent of the gas cap. These differences in ownership interest actually increase the transaction cost, because it takes human resources every time a project comes up in the Prudhoe Bay field. They must look at the implications from both the oil rim and gas cap perspectives. In a traditional field, there is only one set of interests. It's a simple investment decision. They have to negotiate cost sharing and how to split the costs because the project will benefit both the gas cap and the oil rim. The merger would simplify the decision making of the BP Amoco/ARCO interests. This has not been quantified monetarily, but it is an intangible benefit. He reiterated that in the commodity business, the most important thing you can do is try to control and reduce the cost base. It's the critical first step in trying to trigger a cycle that leads to additional production. The cycle is simply to reduce the costs, improve the economic attractiveness of new opportunities, draw in more capital from all companies, increasing production ultimately, and tax and royalty revenue for the State would increase. Number 419 MR. HOLT said the Charter represents a reasonable balance between considerations of local competition and some Alaska-specific concerns. Last year ARCO's management made the decision to sell their company and they chose BP from several options. The merger would give them the unique opportunity to reduce the cost base and improve alignment on the North Slope; therefore, benefits would flow to the entire industry and the State of Alaska. The events of the merger give the State unprecedented opportunity to actually reengineer the structure of the industry in Alaska. This would not normally happen under normal business circumstance. Through the review process, the Governor and Administration have taken advantage of this opportunity and used their judgement to restructure the industry to the benefit of all Alaska. Some will argue that it will worsen it, but he feels that the Governor and Administration have done their best to try to improve the dynamic of the industry here. He thought the merger actually put a positive spotlight on Alaska from the industry's standpoint. MR. HOLT said the industry has not been as vital as it could have been, certainly if you measure it by the number of companies who have tried to come in. It's been heading the other way. There have been rising unit costs. The merger allows costs to be reduced substantially, it creates new opportunity for new players to come in and get "some pretty big chunks of business in one fell swoop." The Charter strikes a balance of taking some of the cost savings on one hand to improve the basic competitive attractiveness of the State of Alaska by carving up big enough pieces to draw in new players to revitalize they dynamics of the State. There are lots of views as to how to strike this balance, but in concept it's a very simple balance. Number 419 The proposed divestiture is presented on page 21. MR. HOLT emphasized that these are huge pieces of business assets. These are world-scale divestitures in the oil industries. These do not come along very often. He said that more than 10 companies have come through to look. Although he must keep the names confidential, he said several of them were household names in the oil industry-not second tier companies. Some of them are bigger companies than ARCO. He informed them that these packages are vertically integrated including exploration acreage, material and operating interests in major producing fields. Kuparuk is the second largest oil field in the United States. The package includes more than half the interest plus operatorship of it. It includes interest in pipelines, both field pipelines and the TAPS and tankers. MR. HOLT said there is a possibility that the two packages could be sold to a single buyer and repeated that some of the interested buyers are very big players. These packages are not complete divestitures, but there are other pieces like segments in TAPS totaling nine percent interest that will be sold. There is additional exploration acreage on both on the State side and the NPRA (federal). MR. HOLT summarized that this a unique opportunity and they do not come along very often to pick up assets of this scale. In fact, he has never seen an opportunity like this come along. The size of the packages are very attractive to buyers who have the financial wherewithal to compete. It will represent a major holding in anyone's portfolio. One hundred seventy-five thousand barrels per day is a huge piece of business in the oil industry. Very few profit center interests of any company, including BP Amoco, are of that scale. It is bigger than some companies, like UNOCAL. Another point to recognize is that the successful bidders could be someone who already has a presence here in Alaska and sees this as a golden opportunity to dramatically increase the size of their presence here and take a bold step forward in terms of growing their business in Alaska. Number 519 The net effect of implementing the Charter will be complete restructuring of the North Slope. The assets to be divested were pretty much selected by the State, as they were very opposed initially to divesting a majority interest and operatorship of the Kuparuk and Alpine fields. They are prime assets and they wanted to hang on to them. The State was insistent and they eventually agreed as it would keep the right kind of relationship with the State. The combined divestiture represents a very expensive restructuring of a very mature oil province. This does not happen normally. There are some aspects of the oil industry that are competitive and they generally center around competing for access to acreage. This is seen in lease sales in the United States. Once that has been achieved, the ball game changes fundamentally in the "upstream" industry. The amounts of dollars required to develop fields is so significant, the rifts are so large given the uncertainties that traditionally the pendulum swings from hard-core competition to very significant cooperation. This is to try and create the best value possible. This is done all over the world. The two best examples of that cooperation are the wholesale facilities sharing on the North Slope and sharing between companies with a smaller satellite pool here agreeing to use existing facilities in a bigger field owned by another company. Another example is shared aviation services. He summarized that the Charter will promote broader cooperation beyond the very traditional and classic divestitures that are required through an anti-trust action. For instance, BP and ARCO have agreed to share data that tens of millions of dollars were spent to acquire. This should stimulate broader participation in future lease sales. They have also agreed to use arbitration in shared facilities in case any party feels like negotiations aren't being resolved in a timely manner. They have also agreed to purchase oil at Pump Station #1 from those who want that option at a price established by the State. This would give more flexibility to the smaller players. MR. HOLT thought there would be efforts to push commercialization of North Slope gas and, under the Charter, BP and ARCO have agreed with the State to make gas available at an acceptable price. In addition, BP Amoco is committed to bringing a global gas technology group to Alaska consisting of 25 world-class technologists to drive their efforts to commercialize gas. They would establish a new gas unit headed up by the very senior manager to solely focus on commercializing North Slope gas. They would look at all options. BP Amoco is an active member in the ARCO-led LNG sponsor group. His fourth and final point is that the merger is the result of irreversible trends in the increasingly global economy. Some traditionally national oil companies are stepping out of their boundaries and competing in other parts of the world; and this trend will continue. Oil companies will continue to consolidate to reduce costs in order to compete more effectively globally. He reiterated that the only factor private industry can influence is cost. The Exxon/Mobil transaction is the best recent example of this. They will continue to merge to achieve bigger scale, which is necessary to invest in larger scale, riskier projects. The nature of the oil industry involves tremendous risk. You need the scale to be able to do that on a consistent basis, particularly when you have the oil price cycling wildly up and down like it has last year. TAPE 00-04, SIDE B Number 580 You need to be able to survive when you're in the low end of the cycle as in last year and be able to invest in the long-lead projects that are inherent to the oil industry. Companies need to be strong financially. "This typically means having scale," MR. HOLT said, "so you can make it through the low spots." Private energy companies increasingly need to be able to compete with state-run oil companies. Traditionally, nationalized oil companies are extending beyond their boundaries in competing with private companies. To compete with them, you have to get bigger because they are bigger. Alaska is not isolated from the global forces that work in the oil industry even though we might want to be. There's competition for capital throughout the industry and competition for human resources. Companies like Shell and Texaco have left the State, for example. We need to face reality and not think the problems are going to solve themselves. "Accepting and working with these global trends will ultimately lead to the full development of the North Slope." He reiterated that Alaska's high costs have actually been heading the wrong way on a per barrel basis making Alaska progressively less competitive - given the high cost and the maturing field, and the rising unit costs. This merger is an opportunity to affect those costs. The summary on page 31 says that the quicker the merger is completed, the quicker Alaska can get back to making positive investment decisions that will preserve and extend the future of the energy business here. Time is an element. Number 550 CHAIRMAN HALFORD asked in terms of activity in the industry in the State, they have heard there is industry slow-down because of the merger and asks what really was happening to numbers of rigs, expenditures, etc. and what their proposed capital budget was for next year. MR. HOLT answered that 1999 was largely driven by the low oil prices and was a low activity year. In 1998, they had 12-15 rigs going; in 1999 they went down to 3-4 rigs. This was largely driven by the low oil prices. For 2000, BP Amoco is pretty far along with its independent business plans this year. He goes to London tonight to get approval for his capital. CHAIRMAN HALFORD asked him for a range of options in terms of capital expenditures. MR. HOLT replied that he couldn't give him precise numbers, but that the momentum is swinging with Northstar which will continue no matter what happens with the merger. They are looking at a modest uptake in drilling activity this year in things like satellite and in-field drilling. He would have a more accurate picture within the next few weeks. The merger has to do more with the longer term and what happens with some of the new opportunities that might be created. CHAIRMAN HALFORD said he thought it sounded like there wouldn't be any reduced activity right now or even next year based on merger considerations. Those considerations are further in the future. MR. CAMPBELL responded that things they made investment decisions on some time ago are moving forward and they are spending more than $250 million in development at Northstar this year. The decisions about new developments and new work that might involve a change of ownership of assets, that might involve new operators, are difficult to make today until they can see clarity in the conclusion of the merger and the Charter. The money they should be spending today to do the projects in the future is on hold. That's the normal cycle of industry. MR. HOLT explained that it's pretty hard to form an exploration program if you're not quite sure what acreage you're going to own. Number 498 REPRESENTATIVE GREEN said before the Charter, a year ago, BP indicated that they were willing to spend $5 billion over five years and they based their future spending on a projection of the mid-teens for oil prices, and asked if that was primarily on development of Northstar, was it mixed between exploration and Northstar, or was it also including in-field drilling in Prudhoe which they didn't plan to keep? If that is the case, is there a reason now that they are still not active, because they are not going to get rid of the Prudhoe Bay field. MR. HOLT answered that the $5 billion commitment was expressed shortly after the deal was announced and they tried to use that as a clear indication of their interest in growing the business here in Alaska. The ball game has changed since then with the divestiture, etc., so the $5 billion is off the table. Regarding the in-field drilling at Prudhoe is directly related to the cost of producing oil at Prudhoe Bay. To the extent they can achieve the step-change in cost, there will be more in-field drilling that will occur at Prudhoe Bay. To the extent they are not able to achieve it, it will be less. If they can get the costs lower by $.50 per barrel, there will be more wells drilled, because it will be economically attractive for some wells. If they are not able to achieve the step-change in cost, there will ultimately be less development. The cost structure of the North Slope is what is going to drive development of the North Slope. MR. CAMPBELL added that the $5 billion was a commitment they were willing to make at that time based on acquiring the full set of ARCO assets in Alaska. It wasn't a plan, but it was a commitment. That goes away because the deal has changed. Projects that were under way were included in that spending. They had also hoped to finance the vision they had for Alaska of new projects that would become viable because of synergies that would be achieved with the combination of both companies. Number 454 REPRESENTATIVE PORTER said their original proposal had a savings of $200 million, but now it's down to $140 was that the expense of development cost that had been reduced or what, he asked. MR. HOLT answered that it wasn't a dollar for dollar correlation, but there was a positive correlation. Of the $5 billion there are too many variable to comment on. Number 439 REPRESENTATIVE KERTTULA said she is trying to understand the risks the State faces in going from two buyers to one big buyer and one or two lesser buyers. She appreciated the explanation of the global scenario, but wanted to know how to deal with the risk at the Alaskan level. She felt the two perspectives were at odds with one another. MR. HOLT said in his view, there are more than 10 companies who own an interest on the North Slope. Some of them are very large companies. The nature of how decisions are made and who has control with regard to the operation of the North Slope are all highly defined through things like unit agreements and unit operating agreements. Many companies, although they have small interests, actually have control as to whether something happens or not. For instance, at Prudhoe Bay many of the investment decisions require 90 percent owner approval. BP owns 51 percent, ARCO owns 21 percent, and even combining those two doesn't give them sufficient control to actually control things. Another owner company has to approve them. In most cases on the North Slope today where BP has an interest, Exxon has the controlling vote. Today more than 10 companies own interests; three players and often more have controlling votes. In the world we're heading for with the merger there's the potential of four companies having control of decision making. There's a plus and a minus to that. It could take more energy to get four companies to agree to do things than it takes three, but the notion because BP Amoco has around 50 percent of the production does not equate to control. They do not have sole decision making power. They can block vote as does Exxon, and as will the two new buyers. There are potentially four companies with blocking votes, whereas today there are three. Number 439 REPRESENTATIVE KERTTULA said she understood his point that there may be more competition because of the merger, but would BP Amoco become a more powerful buyer. MR. HOLT answered that he didn't know how she measured power. His business unit is in the Prudhoe Bay field and he has business agreements he has to adhere to. They define who has the power and this is reflected in things like what percentage of votes are required to make decisions. This is where the real power presides. The BP Amoco merger does not give them any more power in Prudhoe Bay. They still need to get more owner companies to say yes to things - in particular Exxon. He did not agree with the assertion that more production meant more power. MR. NOBLE added that in the primary phase where the State is the seller and BP Amoco is the buyer is in selling development rights, leases, and things like that. At that point the State is probably the most powerful seller in the world. There are 10-15 ways they could handle placing those leases in the hands of people who develop them. It's a global market and the people who can participate are dictated by the manner in which you handle the sales. In fact, with new players coming in and with the addition of the seismic data, he would expect it to be more dynamic than it has ever been. What becomes a determining factor really becomes how attractive it is to be here in the first place. That becomes a function of the cost base of the Slope. This is something they are trying to address. Number 325 REPRESENTATIVE KERTTULA said that ARCO didn't always go along with everything and that they didn't really know, yet, what the "shake- out" would be with all the operators. And that's her concern. MR. HOLT agreed that BP Amoco and ARCO had not always agreed on investing decisions, but they have always worked out those differences. He added that Exxon has always been a key part in bringing another perspective to the table and they would continue to do that. On occasion, the smaller owners at Prudhoe Bay would do that. These "smaller" companies are Chevron and Phillips which are actually big companies. Even though they don't make headlines, they are at the table influencing decision making and often they have a controlling vote for a negotiation. There is a variety of other views there besides BP's. Even though they have small interests, they know how to play the game. MR. CAMPBELL emphasized that knowing the companies that have been looking at these assets, he wouldn't expect to get any less of a challenge on an on-going basis from the new owners of these assets than they have in the past. These companies are going to be in the leadership position at Kuparuk and Alpine. Number 290 CHAIRMAN HALFORD asked about the agreement and when they list Buyer B and a percentage, he thought the agreement said the majority ownership of Alpine would go to a different company and a majority of Kuparuk would go to a different company; and yet the presentation on page 21 shows Alpine at only 43.1 percent going to a different company. He asked how that worked. MR. NOBLE answered that selling 40 percent would make the other party the largest interest. So it would be making another company the largest. CHAIRMAN HALFORD asked if it didn't require to be a majority interest. MR. HOLT replied that it requires another company to become the largest owner. The combination of BP Amoco and ARCO would own 78 percent of Alpine and the proposal is to sell 43 percent (leaving them with BP with 35 percent). If a new company bought that 43 percent, they would be the largest owner of Alpine. CHAIRMAN HALFORD asked if it's not Anadarko, it will not be a majority owner of the field. MR. HOLT replied that if he meant by majority greater than 50 percent, that was correct. If he meant majority to mean the largest owner, the new company will be the largest owner as well as the operator. Number 270 SENATOR PEARCE said she appreciated the companies giving their attorneys access to their 2,000 boxes of documents. It made their efforts a lot more meaningful. She said the original agreement would have allowed 100 percent ownership of the assets owned by ARCO and BP to go to BP ownership and asked what percentage of the present assets of BP and ARCO go to BP after the divestiture today. MR. HOLT answered that there was not simple measure. In terms of current production, 175,000 barrels per day of working production is about 50 percent of ARCO's current production. He said they wouldn't know the value of the assets to be divested until they actually do the divestiture. MR. NOBLE added that he thought just in Alaska, on the exploration production side, it becomes approximately 50 percent of ARCO will be divested and put in other hands. SENATOR PEARCE asked if that meant BP co-ownership goes from 50 percent to 75 percent of the North Slope assets. MR. NOBLE agreed with that. Number 220 CHAIRMAN HALFORD asked what level of TAPS divestiture was in that calculation. MR. NOBLE said being a lawyer, he was the worst one to value anything, but for value he first looked at the production assets. MR. CAMPBELL said he didn't think they would go anywhere, because the numbers were not available. If they were going to acquire all of ARCO's assets, they would have 100 percent of the combined assets. If they divest half of them, they would end up with 75 percent of the combined BP/ARCO assets. Another way to look at it is if they acquire ARCO's share of the pipeline, they would go from just over 50 percent to 72 percent. In the Charter, they would be divesting about 13 percent of that 22 percent of the pipeline with buyers A and B and there is a provision to dilute even further by selling off the additional 9 percent. After the deal is done, they could still be back at the original position in terms of a BP ownership in Alyeska. In terms of production, whatever is quoted as the increase in production, they would dilute by half of that approximately. Number 170 SENATOR PEARCE said last year in a speech on January 22, 1999, Mr. Albert gave a keynote speech for BP. In the speech he said there would be more competition for the rare investment dollars because of the state of world oil prices. This made a lot of sense at the time. He said also that Alaska still has a highly significant resource base and that the infrastructure is in place to develop its further potential in accordance with our (BP's) standards of care. He also said the BP Amoco was in it for the long hall. Their presentation on page 3 says that at this time last year, the North Slope was at risk of losing its position as an attractive place to invest in new exploration and production capital and was at risk of becoming a subpar global prospect. She thought there was a discrepancy in the two statements. MR. CAMPBELL responded that they are not implying that BP is going to leave Alaska. Alaska is going to remain an important part of BP Amoco's portfolio. That doesn't detract from the fact that they will make a level of investment decisions on the competitiveness of Alaska with other places around the world. All companies do that. MR. NOBLE responded that there were differences in perspective of Mr. Holt's first point and Mr. Albert's first point. Mr. Holt's point was not just BP's perspective, but industry perspective, because they can't invest in Alaska alone, no matter how they do it. This is a partnership business and they need everyone voting with their dollars in Alaska at the same time to get the fullest possible development. They are here to stay, but they aren't here alone. Number 119 SENATOR PEARCE asked if we were at risk last year of not being at an attractive place to invest, and if the merger is important because it brings in $140 million per year in cost efficiencies, why would Alaska be so attractive to all the companies which they say are interested in buying what are realistically much smaller prospectors for buyer A(Kuparuk) and buyer B(Alpine) without the opportunity for efficiencies they will be getting from the merger. MR. HOLT responded that using the words "bad" and "good" are totally relative. Asset sales of the magnitude these divestitures represent don't come along very often. They are unique opportunities. Companies don't often have a chance to make investments in asset purchases or profit centers like this in a new region. It is very difficult to do that through a lease sale; it takes a long time. Some companies will see this as a very unique opportunity to establish a toe hold in the region and may see opportunities to bring their own technologies to the table to further reduce costs. They may see higher prospectivity than other companies see. What will determine whether a company chooses to bid on the divestments is they will take a long term view of how Alaska stacks up to other places. There is a lot of oil in Alaska, but the key to unlocking it is managing the costs. Other companies will see this as an opportunity to establish a big presence. Kuparuk is the second largest field in the United States and you don't get the opportunity to buy more than 50 percent of the second largest field in the U.S. ever. He didn't see Alaska's relative attractiveness as a place to draw continuing investment is diminishing. To the extent they can reduce the cost base on a relative basis, it will draw more on-going investment in Alaska. This is different than the one time opportunity that the divestments represent. Number 43 SENATOR PEARCE asked if it's that great, since they would end up holding between 65 and 80 percent of the holdings of the old ARCO and BP, why are they taking the $5 billion off the table and not putting another there in its place. MR. CAMPBELL asked if they could come back to that question when they are finished with the previous answer. SENATOR PEARCE acquiesced. MR. NOBLE continued to explain that the assets that have to be sold will go without a minimum price. This adds to the unique opportunity for people coming in. Cost savings BP expects to get are not going to be only enjoyed by them. More production reduces the cost base of the entire North Slope. There is an advantage in that to everyone. TAPE 00-05, SIDE A Number 001 MR. NOBLE said, "Oil production will lower tariff. Increasing the TAPS tariff is a function of volume, in large part. Greater production leads to lower tariffs." MR. CAMPBELL turned to Senator Pearce's earlier question regarding capital spending. As mentioned earlier, when the announcement was made that BP Amoco and ARCO desired to combine there were a series of commitments. Those commitments included the $5 billion capital expenditure over a five year period. At that time, it was felt those commitments would satisfy concerns in Alaska about the merger. He acknowledged that since that time, Alaska in the form of the Administration has expressed the desire to follow the path encompassed in the Charter. He pointed out that the Charter does not refer to the aforementioned capital expenditure. Mr. Campbell said that although he did not have the information today, he would be happy to inform everyone of what his capital expenditures will be in Alaska for the year 2000 as well as the planning basis for the following years. He clarified that he would be happy to provide that information as soon as those figures are complete and as soon he knew what assets he would own in Alaska. SENATOR PEARCE referred to page 6 of BP Amoco's presentation, which specifies BP Amoco's 1997 world exploration and production capital expenditures. She then referred to page 9 of BP Amoco's presentation, which specifies costs in various countries in comparison to Alaska. Although no year is specified in regard to the costs, she assumed that costs stay, on a relative basis, fairly similar country to country. Therefore, she assumed the figures could be compared. Senator Pearce turned to the notion that Alaska is a high cost region by global standards. She inquired as to the investment opportunities, in those countries listed, for international oil companies that are not nationalized oil companies. Of those countries listed, where are the investment opportunities for BP Amoco or BP Amoco/ARCO. MR. HOLT pointed out that Venezuela is "open for business." He informed the committee that the capital that has flown into Venezuela in the last two years is appreciable, including capital from companies such as ARCO and BP Amoco. He indicated that countries such as Kuwait are interesting in that companies such as BP Amoco, Chevron, Exxon, et cetera have worked for a number of years to establish a presence in the country. Most of the companies in Kuwait share the view that "it is just a matter of time." Mr. Holt estimated that BP has about 100 people in Kuwait. Kuwait has indicated that it would like to invite more foreign participation, although he noted that such does take time. He noted that over the past two years, other countries have been consistently sending signals that more private participation is desired. BP Amoco and its competitors are "at the door." Number 120 SENATOR PEARCE interjected: That's fine, but to put a chart like this in front of us - with the possible exception of Venezuela, where I know both companies were active in the offerings because I happened to be there when both companies were winners of offerings - those were in the frontier areas where I suspect the cost in the frontier areas aren't the costs we see on this sheet - because I suspect those costs, finding and development costs, have Petroelas de Venezuela South America (P.D.V.S.A.) numbers and are also opportunities in areas that aren't available. But I guess, if you don't have present opportunities there, if you can't, on one hand, say we're a high cost region by global standards, as though that should affect our interests here in Alaska and how we deal with the oil industry when these companies aren't, at present, available for investment, with the exception of Venezuela. MR. CAMPBELL responded that he believed it was the same CERA report that this material was taken from. There is a comparison of Alaska with some 30 other states and countries, which illustrates that Alaska lies in the middle with regard to its competitiveness on these parameters. Mr. Campbell acknowledged that Senator Pearce may be correct with regard to Venezuela, but the international industry has had a "feeding frenzy" with Venezuela over the last few years. With regards to Kuwait, the Middle East will always be focus of attention for the industry because of the very large reserve that it has and the low productions cost. He noted that access is clearly the issue in this area, although Kuwait and Saudi Arabia are discussing access. Iraq and Iran remain politically difficult to deal with. Mr. Campbell informed the committee that this chart does not include the African countries such as Angola, where the industry has recently experienced success. South America could also be discussed. There are many opportunities and data that could be included on this chart on page 9. SENATOR PEARCE agreed. However, with regard to discussions of worldwide opportunities for BP Amoco/ARCO capital and why something happening in Alaska should be liked or disliked, then there should be comparison between Alaska and the places that capital is likely to go. The industry put $3 billion up-front in Venezuela in only one of the three offerings. Of course, the investment dollars followed because they often sign contracts that specify that a certain amount will be spent over a specified amount of years in investments over the $3 billion. Senator Pearce believed that BP Amoco actually signed a contract saying that a specified amount would be spent over a specified time frame and if that did not occur, then the leases would be returned. Perhaps, the same sort of opportunities could be had here. She suspected such a proposal would be welcomed. She maintained that the examples provided are not good examples of the other opportunities for capital investment. SENATOR PEARCE turned to the cost chart on page 14 of the presentation. She commented that these are "round numbers" as were the numbers discussed by Mr. Albert in January of last year. Senator Pearce recalled that Mr. Albert said that at $10.50 oil, it cost the industry $3.00 to produce the barrel, $3.00 to develop that barrel, $2.00 on taxes and $2.50 to move it to market. Those numbers have no earnings. She inquired as to what has happened to make the cost rise that much; what is the difference between the $10.50 oil and the $15.00 oil, in terms of the cost? MR. HOLT specified that the pie chart is from CERA and is not a BP view. Therefore, he deferred to CERA. Mr. Holt presumed that CERA was taking the view of industry. In further response to Senator Pearce, he stated that this is Alaska specific. Again, he deferred to CERA. CHAIRMAN HALFORD noted that the page 9 chart is also from CERA. Therefore, is it not BP's view that the total cost to market for Alaska oil is $10.00. If $10.00 is not the number, then what is. Number 225 MR. CAMPBELL guessed that BP's view is that the cost of production is around $10.00. AN UNIDENTIFIED SPEAKER [MR. HOLT] said that he did not know the following as a fact. However, he believed that part of the difference between the $4.00 specified in the chart and the $2.50 on the transportation cost has to do with whether or not one owns interest in a pipeline. MR. NOBLE stated that he believed that Mr. Albert's statement that the transportation cost of $2.50 is referring to transportation to Valdez. Here, in the chart, he believed the transportation cost refers to transportation to California. REPRESENTATIVE CROFT returned to page 9 of the chart. He informed the committee that he reviewed the CERA report, which lists all the cost centers, not just those listed on page 9. He pointed out that the CERA report lists the lowest in the world, in order, as Iraq, Kuwait, Saudi Arabia, Venezuela, and Iran. He asked if the lowest were chosen. Furthermore, he asked if there are significant nationalization trends in some or all of those areas. MR. NOBLE informed the committee that he was looking at the CERA report entitled, "White Paper Industry Contacts" from September 1999. He believed that chart on page 9 of the handout is CERA's chart, Table #2 on page 19 of CERA's report. He indicated that it is an unedited list. REPRESENTATIVE CROFT maintained that the chart he has from the CERA report shows them all [the cost centers]. This chart has Alaska in the middle. With regard to Mr. Campbell's comments that Angola and Brazil are alternative sources, the CERA chart shows that the full cycle cost of oil for Angola to be about 50 percent higher than in Alaska, while in Brazil is shown to be one of the highest in the world. Representative Croft acknowledged that it excludes transportation but, as Senator Pearce noted, a fair amount of the transportation costs are tariffs where there is an ownership (indisc.). Representative Croft asked if it is true that Angola and Brazil, before transportation, have higher costs than Alaska. Furthermore, are those the countries Alaska is competing against. MR. CAMPBELL indicated agreement with Representative Croft's interpretation of the CERA chart in that Alaska is in the middle and the numbers do not include transportation costs. With regard to political stability, Mr. Campbell agreed that is something companies review when considering investing in countries. He recalled that there have been nationalizations in the past, although he felt that it is somewhat "out of fashion" now. However, companies will continue to review countries in terms of political stability, the size of reserves that can found, and whether the company can establish a large presence in that country. Countries such as Brazil and Angola do offer opportunities for companies to establish substantial positions in those countries. REPRESENTATIVE CROFT referred to the cost savings achieved under the two charter proposals. He then inquired as to the other areas cost savings could be achieved. MR. HOLT answered that the savings come from areas where there are overlapping operations. For example, in the North Sea the savings would be achieved through deleting duplicate facilities because the combined companies would not need such an extensive corporate office that ARCO has in Los Angeles. Other cost savings would be achieved from research centers because all of them would not be necessary after the merger. Therefore, the savings would be achieved in areas of overlap in either corporate offices, research centers, or operating areas such as the North Slope. CHAIRMAN HALFORD pointed out that the committee is behind schedule and there have also been requests for executive session on confidential information. He suggested the committee take a half hour lunch break and come back to BP. He announced that the Administration would not want to push back its timing much due to some testifiers who are teleconferenced from the East Coast. If the meeting goes into executive session, Chairman Halford requested that it be kept an all-member executive session at least for the nonconfidential information. Then a collective decision regarding how to proceed could be addressed. MR. CAMPBELL, in response to Representative Green's question, said that his staff have some time constraints that may affect their ability to testify after the Administration. Mr. Campbell offered to return after lunch. CHAIRMAN HALFORD announced, at 12:40 a.m., that the committee would break for a half hour. The committee reconvened at 1:30 p.m. Number 349 REPRESENTATIVE ELTON referred to the $140 million that accrues in savings helps the investment (indisc.) of Alaska. He recalled that at yesterday's meeting a committee expert suggested that a large part of that $140 million could accrue outside the framework of the merger. MR. HOLT commented that, in BP's view, that little to none of that $140 million could be achieved without a major structural event such as the proposed merger. As production has declined, the existing operators/owners on the North Slope have been working hard to take the cost out of the system on the North Slope. He informed the committee that "we" [BP] feels it has tried everything under the existing structure of separate companies and separate operations. [There is a small break in the tape, only a few seconds.] MR. HOLT noted that BP has worked with the other owners [on the North Slope] over the last 10 years in order to affect some of the structural changes such as a single operator at Prudhoe Bay. Those efforts have been unsuccessful. CHAIRMAN HALFORD asked if a single operator would achieve a large portion or any portion of the $140 million. He acknowledged that a single operator may be difficult to achieve. He asked if achieving a single operator would be a structural event. MR. HOLT agreed that such would be a structural event, although it would not be as big as the proposed merger. Therefore, he could not provide a specific percentage that could be attributable to achieving a single operator. He indicated that a fair portion would be attributable to a single operator, but not all. SENATOR WILKEN referred to page 14 and the pie chart entitled "Cost Reductions Increase Earnings Materially in Investment Case ($15)." [There is a break in transmission.] SENATOR WILKEN asked if [the $.56] (indisc.) in the transportation of the oil is part of the $9.70 cost or part of the $1.28 in earnings. MR. HOLT said that he did not know where the $.56 comes from. He indicated that he would have to talk to CERA to obtain a direct answer. SENATOR WILKEN explained that the $.56 is a pre-tax margin built into every fair up oil transport per TAPS. Senator Wilken said that he did not know if that $.56 was counted as cost or earnings, which would make a difference. MR. CAMPBELL answered that they would be happy to get back to Senator Wilken with that answer. REPRESENTATIVE GREEN clarified that he wanted to make sure that his series of questions was not misconstrued as negative. Representative Green agreed with BP Amoco's statement on page 23 that, "The resulting combined packages of divestitures represents a comprehensive re-engineering of a major oil province without precedent in the United States, or even the world." That statement could be raised exponentially in regards to the importance to Alaskans. Number 397 REPRESENTATIVE GREEN recalled that it had been reviewed to some degree that oil prices had declined last year. He acknowledged the difficulty for BP Amoco to make a commitment with regard to how much money it will spend since it does not know what properties it will own after the "dust settles." Representative Green surmised that if all the known and producing fields are declining, then Alaska must find real oil in order to have continued viability. Therefore, exploration is necessary. He expressed concern that it was unknown how much BP Amoco's commitment to spend $5 billion over five years would go toward developing known oil accumulations or exploration. One of the most dynamic exploration companies in Alaska has been ARCO and if ARCO is gone, will the commitment of the merged company be as aggressive. Representative Green noted the discussion that Alaska is one of the many opportunities in the world and pointed out that ARCO viewed that far differently. How much of ARCO's aggressive exploration attitude may continue? MR. CAMPBELL replied that clearly, BP Amoco is committed to a exploration program in Alaska, as has been the case in the past. He commented that "we" will end up with acreage in NPRA and that is something that will be aggressively explored. With regards to offering state acreage for farmers, he explained that the aim is to ensure that there is the maximum amount of work and exploration on those acres that are farmed out. He said that "we" are not interested in selling that acreage, "we" are interested in building on the base that "we" have established with additional exploration. He indicated that he could not specify a number of the $5 billion that would be put towards exploration. However, he emphasized BP Amoco's commitment to exploration in Alaska. REPRESENTATIVE GREEN understood the divestiture of acreage down to the maximum would not be divestiture of 100 percent of any groups of acres, but rather a percentage of each. He acknowledged that BP Amoco cannot guarantee anything is this realm, it certainly has veto power for a company coming in that may want to aggressively explore. He realized that there would be agreements providing for companies such as [the merged company]. However, there could also be agreements that contain nonconsent clauses, which would charge a large rate on the money that [the merged company] would otherwise spent. He asked if this will be a deterrent to companies interested in coming to Alaska to be aggressive; is that a monopoly. MR. NOBLE agreed that the Charter does contain a provision that any divested exploration acres will include nonconsent provisions so that BP Amoco would not have the contractual ability to stop the investment of investor in any property. However, it is in BP Amoco's interest to find attractive packages. BP Amoco, as the largest infrastructure owner and largest owner of a fixed cost base on the North Slope - no one has a larger interest in increased production save the state. He informed the committee that a number of those packages include majority ownership of those whereas the Charter provided the opportunity for the company to dilute the interest. The packages are structured such that they are attractive for investors. MR. HOLT added that there is risk in the exploration arena, and therefore it is typical for folks to partner in order not to bear 100 percent of the risk. Of course, people want to partner with those who have knowledge and/or capital. He believed the ability to partner with others existing players or not would be attractive in many cases. REPRESENTATIVE GREEN expressed concern with BP's exploration efforts, which were far less than those of ARCO. He was concerned that with the merger that emphasis [on exploration] may be lost, especially coupled with statements referring to the competitiveness of the world market. With regard to the mention that Shell and Texaco have left Alaska, Representative Green wondered if that occurred due to Alaska's hostile and high-cost environment. He noted that Shell and Texaco had the least developed and drilled acreage on the North Slope, which this merger would make available to BP Amoco. MR. HOLT said that he could not speak for Shell or Texaco. He reiterated that when a company decides whether to enter, exit, or stay in a region many factors are considered. Factors such as the cost structure of that region which determines the profit potential of that region, the government take, the stability of the region, and the prospectivity of the region are all reviewed. He guessed that companies that have left have reviewed those factors and determined that other opportunities looked better. With regard to one of the factors being that the company did not have an infrastructure position, Mr. Holt acknowledged that it may have been a factor. However, he pointed out that the infrastructure position could have been picked up. He mentioned that BP Amoco has not had people pursuing obtaining interest in TAPS. REPRESENTATIVE GREEN understood that BP Amoco did not want to disclose with whom it has had conversations. However, has the situation alluded to earlier been a deterrent to those companies interested. Number 547 MR. NOBLE stated that with BP Amoco has strict confidentiality agreements with all the companies. Therefore, he did not want to answer. REPRESENTATIVE GREEN referred to page 8 and the indication that there are things that could be modified such as taxes and royalties. He asked if BP Amoco would be suggesting that Alaska would do well to reconsider the tax structure and the royalty demands. "Or that we can continue to be viable as we are, if we don't go the other way with them?" MR. CAMPBELL echoed the earlier comments that "we" could only affect the costs. He added that producers in the state always need to look at opportunities for development. If that can be encouraged by the state reviewing a tax code, that is a choice for the state. He indicated the need for Alaska to review its competitiveness in comparison with other places around the world. CHAIRMAN HALFORD asked then if Mr. Campbell meant that Alaska's taxes and royalties are reasonable at this point. REPRESENTATIVE GREEN pointed out that Mr. Campbell's testimony has indicated that it is imperative to reduce costs as it makes for a better profit picture. He said, "I'm wondering about the fields that are higher cost operating fields than Prudhoe are those that you are indicating you would be willing to divest in, but that the Charter expires in 2008 and if you extrapolate the performance curve at Prudhoe ... out to about 2008 ... then we're gonna have water oil ratios that are probably up five, six, seven, eight to one instead of two to one." Therefore, operating costs rise much higher, but it is still profitable. He acknowledged that the lower the performance curve to the economic limit, the less profit is obtained. In general, that is an asymptotic curve that extends for years and years if one is willing to work in a low margin such as the Cook Inlet fields. He inquired as to what BP's attitude would be if the merger was intact and the year is 2005 or so and the declined curve can be helped with in-field drilling and more technology. However, it is inevitable that the economic limit will be reached some day. He recognized that those five to ten years that it is nursed along will not mean much to the operator, although it would have tremendous meaning to the state. Therefore, "we" have introduced reduction in royalties when that has happened. Representative Green asked if BP plans to be present in Alaska, for the long haul, on low profit fields as well as any new fields, which may have a higher profit ratio. MR. CAMPBELL said BP would be here in the long term TAPE 00-05, SIDE B Number 580 REPRESENTATIVE GREEN commented, "Okay, long-term." MR. CAMPBELL pointed out that BP had not once asked the state to divest anything. Therefore, he said that BP would be happy to be in all the fields. We would be happy to stay in Kuparuk, to be in Alpine, and to continue in all of Prudhoe. MR. HOLT said, with the "Kirby's" aside, he would agree. As fields such as Prudhoe decline, there will be a long tail and BP fully intends to make that tail as long as it can. One of the motivations for trying to create a step change in cost in existing fields, as well as existing use fields, is to help extend the life of the field. BP intends to be part of driving that curve out as far in time as possible. Mr. Holt expressed pride in being part of the owners which have achieved more from Prudhoe than was originally anticipated. The proposed merger will enable the company to extend that further, but the number of specific years is not known. Number 571 REPRESENTATIVE GREEN turned to the heavy oil associated with the Milne Point Schrader Bluff area. He acknowledged that BP Amoco has been greatly involved with the Schrader Bluff area. Representative Green surmised that it would be unlikely that the heavy oil will ever be as lucrative on a per barrel basis as the light oil. He asked if BP Amoco intends to perform research with regard to extracting poor quality oil as well as the better oil. MR. CAMPBELL replied yes because it is in BP Amoco's interest, both in respect to Alaska and other places around the world. He noted that heavy [oil] in Alaska is not heavy in other places and the climate and temperature also come into play as well. He affirmed that BP Amoco would continue its work on heavier oils. MR. HOLT directed the committee's attention to the amount of money, several hundred million dollars over the last five years, that BP Amoco has invested in Milne Point. A fair amount of the investment was to try to progress the heavier accumulation of development at Schrader Bluff. He also noted that at Prudhoe Bay there is some heavier oil as well, such as the Schrader Bluff Satellite. We are working aggressively to try to develop ways to more of that heavy oil. Mr. Holt said, "We are fully committed to keep (indisc. - coughing) inputting investment capital at risk to try to ... further develop that." MR. CAMPBELL informed the committee that BP Amoco's work at Milne Point has increased that production three times since BP Amoco took it over from Conoco. REPRESENTATIVE GREEN referred to the chart on page 14. He recalled charts of an earlier era in which the ratio was one-third to one- third to one-third between the state, federal government and operators. This chart seems to be considerably skewed; is that triad no longer valid? MR. HOLT answered that there are at least two factors at play. The costs have increased over time, which is the dark slice of costs. The other factor is that the relative proportion of take is a function of the absolute oil price. There are elements of the state tax, which are independent of price. Therefore, as prices fall, the lower prices the relative take associated with government take actually increases. If prices go above $15 [per barrel], the share of the earnings would shade more toward industry. He specified that it is a function of the tax regime, and therefore the oil price assumption will drive the relative size of those slices. The cost will also drive the relative size of those slices. REPRESENTATIVE GREEN understood then that this curve would, relative to each other, would improve if the oil moved back to the mid-teens or $20 oil [per barrel]. MR. HOLT said that the curve would improve for industry if oil prices were higher than $15 [per barrel]. He also pointed out that the curve would improve for industry if some of the cost could be taken out. It would improve for everyone, if cost was taken out. CHAIRMAN HALFORD mentioned the windfall profits tax, which would substantially change the equation. SENATOR TAYLOR inquired as to the date that was used to fix the valuation of assets that BP Amoco would acquire from ARCO in the merger. Was that date and valuation period at a time when oil prices were $10 or less? Currently, oil is at $25 per barrel, and therefore he assumed that oil assets probably have a greater value today than when BP Amoco acquired them through the merger documents. He inquired as to the amount of profits that BP Amoco would project it would make off of the forced liquidation or divestiture of ARCO assets through this merger or the Charter, if it proceeds. MR. NOBLE said that he recalled that because of the share-to-share trade, he believed that the valuations are fixed in the range of the time of close. Therefore, as other forces go forward then the price of oil is reflected in both sets of shares. He noted that there ends up being a readjustment, but he did not believe there to be a risk of false pricing based on oil prices on one side of the equation and not the other. In summary, he believed that the two move together towards the closing date. SENATOR TAYLOR referred to the $9.70 cost per barrel reflected in the CERA report and recalled that Mr. Campbell testified that BP Amoco's cost to be a "ballpark" figure of $10. He said that cost is reduced relative to the merger by $140 million or some portion of the $1 billion in overall savings, this is according to BP Amoco's numbers. He asked what the projected cost would then be; would it be $8 per barrel? MR. NOBLE responded that he believed that the figures currently being worked with would place it in the range of $.60 per barrel. MR. HOLT explained that if one took the $9.70 from the CERA report and the $140 million referred to by BP Amoco would take it down to the $9 range. SENATOR TAYLOR surmised then that such would increase the earnings reflected on the same chart up to approximately $2 per barrel. Number 490 MR. HOLT replied, not quite because the profit element is taxed at both the state and the federal level, and therefore is split between the state taxes, federal taxes, and the earnings. SENATOR TAYLOR indicated his interest in the numbers specific to BP. What percentage of BP's worldwide production has and is now coming from Alaska? He mentioned that he had been told 20 percent. MR. HOLT informed everyone that in terms of BP Amoco's worldwide oil production, leaving out gas production, he believed it fell in the range of 3 million barrels per day. Alaska's production is on the order of 400,000 divided by 3 million, which is 13 percent. SENATOR TAYLOR indicated that he had estimated that a little higher. With the addition of ARCO production, that would obviously increase. MR. HOLT said that the total increase, if the merger goes through, since BP Amoco would receive ARCO's global production. Therefore, the $3 million increases to something just under $4 million while the Alaska piece increases to about $575[,000]. Therefore, the ratio becomes $575[,000] divided by $4 million which results in about the same percentage. SENATOR TAYLOR inquired as to what percentage of BP worldwide profit is due to Alaska production of oil. He mentioned that he had been told that it was almost double that amount, close to 30 or 40 percent of the overall profit. MR. HOLT agreed that the percentage of BP worldwide profit due to Alaska production of oil is a function of the oil price. When oil prices are low, Alaska's profit contribution is low. When viewed in the overall relatively high cost of this state, the relative profit margin of barrels here compared to other places ranks Alaska in the lower tier, the lower third. REPRESENTATIVE GREEN turned to the Charter. If BP Amoco does not receive an internal value for the leases and the divestitures, he understood the Charter to mandate that "you" will do it. Is that BP Amoco's intention? MR. NOBLE and MR. CAMPBELL both answered yes. REPRESENTATIVE GREEN recalled the Governor recently saying that if BP Amoco did not acquire ARCO, someone else will because ARCO can no longer exist. He asked if they believed that, under the current oil price. MR. CAMPBELL deferred that question to ARCO. REPRESENTATIVE GREEN noted that one of BP Amoco's Vice Presidents from London was in his office and made that same statement. Number 405 SENATOR PEARCE returned to her concerns regarding investment in Alaska as she believed that is where Alaskans' support or opposition to the merger should lay, outside of the antitrust laws. The Administration is saying that there is a negligible effect on Alaska's revenues due to the merger, even though there are some fairly significant Alaskan cost savings that BP will receive from the merger. Senator Pearce commented that she would like see some part of the savings return to the state in revenues, although the Administration says that nothing more should be expected from "his" Charter. She explained that she is still stuck with regard to what those investments will be because if the state cannot depend upon more revenues coming from the current production base, then the state has to look to future investments as the only reason the proposed merger would be good for Alaska. Senator Pearce inquired as to how reducing production costs affect the decisions that are made in London with regard to investments in other areas. MR. HOLT explained that BP Amoco is organized in business units, which are substantial pieces of business that run, in large part, as independent businesses within a framework of common standards. He informed the committee that he manages the North Slope business unit. The investment decision-making process begins with each business unit laying out the opportunity steps that are believed to be attractive, based on the technical work. He used Prudhoe Bay as an example. In the near term, Prudhoe Bay looks like additional in-field drilling and development of some of the satellite accumulations around the Prudhoe Bay field. The economic attractiveness of that opportunity is reviewed and the cash-flow and reservoir models are run in order to determine the possible benefit streams from drilling more wells and the costs that would result as well as the economics. Based on the opportunity step, it will be determined how much should be spent. At this point, Mr. Holt would then meet with a group of peers, business unit leaders from other parts of the U.S. and the world, who review the collection of business units in order to see how the opportunity steps compare. Judgements are made with regard to how much of the total opportunity set should be supported and then a pitch is made to executive management. MR. HOLT turned to the cost savings of the proposed merger. For example, if the lifting costs in Prudhoe Bay can be reduced through the merger, there will be more individual wells that pass economic hurdles, and thus more drilling opportunities at Prudhoe Bay. The cost to produce oil will have decreased not only for them, but for their partners, as well. He explained that they use the same economic measures to put these opportunity sets in the same sort of framework. He gets challenged by some of his peers to test out the quality of their opportunity set versus another and form a view as to how much capital they want to make a pitch for and they make the pitch; generally getting what they ask for. SENATOR PEARCE said as a result of the merger, she would imagine the numbers of people he would have to meet with has expanded, because there are more opportunities. MR. HOLT agreed that both the opportunity set and the capital available increase as a result of the BP Amoco merger. SENATOR PEARCE said she thought it was fair to say that the lion's share of capital expenditures up here on exploration and development are made by BP Amoco or ARCO. She asked how much has the competitive factor in the past three years in Alaska, as he has gone to London to ask to invest money in Alaska, been a stimulus to the investment decisions because of competition. MR. NOBLE answered that the value of the opportunity is what drives the capital that is available. The opportunity has always been in Alaska; they do not bid above what an opportunity is worth. SENATOR PEARCE said she is trying to figure out if the Board really looked at the competition in Alaska or at BP opportunity and is it important to competitors on the North Slope. MR. NOBLE answered that he thought much had been made of competition in an analysis which treats Alaska like we have three or four "widget factories" competing to sell widgets. But in his view, oil and gas production is a dramatically different business. The upstream end of it has not been the subject of anti-trust analysis in the past. It's been where the consumers are with the gas stations and refineries. This has been partly because Alaska's laws mandates competition. For example once you get a lease, you don't compete with each other to drill wells next to each other. The State requires you to for the maximum production of that asset, to develop that jointly in an intelligent way. When they talk about competition, it has very different effect in the upstream and downstream markets. MR. NOBLE rhetorically asked if the State benefits from diversity of views and said he thought it did. He asked if it benefited from having a configuration which allows to compete globally for capital in various markets around the world and he answered he thought it did. But then he asked, is it a function of the number of players there are up here and he didn't think it was. He thought that we are much better off with an intelligent configuration of companies that can keep costs low and develop resources than with having lots of folks running around claiming they are competitors. He thought the conversation about competition on the North Slope was misplaced and misfocused. Number 260 SENATOR PEARCE asked if competition isn't a factor, should Alaskans expect that there will be an increase in investment in Alaska because of the merger and the Charter and a sale of some of the assets to what is maybe a big company (at least aggressive), should we see more or less investments than we would have seen with BP and ARCO. MR. NOBLE answered that he believed we would see more. He believes what Mr. Holt says about the "virtuous cycle." He believes the economics of the North Slope; a very large pool very far from market with very high fixed costs. You need large amounts of production just to keep face load up, the state it's in right now. Now, if you can lower costs, just by new investments, you will attract new investments, not just from BP, but from the new participants. You cycle up with more production and he thought that was where to go, although he couldn't guarantee anything. He said the State was in the same position Mr. Holt was in. You have to pick your best horse and ride with it. You don't always know what's going to happen. BP has worked for the last 40 years to prove it's the best horse up here and he believes it is the best horse. The merger will make it a better horse. We'd better get on it. He predicted an explosion of growth on the North Slope and an extension of those fields. SENATOR PEARCE asked why BP was not willing to commit to some number of investment over the next five years. There should be some number they could commit to make Alaskans feel more comfortable about this. The public is scared and she needs to tell them some good reason why they should believe in it, that it's good for Alaska. It's clear that it's not revenues to the State. MR. CAMPBELL responded that they would increase revenues to the State by increasing production. They plan to make more money with the merger. The Commissioner of Revenue said the way to increase revenues was to increase production. SENATOR PEARCE retorted that he showed how the State would get less money with increased production. MR. NOBLE explained the revenue note as he understood it, made an assumption of no increased production. BP has said there will be more production. Number 220 SENATOR PEARCE said she didn't understand why they would not commit to a dollar figure. MR. CAMPBELL said they were willing to make a commitment on the basis of defined assets. Today they don't know what the asset set is going to be. MR. NOBLE added once you go down divestiture route, which had a lot of support in Alaska, until you get the exact assets in place, you can't say for sure. REPRESENTATIVE GREEN asked on page 22 they ask that the new parties will be fully integrated in Alaska and wanted to know if that meant in the sense of the corporate structure they would be all the way from producer to marketer in Alaska or some other meaning. MR. HOLT answered that all he meant that they would have interest in the whole upstream chain - exploration acreage, producing fields, pipeline ownership. REPRESENTATIVE GREEN reference Commissioner Shively's December 13th letter and a provision in the Kuparuk River Unit about preferential right of first refusal and that he could potentially disapprove of the signing. MR. NOBLE said it was premature to say anything about at this point. Number 156 REPRESENTATIVE GREEN said on page 24 they indicate there is a common occurance of sharing of facilities and certainly in drilling exploratory wells. He didn't recall any agreements for operators coming on later and asked if they thought there would be anything different for an operator coming later who wasn't in on the original installation. How much would he be charged, for instance. MR. HOLT answered that the best examples of facility sharing agreements are between satellite owners and the old existing field owners. These agreements are being negotiated all the time and there are over 30 of them now. REPRESENTATIVE GREEN said on page 26 BP and ARCO agree with the State to make gas available at an acceptable price to viable projects and asked what that meant. MR. HOLT replied that there were a lot of comments on a specified price for the gas in the first draft and that was deleted and replaced with words like "commercially reasonable, fair market, to be mutually agreed between three sets of parties," the parties being BP, ARCO, and the State. MR. NOBLE added that the Charter contains a definition of a qualifying project in there as well. If the project can obtain project construction financing, provide reasonable financial security with respect to a take or pay contract, and can obtain the necessary approvals from other fields. REPRESENTATIVE GREEN said the third box on page 28 says energy companies must continue to merge to achieve a scale necessary in invest in the largest scale projects without sacrificing portfolio. He asked if that threw a wet blanket on smaller independent companies. MR. NOBLE said he believed the scale on the North Slope is such that it needs at least one critical mass investor. Once that's in place, there's room for all sorts of participants who can pick an opportunity set that, in effect, increases the pie. Number 90 REPRESENTATIVE KERTTULA asked about long-term contracts. MR. NOBLE answered that he really couldn't because his group focused on the Alaska end of it and another group is focused on those. He read in the paper they have been announced to the public. He said he would find out and let her know. CHAIRMAN HALFORD asked if $140 million was saved every year and if did apply to the total combined production of ARCO and BP, it looks like that would represent something less than $.50 per barrel. If that's the exercise, it's frustrating to know this occurs with that effort when the price of oil is fluctuating and moving so much. It's a third of our severance tax, it's a third of our royalty; it's pretty small numbers in terms of a per barrel comparison. Number 23 MR. HOLT responded that he has been living that frustration for a much smaller target on a per barrel basis. Much smaller targets than that have been the driving force behind his organization for a number of years. Fifty cents a barrel in the context of oil price swings seems small, but he emphasized that most companies actually make their investment decisions on what they perceive to be an average price. The ignore the swings for the most part in terms of making large investment decisions. Given that, if you can reduce the cost base by 50 or 60 cents on the auspices of an assumed average oil price. TAPE 00-06, SIDE A Number 001 SENATOR LEMAN asked if Mr. Holt could provide a category breakdown of the $140 million cost savings so that legislators could see where the savings accrue. MR. HOLT responded that there is no detailed breakdown but he could provide notional areas where they expect the costs savings to come from and he would get that information to the committee if no confidentiality problems exist. He added there are a number of identifiable things, one being overhead costs in Anchorage. CHAIRMAN HALFORD thanked the BP Amoco panel for their participation. Number 96 KEVIN MEYERS, President of ARCO Alaska, stated what drove ARCO to approach BP was not the financial viability of ARCO, it was that ARCO felt the merger would be in the best interest of its shareholders, ARCO employees over the long term, and for the communities ARCO serves. If the merger were not to happen, there would be changes--it would not be the ARCO of 1999. Mr. Meyers said he doesn't know what the changes would be, but costs would continue to be reduced, ARCO would continue to focus its operations worldwide, and the organizational structure would probably change. CHAIRMAN HALFORD asked what the current plan would be, with regard to expenditures for this fiscal year, and where ARCO is in that plan process. He also asked Mr. Meyers what Alaska can expect from ARCO, as a contingency plan, while the process continues. MR. MEYERS responded that every year ARCO goes through a planning process and puts an operating plan together for that year and the subsequent three years and, in the long range, a ten year period. ARCO finalized one of those plans in January 1999, just before the merger was announced in April. ARCO implemented that plan through 1999 - last year ARCO spent about $535 million in Alaska, half of which was spent on Alpine. ARCO will continue to implement that plan this year. He offered to furnish the committee with actual numbers for the 2000 plan when he returns from a trip to Los Angeles but he pointed out the levels of expenditure are consistent with the operating plan that was put into place a year ago and they are consistent with the levels that were spent last year. CHAIRMAN HALFORD asked if the amount is in the neighborhood of half a billion dollars. MR. MEYERS response was yes. Number 132 REPRESENTATIVE GREEN asked Mr. Meyers if he envisions that the timing would also be according to ARCO's one, two or three year plan. MR. MEYERS responded that ARCO would keep implementing according to that plan so that the key activities that were in place will continue. Alpine has always been scheduled for a third quarter start up and that start up is on schedule. Alpine will be a significant part of the investment. ARCO plans to drill a number of exploration wells this year, several will be in NPRA. Point Matthew(ph) projects would be set up in the first or second quarter of this year. These projects are ongoing and will continue to be implemented. The potential merger is impacting the long lead items. Future projects and new plans are not being developed because it is not known who the partners will be. Mr. Meyers expressed concern about what will happen with long term plans. Part of the difficulty is determining who their partners will be and what the partner's perspective will be. ARCO planned to run two seismic crews this year but because of some of the uncertainty surrounding ARCO's exploration acreage, it's been difficult to agree on how to fund those and to find partners so ARCO will probably only run one crew. Number 174 SENATOR PEARCE asked if the downturn that was experienced in the fourth quarter of this year would have happened anyway. MR. MEYERS answered that the plan ARCO has been following was predicated on a gradual return of oil prices more indicative of the normal. That plan was put together in December of 1998 and January of 1999. The plan assumed that oil prices would be back to normal- -oil prices are above that now. Additional activity could be anticipated in response to that oil price. SENATOR PEARCE stated that in December, 1999, the Governor and others made a case that not having a decision on the merger was having an impact on the number of rigs operating on the North Slope and the amount of work going on. She said it sounds like that was not true, at least for ARCO. MR. MEYERS responded that this is not a black and white issue. The industry has not responded as strongly as it would have, going from $9.00 to in excess of $20.00 so there was clearly not as much activity but, on the other hand, ARCO has continued to execute the plan that was in place. Number 242 SENATOR PHILLIPS commented that he spoke with several ARCO employees this fall who expressed reservations about the merger. MR. MEYERS responded that as an Alaskan, an ARCO employee and as an oil field industry person, he has found himself torn on the issue but, when he looks at the economics of the issue which is what is important to Alaska, the merger is the right answer. CHAIRMAN HALFORD thanked Mr. Meyers for his presentation and welcomed the speakers from the Administration. Number 305 MR. JACK GRIFFIN, Assistant Attorney General from Anchorage, introduced some of the consultants who assisted members of the Governor's cabinet review team to determine an appropriate set of remedies. Mr. Griffin said the group's principle point is that the Charter protects the public interest in maximizing total future North Slope production in two ways. First, it attempts to capture the efficiencies and benefits that the public would see at Prudhoe Bay as a consequence of the merger. Second, it adopts the competitive paradigm for future North Slope leasing and bidding. ASSISTANT ATTORNEY GENERAL GRIFFIN continued. There are several points to remember about the public interests and the government's role in evaluating the contract that these two companies voluntarily entered. ARCO went to BP Amoco, it wasn't the other way around. This is not a situation in which one company is attempting to do something that we disagree with and that perhaps other companies disagree with. It is also important to know the market reaction to what ARCO did, and what BP Amoco and ARCO agreed to do, was overwhelmingly positive. The market saw the same benefits to this transaction that the companies did, and the shareholders of those companies agreed. The State is not in the same position as the either companies, the shareholders or the market. ASSISTANT ATTORNEY GENERAL GRIFFIN discussed some of the issues the Administration saw when it first looked at the merger. It saw benefits at Prudhoe Bay. There was no public interest that supported keeping BP Amoco and ARCO as "competitors" at Prudhoe Bay. Everyone agreed that one operator is sufficient to operate at Prudhoe Bay and BP believes other benefits would result at Prudhoe Bay from rationalizing the disparate interests in the oil rim and the gas cap. From the Administration's perspective, those benefits were undisputed and could increase production at Prudhoe Bay by lowering some of the barriers to some of the incremental investment decisions that happened in that field. ASSISTANT ATTORNEY GENERAL GRIFFIN noted that wasn't the only real benefit from the merger; the Administration also saw potential benefits that were talked about by BP Amoco earlier. There was a very real possibility for an increase in production attributable to the $5 billion dollars BP was willing to commit to spend over the next five years. Also, BP's argument about the efficiency that could be gained across the North Slope by having just one operator and lowering the overall cost base was substantial. Those efficiencies would increase the ultimate production from the North Slope. That argument was not lightly disregarded. The Administration agreed that there were substantial benefits to Alaskans in capturing the efficiencies and rationalizations of interests at Prudhoe, and given that had not occurred for over 25 years despite repeated efforts, it became a proposition for the Administration's team to evaluate the anti-competitive effect of the merger outside of Prudhoe Bay and to evaluate whether the benefits of one operator at the North Slope outweighed the benefit of a competitive environment. The Administration's team felt it was necessary to take a very long term view of the merger and with that view, it felt opting for a competitive solution for future North Slope leasing was a better approach than having a single low- cost operator. Once that decision was reached, the question became, how can new competitors be created to replicate what ARCO's anticipated activities would have been in the future for new lease sales. To answer that question, the Administration's team went to the players in the industry. Oil companies gave four essential answers to what it would take for them to be interested in Alaska and what it would take for them to be competitive in Alaska. The information is reflected in the specific terms in the Charter. First, they would need to have an existing and substantial base of production and you need to be an operator. Second, a company would need to be an operator. A non- operator would fall into a category of disinterested observer and collector of revenues from the State and that is what the team did not want to capture. Third, a company must be integrated and have some of the infrastructure to take the oil from the producing field to the point you are going to dispose of it. Fourth, companies must have good prospects for exploration. The Charter has accomplished those goals and creates a structure that will provide the best opportunity to maximize the North Slope production. Number 492 MR. DAVID BOIES informed committee members that he looked at the merger from the perspective of the antitrust issues and, in this case, how to balance the efficiencies that a merger will obtain. Almost every merger has some potential efficiencies associated with it as well as potential competitive problems. In doing that analysis, the relevant markets of concern need to be analyzed. The concern, from an antitrust standpoint, is competition within a particular market or markets. When looking at potential competitive problems, it is important to keep in mind the market of concern. MR. BOIES explained that his focus was on the upstream market because if there is going to be an adverse competitive impact on the State of Alaska, that is where the impact would be felt. Of particular concern was a potential problem for the markets for bidding and leasing properties on the North Slope and, to some extent, the possibilities of competition for exploration of properties once they had been leased. The latter has a much more attenuated effect because the latter is going to be driven more by world market conditions than by the number of operators or holders of those resources on Alaska's North Slope. The extent to which a company has development rights in particular properties and to which a company tends to develop those rights is going to be a function of how those values and costs of doing that exploration compare to the cost and terms of exploration and development in other areas of the world. MR. BOIES pointed out that diminutive competition for bids for leases was of concern. The number of viable bidders could have an effect on bids and leases because of the importance of lease prices and payments to the State of Alaska. From an antitrust perspective, the extent to which the merger will cause a diminution in competition for leases raises an antitrust problem is complicated because the antitrust laws are designed to promote consumer welfare. A diminution of competition for leases may or may not adversely affect consumer welfare therefore an argument can be developed to say diminution of competition could actually reduce prices for consumers. Mr. Boies said he doesn't believe that argument is well taken but the complications that are inherent in that argument had to be taken into account in assessing the litigation risk if they were going to attempt to bring an antitrust action. MR. BOIES stated the thing to assess in antitrust litigation is one's prospects for winning or losing, because that affects settlement leverage. The litigation risk had to be taken into account to assess the value of the case. The Administration's team also had to assess the "relative few precedent" regarding what precedents exist for a state actually being successful in bringing its own action to court and getting an injunction. In a number of cases, states raised issues on mergers and worked out a settlement, but there are few cases in which a state litigated a matter and succeeded in getting an injunction against the merger. That was likely to be the case in the BP Amoco and ARCO merger, and despite its very significant impact to the State of Alaska, the state's aspect was only one part of the merger. MR. BOIES indicated that one background fact he kept in mind during the antitrust analysis was where the potential competitive problems were, and also what the realistic expectations were in achieving the desired result in court if we were not able to achieve that result in negotiations. To do that, he thought a potential participant would have to have a certain degree of existing production. Second, a potential participant would need certain integrated transportation rights so that its incremental costs, as opposed to the fully distributed costs that it would pay if the participant was simply a user of the transportation facility. Third, he thought it was important that a potential participant have operating rights and, fourth, that the participant have a substantial portfolio of exploration leases to provide incentives and the scope and scale to operate efficiently. The team attempted to address each of those four points in the Charter. The team believes the Charter is a reasonable response to the potential competitive problems and that it is preferable to litigation. This approach enabled the team to maintain the efficiencies and benefits to the State that would result from the merger, and the team was able to achieve a solution as good, and perhaps better, than the State would have likely achieved in antitrust litigation. TAPE 00-06, SIDE B Number 584 MR. BOIES' last point was that the Charter as the form of the settlement does not differ from a judgment approach if a dispute arises regarding whether the terms have been followed. In either case, the State will have to go to court and establish that the terms were not followed. In a regulatory context, a judgment has the advantage of providing for a remedy of contempt which tends to discourage the defendant from drawing too fine a line in terms of its performance. That is not likely to be a problem where you have a concrete step like divesting a particular quantity of acres, or divesting certain ownership shares in feeder pipeline or in TAPS, or divesting a particular quantity of barrels per day of production. The form of the remedy is not a non-issue because had it been done another way, the effect would not have been materially different. CHAIRMAN HALFORD asked when Mr. Boies referred to settlement leverage with regard to going to court, whether he was talking about a state going into state court, or the state being involved in a federal court action in conjunction with the FTC. Number 555 MR. BOIES said he was referring to either because the state has the option of going to state court under Alaska law or going into federal court under the federal antitrust laws. The federal courts have exclusive jurisdiction over the federal antitrust laws, so if the state were to assert a claim under the federal antitrust laws it would have to be in federal court. Regardless of the forum selected, the issue would not be materially different in terms of the relative lack of precedence for a state achieving a litigated successful result of enjoining the merger. That is something the court, particularly in large national or multi-national mergers, will tend to defer to the federal antitrust enforcement agencies, and those agencies will tend to take the lead role in determining any remedy. CHAIRMAN HALFORD asked Mr. Boies when he referred to the antitrust as designed to promote consumer welfare, whether the state is a consumer of the development services of the industry in returning a revenue for the state's natural resources. MR. BOIES said that it could be in one sense, but it probably is not in another sense. To the extent that the state, as the owner of certain resources or having ownership interests in certain resources, has consumed services like transportation services, the state might be considered a consumer. However, where the state is lessor of hydrocarbon leases, the state would not be considered a consumer, the state would be considered a supplier of a factor of production. Suppliers of factors of production are not irrelevant under the antitrust laws because conduct that adversely affects them can, in turn, adversely affect consumers under certain circumstances. In this instance, the state has an interest in competition among bidders because that will drive up the price that the state is paid. The price increase, to the extent it has an effect on consumer prices, which for a whole variety of reasons given conditions in the international oil market, is a matter of a lot of complexity and question. To the extent it has any effect, that effect is going to be adverse to the consumer, not in promoting the consumer, unless you were to tie the lack of competition into a lack of actually developing leases once they were let. In general, consumers have an interest in factors of production being priced as low as possible, as long as the price is not so low that supply drops below an optimum level. With respect to these leases, it is hard to make a case that the consumer is at harm, unless one argued that fewer leases would be available, as opposed to the state getting less for the leases that were made available for bid. Number 502 CHAIRMAN HALFORD said he was thinking in terms of all the costs of production, transportation and so on, that are deducted from the wellhead value. Those costs drive up the price and drive down the value at the same time. He asked if the state and the consumer are really on the same side of the issue. MR. BOIES said they are. For example, if this merger were viewed as having a likely effect of increasing pricing power with respect to charges that would be imposed on the TAPS pipeline, you would have a different question than the one being analyzed. Number 482 REPRESENTATIVE KERTTULA asked Mr. Boies' to clarify his last statement. MR. BOIES said one of the things the team focused on was to try to ensure that an alternative operator on the North Slope would have access as an owner to transportation so that they would be paying in effect the incremental cost and not the cost that they would be paying if they simply approached it as a customer of the pipeline. The team concluded that the divestiture achieved in the Charter would solve that problem. Had that problem not been solved, a potential alternative operator on the North Slope might say it is a competitive disadvantage to one of the incumbents. REPRESENTATIVE KERTTULA asked if that is the reasoning for all four areas - to be certain that you have someone that is vertically integrated and able to compete? MR. BOIES said yes. REPRESENTATIVE KERTTULA asked why the vertical integration is important ultimately. MR. BOIES said if you want to have an operator or company on the North Slope that is going to be an effective bidder for leases, you want someone who has a cost structure that will make it practical for them to be an effective bidder. You want them to have a scope and scale that will be efficient, you want them to have integrated access to transportation, and you want them to have the kinds of things provided in the Charter so they can be an effective and cost efficient operator because it is their ability to be cost efficient that will give them both the incentive and the strength to be a plausible bidder for leases. REPRESENTATIVE KERTTULA agreed with Mr. Boies' statement. Number 452 REPRESENTATIVE GREEN asked Mr. Boies if he considered the fact that all North Slope production is from State land which is shared equally among all the residents of the State, as opposed to Texas where the leases are owned by individuals. MR. BOIES replied the issue is whether it is owned by the State or owned by individuals. Hydrocarbons are a factor of production. From the standpoint of the State of Alaska, as the owner of substantial hydrocarbon reserves, the State of Alaska has a fiscal interest in getting a good return for that asset, just as a state that owns a lot of timberland has an interest in getting a high price for lumber. That is not really an antitrust concern. The antitrust laws are not designed to get a good or even fair return for producers. The antitrust laws are designed to get consumers the lowest possible price. In effect, the antitrust laws are designed to drive down the price that owners of productive assets have. To the extent that the productive assets require renewing capital investments, one doesn't want to drive it down to a point where optimal investment becomes unprofitable. When the resource is hydrocarbon in the ground, and the question is how much you are going to be paid for those hydrocarbons, the antitrust laws want to pay you as little as possible to reduce the price to consumers. Number 420 REPRESENTATIVE GREEN said Alaska is different because we are upstream. He asked if you carry that concept to the ridiculous and assume that there is absolutely no profit on the upstream side because the price was driven so low to benefit consumers in some other state, whether Mr. Boies would consider that an adverse situation from an antitrust perspective. MR. BOIES said it would not be an adverse antitrust problem. It would be a matter of great concern to the State of Alaska and it would be something the State of Alaska would have an interest in trying to counter. OPEC's desire is to attempt to stabilize and improve the price of hydrocarbons to the producing states. If that took place in the United States by private parties, it would be a violation of the antitrust laws. CHAIRMAN HALFORD asked about the State royalty oil barrels and transportation. MR. BOIES said one can argue that the State is a consumer of the transportation resource. It is a consumer, in the sense of a purchaser. When antitrust laws refer to consumers, they are talking about the ultimate consumer. To the extent that a person, state or entity in the production chain is a purchaser of goods or services, the antitrust laws are interested in the purchaser to the extent that what happens to that person, state or entity will affect ultimate consumers. Another issue that the FTC is currently grappling with in connection to this merger is whether this merger will affect gasoline prices on the West Coast. That is unlikely because such prices are determined by world market prices. One of the things the FTC is looking at is whether one could consider the refineries as protected consumers under the antitrust laws. They would have to prove that there would be an affect on the price of the crude oil. Even, if that was true, the legal issue of whether those refineries are really protected consumers under the antitrust laws remains. CHAIRMAN HALFORD asked if the refinery is designed to handle Alaskan crude oil and a change to that design would cost money, and the refiner decides to pay the difference in the premium to avoid making refinery changes, whether the refiner would be considered a consumer. Number 344 MR. BOIES said in the very short-term, it is probably the case that there can be differentials in pricing. That is true for commodities generally. There are a wide variety of reasons why commodities are not priced uniformly, and some of those may be differences in terms of the cost that would be required to make a short-term adjustment. A particular refiner might pay an upper and lower range expressed in a few cents for any particular kind of crude oil, including ANS crude oil, depending on the refiner. You have to accept that as something that happens in the real world. REPRESENTATIVE WHITAKER asked to hear more about downstream issues. ASSISTANT ATTORNEY GENERAL GRIFFIN stated the press has reported that the FTC is concerned that the merger benefits Alaska at the expense of people at the pump in California. He noted Dr. Leitzinger has some information on that. CHAIRMAN HALFORD asked where that information came from because he hadn't heard that. ASSISTANT ATTORNEY GENERAL GRIFFIN said he didn't know who leaked the information, but the leak was that FTC staff was advocating to the Commission that this merger would raise the price of gasoline in California. CHAIRMAN HALFORD asked if this is supposed to have come from the FTC. MR. GRIFFIN said it is alleged to have come from the FTC staff in a paper they prepared urging the commission to take a particular action. Number 344 DR. JEFFREY LEITZINGER, President of EconOne Research, made the following statements. He has spent much of his career looking at ANS market issues, and much of that on behalf of the State of Alaska. The issue the FTC is looking at is whether the merger will result in higher ANS prices on the West Coast, whether that will lead to higher crude oil prices generally on the West Coast and then higher gasoline prices. Based on 15 years of looking at ANS market conditions, he does not see how either of those effects will result from this merger. His conclusion is based on three reasons. First, the crude oil market prices today are set by world market price conditions - by the cost of bringing imported crude to the West Coast. Changes in ANS output or prices are not going to affect West Coast crude oil price levels. Changes will only affect how much ANS is used on the West Coast versus foreign crude. CHAIRMAN HALFORD said there will be no impact at all on the West Coast based on increases or decreases in ANS production. Number 278 DR. LEITZINGER said yes, the West Coast today is very different today than it was five or ten years ago when there was surplus ANS production. Because of the export ban, the market that people looked to for ANS was the West Coast. At that time, ANS had backed off the West Coast and just about all of the imports that were available to substitute for ANS. ANS became the price setting crude oil. It was absolutely the case ten years ago, that when you change the amount of ANS you tried to sell on the West Coast, it had an effect on the West Coast crude oil prices. What happened as a result of the decline in ANS production, and in some parts because of the relaxation of the export ban, is in the mid-1990's there was no longer enough ANS crude oil to supply demands in West Coast refineries. What had been a small stream of imports, which came into the West Coast for purposes of blending and increasing average quality of California crude oil, had now become a veritable flood of imports. Five years ago about 200,000 barrels a day of imported crude oil was brought into the West Coast, this year there will probably be close to 600,000 barrels a day. That is about 25 percent of what West Coast refiners demand. DR. LEITZINGER continued. The importance of that is not just the 25 percent, but it is the 70 million barrel a day world market, with six million barrels a day of excess capacity. In his view, if an ANS producer were to attempt to raise West Coast crude oil prices by holding back output, which is the mechanism used by a firm with market power, the West Coast refiners will simply substitute imports to take the place of ANS. In the last two or three years, ANS production has fallen off and more imports are coming in to take its place, but the relationship of ANS prices to import prices has stayed the same. The 200,000 barrel decline of ANS supplies to the West Coast over the past several years has had no discernable impact on ANS prices as compared with foreign prices. His point is that the West Coast is now driven by worldwide market conditions and changes in ANS volume or any efforts to raise prices are simply not going to succeed. CHAIRMAN HALFORD asked if any refineries on the West Coast run 100 percent ANS crude oil. DR. LEITZINGER replied yes, the two ARCO refineries are running virtually 100 percent ANS crude oil, and he believes that EXXON's Benicia refinery is also running 100 percent ANS crude oil. CHAIRMAN HALFORD asked if there was any cost for conversion. Number 223 DR. LEITZINGER answered no. ARCO's refineries are especially suited to run ANS, and if ARCO were to try to change that to run foreign crude oil, there would be significant cost. The reason why that fact doesn't mean you can raise prices on the West Coast is that the problem is the West Coast is a refining market of 2.4 million barrels a day. The ARCO and the EXXON refineries together use about 500 thousand barrels a day, maybe a little more. There is another 1.5 million barrels a day in refineries on the West Coast that readily use imported crude oil, so a large part of the market will readily switch to foreign crude. Even if you were to try and target a particular refiner who, because of its configuration, couldn't switch with the high price, because there is that other large volume of crude oil coming to the West Coast, they would just buy it from one of the other refiners. If you wanted to put the squeeze on those few refineries that are ANS specific, you would have to pull all the rest of the ANS off of the West Coast. It will not be in a company's best interest to do that because the West Coast is too important as a market. DR. LEITZINGER explained the second reason for his conclusion is that he doesn't believe the merger will increase BP's ability or incentive to try and increase prices on the West Coast. The Charter will reduce BP's position as a net seller of crude oil on the West Coast. To the extent that volume is a measure of a company's size and importance, it's going to make BP less important on the West Coast because, as a result of the merger, while BP will obtain ARCO's crude oil volume, BP is also going to be obtaining ARCO's refineries, which today consume more crude oil than ARCO produces. The estimates are that about 50 thousand barrels a day of the supply that BP used to sell on the West Coast to third parties will be needed to feed ARCO's refineries. That is 50 thousand that BP used to sell that won't be there. In addition, the Charter will mean another 175,000 barrels a day in BP production will go to two other parties who will either use or market that oil on their own. The net result, from BP Amoco's standpoint, is that 225,000 barrels of oil which it used to sell on the West Coast, is now going into their own refinery or to other parties to market. That volume is going to disappear from BP's sales business as a result of the merger, and equals a little over 50 percent of the total volume it has to sell. CHAIRMAN HALFORD asked about long-term contracts for another 200,000 barrels, and how that relates to all of this. DR. LEITZINGER replied BP sells about 400 thousand barrels a day on the West Coast today. Two-hundred-twenty-five-thousand barrels of that is going to disappear because of the merger. It is going into the ARCO refinery and it is going through the Charter to two other sellers. BP has committed to sell 100,000 barrels of the remaining 200,000 barrels a day under long-term contracts. That should act to reduce any concern that BP Amoco after the merger might somehow try and pull back output. They have already shrunk the amount of output they have to sell by over half, and half of what remains BP has now committed to sell under long-term contracts. It is really going to take them out of play as a seller. On the West Coast today, there are really two significant arms-length sellers of ANS, one is BP and one is EXXON. The merger with the Charter will turn the West Coast into a market where there are potentially now four significant sellers of ANS on the West Coast: BP, EXXON, and the two companies that pick up the oil under the Charter. If there is a concern that the merger may affect competition, it will mean there are more arms-length crude oil sellers with significant volumes, not less. If it will do anything, it will have to work in the right direction competitively. DR. LEITZINGER stated his third reason goes to the relationship between crude oil prices and gasoline prices on the West Coast. This is something at EconOne has been studying carefully for the past six to eight months. One thing that has happened in the West Coast over the last three years is gasoline prices have become disconnected from crude oil prices. The margins that existed in prior years in the refining business have increased 30 percent. The market is much more volatile with peak margins doubling in size over prior years. Several things contributed to that disconnect. The "carb restrictions" were implemented. No longer can outside supplies of gasoline be brought in to supply the important market on the West Coast because outside sources typically can't make large volumes of carb-gasoline quickly. Second, when you have a refinery outage, there isn't an easy way to make that up, and we have had several big price spikes in the last three years that have caused average margins to go higher. Third, there are some issues regarding the market structure and competitiveness of the gasoline marketing and distribution business on the West Coast. There are some very odd pricing relationships when you look at Northern and Southern California and San Diego in gasoline prices, and the only thing that seems to differ is differences in marketing margins and what happens to retail under the business. DR. LEITZINGER said that is significant for two reasons. First, because of this disconnect, it's not crude oil costs that are driving gasoline prices, it could be pure carb-refining capacity, problems with inventory when there are crude outages, or marketing issues in the distribution of gasoline. But, some combination of those factors are what is driving gasoline prices on the West Coast today, not crude oil costs. Even if one were to believe that a modest increase in ANS cost for the West Coast were to occur, he does not believe you would see it in gasoline prices. Carb- refining, the availability of supplies for outages, and implications of competitive concerns about the distribution system, will be affected by the merger. Because the West Coast is part of the world market, because he doesn't think the merger is going to add to anyone's incentive or ability to increase West Coast prices, and because of the disconnect between crude oil costs and gasoline prices, he doesn't think there is a dangerous prospect here. Number 44 ASSISTANT ATTORNEY GENERAL GRIFFIN said Dr. Leitzinger is not the only one who has concluded this. We essentially had this debate in 1994, and 1995. At that point, part of the debate really was should we lift the export ban. Since by doing so, we may cause ANS prices to rise which would hurt California gasoline consumers. Sounds a lot like some of the things we have been hearing that are allegedly coming out of the FTC. Congress concluded when it decide to lift the export ban that the national interest would be advanced by allowing ANS to trade at world crude oil prices. Because of the export ban, the ANS price was artificially depressed. Alaska was picking up the tab for the export ban. Congress found that it was not in the national interest, because California gasoline consumers were not benefiting. Even though the export ban was artificially depressing the price of ANS, and we were paying that cost, the refiners on the West Coast were not passing that along to California gasoline consumers. They were putting it into their bottom line. What appears to be happening today at the FTC is that they are afraid that the State of Alaska may be able to enjoy higher crude oil prices and they are concerned about protecting the margins of West Coast refiners. If that is true, we think it is illegitimate and the FTC should step back and reevaluate where the national interest is. TAPE 00-7, SIDE A Number 001 I don't think that the State of Alaska benefits by aiding and abetting what may be an effort by the FTC to protect or increase the margins of West Coast refiners. I mean as Dr. Leitzinger pointed out, it's a world crude market. It's an argument that's not even a rational concern on their part. Obviously something is going on there and that's why we had Dr. Leitzinger here today to talk to you. CHAIRMAN HALFORD asked what the current differential is of ANS to other West Coast refiners. MR. PULLIAM replied the ANS to WTI differential today is about $1. AN UNIDENTIFIED SPEAKER said the differential has averaged about $1.50 over the past year. MR. PULLIAM said he thought Saudi is also priced off WTI so he imagines that relationship would be relatively easy to establish. CHAIRMAN HALFORD asked if that is just a little bit less than it has been for a long time. MR. PULLIAM replied ANS prices have stayed in a very narrow ranges on the West Coast at least since 1995 which is about the time ANS became deficit to West Coast refiners. CHAIRMAN HALFORD said, "But even before that it was $1.50 to $2 maximum. MR. PULLIAM agreed it was closer to $2 below WTI before that time. ASSISTANT ATTORNEY GRIFFIN pointed out a report issued by the Governmental Accounting Office (GAO) in June or July of 1999 noted the decrease in the differential between ANS and other world market crudes that occurred in the 1995 time frame. The GAO concluded that the rise in the ANS price at that time was not passed along to West Coast gasoline consumers. Another federal agency along with the federal Department of Energy concluded that the price of ANS on the West Coast is not a California consumer issue. CHAIRMAN HALFORD stated, "But that works the other way. That was a rise." ASSISTANT ATTORNEY GENERAL GRIFFIN said that was a rise in the price of ANS and, although he does not know what FTC members think, if what has been reported in the press about the FTC's concerns is accurate, the FTC must be concerned about a price rise in ANS. A price rise concern is the only thing that could drive what is being reported about the FTC. He indicated there may be a question of the State of Alaska's credibility among some of the FTC staff because they know that Alaska benefits when the price of ANS rises. The fact that ANS may go up is not something that Alaskans should fear, but for a number of reasons, the FTC should also not fear it. Number 82 MR. LOEFFLER made the following comments to "connect the dots" between statements made by Dr. Leitzinger, David Boies, and the FTC's alleged concerns. If the FTC wants to maintain a case based on this alleged impact on California consumers, it will run into testimony similar to Dr. Leisinger's that there is no retail consumer impact. The FTC is really trying to protect the margins of California refiners which several federal reports have said those margins to be the highest in the country or, indeed, the world. The FTC has difficulties with its case, if that is its complaint. The FTC may have thought it could slow this merger through attrition in the absence of this sustainable legal theory. ASSISTANT ATTORNEY GENERAL GRIFFIN introduced Dr. Warren-Boulton who examined the upstream fitting issues from the State's perspective. DR. WARREN-BOULTON made the following points. First, given the current State leasing practices, even a merger to monopoly would not be expected to have a systematic effect on the acreage leased, the exploration efforts, or production and hence, on state revenues and royalties or taxes. A merger to monopoly would, however, significantly reduce revenue from bonus bids. For that reason, he has concentrated on the effects of this merger on state revenue from bonus bids. He repeated Mr. Boies' statement that the relevant antitrust market here is not production but leasing. The critical issue from the point of view of state revenues is the market for state leasing and the issue is whether or not this merger will significantly increase concentration amongst potential buyers of state leases. DR. WARREN-BOULTON said a third potential market is affected by this merger which is the gasoline market in California. He repeated the critical issue is the effect of the merger on the market for leasing of State lands. To the extent that the Charter is involved in issues of production, the goal is not to create competition in production, but rather to create units that are capable of becoming effective bidders. The ultimate goal is to increase the competitors in the market for bidding on State leases. DR. WARREN-BOULTON informed committee members that he constructed a fairly complex econometrics model to determine the value of winning bids. He calibrated that model using a very extensive data set provided by the State on all tracts leased on the North Slope. That model was then used to determine the effect on winning bids and on State revenues. Two variables exist; the first affect the competitive or true value of the oil under the tract, such as the price of oil, the amount of reserves and the cost of recovery. The second set of variables are variables such as the number and nature of competing bidders which determine the share of the value that goes to the State. That model is then used to simulate the effect of the merger on state revenue and to estimate the potential effects of the merger combined with the Charter. DR. WARREN-BOULTON explained the prediction of the model, in terms of the effect of the BP-ARCO merger absent the Charter, is a reduction of competition for leases and a reduction of state revenue on bonus bids. He estimates that historically, the elimination of competition between BP and ARCO would have reduced total bonus bids to the State by about 19 percent. That number is a reasonable one to use in looking forward as to the impact of the merger, absent any other provisions such as the Charter, on the estimated revenue of the State from bonus bids in the future. DR. WARREN-BOULTON said he analyzed the level of bidding activity that would be needed on the part of two new firms whose entry was induced by the Charter to more than offset the effects on bonus bids of the merger and compared the entrants to existing firms on the North Slope. The analysis reveals what hurdle the Charter will have to overcome in order to offset the anti-competitive effects of the merger. The model concluded that the entry of two moderately active firms would counteract the effect on bonus bid revenue of the merger. For example, if two entrants with the past bidding characteristics of Union Texas, which ranks fifth in bidding frequency, and Murphy Oil, which ranks about eighth, that would just balance out the effects of the merger of BP and ARCO. If the Charter resulted in the entry of an Amerada clone, which is seventh, and a Murphy Oil clone, that would not be sufficient to counteract the effects of the merger and bonus revenues would fall about three percent. On the other end, if two firms, such as Unocal, which ranks ninth, and Anadarko, which ranked fourth, the net effect would be an increase in bonus revenue by about two percent. DR. WARREN-BOULTON explained that since the merger is expected to generate significant efficiencies downstream, it follows that if the Charter is successful in counteracting the anti-competitive effects of the merger on the leasing market, the state will be better off in terms of revenue with the merger and the Charter than without the merger. Number 225 REPRESENTATIVE GREEN asked how the model compares his analysis of two potential buyers with the continuation of ARCO as is. DR. WARREN-BOULTON said that is exactly what the model does. The model looks at the entire pattern of ARCO bidding and its effect over time, not only on the bid leases but also on its presence on the bids by BP and others. The model looks at what the effects would be if there was no competition between BP and ARCO. The effects are quite substantial; about a 20 percent reduction. The model was also constructed to ask what the effect of bidding by Union Texas and all other bidder firms was. He was then able to combine BP and ARCO and ask how large and aggressive the entrants would have to be to offset the anti-competitive effect of the merger. The answer is, assuming that the Charter is effective in introducing two firms, that the effects on bonus revenue of the merger could be counteracted. REPRESENTATIVE GREEN asked Dr. Warren-Boulton if he has checked his model against the last couple of lease bids in which the combinations did not rise to the top in getting bids. DR. WARREN-BOULTON answered the model uses all data from the entire leasing period since leasing began in Alaska. He asked whether those relationships have changed over time to re-estimate the model for different time periods and got substantially the same effect. REPRESENTATIVE GREEN clarified that he was asking if Dr. Warren- Boulton compared the findings of his model regarding off-setting the anti-competitive possibility of the Charter and the merger with the real picture in which Anadarko did not win the leases that ARCO did. DR. WARREN-BOULTON replied the presence of firms bidding affects the winning bid even if they don't win. For example, one of the things he found was the presence of ARCO had a significant impact on the bid by BP even when BP was the winning bidder. The potential competition from ARCO had a significant impact on the winning bids even on tracts that ARCO did not bid on because firms do not know who will bid. REPRESENTATIVE GREEN expressed concern that something is not right with the model. Number 363 REPRESENTATIVE WHITAKER asked if Dr. Warren-Boulton's model is available for review. DR. WARREN-BOULTON asked to take a look at that question but surmised that until the outcome at the FTC is known, the model is probably not available. REPRESENTATIVE WHITAKER expressed concern that the committee's inability to validate substantial conclusions presented by the Administration is problematic. REPRESENTATIVE GREEN said Assistant Attorney General Griffin noted he was not surprised that BP's previous attempts to find a single operator for the North Slope failed. He said he presumes those attempts failed because of a problem with ownership of proprietary information and asked if that is correct. ASSISTANT ATTORNEY GENERAL GRIFFIN replied that he has no direct personal knowledge of what considerations entered into the discussions of the parties in negotiations. From looking at the Prudhoe Bay field and the separate participating areas for the oil revenue gas cap, his guess is that an inability to agree on the value of the gas played a substantial role. He noted that since the inception of Prudhoe Bay, they have not been able to do it even though it makes sense to have a single operator for that field. REPRESENTATIVE GREEN asked Assistant Attorney General Griffin if he said the value that the various estimators made on the gas cap may have had an effect on the bids for other leases. ASSISTANT ATTORNEY GENERAL GRIFFIN clarified he was responding to the question of why does the Administration think the owners at Prudhoe Bay have not been able to align their interests to date. ASSISTANT ATTORNEY GENERAL GRIFFIN offered to address further questions about the fiscal report prepared by Dan Dickenson for Commissioner Condon. CHAIRMAN HALFORD asked Assistant Attorney General Griffin to elaborate on the last paragraph of the conclusion. ASSISTANT ATTORNEY GENERAL GRIFFIN read the paragraph as follows. The goal of the Charter for development of the Alaska North Slope was to keep North Slope competition alive in the long term and create replacement barrels for the fields that drive our current production. It will be many years before our forecast will begin to reflect whether that attempt was successful or not. He said he believes there is a question of whether there is going to be additional production in the short term over what we have predicted and would be expected to predict in the absence of thee merger. Hypothetically, if the FTC was to block the merger, the Charter would disappear and none of the efficiencies hoped for would occur at Prudhoe Bay. The long term intent of the Charter was to create competitors for future North Slope lease sales. It will be years before it is known whether the creation of new operators and new competitors on the North Slope will ultimately produce more barrels of oil than we might have otherwise seen through a single operator across the North Slope. Number 363 REPRESENTATIVE KERTTULA asked, in the best of all worlds, whether the group believes it would be better for the long term picture of Alaska to go back and have ARCO as it was or to have the Charter. ASSISTANT ATTORNEY GENERAL GRIFFIN stated a lot of people really respected ARCO. People liked that ARCO was aggressive in some areas of developing the North Slope while BP was more aggressive in other areas. BP and ARCO brought two sets of eyes and skills to the North Slope and tried different things. In that sense, reverting to the way things were sounds good. He does not believe that is any longer a realistic view, however, and the Administration is not articulating an anti-trust argument that ARCO is a failing company. He agrees with the market's perception that the combined companies would be a lot stronger. In the long term, combining the interests of Prudhoe Bay, achieving some cost synergy in other areas of the North Slope, and creating new competitors in Alaska, the State will be better off in terms of the total numbers of barrels produced. He maintained that ARCO was a great company but the bottom line is that the State will be better off as a consequence of the new arrangement. REPRESENTATIVE KERTTULA asked if he approached this issue with the view that the merger would happen. ASSISTANT ATTORNEY GENERAL GRIFFIN replied when the proposed merger was announced, it took everyone by surprise. The Administration did not start its investigation with any preconceived notion of "the right answer." They looked at the law and the facts and adopted an approach that appropriately reflects how government should react when it sees a situation like this. REPRESENTATIVE WHITAKER indicated one part of AS 45.55.068 says that a substantial lessening of competition may not develop from an acquisition or merger. He asked Assistant Attorney General Griffin to justify the Charter agreement with regard to AS 45.55.068. Number 415 ASSISTANT ATTORNEY GENERAL GRIFFIN replied that particular statute is an analog of the federal Clayton Act. The legal standards that Mr. Boies spoke about would, more likely than not, apply in the interpretation to the state's law as well. The question is not only about competition, it is about the sort of competition that the antitrust laws are designed to protect. He asked committee members to keep in mind whether the merger creates a viable antitrust case and whether the law would even apply. REPRESENTATIVE WHITAKER asked if he is referring to Mr. Boies' comments regarding the upstream versus consumer issues on the downstream issue. ASSISTANT ATTORNEY GENERAL GRIFFIN said yes. REPRESENTATIVE WHITAKER asked if Mr. Boies' concern is with the downstream. Number 438 ASSISTANT ATTORNEY GENERAL GRIFFIN thought Mr. Boies' was saying the traditional antitrust analysis would focus on consumers. He added that the Administration did take a look at competition and that is precisely what they asked Dr. Warren-Boulton to look at on the upstream. They asked him to address what the loss of ARCO as a competitor at the lease sale stage would mean to the State. Regardless of whether all antitrust experts would agree that Alaska has a case, the Administration felt it was important to exercise the State's responsibility to protect the public interest to create a competitive environment on the North Slope. REPRESENTATIVE WHITAKER thought that would lead to a negation of Mr. Boies' contention that the upstream competitive issue really is not an issue. ASSISTANT ATTORNEY GENERAL GRIFFIN responded that one could argue that the upstream competition issue is not an antitrust issue. The Administration never took that position in its negotiations. DR. WARREN-BOULTON added they would have said the leasing market is an antitrust market and that the State of Alaska is standing in as a consumer. There is no difference between a merger that increases monopoly that raises prices to consumers or a merger that creates monopoly power that reduces prices paid to input suppliers. The Antitrust Division merger guidelines regards the two as equal. His conclusion, however, is there is risk of litigation even when one is on the right side. In his analysis the issue comes down to the fact that it is pro-competitive if it leads to more revenues and it is anti-competitive if it leads to less revenues to the State of Alaska in exactly the same way that a merger in an output market is pro-competitive if it leads to lower prices to consumers and anti- competitive if it leads to higher prices to consumers. The litigation risk arises in the distinction between what one would argue and what one believes and persuading the court. REPRESENTATIVE WHITAKER said he understands that argument in part. He asked Assistant Attorney General Griffin to elaborate on point number 2. ASSISTANT ATTORNEY GENERAL GRIFFIN said assuming the broader interpretation of the statute is correct, the Administration looked at the competition issue and then developed the solution necessary to address the competitive problems they saw. One of the tenets of the application of the antitrust laws is that in evaluating a proposed agreement between two private parties, the government can step in and take that contract away if the public interest in preserving competition requires it. Taking the contract and ripping it up is the most egregious form of government reaction. It is incumbent upon the government to look at the agreement and ask itself whether there is a less drastic remedy which is what the Administration did. They looked at the Charter and developed a structure that would guarantee competitors in future North Slope lease sales on both state and federal lands. REPRESENTATIVE WHITAKER asked if he could justify the substantial lessening of competition concerns of AS 45.55.068. ASSISTANT ATTORNEY GENERAL GRIFFIN said the Charter satisfies any concerns under the state's antitrust laws by creating one, and possibly two, new operators on the North Slope who have the production, right to operate, and additional exploration leases necessary to form the basis of a company that will step into ARCO's shoes and bid. REPRESENTATIVE WHITAKER commented if that is the case, he finds it curious that there is a necessity in the Charter under the heading of Number 3, Alaska's Commitment. The last sentence of that paragraph reads: The State accordingly agrees that in exchange for BP/ARCO's fulfillment of their obligations under this merger, it will not seek to enjoin the merger to seek additional orders or judgments under AS 45.55.080 related to a claim that the merger is unlawful under AS 45.55.068. He repeated that if it is so clear that the Charter answers the antitrust concerns under its merits, it seems strange that it need be specifically precluded from prosecution under that statute. ASSISTANT ATTORNEY GENERAL GRIFFIN commented that the sentence read by Representative Whitaker is the consideration the state gave in return for forcing BP to agree to divest between $3 and $4 billion worth of assets. It is the standard response of the enforcement agency that if the parties being investigated agree to your terms, you will not sue them under the antitrust laws alleging that the merger they propose is unlawful. He emphasized that provision is very unremarkable. REPRESENTATIVE CROFT asked whether the Administration had the information about the merger costing the state money if it was anti-competitive and that income tax could be less even though profits were higher when negotiating the Charter agreement. ASSISTANT ATTORNEY GENERAL GRIFFIN said the Administration did not have the document at the time but it knew that the combination of ARCO and BP would have a number of effects on the corporate income tax. The Administration knew the efficiencies that the companies were claiming were attributable to the merger of their interests and should serve to increase the worldwide income that the State of Alaska would look to in calculating the Alaska income tax. The Administration also knew the apportionment factors would change. Mr. Dickenson's report indicated one cannot predict with any certainty where the numbers would fall out. Certain factors suggest an increase in the taxable income, other aspects of the tax regime suggest the combination may affect the size of the slice that Alaska takes when it apportions income for tax purposes. The Administration knew of the potential effect but it also knew there was no definite way to quantify those effects. DR. WARREN-BOULTON stated there are three ways the efficiencies can be passed through to the State of Alaska. The first group is the extent to which those efficiencies are retained by the firm and there is a profits tax. Second, if the efficiencies result in reducing the initial cost of extraction, a larger quantity of oil will result in more royalties. Finally, to the extent that efficiencies are carried forward to the future in terms of exploration on new land, the more efficient the firm, the higher the reservation bid price. Efficiencies will have a positive impact on state revenues through state income tax, royalties, and bonus bidding. TAPE 00-07, SIDE B Number 001 REPRESENTATIVE CROFT stated the Administration's argument is that as corporate profits increase, the state will benefit from increased production that will result from efficiency. DR. WARREN-BOULTON replied in addition to the direct accounting effects through the income tax, if the efficiencies result from larger production at Prudhoe Bay, royalty revenue will increase due to quantity even though the royalty rate remains the same. To the extent that those efficiencies mean that new prospects look more profitable in the future, the bids will go up. Number 579 REPRESENTATIVE KERTTULA asked for an explanation of the dangers of monopsony are in general. DR. WARREN-BOULTON replied a monopsony can be as dangerous as a monopoly. People see monopolies as creating a transfer of wealth from consumers to producers and they restrict output. Monopsony has the same effect. One buyer results in two things: first a transfer of income from the producer to the buyer occurs, and second, a monopsony usually drives down the price by being [indisc.]. He said if all steel firms were merged into a monopsony so that they were the only buyer of iron ore, the end effect would be a higher steel price. In many cases, monopsony power can occur where the output effect is fairly small. He pointed out a reserve clause is used in professional sports contracts in which a player can play for only one team. That clause does not result in lower ticket prices. REPRESENTATIVE GREEN said his series of comments pertained to basic assumptions that went into the modeling and the group's approach. For example, there was a question of whether ARCO would continue to exist if the merger does not occur. ARCO spent almost $500 million last year and is going to its Board of Directors next week to request another huge expenditure. BP will make no commitment in that same regard. There is concern that without the merger efficiencies will not be realized, yet efficiencies in charter flights, drilling, warehousing, and personnel have already taken place. He asked what assumptions went into the modeling. DR. WARREN-BOULTON replied the model estimates what the effects of things really were. He explained the value of the winning bid on tracts, and the amount of revenues the state gets on state tracts, is very sensitive to the price of oil. REPRESENTATIVE GREEN clarified he was concerned about the groups' attitudes and how much those attitudes affected the outcome. DR. WARREN-BOULTON asked Representative Green to elaborate on the groups' attitudes. REPRESENTATIVE GREEN said he is hearing that it is far more favorable to the State of Alaska, both now and in the future, that this merger continue as outlined in the Charter. That belief was most likely predicated on the result of modeling or analysis by the Administration's experts. He expressed concern that some of the input used in the model one year ago may no longer be applicable or valid. Number 518 ASSISTANT ATTORNEY GENERAL GRIFFIN asked Dr. Warren-Boulton if the price of oil affects his model, and if so, how. DR. WARREN-BOULTON replied the price of oil plays a very important role in the model. He surmised that Representative Green is asking whether the conclusion of what the State needs, regarding new entrants, is sensitive to the price of oil. Regarding whether the burden on the Charter is greater if the price of oil is low, the answer is "no." If one is just looking at offsetting the effect of the merger on revenues, two new entrants of the seventh and eighth rank would be sufficient. REPRESENTATIVE GREEN maintained that answer says the assumptions, as well as the price of oil used, would not change the results now. DR. WARREN-BOULTON indicated any model is an attempt to learn from history. CHAIRMAN HALFORD asked if the FTC must prove damage from increased monopoly power or whether it has to prove that increased monopoly power will exist as the result of the merger. Number 484 MR. BRADLEY LUI replied the FTC would have to prove that it is likely the merger would substantially lessen competition. CHAIRMAN HALFORD asked if the FTC proves the merger would substantially lessen competition, whether it has to prove any specific consumer damage from the lessening of competition. MR. LUI replied the FTC would have to show that the merger is likely to result in a substantial lessening of competition and that is the consumer harm. CHAIRMAN HALFORD clarified he is trying to separate out the two questions. If the FTC proves a substantial lessening of competition is likely to occur, must the FTC then prove that will impact price, leasing, or something else or does the FTC have to prove a substantive affect on somebody. MR. LUI answered, as Mr. Boies pointed out, there is an argument that the FTC must prove a merger would have a substantial effect on consumers. If the State were to litigate, it would not take that position, however there is a litigation risk associated with that position. CHAIRMAN HALFORD asked about case law on that question. MR. LUI replied that most merger cases are settled so no definitive law exists. He felt the companies do have an argument that the FTC would have to prove consumer effect. CHAIRMAN HALFORD asked if the FTC chooses to enjoin the merger, whether it would enjoin the original merger. He asked whether the Charter is before the FTC to act on. MR. LUI explained if the FTC seeks to get a preliminary injunction in federal court, the FTC will argue that it take the transaction as originally proposed by the parties. The parties will probably argue the merger is the merger plus the Charter. CHAIRMAN HALFORD noted the Charter is an agreement between BP and the State of Alaska. He questioned whether BP can amend the merger agreement to include the provisions of the Charter so that the entire package is before the FTC. MR. LUI replied the Charter is a binding agreement between the companies and the State of Alaska so that it is the contract before the FTC. Whether the FTC decides to accept the Charter is within its authority. CHAIRMAN HALFORD asked if another agreement was added between the companies and the State of California, whether the FTC would consider the merger, plus Charter, plus the agreement with the State of California. MR. LUI said that would depend on the agreement itself but, assuming it is a binding contract that is enforceable by the State of California, then the FTC should consider it. He thought a court would. Number 422 REPRESENTATIVE GREEN asked how the FTC would go about stopping the merger after reviewing the price of ANS in California. MR. LUI answered typically the FTC would go to federal court, seek a preliminary injunction and enjoin the merger. SENATOR PEARCE asked if the model assumed the same acres would be leased, just changing the bid price. DR. WARREN-BOULTON answered that the model doesn't ask the question regarding bidders. It asks given the acreage and all the provisions of the Charter which are intended to create an active bidder, how active does that bidder have to be. It doesn't ask how the provisions of the Charter result in an active bidder. It can't answer the question. SENATOR PEARCE referred to page 2 of Mr. Dickenson's memo, point one, where he assumes production volumes from known resources will not be affected by the merger on one hand and on the other hand, Mr. Holt asserts that the merger should improve production efficiency on the North Slope. She asked why Mr. Dickens came to his conclusion of no increase in production because of those efficiencies. ASSISTANT ATTORNEY GENERAL GRIFFIN answered that the memo is the director's explanation to the Commissioner regarding why the revenue forecast doesn't reflect any change attributable to the merger. It's slightly different than asking about whether the Charter will increase production. Mr. Dickens did not include anything that suggests the merger will affect production, because he was operating under the same sort of uncertainties Mr. Campbell alluded to when he was asked what BP's spending commitment was going to be. Mr. Dickens didn't know if the merger was going to go through. He was making relatively conservative assumptions about what the world was going to look like. The question should be what production do you anticipate seeing as a consequence of creating new operators who ultimately they expect to see bidding on new prospects or on State land and bring those ultimately into development. Number 282 SENATOR PEARCE said on page 1, it says, "based on his analysis, the Division concludes the most likely effect from the merger the revenue sources would be immaterial." This was the response to what happens to the revenues under the Charter. ASSISTANT ATTORNEY GENERAL GRIFFIN answered that until new investments tell them there will be a bump in production, it's too early to include that bump in an estimate on the effect the merger will have. CHAIRMAN HALFORD noted that there was about 15 minutes before everyone had to leave to catch airplanes and asked what everyone wanted to do. People indicated they would continue. SENATOR PEARCE referenced page 4 and 5 that a theory says the merger might reduce costs in Prudhoe Bay in the short term, but because of the combination of the two largest players, there would be less competition leading to less competition in the long term. She asked how smaller economic players could replace ARCO's competitive presence completely. DR.WARREN-BOULTON answered that if they are looking at the effects of the merger on the states revenues, they would not have to create two small firms that are collectively as large as ARCO to counter balance the effects of the merger. SENATOR PEARCE asked if two smaller companies could replace ARCO's competitive presence. DR. WARREN-BOULTON answered that he didn't think there was a concern from an economic, antitrust, or a state revenue point of view having firms compete in production. Where competition is important is in the bidding process. Once a tract is leased, production takes place by a single firm. Firms don't compete in the exploitation of a particular tract and therefore, the reason why there is so much emphasis on creating multiple firms that produce is not because economic theory says we are better off having many different firms performing their function, but that having a firm with those resources means they have the information, knowledge, and ability to bid more effectively on new tracts. Once you lease those tracts from the State's point of view, they are gone. All you care about is the volume of production that comes off those tracts. SENATOR PEARCE asked if two smaller companies could be expected to gain the same efficiencies of scale as ARCO and, therefore, have the same level of production. DR. WARREN-BOULTON answered that you could always joint venture a production operation, if two little companies are less efficient. SENATOR PEARCE asked if the Charter didn't specifically disallow companies A and B from combining. ASSISTANT ATTORNEY GENERAL GRIFFIN answered that under the Charter there could be a single purchaser of the Kuparuk and the Alpine packages. CHAIRMAN HALFORD commented that single purchasers would be almost half as big as ARCO. ASSISTANT ATTORNEY GENERAL GRIFFIN answered with 175,000 barrels of production, yes. From the State's perspective of capturing the benefits at Prudhoe Bay, they required divestiture of close to all the production that was outside of Prudhoe Bay today under ARCO's control. Number 215 SENATOR TAYLOR recapped that we have a merger announced that violates certain state laws of antitrust, that too much of our land is to be leased by one company. The Governor put a deal together and now we found out that we're not going to make any money, but they are going to make $140 million net. That's just off of what they are telling us which makes it conservative at best. Now we're going to force this new company to go out on the market and sell $3 billion - $5 billion worth of assets. We have no control over how that sale occurs other than they divest themselves in the market. ASSISTANT ATTORNEY GENERAL GRIFFIN responded that the State has the ability to object to a purchaser or purchasers of the packages. If they object, the sales cannot go through unless BP goes to court and gets a court order saying it's O.K. SENATOR TAYLOR asked on what basis the State might object. ASSISTANT ATTORNEY GENERAL GRIFFIN answered if packages were put together that did not reflect the terms of the Charter - the amount of production, acreage, infrastructure, and the right to operate. A sale could not be consummated unless they went to the court and said even though they weren't creating new operators, they were divesting the production. They would not win that case. SENATOR TAYLOR responded that for this we have given up the State's right to exercise what are our existing State laws. ASSISTANT ATTORNEY GENERAL GRIFFIN said he would agree with that. SENATOR TAYLOR said in Rome that was called dispensation or paying for sinning. ASSISTANT ATTORNEY GENERAL GRIFFIN explained when the companies acceded to the State's demands and entered the settlement agreement they felt was necessary to alleviate concerns created under that statute, the State, as any other enforcement agency would do, once they had gotten what they needed to address their concerns, they agreed they would not sue to enjoin the merger. Once BP agreed to the conditions the State set to make the merger acceptable, it was incumbent upon us to let BP know we weren't going to file a lawsuit the next day claiming the merger violated state law. SENATOR TAYLOR went on to say that part of the deal didn't have anything to do with oil or future production. It had a lot to do with someone who wanted to play Santa Claus. He asked if there was any money in there for the University. ASSISTANT ATTORNEY GENERAL GRIFFIN answered that there was an unenforceable commitment by BP to increase its charitable givings. SENATOR TAYLOR asked, "Unenforceable?" ASSISTANT ATTORNEY GENERAL GRIFFIN replied if the merger goes through and the Charter is implimented, and BP were to say they changed their minds about the charitable commitment, the State could not sue to enforce that. CHAIRMAN HALFORD asked if there was a private right of action under the anti-trust act. ASSISTANT ATTORNEY GENERAL GRIFFIN replied, "Yes, there is." CHAIRMAN HALFORD asked if someone else could sue even though the State didn't. ASSISTANT ATTORNEY GENERAL GRIFFIN replied if there was a person in the State that suffered an anti competitive injury as a consequence of the actions of these companies, they have the right to bring their own lawsuit alleging violation of the anti-trust laws. SENATOR TAYLOR asked if they could bring a lawsuit not only against the companies, but against the State, itself. He asked, "Aren't we a party at this point?" Number 116 ASSISTANT ATTORNEY GENERAL GRIFFIN answered, "No, they couldn't bring an anti-trust lawsuit against the State. No actions of the State would create competitive harm to others affected by this industry." SENATOR TAYLOR said he was confused about who and what was going to the FTC. At first it was the merger; then it became merger plus Charter. He asked if this Administration is also advocating acceptance of this merger to the FTC. ASSISTANT ATTORNEY GENERAL GRIFFIN answered that the Administration addressed the FTC and informed it that in their view the Charter satisfied any legitimate anti-competitive concerns with respect to the upstream. They have also expressed the view that they didn't see the effect on the price of gasoline in California as being attributable to the merger. Taken together, it could be interpreted as urging the FTC to accept the deal. They have done everything they could to explain the Charter to the FTC. SENATOR TAYLOR asked if there were any obligations or liabilities the State has incurred through taking these positions relative to this deal. ASSISTANT ATTORNEY GENERAL GRIFFIN replied that he would say not. This is a contract between the State and the companies. It expressly does not create a third party right of action in any of its provisions. SENATOR TAYLOR asked about an action by the companies against us. He asked what if the Legislature after these hearings makes a decision that they don't like the merger, to the extent BP was made to do things they didn't want to do. He asked if the Legislature had liability within the contract. ASSISTANT ATTORNEY GENERAL GRIFFIN answered that the State has an obligation under the contract which is that we will not sue to enjoin their merger if the comply with the terms of the agreement. Anything the Legislature does, for example, passing a resolution objecting to the Charter, that wouldn't constitute a violation of the Charter. SENATOR TAYLOR reiterated the question that there was nothing the Legislature could do. ASSISTANT ATTORNEY GENERAL GRIFFIN reiterated not with respect to the State's obligations under the Charter. The executive branch is charged with enforcement of the anti-trust laws, but the agreement says that the executive branch is not going to sue to enjoin the merger assuming the companies live up to their end of the bargain. It does not purport explicitly or implicitly to limit in any way any of the legitimate powers of the Legislature. REPRESENTATIVE GREEN said a December 13, 1999 letter from Commissioner Shively to the various owners ... TAPE 00-08, SIDE A Number 001 ASSISTANT ATTORNEY GENERAL GRIFFIN responded for example, if a working interest owner at Kuparuk tried to exercise preference rights in a way that defeated the intent of the Charter (essentially prohibited BP from complying with its terms, because it could not meet the level of production and obligation to relinquish operatorship), Commissioner Shively is saying he would take that into consideration in his best interest analysis. CHAIRMAN HALFORD said he thought it was worded stronger than that. REPRESENTATIVE GREEN said he had done reservoir modeling of Prudhoe in his other life and knew they could be "tweaked." He asked if the analysis was predicated completely on bidding affects or bidding affects and subsequent operations, since bidding represents only less than five percent of the revenue the State receives from oil operations. He wanted to know how far their model went. DR. WARREN-BOULTON said the short answer was no. He said the statistic returns are very robust and you don't make variables become significant or insignificant depending on how you specify it. REPRESENTATIVE GREEN asked if the model dealt with the bonus effect. DR. WARREN-BOULTON answered they just dealt with the bonus effects, but he wanted to clarify why they are obsessed with bonus revenues because they are such a small share of the total. First of all, the effects are true in Alaska, but not generally true anywhere else. Anywhere else, bonus share is a very high share of the revenue. It is extraordinarily low in Alaska. The second reason is all the impact of the merger is going to have a magnified effect on the bonus. Even though the bonus revenue may be a small percentage of the total, the effect of the merger on the bonus revenue is quite large. The bonus is everything you get above the base. Number 60 SENATOR TAYLOR asked, if as part of these negotiations, was any commitment, pledge or promise made concerning the future tax revenues or royalties of this State. ASSISTANT ATTORNEY GENERAL GRIFFIN answered, "Absolutely not. All of the State's commitments in its entirety can be found on page 12 of the Charter, paragraph 3, section 3. It's a recognition that the companies will abide by the divestitures mandated in the agreement and the State will not block their merger. SENATOR TAYLOR said he had asked the Administrative consultants, if they attempted any calculation of the net worth of ARCO assets at the time of acquisition (proposed last spring) and how that would differ from their worth now - in stock value for instance and he was told no. He should have asked, when you sell the assets that used to be ARCO to another company, what's the difference between the depreciated value and the market value for ARCO or BP. Through this forced divestiture, are we forcing them to run out and make a huge profit based on what they are selling the assets for. He guessed with today's $25 a barrel oil, it sells higher than it would have last spring. Number 146 ASSISTANT ATTORNEY GENERAL GRIFFIN responded that a more traditional view would hold that when you force companies to divest billions of dollars of assets at no minimum value, you are unlikely to be forcing them into making deals with an excess profit. BP and ARCO will get whatever they can for those assets, but he didn't know what it would be. MR. LOEFFLER added that regulated assets have to be sold for rate making purposes at their depreciated value. They can't build that stepped up cost into the rates once they are sold to a new owner. The law is different for regulated assets [than for private industry]. Someone said that the pipeline rate can't change based on the sale price. SENATOR TAYLOR agreed and said that doesn't mean they can't be paid a bonus for the percentage they are selling if it's worth it. He wasn't concerned if this was just an exchange between the two companies and done on a stock swap, but none of the assets will go back to the State to sell. The State has no control over that. We get to monitor a little bit, but he didn't think our supervision had anything to do with market value and whether they sold at a good price or a bad price was probably proprietary information we would not have access to. He was wondering if there were any computations done in light of the significant increase in the oil values that have occurred in the last nine months. DR. WARREN-BOULTON responded if the goal is creating more revenue, then the thing to do is make sure BP sells these assets for the highest price they can get to take advantage of the opportunities and future exploration. The person who is going to be most active in exploring is going to be the one who is going to pay the most for the assets. Any concern with these kinds of divestitures in cases is that the selling firm might deliberately go out and sell to someone other than the highest price - simply because they wouldn't compete with them. He thought the State should try to make sure the assets are sold to the highest possible bidder because that is their best indication of the kind of bidder who is going to take advantage of the opportunities to explore rather than just sit there pump and sell the oil. SENATOR TAYLOR said that seemed backwards to him. If the cost of production has anything to do with the value invested into the assets acquired or to develop that production (if we're at $9 or $10 per barrel) forcing the market high would seem to force up the investment value within the cost of production. Number 175 DR. WARREN-BOULTON commented that as an economist, what you pay for an asset is water under the bridge. The question is are you going to be an efficient operator of those assets. The best way to do that is to find who is willing to pay the most. It's not that you're charging more for it; it's that by selling to the highest bidder, you have located the person who is going to make the most money by running that asset (Dr. Warren-Boulton used the analogy of buying a factory.) You want an efficient effective competitor who will bid vigorously on new tracts that are offered on the Slope. The best indication of that is someone who is willing to pay an awful lot for those assets. SENATOR PEARCE said she wanted a letter stating the note from Commissioner Condon was a fiscal note for the Charter and if it wasn't, the Committee wanted one. CHAIRMAN HALFORD announced an at-ease from 6:00 - 6:25p.m. MR. MACLEOD commented that the most important disagreement they had today was the statement from Mr. Boies that the antitrust laws would not apply if we are not dealing with consumers in the traditional sense or if we are thinking of Alaska or producers. He said the Supreme Court had resolved that a long time ago; the antitrust laws apply equally to impacts on producers selling to anticompetitive markets just as they apply to consumers buying from an anticompetitive market. Dr. Boulton's factory analogy was a good one there. MR. MACLEOD said he heard a good deal about the efficiencies of the merger, but he didn't hear why the merger was necessary to achieve the efficiency of unification of Prudhoe. This is an issue they haven't been able to agree on before. They were not the efficiencies antitrust laws typically recognize. As a matter of fact, the merger itself required a valuation of the opportunities each side had in unifying their operations, because the merger is valuation of asset improvement - of the assets all around the companies including the value that was represented by the operation of Prudhoe Bay. If BP could increase efficiency by virtue of unification, they ought to be able to do it as a joint venture or by agreement. He thought that was how the antitrust authorities would look at it. Number 200 The market reaction was used sometimes by the Administration's consultants as an indicator that this was a good deal, but the market reacts to the profitability prospects of the companies; it doesn't react as to whether those prospects are results of procompetitive or anticompetitive practices. If Coke and Pepsi were to propose merging tomorrow, he thought the market would applaud that because they could make a lot more money by not competing with one another. But that market doesn't tell us whether a deal like that is good for consumers. It seems the answer to whether the deal is good for Alaska goes back to the basic assumption that Alaska has to deal with a post ARCO world and that they are not a viable entity here in Alaska. He didn't hear anything like that. He didn't see why the State had to chose just between the merger, the merger with the Charter, and nothing else. The State should be able to choose between those alternatives and the alternative of an ARCO in the form it was in before the merger was announced. DR. SCHEFFMAN said he has sat on situations like this with the FTC and it's not easy to negotiate a settlement to an antitrust issue. He agreed with much of what Dr. Warren-Boulton said, but he thought the problem was that the analysis of theoretical reasons stops short of where the real issue is. The real action is not in the lease bids, it's in the exploration and development expenditures afterwards. We know the reality of who would spend most of the money. It's an economist's theoretical assumption that it doesn't make any difference what happens afterwards on leased acreage once someone bids. He knows that's not true; ARCO and BP are uniquely important and the competition between them is important. The efficiency claim makes that very clear. The claim is that they have to do a merger because the if the hats of the parties involved in Prudhoe were different, we wouldn't have this problem. The identity of the parties and the uniqueness of ARCO is particularly important in what happens in Alaska in the development of resources. All the evidence points to that conclusion. A theoretical model that predicts what would happen to bidding doesn't answer the really important question here. DR. SCHEFFMAN said the Charter is an unprecedented reorganization of the critical assets of the State of Alaska. He wasn't part of the negotiations and maybe that's the best the State could do. In his view, it is a very difficult thing for a government entity to do. Number 300 MR. BONESS said it seems to him that the State's approach to the antitrust issues is that the law is a very powerful tool and he heard a very narrow definition of the antitrust problem without regard to the large number of intangibles. Then the narrow conclusion of bidding as solving the problems with the econometric model. He thought the Committee should contrast that with Commissioner Shively's December 13th letter which looks at the State's rights under statutes approving assignments of lease. Instead of narrowly defining the rights, it stretches them in order to tell companies that have legitimate contract preference rights, if they try to exercise those rights, because it could conflict with the Charter, the Commissioner would take a very expansive view of those rights to protect the broad State interest. The contrast between that approach with respect to the exercise of preference rights and the narrow definition of our rights under antitrust laws is unfortunate. The greater state's interest lies in the ability to exercise the rights we have under the antitrust laws to protect the full range of interest. Number 479 REPRESENTATIVE PORTER said he heard them saying the highest portion of the $140 million savings was going to come out of the single operatorship of the Slope and that there had been great difficulty in having that occur without this degree of ownership switch. He asked Mr. MacLeod if he could speculate why the savings was not able to be done prior to or without this much of a merger. DR. SCHEFFMAN said the State should look at that question and see whether their regulatory powers could bring about those savings that the companies themselves are unwilling to do. MR. MACLEOD answered that someone at the top of those companies was unwilling to take the action that they needed to take to save the money. It's an economic decision. He said they really don't see a reason, but they also don't see why a merger would suddenly would make possible the $140 million savings. This is the question that has to be answered in order to justify the merger. CHAIRMAN HALFORD said he didn't want to break off the discussion, but airplanes were flying now. He adjourned the meeting at 6:40 p.m.