Legislature(1995 - 1996)

04/13/1996 10:00 AM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                   SENATE RESOURCES COMMITTEE                                  
                         April 13, 1996                                        
                           10:00 A.M.                                          
                                                                               
 MEMBERS PRESENT                                                               
                                                                               
 Senator Loren Leman, Chairman                                                 
 Senator Drue Pearce, Vice Chairman                                            
 Senator Robin Taylor                                                          
 Senator Georgianna Lincoln                                                    
                                                                               
  MEMBERS ABSENT                                                               
                                                                               
 Senator Steve Frank                                                           
 Senator Rick Halford                                                          
 Senator Lyman Hoffman                                                         
                                                                               
  OTHER MEMBERS PRESENT                                                        
                                                                               
 Speaker Gail Phillips                                                         
                                                                               
  COMMITTEE CALENDAR                                                           
                                                                               
 SENATE BILL NO. 318                                                           
 "An Act authorizing, approving, and ratifying the amendment of                
 Northstar Unit oil and gas leases between the State of Alaska and             
 BP Exploration (Alaska) Inc.; and providing for an effective date."           
                                                                               
  PREVIOUS SENATE COMMITTEE ACTION                                             
                                                                               
 SB 318 -  See Resources minutes dated 3/29/96, 3/30/96, 4/3/96 and            
           4/11/96.                                                            
                                                                               
  WITNESS REGISTER                                                             
                                                                               
 Eric Luttrell, Vice President                                                 
 British Petroleum Exploration, Inc.                                           
  POSITION STATEMENT:   Commented on SB 318.                                   
                                                                               
 Commissioner John Shively                                                     
 Department of Natural Resources                                               
 400 Willoughby Ave.                                                           
 Juneau, AK 99801-1724                                                         
  POSITION STATEMENT:   Commented on SB 318.                                   
                                                                               
 Patrick Coughlin, Deputy Director                                             
 Division of Oil and Gas                                                       
 Department of Natural Resources                                               
 3601 C St., Ste 1380                                                          
 Anchorage, AK 99503-5948                                                      
  POSITION STATEMENT:   Commented on SB 318.                                   
                                                                               
 Jim Baldwin, Assistant Attorney General                                       
 Department of Law                                                             
 P.O. Box 110300                                                               
 Juneau, AK 99811-0300                                                         
  POSITION STATEMENT:   Commented on SB 318.                                   
                                                                               
 Kevin Banks, Petroleum Economist                                              
 Division of Oil and Gas                                                       
 Department of Natural Resources                                               
 3601 C St., Ste 1380                                                          
 Anchorage, AK 99503-5948                                                      
  POSITION STATEMENT:   Commented on SB 318.                                   
                                                                               
  ACTION NARRATIVE                                                             
                                                                               
  TAPE 96-54, SIDE A                                                           
                                                                               
 Number 001                                                                    
                                                                               
  CHAIRMAN LEMAN  called the Senate Resources Committee meeting to             
 order at 10:00 a.m.                                                           
                                                                               
 The following is a verbatim transcript of the SB 318 portion of the           
 meeting.                                                                      
                                                                               
 CHAIRMAN LEMAN:                                                               
  Okay, we'll set those bills aside and take up SB 318, the                    
 Northstar agreement.  I'll just note that we have on line                     
 teleconference in Mat-Su.  I believe Bill Van Dyke with the                   
 Division of Oil & Gas is at the Mat-Su LIO, and in Fairbanks, John            
 Ringstad from BP is on line.  I don't who is available in                     
 Anchorage, but I assume that there are people in Anchorage on line            
 on this issue.                                                                
  Just so we do things correctly, we'll recess the previous                    
 meeting, which dealt with the other bills, and we'll go back to               
 that meeting at sometime when we have a quorum.  I'll now call the            
 Saturday meeting to order that was posted for Senate Bill 318.                
  Mr. Luttrell, I think I'll run through just some quick                       
 questions for you, then Commissioner Shively.  Is Attorney General            
 Bothelo going to be here today?  Okay, you're here, great.                    
  In your April 3rd testimony, you discussed the timing for BP                 
 sanction for the Northstar Project, and you said "I expect to have            
 a somewhat better date on the startup by the time we get the                  
 sanction this fall."  Here's the question:  If in your view project           
 sanction must be preceded by legislative ratification through                 
 Senate Bill 318 and you expect sanction this fall, why does the               
 agreement provide a full year after the effective date for BP to              
 sanction the project?                                                         
  ERIC LUTTRELL, Vice President, British Petroleum:                            
  When we addressed the question in the negotiation with the                   
 Department of Natural Resources, we always believed that we would             
 be ready to go to sanction in the fall, but we felt it was prudent            
 to put some time in there to allow for a clearer understanding of             
 when the permits would be ready.  Currently, the critical path in             
 the development that we talked about in my previous testimony is              
 the environmental impact statement, and clearly, it seemed to us              
 prudent to give BP some flexibility to go sanction at a somewhat              
 later date, although it certainly was not our intent.  It just gave           
 us some room in there in case that we thought the permits were not            
 likely to come about in the time that we had predicted.                       
  CHAIRMAN LEMAN:                                                              
  I'm sure you are aware that Mr. Morgan on Monday -- when I was               
 at the Anchorage chamber when he spoke -- also suggested that it              
 was very likely that date could be his fault.  I don't remember if            
 he gave a month, but he suggested the same thing, that it was his             
 desire that it would be this fall.                                            
  If BP chose to use the Prudhoe processing facilities instead                 
 of new facilities out on Seal Island -- which you previously                  
 indicated that your intent is to build new facilities on Seal                 
 Island -- but, if you chose to use the Prudhoe facilities, what               
 percentage of any processing fee paid by BP as the Northstar                  
 operator would go to BP as the operator at the Prudhoe Bay unit?              
  MR. LUTTRELL:                                                                
  I'm going to give you an answer, but I'm only partly sure of                 
 my answer.  BP is the operator of the western operating area, and             
 I believe because the oil would be processed in the oil rim part of           
 the field, I believe that the interest would be on the order of the           
 50 percent that we own in the oil rim, but that's not going to give           
 you as an answer.                                                             
  CHAIRMAN LEMAN:                                                              
  How about if on that one we'll give you a chance to ...                      
  MR. LUTTRELL:                                                                
  I'll write the question down and we'll get you a better                      
 answer.                                                                       
  CHAIRMAN LEMAN:                                                              
   If you chose not to build on-site processing facilities, or                 
 chose to do partial processing of the Northstar production on-site            
 and the remaining elsewhere, such as at Prudhoe Bay, how would that           
 affect the amount of capital spending expected instate, and also              
 the employment numbers both short term and long term.                         
  MR. LUTTRELL:                                                                
   Well, Mr. Chairman, the decision to build stand alone                       
 facilities at Northstar has already been taken.  Obviously, that is           
 conditional upon the approval of the legislation, but we had been             
 in negotiation with the owners of the several fields up there about           
 partial processing and processing at other facilities and indicated           
 to them that we would need to have a decision be made by April 1              
 before we would go forward, because it impacted the engineering               
 drawings that we were doing.  We have not been able to reach any              
 kind of an agreement with any of the other fields, and so we have             
 now proceeded forward with full processing on Northstar Island.               
  CHAIRMAN LEMAN:                                                              
  But as far as you're concerned, there's essentially no chance                
 that it would be that way.  I believe that's what you said earlier.           
  MR. LUTTRELL:                                                                
  I want to enlarge my question.  It turns out that the amount                 
 of money that would be saved by partial processing and processing             
 on shore is relatively small, in the tens of millions of dollars              
 range.                                                                        
  CHAIRMAN LEMAN:                                                              
  Like when you use present value of ...                                       
  MR. LUTTRELL:                                                                
  No, that's just capital.                                                     
  CHAIRMAN LEMAN:                                                              
  Or even initial capital.                                                     
  MR. LUTTRELL:                                                                
   And what that means is that the processing fee would have to                
 be very small, and that doesn't seem to be attractive to the other            
 fields.                                                                       
  CHAIRMAN LEMAN:                                                              
  In your April 8th letter regarding the materials for which BP                
 is claiming confidentiality, you provided a table identifying the             
 items submitted to DNR, the dates when the materials were                     
 submitted, and a notation of whether or not BP intends for the                
 documents to be available for public review.  In your                         
 identification of the materials, several documents are identified             
 as not relevant, as opposed to being either confidential or not               
 confidential.  In the interest of full disclosure, are you willing            
 to provide the committee with copies of the materials you've shared           
 with DNR but which you feel are irrelevant.                                   
  MR. LUTTRELL:                                                                
  I think I am provided there's a caveat attached to them,                     
 because we have been open in our conversations with the DNR, and as           
 we went along, we began to develop materials which were more                  
 accurate and with greater certainty.   And so some of those early             
 materials tended to have answers that are different, or tended to             
 have values that were different than what we ultimately agreed were           
 the real values for things like reserves and costs.  And so we just           
 simply said the early materials are not relevant to the ongoing               
 negotiations.                                                                 
  CHAIRMAN LEMAN:                                                              
  Does DNR agree with you that they're not relevant?                           
  MR. LUTTRELL:                                                                
  I do know what the DNR agrees to.                                            
  CHAIRMAN LEMAN:                                                              
  Maybe I can ask that question.  Commissioner Shively, do you                 
 have an answer right off the top on that one.                                 
  COMMISSIONER JOHN SHIVELY, Department of Natural Resources:                  
  Chairman, for the record my name is John Shively.                            
  We would have to look at them.  The last category which they                 
 added, which was some of the information that went back and forth,            
 we believe in that material is some numbers that are probably                 
 confidential under the confidentiality agreement.  The rest of the            
 document themselves may not necessarily fall under confidentiality,           
 and we have not taken the time to review them.  So that was our               
 concern about them.  And then there was some other information, and           
 I don't a list in front of me, but I'm willing to go over that with           
 you at later time, if you'd like.                                             
  CHAIRMAN LEMAN:                                                              
  I just remind you.  We haven't decided to go into any                        
 confidential session.  I really haven't been asked to do so by you,           
 and according to the -- I think there is information that you've              
 identified as being confidential, but you haven't formally asked us           
 to go into confidential session to look at it, so we'd have to vote           
 to decide if we're even going to do it.                                       
  MR. LUTTRELL:                                                                
  To clarify the issue, Mr. Chairman, in the hearing on Thursday               
 night, the model was revealed to the committee in full context.               
 We, in our letter, suggested and indicated it was our understanding           
 that that model was confidential.  We, in effect, on Thursday night           
 waived our right to confidentiality of that model.                            
  CHAIRMAN LEMAN:                                                              
  Even though it was just illustrative?  And that was done with                
 your approval beforehand?                                                     
  MR. LUTTRELL:                                                                
  It was.                                                                      
  CHAIRMAN LEMAN:                                                              
  Senator Taylor.                                                              
  SENATOR TAYLOR:                                                              
  Mr. Chairman, I appreciate the sincerity of the questions, and               
 I think the questions are certainly relevant and need to be                   
 information that is available to the body.  I would just like to              
 apologize on behalf of this committee for the fact that we've now             
 set around from 10:00 o'clock this morning, some of us, it's now              
 2:30 in the afternoon, and nobody is going to have the time in                
 these closing days of the Legislature to wait for the transcript to           
 be produced and read the transcript.  I know that you and I will              
 try to communicate as much of this information as we can, but I               
 really believe it's somewhat of a useless gesture for us to all sit           
 around and talk to a microphone for things that people are not                
 going to take the time to read because they can't even take the               
 time to be here.  I've been around this place for 12 years and I've           
 never encountered this level of arrogant disregard.  I mean, we've            
 got offices around here that I believe -- just the office of the              
 attorney general, the office of the commissioner and others, and              
 certainly your company, Sir, deserve a higher level respect than              
 this.  We've had members from the House seated around here all day            
 long waiting for a bill to be heard.  I know everybody else is very           
 busy, but I'm just going to call on you at this point to just                 
 recess this and join me, and maybe let's go upstairs and have a               
 little heart to heart chat with a few people because I'm personally           
 embarrassed by this situation and I appreciate your patience and              
 tolerance, and I know how embarrassed by all of this you are.  I              
 think at this point for you to sit here and testify to an empty               
 table is an insult to you, and that's what I'd suggest we do.                 
 Let's just take a recess and see if we can get some people to start           
 acting like professionals.                                                    
  CHAIRMAN LEMAN:                                                              
  I don't disagree, Senator Taylor, with your frustration, but                 
 I'd like to continue on, because if I have to wait for the others,            
 then it's my opinion that I will have wasted a Saturday, and I                
 don't want to waste my Saturday.                                              
  SENATOR TAYLOR:                                                              
  I understand that.  You won't mind then if I go up and try to                
 beat the brush a little bit.                                                  
  CHAIRMAN LEMAN:                                                              
  I don't mind if you do, and we'll share with you the                         
 information we glean, and we'll applaud you when you come back with           
 two on each arm.                                                              
  SENATOR TAYLOR:                                                              
  Don't be surprised if they're tied over the hood of my car.                  
  CHAIRMAN LEMAN:                                                              
  Your letter, if I can go back to the April 8th letter, lists                 
 a category of documents entitled "Federal Royalty Relief Efforts,"            
 and under the heading "Date to DNR" you note no data available.               
 Question: does this mean that there still are no data available,              
 that BP has not made any effort to reduce its federal royalties or            
 what does that mean.                                                          
  MR. LUTTRELL:                                                                
  I'm trying to remember the exact context of the request, but                 
 I think the request was had BP requested relief on the federal                
 leases within the Northstar unit to which I think the answer is no.           
 As I recall the request is now four months back when that request             
 came in. DNR might remember the exact details for that.                       
  CHAIRMAN LEMAN:                                                              
   DNR, can you enlighten us on this?  Do you want to look it up               
 and break in later when you have the answer.  That's it, an easy              
 day for you.                                                                  
  Mr. Baldwin.  Commissioner Shively, I think some of these                    
 questions will probably get into that never land in between                   
 Department of Law and DNR and you might as well come up here and we           
 can - whichever one is better able to answer any particular one,              
 you can do that.                                                              
  Commissioner Shively said in his opening remarks last week                   
 that we in the legislature must convince ourselves just as he has             
 done that BP would not proceed with the development of Northstar              
 unless the leases are amended as proposed in the agreement and                
 ratified in the bill.  The principal motivation from our                      
 perspective, the State's perspective, appears to be to encourage BP           
 to develop earlier than might otherwise be possible, to develop               
 those leases.  It appears from the record so far that DNR, itself,            
 may have had sufficient leverage to do just that without amending             
 the leases and without involving the legislature before it approved           
 the current three year plan of development which did not require BP           
 to produce.  That raises a couple of questions.                               
  The first one, has the Department of Law been consulted                      
 regarding whether the DNR may have had any legal basis for moving             
 earlier than 1998 to force production of the lease terms, given the           
 unique facts in this case?                                                    
  COMMISSIONER SHIVELY:                                                        
   Mr. Chairman, I do not believe we did.  Perhaps the Department              
 of Law on that issue.                                                         
  CHAIRMAN LEMAN:                                                              
   O.K., this is your recollection.                                            
  MR. BALDWIN:                                                                 
   I'm not aware of any request for our assistance in that area.               
  CHAIRMAN LEMAN:                                                              
  Since testimony before this committee suggests that BP knew                  
 before it bought the leases, and definitely before the Department             
 approved the three-year extension last June, that it was unwilling            
 to develop the leases.  Would that, perhaps, change how the courts            
 might view the State's efforts to either expedite enforcement of              
 its contract rights or to regain title to the leases.                         
  COMMISSIONER SHIVELY:                                                        
  Mr. Chairman, I should respond to that.  We were not aware at                
 that time they would not proceed.  They had approached us about               
 some discussion, really at that time in April we were still                   
 discussing whether or not the issue of NPSL's should be in 207.  If           
 it had been in 207, then, of course, we would have had to look at             
 the economics and make a decision under the 207 requirements, but             
 as far as I know, BP, themselves, at that time didn't have a good             
 enough idea of the economics to know whether they could or couldn't           
 proceed with the NPSL's.  I think they did conceptually view them             
 as a problem.  You can ask them that whenever you look at something           
 that's 89 percent of your net profits being part of the take, I               
 think it causes certain questions.  But really it was as we went              
 through in the fall, October and then December, January and                   
 February when that became more apparent.                                      
  CHAIRMAN LEMAN:                                                              
   But it was after the June approval of the plan of development               
 that BP gave you, essentially, the comment that it would not move             
 ahead without these changes.                                                  
  COMMISSIONER SHIVELY:                                                        
  Yes.                                                                         
  CHAIRMAN LEMAN:                                                              
   Just a couple of questions here in the nature of policy                     
 questions, but I guess important ones on Alaska's need to remain              
 competitive and make sure that companies believe Alaska is, as the            
 Governor says, open for business.  I think I've even used that on             
 the floor of the Senate this week, didn't I?                                  
  The question is have you, Commissioner Shively, considered                   
 where the State eventually ends up if as a matter of precedent it             
 has to negotiate essentially against itself in other instances to             
 encourage its existing lessees to honor the terms of their                    
 competitively bid contracts?                                                  
  COMMISSIONER SHIVELY:                                                        
   Well, Mr. Chairman, any of these things put the State in a                  
 difficult position.  On the other hand there have been provisions             
 that allowed the State to modify lease terms in law and in the                
 leases since statehood.  This is not a new concept.  I was actually           
 just reading an article the other day about the recent arrangements           
 that were made between the Venezuelan government and a number of              
 private companies and one of the conclusions in that article was              
 that the first thing the companies were going to do down there was            
 go back in and renegotiate their terms.  And so it does put the               
 government in a difficult position.  It's why I think in things               
 like this and also like heavy oil I think we need to do some                  
 economic and other analysis which we did.  But I think in this day            
 and age that's part of how the government manages its resources.              
 But it's not new.  We've made changes to leases before.  We have              
 not made changes in this particular way, but we have done them                
 before and once you start down that road, which we started down               
 years ago, yes, the State does put itself in a difficult position,            
 but not an impossible position.                                               
  CHAIRMAN LEMAN:                                                              
   Maybe in just a little bit different vein, but nevertheless                 
 it's one that I've thought of and I think it's one that exists as             
 this whole process is exposed is whether the State's policies, its            
 leasing policy, needs to be changed.  I'm not sure, maybe, even               
 statutes need to be changed to make this happen, but to give you              
 the tools to make it easier to compel action on leases.  I'm not              
 sure if that's possible.  Your testimony says that we have that               
 ability, but we've never done it.  And it seems like we get                   
 ourselves in the position of where it's going to be so many years             
 and so much litigation that it almost becomes a useless exercise in           
 many respects.  I'm wondering if there are things that we can do as           
 a legislature to help give you the tools to maybe make this whole             
 process a little bit better.                                                  
  COMMISSIONER SHIVELY:                                                        
  I think that's something open to discussion - how leases are                 
 transferred, what can be transferred, whether or not we can bring             
 extra pressure.  I again want to go back to the sort of fact                  
 situation when a lot of this went on, because I think it's very               
 important to understand when Amerada Hess put these leases up for             
 bid, they really believed that they had a much smaller oil field              
 than anybody had originally anticipated and they had a huge capital           
 cost.  My recollection is that only two companies bid on those                
 leases.  BP was - did win that bid.  At the time, then Director               
 Eason, agreed to allow for the transfer of these leases and then              
 allowed BP to have an extension of time to do their development               
 plan.  Basically what was known about the field was that there was            
 around 130 million barrels of oil and that the capital cost to                
 develop it was about $1.4 - $1.5 billion.  And that what was really           
 known even three months later when then Acting Director Ken Boyd,             
 I guess he was the Director by then, agreed to the three year                 
 development plan.  I don't see anything out of the ordinary.  You             
 can go back and second guess either Mr. Eason or Mr. Boyd about               
 their decisions, but BP didn't have a full analysis of what they              
 were doing.  They, then, did exactly what we expect when we look at           
 a company taking over leases.  One of the reasons I think people              
 were interested, I assume that Mr. Eason and Mr. Boyd both decided            
 that it was reasonable to allow that rather than to take the leases           
 back was because of BP's experience and we expect a new company to            
 go in and look at the economics to see if they can make some                  
 changes in and the development plan   did allow for that.  As part of         
 that review, BP came to the decision that they came to, but they              
 have made the field economic in terms of their review.  I                     
 personally think if we'd, if Director Eason had decided that we               
 should take the leases back at that time, he could not have ordered           
 it into development last year.  I do not think that was an option.            
 If he'd decided to take them back, I'm not sure that when we bid              
 them out that we would have gotten any significant amount of money            
 because of what was known publicly.  Unless BP or ARCO or someone             
 else had done a pretty thorough engineering analysis at the time we           
 bid them out, I do not expect that we would have gotten a lot of              
 money.                                                                        
  CHAIRMAN LEMAN:                                                              
   I guess if you in your post mortem on this exercise and last                
 year's come up with things where we can help make changes that will           
 help make this process better, I'd suggest you bring that to the              
 legislature early next year so we or our successors, in the case of           
 those who are going to be subject to elections, can have a chance             
 to look at that.  Early in the session there may be...I'm not                 
 trying to poke you too much for the late timing, but what ends up             
 happening, the same thing as last year, we get in the final weeks             
 and it just gets in the cross fire of all kinds of things.  That              
 just makes it that much more difficult to do this.                            
  COMMISSIONER SHIVELY:                                                        
   Mr. Chairman, I think there's one area that I think probably                
 bears some looking at and I don't know what the constitutional                
 taking issues there might be is this whole issue of a development             
 account and what happens to it when leases are transferred.  And              
 that very much drives some of why I've come to the conclusion I               
 have here.  And I think that's something we may want to review for            
 next year.                                                                    
  CHAIRMAN LEMAN:                                                              
   Representative Phillips, you're welcome to be here and you're               
 welcome to come to the table, if you like, but if you don't want me           
 to draw attention to the fact that you're here, I guess I could do            
 that, but it's too late...You're always welcome to participate in             
 the Resources Committee.                                                      
  When the standard for determining whether or not to reduce the               
 State's share of revenues is a determination that development would           
 not otherwise be economically feasible and that determination is              
 based upon a clear and convincing showing to the commissioner, as             
 is the case under the royalty reduction statutes, I and hopefully             
 all the State's lessees and you can understand the rules.  My                 
 question is how can the Commissioner test whether and to what                 
 extent the State must give up public revenues to promote the                  
 development of the State's resources, if as in this case, there are           
 no standards and no rules?                                                    
  COMMISSIONER SHIVELY:                                                        
   Well, I don't know that there are no standards and no rules.                
 I mean we did a rather thorough economic analysis.  We did come to            
 the conclusion that there was not the kind of 207 standards, but              
 you have to remember the other differences between 207 we were                
 talking about generally driving royalties from about 12 1/2 percent           
 down to about three or four percent.  Here we're starting with a              
 base 20 percent royalty.  We're not reducing that at all and we're            
 adding to it.  So there's a significant difference.  When you make            
 these decisions, it's like anything else.  You have to use your               
 best judgement.  I happen to believe one of the problems with                 
 government is we try to set all these sort of rules and guidelines            
 and it's what make government unworkable.  What you need is people            
 who can make judgements, that can look at difficult situations,               
 assess the information, and say this is a good idea or this is a              
 bad idea.  I see nothing wrong with that.  I think that's better              
 government.  But this idea that we have now - that if you just have           
 enough rules and enough regulations everything's going to be                  
 perfect is nuts.  Even the bidding process doesn't necessarily                
 guarantee the State that you get your full value for your resource.           
 You get the most somebody wants to pay for it.  That may or may not           
 be full value.                                                                
  CHAIRMAN LEMAN:                                                              
   Do you recall if in the negotiations you talked about, and                  
 this may have come up before, but if you came up with a field size            
 factor that if the field was considerably larger or I guess we've             
 heard testimony that it's not anticipated to be considerably                  
 larger.  Not like a factor of two, but it could be 30 or 40 percent           
 larger.  If there would be any corrective factor for that, was that           
 ever a part of the negotiations?                                              
  COMMISSIONER SHIVELY:                                                        
   We did have a proposal at one point on the table that would                 
 have taken that into account.  That's not where we ended up.  It              
 was part of a more complicated formula that was developed by our              
 Division of Oil and Gas that was part of our counter offers.                  
  CHAIRMAN LEMAN:                                                              
   Was that - just fell by the wayside or is it you geared toward              
 something else that's kind of something you gave up in return for             
 maybe the assurance of more..                                                 
  COMMISSIONER SHIVELY:                                                        
   Money...                                                                    
  CHAIRMAN LEMAN:                                                              
   money up front or a projection of more money in that                        
 supplemental royalty?                                                         
  COMMISSIONER SHIVELY:                                                        
   I think I'd also say in that regard because of the confidence               
 that we have in some of the people who work in that part of our               
 department, we feel very comfortable with these figures.  We have             
 some pretty exceptional people who have been very helpful in things           
 like ANWR.  This is not an unknown as Ken Boyd explained the other            
 night- an unknown structure or an unknown field.  So I think that's           
 why we have a little more comfort than I think some other people              
 do.  The other thing is if there may be more oil, but one of the              
 things you cannot predict right now is at what cost there is to               
 bring it on.  You know there's been a lot more oil in Prudhoe, but            
 I think the letter we delivered to you yesterday about the cost               
 that it's taken to get extra oil is significant.  It's in the                 
 millions of dollars.  So you can run extra oil, but I think it's              
 unfair when you do an analysis then, not to try to assume there               
 will be extra money to get it.  Because that's been the sort of               
 history.                                                                      
  CHAIRMAN LEMAN:                                                              
   It seems to me that there has been no shortage of undeveloped               
 leases across the North Slope and that's probably the reason for              
 the proposal for areawide leasing.  There's the Point Thompson                
 unit, the Badami, and elsewhere.  There are also pending projects             
 like the gas pipeline.  By the way, we passed the resolution                  
 yesterday.                                                                    
  COMMISSIONER SHIVELY:                                                        
   Do we have a fiscal note on it?                                             
  CHAIRMAN LEMAN:                                                              
   Yes, we did.  Well, it passed - we left it in.  We still have               
 to deal with it, I guess, in the Finance Committee, but the                   
 question is how can Alaskans be assured - and I guess this comes              
 down to what I consider the first of the two questions I mentioned            
 that I need to have answered in my mind to be satisfied with any              
 answer before I agree to support this, but how can Alaskans be                
 assured that passage of SB 318 would not simply set the precedent             
 for a series of future negotiations potentially reducing the                  
 benefits for which the State originally bargained?                            
  COMMISSIONER SHIVELY:                                                        
   How can you be sure?  If that's the test, I don't know if we                
 can pass it.  I think there may be other...                                   
  CHAIRMAN LEMAN:                                                              
   I'm not so much calling for a guarantee that there wouldn't be              
 future ones. I think there's a good chance there will be, but does            
 it set a precedent that undermines a process that is in place.  If            
 we were to say something essentially to the effect that we want the           
 existing lease process, the bid process to be the rule rather than            
 the exception to the rule and only in unique cases you bring these            
 exceptions or they may be proposed or we may authorize you to do it           
 on the exceptional cases.  Then that would set at least a precedent           
 for a system that bidders will know when we bid in the bid variable           
 is such and such, whatever it is, then the State of Alaska is going           
 to be consistent with that.  That's more of what I'm getting at.              
  COMMISSIONER SHIVELY:                                                        
   I think there are a couple of precedents we've set here.  We                
 do have some precedent as a result of 207 when they are marginal              
 oil fields.  No one is calling this a marginal field.  The one                
 precedent I think we've set here with this field in this kind of              
 situation is that it is something that not only gets the review of            
 the executive branch, but the legislative branch.  And I think                
 that's an assurance that it's not just some kind of precedent that            
 can go wild.  There are two very extensive levels of review.  And             
 I think that forces any of these kinds of arrangements to be                  
 economically realistic.                                                       
  CHAIRMAN LEMAN:                                                              
   Do you view the State's leasing statutes as being just a                    
 starting point for negotiations or would you view them as being               
 competitively bid is the norm and other than the exception.  How do           
 you view it?                                                                  
  COMMISSIONER SHIVELY:                                                        
   I think, yes, I view it as the leases competitively bid are                 
 the norm and that's the way most leases have been developed.  But             
 this is not the first set of leases that there have been negotiated           
 changes on and I do not believe it will be the last whether or not            
 the legislation passes or not.  In most of our leases there are not           
 changes.  That should be the starting point and that should be the            
 - again you've got to look at the situation.  Here you have some              
 leases.  These leases were leased out 16 years ago at a time when             
 people had much different assumptions, both about the amount of oil           
 that might be in that structure, but also more importantly about              
 what oil prices would be today.  Today, if you bid, of course we              
 don't use the net profits as a bid variable, but of course if you             
 did, there wouldn't be anybody bidding 80 - 90 percent net profits.           
 It just wouldn't happen.                                                      
  CHAIRMAN LEMAN:                                                              
   I guess just to still my questions and concerns two main ones               
 and the first is are we maintaining the integrity of our leasing              
 program and I believe you've satisfied yourself on that one that we           
 have.  Is that correct?  Good.                                                
  And the second one is are we maximizing the return to the                    
 people of the State of Alaska.  And I believe you've satisfied                
 yourself on the answer to that one in the affirmative.   Is that              
 also correct?                                                                 
  COMMISSIONER SHIVELY:                                                        
   I guess the problem I have is with maximizing.  I'm not quite               
 sure I'd do that.  I think given the current set of circumstances             
 this is a very reasonable change for the State to make because we             
 have a declining asset in the net profit leases.  And that                    
 declining asset is also based largely on money that BP never spent.           
 Given this fact situation, I think this is a very good deal for the           
 State.  In addition we have some other things.  Kevin Banks                   
 testified several days ago for him it was an O.K. deal.  I think              
 that's exactly the correct answer from Kevin's standpoint.  On the            
 other hand there are some things that aren't in the economics that            
 I think are important to the State.  One that BP has to go ahead or           
 otherwise we get the leases back.  That gives us, you know, an                
 advantage that otherwise we would have to litigate.  And then I               
 think the sort of moral commitment that BP has made in terms of               
 what they're going to do in construction.  There's an extra                   
 economic benefit that has some interest to me as commissioner, but            
 also I think some interest to the State as a whole.  So you've got            
 to look at the whole package.                                                 
  SENATOR LEMAN:                                                               
   Are you satisfied that the conditions in the agreement are                  
 enforceable?                                                                  
  COMMISSIONER SHIVELY:                                                        
   The conditions on local hire and local contracting?  I do not               
 think we could - that that language allows us to enforce to the               
 extent that BP has morally committed to do and I don't think you              
 can write language to do that.  I think their commitments are                 
 beyond what is allowed by the law.                                            
  CHAIRMAN LEMAN:                                                              
   If we were to add some provisions that maybe help enhance that              
 particular area which has been an expressed concern of several                
 members of this committee, as well as many members of the public,             
 would you view that as being a deal breaker in terms of - we heard            
 testimony before about how much we as a committee and as a                    
 legislature change this.  Would you view that as a deal breaker               
 between the State and BP.                                                     
  COMMISSIONER SHIVELY:                                                        
   You have to ask BP that.  For me making the deal better is not              
 a deal breaker; it's just another deal.  If you could find a way to           
 do it, we would be very supportive of that.                                   
  MR. BALDWIN:                                                                 
   I think one thing to be cautious of is not to import something              
 into the transaction that would lead to some successful litigation            
 to block it.  In other words, first I see two areas of concern.               
 One is creating a record here that shows that your primary concern            
 here is local hire as being the basis for this legislation.  There            
 are other sound valid reasons for this which the Commissioner has             
 outlined for you and that should be the primary State interest.               
 Those should be the primary State interest to pursue here.                    
  The other night you and I had the discussion about what was                  
 direct and indirect benefits and I had a memory block.  Well, I               
 think local hire should be an indirect benefit on that analysis,              
 not a direct benefit and that's how you should approach it for                
 determining the public purpose of this transaction.  And so I think           
 the thing the committee wants to be careful of is making as a solid           
 rock hard condition of this transaction that local hire be                    
 enforced.  I mean, as much as the Commissioner likes the concept of           
 local hire as we all do, as a State it's been fairly well                     
 determined in at least three State Supreme Court opinions and one             
 U.S. Supreme Court opinion that we are very limited in what we can            
 do in that regard.  The agreement was very carefully worded to say            
 that BP will do whatever it can within the extent of the law and BP           
 can do a lot of stuff on its own as a private actor, but when we as           
 a State start enforcing them to do things, that's when we get into            
 legal difficulties.                                                           
  CHAIRMAN LEMAN:                                                              
   What if we get them to agree to do it as part of the                        
 agreement.  When you have agreement and we know what the agreement            
 means and we understand it, then we agree to approve it.  How can             
 they litigate on something they voluntarily agreed to do.  The                
 question is one of whether or not there was State action involved             
 in obtaining the agreement.  I think that would be the issue and I            
 don't want to state whether I would see it as being State action or           
 not, at this point, but I think that would be the primary issue.              
  The second thing is that the agreement or the way I understand               
 the way it's worded is that the bill is attached to it as an                  
 addendum and it says if a bill in this form is passed, then this              
 agreement takes affect - similar to this.                                     
  COMMISSIONER SHIVELY:                                                        
   Mr. Chairman, I might add I think the problem is not                        
 necessarily litigation for BP, but litigation from a perceived                
 aggrieved third party.                                                        
                                                                               
  TAPE 96-54, SIDE B                                                           
                                                                               
  I remember when we went through the local hire issue in Red Dog,             
 you know, it was aggrieved third parties who didn't like the fact             
 that there was a priority for people living in an economically                
 depressed area.  They brought the litigation.  So that's the risk.            
  SENATOR PEARCE:                                                              
   On Red Dog?                                                                 
  SENATOR LINCOLN:                                                             
   It's not on Red Dog, but it's on local hire.                                
  SENATOR PEARCE:                                                              
   That was discrete discrimination within Alaska, though.                     
  COMMISSIONER SHIVELY:                                                        
   I would have to go back and read the decision.  I think the                 
 Supreme Court had a variety of reasons.  You're right it did deal             
 within Alaska.                                                                
  MR. BALDWIN:                                                                 
   Right, but Hickel v. Orbeck, which preceded it, dealt with an               
 attempt to do it as a part of a lease transaction.                            
  SENATOR LINCOLN:                                                             
   Mr. Chairman, I think that of all of the provisions that are                
 within the bill and the lease that this particular portion of the             
 bill I've had more contact on than any other.  To me it isn't tied            
 up as tightly as I think that we can make it.  When within the bill           
 it says they're committed to hire Alaska residents, one, my                   
 question is what is a resident.  The same with the contractors and            
 when we then, BP's letter, dated April 5th, says that it's a strong           
 commitment to hire Alaskan workers, again I ask what the                      
 interpretation of Alaskan worker is and that they will hire as many           
 of the more than blank number of people for the job.  I don't think           
 that that is strong enough and I think that if there is some way,             
 Mr. Chairman, that we can get legal advice to strengthen this and             
 it is not - what I hear is that if BP agrees to it, then it's not             
 a deal breaker.  I think that in the past we've seen terminology              
 like this and it's not binding. It just doesn't - it just says, if            
 at all possible qualified, those types of words that we've seen in            
 the past not be terminology that is going to ensure we have                   
 Alaskans - local, local hire on these jobs.  So that's one of the             
 things I think we really need to somehow improve in our commitment.           
  And then, I guess, the other question I had is on the modules                
 that's a commitment to have that in Anchorage?  That's the only               
 place it's going to be done?                                                  
  SENATOR LEMAN:                                                               
   Are you asking that of me.  I don't know that I can give the                
 answer.  I guess from my perspective I would say yes, but we all              
 probably have different perspectives.  Senator Taylor would say               
 it's a commitment to have it in Sitka or Wrangell, but...                     
  SENATOR PEARCE:                                                              
   Ketchikan.                                                                  
  SENATOR LINCOLN:                                                             
   What I did read here was that when they talk about that the -               
 when they talk about the acreage of fabrication yard, it says very            
 specifically in the BP letter, dated April 10th, that it would be             
 in Anchorage in five to 10 acres.  So they must have already made             
 a commitment that this would be in Anchorage.                                 
  COMMISSIONER SHIVELY:                                                        
   Mr. Chairman, Senator Lincoln, I think the reason for that is               
 that's referring to the sea lift modules.  So you have to have it             
 in a place where there is access to the ocean and as I understand             
 it and you can bring BP up here and I'm sure Eric can give a better           
 explanation than I.  But there are fabrication yards for the                  
 smaller part of the modules in Anchorage that would then be put               
 into larger modules and since that activity is already there,                 
 that's why they are looking at Anchorage.  But you need water to do           
 sea lift modules.  That's a requirement.                                      
  SENATOR LINCOLN:                                                             
   I just hope that's not the only place they are looking at for               
 doing fabrication.  I understand the need to have a court.                    
  COMMISSIONER SHIVELY:                                                        
   Mr. Chairman, Senator Lincoln, certainly some of the final                  
 fabrication has to be done on the Slope.  When things are put                 
 together there, as I understand it, there is some commitment in the           
 interior that relate to trucking and moving and of course, a number           
 of the contractors that will be involved here have statewide                  
 ownership and have the ability to recruit workers statewide.                  
  CHAIRMAN LEMAN:                                                              
   I may be speaking out of turn.  It may be old information, but              
 I understand that they are looking at Seward and Anchorage, maybe             
 a couple of sights in Anchorage, and I don't know about other                 
 places.  There may be other sights and they may be trucking them              
 together and I believe there's probably several sights where they             
 actually fabricate and truck together and then create the                     
 megamodules.  Again, I'm probably not the best person to describe             
 where all those are.  It's just my understanding.                             
    Senator Pearce.                                                            
  SENATOR PEARCE:                                                              
   I have a different question.                                                
  CHAIRMAN LEMAN:                                                              
   That's O.K.                                                                 
  SENATOR PEARCE:                                                              
   As a follow up to your question about what would happen to the              
 leases if BP didn't perform.  Let's take one step back. What                  
 happens to the leases if the legislature doesn't approve this deal.           
  COMMISSIONER SHIVELY:                                                        
   Well, what I would anticipate happening is that BP would                    
 complete their three-year development plan.  Several things - they            
 could come back next year as we all know or they could complete               
 their development plan.  That's scheduled to be completed in April            
 1998.  At that time there would be discussions of a continuing                
 development plan.  That is the time that we could order them into             
 production.  In an attempt to do that there are three possibilities           
 if we do order them into production in 1998.  One is they do it.              
 Second is they decide that because of the net profit lease                    
 provisions it's not economic and they give the leases back to us              
 and the third thing to do is litigate.                                        
  SENATOR PEARCE:                                                              
   Under..                                                                     
  COMMISSIONER SHIVELY:                                                        
   There is a forth option that we would come up with a                        
 development plan that would allow them to continue to delay and not           
 go into production.  That's the other thing we could do.                      
  SENATOR PEARCE:                                                              
   And under this agreement, if they don't proceed, what's the                 
 trigger in the agreement that we think would bring the leases back,           
 if they don't get sanction from their Board to move forward or if             
 they don't meet some performance measures.                                    
    COMMISSIONER SHIVELY:                                                      
   Mr. Chairman, Senator Pearce, the measure we use to sanction                
 by the Board of Directors, because we've assumed if their Board of            
 Directors approves the expenditure of money, they are going to                
 expend it.  And we've given them a year to do that.  They have                
 indicated that they hope to get that done this fall.                          
  SENATOR PEARCE:                                                              
   You said, I think, at the very first hearing, that the                      
 paragraph 32 replacement was the product of what you described as             
 intense negotiations.  And I certainly understand that an inability           
 to obtain permits would be a concern - obviously something the                
 company doesn't have any control over and nor, God knows, do we.              
 But is there anything else in that intensely negotiated rewrite               
 that would give us less legal standing than we had in the present             
 language on the lease should they not perform and we want the                 
 leases back.                                                                  
  COMMISSIONER SHIVELY:                                                        
  I don't know.  I'm not prepared to answer that.  Mr. Chairman,               
 Patrick Coughlin's on the line in Anchorage.  If he is, he might be           
 able to answer that.                                                          
  CHAIRMAN LEMAN:                                                              
  Mr. Coughlin are you on line and if so, do you want to respond               
 to that question.                                                             
  MR. COUGHLIN:                                                                
   Yes, I think we are on line.  For the record my name is                     
 Patrick Coughlin.  I am the petroleum investment manager and Deputy           
 Director of the Division of Oil and Gas.  The only change that was            
 made to paragraph 32 of the lease force majeure clause was the                
 insertion of the words in the bracketed language on state, local,             
 or federal permits or environmental impact statements.                        
  CHAIRMAN LEMAN:                                                              
  Does that complete your response, Mr. Coughlin?                              
  SENATOR PEARCE:                                                              
   It answers my question.                                                     
  CHAIRMAN LEMAN:                                                              
  O.K. question answered.  Further questions at this point.                    
 Some final questions for the Department of Law.                               
  Governor Knowles transmittal letter states that the agreement                
 between BP and the Department accomplishes several things and I               
 quote and he may not have written that letter, but I'm sure you've            
 seen it.  If BP Exploration (Alaska) fails to perform its                     
 obligations under the project schedule, the leases terminate                  
 automatically, thereby allowing the State to lease the tracts to              
 another company.  Doesn't the agreement contain a provision that              
 would allow the administration to waive this obligation by prior              
 written consent?                                                              
  COMMISSIONER SHIVELY:                                                        
  Mr. Chairman, again I think Mr. Coughlin is ...                              
  MR. COUGHLIN:                                                                
   ...in paragraph 28 (c) which is added to the agreement.  It                 
 states the State may waive performance of an obligation required as           
 of the project schedule by prior written consent.                             
  CHAIRMAN LEMAN:                                                              
  O.K., I think we got you right in the middle of your response.               
 We lost part of it and so you concur that the agreement does                  
 contain that provision.                                                       
  MR. COUGHLIN:                                                                
   Yes.                                                                        
  CHAIRMAN LEMAN:                                                              
  So is the statement in the Governor's transmittal letter                     
 correct or is it just partly correct?                                         
  MR. COUGHLIN:                                                                
   I believe that the statement in the Governor's letter is                    
 correct, that however one does things that the State wanted to                
 reserve to itself the right to waive the obligation if the State              
 determined that it was in its best interest.                                  
  CHAIRMAN LEMAN:                                                              
  O.K., thanks.  If the legislature passes the bill with the                   
 expectation that BP will be held to its obligations under the                 
 agreement, thus assuring the many benefits that come to the State             
 through the agreement, what is to stop the administration from                
 waiving that obligation?                                                      
  MR. BALDWIN:                                                                 
   Whoever exercised that power, I assume it would be the                      
 commissioner, must do it reasonably and not in an arbitrary manner.           
  CHAIRMAN LEMAN:                                                              
  Is there a process that has documented or at least, I guess,                 
 there has to be some reasons given.                                           
  MR. BALDWIN:                                                                 
   Yes, it would have to be done reasonably and not arbitrarily.               
  CHAIRMAN LEMAN:                                                              
  Is that your understanding, Commissioner Shively?                            
  COMMISSIONER SHIVELY:                                                        
  Yes, assuming I last for a year and commissioners don't tend                 
 to last very long at DNR, but I might get, I mean I have no                   
 intention of waiving that.  That's a very important part of the               
 arrangement and I mean, I think that if we cannot get this project            
 going, then we assess those leases and get them back out into the             
 public market.                                                                
  CHAIRMAN LEMAN:                                                              
  The transmittal letter also says the agreement has provisions,               
 and I quote, that require BP Exploration Alaska to hire Alaskans              
 within the constraints of law and to contract with local                      
 construction and fabrication companies to build the project                   
 facilities.                                                                   
  Finally, the letter says the agreement will result in Alaska                 
 companies fabricating production modules, including one or more of            
 the first sea lift modules ever constructed in Alaska.                        
  You have the agreement with you don't you?  Would you read                   
 those provisions for the record where those are or at least                   
 identify which paragraphs they are in the agreement.                          
  MR. BALDWIN:                                                                 
   This sounds like a deposition.                                              
  CHAIRMAN LEMAN:                                                              
  I've been deposed before.                                                    
  MR. BALDWIN:                                                                 
   I'll have to defer to Mr. Coughlin.                                         
  CHAIRMAN LEMAN:                                                              
  O.K. Mr. Coughlin, could you at least identify the paragraphs.               
  MR. COUGHLIN:                                                                
   The paragraphs that deal with the employment of Alaskans   are              
 paragraph 41 of the 1980 leases and paragraph 31 of the 1983 leases           
 and they obligate, as the letter states, BP to employ Alaskans                
 within the constraints of law.                                                
  CHAIRMAN LEMAN:                                                              
  Patrick, I'm not sure if we're getting all of your testimony                 
 or if you're stopping or if we're losing a portion of it.  Are you            
 completed with your testimony, with your response?                            
  MR. COUGHLIN:                                                                
   Yes.                                                                        
  CHAIRMAN LEMAN:                                                              
  How enforceable are those provisions in your opinion?                        
  MR. COUGHLIN:                                                                
   Well, I think that as Commissioner Shively stated, that you                 
 cannot, and Jim Baldwin can correct me, we try to draft a provision           
 that would be constitutional, that is not unconstitutional on its             
 face, but which would go as far as we could in ensuring that BP               
 would hire Alaskans, that we try to require them to adopt programs            
 provided for Alaskans.  However, you cannot by law create a                   
 preference.  And the agreement does not create a preference.  That            
 would not be enforceable.                                                     
  CHAIRMAN LEMAN:                                                              
  How would the administration or a court, if the need should                  
 arise, measure compliance given the number of disclaimers and                 
 qualifiers and the lack of any specific performance measures?                 
    COMMISSIONER SHIVELY:                                                      
   Mr. Chairman, maybe I can answer some of that.  I think we've               
 stated this before.  What we are asking BP to do and what they have           
 committed to do I do not believe is enforceable by law.  We, as a             
 result of some, I think, outstanding efforts put forth not just by            
 the administration, but by leaders in the legislature to talk to BP           
 about what it meant to develop these fields and what it meant to              
 use Alaskans, both in contracting and hire, we have gotten BP to              
 completely change how they were thinking about development.                   
      They've gone from a development plan for Badami which was                
 somewhat similar where virtually everything was going to be done in           
 Canada to talking about contractors in Alaska about how to do it              
 here.  And my test right now is not what BP says, although I think            
 that's important.  My test is what I'm hearing from the contracting           
 community about how they're being approached and the discussions              
 that are taking place about construction in Alaska.  In Badami it             
 was very clear what the discussions were.  The discussions were               
 original development of modules in Calgary, shipping them up to Hay           
 River, gluing them together, making them a little bigger, and then            
 shipping them to Prudhoe.                                                     
  The discussions now are not around that concept.  They are                   
 around what we do to truck modules here in Alaska, what kind of               
 facilities are needed for sea lift, how you're going to do it.  I             
 mean that's the test and I think that's a much more important test.           
 We will not maintain, and I said this earlier today, that we can              
 legally put into any agreement, as far as BP has said they are                
 going to go and we now believe they are going as a result not just            
 of what they are saying, but of what other people in the                      
 contracting community are saying and I think that's the important             
 test.                                                                         
  SENATOR LINCOLN:                                                             
   On the same point, Mr. Chairman, I just reiterate, and I think              
 I heard, that it's nonenforceable.  But when we look at that                  
 paragraph 41, it says again Alaska residents which is very narrowly           
 defined, I think.  The one kicker that we have experienced over and           
 over again in the rural and bush communities if somebody does not             
 want to hire you, they put in the clause "and qualified" and within           
 paragraph 41 it says that the Alaska residents and the contractors            
 that are available and qualified.  And so that's a way to me that             
 you always end up kicking people off of the roster and it's that              
 paragraph 41, again, says to the best, they'll use "best efforts."            
  Whenever feasible that they will fabricate the modules in                    
 Alaska.  Whenever feasible - that they're going to encourage                  
 contractors.  It's just weasel words, I thought.                              
  COMMISSIONER SHIVELY:                                                        
  Well, absolutely.                                                            
  SENATOR LINCOLN:                                                             
   If I might finish, Commissioner, that the lessee shall furnish              
 the Department a quarterly report talking about the number of                 
 residents that personnel that have been hired.  I'd like to see not           
 only the residents that have been hired, but I want to see on that            
 quarterly report, and it doesn't specify that in here, those non-             
 residents that have been hired.  Those from the lower 48 and I'd              
 like to see what they use as resident.  So I just don't think that            
 particular clause in there and it might be because of the laws that           
 we've got on the books that it's just - we've had this problem here           
 in Alaska for years and as the Governor has stated that we need to            
 have enhanced local hire.  That it has to be truly Alaskan                    
 residents that get hired.  I think this is an opportunity to do it,           
 but I just don't read it in here.                                             
  COMMISSIONER SHIVELY:                                                        
  Mr. Chairman, I agree with you.  We took this as far as we                   
 thought we could go, not because of laws, but because of                      
 constitutional constraints.  Both Alaska Constitutional constraints           
 and U.S. Constitutional constraints.  That doesn't mean that we               
 can't force BP to go beyond what I think has been done by the                 
 industry in the past and we intend to do that.  And I agree with              
 you.  As you know, both of us have spent a fair part of our careers           
 trying to get people, particularly from rural Alaska, jobs.  And              
 I've seen time and time again when the word qualified has been used           
 against particularly rural people.  As part of what we're doing as            
 an ongoing relationship, not with just BP, but with ARCO and the              
 contractors is looking at how we can put together what their needs            
 are and what our training programs are.  Something that's never               
 been done in this State before - to bring in the nonprofits in                
 terms of doing the kind of recruiting they have done, for instance,           
 for Doyon Drilling and for Nana, too.                                         
  So, you're right.  I mean, I'm not going to sit here and tell                
 you that that language is going to do what you and I and the                  
 Governor and others want done.  It will not.  What it will take is            
 a commitment from BP and others, ARCO, and constant vigilance by              
 the political leadership of this State to make sure they do it.               
 And all I can tell you it's our commitment to try to do that.  And            
 in terms of the sort of more specific thing about the kind of                 
 report.  It certainly our intent, and we get to develop the kind of           
 report they give, that you look at not just who got hired as the              
 residents, but what the total work force is, where the people came            
 from that weren't Alaska hire, so that's all very much part of what           
 we would expect to see.  We, of course, actually have some access             
 to that information ourselves as a result of the Department of                
 Labor.                                                                        
  The issue on definition of residency is a real difficult legal               
 one.  I mean I think the legislature, I mean one of the things that           
 certainly, at least in intent language, if you want to have some              
 discussion of that issue of what you considered a resident.  I                
 think that would be appropriate.                                              
  CHAIRMAN LEMAN:                                                              
  I have just one final question and I think this one should                   
 probably be directed to Mr. Coughlin.  I'm going to revisit the -             
 what I was just asking questions on and I'd like you to read for us           
 the section of the agreement, the actual words that provide for               
 what the Governor says in his letter.  He says the agreement will             
 result in Alaska companies fabricating production modules including           
 one or more of the first sea lift modules ever constructed in                 
 Alaska.  I'd like you to read for us where the agreement has that             
 provision.                                                                    
  MR. COUGHLIN:                                                                
   Well, the only language in the agreement that talks about                   
 fabrication of modules is again in the paragraph 41 of the 1980               
 lease and similar provision in the 1983 lease which provides for              
 work in connection with this lease lessee shall use best efforts to           
 contract with Alaska firms and fabricate modules in Alaska whenever           
 feasible.  That is the only language I am aware of that addresses             
 the issue you've asked about.                                                 
  CHAIRMAN LEMAN:                                                              
  O.K., I believe in your previous response you've responded                   
 only to the Alaska hire portion, but I'll ask the same question as            
 before and ask you to respond to the construction, the fabrication            
 of production modules in Alaska.  How enforceable is that provision           
 in your opinion.                                                              
  MR. COUGHLIN:                                                                
   I would answer the question the same way the Commissioner did.              
 It would be very difficult to enforce.  My opinion is that BP has             
 made commitment to hire the people of the State of Alaska and it              
 will be up to the political will of the governor and the                      
 legislature to ensure that the representations that BP has made are           
 followed in the event the legislature sees fit to pass this bill.             
  CHAIRMAN LEMAN:                                                              
  Would you then consider it as important as Mr. Morgan stated                 
 in his opening address where BP has a world wide reputation to                
 protect, that their reputation in the State of Alaska, with us, and           
 probably how they would see it as equally as important to follow              
 what is represented here and our understanding of it.                         
  MR. COUGHLIN:                                                                
   I believe that BP's reputation in the State of Alaska is on                 
 line with this agreement.  And you can ask Mr. Luttrell the same              
 question, but I believe that they have made representations.                  
  COMMISSIONER SHIVELY:                                                        
  Could I add one thing to that, Mr. Chairman?                                 
  CHAIRMAN LEMAN:                                                              
  Yes.                                                                         
  COMMISSIONER SHIVELY:                                                        
  I think there is one difference and that's, I want to go back                
 to the Badami example.  I mean one of the issues about the                    
 proposals that were made about Badami and Calgary there was a big             
 disagreement about what was economically feasible and I think this            
 language would allow us to go test that feasibility in ways that              
 have not been done before should BP make a major change in their              
 current proposal.  So I think it does offer us a little bit of                
 leverage.  What the courts would finally say about that, I think,             
 is, and that's the only place we could go to get restitution.  I'm            
 not sure.  But I think there is a little bit of leverage there if             
 they were to just all of a sudden get this thing through the                  
 legislature, turn around and go back to the proposal that I think             
 was, in some ways, considered by many of us a slap in the face                
 given that we already have a budding module business developing in            
 Alaska.  To build everything in a country that's basically opposed            
 us recently on every major economic development step and on the               
 other hand is now busy stealing our fish.                                     
  CHAIRMAN LEMAN:                                                              
  You must have seen my presentation on TV last night.                         
  COMMISSIONER SHIVELY:                                                        
  I'm sorry to say I missed it.                                                
  MR. BALDWIN:                                                                 
  I saw it.                                                                    
  CHAIRMAN LEMAN:                                                              
  I had to jab our friends to the south and east of us, right?                 
 Just a little bit.                                                            
  SENATOR PEARCE:                                                              
   Just a comment for the record.  I think we're being a little                
 schizophrenic here in terms of Alaska hire when on one hand we                
 don't make our own union members be Alaskans like with the ferry              
 system and we don't force them...I mean if they lie about whether             
 or not they're Alaskans, that seems to be fine.  And so I don't why           
 we're being quite so energetic about pushing BP which has had a               
 good Alaska hire record in the State.  But, John, there's been some           
 talk - discussion - I know amongst some of the legislative members            
 and it's been just talk, so I don't want to characterize it as                
 anything bigger than that.  But there has been some discussion                
 about the possibility of trying to put some sort of language that             
 would require a project labor agreement.  Would the Governor be               
 supportive of that?                                                           
  COMMISSIONER SHIVELY:                                                        
  Mr. Chairman, Senator Pearce, I've seen some language that was               
 developed that would suggest, as I understand, not requiring a                
 project labor agreement, but requiring BP to use best efforts.  To            
 my knowledge we haven't taken a position on that.                             
  The other thing, Mr. Chairman, if I might, just add, we have                 
 taken a lot of time and effort today to beat up on the oil industry           
 about their hire record.  In terms of major industries in the State           
 their record is not that bad.  I mean it's not perfect and in some            
 ways the trend recently hasn't been good, but in comparison to                
 almost any industry it is excellent.  And so I think that's                   
 something that should be said for the record.                                 
  CHAIRMAN LEMAN:                                                              
  And I just am trying to clarify - I don't think we've been                   
 beating up on the oil industry and I hope BP doesn't take this a              
 beating up on them as much as just the feeling of assurance that we           
 understand what the agreement is and I think it is consistent with            
 what they have represented to us and it's just our effort of                  
 ensuring that part of good public policy is being meted out and I             
 hope they don't read it otherwise.                                            
  SENATOR LINCOLN:                                                             
   Mr. Chairman, I want to state that, you know, I certainly am                
 not when I ask the questions about local hire and want to see that            
 there's local hire provisions in there.  I just think it's good               
 business that both parties when you're signing an agreement that              
 both parties understand very clearly from the onset what those                
 words mean.  When I say they are weasel words I think it is a way             
 to say well, we did do that.  What more did you want?  And so to              
 make it very clear when we are talking about Alaskan hire what                
 Alaskan - what that definition is for Alaskan resident.  So I                 
 don't, I'm sure that BP fully well understands as well as the other           
 companies that Alaska we need to ensure that we hire our own people           
 here in Alaska first and exhaust all of the rolls that we've got of           
 folks that are on unemployment and a letter that I just received              
 April 8th says that, and I have no reason to disbelieve this,                 
 although I don't have statistics that show exactly how this is, but           
 Alaskans experienced their lowest percentage of participation in              
 the North Slope construction projects to date and if that is so, we           
 just need to correct that and make sure, ensure, that we are in               
 fact hiring Alaskans.  I just think that's good business on both              
 parties.  I don't think that they take this personally.  I agree              
 that the ferry workers and all of the folks should be Alaskan hire.           
 I have no problem with that.                                                  
  CHAIRMAN LEMAN:                                                              
  I'll check the Senate record, the Journal for yesterday to see               
 the day before on that MEBA deal.                                             
  SENATOR LINCOLN:                                                             
   Absolutely!                                                                 
  CHAIRMAN LEMAN:                                                              
  Maybe you were gone.                                                         
  SENATOR LINCOLN:                                                             
   No, I have attended all of the...I don't think I've been gone               
 on any of the roll calls.                                                     
  CHAIRMAN LEMAN:                                                              
  In response to Senator Pearce's comment.  I agree with you.                  
 I think the legislature, at least the Senate, has been consistent             
 in its response to that - that Alaskan residents should really be             
 Alaskan residents.                                                            
  SENATOR PEARCE:                                                              
   Jim, how does the - how can Congress do or help through the                 
 U.S. Constitution - if we can't do Alaska hire, how can they do               
 laws that force local hire which is by definition - cuts out non-             
 Alaskans.  How does that work?                                                
  MR. BALDWIN:                                                                 
   I'm not sure what specific statute...                                       
  SENATOR PEARCE:                                                              
   Title 29, and I don't know either because I don't know enough               
 about it.  And John may know from his previous positions, but as I            
 understand it in the pipeline right-of-way where the transalaska              
 pipeline, Title 29 or 8 or Title something or other, that law, that           
 right-of-way law allows, in fact calls for, a percentage of local             
 hire of the local residents, not residents?                                   
  MR. BALDWIN:                                                                 
   Natives.                                                                    
  SENATOR PEARCE:                                                              
   Alright, natives, but how can they racially define it if you                
 can't define it by state?                                                     
  MR. BALDWIN:                                                                 
   Well, I'll give a legalistic answer and then the Commissioner               
 who is a very good jail house lawyer can clean up after me.                   
  SENATOR PEARCE:                                                              
   I'm not saying they shouldn't have done it.  I'm just trying                
 to figure out why we can't do that.                                           
  MR. BALDWIN:                                                                 
   Well, for one thing the provisions in the Constitution that                 
 we're dealing with are directly toward state action, as to what               
 states can do concerning the privileges and immunities of                     
 citizenship.  And so the idea in the Constitution is that the State           
 should not be left to their own devices to come up with fragmented            
 employment criteria.  In other words, if you are a citizen of one             
 state, you should be able to exercise certain privilege and                   
 immunities equally in all of the states.  So that's directed toward           
 state action.  Now, Congress has vast powers under the commerce               
 power.  It also has vast powers in relation towards deals with                
 native people.  It has a special relationship toward native people.           
 So maybe under a mix of those powers that Congress can act in a               
 different way than a state can.  So I think that may very well be             
 the legal answer to your question.  I don't know specifically on              
 the pipeline act, but I tend to think it's probably grounded in               
 those elements.                                                               
  SENATOR PEARCE:                                                              
   The actual contracts that call for the example, Red Dog, I                  
 think the actual contractual arrangement called for the local and             
 native hire was the contract between the land owner which was a               
 private land owner and the company and, therefore, that was                   
 obviously legal, I assume.  Can we transfer the Northstar leases to           
 a private entity and make them require whatever kind of help they             
 wanted?  It's not as facetious as it sounds.                                  
  MR. BALDWIN:                                                                 
   Well, I think you're probably a pretty good jail house lawyer,              
 too.  But...I don't know.  That would be a hard one to analyze.               
 What they look for is state action and I've been sitting here kind            
 of curling my toes every once in a while and when I say we've                 
 gotten BP to do this or gotten BP to do that - you know a lot of              
 what's going on here is what BP's going to do on its own because it           
 sees its in its interests to do it and to the extent we can foster            
 that attitude in BP that's probably O.K., but the minute we start             
 enforcing it, then it becomes State action and we get into the                
 legal arena and we do something that may either stop or impair this           
 transaction.                                                                  
  On Red Dog we had a statute that set up preferences within the               
 State and that was attacked in the Ensearch case.                             
  COMMISSIONER SHIVELY:                                                        
  I think he is talking about the agreement between Nana and                   
 Cominco which provided for a preference for Nana shareholders.                
  MR. BALDWIN:                                                                 
   But there was no State action involved in that, though.                     
  COMMISSIONER SHIVELY:                                                        
  No.                                                                          
  SENATOR PEARCE:                                                              
   And is that for just Nana shareholders?                                     
  COMMISSIONER SHIVELY:                                                        
  We had a sort of what I called a concentric circle approach                  
 and Nana shareholders got first, people in the northwest second,              
 and people living in Alaska third.                                            
  SENATOR PEARCE:                                                              
   I can remember Suzy Erlich counting noses, quite literally.                 
  COMMISSIONER SHIVELY:                                                        
  They are required every month to report their hire to Nana.                  
  CHAIRMAN LEMAN:                                                              
  Are there further questions of these two gentlemen?  That's                  
 all I had of you.  Kevin Banks, I believe you are going to run                
 through what was it, another run or was it something else.  I                 
 remember we left and kind of cut out about 10:00 and said this is             
 about all the farther we're going to go tonight.  I just got this             
 new information this morning and I haven't had a chance to spend              
 much time with it, but if you can run through it quickly, it's 3:30           
 (p.m.).  I had announced previously that I'd like to take public              
 testimony today and I know there are some people waiting to do                
 that.  I would like to get into public testimony today and take as            
 much of that as possible.  I will need to close this down at 5:00             
 (p.m.).  So, do you t think we can fit this section in within the             
 next half hour, do you think?                                                 
  KEVIN BANKS:                                                                 
  Well, Mr. Chairman, for the record, I'm Kevin Banks, Petroleum               
 Economist for the Division of Oil and Gas.  After my experience on            
 Thursday night I hope the Committee will find that my ability to              
 predict how long it will take to tell if this does better than my             
 prediction about what the model says.  I had really only one area             
 to discuss, an additional area to discuss, about the model and I              
 didn't anticipate that would take very long at all.  And so it                
 truly does depend on questions.                                               
  CHAIRMAN LEMAN:                                                              
  I recognize that the amount of time is directly related to the               
 questions we asked, but I do believe the level of questions asked             
 last Thursday was probably very good and I'm glad we had those                
 questions asked and you were able to be here to answer them.                  
  KEVIN BANKS:                                                                 
  Mr. Chairman, what I handed out, or what is being handed out                 
 to the Committee at the moment, and what I had brought over last              
 night to your staff represents another run of the model.  You will            
 recall that the model, the printout, that we were discussing on               
 Thursday night calculated what the net profit share would be                  
 assuming that development occurs with full production beginning in            
 1999.  Now, the second run predicts what the supplemental royalty             
 will earn with the same assumption - that production begins late              
 1998 and goes into full production by 1999.                                   
  I can illustrate, for example, where this difference shows up                
 is on page three, the very far right hand column.  You can see that           
 the sum of the State supplemental royalty.  I'm looking at the,               
 basically the third line of the printout of that page.  Sorry, the            
 third line shows 50.6 million dollars for State supplemental                  
 royalty.  And that's in inflation adjusted dollars.                           
  CHAIRMAN LEMAN:                                                              
  And this is the illustrative model.  In the actual model you                 
 used that number was just a little bit lower than that if I                   
 remember correctly.  It was 41 million dollars.  Was that correct?            
  KEVIN BANKS:                                                                 
  We did pass out some materials and if you will bear with                     
 me...materials that were passed out with the white notebook.  We              
 indicated that, I believe, it was 37 - that was in 1996 dollars.              
 That number, in fact, appears in the second box below, down on the,           
 below the dollar sign m reel heading and then the right hand                  
 column.  It's the second figure there - 37 million.                           
  CHAIRMAN LEMAN:                                                              
  So this illustrative model in terms of the output is producing               
 something pretty close to what you actually used?                             
  KEVIN BANKS:                                                                 
  That is correct, sir.  In particular this, the supplemental                  
 royalty is a function of production and prices so that would be               
 unchanged by some of those other assumptions.                                 
  We got as far on Thursday night as the development account                   
 calculations and some of the information that I characterized as              
 BP's financials.  As far as a lot of discussion was had about page            
 five and I'll just make a couple of observations here.                        
  Senator Frank looked at page five and in the row that                        
 identified as development account and capital expenditures that it            
 didn't appear as though some of those numbers equalled 350 or 380             
 million dollars as you would expect - 378 actually is the number it           
 should add up to.  It is the total capax for the field.  The reason           
 for that is that the allocation of cost to the net profit share               
 leases is in proportion to the allocation of the oil under those              
 leases - that we have assumed.  So this represents roughly 76                 
 percent of the total capital expenditures that are added to the               
 development account.                                                          
  Obviously, the capital expenditures that are being made in                   
 Northstar will produce oil on the federal leases which bear a                 
 little bit more than 23 percent of the oil.  So these numbers                 
 reflect the amount of the capital expenditures that can be                    
 allocated to the net profit share leases.  I hope that answers                
 Senator Frank's concern.                                                      
  We've also tried to in the cover letter of the packet that                   
 we've submitted to answer a couple of other questions.  I could               
 either proceed with the discussion of the model now or maybe touch            
 on those questions first.                                                     
  CHAIRMAN LEMAN:                                                              
  At your pleasure, either one.                                                
  KEVIN BANKS:                                                                 
  Well, in the cover letter Senator Halford asked questions                    
 about the ultimate recovery at the Prudhoe Bay reservoir and he               
 observed that we started out at around 9.6 billion and we're now              
 well into the 13 billion barrel range.  And this letter just simply           
 states that the original oil in place estimate that has been                  
 bantered around over the years has not really changed very much,              
 but it is after the expenditure of over 2 billion dollars on                  
 enhanced oil recovery projects like gas cycling and miscible                  
 injection that it's been possible to raise the recoverable rate               
 from what it may have been in 1977 to the 55 percent or so that we            
 see today.  And so as a result the recovery estimates for Prudhoe             
 Bay have risen dramatically.  And I think a related question to               
 that was there an expectation that 3-D seismic shot over the field            
 that is tentatively scheduled for this summer whether or not that             
 would change our estimate of the oil in place.  And the answer is             
 no that in fact this is development 3-D seismic which is intended             
 to illustrate or show a model for them where the anomalies are in             
 the field and where the most efficient placement of production                
 injection wells need to be put in.                                            
  And lastly, Senator Frank asked about what impact on the rate                
 of return would an early shutin of the field create if BP were to             
 shutin the field when the net profit share payments began to be               
 required...(indisc)and their share of the profits had to be traded.           
 Senator Frank speculated and I agreed with him....                            
                                                                               
  TAPE 96-55, SIDE A                                                           
                                                                               
  CHAIRMAN LEMAN:                                                              
 ... get some understanding at this level of what your understanding           
 is of it so as we proceed with future hearings that, you know, we             
 don't chase off on a area where we're clearly going to come to                
 logger heads with the two of you.                                             
  Senator Taylor.                                                              
  SENATOR TAYLOR:                                                              
  Nice to have both of you at the table at once, because from                  
 the testimony I have heard so far, there certainly appears to be              
 somewhat of a disagreement, and that may be the reason for this               
 deal.  But you as commissioner, Mr. Shively, are reported to have             
 refused to make a finding that the project was not economically               
 feasible, whereas Mr. Morgan believes that the project is                     
 economically feasible if, in fact, you grant him the relief sought.           
  COMMISSIONER SHIVELY:                                                        
  I think that's a little confusing.  You have to go back to                   
 what we did last year in HB 207, and that's the analysis that I               
 believe Mr. Baldwin is doing.  In that bill, we were looking at the           
 sort of base royalty reduction, and in that legislation I had to              
 find clear and convincing evidence that the change in royalty was             
 necessary in order for the development to take place.                         
  I do not believe that no oil company in the world could                      
 develop this oil field under the current provisions.  When we did             
 the economic analysis, we believe the rate of return is sufficient            
 for somebody to want to do it.  On the other hand, BP has told us             
 they would not do it, and, therefore, I cannot make a finding that            
 under the current situation the development of the field is not               
 economically feasible.  It, in my mind, is economically feasible              
 under both considerations.  Both of the considerations of the net             
 profits and using the supplemental royalty.  BP has said for them             
 it is not developable under the net profit conditions.                        
  MR. MORGAN:                                                                  
  If I may, Chairman.  What I was careful not to say, was the                  
 development was not economically feasible, and that it is the                 
 broader consideration of the economic impact of coming into force             
 of those net profit terms before the field has been fully developed           
 that is the consideration.  So there is something of a subtlety in            
 the words that we're all using here.                                          
  CHAIRMAN LEMAN:                                                              
  If that's the case, then in negotiations why did you not, Mr.                
 Commissioner, insist on a net zero change in the value to the state           
 of Alaska when you modified the net profit share?  You know, if               
 it's still economic, it would seem to me that you deal with the               
 issue of net profit share, but not come up with a new arrangement             
 that results in an economic disadvantage to the state, if I can               
 call it that, even in light of your -- you had a couple different             
 numbers; one I think was 45 million and the other 4 million that              
 your model projects.                                                          
  COMMISSIONER SHIVELY:                                                        
  Well, again, you have to get to the point where you believe                  
 BP, that they will not develop now under the net profits                      
 provisions.  If you believe that, then the earliest we can force              
 them into production would bring the oil on in 2002.  If you do               
 that analysis, then we're about $4,000,000, apart in what I believe           
 we would get under the supplemental royalty and what we would get             
 under net profits.  If I believe that they would use the net                  
 profits, then I should have worked on this deal, you're right, but            
 I believe and that's why I did it the way I did.                              
  CHAIRMAN LEMAN:                                                              
  Would you consider then the 4 million, in light of that model,               
 would be close enough to a wash that its ...                                  
  COMMISSIONER SHIVELY:                                                        
  I consider it to be very close since the only thing we know                  
 about all these numbers, since they are projections, is that                  
 they're wrong.  We just don't know how wrong.                                 
  CHAIRMAN LEMAN:                                                              
  I don't know what other members have for time constraints, but               
 we have three others who have come from out of town that I said I'd           
 like to have a minute at 5:15.                                                
  Senator Rieger, did you have a question for these witnesses.                 
  SENATOR RIEGER:                                                              
  I appreciate your allowing me to participate in the hearing,                 
 and I apologize for coming in late, but I was wondering if you                
 could just perhaps qualitatively, or if you could quantify it,                
 describe the nature of the negotiation -- of how much of the                  
 negotiation was on the straight finances and straight economics of            
 the lease and the modification of the lease, and how much was on              
 other peripheral considerations that you've made reference to, like           
 I think it was use of local contractors or whatever, but who knows            
 what all else came up.  Can you, in very rough terms, qualitatively           
 describe how much was one and how much was the other.                         
  MR. MORGAN:                                                                  
  Mr. Chairman, Senator Rieger.  Obviously, I did not personally               
 conduct these negotiations, although from time to time I was                  
 involved in the process, so I think my answer is essentially an               
 impressionistic one.  I think that most of the time that was spent            
 in technical discussions between ourselves and the department was             
 focused around understanding the issues around the impact of the              
 net profit arrangement and the creation of options for an                     
 alternative arrangement that the state and ourselves would feel               
 comfortable with.  Most of the time that was spent was spent in               
 that area.  It was always clear that we were going to have and the            
 agreement was going to contain areas concerning some of the broader           
 issues around Alaska hire and contracting and the building of                 
 modules.  Those things I think were more specifically focused                 
 towards the end of the more technical negotiations as it became               
 clearer to both sides that we were likely to reach a point of                 
 agreement on the value or the technical components of this.  I hope           
 that helps you get a feeling for it.                                          
  SENATOR RIEGER:                                                              
  That does help.  Were there issues beyond the contracting of                 
 modules and local hire that were brought up, but maybe rejected?              
  MR. MORGAN:                                                                  
   Not to my knowledge, but, clearly, I wasn't involved in all of              
 the discussions.                                                              
  CHAIRMAN LEMAN:                                                              
  Mr. Morgan, I don't know if Mr. Luttrell was involved in those               
 negotiations, but it would be real good for us I think if you                 
 wanted to pursue that first and maybe we could talk to some of your           
 folks that were involved in those negotiations.                               
  MR. MORGAN:                                                                  
  Mr. Chairman, with pleasure -- you will be able to do that.                  
  CHAIRMAN LEMAN:                                                              
   Senator Halford, you had a quick question?                                  
  SENATOR HALFORD:                                                             
  In the consideration of the economic analysis at BP, was there               
 any question that the capital credits or development credit account           
 went forward with the lease, or was that an area that you had                 
 conflicting legal advice as to whether it actually would go                   
 forward?                                                                      
  MR. MORGAN:                                                                  
  Chairman, there was never any doubt in the advice that we                    
 received and I received.  That we were very clear that on                     
 acquisition of the leases the development account carried forward             
 into  our name.                                                               
  SENATOR HALFORD:                                                             
  And the $260,000,000 value of that account, is that with                     
 interest at this point, or is that a ...                                      
  MR. MORGAN:                                                                  
  Mr. Chairman, I'll have to take advice on the answer to that                 
 question.                                                                     
  COMMISSIONER SHIVELY:                                                        
  Mr. Chairman.  Yes, that's correct.  And I will tell you,                    
 Senator, and I am sure that the Attorney General's office will                
 provide this information tomorrow, there has been a lawsuit on that           
 issue that I think clearly settled it, and we clearly believe that            
 the development account goes with the leases.  Not on these leases,           
 but on ...                                                                    
  SENATOR HALFORD:                                                             
  Yeah, yeah.  So, I mean, there's a very significant incentive                
 if, for example, you could buy a $260,000,000 development account             
 for $5,000,000.  That would be a fantastic starting point on the              
 overall lease obligations.                                                    
  COMMISSIONER SHIVELY:                                                        
  Mr. Chairman.  I think it would, but it's also where the                     
 state's risk is, and it's one of the reasons I thought it was                 
 important to consider this is because as that development account             
 grows, our take only goes one direction and that's down.  And the             
 development account will continue to grow, you know ...                       
  SENATOR HALFORD:                                                             
  On yeah, it's a benefit to the company, not at the state's                   
 expense necessarily, but it's a benefit to the overall development            
 of the project based on prior expenditure.  The only way the state            
 gets it back is if the state cancels the leases and resells it.               
 Then there is no development account left.                                    
  COMMISSIONER SHIVELY:                                                        
  That's right.                                                                
  MR. MORGAN:                                                                  
   Mr. Chairman.  The point I would make of course is that were                
 that not the case, or were the account to be lower, the need for              
 the removal of net profit would have been -- I can't say it would             
 have been greater, but it would have been absolutely as great.  And           
 that, in a sense, one of the unfortunate effects of the net profit            
 arrangement is that it provides a disincentive to reduce the                  
 development cost of the field.  It is only because through our                
 technical and professional efforts we were able to see the                    
 development cost in the $350,000,000 to $400,000,000 range that               
 this actually became a live issue.                                            
  CHAIRMAN LEMAN:                                                              
  Senator Frank.                                                               
  SENATOR FRANK:                                                               
  I've always thought that when we talk about development cost                 
 we were talking about capital cost not ongoing operating cost.  Can           
 you clarify that for me?  Is that $380,000,000 totally capital, or            
 doesn't include the operating costs over the life of the fields?              
 I assumed that an operating cost or a, you know, a guy spending               
 money doing something in the field was part of the development                
 cost.                                                                         
  COMMISSIONER SHIVELY:                                                        
  There are three pieces that go into the equation until you get               
 net profits.  The first is what we would call sort of the                     
 development cost, which is like the seismic, any exploratory                  
 drilling, all of the work that goes forward to define out even if             
 there is any oil there.  And then the next thing that goes is sort            
 of the next step of development, which is the engineering, then the           
 capital expenses.  Those all go in.  Also, then once you are doing            
 net profits, you also throw in their operating cost as an offset              
 against revenue so that ...                                                   
  SENATOR FRANK:                                                               
  Well, I understand that.  That makes sense that your operating               
 costs would come off of your revenues and then you would have                 
 operating earnings, and those, then, would offset against the                 
 development cost before you got any net profits, right?                       
  COMMISSIONER SHIVELY:                                                        
  That's correct.                                                              
  SENATOR FRANK:                                                               
  But my question is really the development cost because you say               
 that there's $380,000,000 worth of development costs, and are those           
 development costs made up of both operating and capital costs?                
  MR. MORGAN:                                                                  
  No, Sir.  They are made up of the development cost to bring                  
 the field onto production from its current state.  So that is                 
 moving ahead now from conceptual engineering, which we have already           
 completed, and we have spent, since we acquired these leases, I               
 think of the order of $24,000,000 on conceptual engineering work.             
 It is to go forward now into the detailed engineering phase, the              
 acquisition of material, the placing of orders, the spending of               
 monies with contractors to fabricate and construct the field to               
 bring it into operation.                                                      
  SENATOR FRANK:                                                               
  Okay, let me just follow up on that a little bit, because I'm                
 trying to understand how that works.  So, I don't think you have to           
 put all your money in before you get your first barrel of oil, but            
 is it true that you put all the $380,000,000 in before you get your           
 first barrel of oil, or is that $380,000,000 -- I assume you put              
 most of it in and then maybe some of it comes after as you do                 
 further development, or something like that.                                  
  MR. MORGAN:                                                                  
   I think the issue may be around the phasing of drilling                     
 activity, in particular, given the nature of this reservoir.  There           
 are not, in fact, a large number of wells to be drilled so it may             
 be that the whole of that $380,000,000, including all of the                  
 drilling component of it, would not be complete by the time the               
 field came on, but you can have full technical input on that.                 
 Certainly the vast majority of it, any residue would be a very                
 small proportion, I believe.                                                  
  SENATOR FRANK:                                                               
  Well, that's what I always thought when they talk in terms of                
 development costs being kind of an up-front capital cost, and then            
 oil starts to flow, and then you have operating costs that go along           
 and operating revenues, obviously.                                            
  SENATOR LEMAN:                                                               
  One final easy question for you, Mr. Morgan.  If my memory                   
 serves me correctly, in the past you have advocated that the state            
 consider changing its severance tax and royalty policies in favor             
 of more profit-based systems.  And, if that's true, and, if my                
 memory serves me correctly, how do rationalize your comments on the           
 net profit share leasing with that view, or is there something that           
 we're missing in the linkage that ...                                         
  MR. MORGAN:                                                                  
  Easily, Chairman, I think that it is quite clear that the net                
 profit interest arrangements that were in place here are not profit           
 related.  They do a calculation of net profit, but then they have             
 no impact until the point when, under those arrangements, they cut            
 in, and then they simply cut in at that high level, certainly in              
 the case of Northstar.  That is not a profit-related arrangement,             
 and what we're introducing here in terms of a supplemental royalty            
 is very much closer to a profit-related arrangement.  It doesn't              
 have all the administrative complexity of actually defining and               
 keeping detailed accounting records of profit in a formal sense,              
 but, very clearly, the oil price is a strong proxy for the                    
 profitability of an oil field operation.                                      
  So to the extent that we have now linked the supplemental                    
 royalty to oil price, we have something that is much more profit              
 related than the so-called net profit scheme ever was.  That,                 
 indeed, is part of the benefit of this, because the arrangement we            
 have now leaves our interests, in my view, completely aligned with            
 those of the state.  We have every incentive to increase the size             
 of this oil field going forward, and that's aligned with the state            
 because they will clearly take a significant share.  We are now               
 talking even at 20 percent of the highest royalty rate in operation           
 on the North Slope, and clearly, if the supplemental royalty cuts             
 in significantly higher rates than the highest now in existence.              
 So I think my view is that that is one of the real benefits of the            
 arrangement that has been negotiated in that it really does align             
 those interests going forward.                                                
  COMMISSIONER SHIVELY:                                                        
  Mr. Chairman, if I might, just briefly.  The Oil & Gas Policy                
 Council has talked about this, and what they've talked about is the           
 state taking more risk and the supplemental royalty is a risk-based           
 royalty.  We're taking risk on higher prices, and if those higher             
 prices come, we get a higher take.                                            
  CHAIRMAN LEMAN:                                                              
  Senator Halford, last question.                                              
  SENATOR HALFORD:                                                             
  Well, and I asked the question, but the question I have is it                
 would appear that because the net profit share comes in the back              
 end, the real variable that affects the relative take to the state            
 is the size of the field and the amount of recoverable oil, much              
 more so than the price.  And I think if we double the size and run            
 the assumptions, I would be very curious to see what the                      
 differences in dollars were, because it just seems to be much more            
 size sensitive.  Because by the time you've recovered all your                
 costs, then if you can add, you know, ten, twenty, thirty, forty,             
 fifty thou -- every barrel you add is essentially in the net profit           
 share of the state.                                                           
  COMMISSIONER SHIVELY:                                                        
  Well, if you double the size without any increase in                         
 investment, that is true.  A lot of what's happened in terms of               
 increase in oil production or oil fields has been a result of                 
 substantial investment, all of which goes back into the development           
 account.  So, (a) you would have to make a guess at that.  The                
 other side of it is timing, again, because our price-based                    
 supplemental royalty, if one assumes some overall growth of oil               
 prices over the long run, we get some increase in the end, too, if            
 the oil field lasts longer.  So it is not a simple calculation to             
 make.                                                                         
  I would say that we have looked at the geology.  We had looked               
 at it independently -- BP actually even, I think, before the leases           
 were transferred -- and we independently came up with an estimate             
 that was very similar to theirs.  So we're comfortable that we're             
 in the ball park.                                                             
  MR. MORGAN:                                                                  
  I hope that it turns out to be twice as big.                                 
  CHAIRMAN LEMAN:                                                              
   Me too.                                                                     
  SENATOR HALFORD:                                                             
  I'd just like to see the numbers, or twice as recoverable,                   
 maybe not twice as big, twice as recoverable.                                 
  SENATOR TAYLOR:                                                              
  I want to thank you, Mr. Morgan and John Shively for coming                  
 forward with this.  I think it's wonderful to have the opportunity            
 to hear and to be educated on this process.  But I do find myself             
 somewhat frustrated by the questions and answers I received earlier           
 in that it seems to me that if we are to be a true partner in the             
 Legislature in this process, that there is a certain level of                 
 arrogance involved where we're handed a proposition and it says we            
 want you to know all about it, to be all involved in it, but it's             
 taking a [indisc. -- coughing].  I think that if, in fact, this is            
 to be a meaningful process and there is to be public input and                
 participation and an affect by the elected representatives of the             
 state, that it ought to be a meaningful involvement and that ought            
 to involve something more than take it or leave it.  And if, in               
 fact, it is take it or leave it, I certainly want to do whatever I            
 can to encourage both your good offices, Mr. Shively, and Mr.                 
 Morgan's company to find good resolve and produce things for this             
 state.  But I don't know that my participation or the rest of this            
 group, our participation is either essential or necessary, other              
 than or whatever the political purposes may be for doing so.  It's            
 good to have educated and good to have us involved, but I just                
 don't believe that we need to be part of this process under the law           
 that currently exists.  But I think it is nice that you came in               
 today and we've had this discussion.  I appreciate it very much.              
  COMMISSIONER SHIVELY:                                                        
  Well, I'd just like to say that we've considered this when we                
 went through it, much similar to a royalty oil arrangement where              
 the Executive Branch negotiates the arrangements, we bring those              
 arrangements to the Legislature, and the Legislature says, well you           
 did an okay job or a good job and that's fine, or you did a                   
 terrible job and we don't want it, and that's why we did this.  I             
 do think it is the Executive Branch's responsibility to negotiate             
 these things and to bring, particularly this deal, forward because            
 we do not believe we have authority -- and I think negotiating an             
 arrangement like this in this kind of body would be very difficult,           
 even for the body.  So, we're not trying to be arrogant, and we               
 think that there have been other instances, particularly in royalty           
 oil, where you have seen the same thing.                                      
  MR. MORGAN:                                                                  
  Chairman, I would only add that I would ask you to consider                  
 how, from the perspective of my or any other company in our                   
 business, the sense of having to negotiate an arrangement in public           
 in a legislative arena might appear.  I have to say that there is             
 no where in the world where that happens, and I believe there are             
 very good reasons for that.                                                   
  CHAIRMAN LEMAN:                                                              
  Thank you both, gentlemen, for being with us today.  I                       
 certainly appreciate it.  And, Mr. Morgan, happy traveling.  I                
 understand that you will be able to be back with us, not next week            
 but the week after next, is that correct?  Whatever, I don't                  
 remember the exact details.                                                   
  MR. MORGAN:                                                                  
  Thank you.                                                                   
  CHAIRMAN LEMAN:                                                              
  Carl Marrs.  Standing by, Bill Allen and Dave Jensen.  Sorry                 
 to keep you gentlemen waiting 17 minutes longer than I had                    
 promised.                                                                     
  CARL MARRS, President, Chief Operating Officer, Cook Inlet Regional          
 Corporation:                                                                  
  Thank you, Mr. Chairman, members of the committee.                           
  One of the company's principal lines of business is natural                  
 resource development, and that's what I'm here to talk about today.           
 CIRI is heavily involved in supporting the oil industry in Alaska,            
 including, through its three subsidiary companies, Peak Oil Field             
 Service Company, Construction Machinery and Alaska Interstate                 
 Construction.                                                                 
  CIRI has benefited significantly from the oil industry's trend               
 toward alliancing and partnering and remains a significant                    
 contractor on the North Slope.  It is for these reasons I'm here              
 today to speak in favor of Senate Bill 318.  So let me put my cards           
 on the table here.                                                            
  CIRI and its shareholders will benefit greatly from the                      
 development of the Northstar field.  Our company, Alaska                      
 Interstate, will be a prime contractor on the project.  But beyond            
 CIRI's direct benefit, I'm here today to talk to you about why this           
 legislation makes sense for Alaska.                                           
  As you are aware, with the decline of the production of                      
 Prudhoe Bay, Alaska must act quickly to develop new sources of oil            
 in order to ensure that jobs, business activities and state                   
 revenues derived from the oil industry continue at a level that can           
 support our economy.  Northstar can help make that happen.  It's              
 one of a number of smaller reserves near existing fields and                  
 infrastructure that we can bring on fairly quickly.  That will help           
 us bridge the production gap between the decline of Prudhoe Bay and           
 the potential long-term opportunities of ANWR.                                
  Looking at it from the state's benefit alone, Northstar will                 
 channel in order of $500,000,000 into the state coffers over the              
 life of the field and contribute nearly $100,000,000 into the                 
 state's permanent fund.  To my way of thinking, those are two                 
 excellent benefits to the state of Alaska and to support this                 
 development.  Northstar can also come on line very quickly.  Its              
 projected completion date is 1999, and as far I know, it is the               
 only significant field that we have on the state development                  
 horizon during this time frame.  We ought not to miss the revenue             
 opportunity that developing this field provides.                              
  I've appeared before legislative committees before and                       
 advocated the state being more proactive in dealing with the                  
 industry.  This legislation does that.  It will adjust an old, out-           
 of-date lease that has no chance of being developed into a working            
 field.  We'll benefit from the new state revenues I've discussed,             
 and we'll put hundreds of Alaskans to work, and that, for CIRI, is            
 a number one priority.  We'll build some instate know-how for                 
 developing larger projects on the horizon.  We see it as a win/win            
 proposition for everybody.                                                    
  Finally, please don't buy into the argument that changing an                 
 old lease will send the wrong signal for future development.  We              
 believe it is just the opposite.  Letting the industry know that              
 we're willing to change the past ways of doing business if it's not           
 working is the best way to ensure that Alaska remains competitive             
 in the future.  Accordingly, on behalf of Cook Inlet Region and its           
 6,700 shareholders, I would urge strongly that you support SB 318             
 and keep Alaska moving forward.  Thank you, and I'll answer any               
 questions if there is any.                                                    
  CHAIRMAN LEMAN:                                                              
  Thank you, Mr. Marrs.  I'll just note that when you talk about               
 the $100,000,000 additional money to the permanent fund -- just               
 yesterday or it might have been day before yesterday I was speaking           
 with Byron Mallott from the permanent fund and he said that the               
 permanent fund lost $300,000,000 in that one day where the market             
 dropped what was 146 points ...                                               
  MR. MARRS:                                                                   
  Right, but it's made a few billion dollars ...                               
  CHAIRMAN LEMAN:                                                              
  But made almost all of it back over the next two or three days               
 -- quite volatile.  Thanks so much.  Any questions for Mr. Marrs?             
 Thanks for joining us.  Bill Allen.                                           
  BILL ALLEN  , Chairman and CEO of VECO:                                      
   Good afternoon, Mr. Chairman and committee members.  For the                
 record, I'm chairman and CEO of VECO.  We're one of the largest               
 Alaskan owned companies in the state, and naturally, I'm here to              
 talk to you about Senate Bill 318.                                            
  Senate Bill 318 does a lot of unique and good things, in my                  
 opinion.  It's the first field that the government and industry can           
 work together on.  It's the first field out there that [indisc.]              
 has state and federal leases.  It's the first one that we'll be               
 able to run a pipeline to shore on.  It'll add, I think, 50                   
 thousand barrels a day to the oil coming down that pipeline, and              
 that will help save the economics on the big pipeline for a longer            
 period of time.  It will be developed on just a six acre island, a            
 very small footprint compared to other fields.                                
  As far as helping VECO, it'll help immensely.  We've got --                  
 well, we built the first truckable modules that was built in the              
 state, and we've been building them ever since.  So has Arctic                
 Slope, APC.  So we've got a good experience -- we have a lot of               
 experience on building truckable modules, and we've proved that we            
 can compete pretty well with those.                                           
  The thing that is really great about this is BP's committed to               
 build sea-lift modules if we can find a suitable facility to build            
 them in, and I think that we can.  It'll probably cost a little bit           
 more to build sea-lift modules up here to begin with, but after we            
 get the infrastructure in, I think we can compete with the rest of            
 the world.                                                                    
  And that's going to develop a new industry that we never had                 
 before.  And like they said, just on Northstar it will be 500 new             
 construction jobs and 50 permanent jobs.  Well, these 500 people              
 that's going to be working on building these modules up here,                 
 they're going to have to live here.  They can't live down south and           
 come up and work because you are going to be working five or six              
 days a week so they'll have to live in the state.  We've built                
 these truckable modules that I was mentioning to you, and the                 
 people that work on those have to live right here.                            
  Also, by building these modules here, and particularly the                   
 sea-lift modules, we can get the expertise, we keep the people                
 here, so if ANWR ever does go, we can build a lot of their sea-lift           
 modules.  It's really a chance to develop a new industry.  And I              
 think BP committing to that alone we ought to go ahead and give               
 them what they want as far as 318 and what they propose.                      
  VECO has somewhere -- I don't know, we're close to 3,000                     
 employees, and VECO and its employees urge you to see what you can            
 do as far as getting 318 passed and through.                                  
  I really want to, again, compliment BP on coming in here and                 
 willing to particularly build the sea-lift modules.  You know, BP,            
 right now, they're investing money in the state when nobody else,             
 no other oil companies are doing that right at this time.  I think            
 if BP comes through with this and we can go ahead and build these -           
 - ARCO is talking about building Colville modules up here.  If                
 Colville is economical, they'll build them here, so, we're really             
 starting a new industry, and I really encourage you guys to get               
 this senate bill through and I know BP will come through with what            
 they said they'll do.  I believe it.                                          
  CHAIRMAN LEMAN:                                                              
  Mr. Allen, in the revisions to the lease, there is certain                   
 language, I don't know if you've seen it, on the local hire and               
 local contracting and the words "lessee shall use best efforts to             
 contract with Alaska firms and fabricate modules in Alaska whenever           
 feasible" and there's a number of phrases like that.  Are you                 
 satisfied that these are sufficient and there is a strong enough              
 commitment to (1) use Alaskan contractors and (2) that Alaska                 
 residents will be the workers that are working for those Alaska               
 contractors.                                                                  
  MR. ALLEN:                                                                   
  Yes, I do because BP's staking their reputation on it, and I                 
 don't think that they want to be looked on as some company that               
 said they were going to do one thing and do something else.  I've             
 done business with them a long time, and when they commit that                
 they're going to do something, they've never changed directions,              
 and worked for them since 1974.                                               
  SENATOR HALFORD:                                                             
  The question I had is -- you're familiar with the, you know,                 
 the difference in costs here to building outside.  What do you                
 think is a reasonable differential?  If we were trying to ensure              
 that we're actually going to get the big modules built or the sea-            
 lift modules and we were to ask a question as to what BP is willing           
 to spend, recognizing that it will cost a little bit in Alaska to             
 build the same modules, and if they came back and said that if it             
 were anything under 10 percent they'd be willing to do it, would              
 that cover the kind of difference that you think it would take, at            
 least initially, to get sea-lift modules built in Alaska?                     
  MR. ALLEN:                                                                   
  Yeah, I do.  And I think once we get the infrastructure here,                
 I think we can compete with the whole Lower 48.  I don't think                
 after we get the infrastructure here and we really get into it, I             
 don't think they would have to spend any more here than they would            
 in the Lower 48.                                                              
  SENATOR HALFORD:                                                             
  A big selling point, if this goes, will be because of instate                
 activity, and if there's $30,000,000 in module construction and               
 it's really labor cost getting into the economy, that's a big help.           
 It's just hard to ensure that that's actually going to happen                 
 unless there's some recognition of what the differential really is.           
 If its five percent, 10 percent and they're willing to work in                
 those kinds of numbers, that, I think, is something we need to                
 know.                                                                         
  MR. ALLEN                                                                    
  We ought to jump on it, you bet, it it's within the 10                       
 percent.  I think there's more than $30,000,000 there.  I don't               
 know where you came up with the $30,000,000, but ...                          
  SENATOR HALFORD:                                                             
  Well, I think the testimony was $30,000,000 more than would                  
 otherwise be done in the initial development.  So $30,000,000                 
 increase ...                                                                  
  MR. ALLEN:                                                                   
  I think they're being conservative.  I think there will be                   
 more than $30,000,000 spent here than if they didn't -- I think               
 they're being conservative.  They'll spend more than they would               
 have normally.                                                                
  SENATOR HALFORD:                                                             
  I think just the question of sea-lift modules was $30,000,000                
 more than they would otherwise spend if they didn't reach out and             
 build in Alaska what they wouldn't have built in Alaska on just               
 purely economic grounds.                                                      
  MR. ALLEN:                                                                   
  Oh, I see, that's probably true.                                             
  SENATOR TAYLOR:                                                              
  Mr. Allen, what do you need for infrastructure?  We've got                   
 three large facilities in my district alone, all of which have                
 major deep water ports, docks, huge gantry cranes that are sitting            
 there on rail, large warehouses with cement floors and electricity            
 to them.  I mean, I don't know what you need for infrastructure to            
 build this type of thing.                                                     
  MR. ALLEN                                                                    
   Well, that's along the lines of what you need.  You need that               
 and then you need the skilled labor to do it with, and Anchorage              
 and the Mat-Su Valley and Kenai have a lot of skilled labor that              
 have moved up here and worked on construction for a long time.                
 Also, you know, in a real rainy climate, you need some kind of a              
 building that you can put these modules under while you're                    
 building.  But all of the other stuff that you tell me, it might be           
 real feasible.  You know, like on the slope when you build stuff up           
 there, you have to have camps so that your workers can live in                
 them.  Now that's an extra expense.  In Anchorage or in the Mat-Su            
 Valley or even in Fairbanks, you know, the people have their own              
 homes there, so the only thing I can see that might not be as                 
 favorable down where you're at is the skilled labor living right              
 there.                                                                        
  SENATOR TAYLOR:                                                              
  Well, I think we've got quite a few of those too ...                         
  MR. ALLEN:                                                                   
  Yeah, hey, tell you what.  Loggers are good hands.                           
  SENATOR TAYLOR:                                                              
  We've got a lot of people like certified welders that have                   
 worked on the slope.  We've quite a number of people that have                
 worked on the slope.                                                          
  MR. ALLEN:                                                                   
  Do you?  Well, we ought to look into that.                                   
  CHAIRMAN LEMAN:                                                              
  You just got an invitation from Senator Taylor to tour his                   
 district.                                                                     
  SENATOR FRANK:                                                               
  Well, I think there's a lot of people in my community, in                    
 Fairbanks who feel like they're skilled in terms of this type of              
 work.  I'm hearing a lot about the modular development and I'm                
 hearing a lot of excitement about it, and that's good and valid.              
 I have the same kind of desire to see my community benefit from               
 local hire as well and wondering about how you think that can be              
 accomplished.                                                                 
  MR. ALLEN:                                                                   
  Well, I think it already is.  You know, you guys are going to                
 get about 42 percent of it?                                                   
  SENATOR FRANK:                                                               
  Hey, I like that, that sounds good.                                          
  CHAIRMAN LEMAN:                                                              
    Hmm, now that you tell me that, you might start losing some                
 of our support.                                                               
  MR. ALLEN:                                                                   
  We've done a study and you're probably going to get 42 percent               
 of the money spent on Northstar, so you guys are ...                          
  SENATOR FRANK:                                                               
  Well, that's good.  You know, I think that the oil industry,                 
 if they were to spread out of the benefits of local hire throughout           
 the state adequately, they would be well served by that.                      
  MR. ALLEN:                                                                   
  In talking to BP, they want, if it's at all possible, to build               
 more in Fairbanks.                                                            
  SENATOR PEARCE:                                                              
  Is there a -- you may have answered this, and if you did, I                  
 apologize -- is there some sort of a written document between you             
 and BP saying that you will get some of the work if this project              
 goes forward?                                                                 
  MR. ALLEN:                                                                   
  No, but we're an alliance partner.                                           
  SENATOR PEARCE:                                                              
  What does that mean?                                                         
  MR. ALLEN:                                                                   
  We do most of their construction.  It's between us and Arctic                
 Slope, the mechanical part.  Usually Arctic Slope gets 50 percent             
 and we get 50 percent and then Peak gets most of the civil work,              
 the dirt work.                                                                
  SENATOR PEARCE:                                                              
  Is there a formal document that makes you an alliance partner,               
 or is that just a gentleman's agreement.                                      
  MR. ALLEN:                                                                   
  Yes, there is one, a formal document.                                        
  SENATOR PEARCE:                                                              
  Is that a public document?                                                   
  MR. ALLEN:                                                                   
  No, it's not public, but I wouldn't have qualms if you wanted                
 -- would you, the alliance agreement?                                         
  MR. MORGAN:                                                                  
  I'd need to see the agreement first.                                         
  CHAIRMAN LEMAN:                                                              
  Further questions of Mr. Allen?  Thanks for joining us and                   
 thanks for standing by.  I know that sometimes these committee                
 meetings can get tedious and I appreciate your patience.                      
  The last person to testify today is Dave Jensen.                             
  DAVID JENSEN, President and CEO of Natchik, the Oil and Gas                  
 Division of Arctic Slope Regional Corporation:                                
  Thank you, Mr. Chairman.  We operate principally through our                 
 two subsidiaries:  Alaska Petroleum Contractors (APC) and Houston             
 Contracting (HCC).                                                            
  You've covered just about everything that could be covered                   
 with a long list of comments that I had to make here, so I'd like             
 to shift my emphasis to a recurring theme brought up here is what             
 is your reassurance to you as a principal contractor, which we are            
 one of the principal contractors in the alliance agreement for the            
 Northstar project -- what is your assurances, do you have something           
 in writing, are there pledges, blood documents, and so forth?  And            
 you've heard the answers to them.  I would like to convey to you at           
 this time that I have been in the industry for 33-years at this               
 point.  In the last two years, the entire contracting community --            
 and it's been a little longer than two years now, probably three;             
 but in the last several years the contracting community, as a                 
 general entity, has entered into a variety of alliance agreements             
 and contracts with the two principle operators on the Slope:                  
 British Petroleum and ARCO.  I can tell you with a great deal of              
 authority that those contracts have been well honored.  And I have            
 never been, in the prior thirty-some years, experienced that type             
 of and level of cooperation both in negotiating changed conditions            
 in terms as we run into changed conditions with them.  I have the             
 highest degree of confidence in our agreements with BP to fulfill             
 what they have set forward in their considerations for the                    
 employment of Alaska corporations and Alaska personnel with it.               
 It's worked well for us and we look forward to it in a very                   
 positive fashion.  I almost, I thought I heard a comment that the             
 Alaska hire in Alaska corporation work might be a peripheral issue.           
 I take a little umbrage with that and think about that for a moment           
 as we're all so engrossed in net profits and royalty considerations           
 and so forth.  And of vital importance are those folks we call                
 Alaskans out there today.  And generating work and future work in             
 considerations, this particular project offers us those                       
 opportunities as we develop a more intensified, skilled labor pool            
 which we need to do again as we've lost a great deal of that labor            
 pool over the last ten years.  They've exited the state.  This                
 gives us an opportunity for the development of a larger skilled               
 labor force that will allow us or put us in a position where we               
 don't have to import labor or certainly reduce the requirements to            
 import outside labor.  In addition to it, you've heard the                    
 references to developing an improved infrastructure for these                 
 manufacturing or fabricating opportunities that we have with the              
 process module considerations.  As we do this, this again opens the           
 door to the future for us again.  So, I would ask you to really               
 look at also, as we pick apart the royalty and net profits and so             
 forth.                                                                        
                                                                               
  TAPE 96-55, SIDE B                                                           
                                                                               
  MR. JENSEN:                                                                  
  ...aren't we all considered with our future in developing - in               
 developing.  This project offers that opportunity and we needn't be           
 so caught up with at least from the Arctic Slope point of view,               
 contracts that become iron clad and you promised x number of                  
 positions and dollars and so forth.  We're out of that era, we're             
 out of that era.  I know that comes as news to a lot of us, but I             
 can tell you that with a great deal of confidence.  I know we're              
 pressed for time so, I'll limit my comments to that.                          
  CHAIRMAN LEMAN:                                                              
  Senator Pearce.                                                              
  SENATOR PEARCE:                                                              
  Thank you.  I appreciate what you're saying about contracts in               
 the '90s, but some of the comparisons of both alliancings -- since            
 I learned this weekend you're not supposed to say partnering                  
 anymore -- and the state's ability to have surety of how that                 
 affects Alaskan contractors and Alaskans.  Alaskan contractors will           
 get the jobs and then the Alaskan contractors will hire Alaskans,             
 I guess its a two step process.  We use, because these projects               
 have come up as a basis for comparison -- things like Red Dog,                
 where the owner, the land owner was able to force because of a very           
 good local hire, a very restrictive local hire clause, and also the           
 Title 29 alliancing with Alyeska which was just the topic of a                
 dinner Wednesday night where certainly your parent company was                
 represented along with others in the state that have alliance                 
 partnerships.  And that of course, was required under federal law.            
 And I think that there are, if not, quotas per se, there were                 
 certainly some performance measures that had to be met, and that              
 the Department of Interior gets to actually count noses, if they so           
 desire.  I think we have not figured out of way because of the                
 problems we've had with Alaska hire and our inability to figure out           
 a way to write an Alaska hire amendment in the Constitution that              
 can stick.  We're kind of trying to feel our way toward being able            
 to go home to our constituencies and say, "We have an iron clad               
 agreement that we're going to have Alaskan contractors and we're              
 going to have Alaskans in those jobs," because our constituents               
 have come to expect it because they've seen it happen in other                
 cases.  Maybe we should ask Congress if they'd write and then they            
 could do it because they can do things that we can't do.  But it is           
 a give and take, and I understand your frustration with our wanting           
 something iron clad, but it's something that I think the                      
 legislators feel is necessary for us to be able to explain taking -           
 - well, to explain positive votes on some sort of a negotiated deal           
 like this.  So that's not really a question, it's how we get to our           
 position.                                                                     
  MR. JENSEN:                                                                  
  Well, I can understand your concern, Senator Pearce, and to                  
 come to some quantitative solution with that that we can get down             
 in black and white, I think you have to be so cautious that we                
 don't run amuck with the previous issues that we've been faced                
 with, and Alaskan preference, and Alaska hire, and so forth.  So              
 when you start to couch or incorporate in a document numbers and              
 percentages or make more than general references to Alaska hire, we           
 can certainly all experience a very difficult and a long and costly           
 legal problem, and I think that will make it the fourth time for us           
 as a state to become embroiled in that again.  I know it's                    
 difficult to go back and say "Trust me."  We've heard that                    
 previously, but I can again offer you my assurances and experiences           
 that have just transpired over the last several months when we                
 began to focus on this as a team with BP and the contractors; how             
 we've begun to develop some conceptual frameworks of how we can               
 accomplish this additional fabrication, transportation of these               
 modules, modules now up to 2,800 tons, which is pretty unique when            
 you take into consideration the modules fabricated here in                    
 Anchorage were 80, 85, 90 tons maximum.  We're making quite a                 
 quantum leap with this whole approach.                                        
  CHAIRMAN LEMAN:                                                              
  On behalf of Senator Taylor and perhaps Senator Frank, can you               
 tell us what your distribution of employment might be throughout              
 the state?  Senator Taylor would probably offer that a number of              
 people in Southeast Alaska would be interested in these jobs.                 
 Senator Frank, of course, interested in jobs in Fairbanks, and I'm            
 somewhat provincial too, so ...                                               
  MR. JENSEN:                                                                  
  I can share with you what our current distribution is and that               
 vacillates with the projects that we're doing.  Currently, between            
 APC and Houston Contracting we're a little in excess of 2,000                 
 employees solely within the state of Alaska.  Of those,                       
 approximately 80 percent are on the North Slope working for British           
 Petroleum, ARCO and Alyeska, through the northern end of the                  
 pipeline for Alyeska.  The other 15 percent of those employees are            
 in Fairbanks and Kenai.  And that shifts dramatically from year to            
 year.  To give you an example, if we have a shutdown at the Mapco             
 refinery in Fairbanks associated with our other maintenance work              
 for Mapco in Fairbanks, that number balloons significantly to a               
 couple hundred people immediately in Fairbanks in addition to the             
 number of Fairbanks residents that are hired, that are working on             
 the slope.  So when we look at, you know, a cross-section of where            
 people are working, that isn't so important as to where they                  
 reside.  So we have a fair number of people from the Kenai                    
 Peninsula that are employed on the North Slope, as well as                    
 Fairbanks and Anchorage and from the various bush communities also.           
  CHAIRMAN LEMAN:                                                              
  I would just suggest that for you and for the others who are                 
 still here and listening that it would be interesting information,            
 I think, for this committee and for other legislators to have                 
 perhaps a distribution of where these people reside so others will            
 know if they're coming from the districts.  I think that would be             
 something that will be useful.  Mr. Allen talked about 3,000, you             
 talk about 2,000, and I think we can probably show that the impact            
 of this project impacts probably every region of the state.                   
  MR. JENSEN:                                                                  
  We are in the process of doing that as we speak, Mr. Chairman.               
  CHAIRMAN LEMAN:                                                              
  Thank you.  Any further questions?  Thanks for joining us.                   
  I'll announce that we will continue this hearing of Senate                   
 Bill 318 tomorrow starting at 10:00 a.m., and we will pursue                  
 primarily legal issues with the Department of Law, but also we'd              
 like to have the Division of Oil & Gas people here available, and             
 I would suggest that if BP has some of your people available                  
 because undoubtedly as we get into questions we'll probably                   
 encroach on turf that you [indisc. -- coughing].  I expect that               
 will last for two hours tomorrow.                                             
  Next, just so we can plan further in advance, I'd expect that                
 we will resume hearings on this next week on Wednesday.  We will              
 work with our schedule; we have other bills scheduled.  We may need           
 to go to an evening meeting on Wednesday evening like at 7:30 if we           
 can't deal with the other bills, but we are getting stacked on some           
 others that we do need resolve.  But I want to keep the momentum up           
 now that we're started.                                                       
  Monday's meeting we have posted the schedule: HJR 60, SB 311,                
 HB 539 and HJR 58.                                                            
  Any further business to come before us?  If not, we are                      
 adjourned (4:22 p.m.).                                                        
                                                                               
                                                                               

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