BP merger lacking on several fronts

Posted: Monday, February 21, 2000

The Legislature's Special Joint Committee on Mergers recently heard from BP Amoco executives, the Administration, and the oil industry economists and antitrust legal experts that the Legislature hired on whether a merger between BP and Arco is in Alaska's best interest. Despite agreeing on many of the basic facts and analysis, I was amazed that these speakers could reach opposite conclusions. How could this be?

I believe the answer lies in how you choose to define what state interests must be protected. In my opinion, the answer to what is best for Alaska includes several components such as employment of Alaskans in Alaska, that the state shares in the financial savings accrued in the merger, and reasonable assurances that spirited competition in the exploration and development of North Slope oil and gas will continue into the future.

Shrouded by complicated data and guided by an implacable economic model, the Administration seeks to define Alaska's best interest in the narrow context of antitrust law. Determining that the merger would diminish competition on the North Slope, the Administration's narrow focus, suggested by its model, required BP to sell approximately half of Arco's exploration and production assets and a portion of its transportation assets to two new operators. Voila! Competition is restored and the antitrust laws are satisfied. End of the inquiry. I could not disagree more.

How will the merger impact long and short-term revenues for the state? Neither the Administration or BP has said much on this point and what little they have said is distressing. BP expects to save approximately $1 billion from the merger. Approximately $140 million of this would be saved in Alaska. This is all well and good. But shouldn't Alaska's tax and royalty structure cause a fair share of the savings to accrue to the benefit of all Alaskans?

The Administration's analysis reaches a different conclusion. A memorandum to the Merger Committee by the Department of Revenue indicated that severance tax, royalty, and property taxes will not be changed by the merger. And yet, despite repeated requests beginning last fall, the Administration has yet to provide the committee with a fiscal note explaining the fiscal impact of the merger on future state revenues.

Although BP's profits in Alaska are expected to increase because of the savings, under the state's form of modified apportionment income tax, the Department of Revenue cannot say for certain what will happen to income taxes, but they believe they will go down.

Is a company's commitment to Alaska something to consider when evaluating the merger? Of course. Yet at the hearing, BP made it clear that its previous $5 billion commitment to Alaska was off the table because of the amount of Arco's assets it would be required to sell as a part of the merger. Even so, BP would not provide a ballpark figure for what commitment it felt it could make to Alaska.

Even if the Charter is implemented, BP's witnesses admitted that it would still own 75 percent of the combined assets of both companies in Alaska. So why won't BP commit to some level of capital investment in our state? In my view BP has offered no credible explanation.

Arco Alaska President Kevin Meyer was not part of the scheduled agenda for the merger committee hearing. But he was asked whether Arco would fail if the merger was blocked. He explained that his company was proposing for board approval Alaskan capital expenditures in the $500 million range for this year. Mr. Meyer said he could tell us the amount to the penny by the end of the week. So why couldn't BP answer the same question?

Isn't resolution of old tax and royalty disputes in the State's interest? I think so. But the Administration says the antitrust laws don't cover these matters and therefore it chose to ignore them. I don't agree with this approach, but at least I could respect the Administration's position to ignore these ``extraneous issues'' if I thought its decision was restricted to antitrust law. But instead they give the appearance of a justification for its failure to go any further.

If the state can only seek antitrust remedies, how do we explain BP's ``environmental and community commitments'' language in the charter? Surely ``donations'' to the university or cleanup of orphan sites are not antitrust remedies for a lack of competitive bidding on the North Slope. The charter obviously extends beyond the focus of antitrust law. Since that is the case, why not deal with the big picture instead of protecting Alaska's interests in the narrowest way possible?

I would like to support the merger, but in all honesty I cannot. The charter may lead to better bidding on North Slope leases and if it does I applaud it. But as recent polls and my constituent contacts demonstrate, most Alaskans understand the tangible and intangible benefits Arco has brought to Alaska. Two unknown companies with unknown intentions cannot replace these benefits. So like the majority of Alaskans, I oppose the merger as laid out in the BP/Knowles charter and believe that the state should use its full resources to block it.

Sen. Drue Pearce is president of the Alaska Senate.

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