UNIDENTIFIED VOICE: I had a question I wrote down. What I hear we in the discussion today is a little bit different than we heard from the DNR commissioner so it's kind of interesting.

MARTY RUTHERFORD: Well, Harry, I think talked about risk and.....

UNIDENTIFIED VOICE: He did. He did. The point I'm trying to make here is-the question asked is in an open market, let's say we've scrubbed everything we've got and go back and say to the market place we'd like someone to build a gas pipeline, make your offers. We're already confused ourselves in the state about what the scope of work is. So we've imposed this additional cost by building the pipeline all the way through Fairbanks with the notion that we're going to have domestic use. But it's starting to get confusing to me that even the notion of that may undermine exploration in Cook Inlet, I think goes to the heart of this. How do we-what's in the best interest of the state, what criteria do you use. If it's pure economics, you-it can't be unless you can put a dollar.....

MARTY RUTHERFORD: I'm going to ask-probably Mark can answer part of that question about Cook Inlet, but I want to just make something really clear. The contract itself does not absolutely say it will be built down the Alaska Highway. It leaves open whether it could be built over the top.

Now obviously the state of Alaska has passed a law that says it has to go down the highway, but, you know, if, in fact, the project doesn't get developed for 10, 15 years, there's nothing to preclude them from, you know, changing that particular.....

UNIDENTIFIED VOICE: So how do you know what's in the best interest of the state if we don't know what we want?

MARK MYERS: I think we kind of-every contract's going to be a balance, you know, assuming-even the law of general application of give incentives, you're trying to incentivize certain behavior and you'll put certain restrictions on the use of it. Maybe a restriction is that it goes south versus this, but we're willing to pay the difference.

On things like expansion, your Cook Inlet questions, I there's kind of two parts to this, the Cook Inlet Basin, the (indiscernible) of gas to southcentral, what's available here in terms of reserves and how would a spur line effect that. The second question is how cheaply and at what cost to the overall project do you bring gas down to southcentral. And they're both very complicated questions that we spent a lot of time and I think we came up with pretty robust answers to those questions.

The Cook Inlet piece is we have an inefficient market in Cook Inlet, we have too few producers, we have a high value market, that's the utility market, we have a very low value market, that's the fertilizer market, the Agrium urea market, and we have a middle market, it's an LNG.

Well, the middle and the high end market are limited in scope and locked up by a few folks, Marathon, Unocal, ConocoPhillips. That means a new explorer coming into that basin has an option of really selling to the fertilizer plant at well below Lower 48 prices which means he can't get the exploration dollars to come in the Inlet, he simply can't.

If he can get Henry Hubb prices which are much higher than Agrium is willing or can afford to pay, he's not going to come here and invest where it costs more for exploration because we're-it's a more localized, smaller market and we have slightly higher cost because of the limited amount and availability of equipment and our seasonal restrictions and our environment. He's got to compete for dollars in the Lower 48 and he can't do it, he can't do it for $4 gas or $3 gas when he's competing against six to $12 gas in the Lower 48.

We have a systemic market problem, because he can't get access to that higher value LNG export market and because the long-term utility contracts are basically locked up.

Now if he finds that gas, he needs to find a sufficient quantity of gas to justify exploration and development. So there's a size scale he needs. If he goes offshore in the Inlet he's needs a lot bigger supply of gas than in some of the on shore areas where you see the shallower wells being pushed down. And as you look at that then if he's got too much gas and if he can get in that utility market, he can't sell a sufficient quantity of gas anyway, he can't get in the LNG market. So consequently he's got stranded gas in the middle of Cook Inlet even though we're facing a shortage of reserves. So we have a systemic problem and our market isn't open enough or large enough.

So the answer-really the answer is that we need a better and larger LNG export facility to suck up our reserve base in order to get more reserves in they're in the basin and I think they are.

UNIDENTIFIED VOICE: So the gas pipeline competes with that economically.....

MARK MYERS: Well, let's think about that. If you had an LNG export facility and willing markets in this area, then it wouldn't be in competition because you don't have stranded gas. The question is if that gas comes down, it's not going to displace-its price structure is going to be-it's going to be relatively expensive gas. At minimum it's going to be equivalent to the next best alternative in that particular market. In that case in the Fairbanks market it's coal and oil, in the Anchorage market it will be the cost of exploration and development in the Inlet. I mean, the tail doesn't wag the dog, you have this infrastructure set up.

So if we normalize that as I expect we do-will, to market prices there's going to be competition. And they're closer to the market, they don't have to pay that North Slope pipeline tariff, that's going to spur exploration provided there's an export market for it. If you flood the market and you can't get the gas out, then you're going to have low prices which is good for local people, but you're going to kill exploration in Cook Inlet.

UNIDENTIFIED VOICE: What about the notion of selling (ph) gas through the pipeline in the other direction?

MARK MYERS: That could happen.

MARTY RUTHERFORD: I don't know whether Harry talked about it, but, you know, Harry was under contract with us and participated in the negotiations. And as part of that analysis we, DNR, did look at a very small line that ran from the North Slope down into Cook Inlet and ran the economics of it. Why don't you just quickly just note that, Mark.....

MARK MYERS: Yeah.

MARTY RUTHERFORD: .....because that's an alternative.

MARK MYERS: And I can't remember exact numbers, but for around $4 billion you can build a 24 inch line all the way a high compression line all the way from the North Slope to Cook Inlet, and about 800 million to maybe a bcf per day. So the tariffs on that will be higher than on the bigger line, but the capital cost and the risk are much lower.....

MARTY RUTHERFORD: Much lower.

MARK MYERS: .....and the ability to get it done quicker. But that requires you have export gas or you will kill Cook Inlet exploration and development.

UNIDENTIFIED VOICE: I have two questions. The first question is I've known all three of you long enough to know you didn't go into this administration to give away the store. And I also know from having talked to Tom earlier in this negotiation that you were looking at general application and-or at least, you know, dealing with all three different entities. And then at one point the story changed. Why did the story change, was it to get Exxon to the table because we kept hearing that, you know, ConocoPhillips was there and Exxon wouldn't come, was it some determination by the governor that he was just going to squash alternatives, what-what got us there? And then I do have a follow up question about the in kind.

TOM IRWIN: I'll start on that and I need to be careful because I really don't know, but I can tell you some of the history. When we got started it really looked like fair negotiation amongst the various parties. During that process Mid American, remember, asked for three to five years exclusivity. And they wanted to start this year, by the way, but they wanted protection for that immediate investment, the time value of money. They were told no exclusivity, everyone would be treated the same.

Revenue, the governor's office really didn't-was the lead in negotiations with the producers, DNR was the lead negotiation with Trans Canada. Now I want to make it clear, I in my mind haven't chosen what's best because we need to do a fair evaluation. And the question what-look I'm driven by technical economics, I've done this, that would drive my decision what's best for Alaskans, cash flow, time value and money to Alaskans. That's my background.

But what happened in there, I think there became a philosophy of on one hand you negotiate hard, on the other hand you have to give to incent them to stay at the table.

UNIDENTIFIED VOICE: The producers?

TOM IRWIN: The producers. In negotiations in my mind, you have to know your bottom line, at what point you walk away or you eventually get to their bottom line and, in fact, you can go past their bottom line because when you're working with really top notch negotiators they sense that. They not only get to the point they wish they could have gotten to, but well, gee, we'll just go wait a while, we'll back away and if the other side's afraid of you leaving, you're hammered.

Politely I say that that's the two issues.

From my background in negotiations, we broke every rule in the book. First off in negotiations you never set a date on yourself. We did. We will have negotiations done by what was it, last September. We will call the legislature back. Oh, boy, come negotiate with me if you want to set a date because you won't get anything out of me until after that date.

Second thing is for DNR as an example, Marty led the negotiations. Your top person never goes to the table, ever. That's my background, hey, it's different in politics, I guess.

That's not my call ever.

Marty could always say I'm not going to go there, even if she just needs time to think. Maybe she knows she's darn right and she wants to put pressure on, I'm not going to go there today, I've got to talk with the boss. And you start going down that line and you set a pattern.

But once a technical team again-and we-I don't believe we ever haven't had a bottom line. And you do that before the first day of negotiations start. Where do we want to go, how much can we afford, what are the total dollars, what's the risk I can take.

And I don't think there ever would be anything wrong with going to the Alaska public and saying, folks, I've negotiated hard for you, I've maybe even given a little too much because I want this gas line, but support me I'm not going to give it all away. And I don't feel we ever did that. So it's two styles.

MARTY RUTHERFORD: Let me just weigh in for just a second. I mean, I think it's important for the public to know that Mid American was the first, you know, they actually came through the door and asked for this exclusivity and that really never got off the ground because the administration said no exclusivity. Mid American, they're tough negotiators, they left.

Trans Canada came through the door and at that point in time the governor's office was completely comfortable with progressing a Trans Canada negotiation and progressing a producer negotiation. And so we did simultaneously, moved each of them forward.

While we were in-as we started the actual aggressive negotiation with Trans Canada Mid American came back and said we want to be part of this. So actually for the first half of the Trans Canada negotiations Mid American was at the table as well with them as a combined, independent pipeline negotiation. There was a falling out between the two companies during the middle of that.

We progressed Trans Canada, we actually got done with all the commercial decisions on Trans Canada. That deal is sitting there, it never was papered, you know, we never did the legal supporting documents to provide those to the legislature, but all the commercial decisions were made. And it would be very interesting, I think, for the Alaska public to see the commercial elements of that deal compared to what's-the commercial elements of the producer deal because I know they're very different.

So we reached that point of having to decide whether we're going to expend the money and the resources to paper the Trans Canada deal as well. The producer negotiations were done very differently, we started papering that deal from the bottom up and the commercial decisions weren't made until the very last. So it had all this boiler plate that was progressing without any of the major structural decisions being made until towards the end.

So at a certain point the governor, who was interested in progressing both of them decided for some reasons that we'll probably never completely understand, that he didn't want to move Trans Canada all the way forward. And I believe it's associated with his opinion that he doesn't want to get into, you know, the hard ball negotiations and using whatever leverage we as a state have such as the Point Thompson Unit development and the lease terms that require due diligence development when there's reasonable economics. So that's my take on it.

TOM IRWIN: And I think you know as well as anybody, there is the issue that we were not exclusive, then for some reason we went exclusive, but that reason really is accessing the gas. And the state, does it want to stand up for its rights of duty to develop. And I think that's a significant issue, the lease terms, it's clearly in there, but it's clearly our right to enforce those, and do you choose to or not. I clearly think you have the situation, leverage if you call it, other issues that we should be enforcing Alaskans rights to see our gas developed.

GOVERNOR HICKEL: If we got rid of the contract, got rid of it, wouldn't you have more freedom to do what's best for Alaska?

MARTY RUTHERFORD: Absolutely, in my opinion.

MARK MYERS: Absolutely, governor.

GOVERNOR HICKEL: Well, then throw the thing out.

TOM IRWIN: Absolutely that's the best thing.

GOVERNOR HICKEL: Well, absolutely. You can't deal with-it's impossible. I spent last few days in Homer for about four days, to-can't believe that any person would sell a country out like that. It's our gas, it's our land. And so I think throw the contract out, maybe the people that voted too and start over.

TOM IRWIN: Governor, it is the worst contract imaginable for this state and the worst I've seen in my life.

GOVERNOR HICKEL: I read it, I said I've never seen anything like it in my life including in Washington when I was secretary.

TOM IRWIN: If I would have brought that contract to any board of directors I've ever worked for.....

GOVERNOR HICKEL: You'd get fired. It's so bad I don't even want to think about it. It is really bad.