KAREN HUNT: I had a quick question.

UNIDENTIFIED VOICE: .....follow up.

KAREN HUNT: Yes, you had a follow up, go ahead.

UNIDENTIFIED VOICE: Just on the issue of taking the gas in kind as opposed to in value. I can see some advantages to that, I frankly agree with your analysis. But, you know, given the problem with accessing gas, could we get over this-you know, we don't get our royalty until gas is produced.

MARTY RUTHERFORD: Underlifting and overlifting.

MARK MYERS: We don't have that right under the lease, it's because the infrastructure isn't there.

UNIDENTIFIED VOICE: Was it ever part of the negotiation?

MARK MYERS: No, but it wouldn't have mattered. The part that's really missing from the table is the way the underlying upstream agreements between the producers operator. And that is the least willing producer can block any development. And that's their unit operating agreements which the state is not a party to and which we don't even have copies of from any fields, we forced the Prudhoe one public, it was a big fight with the companies, but we got there. And those agreements basically say the ones we have and I assume the other ones are templates because they involve the same three parties, say that any one of those guys has the right to veto. In other words, all three have to agree to move a financial thing forward. So if you produce gas, for example, in Prudhoe Bay and Exxon doesn't want to say, if Conoco is willing to sell it, Exxon-the first thing Exxon will claim is you have to kick their 100 percent of costs of this. I'm not going to pay my share of costs.

Secondly, you have to compensate me because again I'm going to-might lose some oil down the line or I might be inconvenienced this way or that way or this way. And you have to pay for the full compensation of any loss that I might incur as an oil operator. And if you want to do all those things, go ahead and sell your gas and I'll leave mine in the ground. But they don't have an agreement to say that I can produce if you can't also, it's called the gas balance agreement. None of that basic infrastructure is there and the agreements inhibit it. That's why if the state came to them-first of all we don't have the authority to based on the legal opinions that we've seen so far, but secondly the commercial costs extracted by these guys would make the cost of that gas the most expensive gas in the world.

MARTY RUTHERFORD: Let me just say though it was not part of the negotiations, we do not believe we've got the legal right tooverlift, but that was one of the reasons the Point Thompson development was such an issue is that we did have the leverage to either force development of the liquids at least and now or to take-to default those leases, at least 40 percent of them, and take them back.

Now there's real gas that's under the state control that we could have done any number of things with, turn to another large producer, Shell's been interested in getting in, I mean, they're huge. They've certainly been interested. We could have turned those leases over to somebody with immediate development requirements. We, the state, could have taken that gas and done with something with it like a smaller line. I mean, that's one of the reasons the Point Thompson Unit is such a major issue to the state, it's one of the places where we could have actually gotten immediate control of some gas.

UNIDENTIFIED VOICE: Okay, Marty, what does the proposed contract do with the Point Thompson field?

MARTY RUTHERFORD: It extends their lease control for another-up to 45 years.

MARTY RUTHERFORD: No requirement, no requirement for the due diligent development that we had agreement on. They signed that agreement saying they would start a production well by a year ago that is completely obliterated.

UNIDENTIFIED VOICE: Okay. So what I'm understanding you're saying is what theirs potentially with Point Thompson under the lease, get's nullified because it's all.....

MARTY RUTHERFORD: Yes.

UNIDENTIFIED VOICE: .....wiped out by new contract provisions.....

MARTY RUTHERFORD: That correct.

UNIDENTIFIED VOICE: .....that makes that field just like everybody else.

MARTY RUTHERFORD: That's correct.

MARK MYERS: It's actually worse than that, because DNR has other responsibilities with respect to the Point Thompson Unit. It has to protect the correlative rights of the other-like Chevron and the other parties. There's an honor parties (ph) agreement in there, it has a right to make sure that when the field's produced there's no physical or economic waste of oil or gas. And under this contract the state forgoes those abilities, it says I will no longer regulate this unit. That, in fact, for the period of this time the only commitment Exxon has to do-first of all that-assuming that they can get the Oil & Gas Conservation Commission to approve it, they can blow the reservoir now. So DNR's turning the other cheek and saying I'm not going to enforce my regulatory responsibilities. Secondly, any decisions with the unit have to go to this tribunal.

MARTY RUTHERFORD: And we no longer have any executive appeal.....

MARK MYERS: .....arbitration tribunal.....

MARTY RUTHERFORD: .....or judicial review.....

MARK MYERS: .....45 year lock up.

MARTY RUTHERFORD: .....The tribunal takes the place.

MARK MYERS: The only condition on the producers that I can see in there is that they have to nominate up to half a bcf per day out of Point Thompson when and if they hold an open season. It's totally in their control.

So again we have foregone our regulatory responsibilities, we have given up our prerogatives under the lease on a project I believe ought to be first produced as a liquids project followed by a gas sales. And that the numbers fully show it's economic under today's prices.

MARTY RUTHERFORD: And the opportunities to use.....

MARK MYERS: Well under today's prices.

MARTY RUTHERFORD: .....that Point Thompson gas for our in state needs, if that's the only alternative available to us.

MARK MYERS: I and the administration's argument that they need that gas through a pipeline. If they're producing the oil, they're going to produce that gas, they've got the infrastructure there, they got it backwards. That's what we never understood is why the administration would give up its leverage, surrender it, and create the situation where they're likely not to get it. And I suspect, you know, one or two or three of the producers will sell their interest out before this is all over, but now they have a 45 year lock up so it totally removed all their leverage and they went backwards on trying to get a gas line. It was silly.

TOM IRWIN: A step at a time, it's not over yet. We don't know when the next session will be called.

MARTY RUTHERFORD: I guess I would answer that.....

TOM IRWIN: Let me just finish this.

MARTY RUTHERFORD: I'm sorry.

TOM IRWIN: A step at a time. First off, people like you, if we could get more people involved to understand it, and not globally, I don't understand it yet, that's why I hang around with Marty and Mark, but they've got to start understanding the basics. And then we as a people should be incensed when certain folks in our legislature don't even want to listen to the experts.

MARTY RUTHERFORD: Their own experts. Not us, their own experts.

TOM IRWIN: And we want openness, fairness, honesty in this state. And that's what we should ask for. If that happens, unless you're completely biased, that deal will get killed. But it should be, plain and simple.

MARTY RUTHERFORD: I guess, my answer to that question is there is no certainty on who is going to be involved in the next administration or who-what that administration will be. I would say the stranded gas-and I'm going to reiterate what I said before, the Stranded Gas Development Act's time has passed, that gas is no longer stranded. It is at $5 gas virtually every project-gas project in the world becomes reasonably viable.

So I think we as a state need to throw out that contract, not attempt to negotiate against the best companies in the world. I mean, we were so outclassed and out numbered that it was appalling.

So we need to do what government does best, have a public discussion about what we appropriately should do to move that project forward, do it in the public arena, don't attempt to sit across the negotiation table from Exxon, Conoco and British Petroleum all at the same time. And pat and say like the federal government, here's what we will do, here's all we can do to incent this project. And try to do that in a fashion that encourage earlier development of the project rather than later.

That's what we should do, negotiation with those people is not what government does best. And by the way, I've been in government a long time, I'm very proud of my tenure, I'm very proud of the people I've associated with, but we are not structured for this kind of negotiation nor are we structured to run the kind of businesses that we would have to do. Not only a pipeline company, we might be able to do that because it's pretty simple, but the marketing, the capacity, risk, those things we are not setup to do. We will never, ever be able to hire people at the salaries that is commensurate with who we'll be competing against. We will never be able to retain them, we will never hit the same level of expertise that they will.

So let's recognize what government does best and deal with it. And let's not pretend we are all things to all people.

MARK MYERS: Can I add a little bit to that?

TOM IRWIN: Sure. I just-you'll find out we're not yes people here. I don't 100 percent agree with what Marty said on one issue. I thought the DNR team that was put together, the technical team, the money the legislature gave us, the model, we can model with the best. We can model the numbers as quickly as they could, they knew their numbers. Our technical team on that negotiating team, these two and other folks, we could compete with them, but we couldn't compete with everyone. And because that wasn't allowed, yes, we shouldn't be a business in some of these things, but the technical team couldn't compete. I would even ask the question and the public should be asking, is the DNR model being used now with the assumptions that our experts said should be in that model. I don't know, but you might ask it.

KAREN HUNT: You had a question?

UNIDENTIFIED VOICE: Oh, yeah, you said that the Point Thompson development, that was supposed to have been done under the lease. Does this mean the contract has suspended the lease?

MARTY RUTHERFORD: No, it means that while the negotiations were occurring the administration after we left chose to extend the period of time under which they had to do their development well.

MARTY RUTHERFORD: They just made an administrative decision.

TOM IRWIN: No, they-the leases under the contract for when-if the contract's passed.....

UNIDENTIFIED VOICE: The current leases.

TOM IRWIN: ....the obligations under the lease and the plan and development currently are null and void. And the only development requirements on them under the contract. The current leases are within the unit currently, in the unit itself. And once you put them in an oil and gas unit, holds those leases while there's a legitimate plan of development approved by the DNR commissioner intact. Because most of those leases are well beyond their prime return, some are 40 years old. So the unit itself, the constrict of the unit that holds the lease intact, once the unit is in default like we put it in, then the leases are contracted out and they come back to the state subject to appeal with the court. And that's where DNR was, the leases were now in default and they had a chance to cure it. Well, they had a chance to go the DNR commissioner.

MARTY RUTHERFORD: We're both wrong, we're both right.

TOM IRWIN: Okay. But the bottom line is the contract supersedes any development requirements under the lease which is being held by the unit.

UNIDENTIFIED VOICE: Let him rebuff it. The leases as they exist right now are still in full force and effect, but the time for performance has been extended, is that correct?

MARTY RUTHERFORD: Yes.

UNIDENTIFIED VOICE: So the contract negotiation has changed the terms of the old leases?

MARTY RUTHERFORD: Not the terms of the lease. There was an agreement.....

UNIDENTIFIED VOICE: as extending the period for performance under the terms of the lease.....

UNIDENTIFIED VOICE: Right.

UNIDENTIFIED VOICE: .....and under the contract negotiations all those terms and conditions of the lease will become null and void or won't exist and they'll be a new set of terms and conditions that are in the contract that will replace the old lease. Did I get that answer right?

MARTY RUTHERFORD: Well, I-yeah, I think you did. Pat may want to clarify something.

UNIDENTIFIED VOICE: There's one of the guys on the team I have high regard for, I don't want to get him in trouble.

MARTY RUTHERFORD: And this-they had agreed under the plan of development, they-the companies involved in Point Thompson that they would drill a development well by June of '06. And when their plan of development came in that effected June of '06 and didn't have a development well in it, that's when we said you're out of compliance. You had agreed to this, you're out of compliance, we're going to progress a default situation and that's how we got into this position we are now.

MARK MYERS: And we did tell them months in advance that that's where the decision was going.....

MARTY RUTHERFORD: Yeah, it was no surprise.

MARK MYERS: .....and they better start committing for the wells and if they had enough geologic uncertainty as they were claiming, that we could substitute an exploration well in the area of uncertainty instead of the development well. We'd said okay, you're coming up with a geologic model here that says the field's riskier and-but-and we don't buy it, but if you buy it get the data to answer the questions and then develop. So we were unwilling.

MARTY RUTHERFORD: But they weren't willing to do either.

TOM IRWIN: Something that's important for you all to appreciate, and I think you're starting to, this is complex. But I'll tell you, we had discussions by the hour, day, week, maybe month where we'd have folks like Pat and Marty and Mark and someone from our group who was really technical on FERC issues, on right-of-way issues, on gas sales issues or purchasing, and we'd all be together hashing these around and around, frankly arguing at times with each other, and everyone was free to say that's the stupidest idea I've ever heard, but there's no recrimination. We wanted the truth to sort out as we kicked this around and that's sort of-you're getting a taste of it now.

UNIDENTIFIED VOICE: All right. Let me switch gears to the LLC and I don't know how much you guys work on the LLC.....let me make sure, does everybody understand? Somebody tell us what the LLC is?

MARTY RUTHERFORD: Limited liability corporation. It would be the company .....the entity that would own the pipeline. We worked on a limited liability corporation that would have owned the pipe.

UNIDENTIFIED VOICE: And that's what I want to talk about, Marty. There's talk they've put a contract out to have the permanent fund look at investing and we've got to come up with 4 billion if it's a 20 billion project, if it's 25 it's 5 billion, if it's 30 it's 6 billion and could-and with cost overruns it could be 10 or.....

MARK MYERS: Never saw a full developed business plan in any of the aspects nor how they linked.....

MARTY RUTHERFORD: Yes.

UNIDENTIFIED VOICE: .....the state bond it?

MARTY RUTHERFORD: They were looking at bonding it.

MARK MYERS: And the ability of the state to finance it and the risk associated with it. But again, one of the- and if I get on a soap box for a minute, again we talked about how dramatically this changed the PPT, the oil production tax is a part of this equation. The state's taking a system where it takes relatively low risk, it gets a percentage of production and severance taxes are basically a percentage of production as well and with a complicated formula about what that is based on the productivity of the fields, but we went to that system to a system of-a very complex system of net profits where no one with certainty can tell us what our revenue picture's going to be, because we don't know what their investments will be, what the deductions are, what's allowable profit and how much profit shifting, our ability to manage the accounting.

But whatever you looked at they made it progressive in the sense that at high prices we should-at least the governor did not make it progressive, but the legislative made it progressive where we cover more high prices. But we're still taking a tremendous amount of downside price risk with respect to the current system. The current system, again it's always percentage of the product and we can never go negative. Under this we go to zero at places where on the current system we're still receiving significant income.

But again on the upside, if the-if the accounting works right and the auditing works right we get more. That's a risk. The state's taking a risk. How you balance that then is very complex. And how you balance it then when you overlay a gas line with it, where now we're taking extremely more risk, like you said paying a high percentage of the cost of the project and getting a small percentage of the actual revenue off the project compounds that.

There was never a rational discussion of an integrated business plan and managing it, let alone looking at the risk over a wide range of prices on this. The legislature has to this day has not got a grasp on it.

So now you're taking not only normal business risk, but extraordinary risk with your only source of solid income projecting in the future and the state runs. And there's been virtually no discussion.

The producers and the governor broke it into pieces so you wouldn't see how A and B connected together and the total amount of risk. So at a minimum if you look at this type of system, see the whole system, look at the risk, model over a range of prices and outcomes and successes versus failures, like a business would. And to do that you've got to run a lot of probability and sensitivities and it gets very complicated.

But you need months and months of public discourse on whether that level of risk is appropriate and exactly what that risk is and how good is our modeling. You need two or three different folks looking at the models and with different models. None of that is being done, they've shutdown the one internal model that was complex and could deal with that, that was the DNR model, to use a very simple deterministic model that doesn't look at risk over ranges of prices.

(END OF PROCEEDINGS)