Head to head against Big Oil

Times Staff Writers

Days after she was sworn in as governor, Sarah Palin began to clean house at the department of natural resources, firing and demoting several top officials and eventually appointing a new director at the agency that oversees the energy companies that provide the state with 85% of its revenue.

The shake-up was an early sign that this newly elected Republican governor was not like any of her predecessors -- she was determined not to cave in to the energy industry, the state’s lifeblood.

“The governor is not a negotiator. She is a non-negotiator. She draws lines in the sand,” said Tim Bradner, an oil industry analyst for Platts Oilgram and the Alaska Journal of Commerce.

Palin, in her inaugural speech, had another way of putting it: “I will unambiguously, steadfastly and doggedly guard the interests of this great state as a mother naturally guards her own,” she said.


Palin’s willingness to take on powerful interests in her state drew the attention of Sen. John McCain, who has praised his running mate as a reformer.

Since becoming governor in December 2006, Palin has tripled production taxes on oil and seized control of a proposed $30-billion natural gas pipeline from the traditional oil giants.

The Palin administration now stands in a nerve-racking faceoff with the multibillion-dollar oil industry interests that have for 40 years been the bedrock of the state’s politics and economy. Who blinks first -- Palin, or companies like BP Alaska, ConocoPhillips and ExxonMobil -- will determine who controls transport of Alaska’s massive untapped gas resources and future tax revenues for a state dependent on petroleum revenues for 85% of its budget.

Most analysts are predicting that it won’t be Palin who yields.

“She has been more adversarial with the producers than any previous governor,” said Democratic state Rep. Mike Doogan, whom Palin courted -- with cupcakes -- to power her oil program through the Legislature this year.

Palin’s showdown with the oil companies has earned her enormous public acclaim but alienated her from all but a handful of Republican legislators and forced her to develop working alliances with Democrats.

She has taken on the leadership of the state Republican Party at a time when a growing number of Alaskan politicians are being indicted on corruption charges because of their ties to the oil industry.

“I’m a Democrat. She’s a Republican. But she and I have a larger alliance with each other than we do with our own parties,” said Ray Metcalfe, a former state legislator who has long complained about corruption. “We have a Republican governor who is not part of the system, and she has set out to reform the party.”


Palin’s independent approach to politics recalls the kind of Republicanism championed, at least rhetorically, by another maverick: McCain.

“She came into office with a single focus, and that was to undo everything the previous governor had done, and to do as much as she could to prevent Alaska’s oil producers from having any participation in any development of an Alaska natural gas line,” said Republican state Rep. Mike Hawker, who chairs the state House budget committee.

At least 40 Republicans were opposed to the enormous oil production tax increase crafted in the Legislature, he said, but Palin “cut a deal with the Democratic caucus.”

“She rode the tide of vindictive populism against the oil and gas industry in this state,” he said.


The connections between oil and power go back to the earliest days of Alaskan statehood. Four of the 10 largest oil fields in North America are on the North Slope, contributing an estimated $5 billion to the state’s economy, according to the Alaska Oil and Gas Assn.

Palin is a strong supporter of expanding drilling across the North Slope and in some other environmentally sensitive regions. Unlike McCain, she favors opening the Arctic National Wildlife Refuge to oil production.

But her hard line on expanding state control has flummoxed oil executives. They have warned that the higher taxes will discourage investment in oil production at a time when Alaska must compete with other fields around the world for oil capital.

“The governor pushed for an increase in taxes and the Legislature went along. That was totally their right to do so, but we were pretty clear going in what the long-term consequences would be,” said Steve Rinehart, spokesman for BP Exploration.


He said the company has decided to place one of its North Slope projects on hold as a result of the tax increase.

“It was a bread-and-butter oil field development, and a billion dollars’ worth of work. We decided it doesn’t make sense in the current tax environment,” Rinehart said.

The showdown comes at a crucial time, when oil flows from the North Slope down the Trans-Alaskan Pipeline are barely half what they were at their peak in 1988.

Palin not only wants a greater share of what’s left for state coffers, but has also told oil companies they must develop the leases they have or give them up -- a challenge to producers who may have been waiting for marginal oil and gas fields to become economical before investing millions more in them.


Last month, the Palin administration revoked 13 ExxonMobil leases on the North Slope project known as Point Thomson, a field believed to hold up to 7 trillion cubic feet of gas, or about a quarter of the North Slope’s known reserves.

Palin’s administration has also squared into an epic standoff with North Slope producers over a proposed $30-billion, 1,700-mile pipeline that would for the first time allow gas to be transported to markets in the Lower 48.

ExxonMobil, BP and ConocoPhillips own rights to most of the gas on the North Slope, and have sought long-term tax guarantees before signing on to build the transit facility, which would be the largest private enterprise project in North American history.

Palin’s negotiators have offered only medium-term tax promises and do not want the gas producers holding monopoly control over the facility.


The dispute came to a showdown in the Legislature last month, when Palin succeeded in offering the license -- accompanied by a state subsidy of $500 million -- to Canada-based Trans-Canada Corp. She cut the North Slope producers out of the loop.

But in a stunning war of nerves, ConocoPhillips and BP have launched a private pipeline project of their own, announcing they will spend $600 million to begin construction within five years.

“We’re trying to break this logjam and move the project forward,” said Bud Fackrell, president of Denali, the company formed to build the pipeline.

The Republican governor’s hard line on the oil companies has stirred concern among energy executives across the country. In Washington, energy lobbyists have prepared reports on Palin’s record.


Her pro-drilling stance “reminds me a lot of Dick Cheney,” said Scott Segal, a prominent D.C. energy lobbyist. But her policy of taxing windfall energy profits is disconcerting, he said. “That approach is anathema to oilmen.”