Palin's Pipeline to Nowhere?
By Michael Weisskopf/Anchorage, Nathan Thornburgh/Anchorage
In 2001, a burly anchorage longshoreman named Scott Heyworth turned up in the nearby town of Wasilla for a meeting with its mayor, Sarah Palin. Heyworth, a local Democratic activist, had grown tired of waiting for the Big Three oil companies to tap their huge natural-gas reserves in the state's North Slope, the long swatch of northern Alaska tundra that includes the largest oil and gas fields in North America. For decades, ExxonMobil, ConocoPhillips and British Petroleum had little incentive to sell the trillions of cubic feet of natural gas that shares space beneath the ice with all those oil deposits. Gas is less profitable than oil and much harder to move to market. The majors could afford to wait until the economics of gas were more favorable before embarking on a multibillion-dollar pipeline project. But many Alaskans, accustomed to annual oil royalties, didn't want to wait on gas any longer. Nor did they want the Big Three to own the gas pipeline the way the majors owned the oil pipeline--or rig the tax bills they paid the state as the price of doing business there.
So Heyworth set out to collect signatures for a ballot initiative that would allow some company other than the Big Three to build a pipeline to the south. It was, on one level, a populist end run around some very big companies. And as he made the rounds of small towns seeking support from local officials, he found his way to Wasilla and its then 37-year-old mayor.
Sarah Palin poured the visitor a cup of coffee and listened intently to his 45-minute pitch. "It sounds like a good idea," she told him. "I'll sign it and support it."
And so began Palin's unusual relationship with the oil and gas industry that dominates the state's economy. She says it is her experience in energy matters that best prepares her to be John McCain's Vice President. Indeed, she came out of nowhere to win the governorship by promising to get more out of the oil industry for Alaskans. But for many independent observers, this heady populism was more effective in getting her elected than it was in actually getting things done once she was governor. No initiative illustrates that better than the natural-gas pipeline project, which Palin pushed the big oil companies out of--a popular but ultimately unrealistic gambit, considering that those producers control the gas that the pipeline would eventually ship south. Her critics say that when it comes to oil and gas, Palin has little appetite for dissenting views. "I've never seen a governor with the door so closed," says Bruce Richards, a local official who briefly found himself on the opposite side of an energy issue from Palin.
Pipeline Wars
It may be difficult for Americans in the Lower 48 to fully grasp how much Alaskans benefit from their state's vast oil and gas deposits. Alaska is home to just over 20% of the nation's proven oil deposits and almost 18% of its natural-gas reserves. About 90% of the state's public revenue comes from oil and gas royalty receipts. Alaskans pay no state income or state sales tax. Instead, they receive an annual dividend from the state treasurer that comes directly from the oil industry. Over the past 25 years, the average Alaskan has received roughly $1,200 from the state each year. When fuel costs spiraled out of control in rural Alaska, instead of focusing on suggestions to help rural residents weatherize their homes or develop small-scale renewable energy sources, Palin wrote every Alaskan a second check for $1,200.
The downside of that dependency is that it's sometimes hard to distinguish the state government in Juneau from the energy companies that it regulates. The state's elected officials have always worked closely with oil companies--at times, too closely. In the late 1950s, bureaucrats actually hired an oil-industry lawyer--with the big oil companies paying his expenses--to write the new state's oil and gas lease laws. Palin's populist approach was the perfect complement to rising public discontent with Big Oil, and it was the main engine of her remarkable rise from small-town mayor to a place on the Republican national ticket.
After Palin lost the race for lieutenant governor in 2002, then GOP governor Frank Murkowski rewarded her strong campaign by appointing her chair of the Alaska Oil and Gas Conservation Commission, an obscure but important board that regulates oil-field production. In her short tenure, she gained attention not for her grasp of technical detail but for making public ethics accusations against a fellow board member who happened to be chairman of the state Republican Party. She resigned in protest, leaving the $122,400 job after a year. (He was later fined for, among other things, sending confidential information to an industry lobbyist.) But Palin emerged with the image of a bold reformer in a state where the interests of Big Oil and politicians had seemed inseparable.
By 2005, Scott Heyworth was back in Wasilla, eating pancakes in the mayor's breakfast room next to her husband Todd as they discussed her plans to run for governor. Palin was weighing whether to run as an Independent or a Republican, Heyworth recalls. His ballot initiative had passed in 2002, and he was in a good position to help either way. He organized a Palin fund raiser and turned over the names of 42,000 voters, largely independents who had signed his petitions.
Heyworth saw in Palin a potential ally against Murkowski, who was negotiating behind the scenes with major gas producers to build a pipeline across Canada--a move that critics feared would give too much away. Palin doubled down on her support for her friend's "all-Alaska gas line," and she soon appeared in full-page newspaper ads across the state, standing between a pair of popular former GOP governors who were also wary of Murkowski's ties to the Big Three. "There was Sarah Palin running with the big dogs," recalls John Bitney, a longtime GOP operative in the state. "It elevated her in stature."
Then Palin saw her opening. In October 2005, Murkowski fired natural resources commissioner Tom Irwin, a well-liked "unreconstructed miner," as one political observer calls him, for opposing concessions won by producers on the gas pipeline. Immediately, six of Irwin's top aides walked out in solidarity. The mass exodus created a firestorm, with editorial writers and politicians extolling the "Magnificent Seven" and calling the mass resignations the "Thursday-afternoon massacre."
In Irwin, Palin had found a model of resistance. She put an "all-Alaska" gas pipeline at the center of her campaign for governor. It was shorthand for putting Alaskan voters, not oil companies, at the forefront--and drawing a distinction between herself and the GOP Old Guard led by Murkowski. More dramatically, Palin joined the Magnificent Seven at a large downtown Anchorage rally and promised to rehire Irwin and his aides if she was elected.
Palin trounced Murkowski in the 2006 GOP primary. Facing former Democratic governor Tony Knowles in the fall, she shifted her pipeline position to "look gubernatorial," recalled Bitney, who served as her policy director. The original "all-Alaska" option excluded any role for the major producers. But they, after all, had the gas and the capital needed to build and operate their own pipeline. So Palin took a more inclusive stance in the general election, favoring open competition for anyone, including the major producers, who were willing to meet certain criteria for a pipeline.
Touting energy reform and clean government, Palin cruised to an easy victory in November. She pledged in her inaugural address to have a gas-pipeline bill in four months and spent the next two days in back-to-back meetings with gas producers. One of her first appointments was Marty Rutherford, Irwin's deputy, who agreed to act in Irwin's old job until Irwin could return a few months later. The two veterans joined with another Palin appointee, revenue commissioner Pat Galvin, to form what everyone in Alaska politics simply calls the "gas team." Their job: get the pipeline built.
Hardball with Big Oil
True to her campaign pledge, Palin had her gas team draft a pipeline plan that set tough conditions on whoever would build the line. One of the "must-haves," as they were called, required the builder to allow other producers to use the pipe, even if that meant expanding it at the builder's expense. That was a nonstarter with the big producers, who didn't even put in bids. In the end, the only acceptable offer came from TransCanada, an independent Canadian pipeline builder.
Neither the plan nor its proponents were universally loved. Critics pointed out that gas-team member Rutherford had briefly been a lobbyist for a TransCanada subsidiary. And stiffer resistance came from economic conservatives. Representative Mike Hawker says that by cutting Big Oil out of the pipeline, Palin's team "endangered the state's economic future. It's a classic case of biting the hand that feeds us."
The Palin administration has also had a tendency to vilify its opponents. Hawker, whose wife works in the oil industry, says that this year after opposing the governor's tax plan on conservative economic grounds, he faced a GOP primary opponent for the first time in his career. Palin's political allies--Palinistas, as Hawker terms them--"called me 'corrupt' every day."
Even some who worked for the Palin administration say the gas team went overboard. "They had a tendency to be preachy," says Larry Persily, who worked in Palin's Washington office. "They are true believers, zealots even." Irwin defends the hard line: "People in Alaska are tired of being pushed around by oil and gas companies." Palin's approach, Galvin says, "represented a fundamental shift in the entire relationship between the state and companies."
Palin's pressure tactics prevailed. The Republican legislature passed a measure giving TransCanada up to $500 million in seed money. Alaskans had been talking about a gas pipeline for three decades, and in less than two years in office, Palin had made almost unbelievable headway. "I fought to bring about the largest private-sector infrastructure project in North American history," she told the convention audience in September. "And when that deal was struck, we began a nearly $40 billion natural-gas pipeline to help lead America to energy independence."
And yet began is the keyword. To obtain financing, TransCanada will need commitments from producers to use the pipeline. But the majors aren't likely to agree to pay someone else tariffs for pipe they could lay themselves, and this they have steadfastly refused to do without long-term tax breaks from the state. Palin's initiative was "bold but unworkable, a big splash with little payoff," says University of Alaska energy economist Doug Reynolds. He predicts no movement on a pipeline until Palin agrees to negotiate with the producers.
What's unfolding now is a game of high-stakes chicken. In response to Palin's TransCanada plan, BP and ConocoPhillips started plans to build their own pipeline into Canada--and nobody thinks there will be two pipes. Palin's critics say that the gas team's inability to find a way to include the producers from the start could delay the project indefinitely.
It wouldn't be the first time a big project was held hostage by hard-line tactics, critics say. Palin's administration revoked ExxonMobil's leases of Point Thompson, a giant North Slope oil and gas field, for failing to put the area into production over three decades. Palin chided the company for "warehousing" 8 trillion cubic feet of gas. A state judge upheld the state action but said ExxonMobil and its partners should be given another chance to prove themselves. In February 2008 the company submitted a $1.3 billion plan calling for production of 10,000 bbl. a day of gas condensate to begin in six years. But Irwin rejected the proposal in April, saying he did not "trust" ExxonMobil's word after years of false starts, and pulled the leases. The state wants other producers to bid for the development rights, a plan unlikely to occur for years because of court challenges. Dan Dickinson, tax chief under Murkowski, claims that the Point Thompson decision may have scored p.r. points for Palin but ultimately set back early production of the field. "I don't think Governor Palin really understands the intricate details of oil and gas here," says Persily, the former administration official. "She underestimates the complexity of this."
But others have made the case that whatever the result, Palin has succeeded in calling the do-nothing bluff of the Big Three and, even if the outcome is uncertain, finally moved them into action. Her campaign defends her tactics. "Ultimately, the energy companies will push for the best deal they can get, and Governor Palin has pushed just as hard to make sure that deal is in the best interests of Alaskans," says McCain-Palin spokesman Taylor Griffin. Irwin is confident that the strategy will pay off. "There will be a gas line," he says. "Once the producers get over the idea they're not going to control our gas fields like they did our oil fields, they'll get involved. There are hundreds of billions in profit to be made. The economics are going to drive it."
At its peak in the 1980s, the oil pipeline from the North Slope carried 2 million bbl. a day. The flow is now about a third of that, and supplies are projected to dwindle further. Alaska has seen these boom-and-bust cycles before. The "seal mines" of the Pribilof Islands, the salmon canneries, the Klondike gold rush--all these short-lived booms appealed to what New Deal--era Secretary of the Interior Harold Ickes once derided as Alaska's "gambling spirit." Palin is now rolling the dice on the national stage with a political persona based in part on her willingness to challenge the big oil companies. To many Americans, it's an appealing pitch, and Palin's record suggests that she has stuck to her guns more than most. But it's also true that her zeal has produced mostly short-term political gains rather than lasting results--and she has been forced, in some cases, to do business with the same companies she originally sought to push to the sidelines. And that underlines a political reality as true in Washington as it is in Juneau: Fighting the system is a lot easier than actually beating it.