Tales of oil industry's influence in Alaska

In grainy, secretly recorded hotel-room videotapes, executives with Alaska's biggest oil-services company plot ways to craft an industry-friendly version of a pending oil-tax rewrite, brag about how they "own" key politicians and hand out wads of cash to lawmakers, who swear their fealty.

"Never forget who takes you to the dance," says former House Speaker Pete Kott, pointing to VECO Corp. Chairman and heavyweight Republican patron Bill Allen, in one of the tapes. "I had to cheat, steal, beg, borrow, and lie."

"Well, that will stay in this room," one lobbyist responds. Bursts of laughter ensue.

"I sold my soul to the devil, though," Representative Kott jokes later, to which Mr. Allen tells him: "Now I own [you]."

That 2006 conversation and others like it recorded by the Federal Bureau of Investigation have extended far beyond Juneau's elegant Baranof Hotel and its now infamous Suite 604, rented annually by the VECO oil officials. The tapes have been played repeatedly in federal court, on local news, and the Internet. The still-unfolding scandal, brought to light by a federal investigation years in the making, has forced Alaskans to ask serious questions about who is running their state.

The investigation covers vast political territory, including federal fisheries policies, budget earmarks, federal grants, and even ambitions for private prisons in Alaska – but most of what has been revealed so far involves the staggering amount of leverage the oil industry exerts over fundamental oil policy, including last year's oil tax.

Alaska has endured other scandals, says Jerry McBeath, a political science professor at the University of Alaska Fairbanks. But "in terms of the impact on the integrity of the state's institutions, this has been the worst."

Allen and former VECO vice president Rick Smith are headed to prison, having pleaded guilty to providing more than $400,000 in illegal benefits to various Alaska politicians. More charges and trials are expected. Those implicated include some of the state's most powerful figures – US Sen. Ted Stevens (R); his son, former state Senate President Ben Stevens (R); and US Rep. Don Young (R). None of the three have been charged, and though Allen and Mr. Smith testified they gave illegal payouts to each, the four have asserted their innocence.

One decisive response to the scandal came last month, when the legislature rewrote the 2006 tax bill that critics say was hopelessly tainted. Gov. Sarah Palin, a reform-minded Republican who has clashed famously with her party's establishment, called for the special session to "restore public trust in our oil and gas value system."

The oil-tax bill that resulted – passed Nov. 16 – raised overall rates, tightened allowances for deductions and investment credits, and closed loopholes. Gone, for example, are credits for investments made several years ago and the ability of companies to write off public-relations and lobbying expenses. The measure includes an explicit ban on credits or deductions for costs of repairing or replacing improperly maintained equipment.

"We didn't blink," says Senate Judiciary Chairman Hollis French, an Anchorage Democrat. "You just don't see the sort of reflex subservience that you saw in the '70s, '80s, and even '90s."

Meanwhile, stunned oil companies say the new tax bill, estimated to bring in an extra $1.5 billion in annual state revenues, is a money grab.

"You can't tell me that [this is] anything more than a feeding frenzy," Jim Bowles, president of ConocoPhillips Alaska Inc., said at an industry conference last month in Anchorage.

"It feels like the oil and gas industry is the enemy," Doug Suttles, president of BP Exploration (Alaska) Inc., said at the conference.

Aside from the corruption scandal, there are other reasons why the relationship between Alaska and Big Oil has crumbled.

The scandal, plus anger over BP's failure to control corrosion in oil-transit pipelines at Prudhoe Bay, the producers' failure to develop a much-desired natural gas pipeline, and legal challenges to the 1989 Exxon Valdez settlement, have put the Alaska public "in a mood," says state Rep. Mike Kelly, a Fairbanks Republican who helped push for the higher tax.

Industry defenders say the tax hike is part emotional reflex that will do more harm than good.

"I'm afraid that trying to ... reestablish confidence in the public process is a bit of a fool's errand," state Sen. Con Bunde, an Anchorage Republican, said during floor debate on the measure. "It seems like the new national sport is to distrust political figures and government."

ConocoPhillips has already canceled one $300 million project to upgrade a refinery in what it says is a response to the new tax. The company says it may have to truck in ultralow sulfur diesel, mandatory under new federal environmental standards, from a refinery 1,000 road miles away.

Like the extractive industries that preceded it here, the oil industry has exerted tremendous clout in sparsely populated Alaska.

Four of every 5 dollars that the state collects for its general government operations comes from oil royalties, taxes, and fees. Thanks to the wealth generated from the nation's biggest oil fields, Alaska has no individual income tax or statewide sales tax and has built up a $39 billion savings account that pays annual dividends from investment earnings to all residents.

But if Alaskans owe much to oil development, oil companies also owe much to Alaska's publicly owned resources. The Alaska constitution mandates that the state government secure the maximum benefit from commonly owned resources, meaning an explicit fiduciary duty to get the best economic return when oil is extracted from beneath state lands.

"In a very odd sense, the FBI helped us finally fix our oil tax and finally get our fair share," says state Rep. Les Gara, an Anchorage Democrat who for years has argued that the state's oil-tax structure has shortchanged the public during the recent years of high oil prices.