Is BP cutting production to blackmail Alaska?

The San Francisco Chronicle, the Houston Chronicle and Fairbanks News-Miner report that BP’s tankers sometimes return to Valdez with millions of gallons of Alaska oil on board. They top-off and return to West Coast refineries too full to receive their load. BP’s West Coast refining and retail capacity is maxed. Its Valdez holding tanks are 90 percent full. BP is using tankers for one-time as-needed delivery to meet the maximum market share of BP’s West Coast refined products.

Alaska’s oil has been BP’s cash cow since its subsidiary Sohio Petroleum was the company’s face in Alaska. I was in the 1981 Legislature when the biggest tax break giveaway ever, a tax system nicknamed ELF, was voted on. Prior to voting, an oil lobbyist told me they were losing so much money on their Alaska investments that they were considering shutting down and leaving. Sound familiar?

Shortly after voting for ELF, I uncovered a well-hidden letter to stockholders from Sohio’s president. He explained that Sohio was practically drowning in cash before we gave them the 1981 tax break. I copied that letter and distributed it to all legislators and soon thereafter became the first political target of BP’s surrogate VECO.

In the mid 1980s, it became obvious that other countries were getting far more for their oil than we; even countries with expensive deep-water platforms were making more.

Between 1980 and 2000, BP went from the 13th largest oil company in the world to the third largest. It did this with profits that rightfully belong to Alaska, profits that would have built roads and fattened dividend checks had it not been for VECO’s bribery and the fraudulent representations of their lobbyists. A jury might find that oil companies owe Alaska a few billion dollars if given the chance.

Before acquiring ARCO, BP successfully asked congress to lift the ban on the export of North Slope crude. As demonstrated by returning to Valdez with oil on board, BP’s incentives changed to the more profitable business of refining and retailing when it acquired Arco’s West Coast refineries and retail stations. If BP were interested in exporting crude, it wouldn’t be returning it to Valdez.

BP controls Alaska crude from the well head to the gas pump. It takes Alaska’s oil for the cost of production and transportation plus local, state and federal taxes. BP’s crude costs add up to about 28 percent less than independent nonproducing refiners pay. The life of BP’s cash cow is extended by trickling Prudhoe’s production, and Parnell’s tax cuts won’t change BP’s incentives.

Lease holders are legally obligated to produce on our timetable, not theirs. When Sarah Palin told Exxon to produce its Point Thompson lease or get out, Exxon got busy. Clearly, our previous lower tax didn’t incentivize Exxon to produce and clearly our new much higher tax didn’t stop them. BP will produce on our timetable when BP hears the same clear message.

Doubt that BP would shut in production to blackmail Alaska for a lower tax rate? Consider this — on Sept. 21, 1999, the Anchorage Daily News reported BP’s promise to increase Kuparuk’s production by 150,000 barrels per day if the company was successful in purchasing ARCO’s share. Arco was the largest owner and therefore operator of Kuparuk. Six weeks later, Nov. 6, 1999, the Anchorage Daily News reported that BP was no longer willing to increase Kuparuk’s production.

BP’s promise raised the question that if that’s doable, why hasn’t it already happened? When I and two friends filed a lawsuit to prevent BP from gaining monopolistic control of Alaska’s oil, a man describing himself as an ARCO employee told me Kuparuk’s production fueled ARCO’s West Coast refineries. Production had fallen, and for seven years ARCO had proposed drilling new holes in its annual budget. BP, however, owned a 35 percent share of Kuparuk and by Alaska law therefore had the right to veto ARCO’s proposed drilling. BP used its veto to disrupt ARCO’s cash flow with hopes of starving ARCO into selling out. A friend inside BP later told me it was true and offered to testify to that if subpoenaed.

Oil companies are telling voters that Alaska’s taxes are the highest in North America. The statement is false and those saying it know it’s false. Mexico is the highest at 94 percent (source: Mexico government).

According to the U.S. Department of Interior, the second highest oil tax in North America is Louisiana at 85 percent, third is the U.S. Government’s 79 percent tax on production in the Gulf, and Alaska is tied with Texas at 76 percent.

ConocoPhillips’ VP of finance told KTUU television news that Alaska’s tax was “one of the highest in the world.” she said it with full knowledge that Exxon Mobil had just beaten ConocoPhillips in a bid to overhaul and produce Iraq’s West Qurna Phase 1 for an after tax net profit of $1.90 for each barrel (Wall Street Journal, Jan. 18, 2010). While telling KTUU that giant fabrication, ConocoPhillips was reporting to the Securities Exchange Commission that it had made an after-tax net profit of $28 per barrel from its Alaska oil.

We at Citizens for Ethical government believe selling our commonly owned resources substantially below their clear and definable value on the world market not only violates Alaska’s constitutional prohibition of squandering a state-owned resource, it also violates established fiduciary responsibilities, prudent investor rules and public trust doctrines. If Parnell’s proposal becomes law, it needs to be litigated, and hard questions need to be asked under oath.

Ray Metcalfe is a former state legislator, participant in the VECO investigation and chairman of Citizens for Ethical Government. Contact him at (907) 344-4514 or RayinAK@aol.com.