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Alaska's Big Three oil companies prefer limited competition

Dermot Cole

FAIRBANKS -- The three giant companies that control North Slope oil production mention “global competition” in every discussion of Alaska oil taxes or the elusive natural gas pipeline.

In the announcement Monday about picking Nikiski as the likely southern terminus of a possible gas line, the companies said once again that unless Alaska tax rates are low enough and kept stable long enough, the project won’t be competitive on global energy markets.

Everyone wants Alaska to be competitive.

But overlapping or conflicting corporate commitments around the world put Alaska at a disadvantage when there are only three competitors, each with its own internal pressures. And those three would be doing a disservice to their shareholders if they did anything to promote more competition by more companies working in Alaska.

The Parnell administration and the Legislature made no effort to unravel any of these complex issues before approving a multi-billion dollar oil tax cut this year, preferring to focus on hypothetical oil companies and perfect competition of the sort Adam Smith imagined

More and more firms are doing business in Alaska, many of them encouraged by tax credits offered under the old oil-tax regime, known as Alaska’s Clear and Equitable Share (ACES), which subsidized new arrivals.

But newcomers do not control the North Slope or the trans-Alaska pipeline.

'We pick the best global options'

“Keep in mind that what enabled all this is you’ve got three global companies that have a list of global options, and we pick the best options,” BP Alaska President Janet Weiss said in a speech in Fairbanks last week about future investments. “More favorable tax environments will obviously move some of your options up.”

The best thing the state could do in the long run to increase oil investment would be to expand competition in Alaska’s oilfields. But the state has rarely addressed competition on the slope because of the political and economic power of BP, Exxon Mobil Corp. and ConocoPhillips.

The situation has not changed much in the decade since Mark Myers, then the director of the state Division of Oil and Gas, made a concise argument of the benefits of competition. "Mergers and market concentration on the North Slope have created a non-competitive environment in which three majors have a near monopoly that gives them a large competitive advantage in exploration, development, production and transportation,” he wrote to then-Gov. Frank Murkowski.

“It is this uneven playing field that has raised the barrier to new entrants, from smaller independents through large integrated majors. As long as these majors invested sufficient capital for exploration and development activities, the state accepted the consequences of the oligopoly. Since the existing majors no longer are willing to invest sufficient resources on exploration or development, the state must look elsewhere. The state must look beyond the existing majors to the new wave of independents and remaining majors. This situation parallels the experience in other oil and gas basins worldwide, several of which have successfully made this transition."

The transition takes place, or has taken place elsewhere, after the period of initial exploration and development has been completed and the largest companies begin to look elsewhere.

In a 2011 review prepared for municipal governments challenging the valuation of the pipeline for property tax purposes, Washington D.C. consultant John Brown said the transition has not taken place in Alaska because the three companies control all aspects of the business. 

“The extent of vertical integration across the production, transportation and refining stages of production by the Big Three enables the Big Three to continue to control crude oil exploration and production on the North Slope, to potentially increase competitor costs, to discourage entry by new competitors and to take monopoly profits in their downstream operations,” he wrote.

That is not one of the barriers to competition that the Make Alaska Competitive Coalition talks about.

'What's love got to do with it?'

The difficulty new companies face gaining economic access to North Slope facilities became an issue during the Legislature’s oil tax debate last spring, when independent explorer Bill Armstrong made a startling comment.

“I would say my relationship with ConocoPhillips is a little bit like Ike and Tina Turner. And I’m Tina Turner,” Armstrong said, referring to the domestic violence allegations against the late Ike Turner.

“I’m like, ‘Come on, Ike. Hit me again.’ So, they don’t make it easy.”

Armstrong prefaced these remarks by saying that he supported the governor’s tax cut and that he supported a tax cut for the three companies that control the giant oil fields.  He added, “I know that Conoco says they’re super happy I’m up here, but I just look at their actions.”

The underlying issue is the barriers preventing the oil and gas industry from expanding in Alaska, though that got little attention in a campaign that linked competition to tax rates above all else.

What also got lost was the potential value of using tax credits to draw more explorers to Alaska. These credits were denounced by the Parnell administration as the “real giveaway,” because money was paid to companies that offered no guarantee of production. Rather than fix problems, the solution was to do away with the credits designed to attract new companies.

The long-term challenge remains. If the state really wants to make Alaska more competitive for the development of oil and gas resources, it has to find some way to count higher than three.

Contact Dermot Cole at dermot(at)alaskadispatch.com. Follow him on Twitter @DermotMCole