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Did Alaska corruption probe damage the state's quest for a natural gas pipeline?

Craig Medred,Amanda CoyneThe New York Times
Stephen Nowers illustration

History might one day dictate that Aug. 31, 2006, was the day the long-held dream of a natural gas pipeline stretching more than 1,700 miles from the resource rich North Slope of Alaska south to America died forever. History is already clear that on that day the political landscape of Alaska shook with a tremor of Good Friday earthquake proportions.

Drive east and south along the Seward Highway from Anchorage, the state's largest city, toward the Kenai Peninsula even today, and you can still see the legacy of the 1964 geologic convulsion in the black hulks of the dead trees standing along Turnagain Arm.

Lands along the Arm dropped below the level of the tides after the '64 quake. When the saltwaters of Cook Inlet came rushing back, the trees were flooded. Their roots sucked saltwater up into their trunks, and they were preserved seemingly forever, although eventually they will topple and be visible no more; one given in life is that the world, and its history, is always changing.

And there are always cataclysmic events. Aug. 31, 2006 marked the beginning, though far from the end, of one such event.

Parts of this article come from the forthcoming book, “Crude Awakening: Money, Mavericks and Mayhem in Alaska,” by Amanda Coyne and Tony Hopfinger, due out Nov. 8.

That was the day the Federal Bureau of Investigation stormed into legislative offices across the state. Agents, backed by lawyers from the U.S. Justice Department, were looking to take down a cadre of legislators who'd self-proclaimed themselves, only half-jokingly it would later turn out, "The Corrupt Bastards Club.''

The intentions of investigators were, at the time, painted in the noblest of terms.“Thanks FBI” bumper stickers began to appear on fenders all across the state. An innocent observer might have fairly thought Elliott Ness had arrived to take down some northern version of Al Capone.

Only later would people begin to wonder if maybe there wasn't more to it than that. When Ted Stevens, one of the most powerful men in the U.S. Senate, was convicted of corruption only to have his high-paid lawyers uncover the lies and deceit of the prosecutors who convicted him, Alaskans wondered maybe the whole affair wasn't as much about people trying to catch a big fish and make their careers as it was about justice.

Whatever it was about, whatever the intentions of the players, there is no doubt the FBI probe and what followed set off a chain-reaction of events of epic proportions.

The most powerful politician in state history was toppled from his position; the stage was set for a newly elected governor and little-known mayor from the small hamlet of Wasilla to launch onto the national political stage in a way rarely seen in American politics. One of the biggest companies ever founded in the 49th state died. A backlash against Big Oil led to a tax that pumped state coffers full with new oil money. And the proposed natural gas pipeline -- one of the great dreams of Alaskans for decades -- was perhaps doomed forever.

Everyone walks away

It all stems from what Alaska's U.S. Attorney Karen Loeffler on Friday called a "victory” in the “largest and most successful corruption case in Alaska history.”

Her words came after the cases of former state Reps. Pete Kott and Vic Kohring ended. Both men had been in prison when evidence of misconduct in the prosecution of former Sen. Ted Stevens exposed dirty dealings by some in the Justice Department. Kott and Korhing were subsequently freed from jail pending new trials. Both former lawmakers eventually agreed to plead guilty to bribery charges to escape any possibility of going back to jail. What they got in exchange for those pleas were sentences equal to the time they'd already served.

What both the defendants and prosecutors got was a way out of federal trials that would have likely proved embarrassing for everyone. Kott and Kohring had behaved badly in Juneau. They didn't need to see themselves on videotape again, kissing up to Bill Allen, the influence-peddling head of the now defunct oil-services company VECO Corp. And the prosecution really didn't need attorneys for Kott and Kohring bringing up how the government might possibly have overlooked Allen's alleged sexual relationships with underage girls so as not tarnish their chief witness in the political corruption cases.

Loeffler, of course, didn't get into any of that last week. She said the convictions of Kott and Kohring simply brought the investigation to a close, leaving a message that “corrupt politicians and those who work to benefit from corrupt politicians will not be tolerated.”

The long and tangled investigation had netted 10 convictions. Six of the convicted, including Kott and Kohring, were public officials. All told, the 10 convicts combined spent, or are spending, about 10 years in prison.

Loeffler didn’t mention how much money the probe cost. Nor did she talk about how the careers of a handful of prosecutors have been tainted. One of them took his life because of his role in the Alaska political corruption probe. Meanwhile, some who might well have been the worst offenders -- including the government’s chief witness -- dodged charges they should have faced. But what happened in and around the courtroom was just the tip of the iceberg. Outside the courts, all hell was breaking loose.

A new political party, the tea party, was formed and fueled by celebrity politician Gov. Sarah Palin, who was elected to her first major office as Alaska governor -- in part because of the probe. Palin enacted sweeping pieces of legislation -- in part because of the probe. Palin’s role as the “Great Reformer” of Alaska’s sullied political establishment caught the eye of another maverick reformer, Arizona's Sen. John McCain -- in part because of the probe. While Ted Stevens, the longest-serving Republican in Senate history, was losing his re-election -- in part because of the probe -- Palin was starting a rocket ride toward unbelievable heights as a woman who could make things happen.

As the 2008 GOP vice-presidential nominee, she stood in front of the Republican National Convention and told the delegates how she'd gotten the Alaska gas pipeline started.

Only she hadn't. Her political solution to the problem, her decision to punish major oil producers for the VECO scandal instead of trying to work with them, perhaps doomed that project.

And to think this all started with a probe into private prisons.

In the courtroom Friday, Assistant U.S. Attorney Kevin Feldis dispassionately summarized the history of the investigation, which started in 2003 with a probe into politicians and businessmen trying to get that prison built. The investigation then snaked its way into Alaska’s oil patch. where the future rested on that old dream of getting Alaska’s natural gas to market. He spoke of the state taxes negotiated with oil companies under former Gov. Frank Murkowski. The taxes were part of a deal Murkowski had cut for a gas pipeline project. Feldis spoke of Bill Allen and VECO and the millions they stood to gain off construction associated with the pipeline deal, and how Allen had enlisted lawmakers to help keep petroleum taxes low to push the project forward.

The federal attorney took only about seven minutes to describe the whole situation.

He didn’t, however, mention what was at stake for the state with that natural gas pipeline. He didn’t mention what might have been lost.

Pipe dreams

The natural gas pipeline was a 30-year-old pipe dream -- Jimmy Carter was the first president to endorse the project -- long deemed financially risky for three reasons.

First, the pipeline was expected to be the most costly private energy project in North American history. In 2011, pipeline construction was estimated at more than $40 billion. The line would be so long that it would cross land owned by more than 10,000 public and private entities. The sheer size of the pipe itself was mind-boggling. One 40-foot-long segment would weigh 56,000 pounds.

Second, natural gas prices weren't nearly as high as oil prices, and fluctuated even more wildly. The concern among industry leaders was that tapping Alaska’s vast reserves could flood the U.S. market and depress natural gas prices.

And the third reason was that oil companies were reluctant to gamble the futures of their companies on the project given uncertainty over how much the state would tax them on developing the gas, which, like much of the North Slope’s oil reserves, was owned by the state.

Exxon, BP and Conoco Phillips -- which held leases to develop much of the North Slope’s gas -- didn’t have much control over price swings in the natural gas markets. They needed a favorable tax deal with the state to help wipe away some of the financial risks plaguing the project. Without long-term guarantees on the tax structure and rate, the companies said they couldn't commit to the project. The economic environment looked good -- gas prices were rising; shale gas had yet to come flooding in -- but still there was that tax issue.

Gov. Frank Murkowski tried to help. The one-time U.S. senator staked his political future on getting that gasline built.

His solution was to negotiate a deal with the oil producers. If they would build the gasline, he'd get the Alaska Legislature to change the way the state taxed the companies. Murkowski’s bill put a tax on profits rather than production. It would result in a big hike in taxes in times of high petroleum prices, but help the companies out if prices fell while production remained high. Eventually, after months and months of closed-door negotiations, his popularity in the tanks, Murkowski announced he had a deal with the producers to build the pipeline. There were many even in Murkowski's own administration who objected to the deal, particularly the part of it that would have the state lock in the tax structure for up to 45 years.

It was going to be a tough sell to an increasingly leary Legislature.

Enter Bill Allen.

Allen, a former migrant fruit worker and high school dropout, who had some welding skills and a lot of luck, arrived in Alaska in 1968, the year of the massive Prudhoe Bay oil discovery. Alaska was good to him. The oil companies were very good to him. Eventually, he founded VECO, a nonunion oil contractor that, with the help of the big oil producers, turned into one of the largest homegrown companies in state history. Eventually, Allen found his way into politics, turned political kingmaker, and became Big Oil’s go-to guy to in the effort to keep taxes low.

With Alaska's oil fields in danger of running dry, the gasline looked very good for VECO, as Feldis, the federal prosecutor, pointed out in the courtroom on Friday. VECO would get the contracts to help build the line, contracts that would be worth hundreds of millions of dollars to the company.

What Feldis didn’t say was that the gasline would also be very good for the state, whose lifeblood is oil and whose lifeblood is running dry. If it meant hundreds of millions of dollars for VECO, it meant billions of dollars for the state and a shot at a future.

Sarah Palin takes over

It’s abundantly clear that much of the country, and most Alaskans, would rather not read about Sarah Palin anymore. But to erase her from the history books would be partaking in the kind of historical amnesia that her critics claim she practiced, and that would be a mistake. Because she played a big role -- perhaps the starring role -- in the outcome of this drama.

So let’s go back to that day on Aug. 31, 2006, when the feds arrived brandishing their search warrants. Palin had announced more than a year earlier that she would challenge Murkowski for governor on the Republican ticket. Former Alaska Gov. Tony Knowles had also thrown in his hat as the main Democrat contender, and there was independent Andrew Halcro and Republican John Binkley. Palin was the only one among them all who had taken a hard stand against oil and against Murkowski’s negotiations with the oil companies. The others took a hard stand against Murkowski and locking in oil taxes, but pretty much agreed with at least the skeleton of Murkowski’s plan.

Palin was vague about the specifics of what she wanted to do. But more than the any of the others who were running for Murkowski’s seat, she had been leading the mounting dissent over the governor’s plan.

She was speaking at rallies and forums, at any public event that would have her. She’d amassed an army of Alaskans from all walks of life, telling them they needed to take their state back from Big Oil. She cited the Alaska Constitution over and over again. Her mantra was that the resources belong to the people, not to the oil companies. Like moles, people squinted into the springtime sun at these rallies, holding signs that read, “Pass the petroleum: We’re getting screwed,” and “The deal’s too Murky.”

In part because of that opposition, much to the dismay of the oil companies the Alaska Legislature passed a tax hike of 22.5 percent of profits, which would rise 0.25 percent for every $1 increase in oil prices above $55 a barrel. Oil then was hovering at about $70 a barrel. At that price, the legislation amounted to a more than $2 billion tax increase. It was, oil industry executives said, the highest tax in the nation. The final tax, passed at a second special session of the Legislature, was already much higher than what Bill Allen or Pete Kott or Vic Kohring or the oil companies had wanted.

The gasline legislation itself, however, was still on the table. But given the highly charged political environment when the FBI agents arrived with their search warrants to start digging into relationships between lawmakers, the oil tax legislation and Bill Allen and VECO, a Palin win was all but assured.

And there was no gasline legislation.

AGIA arrives

Sarah Palin was elected governor in late 2006 and within six months Bill Allen and another VECO executive had pleaded guilty to bribing lawmakers during the previous year's tax fight. Former state Reps. Pete Kott, Vic Kohring and Bruce Weyhrauch were indicted around the same time for allegedly taking bribes or favors from Allen and VECO.

Even though Alaska was raking it under Murkowski's oil tax plan, Palin used the corruption scandal as a reason to revisit the tax law, saying the process had been corrupted.

The political corruption scandal hung over Juneau. In late 2007, the Alaska Legislature voted in favor of jacking the oil tax. Some of those lawmakers later said they felt bullied into voting for the tax hike or otherwise stand accused of being too cozy with the oil companies.

With the state’s past fiscal problems suddenly solved by rising oil prices and an even higher tax rate, Palin could now focus attention on sparking construction of the mega natural gas pipeline project.

While she fought successfully for the oil tax increase, her administration had already birthed a new pipeline proposal with a snappy name, something that would roll off the tongue and permeate the consciousness of a state full of pipeline-weary citizens and lawmakers: AGIA, the Alaska Gasline Inducement Act.

AGIA was complex and most Alaskans didn’t really know what the legislation meant for the state. But they trusted their new governor, whose approval ratings were in the stratosphere. State Democrats were particularly smitten with AGIA.

The Palin administration had scrapped Murkowski’s plan and taken off in a totally new direction, something that probably no other candidate, had they won, would have done. Palin's administration had essentially written up a list of demands for any company that wanted to build a pipeline. In exchange for going along with those demands, the prospective builder would get up to $500 million in subsidies to move the project forward. This, the administration said, was for "independent" companies, those without the resources that the major oil companies, could apply and the money could get them through at least part of the permitting process.

There was no mention of fixed gas taxes as part of the deal as the oil companies had always demanded in past pipeline discussions. Unlike Murkowski, who proposed locking in tax rates for decades, the Palin administration refused to go there. Learning from what the state had done wrong it in its oil fields, Palin wanted to break the hold the three major oil companies had on Alaska’s undeveloped gas.

Opponents of Palin’s scheme wondered what kind of legal mess she was moving the state toward. If an independent company built the pipeline, it would set the price for moving gas. Yet, the BP, Conoco and Exxon still held the leases to the gas. It was basically their gas.

Some wondered what would happen if the price to ship the gas was too high, and the companies opted not to pump their gas into the pipeline. A legal battle to try to force them to ship gas would take years and in the meantime tie up the reserves. Indeed, Exxon was at the time still in court fighting with the state over how much it should pay in damages from the 1989 oil spill outside of Valdez. There were obvious reasons other governors had chosen a less confrontational approach and tried to negotiate a deal with industry.

But Palin loved the gamesmanship, and she had advisers who figured the game had changed. They believed they now held the upper hand, and they were going all in. They were, to use a phrase, taking back the state.

They were confident the oil companies would eventually bend to the potential to still turn a healthy profit. Palin reveled in the competition, fervently believing that she would win in the end. After all, the gas pipeline was, in her words, "God's will." And at least one member of her gas team thought the same. Department of Natural Resources Commissioner Tom Irwin often sent her religiously infused messages.

"(W)e are part of God's plan," Irwin once wrote Palin.

"Thank you so much Tom," Palin responded in email. "I'm very thankful for you and the team you've put together. God's got all this in control as we give it up to Him!"

To her lieutenant governor, Palin wrote, "Pray for wisdom for us, for the team … And may God's will be done with His resources."

His will, Palin was convinced, was to pump the natural gas out of the ground. And she was going to be the one to make his will manifest. Nothing, no oil company, could stop that.

AGIA might have sounded a bit like the name of a Russian car or a venereal disease, but to the Palin administration, Democrats and others it was more like the acronym for a missile launched at the hearts of those who assumed the state should do whatever Big Oil wanted.

AGIA was for them a declaration of war, a reckless war some thought, over the future of Alaska, and no one could have launched this battle but a Republican governor elected to lead at a time in Alaska history when anti-oil sentiment had reached lofty new heights.

On Aug. 27, 2008, the Alaska House voted 23–16 and the Senate 14–5 to give the AGIA license and $500 million to TransCanada Corp., a Calgary-based pipeline builder. At a press conference to celebrate this victory, Sarah Palin was careful to say the action was only a “first step” and that there was a “heck of a lot of more work to do.” In fact, she said, that there was “harder work from henceforth to make sure it happens.”

She signed the legislation and flew to Arizona later the same day.

Two days later, in the early hours of Aug. 29, the national television networks began announcing that Republican presidential contender John McCain had chosen as his running mate an attractive governor hailing from the Last Frontier.

Palin had moved on. Left behind was her gas pipeline plan. It fizzled and sputtered and now appears stalled, maybe forever.

Missed opportunity?

No one can ever know if the natural gas pipeline would have been built if Murkowski’s plan had been followed. A lot changed in the years after he offered his scheme.

In 2005, Congress passed The Energy Policy Act, which prohibited the regulation of hydraulic fracturing under the Safe Drinking Water Act. That set the stage for a boom in the production of shale gas.

Now the market for natural gas is nearly glutted. The resource is as cheap as it’s ever been, and it is expected to remain cheap for the foreseeable future. The state continues to try to work with TransCanada, which has since teamed with Exxon, to get the line built under the terms outlined in AGIA. But it's not easy coming up with billions of dollars in financing in the midst of a still-running global financial crisis.

So far, Alaska has not made money on Palin's AGIA pipeline plan. The state has set aside or paid the two companies some $300 million of the $500 million that AGIA allowed, but the companies have so far failed to meet a target of getting agreements signed. A growing number of Alaskans doubt the line will ever be built.

In May, former Gov. Murkowski wrote in an editorial, “Unfortunately, the actions of the Palin administration in its gas line efforts displayed a measure of ineptness which will likely result in grave consequences to the economy of our state. So much for lost opportunities."

Maybe Murkowski is looking for a legacy. Many say that it would never have gotten built, even had his plan been followed. And maybe Alaska will still see a line, someday. Under its own terms, terms like AGIA. But it is certainly true that Alaska got close to realizing the long dream. And then the FBI arrived. 


Parts of this article come from the forthcoming book, “Crude Awakening: Money, Mavericks and Mayhem in Alaska,” by Amanda Coyne and Tony Hopfinger, due out Nov. 8.

Contact Amanda Coyne at amanda(at)alaskadispatch.com and Craig Medred at craig(at)alaskadispatch.com