Editor’s note: This is the first of a two-part perspective piece. The second installment will be published Monday.
In December 2009, 15 House Republican lawmakers called for an in-depth public review of the 2007 oil taxation rewrite that for the first time gave Alaska an equitable share of its oil wealth. The lawmakers cited “mounting evidence that the new tax rules could be choking investments by energy companies.” It is, therefore, illuminating to look at the history of state oil taxation policies. At statehood, Alaska was unprepared for the oil industry. The first commissioner of Natural Resources asked the Western Oil and Gas Association for help in drafting lease legislation. It recommended, and paid a portion of the fees, for a lawyer from a San Francisco firm that represented Standard Oil to draft a lease article. The lease form resulted in extensive litigation because the oil’s value was calculated at the wellhead.
On Sept. 2, 1977, the state filed the lawsuit Alaska vs. Amerada Hess, et.
al. The state charged 18 oil corporations with underpayment of the state’s royalty share of production. By law, Alaska was to receive a royalty share equal to 12.5 percent of the total oil production. The state contended that corporations over-reported their production costs to lower their payments to the state. That started 15 years of litigation.
State officials estimated the value of contested royalties at a minimum of $80 million per year. It was one thing to claim that the oil companies undervalued their product. To prove it was another matter.
The state argued the “upstream theory.” Alaska’s lawyers assumed that the value of crude oil for royalty purposes could be determined through a mathematical process. First determine the market price of crude oil where it was sold, and then work “upstream” toward the source, along the way subtracting the identified approved costs. The oil companies did not dispute this basic idea, but disagreed with the state about which costs were applicable and how much those expenses should be. Each oil company proposed a different market price and a different method of determining that price.
The conflict employed a legion of lawyers and cost both the state and the corporations several hundred million dollars. Out of the 18 defendants, Atlantic Richfield Co., British Petroleum and Exxon owed about 90 percent of the revenues the state claimed. After extensive legal maneuvering, the state and the defendants agreed on Sept. 11, 1984, to a protective order that established confidential documents.
This agreement provided a framework for the case to proceed. Vast amounts of material were placed under court seal, so reporters, industry monitors, the general public and scholars have remained ignorant about a lawsuit involving hundreds of millions of dollars of public funds.
In 1989, the state estimated oil companies in the Amerada Hess case owed back payments from 1977 totaling $902 million.
Amerada Hess settled with the state on Dec. 26, 1989.
Arco followed on Sept. 12, 1990, paying $285 million or 86 percent of what the state claimed it owed. The Arco settlement also created a formula for computing royalties, and the state dropped $100 million in fraud charges against the company.
After Gov. Hickel assumed office in late 1990, the state continued to seek, and reach settlements. Not all companies, however, were willing to reach an agreement. BP was such an example. The state alleged that it owed the most, at least $335 million, and BP fought hard to avoid such a payment. After much legal wrangling, the state and BP reached a settlement in which the latter agreed to pay the state $185 million, settling all disputed claims through December 1991.
The state dropped fraud charges against the company and its ability to recover punitive damages.
Alaska Attorney General Charles Cole called the BP settlement a victory. Critics pointed out that the state had tried to collect $335 million and only received 55 percent of that amount.
Exxon was the only holdout and did not settle until April 15, 1992, agreeing to pay Alaska $128.5 million, or 76 percent of the $170 million the state had originally sought. Alaska had claimed $902 million and received a little more than $600 million in back royalty payments.
The state had spent more than $100 million, put together a team of 20 lawyers and hired outside counsel as well. It and the oil companies had compiled storerooms full of documents, which are still closed to study and research. To this day, despite repeated requests, the protective order has not been lifted.
The bulk of the Amerada Hess case —millions of documents and file folders — fills three rooms, floor to ceiling, at a law office in Anchorage.
Claus-M. Naske is a professor emeritus of history at the University of Alaska Fairbanks, where he earned a bachelors degree in 1961 and then joined the faculty in 1969. He is author or co-author of a dozen books, including “Alaska: A History of the 49th State,” the third edition of which is forthcoming.