Palin's Pipeline to Nowhere?

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In Irwin, Palin had found a model of resistance. She put an "all-Alaska" gas pipeline at the center of her campaign for governor. It was shorthand for putting Alaskan voters, not oil companies, at the forefront--and drawing a distinction between herself and the GOP Old Guard led by Murkowski. More dramatically, Palin joined the Magnificent Seven at a large downtown Anchorage rally and promised to rehire Irwin and his aides if she was elected.

Palin trounced Murkowski in the 2006 GOP primary. Facing former Democratic governor Tony Knowles in the fall, she shifted her pipeline position to "look gubernatorial," recalled Bitney, who served as her policy director. The original "all-Alaska" option excluded any role for the major producers. But they, after all, had the gas and the capital needed to build and operate their own pipeline. So Palin took a more inclusive stance in the general election, favoring open competition for anyone, including the major producers, who were willing to meet certain criteria for a pipeline.

Touting energy reform and clean government, Palin cruised to an easy victory in November. She pledged in her inaugural address to have a gas-pipeline bill in four months and spent the next two days in back-to-back meetings with gas producers. One of her first appointments was Marty Rutherford, Irwin's deputy, who agreed to act in Irwin's old job until Irwin could return a few months later. The two veterans joined with another Palin appointee, revenue commissioner Pat Galvin, to form what everyone in Alaska politics simply calls the "gas team." Their job: get the pipeline built.

Hardball with Big Oil

True to her campaign pledge, Palin had her gas team draft a pipeline plan that set tough conditions on whoever would build the line. One of the "must-haves," as they were called, required the builder to allow other producers to use the pipe, even if that meant expanding it at the builder's expense. That was a nonstarter with the big producers, who didn't even put in bids. In the end, the only acceptable offer came from TransCanada, an independent Canadian pipeline builder.

Neither the plan nor its proponents were universally loved. Critics pointed out that gas-team member Rutherford had briefly been a lobbyist for a TransCanada subsidiary. And stiffer resistance came from economic conservatives. Representative Mike Hawker says that by cutting Big Oil out of the pipeline, Palin's team "endangered the state's economic future. It's a classic case of biting the hand that feeds us."

The Palin administration has also had a tendency to vilify its opponents. Hawker, whose wife works in the oil industry, says that this year after opposing the governor's tax plan on conservative economic grounds, he faced a GOP primary opponent for the first time in his career. Palin's political allies--Palinistas, as Hawker terms them--"called me 'corrupt' every day."

Even some who worked for the Palin administration say the gas team went overboard. "They had a tendency to be preachy," says Larry Persily, who worked in Palin's Washington office. "They are true believers, zealots even." Irwin defends the hard line: "People in Alaska are tired of being pushed around by oil and gas companies." Palin's approach, Galvin says, "represented a fundamental shift in the entire relationship between the state and companies."

Palin's pressure tactics prevailed. The Republican legislature passed a measure giving TransCanada up to $500 million in seed money. Alaskans had been talking about a gas pipeline for three decades, and in less than two years in office, Palin had made almost unbelievable headway. "I fought to bring about the largest private-sector infrastructure project in North American history," she told the convention audience in September. "And when that deal was struck, we began a nearly $40 billion natural-gas pipeline to help lead America to energy independence."

And yet began is the keyword. To obtain financing, TransCanada will need commitments from producers to use the pipeline. But the majors aren't likely to agree to pay someone else tariffs for pipe they could lay themselves, and this they have steadfastly refused to do without long-term tax breaks from the state. Palin's initiative was "bold but unworkable, a big splash with little payoff," says University of Alaska energy economist Doug Reynolds. He predicts no movement on a pipeline until Palin agrees to negotiate with the producers.

What's unfolding now is a game of high-stakes chicken. In response to Palin's TransCanada plan, BP and ConocoPhillips started plans to build their own pipeline into Canada--and nobody thinks there will be two pipes. Palin's critics say that the gas team's inability to find a way to include the producers from the start could delay the project indefinitely.

It wouldn't be the first time a big project was held hostage by hard-line tactics, critics say. Palin's administration revoked ExxonMobil's leases of Point Thompson, a giant North Slope oil and gas field, for failing to put the area into production over three decades. Palin chided the company for "warehousing" 8 trillion cubic feet of gas. A state judge upheld the state action but said ExxonMobil and its partners should be given another chance to prove themselves. In February 2008 the company submitted a $1.3 billion plan calling for production of 10,000 bbl. a day of gas condensate to begin in six years. But Irwin rejected the proposal in April, saying he did not "trust" ExxonMobil's word after years of false starts, and pulled the leases. The state wants other producers to bid for the development rights, a plan unlikely to occur for years because of court challenges. Dan Dickinson, tax chief under Murkowski, claims that the Point Thompson decision may have scored p.r. points for Palin but ultimately set back early production of the field. "I don't think Governor Palin really understands the intricate details of oil and gas here," says Persily, the former administration official. "She underestimates the complexity of this."

But others have made the case that whatever the result, Palin has succeeded in calling the do-nothing bluff of the Big Three and, even if the outcome is uncertain, finally moved them into action. Her campaign defends her tactics. "Ultimately, the energy companies will push for the best deal they can get, and Governor Palin has pushed just as hard to make sure that deal is in the best interests of Alaskans," says McCain-Palin spokesman Taylor Griffin. Irwin is confident that the strategy will pay off. "There will be a gas line," he says. "Once the producers get over the idea they're not going to control our gas fields like they did our oil fields, they'll get involved. There are hundreds of billions in profit to be made. The economics are going to drive it."