Many Alaskans are feeling bitter about the U.S. Supreme Court's decision Wednesday to slash the amount of punitive damages Exxon Mobil Corp. must pay for the 1989 Exxon Valdez oil spill. But the relationship between the oil-rich state and the oil-producing giant could get even rockier in coming months.
That's because Exxon holds an effective veto over whether a pipeline can be built from Alaska's North Slope to carry natural gas to the lower 48 states.
Gov. Sarah Palin, a Republican, has made building the pipeline a centerpiece of her administration. The project, which will cost more than $30 billion, has wide support from Alaskans, many of whom remember the economic boom that accompanied building the state's oil pipeline.
But to get the gas pipeline built, she will need Exxon to commit its portion of the gas in Prudhoe Bay -- something the Texas company has refused to do.
Indeed, Exxon is the lone holdout. Its Prudhoe Bay partners, ConocoPhillips and BP PLC, earlier this year announced they would begin planning for a pipeline. And the state legislature, with the support of Ms. Palin, is currently meeting to determine whether to back a competing pipeline proposal from TransCanada Corp.
"In terms of the parties that have to be out on the field, so to speak, and playing for this to go forward, we have four out of the five: the state, BP, TransCanada and Conoco," says Joe Balash, special assistant to Ms. Palin.
He said the relationship between the governor and Exxon wasn't close. "We don't think this is impossible to overcome, but it is going to require a certain amount of accommodation by Exxon, which is not their first choice in dealing with governments or commercial parties," he said.
"Exxon has been in Alaska for over 50 years," said Margaret Ross, an Exxon spokeswoman. "We look forward to working with the state, the legislature and the people of Alaska to develop the state's resources in the future." She added, "We want to work with the state. Everyone believes it's important for a pipleline project to move forward."
BP spokesman Steve Rinehart said: "I'm not going to discuss the unit agreement or those kinds of concerns. We have invited Exxon to join our project and we hope they do."
Meanwhile, anger against Exxon spiked after the Supreme Court decision was handed down. "Exxon has made billions of dollars off our North Slope oil. What we must demand in return is to be treated fairly," said Ethan Berkowitz, the Democratic candidate for Alaska's seat in the U.S. House of Representatives.
For the pipeline projects to proceed, energy producers must commit to shipping enough barrels of oil or cubic feet of gas in a process known as "open season." But Exxon, under a 1977 agreement among the Prudhoe Bay producers, can stop its partners from committing the estimated 24 trillion cubic feet under Alaska's North Slope to any pipeline.
Exxon also has a large stake in the Point Thomson field, near Prudhoe Bay. The state currently is trying to wrest control of the field from Exxon for not moving fast enough to develop it.
Drue Pearce, a federal Interior Department official charged with expediting the gas pipeline application, said rising energy prices and limited opportunities to invest their cash should help convince them to get on board. "At the end of the day, Exxon has a business decision to make," says Ms. Pearce. "I hope that their decision is this is a project they want to be part of."
Meanwhile, earlier this month, Russian gas giant OAO Gazprom said it is interested in opening discussions about its possible participation in either of the competing pipeline projects. The company operates several pipelines that deliver gas from Russia into Europe.
Copyright (c) 2008 Dow Jones & Company, Inc.