Alaska recovers billions by suing oil companies for rightful revenues

Apr 29, 2020 News

The U.S. State of Alaska is testimony to the fact that strong countries or states can bring oil companies to heel, and ensure the people get as much value from the extraction of the resource as possible.
The State, starting in the 1970s, was able to recover billions of dollars in money rightfully belonging to the people, through legal challenges. It had recovered so much that an analysis undertaken in 2003 states, for the 25-year lifespan of the petroleum sector, that “one dollar out of every six that Alaska received from its oil development was obtained through legal challenges to the industry’s original payment”.
The State’s success is documented in a book by author Svetlana Tsalik, called Caspian Oil Windfalls: Who Will Benefit? Caspian Revenue Watch, 200.
Richard A. Fineberg, an author contributing to a chapter titled Securing the Take: Petroleum Litigation in Alaska wrote that the State provides a compelling example of the technical challenges of securing the full proportion of revenues owed to the Government.
The State’s production of petroleum had been dominated by ExxonMobil, British Petroleum and ConocoPhillips for decades, with the Government receiving about US$70B in petroleum revenue, in the 25-year period following the start of oil production. The revenues came from royalty payments of 12.5 percent of the value of the oil, and three principal taxes: corporate income tax, a petroleum production tax, and property tax.
The challenges came when Alaskan officials overseeing the petroleum sector claimed, based on independent analyses and audits, that “industry chronically reduced the bases for calculating royalty, severance, and income tax payments by underestimating the market value of a barrel of oil at the point of sale. Overstated pipeline shipping charges (tariffs) had the same result.”
To remedy this, the government hired skilled contract lawyers and accounting specialists to fuel a prolonged and intensive legal action against the oil companies. Between 1977 and 1994, the Alaskan Department of law reported that the hires cost more than US$217M. But the investment paid off so well that the litigation resulted in the government receiving additional payments from the industry of US$2.7B.
While some of the issues were noted to be highly technical and based on legitimate differences of opinion on how the complex contractual language and tax laws should be interpreted, others were not, Fineberg wrote. The Center for Public Integrity, an American investigative journalism non-profit described many of the cases of differences as based on outright deceit and fraud.
In sponsoring its own tracking of the export and value of each barrel exported, Alaska exposed the misrepresentations by the oil companies and the inflation of costs associated with transporting the oil by tankers and pipeline.
Fineberg wrote that litigation was able to produce an additional US$10.6B in revenue by 2000, including US$6.8B in direct payments for taxes and royalties, and US$3.8B in increased taxes and royalties related to reassessing pipeline and transportation costs.
Settlements were also made, in some cases, amounting to US$1.7B in payments to the State, in the decades preceding 2003.
Even then, Fineberg wrote that the figures substantially underestimate the scale of abuse, as other claims were launched against the oil companies, but were settled by private out-of-court deals.

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Alaska recovers billions by suing oil companies for rightful revenues

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