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Judge pegs pipeline life at 50 more years

Lisa Demer

Oil could flow through the trans-Alaska oil pipeline much longer than state policy leaders have assumed even under very low levels of production from North Slope fields, according to evidence presented in a court case over how to value the pipeline for property tax purposes.

In a 213-page decision issued last week, Anchorage Superior Court Judge Sharon Gleason bumped up the value of the pipeline for tax years 2007, 2008 and 2009, putting it at $9.25 billion as of 2009. The ruling comes after an earlier decision by Gleason that more than doubled the value of the pipeline as determined by a state board for the 2006 tax year.

In the recent case, the judge relied in part on evidence about how much it would cost to replace the pipeline as well as how low oil volume could fall before the pipeline would cease to be functional. A nine-week trial last fall generated thousands of pages of evidence, including internal company documents not previously made public.

Much of the judge's analysis concerned whether the pipeline can operate with far less oil running through it, a major consideration in determining its value.

Oil production has been on a dramatic decline at aging North Slope fields, from a peak of about 2 million barrels a day in 1989 to about 600,000 barrels a day now. When the volume of oil in the pipeline drops, so does the temperature of the crude, which increases the likelihood of complications like water freezing in the line, wax buildup and frost heaves.

Under state law, Gleason had to consider the estimated life of proven reserves of oil "technically, economically, and legally deliverable" into the pipeline.

Gleason concluded the trans-Alaska pipeline, sometimes called TAPS, should be able to operate for at least 50 more years, despite declining production.

"Evidence at trial persuasively demonstrated that the life of TAPS based on its proven reserves and incorporating its minimum capacity throughput limitations ... is at least until 2065," she wrote.

She put the amount of the proven reserves at more than seven billion barrels at the time of the tax years at issue and found that potentially recoverable oil is more than 30 billion barrels.

The state tax division initially assesses the value of the pipeline for tax purposes. Parties that disagree with the assessment can appeal it to the State Assessment Review Board first and then take the matter to court.

The Fairbanks North Star Borough, the North Slope Borough and the city of Valdez, which all collect property taxes on the pipeline because it passes through their boundaries, went to court arguing for a higher pipeline value and therefore higher tax payments for their communities. The companies argued for lower values.

Some of the key information presented to Gleason came from studies done for BP that examined the lowest limits of the pipeline's operational ability.

If the pipeline can run with less oil in it, that extends its life and allows BP to recalculate its proven oil reserves, a key oil company asset that must be reported to the Securities and Exchange Commission. The companies must be able to get the oil to market before they can count reserve estimates as assets.

BP is one of several companies that together own the pipeline, which is run on their behalf by Alyeska Pipeline Service Co.

If the pipeline can run with less oil moving through it each day, producers will be able to pump oil through it for longer, Gleason wrote. That means the fees for transporting the oil decrease per barrel and extends the economic life of oil fields, she said in her decision.

Until about 2004, BP considered 300,000 barrels a day to be the lower limit. Then it hired a company called JTG Technology Consortium to revisit the issue. The consultant in a 2005 report put the lower limit at 135,000 barrels a day, which it said could be achieved with heaters, booster pumps, new piping and valves, and more use of devices called pigs that can scrape wax buildup and prevent blockages.

BP used the 135,000 figure in reporting its reserves to the SEC for several years, Gleason said in her decision.

One option included in that study was building a new, smaller $3 billion pipeline from the North Slope to Fairbanks, then transporting the oil south by train to tidewater for shipping.

In 2010, BP hired another expert, Phil Carpenter, to see whether the pipeline could operate at even lower levels -- but without building a new pipeline. Carpenter concluded that, with heaters installed along it, the pipeline could operate at 70,000 to 100,000 barrels a day. BP again used that information in calculating reserves.

Alyeska later did a study of problems likely to arise with declining production, but it did not look below 300,000 to 350,000 barrels a day.

An Alyeska employee, Pat McDevitt, testified to Gleason that it is "not possible" for the pipeline to operate below 300,000 barrels a day, according to her decision.

Gleason "found that testimony, when considered with all of the other evidence at trial presented on this topic, to be completely unpersuasive."

The fight over property taxes brings to light information that state leaders say will help shape the debate in the Legislature over the future of Alaska oil production.

"I feel that this decision relies upon the substantive facts that support that conclusion that there (are) going to be many decades of oil that are pumped down the TAPS system," said state Sen. Joe Paskvan, a Democrat from Fairbanks and co-chairman of the Senate Resources Committee.

Most of the revenue for state government spending comes from oil production taxes and royalties.

Gov. Sean Parnell has proposed cutting oil taxes to spark investment and new production. But senators have resisted, saying there's no proof that tax breaks will result in additional oil development.

Even if the pipeline can operate at 100,000 barrels a day, that won't bring in enough revenue to pay for state government, said Joe Balash, deputy commissioner of the state Department of Natural Resources.

"Our goal is to stem the decline and reverse it and get back up to a million barrels a day," Balash said.

The pipeline owners haven't yet said whether they intend to appeal the recent decision. Gleason's ruling for the 2006 tax year is already on appeal to the Alaska Supreme Court.

Reach Lisa Demer at ldemer@adn.com or 257-4390.


By LISA DEMER
Anchorage Daily News