FAIRBANKS -- The Alaska Supreme Court today upheld a key Superior Court decision on the value of the trans-Alaska pipeline for tax purposes.
The oil companies said the pipeline should be valued at $850 million, but after a five-week trial in 2009, then-Judge Sharon Gleason in a May 2010 decision put the value at $9.98 billion for the 2006 tax year.
The lower court had found that the primary value of the pipeline is in transporting North Slope oil reserves, estimated to be worth $350 billion in the decades ahead.
The court said that the companies would rebuild the pipeline if they had to, not for the tariff income received for shipping oil, but “to monetize the Alaska North Slope’s $350 billion worth of oil reserves.”
The court ruling today is a victory for the municipal governments that have sought a higher value on the pipeline, in part because it means higher property taxes for them. The North Slope Borough, Valdez and the Fairbanks North Star Borough have repeatedly argued that the oil companies were undervaluing the pipeline.
The decision applies directly only to 2006, but the companies have also challenged the tax value used in the years since then, using many of the same arguments rejected by the court.
The North Slope Borough, Valdez and the Fairbanks North Star Borough have repeatedly argued that the oil companies were undervaluing the pipeline by billions.
The oil companies argued that the value of the pipeline was in the tariff income they received from shipping oil.
“The owners’ argument implies that because the Superior Court assessed the pipeline’s value as a vessel for transporting oil reserves to market, the Superior Court improperly imposed a tax on the actual value of those oil reserves,” the Supreme Court said. The court rejected that argument, saying the value of the reserves came up only in the context of providing an explanation that money collected for shipping oil is not the real value to the companies of the property.
The justices mentioned that Adam Jaffe, testifying for the pipeline owners in a Federal Energy Regulatory Commission case, had said the Alaska pipeline was different from most pipelines because it was “largely a closed system in which the vast majority of business is transacted among affiliated buyers and sellers.”
Valuing the pipeline based on tariff income alone, Gleason found, would ignore the interests the companies have in getting their oil to market. The companies that own the oil charge themselves to ship the oil.
“Several witnesses testified that, due to this integration, the value of the pipeline is completely divorced from the owners’ ability to charge tariffs,” the Supreme Court said.
One key aspect of the Superior Court ruling was Gleason’s finding that the economic life of the pipeline was much longer than the companies -- or even the state -- had argued, based on the value of proven reserves. To be considered proven, a supply of oil has to be “technically, economically and legally deliverable to the pipeline,” meaning that a great deal is known about the resource and that it can be produced with current technology.
“The owners argue that oil reserves under development and under evaluation are not ‘proven reserves,’ ” the court said. The high court said that even if the infrastructure to produce an oil resource does not yet exist, it is still a proven reserve.
Pipeline owners said that existing oil reserves would be enough to keep the line running until sometime between 2032 and 2053. BP used a longer lifespan in its reports to the Securities and Exchange Commission. The court went with 2065 to 2068.
Justices Daniel Winfree and Craig Stowers dissented in part from the decision in a way that could lead to a higher valuation on the pipeline. They said that Gleason allowed a deduction for economic obsolescence based on unused capacity in the pipeline. The two justices said that by confirming this aspect of the ruling the court was saying that external factors beyond the control of the companies led to the decline in oil production, but this was not litigated during the trial.
The North Slope Borough and the Fairbanks North Star Borough had argued against the economic obsolescence deduction because no evidence had been presented at the trial.
This is a developing story. Please check back for updates.