Alaska News

In Alaska, oil companies keep 2 sets of books on pipeline's value

Longtime Alaskans may remember a commercial featuring three school-aged boys in a kitchen. They're making a box cake and following the directions. Then one of them has a brilliant idea: if you turn up the heat, the cake will be done in half the time! Cut to the smoke billowing out of the oven, the boys coughing, the cake burnt. The concerned announcer tells the viewers: "A quick fix for today's desires could ruin a promising future for everyone."

Arco Alaska first aired that commercial in 1986, when it looked as though the Alaska Legislature might raise taxes on the oil industry. It was followed with more commercials, Op-Eds, letters to the editor, threats and stuffed campaign coffers. Arco -- the company that discovered Prudhoe Bay -- was Alaska's oil company and it didn't shy from flexing its muscles. The debate all but died with the help of oilman Bill Allen and former-lawmaker-turned-lobbyist Ed Dankworth.

That is, until 1989, when the Exxon Valdez ran aground in Prince William Sound during a legislative session, and Alaskans wanted revenge. Leases, which are legally binding, couldn't be pulled. The companies couldn't be kicked out. Taxation was the only tool available.

"We're smoking on Big Oil," one legislative aide said after votes were cast.

Arco and BP reacted swiftly, suspending more than $140 million in new North Slope projects. Industry, it seemed, was living up to its warnings. Within a year, however, BP resumed its projects. Arco waited longer, reviving its canceled projects in 1996.

The threats oil companies were making then -- and in fact in nearly every discussion of oil taxation since Prudhoe Bay was discovered in 1968 -- very much resemble the threats they are making today.

New salesmen, same snake oil

Jump to 2012. On the Make Alaska Competitive website you'll find a series of ads slicker than those from 1986 but offering largely the same message: keep taxes low and oil production will continue. Make Alaska Competitive (MAC) is a coalition set up by Anchorage public relations and advertising firm MSI Communications. The campaign is charged with leading the public opinion crusade to lower taxes on the oil industry.

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MAC's ads feature 6-year-old Ava. By the time she gets into high school, the trans-Alaska pipeline could be shut down, a concerned narrator warns, adding, "If we don't stop the decline, we'll all pay the price."

This sentiment pervaded the Capitol last regular legislative session as yet another oil tax debate captivated Alaska. A coalition of House Republicans and oil company executives joined Gov. Sean Parnell warning that if lawmakers didn't offer tax relief to Alaska's producers, "little Ava" from MAC's ads may not be able to grow up in a state where nearly 90 percent of its budget is funded by oil royalties. That little Ava may some day be forced to pay something like a state income tax. That Alaska's current tax regime might jeopardize little Ava's annual state welfare check, the Permanent Fund Dividend.

And the big one: That without an estimated $2 billion cut in taxes, oil production might continue to diminish to a point that the state's economic main vein, the trans-Alaska pipeline, may have to be dismantled -- before MAC's "little Ava" even attends her high school prom.

That argument might well have continued in Juneau, aided and abetted by a governor who once worked for an oil company and who along with pro-industry lawmakers supports a tax break for the oil companies. In a recent speech on the Senate floor, Sen. Hollis French, D-Anchorage, said that the pipeline has been used as a "pawn" in the fight to slash oil taxes.

But a ruling by Anchorage Superior Court Judge Sharon Gleason on what was until recently a little-known court battle may change the debate somewhat.

"The PR campaign continues," said Democratic Rep. David Guttenberg, himself a former oil worker. But the result of Gleason's decision and the information gleaned from it is a campaign shifted from pipeline to production, he said. And it will give legislators greater leverage as they continue to fight for solid information about the oil patch and the life of TAPS.

Gleason's ruling

The TAPS case was a long, drawn-out ordeal over the valuation of the trans-Alaska pipeline for property tax purposes. Alaska's pipeline is taxed just like any other piece of property. And the more property is worth, the higher its tax burden. Property worth of TAPS depends in large part on how much oil is on the North Slope and at what levels the oil can flow down the line.

The pipeline's owners contended that the state's assessment office valued the line too high. The Fairbanks North Star Borough and Valdez, which both get a cut of the tax because TAPS passes through their property, argued that the state undervalued the line.

Gleason's decision pretty much split the difference between the state, Fairbanks and Valdez, ruling that between 2007 and 2009, the line was worth $8.94 billion in 2007, $9.64 billion in 2008 and $9.25 billion in 2009. The oil companies contended that it's worth a little more than $1 billion.

It's a decision that, if it holds up in the Alaska Supreme Court where the companies are expected to file an appeal, will result in additional tens of millions of more property tax dollars than the companies believe they should spend. That, at least for public policy purposes, particularly the currently production tax fight, is the least of it. The decision — at 212 pages — is a treasure trove of data on the value and life of the pipeline.

Judge Gleason contends that the pipeline is a lot more valuable and has a lot longer life than Make Alaska Competitive and the oil companies would have you believe.

There's much to be learned about the pipeline and the information that Alaska's oil producers, who own the pipeline, consider confidential. (Dermot Cole of the Fairbanks Daily News-Miner, whose reporting on this has been invaluable, is beginning to key in on these points.) But for the current purposes of the tax debate, here are a few key points:

• Arguments floating about the state Capitol about TAPS running precariously low were fairly well debunked in court. BP itself commissioned a report that said the pipeline could continue to operate economically with as little as 70,000 barrels a day flowing through it. Flow is now about 600,000 barrels, and is expected to decrease between 5-7 percent in ensuing years, but that's only if production continues to decline. And considering how much oil is left, that's a bigger "if" than has been argued.

• "Proven reserves" is a term with varying definitions, but generally means how much oil is economically, legally and technically recoverable. In order to rule on the value of the pipeline, a number was sought. Gleason admitted that coming to this number was difficult, largely because the producers don't offer it. "The history of this case demonstrates that it has been exceedingly difficult for the municipalities to obtain any proven reserves information from the owners and their affiliates," she wrote. "Only a limited amount of reserves information has been made available ... and certainly not due to a lack of effort on their part, both before the trial court and on repeated petitions for review to the Alaska Supreme Court."

However, she was able to use a confidential BP report, and additional information reported to the Securities and Exchange Commission, various state agencies, and Dudley Platt, a petroleum engineer whom the state often uses to chart reserves, to make a reserve ruling. She said that as of 2009, North Slope proven reserves were more than 7 billion barrels.

That number, it should be noted, does not include the adjacent Point Thomson field yet to be tapped, or the roughly 20 billion barrels of heavy oil that isn't considered technologically or economically recoverable at the moment. Nor does it take into account that Royal Dutch Shell is planning on using TAPS to deliver Arctic offshore oil to market. An aggressive timetable puts first production at 2023, according to Shell.

To put those reserves into perspective: when TAPS was first constructed, estimated, proven North Slope reserves were just over 9 billion barrels. Since construction was completed in 1977, 35 years ago, additional discoveries and technological advances have allowed the pipeline to carry more over 16 billion barrels of oil -- and that's just so far.

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And to put it into even greater perspective: North Dakota's proven reserves, a state that is supposed to jump ahead of Alaska in the near future, are only 1 billion. Estimated reserves (proven and unproven) from the Bakken formation, which holds most of North Dakota's oil, are approximately 4.3 billion barrels, according to the American Petroleum Institute.

Given years of low oil flow that's still profitable, and those so-far proven reserves, Gleason ruled the death of TAPS won't come until at least 2068, at the ripe old age of 91.

Because a proven reserve also has to be economic for the companies to produce, ups and downs in the price of oil could extend or shorten the pipeline's estimated lifespan. But remember that the reserves don't take into account Point Thomson, or any of the billions of barrels of heavy oil that may one day become economically recoverable.

During his State of the State address earlier this month, Parnell addressed the issue. "(T)here will come a day when the trans-Alaska pipeline system shuts down," he said. "Some say this point will come at 300,000 barrels. Others say at 100,000. I say: Let's not find out."

If Gleason's date holds constant, by the time TAPS gives up and runs dry, Make Alaska Competitive's little Ava will be 62 years old. And that's only if none of the billions of barrels of heavy oil pan out, and the billions more estimated under the Arctic seabed stay there.

Dates haven't been set, but there's been talk of holding legislative hearings on the decision. "We need to have more information," said Guttenberg. "We need it badly."

Contact Amanda at Amanda@alaskadispatch.com

Correction: The original article said that Dudley Platt was a geologist. He is a petroleum engineer.

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