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Tariff fight resurrects dispute over Alaska pipeline's life expectancy

State of Alaska photo

A complex regulatory battle is brewing over how much money the owners of the trans-Alaska oil pipeline charge to ship crude, one that raises questions about Gov. Sean Parnell's push to slash billions of dollars in oil taxes.

Parnell has said that the trans-Alaska pipeline -- the 800-mile umbilical cord that symbolizes the state's lifeblood industry -- is running low on oil and could shut down in as early as eight years under certain conditions.

To solve that alleged dilemma, he has advocated for the Alaska Legislature to cut oil taxes by up to $2 billion a year for the companies that produce crude from state lands. Parnell and others claim that will result in the companies searching for more oil and pumping it into the trans-Alaska pipeline.

But as Parnell makes such claims, his Attorney General's team is enmeshed in a regulatory fight with BP, ConocoPhillips and Exxon Mobil Corp. They're the majority owners of the trans-Alaska pipeline, also called TAPS. And part of the state's claim before the Federal Energy Regulatory Commission (FERC) is that the pipeline, in fact, is not running out of oil any time soon.

On the contrary, the pipeline could continue operating and shipping oil until 2075, the Attorney General's office argues as it protests the latest pipeline tariff hikes proposed by those three trans-Alaska pipeline owners. The Attorney General is requesting an investigation of the matter before the FERC, the body tasked with ensuring consumers receive reasonably priced energy.

"The available evidence indicates that TAPS has a far longer expected lifespan" than the 2034 end date that Conoco and other pipeline owners give the line, the state's legal team argued in a July 12 protest filed with the FERC. The filing goes on to say that “...statements of one of the largest owners of all fields on the North Slope, BP Alaska, indicates that TAPS will be operating far beyond 2034 -- perhaps even until 2075."

But Attorney General Michael Geraghty argues that there is no contradiction between the state's FERC protest and Parnell's argument for oil tax breaks to keep the pipeline operational. That's because the amount of oil flowing through the line is what's most important to Parnell and the state. Less important are the varying forecasts about the line's expiration date, Geraghty said in an email to Alaska Dispatch.

The line's flow rate is falling annually by about 6 percent. In 2011, an average of 613,000 barrels flowed through the pipeline. Geraghty said there's evidence that the pipeline will have low-flow issues once rates fall below 350,000 barrels a day.

"Lower throughputs may not make the pipeline shut down in the near term," but the line will become more expensive to operate as mitigation measures are needed to address problems associated with reduced flow, he said in his email.

The tax breaks are designed to provide an incentive so the oil companies increase production and fill up the line, he said.

Still, those opposed to slashing taxes believe Alaska's oil players won't allow production to drop that low. They argue there is still plenty of oil to develop in Alaska's Arctic and that the pipeline -- an engineering marvel -- will be around for decades to transport crude.

The state cites statements from the oil industry itself that allude to this fact in its FERC filing: As long as there is "economic oil" to develop in Alaska, the pipeline will continue to operate. Conoco for one appears to find Alaska oil economical to produce. It recently reported a $551 million second-quarter profit from its Alaska operations -- about one-fourth of the total $2.27 billion profit it earned worldwide.

State Sen. Bill Wielechowski, D-Anchorage, said he's glad to read the FERC filings and see that the administration is "coming around and admitting to what we've all come to know" -- that the pipeline could be around for many decades to come.

He pointed out, however, that Parnell's website to support his tax cut proposal, "Stem the Decline," still makes the argument of a shorter pipeline life. That site says the pipeline could end sometime between 2020 and 2035, according to a U.S. Energy Department report cited on the website.

As for the governor's concern that lower flows could jeopardize the pipeline, Wielechowski said it's "something we're all concerned about." But exploration incentives passed by the Legislature in 2010 are working and will lead to more oil production, he added.

"I think you're going to see a big turnaround on oil being produced on the North Slope in the next few years," Wielechowski said.

Never-ending pipeline battles

The trans-Alaska pipeline is owned by BP, Conoco, Exxon, Koch Alaska Pipelines and Unocal, though the latter two stopped moving oil in the line Aug. 1 and intend to sell their combined 4.4 percent stake to the remaining owners, according to FERC filings.

The state's latest protest over tariff rates build on a long-running battle over how much the pipeline owners have been charging to ship crude on the trans-Alaska pipeline. The state essentially argues that the pipeline owners are shortchanging the state by increasing the fees they charge for moving oil down the pipeline. The higher that fee is, the less money the state makes in production and royalty taxes.

The higher fee could also price out potential explorers and independent producers, argues the Attorney General's team, which is being assisted by the law firm of Morrison and Foerster in Washington, D.C.

"The increased tariff rates result in a direct and substantial loss to Alaska. Excessively high tariff rates may also have adverse consequences on North Slope bidding, exploration and development," the state's attorneys argue.

The state and others have fought the oil companies in court over similar matters for decades. A glaring example is Alaska v. Amerada Hess, a nearly 20-year battle won by the state. The judge found that almost since the oil began flowing in 1977, Alaska oil companies were deliberately falsifying records to reduce royalty payments to the state. The state claimed the companies were undervaluing their oil and gas and overstating the costs of transporting the oil, resulting in smaller royalty payments. In the end, the state won about $1 billion in out-of-court settlements.

Alaska's recent protests to the FERC show the state still has some of the same concerns.

The state isn't alone. Oil producer Anadarko is also protesting the 2012 rate increases to move its North Slope oil through the pipeline. The state and that independent oil and gas company are asking to have their latest protests consolidated into a single hearing before the commission.

The 2011 rate was $5.05 for every barrel shipped. The new rate charged by Exxon and BP is $5.97 effective July 1, said a BP spokeswoman. ConocoPhillips' new rate is $6.06.

That's roughly an extra $1 per barrel shipped down the pipeline. That fee can pile up quickly, hurting a company's bottom line.

Anadarko is an independent producer with a minority interest in the Alpine oil field operated by Conoco. Of the daily amount of oil shipped this winter in the pipeline, Anadarko owned about 15,000 barrels. The higher shipping rate will cost the company roughly an additional $15,000 a day, boosting Anadarko's tariff to about $90,000 daily, or more than $3 million a year.

Higher tariff rates could also impact the newest hope in Alaska's oil industry. If Royal Dutch Shell finds huge offshore oil reservoirs in the Chukchi and Beaufort seas, as it intends to do with exploratory drilling this summer, and if it eventually pumps, say, one million barrels daily through the pipeline, the extra dollar in tariffs would cost the company an additional $1 million a day.

Pipeline tariffs have been rising over the years. The rate hikes come in part because the trans-Alaska pipeline operators are paying the state and municipalities more in property taxes, so they're charging more to transport oil, they argue in FERC filings.

Also, with the pipeline's oil flow steadily decreasing, the companies don't earn as much. Thus, they must charge more for each barrel to recoup expenses.

But the state argues that the pipeline owners are in part jacking tariffs to try to recover expenses for a botched program to upgrade the trans-Alaska pipeline facilities. The so-called Strategic Renovation program was "planned poorly and executed worse," and the pipeline owners made "flawed" decisions at every turn, the state argues to the FERC. Recent estimates indicate the program's costs will more than triple original estimates, and the work will take nine years longer than planned.

How many years does the pipeline have left?

The state also argues the pipeline will last decades longer than companies are telling the FERC. A shorter life supports higher tariff rates because the companies can charge more to cover their investment costs over a shorter period.

The state's legal team argues that 2034 -- the pipeline's end date declared by the oil companies in their arguments before FERC -- is a convenient timeframe that "merely coincides" with the pipeline's 30-year right-of-way agreement. The date "does not reflect any judgment that TAPS will stop operating in 2034," the state's legal team argues. It reflects only that extensions of right-of-way are granted in 30-year increments.

To claim the pipeline will last perhaps decades longer than 2034, the state's legal team cites information that came to light in a recent lawsuit against the oil companies brought by Alaska municipalities. Municipalities like the Fairbanks North Star Borough argued in recent years that BP and others were understating the life of the pipeline in order to reduce its assessed value and the property taxes they pay.

The municipalities won a state court ruling that agreed the pipeline's life will extend until at least 2047. Then there's the State Assessment Review Board, which assesses the pipeline's value. It sets an end date of 2042.

But the pipeline could be around even longer than that. The state quotes to FERC a 2007 form filed with the U.S. Securities and Exchange Commission by the BP Prudhoe Bay Royalty Trust, a Wall Street-traded trust that distributes royalties to shareholders using a portion of BP's proven Prudhoe Bay reserves.

BP runs Prudhoe Bay, the nation's largest oil field, and the crude is shipped on the trans-Alaska pipeline -- the only way to transport it to markets.

"BP Alaska expects continued economic production from the Prudhoe Bay Field at a declining rate through 2075," the 2007 form states.

So if Prudhoe Bay is around until 2075, the state argues, then the pipeline will also be operating that long.

Whom to believe?

Such a long lifespan for the pipeline seems at odds with Gov. Parnell's urgency to cut taxes on oil producers.

So whom should Alaskans believe as the authority on when the line may cease operations? And can Alaskans trust the three largest oil producers when the state has for years battled them over tariff rates on the pipeline they own?

State Senate President Gary Stevens has urged Alaskans to be wary of the oil industry's claims when opposing major tax breaks. Last year, for instance, he reminded the audience that the judge in the 1997 Amerada Hess ruling found the oil companies guilty of "deliberate falsification" of records to reduce their state royalty payments. The judge also accused the state of "inexcusable trustfulness" in their interactions with those companies. That shouldn't happen again, Stevens said.

But Parnell-appointed Attorney General Geraghty -- the man in charge of the latest pipeline tariff battle with the oil companies -- said trust isn't an issue when it comes to the oil tax debate.

"Governor Parnell is relying on what other Alaskans already know: businesses will generally invest their monies and their efforts where they can make the most profit," he said in his email comments to Alaska Dispatch. "Trying to tie (the state's long-running tariff arguments) into the governor's proposal to stimulate increased production in Alaska is a non sequitur."

But if the companies need tax breaks so that they will invest more in Alaska oil production, how much profit is necessary for them?

Of the major oil companies operating in Alaska, only ConocoPhillips reports its Alaska profits separate from worldwide earnings. Alaskans currently have no way of knowing the financial strength or weakness of BP's and Exxon's Alaska oil production.

For Conoco, things appear to be looking good this year.

Even as the company's leaders have fought for the multibillion-dollar oil tax cut, Conoco has reported earning more than $1.67 billion in Alaska profits during the first half of 2012. Its first-quarter profit alone was $616 million, or about $7 million a day -- up 12 percent from the first three months of 2011, according to its earnings reports.

Contact Alex DeMarban at alex(at)alaskadispatch.com