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Hearing begins over valuation of Alaska pipeline

Alex DeMarban
AL GRILLO

Proceedings began this week on the latest dispute over the value of the 800-mile pipeline that helps bring Alaska's oil to the Lower 48, part of a long-running war between Alaska's major oil producers, the state and the local governments that depend on the line for property tax income.

This year the estimates on the pipeline's value range from the $2.7 billion proposed by the pipeline owners -- BP, ConocoPhillips and ExxonMobil -- to the $13.7 billion proposed by the municipalities --the city of Valdez, the Fairbanks North Star Borough and the North Slope Borough -- through which the pipeline runs.

Falling in between is the $5.7 billion value set by the state Department of Revenue, the starting point for a discussion that, if past years are any example, now faces ongoing litigation. Hearing the matter is the State Assessment Review Board, the entity that sets pipeline values and has faced turmoil after it established a record 2013 value at $11.9 billion.

Gone is former chairman Marty McGee, fired by Gov. Sean Parnell in what critics said was an attempt to stack the board in favor of the oil industry. In his place is the new chairman, Jim Mosley, a former oil worker appointed in 2011 by Parnell. This year, Parnell was also successful in appointing another former oilman, Bernard Washington of Anchorage. Parnell failed in an effort to appoint another former oil industry employee to the board, after controversy flared over the man's California residency and he backed out.

Only three of the five governor-appointed seats are currently filled, with 20-year member Michael Salazar, former mayor of the Ketchikan Gateway Borough, rounding out the group.

During opening arguments Monday in the ConocoPhillips building in Anchorage, attorney for the municipalities Robin Brena used Mr. Potato Head to illustrate a key point, saying that the state had accepted some of the court's guidance, but not all of it, to cobble together a low-balled estimate.

"They've taken random ears and noses and put them into one of these little Mr. Potato Heads," Brena told the board.

As for the estimates from the oil companies, not much time should be spent on their figures, Brena said, since they typically "aren't even in the ballpark," with their estimates coming in far below the final values. On the other hand, courts and past decisions by the board have favored the municipalities' arguments, he said.

"I kind of think we've been winning," he said.

State court decisions for tax years 2006 to 2009 have set values between $8.9 billion and $10 billion. A Supreme Court decision earlier this year upheld the Superior Court's 2006 value at $9.98 billion.

Attorneys for the state and oil companies, in separate presentations, argued that the value of the pipeline today should be less than in 2006. Among their arguments, they said the pipeline now carries 43 percent fewer barrels per day -- 503,000 down from 890,000. And, during that time, 2 billion barrels of proven reserves have been transported to market and not replaced.

"Reality check: Depreciating assets are going to be worth less after eight years," said James Torgerson, an attorney with Stoel Rives arguing for the oil companies.

Central to the arguments is the pipeline's estimated end of life, with the state setting the date at 2047, as established by the Superior Court in the 2006 case and upheld by the state Supreme Court. The municipalities argued end of life should be at least 2075, a figure they base partly on a current filing by BP Prudhoe Bay Royalty Trust with the Securities and Exchange Commission.

Brena also pointed out that the state's argument ignores that the Superior Court, with new information for tax years 2007 to 2009, updated the end of life for the pipeline from 2065 to 2068.

Ken Diemer, assistant attorney general for the state, pointed out the case for those tax years is on appeal, while the Supreme Court decision for 2006 is binding. The department "adamantly believes" the Superior Court was wrong in its end of life estimate from 2007 to 2009, he said.

Much of Diemer's argument centered on the role of the board, saying it should be deferential to the state's determination. He spoke at length about the burden of proof that must be met by the appellants -- the owners and municipalities.

Brena, for the municipalities, said he believes the the longer an attorney talks about "burden of proof," the weaker their case is. He said the state is wrong in its view of deference.

"Whatever you decide is what goes to the court, you don't owe that deference to the division," Brena said.

Reach Alex DeMarban at alex@alaskadispatch.com

 


By ALEX DEMARBAN
alex@alaskadispatch.com