A federal agency has ruled that the oil-company owners of the trans-Alaska pipeline had so badly managed an upgrade project, they can't recover their costs by charging higher fees for moving oil, a decision that could save the state and independent producers hundreds of millions of dollars over the life of the pipeline.
The "imprudently" managed project to update four pump stations and control systems along the 800-mile line, known as Strategic Reconfiguration, lasted years longer and cost hundreds of millions dollars more than anticipated, said the Federal Energy Regulatory Commission in a 67-page decision issued last week.
The ruling means the pipeline's oil company owners, primarily BP, ConocoPhillips and ExxonMobil, will collect at least $1.5 billion less in rates than they otherwise would have collected in the decades to come, said Robin Brena, lead counsel for prevailing parties Anadarko Petroleum and Tesoro Alaska, two companies that don't own a piece of the Trans-Alaska Pipeline System.
The lower rates, roughly estimated at 20 percent, will help refiners and independent producers and shippers, a group that currently includes refiner Tesoro, as well as Anadarko, a minority partner in ConocoPhillips' Alpine field, and others, such as North Slope newcomer Hilcorp Alaska.
The state will also benefit to the tune of about $500 million in additional revenues because lower rates mean lower transportation costs that the oil companies can deduct from royalty and severance taxes paid to the state, Brena said.
"It increases the value of the resource and opens up the basin for independents," said Brena.
All four commissioners heard the case, affirming the finding of imprudent management in a 542-page decision by a FERC administrative law judge in 2014 that was appealed by the pipeline owners.
Spokespeople with BP and ConocoPhillips said the ruling is under review and did not provide further comment. ExxonMobil had no comment.
The case is expected to be appealed to the U.S. District Court of Appeals in Washington, D.C., which could lead to a stay on the FERC decision, said Ed Sniffen, chief assistant attorney general for the state's Regulatory Affairs and Public Advocacy section.
"Overall we're pleased with the outcome," Sniffen said. "This is certainly a win for the state and the independent shippers."
The case was also heard by the Regulatory Commission of Alaska, which sets transportation rates, or tariffs, for oil shipped in state. The federal agency sets rates for oil shipped between states.
Brena said he expects the RCA to issue a similar decision, because the cases were heard with both commissions sitting together.
The decision, if not overturned by the courts, means the trans-Alaska pipeline owners won't be able to recover some $600 million in capital costs by charging higher rates to move the oil, said Brena.
It also sets a precedent, making it less likely another $200 million to $300 million in disputed capital costs can be collected through higher rates, he said.
The decision also does not allow the collection, through higher rates, of hundreds of millions of dollars more related to return on investment and taxes, Brena said.
The commission called the overhaul, involving the electrification of pump stations and control systems that had long been powered by gas and diesel turbines, the biggest update in the history of the 38-year-old TAPS.
Despite the importance of the project, though, the owner companies did not act as a "reasonable manager" with meaningful evaluation of the costs and benefits before the spending began.
The project began in late 2003 with a two-year completion date, but it won't be wrapped up until 2016. The initial cost estimate of $242 million more than tripled as the project dragged on.
A remedy approved by the commission, and proposed by Anadarko and Tesoro, calls for rates to allow the recovery of $229 million of the initial estimate.
The errors in the project included the appointment of an inexperienced project manager in the rush to launch, and a lack of scrutiny related to actual costs and the work involved.
The owners ignored internal criticism from numerous engineers with Alyeska Pipeline Service Co. and the pipeline owners -- including one who dubbed the process a "train wreck."
A bungled initiation tainted "subsequent decisions with still further costs as design flaws were corrected." New mistakes also arose as the project continued, with subsequent funding decisions based in part on limited planning, said the ruling.
The commissioners rejected several arguments from the oil company owners, including that they "prudently" estimated the projects benefits, such as reducing personnel and major maintenance expenses by up to $1.4 billion over 20 years.
The commissioners challenged claims that more than 250 positions had been eliminated as a result of the project, noting that overall workforce numbers remained slightly above 800 over the long-term and reveal a "far more muddled narrative."
Pipeline operator Alyeska, owned almost entirely by BP, ExxonMobil and ConocoPhillips, is not a party in the case. But Alyeska employees have worked on the project, along with employees loaned by the oil companies, said Michelle Egan, communications director for Alyeska.
Egan said there are several reasons the project has taken so long, but a key factor was the decision to modernize each pump station one at a time to take advantage of lessons learned before moving to the next station.
She said the update to the last pump station at the start of the line in Prudhoe Bay will be wrapped up next year.
The benefits of the project include remote operations of the pump stations from Alyeska's control center in Anchorage, as well as greater flexibility and control for managing the flow of crude oil, she said.
"At the end of the day we have four pump stations with new, updated power systems that allow us to manage for the future," said Egan. "These are more efficient ways to handle the (oil) throughput, regardless of how long it took."
Brena said the original decision by the administrative law judge found just the opposite in 2014.
"As a result of this project, TAPS is less efficient, less operationally flexible and they have less control of the system than they did before the project," he said.
As part of the case, FERC staff had urged the commission to consider several remedies, even allowing the oil company owners to recover none of the project costs. The commission rejected that idea.
Although "difficult to quantify, we find it implausible that there are absolutely no benefits from the (Strategic Reconfiguration) project, which installed new equipment related to several aspects of the TAPS system," the commission said.
Alaska Dispatch Publishing