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Multibillion-dollar tax dispute resumes over value of Alaska pipeline

  • Author: Dermot Cole
    | Opinion
  • Updated: September 28, 2016
  • Published May 18, 2015

An annual multibillion-dollar debate between oil companies and local municipalities about differences in the taxable value of the trans-Alaska pipeline resumed in Anchorage Monday.

The oil companies argue the 38-year-old pipeline is worth $2.6 billion, while the municipal governments of the North Slope, Valdez and Fairbanks say it is worth about six times that much, in large part because billions of barrels of profitable oil remain to be pumped to Valdez in the decades ahead. The state is arguing for a value three times higher than that favored by the companies.

The state collects a 20-mill property tax and the ultimate decision on pipeline value determines how much the companies have to pay in taxes, and how the money is split between the state and local governments.

The State Assessment Review Board, a five-member committee set up to hear appeals in the property tax assessment process, is meeting in Anchorage to hear the competing estimates on the value of the pipeline. The SARB generated more than the usual level of political interest a year ago after former Gov. Sean Parnell criticized its pipeline valuation decisions as excessive and said the pipeline should be valued lower than it had been in the past.

The state Department of Revenue now puts the current value at $7.7 billion, up $2 billion from the Parnell administration's numbers a year ago. Offering a more optimistic future forecast, the administration of Gov. Bill Walker says the line should be economic to operate until 2068. The Parnell administration had predicted it would ship its last barrel in 2047.

The SARB eventually settled on a 2014 value of $10.2 billion. The Walker administration's number falls between what the Parnell administration said the pipeline was worth a year ago and what the SARB concluded after its 2014 hearing.

For many years, the oil companies have pushed for a lower valuation, which means lower property taxes. The municipal governments, which relay heavily on pipeline taxes, have long argued for much higher values.

They say the oil companies are low-balling the pipeline value and not counting hundreds of billions of dollars worth of established North Slope oil reserves that will be shipped at a profit for decades to come. The companies say that oil prices are down, the pipeline is old and it won't be able to operate at low-flow levels without "billions" in future investments.

The governments and the companies use a variety of statistical measures to make their cases, ranging from the replacement cost of the pipeline and the size of oil reserves, to the condition of pipeline facilities. The board is called upon to hear disputes about the assessment, though its deliberations have typically been one stop along the way to a complicated battle in the courts.

One of the central questions is how long the pipeline will be economically viable. The companies said the value should drop because "the utilization of the pipeline declines each year" and there is more excess capacity.

The Walker administration concluded that the pipeline could last until 2068, based on current information about oil reserves. A year ago the state said 2047 would be the final year for pipeline operations. It had used 2042 to 2047 as the estimate since a trial on pipeline value in 2009.

"In view of the falling price of crude oil, it is incomprehensible for there to be a longer reserve life today than there was in 2009," the oil companies said.

While the municipal governments asserted that the oil companies have failed "to provide the most accurate information on oil reserves" and what it would take to adjust pipeline operations for reduced flow, the companies said it is not their responsibility to provide that.

The subsidiaries of BP, Exxon Mobil and ConocoPhillips that own the pipeline said there is "no basis for such a contention" because they don't have information about oil reserves.

The companies said oil reserve information is the province of other parts of BP, Exxon Mobil and ConocoPhillips. The subsidiaries that own the Alyeska Pipeline Service Co. are "pipeline companies, not exploration and production companies who develop reserves information."

The companies also said that in a case before the Alaska Supreme Court, which dates from the Parnell administration, the state is challenging oil reserve numbers that it now is defending before the SARB.

The municipal governments say that the pipeline could last until 2100 "if no artificial minimum throughput limit is imposed." Production that year, from current reserves, could average 41,000 barrels a day, with a positive net income of $5.15 billion, the governments argue.

The companies say that 300,000 barrels per day is the correct minimum throughput. To go lower than that could cost billions, they said.

The companies also argue that the state estimates a peak future production of 534,100 barrels a day in 2017, and that -- along with prices and the failure to find new reserves -- shows why the end of the economic life of the pipeline should not be extended until 2068. The companies said that "all things being equal," it would make sense to give the pipeline an even shorter life expectancy than the 2047 estimate used by the Parnell administration in 2014.

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