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Cook Inlet oil pipeline shipping rate increase challenged

  • Author: Eric Lidji
  • Updated: September 28, 2016
  • Published December 28, 2014

The Cook Inlet pipeline is once again causing consternation for a small oil producer.

Cook Inlet Energy LLC is asking state regulators to evaluate the merits of a proposed 19.3 percent increase in shipping rates along the 42-mile Cook Inlet oil pipeline.

The pipeline runs along the west coast of Cook Inlet, moving oil from the Granite Point, McArthur River, Redoubt Shoal and Trading Bay fields to the Drift River Marine Terminal. Cook Inlet Pipe Line Co., which owns the pipeline and the terminal, recently asked the Regulatory Commission of Alaska for permission to increase the shipping rate on the pipeline to $3.76 per barrel, up from $3.15 per barrel.

Cook Inlet Energy operates the Redoubt unit and the West McArthur River unit, both of which are entirely dependent on the Cook Inlet pipeline system to reach market.

The only other shipper on the pipeline is Hilcorp Alaska LLC, which also owns the pipeline and marine terminal through its transportation subsidiary Harvest Alaska LLC.

In late 2009, shortly after Cook Inlet Energy began operations, Cook Inlet Pipe Line Co. proposed a 259 percent increase in its shipping rates to compensate for damage caused by a series of volcanic eruptions at the nearby Mount Redoubt. Cook Inlet Energy challenged the increase, leading to nearly a year of regulatory wrangling.

The two sides reached a settlement in late 2010. The deal created a formula for determining future rates and committed Cook Inlet Energy to ship certain volumes.

The settlement expires at the end of this year.

At the time of the settlement, Cook Inlet Pipe Line Co. was a joint venture between Union Oil Co. of California and Pacific Energy Alaska Holdings. Hilcorp acquired the Unocal interests in early 2012 and the Pacific Energy interests in early 2013.

Cook Inlet Energy is challenging four aspects of the proposed increase.

First, Cook Inlet Energy questions whether Cook Inlet Pipe Line Co. should continue to be exempt from certain financial reporting requirements when it requests rate increases.

The exemption comes from a 2001 settlement between the pipeline and the state.

The state agreed to the exemption, in part, because the only shippers on the pipeline, at the time, were affiliates of Cook Inlet Pipe Line Co., and also because the state and the company expected the pipeline to reach the end of its useful life in about 2006.

Both of those factors have since changed.

For starters, Cook Inlet Energy has become an important customer on the pipeline system and expects production growth to continue from its two west side oil properties.

Additionally, in 2009, the state and the company pushed the useful life of the pipeline out to 2014. Earlier this year, the parties pushed the useful life of the pipeline out to 2021.

For those reasons, Cook Inlet Energy wants the Regulatory Commission of Alaska to require Cook Inlet Pipe Line Co. to end the exemption and provide the financial information.

Second, Cook Inlet Energy questions a surcharge added to shipping rates.

The 2009 agreement also allowed Cook Inlet Pipe Line Co. to collect a 60-cent per barrel surcharge on its rates to cover the cost of DR&R, or dismantlement, removal and restoration, which funds transitions when an industrial facility reaches the end of its life.

Given the recent decision to extend the life of the pipeline, Cook Inlet Energy questions whether the surcharge remains applicable and wants specific DR&R cost projections.

Third, Cook Inlet Energy wants regulators to figure out whether large capital expenditures on the pipeline in recent years should be included in shipping rates.

Specifically, Cook Inlet Energy wants to know whether Cook Inlet Pipe Line Co. is trying to recover the cost of upgrades or maintenance related to the Mount Redoubt eruptions, and, if so, whether those costs should be included in shipping rates.

The final concern might be a technical matter.

Even though oil throughput increased this past year, Cook Inlet Pipe Line Co. is projecting a decrease in annual revenues under the proposed increase in shipping rates.

Cook Inlet Energy wants the company to explain the confusion.

This story originally appeared in Petroleum News and has been republished with permission.

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