FinebergResearch.com -The Oil Patch

News: Anchorage Daily News (Dec 16, 2004, p. A-1)

State protests pipeline price hike
UP TO 28 PERCENT: Officials call rates proposed by oil companies excessive.
By WESLEY LOY

The five energy companies that own the trans-Alaska oil pipeline are proposing excessive rate increases for next year to ship crude oil down the 800-mile line, the state said in a protest filed Wednesday with federal regulators.

The biggest of the pipeline owners, London-based BP, wants to increase its rate from $3.01 per barrel to $3.86, a 28 percent increase, state officials said. The other owners -- Conoco Phillips, Exxon Mobil, Unocal and Koch -- also have proposed substantial rate hikes for 2005.

State officials said they filed the protest because of the big difference in the rates for shipping oil for use within the state and oil that goes to the Lower 48 aboard tankers.

Under a 2002 order from state regulators, the pipeline owners can charge $1.96 per barrel to move oil from Prudhoe Bay to Valdez for oil to be refined in Alaska. Yet they want much more -- up to $3.98 -- to move oil bound for Outside next year.

That means some parties are paying much more than others to have their oil shipped the exact same distance down the pipeline, constituting "discrimination" forbidden under both a 1985 rate agreement between the state and the pipeline owners, as well as under federal interstate commerce law, the state contends

In filing the protest to the Federal Energy Regulatory Commission, however, the state is concerned about much broader issues than just the disparate rates charged for in-state and out-of-state oil shipments, said Alaska Attorney General Gregg Renkes.

Pipeline transportation rates, known as tariffs, are vitally important to the state, which relies heavily on taxes and royalties on oil pumped from beneath state land. It is to the state's advantage if tariffs are as low as possible, because the oil companies deduct those costs from the market price of oil to determine the wellhead price -- the critical point at which the taxes and royalties are calculated.

The bottom line is that each extra dollar in pipeline transportation costs means about $60 million less in annual oil revenue for the state, according to the attorney general's office.

The state also worries that higher pipeline tariffs will discourage oil companies that don't own a share of the pipeline from drilling for new oil discoveries on the North Slope.

Renkes, in an interview Wednesday, said he'd hoped the state wouldn't need to file the protest. He said the state and the oil companies had been trying to negotiate a new pipeline rate agreement to either replace or succeed the 1985 deal, which doesn't expire until 2009.

"Unfortunately, we were not able to do that," he said. "We worked hard, no one's really at fault, but it's a very difficult subject."

It is not the pipeline owners' preference to charge less to ship oil for in-state users, including refineries at Fairbanks, Nikiski and Valdez. The owners have appealed the Regulatory Commission of Alaska's 2002 determination that their in-state tariffs were excessive.

The RCA regulates in-state pipeline tariffs, while the FERC regulates tariffs on outbound oil.

Representatives for BP and Conoco, which together own about 75 percent of the pipeline, said Wednesday the out-of state tariffs that they are proposing for next year are fair and proper.

Conoco spokeswoman Dawn Patience said her company's proposed tariff reflects, in part, a lower than expected flow of oil down the pipeline recently, raising costs per barrel shipped.

BP spokesman Daren Beaudo said some years his company's tariff has dropped, not risen. He said next year's proposed tariff was calculated precisely under the 1985 agreement to cover the company's pipeline operating costs plus provide a profit.

He said BP considers a $250 million pipeline modernization project now under way to be operating or capital costs that can be fairly recouped by tariff increases. He also said BP is entitled to collect higher tariffs on outbound oil to offset the lower revenue on in-state oil shipments.

The state disagrees with that. Because the overhaul of the pipeline, which went into service in 1977, involves shutting down some pump stations and buildings that are no longer needed, it is at least partly a dismantlement project. Because the owners, from the start, have been charging oil shippers a fee to cover the eventual cost of removing the pipeline once the North Slope oil fields are drained out, they shouldn't be allowed to collect again for that purpose with higher tariffs next year, Renkes said.

State officials currently are trying to hammer out a deal with BP, Conoco and Exxon that would set tax and other terms for building a huge Alaska natural gas pipeline. It's one of the state's most coveted economic development projects. Renkes is part of those negotiations, but he said Wednesday he doesn't think the state's oil tariff protest will alienate the oil companies.

"We can't bring those kinds of considerations into defending the state's rights," he said.

Lowering the oil tariff is important not only to ensure fair rates for all oil shippers and to boost state revenue, but also to encourage exploratory drilling on the North Slope, Renkes said.

Daily News reporter Wesley Loy can be reached
at wloy@adn.com or 257-4590.

_________

News: Petroleum News (June 12, 2005, p. 8)

Trans-Alaska pipeline worth $3 billion
State review board upholds Revenue's decision regarding value of TAPS, keeps line's value at about same level as last four years

By Matt Volz
Associated Press Writer

It's pumping half the oil it did in its prime, and tariffs could drop sharply in the coming years, but the Trans-Alaska Pipeline System is still worth $3 billion, according to a state review board.

The five oil companies that own the 800-mile pipeline had appealed that assessment by the Alaska Department of Revenue, which this year changed the way it values the pipeline in figuring the property tax owed.

The owners say under the method used previously - basing the assessment on tariff income - the pipeline's value is actually $1.5 billion.

The local governments through whose land the pipeline runs also appealed the state's assessment, but took the opposite line: The state's price tag is as much as $11 billion short of the real value.

The Department of Revenue's number was upheld recently by the State Assessment Review Board, keeping the pipeline's value at about the same level as it has the past four years.

Taxes the reason for dispute

The reason for the dispute is taxes. Upholding the $3 billion assessment for 2005 means the pipeline owners will have to pay $60 million in property taxes to be split between the state, five municipalities and the North Slope Borough.
"The last time it went to a hearing was four years ago," said Dan Dickinson, Tax Division director. "All the parties agreed looking at it, the revenue stream was the way to go.

"This year when we looked at it, we said there is a good chance for a reduction in tariffs."

If tariffs are reduced in 2009, when a settlement expires in calculating those fees, the property tax would go down using that method of calculation, Dickinson said.

Because of that possibility, the division used a new way of calculating the pipeline's value. Using that method, the value is based on how much it would take to replace the entire pipeline system, minus the cost of depreciation.
The division figures the oil pipeline is about halfway through its life, and is expected to last until 2034, according to Randy Hoffbeck, state petroleum property assessor.

The review board said continuing to use tariff income as the basis for the assessments would "understate the full value of the TAPS."

"The board agreed with the division that valuation of the TAPS based on its tariff income stream is likely to become less and less reliable as an indicator of the TAPS' full and true value," wrote board chairman Steven Van Sant in the May 26 decision.

Appeal possible

Daren Beaudo, spokesman for BP Exploration (Alaska), said since 2001, there has been depreciation and a reduction in oil flowing through the pipeline, pointing to a lower overall value of the pipeline. He said the company stands by its $1.5 billion assessment, but has not decided whether to pursue the appeal in court.

"We're challenging the appraised value just as homeowners have the right to challenge the appraised value of their homes," Beaudo said.

Dawn Patience, spokeswoman for ConocoPhillips Alaska, said ConocoPhillips also believes the $1.5 billion is the appropriate appraisal, but declined to go into details, saying it was "an ongoing dispute."

The municipalities' assessments, which ranged from $8.9 billion to $13.9 billion, includes costs the state kept out of its assessment - road and bridge construction, legal fees, program management and other costs. The municipalities also argued that the pipeline's life is through 2040, not 2034.

The review board said the state did nothing wrong in excluding those costs, but the division should review the 2040 date in future assessments.

		[The Oil Patch] Trans-Alaska Pipeline System: Economics Trans-Alaska Pipeline System: Environment Reports and Research Memoranda [Archives] About Richard A. Fineberg Contact Information Home Page
	(Archived February 7, 2007) *Trans-Alaska Pipeline System: Economics* (This section was last updated June 17, 2005) Recent Articles on Trans-Alaska Pipeline Tariff Issues June 2005 The principal reason that pipeline tariffs (shipping charges) are regulated in the United States is to ensure that would-be shippers have equal access to the pipeline on just and reasonable terms. Otherwise, unscrupulous owners might gain unfair advantage over competitors by over-charging non-affiliates or offering reduced rates to their partners.* Since its discovery nearly four decades ago, the Prudhoe Bay complex (the largest petroleum discovery in the history of the United States) has been controlled by three major oil companies: BP (which bought a major interest in Standard of Ohio in 1970), ConocoPhillips (Phillips merged with Conoco shortly after acquiring ARCO’s Alaska interests in 2000) and ExxonMobil (the product of a 1999 merger). Together, these three companies control more than 90 percent of North Slope production; the same companies own a similar share of their pipeline link to market, the 800-mile Trans-Alaska Pipeline System (TAPS). Most of the oil carried by TAPS goes the Lower-48. Because it is interstate commerce, the tariff on that oil is regulated by the Federal Energy Regulatory Commission (FERC). In 1985 (eight years after start-up of Prudhoe Bay and TAPS) FERC approved a complex set of formulae for recalculating TAPS tariffs annually. The small percentage of TAPS oil destined for in-state refineries falls under the jurisdiction of the Regulatory Commission of Alaska (RCA; formerly Alaska Public Utilities Commission [APUC]). With a regulatory tradition of applying standard utility rate-making conventions to petroleum pipelines, the RCA’s predecessor displayed little enthusiasm for the hybrid methodology. When it eventually approved the settlement in a 3-2 decision in 1993, the state commission specified that future shippers could challenge the settlement terms negotiated by the TAPS owners and the State of Alaska’s Department of Law. In 1997 independent shipper Tesoro Petroleum challenged TAPS tariffs set under the 1985 settlement formula. Five years later, in November 2002 the RCA issued a 486-page order that concluded that TAPS tariffs were grossly excessive and ordered tariff reductions for the small percentage of TAPS oil under its jurisdiction. The TAPS owners challenged the decision in court and continued using the 1985 tariff methodology, resulting in a second RCA order in June 2004 upholding the original decision. (For press on the second order, see archived TAPS tariff articles.) In December 2004, the TAPS owners filed 2005 tariffs of $3.76 per barrel - a 25% increase over 2004 rates. Anadarko Petroleum, a North Slope shipper, and the State of Alaska both challenged the tariff increase at FERC (see article below). The state's protest is particularly noteworthy, since the state has usually defended the industry's overall tariff structure, limiting its challenges to technical implementation issues. On another front of the TAPS economic wars, municipalities and the TAPS owners have both challenged the Alaska Department of Revenue (ADOR) valuation of TAPS for property tax purposes. The State Assessment Review Board (SARB) held a hearing on the issue and affirmed ADOR valuation at $3.0 billion. That figure - which results in an oil and gas property tax of $60.0 million per year - is almost identical to the valuation assigned by SARB four years ago. (see second article below). ------- * The history of the Standard Oil trust demonstrated the necessity for pipeline rate regulation. After the discovery of oil in 1857, the Rockefeller trust employed a wide range of discriminatory practices to choke and then take over its competitors. The break-up of the Rockefeller combine by President Theodore Roosevelt in 1911 (40 years after the first antitrust legislation was enacted) created some of the titans of the U.S. oil industry, including the Standard Oil companies of New Jersey (Esso/Humble/Exxon), New York (Mobil), California (Chevron) and Indiana (Amoco). Fifty-seven years later, the smallest Rockefeller combine spin-off of 1911, Standard of Ohio (“Sohio”) and Atlantic Richfield (an independent firm drilling on a joint venture with Exxon), hit oil at Prudhoe Bay.



	*News: Anchorage Daily News* *(Dec 16, 2004, p. A-1)* State protests pipeline price hike UP TO 28 PERCENT: Officials call rates proposed by oil companies excessive. By WESLEY LOY The five energy companies that own the trans-Alaska oil pipeline are proposing excessive rate increases for next year to ship crude oil down the 800-mile line, the state said in a protest filed Wednesday with federal regulators. The biggest of the pipeline owners, London-based BP, wants to increase its rate from $3.01 per barrel to $3.86, a 28 percent increase, state officials said. The other owners -- Conoco Phillips, Exxon Mobil, Unocal and Koch -- also have proposed substantial rate hikes for 2005. State officials said they filed the protest because of the big difference in the rates for shipping oil for use within the state and oil that goes to the Lower 48 aboard tankers. Under a 2002 order from state regulators, the pipeline owners can charge $1.96 per barrel to move oil from Prudhoe Bay to Valdez for oil to be refined in Alaska. Yet they want much more -- up to $3.98 -- to move oil bound for Outside next year. That means some parties are paying much more than others to have their oil shipped the exact same distance down the pipeline, constituting "discrimination" forbidden under both a 1985 rate agreement between the state and the pipeline owners, as well as under federal interstate commerce law, the state contends In filing the protest to the Federal Energy Regulatory Commission, however, the state is concerned about much broader issues than just the disparate rates charged for in-state and out-of-state oil shipments, said Alaska Attorney General Gregg Renkes. Pipeline transportation rates, known as tariffs, are vitally important to the state, which relies heavily on taxes and royalties on oil pumped from beneath state land. It is to the state's advantage if tariffs are as low as possible, because the oil companies deduct those costs from the market price of oil to determine the wellhead price -- the critical point at which the taxes and royalties are calculated. The bottom line is that each extra dollar in pipeline transportation costs means about $60 million less in annual oil revenue for the state, according to the attorney general's office. The state also worries that higher pipeline tariffs will discourage oil companies that don't own a share of the pipeline from drilling for new oil discoveries on the North Slope. Renkes, in an interview Wednesday, said he'd hoped the state wouldn't need to file the protest. He said the state and the oil companies had been trying to negotiate a new pipeline rate agreement to either replace or succeed the 1985 deal, which doesn't expire until 2009. "Unfortunately, we were not able to do that," he said. "We worked hard, no one's really at fault, but it's a very difficult subject." It is not the pipeline owners' preference to charge less to ship oil for in-state users, including refineries at Fairbanks, Nikiski and Valdez. The owners have appealed the Regulatory Commission of Alaska's 2002 determination that their in-state tariffs were excessive. The RCA regulates in-state pipeline tariffs, while the FERC regulates tariffs on outbound oil. Representatives for BP and Conoco, which together own about 75 percent of the pipeline, said Wednesday the out-of state tariffs that they are proposing for next year are fair and proper. Conoco spokeswoman Dawn Patience said her company's proposed tariff reflects, in part, a lower than expected flow of oil down the pipeline recently, raising costs per barrel shipped. BP spokesman Daren Beaudo said some years his company's tariff has dropped, not risen. He said next year's proposed tariff was calculated precisely under the 1985 agreement to cover the company's pipeline operating costs plus provide a profit. He said BP considers a $250 million pipeline modernization project now under way to be operating or capital costs that can be fairly recouped by tariff increases. He also said BP is entitled to collect higher tariffs on outbound oil to offset the lower revenue on in-state oil shipments. The state disagrees with that. Because the overhaul of the pipeline, which went into service in 1977, involves shutting down some pump stations and buildings that are no longer needed, it is at least partly a dismantlement project. Because the owners, from the start, have been charging oil shippers a fee to cover the eventual cost of removing the pipeline once the North Slope oil fields are drained out, they shouldn't be allowed to collect again for that purpose with higher tariffs next year, Renkes said. State officials currently are trying to hammer out a deal with BP, Conoco and Exxon that would set tax and other terms for building a huge Alaska natural gas pipeline. It's one of the state's most coveted economic development projects. Renkes is part of those negotiations, but he said Wednesday he doesn't think the state's oil tariff protest will alienate the oil companies. "We can't bring those kinds of considerations into defending the state's rights," he said. Lowering the oil tariff is important not only to ensure fair rates for all oil shippers and to boost state revenue, but also to encourage exploratory drilling on the North Slope, Renkes said. Daily News reporter Wesley Loy can be reached at wloy@adn.com or 257-4590. _________ *News: Petroleum News* *(June 12, 2005, p. 8)* Trans-Alaska pipeline worth $3 billion State review board upholds Revenue's decision regarding value of TAPS, keeps line's value at about same level as last four years By Matt Volz Associated Press Writer It's pumping half the oil it did in its prime, and tariffs could drop sharply in the coming years, but the Trans-Alaska Pipeline System is still worth $3 billion, according to a state review board. The five oil companies that own the 800-mile pipeline had appealed that assessment by the Alaska Department of Revenue, which this year changed the way it values the pipeline in figuring the property tax owed. The owners say under the method used previously - basing the assessment on tariff income - the pipeline's value is actually $1.5 billion. The local governments through whose land the pipeline runs also appealed the state's assessment, but took the opposite line: The state's price tag is as much as $11 billion short of the real value. The Department of Revenue's number was upheld recently by the State Assessment Review Board, keeping the pipeline's value at about the same level as it has the past four years. Taxes the reason for dispute The reason for the dispute is taxes. Upholding the $3 billion assessment for 2005 means the pipeline owners will have to pay $60 million in property taxes to be split between the state, five municipalities and the North Slope Borough. "The last time it went to a hearing was four years ago," said Dan Dickinson, Tax Division director. "All the parties agreed looking at it, the revenue stream was the way to go. "This year when we looked at it, we said there is a good chance for a reduction in tariffs." If tariffs are reduced in 2009, when a settlement expires in calculating those fees, the property tax would go down using that method of calculation, Dickinson said. Because of that possibility, the division used a new way of calculating the pipeline's value. Using that method, the value is based on how much it would take to replace the entire pipeline system, minus the cost of depreciation. The division figures the oil pipeline is about halfway through its life, and is expected to last until 2034, according to Randy Hoffbeck, state petroleum property assessor. The review board said continuing to use tariff income as the basis for the assessments would "understate the full value of the TAPS." "The board agreed with the division that valuation of the TAPS based on its tariff income stream is likely to become less and less reliable as an indicator of the TAPS' full and true value," wrote board chairman Steven Van Sant in the May 26 decision. Appeal possible Daren Beaudo, spokesman for BP Exploration (Alaska), said since 2001, there has been depreciation and a reduction in oil flowing through the pipeline, pointing to a lower overall value of the pipeline. He said the company stands by its $1.5 billion assessment, but has not decided whether to pursue the appeal in court. "We're challenging the appraised value just as homeowners have the right to challenge the appraised value of their homes," Beaudo said. Dawn Patience, spokeswoman for ConocoPhillips Alaska, said ConocoPhillips also believes the $1.5 billion is the appropriate appraisal, but declined to go into details, saying it was "an ongoing dispute." The municipalities' assessments, which ranged from $8.9 billion to $13.9 billion, includes costs the state kept out of its assessment - road and bridge construction, legal fees, program management and other costs. The municipalities also argued that the pipeline's life is through 2040, not 2034. The review board said the state did nothing wrong in excluding those costs, but the division should review the 2040 date in future assessments.