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Tesoro joins Cook Inlet Energy plan to build Inlet pipeline

Posted: November 25, 2013 - 10:25pm

Cook Inlet Energy is now working with Tesoro Corp. on its plans for a new 8-inch pipeline across Cook Inlet, a company official said Nov. 15.

An agreement with Tesoro on how the project would be owned and financed is being negotiated by the two companies, said David Hall, CEO of Cook Inlet Energy LLC, a subsidiary of Miller Energy Resources, a Tennessee-based independent.

The project would allow Cook Inlet Energy to move crude oil by pipeline from the company’s producing wells on the Inlet’s west side to Tesoro’s refinery at Nikiski, on the Inlet’s east side.

The company now ships its oil by pipeline to the Drift River terminal on the west side. Tesoro moves it by shuttle-tanker across the Inlet to the refinery.

Tesoro spokesman Matt Gill confirmed his company’s interest but said no final decisions have been made.

A revised application to build the project by Trans-Foreland Pipeline Co. LLC was filed in late October with the Alaska State Pipeline Coordinator’s office, with Tesoro listed as applicant. A two-month public review of the application is now underway, said Allison Iverson, acting director of the agency. The new application revises the application filed a year ago by Cook Inlet Energy, she said.

Hall said that although Tesoro is taking the lead on the permit application, the agreement on how the pipeline ownership will be structured is still pending.

If that comes together, “we hope to begin construction sometime in mid to late 2014,” Hall said.

Cook Inlet Energy is interested in lowering transportation costs and improving safety for moving crude oil from west to east, Hall has said previously. The company also believes there is substantial potential for new oil to be found on the west side of Cook Inlet, and that a pipeline is a best long-term method to move that oil, Hall said.

The pipeline would be 29 miles in length and would run from the Kustatan Production Facility on the Inlet’s west side to the Kenai Pipeline Co. tank farm and Tesoro’s refinery on the east side.

Hall said Cook Inlet Energy now produces about 2,100 barrels per day at its Osprey offshore platform on the Inlet’s west side and an additional 700 barrels per day of oil equivalent (oil and gas combined) at onshore wells the company operates in the West MacArthur River field.

Meanwhile, Hilcorp Energy, which is also a west Cook Inlet producer and also operator of the pipeline and Drift River terminal, says it isn’t yet ready to be part of the cross-Inlet pipeline.

“There are still too many commercial and regulatory uncertainties for Hilcorp to join the project,” with Tesoro and Cook Inlet, said Lori Nelson, Alaska spokeswoman for Hilcorp.

Hilcorp brought the 40-year-old Drift River terminal and two large crude oil storage tanks there back into operation in late 2012 after it had been shut down since being flooded in 2009 after the eruption of the nearby Redoubt volcano, which is still active.

Hilcorp took the terminal over from Chevron Corp., the previous owner. Nelson said some of Hilcorp’s questions about the project are:

■ Will it reduce transportation costs for the shippers?

■ Does it reduce the risk of business interruption?

■ Will it affect Hilcorp’s ability to sell its product to a competitive market?

Nelson said her company also has yet to see any “hard-line studies” that prove a pipeline would be a safer transportation method than a tanker. She noted that Hilcorp has a safe track record with transporting oil in the Inlet.

“We’re being very cautious in involving ourselves in this process because we do want it to be based on sound science and research rather than a knee-jerk reaction to what may be a better option for the company,” Nelson said.

However, Hilcorp’s door is open for conversation with Tesoro and Cook Inlet Energy, Nelson said.

The pipeline has the support of local communities and conservation groups. The Cook Inlet Regional Citizens Advisory Council, or CIRCAC, a federally-chartered watchdog group of municipalities and citizens, feels the pipeline is a safer alternative than the terminal and tanker shuttle operation because of the possibility of tanker spills and future volcanic activity at Redoubt, the council said in a report.

CIRCAC supports the project, and sees it as a safer method of oil transportation than by tanker across the Inlet, said Jerry Rombach, director of the organization.

He noted collisions with docks or ice as safety concerns that could force a tanker off a dock during loading or unloading. Such incidents have happened in Cook Inlet. Rombach also mentioned onboard fires and tank ruptures that as additional concerns with tankers.

“Anything we can do to eliminate or reduce that risk, we want to see happen,” Rombach said.

Following a Hilcorp June 2012 presentation to return up to two Drift River Oil Terminal storage tanks to normal service at the Christy Lee platform, CIRCAC responded with a July 2012 paper. The council stated it would prefer the company replace its terminal and tankers with a pipeline. CIRCAC supported the request to reopen the terminal with conditions that the requested pipeline is constructed within five years.

“We fully support the negotiations that would bring Hilcorp into some kind of partnership or some user relationship when the pipeline is built so that we don’t have that trans-foreland navigation issue any longer,” Rombach said.

The 8-inch pipeline is designed with a transport capacity of 62,600 barrels per day. It is estimated to last 30 years, in coordination with the proposed lease, after which it would be evaluated for useful life, according to the project description.

In its application, Trans-Foreland estimates about 130 construction jobs would be filled and 12 positions would be created to run the pipeline.

Materials for the pipeline are estimated to cost $15 million and construction and installation is estimated at $35 million. Operation and maintenance is estimated at $5.2 million annually.

Tim Bradner can be reached at tim.bradner@alaskajournal.com. Kaylee Osowski of the Peninsula Clarion contributed to this article.

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