Pipeline issue a challenge for new administration

Posted: Tuesday, December 31, 2002

ANCHORAGE (AP) -- Alaska would collect about $110 million more each year if shipping charges for the trans-Alaska oil pipeline were cut to match a recent decision by state regulators.

A lower pipeline charge would also provide a huge boost for new exploration on the North Slope.

''It towers over any incentives the state could rationally do,'' says Mark Myers, head of the state's oil and gas division. ''It's every barrel, and it's long-term.'' The rate cut would amount to about $1.50 a barrel, Myers said.

For the new governor, it's an intriguing challenge.

''Clearly, there are significant implications whichever way you turn,'' said John Manly, a spokesman for Gov. Frank Murkowski.

''They're still sorting out what the state's options are,'' he said. ''By the middle of January, he will have identified his approach to this.''

Some legislators think the decision by the Regulatory Commission of Alaska could open the door for the state to renegotiate pipeline rates before a long-term settlement agreement ends in 2011. The commission ruled last month that in-state rates for 1997 through 2000 were 57 percent too high. That came after two refiners, Tesoro and Williams, filed a challenge.

''There is huge leverage associated with this if the administration chooses to exercise it,'' said Rep. Jim Whitaker, a Fairbanks Republican.

An independent producer such as Anadarko, or a refiner, could also ask federal regulators to look at the rates.

''There are multiple third parties with an interest,'' said Myers of the oil and gas division. ''It's logical one of those would go to FERC (the Federal Energy Regulatory Commission).''

Lower transportation costs could trigger a new wave of oil development, both Whitaker and Myers say.

''It's a full, integrated lower cost on your balance sheet. It's monumental if it applies to interstate rates,'' Myers said. More than 90 percent of Alaska's oil is carried out of state in tankers.

If pipeline charges are lowered, an independent company pumping oil from the North Slope can sell it on the West Coast for the prevailing rate, but pocket an additional dollar and a half a barrel.

''Lower tariffs are better for wellhead values. There's no doubt about it,'' said state oil economist Chuck Logsdon.

In addition, the state collects its royalties and severance taxes after pipeline and other transportation charges are deducted.

Alaska's share is about 20 cents on the dollar. So cutting shipping charges by a dollar and a half a barrel -- or roughly $550 million a year -- would increase the state's take by $110 million annually.

About $77 million would go to the general fund, $33 million to the Alaska Permanent Fund.

The big companies that own virtually all of the pipeline, BP, ConocoPhillips and Exxon Mobil, benefit from high pipeline charges. The owners effectively pay themselves to move their own oil. So there's no incentive to reduce rates. Especially because for every dollar they charge, they pocket 20 cents that otherwise would go to the state.

Just how much profit do pipeline owners collect for transporting oil? The Regulatory Commission of Alaska determined that through 1996, the pipeline generated $9.9 billion beyond the profit that standard ratemaking rules would allow. If that figure is correct, the state lost about $2 billion.

While pipeline owners benefit from high shipping rates, others lose. High pipeline rates have been a huge drag for non-owner producers, who have beaten a path out of Alaska over the years.

Back in 1993, Conoco traded out its interest in the Milne Point field, which it had discovered. Executives said then that the company's profits at Milne Point were being sucked up by the cost of moving crude to Valdez.

''Other folks who have looked at expanding their exploration up here have really balked at TAPS, and the captive tanker fleet,'' Myers said. ''It's been something we've had our eye on for a long time. The governor wants to grow production. To do that, he needs more capital on the slope.'' Lower pipeline charges could attract that capital.

Pipeline charges have been set in recent years based on a 1985 settlement negotiated during the administration of Gov. Bill Sheffield. That settlement runs through 2011.

But all agreements are subject to renegotiation, Whitaker said. The state would have leverage to extract concessions from the industry at such junctures as the BP merger, or the renewal of the pipeline right of way last month.

''The fact is, these are major players and they interact with the state on many levels,'' said Robin Brena, a lawyer who represented Tesoro Alaska Co. for the in-state rate case. ''I don't think the state's hand's are tied at all. There's nothing that limits the renegotiation of bad contracts.''

Brena said if excessive tariffs are allowed, it will hurt the state's long-term interest.

''Now is the time when the second-generation producers should be up there leasing tracts and drilling holes. If Alaska is to benefit in the long run, it needs to get those independent producers up there,'' he said.

Independents are often credited with being the driving force in revitalizing the Gulf of Mexico after the major companies lost much of their interest.

Tesoro could mount a challenge to the interstate rates as well, since it owns a refinery in Washington state that uses Alaska crude. Tesoro hasn't yet decided whether or not to challenge the interstate rates, Brena said.

Whether interstate rates under the 1985 settlement are fair has never really been tested. The Federal Energy Regulatory Agency simply accepted the settlement terms, since there were no objections to them.

The trans-Alaska oil pipeline is owned by subsidiaries of North Slope producers and one refinery owner. BP has roughly 46.7 percent, ConocoPhillips 28.3 percent once a purchase from Amerada Hess goes through, and Exxon Mobil 20.3 percent. Williams Alaska has 3.1 percent and Unocal 1.4 percent.

Williams wasn't an owner when that company and Tesoro challenged the rates back in 1997.

The pipeline owners, except Williams, have filed a lawsuit in Superior Court asking a judge to overturn the RCA decision.

''We strongly disagree with the RCA's actions,'' said Daren Beaudo, a spokesman for BP Exploration (Alaska) Inc. ''The methodology under which the question arose was previously approved by the state of Alaska and FERC.''

A final ruling in state court could be about three years away.

The pipeline owners have asked Superior Court Judge Eric Sanders to rule that the refund order by the regulatory commission is not enforceable until their appeal is resolved. Under the RCA order, the refund is due Jan. 13. Tesoro calculates its refund at $25 to $30 million, plus interest, for the years 1997 through 2000. Rates for later years have yet to be decided.

As for the interstate rates, a challenge in the federal arena could take three to five years.

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