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Trans-Alaska Pipeline System: Economics

Trans-Alaska Pipeline System: Environment

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Richard A. Fineberg

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(Archived June 17, 2005)

Recent Articles on Trans-Alaska Pipeline Tariff Overcharges

August 2004

The most recent RCA order is the focus of the following two articles from the Ancorage Daily News.

News: Anchorage Daily News (July 3, 2004, p. A-1)

Top Alaska Stories

Oil firms overcharge, agency says
PIPELINE: Inflated transportation fees may be costing state millions of dollars annually in oil revenue.
Anchorage Daily News

State utility regulators say oil companies are  overcharging customers for moving crude oil down the trans-Alaska pipeline, a decision that raises the question of whether the state is being shortchanged on oil revenue collections.

The five oil companies that own the 800-mile pipeline this year are charging about $3.02 per barrel to carry the bulk of North Slope crude oil from the giant Prudhoe Bay oil field to the tanker dock at Valdez.

This is more than $1 more than the Regulatory Commission of Alaska said in a recent decision the companies should charge to cover the costs of running the pipeline plus a decent profit.

The decision is important for Alaska refinery operators, who have long argued that the pipeline owners were overcharging them for moving the crude oil down the line.

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

Bottom line: Each additional dollar in pipeline transportation costs means about $65 million less in annual oil revenue for the state, said Chuck Logsdon, the state's chief petroleum economist.

Richard Fineberg, a Fairbanks economist who has testified before the RCA as a state-hired consumer advocate, said the agency's latest decision indicates the oil companies are cheating Alaska crude oil buyers as well as the state.

"Absolutely! Yes!" Fineberg said. "There's no question about it and how many times does the commission have to say it?"

He noted that the RCA made a similar finding of pipeline overcharges in 2002, a decision that's now tangled up in court.

Daren Beaudo, spokesman for British oil giant BP, the biggest owner of the pipeline at 47 percent, vehemently denied that his company is taking advantage of any oil customers or the state.Rather, BP is simply following an agreement on pipeline fees that took effect in 1986 between oil companies and state politicians and regulators, he said.

That settlement set out a fair method for determining pipeline transportation rates, settled endless court fights, and resulted in a square deal and reliable oil delivery for everybody, Beaudo said. Now the 1986 agreement is "under attack" by the RCA, and that could be a disincentive for further oil company investment in risky pipelines or other projects in Alaska, he said.

Beaudo vowed that BP would fight the RCA's June 10 ruling, which sets out a transportation rate of $1.96 per barrel for oil piped to Valdez and orders the oil companies to make refunds to Alaska crude buyers that likely will total tens of millions of dollars.

The RCA decision affects rates just for oil delivered to in-state users including the Flint Hills refinery at North Pole, the Petro Star refinery at Valdez and the Tesoro refinery at Nikiski. This oil accounts for only about 10 percent of all oil moved down the pipeline.

But the lower rates the RCA ordered could be a factor in determining federally regulated interstate rates for oil shipped Outside.

The oil companies late this year must propose rates to the Federal Energy Regulatory Commission, and conceivably two things could happen: The state could use the RCA's findings to argue the federal rates are too high, or the oil companies could seek higher transportation fees to offset the lower in-state rates.

But whether the state would make such an argument is in question. In the past, state officials have said they were bound to defend the 1986 agreement.

In January, Attorney General Gregg Renkes said the state and the pipeline owners were to begin early negotiations for a new agreement on pipeline rates. The current agreement doesn't end until 2011.

The RCA ruling says the pipeline owners "failed to adequately support cost of service for their business operations" and wanted to charge too much to carry oil. Commissioners faulted the oil companies for factoring in "unusual costs" that are not likely to recur, such as the $17.5 million paid to repair the pipeline after a gunman fired a bullet through the pipe wall in 2001.

Robin Brena, an attorney for Tesoro, said his and other Alaska companies have been "overcharged tens of millions of dollars," and they're ecstatic about the RCA decision.He added that the ruling is "nothing but good for the state.

But Beaudo said BP and the other oil companies are being unfairly accused.

"If this is such an outrageously lucrative business, why didn't Tesoro or others try to buy a share of the pipeline?" he said, noting a number of shares have come available since the pipeline's startup in 1977.

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


Commentary: Anchorage Daily News (July 15, 2004, p. B-6)

Pipeline owners overcharge shippers
COMPASS: Points of view from the community

For the second time in 18 months, the Regulatory Commission of Alaska has ruled that the owners of the Trans-Alaska Pipeline System overcharge shippers by more than $1 per barrel of oil pumped through the 800-mile pipeline.

Excessive tariffs (shipping charges) inhibit North Slope competition and reduce state revenues. The commission's carefully documented orders confirm that the five pipeline owners -- three of whom control more than 90 percent of North Slope production as well as TAPS -- reap obscene profits from the pipeline.

Because tariffs are subtracted from the price of oil before calculating state royalties and severance taxes, every tariff dollar paid by shippers costs the state approximately 20 cents. At 1 million barrels per day, that amounts to $70 million per year.

TAPS owners pay themselves for shipping their own oil; independent shippers pay the TAPS owners. Therefore, excessive TAPS profits also penalize competitors of the TAPS owners. That's why reduced TAPS tariffs ranked first among improvements sought by Alaska's oil and gas industry in a 2003 Petroleum News Alaska survey.

Reducing TAPS tariffs would contribute to the principal fiscal goals of Gov. Frank Murkowski, who dreams of stimulating oil and gas development and convened a special session of the state Legislature to deal with the state's fiscal problems. In this regard, the RCA's stinging rejection of the filed tariffs could carry significant weight at the Federal Energy Regulatory Commission, which governs tariffs for most of the oil shipped on TAPS.

But the governor's Department of Law, clinging stubbornly to the wrongheaded policy of previous administrations, appears to oppose RCA efforts to deal with the questionable tariff-raising schemes the TAPS owners employ. The governor's pipeline tariff managers claim they are obliged to defend the complex tariff formula they concocted with the TAPS owners in 1985. Under this banner, the Murkowski administration has:

  •  joined TAPS owners in vigorously defending the results of the settlement methodology.
  •  sharply cross-examined witnesses who questioned tariffs.
  •  filed court challenges to the RCA decisions.
  •  withdrawn the RCA's public advocacy unit (recently transferred from the commission to the Department of Law) from all pipeline tariff cases.

The attorney general says TAPS owners have agreed to talk about changing the tariff formula, but when they will talk and what they will talk about are undisclosed. Closed-door negotiations 20 years ago led to today's tariff problems. An administration serious about reducing TAPS tariffs could find more efficient ways to resolve the issue. After all, lawyers frequently need to extricate clients from agreements when circumstances change.

The experience of Conoco, the only oil company to develop a North Slope field without a major interest in TAPS, confirms the importance of pipeline tariffs. In 1993, Conoco traded its Milne Point property to major TAPS owner BP and left the state (Conoco returned in 2001 through a merger with Phillips, the second largest owner of TAPS); BP immediately increased production at Milne Point.

Later, Conoco president Archie Dunham said, "It broke my heart to trade Milne Point, but we had to do it. All the value of that property was taken away from us in the pipeline tariffs."

My analysis indicates that Conoco's 1993 operating deficit in Alaska roughly matched the pipeline tariff profits it paid to the TAPS owners.

Industry representatives argue that if TAPS were really that profitable, then prospective buyers would be standing in line.

Apart from the RCA's carefully documented decisions, this obfuscation ignores the following:

  •  the TAPS owners control most of the oil that an independent pipeline owner would need to guarantee profits.
  •  since 1997, Conoco Phillips has increased its share in TAPS by 40 percent.
  •  prospective TAPS buyers may be reluctant to assume responsibility for the future pipeline dismantling when the present owners already have collected more than $1.5 billion for dismantling but no funds have been set aside for this task.
  •  The recent RCA finding of TAPS overcharges confirms that the state's failed TAPS tariff policy is what the angry guy in the beer commercial calls a traveshamockery.
Richard A. Fineberg, a research analyst from Ester, presented testimony on TAPS tariff issues to the Regulatory Commission of Alaska in 2001 on behalf of the commission's former Public Advocacy Section. He recently completed a report on the dismantling, removal and restoration component of the TAPS tariff for the Prince William Sound Regional Citizens' Advisory Council.

(Also published in the Fairbanks Daily News-Miner, July 10, 2004, “TAPS tariffs are too high,” p. A-4)









































































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