State, Anadarko respond in TAPS appeal
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Support FERC conclusion that trans-Alaska pipeline strategic reconfiguration project was imprudent, much cost cannot be recovered
ALAN BAILEY Petroleum News
In a Washington, D.C., Circuit appeal case, in which the owners of the trans-Alaska pipeline are challenging a Federal Energy Regulatory Commission ruling in 2015 that the TAPS strategic reconfiguration project was imprudent, the state of Alaska and Anadarko Petroleum Corp. have filed briefs supporting FERC’s position.
Strategic reconfiguration involved the replacement of the original turbine-powered pumps that drove oil through the pipeline with electrically powered pumps, together with the implementation of a more automated pipeline control system. On the grounds that the project had been imprudent, with major cost and schedule overruns, FERC objected to full cost recovery for the project using pipeline usage rates.
The question of having the cost of strategic reconfiguration added to pipeline rates matters to the state because the higher the cost of shipping oil through the pipeline, the lower the state royalties and production taxes for North Slope oil. For Anadarko, a North Slope oil producer that does not have an ownership interest in the pipeline, high shipment rates reduce the profitability of the company’s North Slope oil.
At the time of the strategic reconfiguration project five companies owned the pipeline: BP Pipelines (Alaska) Inc., ConocoPhillips Transportation Alaska Inc., ExxonMobil Pipeline Co., Koch Alaska Pipeline Co. LLC and Unocal Pipeline Co.
A determination in hindsight? In appealing the FERC order, the five companies have argued that, by concluding in hindsight that the strategic reconfiguration project had been imprudent, FERC deviated from a long-standing no-hindsight rule. The agency has long held that basing its determinations on hindsight, on reasoning backwards from how a project turned out, chills managerial discretion, to the detriment of facility ratepayers, the companies argued.
Not so, argued the state in its filing.
The state said that, prior to the strategic reconfiguration project, a report referred to as the Bailey Report, the result of a multiyear engineering study commissioned by the TAPS owners, had recommended keeping the original turbine-powered pumps in place while making some modest changes to the pump station control systems. The report recommended a $52 million upgrade project which would have saved $20 million in operating costs per year, the state said.
After this and some other engineering studies the owners knew that the original gas-turbine pumps were working well and that the economics of the situation did not favor major changes to the pump stations, the state argued.
Nevertheless, the owners decided to move ahead with electrification of the pump stations, taking a “clean sheet” approach that conducted the project from the perspective of building completely new pump stations, rather than just upgrading the existing facilities. This clean sheet approach came to be known as strategic reconfiguration, the state said.
Compressed timeframe The project moved ahead on an aggressive timescale, with conceptual engineering compressed from the several years anticipated in the Bailey Report to just three months, and envisaging simultaneous work on all pump stations. That, despite a recommendation in the Bailey Report that automation upgrades at the pump stations should be conducted one pump station at a time, to enable learning from mistakes as the project progressed, the state said.
To compound the project risks, the pipeline owners hired a project manager who had no experience of the scale of project involved, and contracted an engineering company with a poor understanding of the project scope and no Arctic or Alaska experience, the state said. The owners also ignored employee criticism of the project plan, the state said.
And, despite independent reports questioning cost estimates for the project, the owners pursued early project sanction.
In the event, the project massively overran on both cost and timescale, with an initial cost estimate of $252 million escalating to more than $707 million, despite pump station 1 at the northern end of the pipeline not being electrified, the state said.
Other issues Two other issues involved in the appeal consist of whether the pipeline owners should be able to recover retrospectively some property taxes dating from 2006 from pipeline rates in 2010, and whether the carriers should be able to recover from pipeline rates the cost of electrification of pump station 1, an upgrade that was conducted after the original strategic configuration cost recovery challenge was launched.
The state argued that the property tax could not retrospectively be recovered but said that it is premature to rule on the pump station 1.
Anadarko also argued for the rejection of the no-hindsight argument over the strategic reconfiguration project, saying that there is a massive record of contemporaneous evidence establishing imprudence at every stage of the project. A rule against retroactive ratemaking prohibits the pipeline owners from recovering a 2006 tax increase from 2010 pipeline rates, Anadarko said. And Anadarko agreed that a ruling on the pump station 1 costs is premature.
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