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Providing coverage of Alaska and northern Canada's oil and gas industry
June 2009

Vol. 14, No. 23 Week of June 07, 2009

Did FERC underestimate life span?

Shippers, state seek rehearing of federal regulator’s conclusion that the trans-Alaska oil pipeline’s usefulness will end in 2034

Rose Ragsdale

For Petroleum News

Shippers on the trans-Alaska oil pipeline and the State of Alaska have asked the Federal Energy Regulatory Commission to reconsider recent rulings in which it concluded that the useful life of the 800-mile conduit effectively ends in 2034.

Anadarko Petroleum Corp. and the state submitted separate requests for rehearing May 29 on this single issue. The state and Anadarko, Tesoro Corp. and Tesoro Alaska Co. also protested the commission’s summary resolution of the issue in an April 16 order and requested a rehearing in a May 15 filing.

The filings reflect the latest concerns raised before FERC in a long-running dispute over interstate shipping rates charged by owners of the pipeline, which transports crude produced on Alaska’s North Slope to tidewater in Valdez.

In the April 29 order, the commission responded to a March 31 filing by ExxonMobil Pipeline Co. in which the carrier proposed to change its 2009 interstate shipping rate for its share of capacity on the pipeline, effective May 1.

The commission ruled last year in a June 2008 order known as Opinion No. 502 that interstate shipping rates calculated using a method established in a 1985 court settlement were “unjust and unreasonable” and directed the pipeline’s carriers to use actual costs to recalculate interstate shipping rates for the years 2005-08.

On Jan. 28, 2009, the pipeline’s five owners — BP Pipelines (Alaska) Inc., ConocoPhillips Alaska, Unocal Pipeline Co., Koch Pipelines (Alaska) LLC and ExxonMobil Pipeline Co. — filed a new interstate rate for calendar year 2008 in compliance with Opinion No. 502.

But the shippers and the state protested the tariff, citing various problems with it, including the incorrect “useful life” estimate.

On April 16, the commission issued an order in which it accepted the 2008 rate on an interim basis, subject to refund, and directed a FERC administrative law judge to hold a public hearing on most of the issues raised and to correctly calculate a 2008 interstate tariff for the pipeline. The carriers have appealed this ruling.

In the April 29 order, FERC accepted and suspended ExxonMobil’s proposed 2009 rate to become effective May 1, subject to refund, and ordered a public hearing to resolve the aspects of the protests that did not overlap concerns about the 2008 rates and to determine correct interstate shipping rates for 2009.

However, the commission dismissed the “useful life of the pipeline” issue in both rulings as one it already decided in Opinion No. 502.

Issue needs current review

The shippers and the state, meanwhile, are pressing their argument that the commission erred in summarily disposing of the “useful life” issue in the two April orders. They said the decision relied on the commission’s earlier calculation in Opinion 502 that the useful life of the pipeline ends in 2034 and said this was a mistake for a variety of reasons. Among the reasons cited:

The 2034 date adopted in Opinion No. 502 was not based on a reserve study of the oil resources that will be transported by the trans-Alaska oil pipeline, which is the type of evidence the commission typically relies on to determine a pipeline’s remaining useful life.

Rather, the 2034 date reflected the extension of the pipeline right of way, which was the longest extension permitted by law.

“In this regard, it is important to recognize that the participants in the Opinion No. 502 proceeding agreed on a number of rate inputs, such as life of line, throughput, and operating expenses, with the principal focus being on the methodological question of whether the TSM should continue to be used to set TAPS rates. Thus, adoption of the 2034 life of line in Opinion No. 502 for the 2005-2006 TAPS rates should in no way be taken as a fully litigated resolution of that issue, nor should it preclude the parties from presenting new evidence, including reserve studies, to determine the appropriate life of the TAPS line to be used in setting rates for 2008 forward,” the shippers and the state told the commission.

They also said the Opinion No. 502 proceeding did not consider issues related to the carriers’ strategic re-configuration program, into which the owners poured hundreds of millions of dollars in a multiyear effort to upgrade and streamline the pipeline system’s operation and extend its useful life. The shippers and the state also have challenged the carriers for including the strategic re-configuration costs in the tariffs and that issue was set for hearing in the April 16 order.

Ample evidence of longer life

The shippers and the state now argue that participants in that hearing should be permitted to investigate and present evidence regarding the life of the trans-Alaska oil pipeline and the life of the North Slope fields given the new facts related to the SR project.

They said ample evidence — including technical studies, Alyeska documents, relevant financial reports, statements of the carriers’ production affiliates, as well as statements of the carriers’ own witnesses — indicates that the remaining economic life of the pipeline extends well beyond 2034.

Included in the evidence, the challengers said, is one witness’ testimony that the U.S. Geological Survey places estimates of technically recoverable, undiscovered oil resources in the central North Slope alone at between 2.6 billion and 5.9 billion barrels. Estimates of undiscovered oil resources expand when offshore reserves and those outside the central North Slope are taken into account.

If resources in the Arctic National Wildlife Refuge, the National Petroleum Reserve, Yukon Flats and the Chukchi and Beaufort seas are included, estimates of undiscovered reserves total about 54 million barrels of oil.

The challengers also cited a report by the BP Prudhoe Bay Royalty Trust in 2008 that “BP Alaska expects continued economic production from the Prudhoe Bay field at a declining rate through 2075.”

In addition, a study titled “Report on the Estimated Life of the North Slope Proven Reserves” presented to the Alaska State Assessment Review Board as part of ongoing proceedings concerning the trans-Alaska oil pipeline tax assessment concluded that the pipeline will flow an average of 196,000 barrels per day in 2050, 16 years after the 2034 end-life date determined by Opinion No. 502, the shippers told FERC. The figure was based on data from the Alaska Department of Revenue Tax Division.

“Thus, the life of TAPS is clearly a disputed issue of material fact, which warrants a hearing under Commission precedent,” the shippers wrote.

Lastly, the challengers argued that “res judicata” principles, or rules that prevent an issue from being re-litigated, do not bar such a hearing, since that doctrine does not apply to litigation concerning rate inputs that change over time. Accordingly, the commission should grant rehearing and set the life-of-line issue for hearing so that the 2008 trans-Alaska oil pipeline rate, which the April 16 order recognizes as the “going-forward” rate, will be based on current evidence, including reserve studies and SR impacts, bearing on the remaining economic life of the pipeline, they concluded.






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