State claims high rates on Kuparuk Pipeline

After terminating decades-old settlement in 2007, state now claiming North Slope pipeline is earning too much through rates

Eric Lidji

Petroleum News

The State of Alaska believes the shipping rates on a North Slope pipeline are unreasonable high.

In a complaint filed with the Regulatory Commission of Alaska in early December, the state argued the intrastate tariff on the Kuparuk Pipeline is nearly 40 percent higher than it should be, and asked the commission to hold a hearing to investigate the matter.

The Kuparuk Pipeline runs 28 miles across the central North Slope, from a processing center in the Kuparuk River unit to the start of the trans-Alaska oil pipeline. The pipeline also moves oil from Milne Point through a tie-in with the Milne Point Pipeline.

The Kuparuk Transportation Co., which operates the pipeline as well as a nine-mile extension, is a partnership between subsidiaries of ConocoPhillips, BP and Chevron.

The Kuparuk Pipeline was originally a 16-inch line laid in 1981, as ARCO Alaska prepared to bring the Kuparuk River online, but was replaced with a 24-inch line in 1984.

Around that time, the state protested the shipping rates on the new pipeline. The dispute led to a settlement signed in 1991 and approved by regulators the following year.

The agreement set a rate of 21 cents per barrel of oil moved through the Kuparuk Pipeline, but allowed that rate to be updated every three years using the Consumer Price Index. The RCA most recently approved a change at the end of 2005, setting rates of 19.8 cents per barrel for the entire pipeline, and 14.2 cents per barrel from the Milne Point tie-in.

The state and Kuparuk Transportation took another look at the settlement around that time, but nothing came of the negotiations. In late 2007, the state terminated the settlement.

A $6.3 million ‘windfall’

The reason, the state claims, is that the rate has until now been based on regular updates to the settlement agreement, rather than on a traditional examination by state regulators.

Now that the settlement agreement no longer covers the shipping rates on the pipeline, the rates should instead be calculated by the usual method of determining costs.

The Kuparuk Pipeline earned a $6.3 million “windfall” in 2008 through shipping rates, according to Thomas Horst, an economist with a long history of testifying for the state.

The state wants shipping rates to be trimmed considerably. Horst said the pipeline earned around $16.1 million in 2007, but should have only brought in around $9.8 million.

Horst recommended that the rate to ship a barrel of oil through the entire pipeline should drop to 9.3 cents from the current rate of 19.8 cents, while the rate to ship a barrel of oil from the Milne Point tie-in should drop to 6.7 cents from the current rate of 14.2 cents.

Kuparuk Transportation believes the calculations are “not consistent with Commission regulations and precedent,” but said it does not object to an investigation into its rates.

The RCA plans to decide whether it will open an investigation on the issue by Feb. 27.

Issue of opening basin

But while the projected “windfall” is minimal compared to the billions the state earns in taxes and royalties, the state is also arguing lower rates are crucial for encouraging new companies without an ownership stake in the Kuparuk Pipeline to explore in the region.

Those twin arguments of diminishing state revenues and burdening new exploration companies have formed the backbone of much larger debates over shipping rates in the past, including a complex and still evolving case concerning the trans-Alaska oil pipeline.

The idea of “opening” production basins to new companies, particularly independent companies, has been a major stated policy goal of the administration of Gov. Sarah Palin.

The Kuparuk Pipeline moved some 114.8 million barrels of oil in 2007, and about 170.1 million barrels in 2006, according to the State Pipeline Coordinator’s Office.