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Providing coverage of Alaska and northern Canada's oil and gas industry
January 2006

Vol. 11, No. 5 Week of January 29, 2006

State wants stake in oil pipeline

Gov. Frank Murkowski has been saying for months that the state should own a piece of the proposed natural gas pipeline.

Now he’s touting another idea: buying a share of the 800-mile trans-Alaska oil pipeline.

It’s a concept state political leaders have kicked around since before oil starting sliding down the nation’s most famous pipeline in 1977.

Even though the pipe is nearly 30 years old, and Prudhoe Bay and other North Slope oil fields are wearing out after pumping more than 15 billion barrels, it still could be a smart move for the state to buy into the line, Murkowski said.

The governor mentioned the idea in his State of the Budget speech Jan. 12 and again at a meeting of oil industry contractors Jan. 20.

Murkowski and his aides say an ownership stake could save the state millions of dollars in payments to ship the state’s share of North Slope oil through the pipeline, and it could end chronic legal fights between the state and the pipeline owners over pipeline transportation rates, which have a big bearing on how much oil revenue the state collects.

In the governor’s view, “it makes good business sense” to evaluate a pipeline purchase, although he said the work won’t begin in earnest until after state negotiators finish work toward a tax contract for possible construction of a $20 billion gas pipeline to carry the North Slope’s prodigious gas reserves as far as the Midwest.

Difficulties

But buying into the oil pipeline presents difficulties.

First, one of the five oil companies that own the line would have to agree to sell. The state also would have to figure out where to get the money to make the purchase, and owning the pipeline could conflict with the state’s role as a pipeline regulator.

Mike Menge, the state’s natural resources commissioner, said no decision has been made on how big a share the state would pursue, or whether to use the state’s recent budget surpluses or some other funding source to pay for it.

Murkowski, however, mentioned that the state might seek a pipeline piece equal to the state’s share of oil pumped from beneath state-owned tundra. This royalty oil amounts to 12.5 percent of total North Slope production.

The pipeline, though aging, still has a lot of life left, the governor said. In 2002, regulators approved new 30-year right-of-way agreements for the pipeline across state and federal lands. And if a gas pipeline is ever built, that could spark a rush of exploratory drilling and new finds of oil to keep the pipeline busy, he said. The pipeline currently carries close to 900,000 barrels of oil per day, about half what it once did but still about one-eighth of total U.S. production.

Ownership would produce savings

Chuck Logsdon, a Murkowski aide and the state’s former chief oil economist, said the state pays about $230 million a year to have its oil shipped down the pipeline.

“If we owned the pipeline, we wouldn’t save that entire amount,” Logsdon said. That’s because, as an owner, the state would have a share in the costs of operating the pipeline, he said.

But most likely, state ownership would result in substantial savings — plus a share of the pipeline’s profits.

“How much we could save, that’s going to take some analysis,” Logsdon said.

On the downside, the state might be buying a costly obligation because, someday, the pipeline will have to be dismantled and the route cleaned up, said Ken Boyd, a former state oil and gas director now working as an industry consultant.

Pipeline valued at $3 billion

And buying even a small share of the pipeline would be expensive.

Last year, state tax officials valued the pipeline overall at $3 billion. The industry, resisting higher property taxes, pegged the value at half that.

Since 2000, several ownership shares have changed hands. Most recently, in 2004 a subsidiary of Koch Industries paid The Williams Cos. $100 million for a 3.08 percent share of the pipeline, according to an appraisal report the pipeline owners prepared last year. The appraisal, however, says the price was “not ... a reliable indicator of the value” of the pipeline because the sale was part of a much bigger transaction involving a refinery in North Pole.

The same 3.08 percent share traded for $35 million in 2000, and again for $40 million the next year, according to the appraisal.

In the late 1970s, BP offered to sell its pipeline interest to the state, but the state rejected the offer “in part because state officials believed state ownership would unacceptably increase the conflict between the state’s regulatory responsibilities with respect to pipeline operation and the state’s interest in maximizing public revenue,” according to a 2002 Department of Revenue study.

BP holds largest share

BP holds the largest share of the pipeline at 46.93 percent, followed by ConocoPhillips at 28.29 percent, ExxonMobil at 20.34 percent, Koch at 3.08 percent and Chevron at 1.36 percent.

BP still is interested in selling some of the pipeline to the state, and company and state officials have talked recently about it, BP spokesman Daren Beaudo said Jan. 23.

“We’re willing to discuss it in more detail when the state thinks the time is right,” he said.

Chevron, which last year took over Unocal and its small share of the oil pipeline, announced it planned to spin off some assets. But no decisions have been made on the fate of Alaska properties, spokeswoman Roxanne Sinz said.

—Wesley Loy, Anchorage Daily News






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