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Can pipeline regulations be simplified? Regulatory Commission of Alaska convenes special hearing to gather views from interested parties and determine way forward Alan Bailey Petroleum News
Government regulation of oil and gas pipeline tariffs and operating rules is intended to create a level playing field for all users of a pipeline transportation infrastructure and to ensure fair tariff levels.
But is pipeline regulation in Alaska excessive? Some pipeline operators have complained about the excessive cost and time of the regulatory process, saying that the regulatory burden inhibits oil and gas development.
And should a small pipeline that only carries products for the pipeline owner even be regulated? Or what about a pipeline where would-be shippers have all reached an acceptable commercial agreement for the pipeline use?
In December 2005 the Regulatory Commission of Alaska opened docket R-05-011 to investigate the possibility of reducing the regulatory burden, perhaps by establishing two or more classes of pipeline with different levels of regulation.
The commission sought comments on possible regulation changes. And an RCA public hearing on June 13 provided an opportunity for interested parties to review and discuss the various comments that the commission has received. At the hearing, counsels representing BP Pipelines Transportation (Alaska) Inc., Union Oil Co. of California (a Chevron subsidiary), Marathon Oil Co. and Tesoro Alaska Co. talked to the RCA commissioners.
Current issues Counsels for Union Oil and Marathon expressed frustration with the time and cost involved in the regulatory process for the construction of the Kenai Kachemak gas line that the two companies own on the west side of the Kenai Peninsula. The KKPL regulatory process continued for three years, despite the fact that the pipeline has only carried gas for Union Oil and Marathon, said David Robinson, counsel for Marathon. The regulations require massive amounts of information, he said.
“At one point in the KKPL (regulatory) proceedings, as much as 25 percent of Union’s management time was focused with dealing with pipeline issues,” said Bradford Keithley, counsel for Union Oil.
Louis Veerman, counsel for BP, listed three BP pipelines on the North Slope solely used by affiliates of the pipeline operator and one of which simply transports gas to an oil field for enhanced oil recovery operations. Economic regulation of these pipelines serves no useful purpose and, unless a third party company requests access, regulation could be eliminated, Veerman said.
“This would reduce the cost of operating these pipelines, which serve an important function but which also need to run in a cost effective way,” he said.
Two factors Keithley said that overregulation results from two main factors:
1. RCA generally interprets Alaska statutes to mean that any pipeline on state land outside a unit boundary is a regulated transportation line rather than a gathering line associated with oil or gas production (the statutes exclude gathering lines from regulation but do not provide a clear definition of a gathering line).
2. RCA applies the same comprehensive regulations to all regulated pipelines, regardless of the pipeline use.
And Keithley compared the situation in Alaska with that in Texas and Oklahoma, where he said that many pipelines are classified as gathering lines and are regulated at a relatively low level. In these states, regulators respond to complaints from third party shippers, using rate comparisons or rules of thumb to determine equitable rate levels, he said.
Robinson said that in Louisiana the public services commission only regulates public utility pipelines while the office of conservation (the state agency that regulates oil and gas production) regulates other lines. Just two people in the office of conservation regulate 100 intrastate pipelines, he said. Tesoro’s views Tesoro takes a different view of pipeline regulation from the other companies represented at the RCA hearing.
“Our position is that the regulatory regime that’s been in place has worked well for 40 years and it’s created certainty for producers, explorers and owners, everybody involved,” David Wensel, the company’s counsel told the commissioners. As well as using products delivered to its Nikiski refinery through various pipelines, Tesoro operates a regulated pipeline that carries petroleum products from Nikiski to Anchorage.
Businesses need access to pipelines with fair tariffs and it is necessary to balance the cost of the regulatory burden against the benefits that regulation brings, Wensel said.
Wensel emphasized the importance of being able to assess future pipeline tariffs and regulatory requirements when planning new projects. And achieving a level of certainty in these assessments depends on “litigation quality numbers,” rather than the summary or approximate data that might result from simplified regulation, he said.
Wensel said that much of the time and cost associated with pipeline regulation in Alaska results from litigation. RCA could exert some control over the amount of litigation generated, he said. However, Keithley said that much of the regulatory burden derives from the numerous meetings and negotiations involved in developing acceptable tariffs.
Wensel also said that Tesoro finds it difficult to comment on simplified regulations in the absence of specific proposals for regulation changes.
“Today we’re here in a vacuum,” Wensel said. “We don’t have a specific proposal to kick around.”
Wensel also questioned ideas of trying to apply simplified regulations to small pipelines — it is difficult to define what is meant by a small pipeline and a small pipeline could prove just as important as a large pipeline to someone wanting to develop a new oil or gas pool, he said.
Simplified regulations However, Keithley suggested that simplified regulations could apply to a user-owned pipeline where there is no request for third-party transportation or to a pipeline where RCA has determined that the tariff is minor to the point of not significantly impacting exploration and production economics. He floated the figure of 25 cents per thousand cubic feet as the “deminimus” tariff that a carrier might apply to a gas line.
Keithley also recommended obtaining ideas for less burdensome regulation from other states.
Robinson thought that in the case of a user-owned pipeline, a regulation requiring just a one or two sentence tariff statement might suffice.
“In many of these cases there’s just never a need for third party (pipeline) use,” he said.
And Keithley emphasized the value of only requiring full pipeline economic regulation at the time when a third party shipper requires service. In this situation the commission could perhaps require an industry-standard rate as an interim tariff, while the pipeline operator applies for the regulated tariff, he said.
After some discussion the company counsels at the meeting volunteered to develop some proposed new regulations for consideration by RCA. And the RCA commissioners agreed with this strategy.
However, Commissioner Dave Harbour pointed out that, as a rule making procedure, the proceedings are completely open to all members of the public.
“Any member of the public can submit to us a suggestion at any time about what the rule should be,” Harbour said.
Harbour also cautioned about the dangers of assuming that a pipeline will never be used by a third party shipper.
“You have to assume that at some time a third party will materialize … then you need the numbers that will give you a basis for going forward,” he said, referring to data such as the cost base for tariff determination.
Harbour also said that some specific details, such as deminimus tariffs, require clear definition. He added that there is a probable need to ensure that state regulations mesh seamlessly with the equivalent federal pipeline regulations.
Commissioner Mark Johnson said that any revised regulations need to adequately consider what happens when a pipeline status change triggers a change in regulatory requirements.
“The real train wrecks are going to be when there’s a change of status,” he said.
And Commissioner Tony Price, in recognition of Tesoro’s views, emphasized the importance of taking into account the needs of pipeline shippers as well as the needs of the carriers.
“It’s important that more than the carriers can sign onto any proposed regulation, or for me it becomes meaningless,” he said.
Plan of action At the end of the hearing Commission Chair Kate Giard proposed a plan in which Union Oil, Marathon and BP would arrange a presentation to the commissioners on pipeline regulations in states other than Alaska and on federal pipeline regulations. The interested parties would then convene workshops, facilitated by RCA, to develop proposed regulations, for submission to RCA at the end of December. RCA would then have a further year to complete the public process for a regulation change.
Giard said that RCA will draft an order to review the plan at a public hearing in the near future.
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