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

Vol. 14, No. 51 Week of December 20, 2009

Huge tariff increase

Cook Inlet Pipe Line Co. cites Mount Redoubt damage for 259% hike; west side line runs 42 miles from Granite Point to Drift River

Wesley Loy

For Petroleum News

Citing damage from the erupting Mount Redoubt volcano, Cook Inlet Pipe Line Co. is seeking a steep rate increase from Alaska regulators.

The company, a Chevron subsidiary, submitted a tariff of $14.57 per barrel of oil, effective Jan. 1. That’s a 259 percent increase over the current rate of $4.06.

“Beginning on March 23, 2009, there was a series of volcanic events at Mt. Redoubt which disrupted operations, significantly curtailing transportation and caused extensive damage to CIPL facilities,” says the company’s Nov. 30 tariff advice letter to the Regulatory Commission of Alaska.

CIPL said it calculated the new rate using a methodology established in a 2001 settlement the commission accepted.

The tariff hike rankled at least one oil and gas producer, Cook Inlet Energy, a new company that’s taking over abandoned properties formerly operated by California-based Pacific Energy Resources Ltd., which is going through a bankruptcy liquidation.

Producer protest

“We object to the proposed tariff,” David Hall, chief executive of Cook Inlet Energy, said in comments filed with the RCA on Dec. 10.

Production from wells Cook Inlet Energy has acquired on the west side of Cook Inlet will rely on the CIPL system, Hall said.

“We respectfully request that the RCA review this tariff, its justification and impacts, and fulfill its obligation to balance the interests of the parties for the best interests of Alaska,” he said.

CIPL’s tariff appears to be improper, Hall said. The pipeline operator is pursuing “unduly speedy recovery of expenses,” he said, and has not informed shippers of its long-term tariff plans.

Hall said Cook Inlet Energy would be resuming production from its west Cook Inlet properties in coming weeks, moving its crude oil via CIPL to refiner Tesoro.

Counting tanker costs, the fledgling producer now faces a transportation rate of nearly $20 per barrel, a burden that “will have grave impacts on oil companies remaining in the Cook Inlet basin,” Hall said.

Volcanic threat

CIPL operates a 20-inch pipeline that runs 42 miles from Granite Point southwest along the western shore of Cook Inlet to the Drift River Oil Terminal, which also belongs to CIPL. The pipeline was installed in 1966.

Chevron subsidiary Unocal owns half of CIPL, while Pacific Energy continues to hold the other half.

Multiple eruptions last March and April at Mount Redoubt, located 103 miles southwest of Anchorage, forced a shut-in of most oil fields on the west side of Cook Inlet and created an emergency at the terminal near the mouth of the Drift River.

Volcanic mud flows, called lahars, swept down the river and lapped against the protective dike around the terminal’s tank farm. The mud overflowed the terminal’s airstrip, and as a safety precaution CIPL transferred oil from some of the storage tanks onto tank ships in a pair of highly publicized emergency operations.

Once oil production resumed in the summer, CIPL began using a new procedure, pumping oil directly into tankers moored at the terminal’s Christy Lee platform without using the terminal storage tanks.

CIPL’s defense

Managers for Cook Inlet Energy suspect CIPL has insurance to cover most of the losses it might have sustained.

The higher pipeline tariff presumably will apply to Chevron’s own Cook Inlet oil production, even though it is CIPL’s parent company.

Petroleum News asked Santana Gonzalez, spokesman for CIPL, which has general offices in Bellaire, Texas, for more details about the damage the CIPL system sustained, and how the company calculated its new tariff.

Gonzalez supplied this written statement:

“CIPL makes a yearly tariff filing at the RCA following the model mandated by the RCA; the new rates reflect a balance of past revenues and expenses, such as CIPL’s Redoubt volcanic event response which protected the integrity of the Drift River Terminal as well as the crude stored at the facility, and the expected costs and production rates in the operation going forward.”

CIPL’s tariff filing says the pipeline had throughput of just under 4 million barrels in 2008, with a 2009 forecast of 1.53 million barrels.

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