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Fledgling producer protests tariff hike Cook Inlet Energy, having just bought a package of oil and gas properties, fights pipeline company’s 259 percent rate increase Wesley Loy For Petroleum News
Less than a month after regulators invited interested parties to jump into a case involving a steep tariff increase for shippers on a pipeline in Alaska’s Cook Inlet, one oil producer has filed a formal challenge to the hike.
Anchorage-based Cook Inlet Energy LLC on Jan. 12 filed a petition to intervene with the Regulatory Commission of Alaska. The company’s attorney, Robin Brena, two days later also filed a 24-page “statement of position, formal complaint, and protest.”
The protest argues Cook Inlet Pipe Line Co.’s 259 percent rate increase — from $4.06 per barrel of oil to $14.57 per barrel — is “excessive, unjust, and unreasonable.”
The protest also says the hike “could not have come at a worse time” for Cook Inlet Energy, which in late 2009 purchased an assortment of oil and gas assets on the west side of Cook Inlet from Pacific Energy Resources Ltd., a California independent undergoing a bankruptcy liquidation. The assets include the West McArthur River oil field and the Osprey offshore oil platform in the Redoubt unit.
“For a small company such as CIE, the financial consequences of a $10.51 per barrel rate increase will be substantial,” Cook Inlet Energy’s petition to intervene says. “CIE’s goal is to expand its current production of 120 barrels per day of crude oil from the west side of the Cook Inlet to 1,100 barrels per day or more by the end of 2010. Having to incur an excessive, unjust, and unreasonable transportation rate while also taking the risks and incurring the investment necessary to expand its production on the west side of the Cook Inlet is a potentially huge burden on CIE.”
Volcano damage Texas-based CIPL operates a 20-inch pipeline that runs 42 miles from Granite Point southwest along the western bank 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 holds the other half.
The RCA, in a 12-page order issued Dec. 28, approved CIPL’s rate increase, at least temporarily, and invited oil producers or others to challenge it and possibly win refunds. The order allowed CIPL to start collecting $14.57 per barrel of oil effective Jan. 1.
The RCA said that although the rate hike is “significant,” it appears CIPL calculated it “in accordance with” a methodology established in a 2001 state settlement the commission accepted.
CIPL attributes much of its rate increase to volcanic eruptions of nearby Mount Redoubt, which caused extensive damage, idled west Cook Inlet oil production and the pipeline for much of 2009, and forced costly measures to protect the Drift River Oil Terminal and the crude in storage there.
In a recent RCA filing, CIPL said its higher rate is “entirely reasonable,” allowing for recovery of actual costs plus a reasonable return. CIPL added it “has no responsibility to subsidize the recent investment” Cook Inlet Energy made in the oil and gas properties.
‘Way out of line’ Brena, the attorney for Cook Inlet Energy, raises multiple arguments against CIPL’s higher tariff.
First, the settlement between CIPL and the state is “legally irrelevant” to Cook Inlet Energy’s right to challenge rates, as the producer wasn’t a signatory to the settlement, Brena argues. Further, he notes that the standard for acceptance of a settlement is “much less stringent” than the standard for establishing just and reasonable rates.
Brena also cites a lack of evidence to support CIPL’s claimed costs, and says about a third of the company’s proposed 2010 cost of service is a pass-through of expenses from past years. That’s OK among settling parties, but it “violates several ratemaking principles” when applied to a nonsignatory shipper, Brena argues.
As for the volcanic eruptions, CIPL, in accordance with prior RCA orders, should have had insurance to protect its ratepayers from an extraordinary event, Brena says.
“The particular location of CIPL’s assets puts it at risk from a Mt. Redoubt eruption,” the protest filing says. “It is incumbent upon CIPL to either insure or self-insure against this risk of loss, and not directly pass on the losses to the ratepayer in extraordinary high rates.”
Brena also questions CIPL’s projection for sharply lower pipeline throughput, and says CIPL’s operating expenses “seem way out of line.” He notes that CIPL isn’t even operating its Drift River tank farm and pumps, leaving producers to push crude directly to tankers.
“Notwithstanding the fact that a significant percentage of CIPL’s assets are not in service or providing any benefit to its shippers, CIPL’s operating expenses are increasing,” including higher salaries and employee benefits, Brena writes.
Other complaints The RCA plans to set a final rate for the pipeline, and has opened a docket to consider the matter.
Two other parties also have taken issue with CIPL’s rate hike.
ExxonMobil, which holds a 75 percent working interest in the Chevron-operated South Granite Point unit, filed a brief statement with the RCA objecting to the tariff increase.
Dan Donkel, an overriding royalty interest owner in the Redoubt unit, filed a petition to intervene on Jan. 12.
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