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Providing coverage of Alaska and northern Canada's oil and gas industry
May 2011

Vol. 16, No. 22 Week of May 29, 2011

Conoco seeks 17% TAPS increase

Request is the fourth since October 2008 for the company and would increase tariffs nearly threefold over last permanent rates

Eric Lidji

For Petroleum News

ConocoPhillips is asking for a 17 percent increase to the rate it charges to ship oil on the trans-Alaska oil pipeline to markets within the state, its fourth request since late 2008.

The proposed increase would raise the cost to ship a barrel of oil from the North Slope to North Pole to $3.37, up from $2.86, while shipping to locations in Valdez would increase to about $5.26, up from some $4.48, depending on final destination. (There are two off-take points in Valdez: the PetroStar refinery and the Valdez Marine Terminal.)

ConocoPhillips wants the increase to go into effect on June 20.

The proposed rates would generate $30.4 million per year for ConocoPhillips. The company brings in $25.8 million from its current rates for intrastate operations.

ConocoPhillips said the increase is needed because throughput on the pipeline continues to fall while costs continue to rise, the same reasons cited for previous rate increases.

13 cases now outstanding

The request further complicates the shipping rate on the pipeline.

The Regulatory Commission of Alaska last approved shipping rates on the pipeline in 2002. The pipeline owners requested increases in the years that followed, but the RCA denied those requests because they used an outdated methodology to calculate rates.

But starting in 2008, four of the five owners — all but BP — began requesting increases using a new methodology. Since then, those four companies have each requested three increases. Because of the similarity of those cases, and because of the need to simplify the proceedings, the RCA ultimately consolidated those 12 cases into a single docket.

Midstream subsidiaries of BP, ConocoPhillips, ExxonMobil, Koch Industries and Union Oil Company of California each own undivided shares of the 800-mile pipeline. Each company can set its own rates, so long as the combined rates stay at or below a certain level.

Although the companies cannot discuss ratemaking strategies among each other, they can use filings from other owners as a guide. Since the first filing in October 2008, ConocoPhillips has led the way, filing first and setting the benchmark for other owners.

Not seeking consolidation

Because the RCA typically approves rate increases on a temporary and refundable basis while it studies the legitimacy of a case, the approved shipping rates on the pipeline are increasingly out of sync with the existing rates on the pipeline. The 2002 rates charge $1.25 to ship a barrel of oil to North Pole and $1.96 to ship to various points in Valdez.

The newest ConocoPhillips application, if approved, would nearly triple those rates.

Therefore, the four owners are increasingly at risk for having to refund millions of dollars to shippers should the RCA ultimately decide not to approve the increases permanently.

As an example, while the newest increase would bring ConocoPhillips $30.4 million in revenue per year, the 2002 rates would generate only $11.3 million per year.

While this newest case is based on the same methodology as its 12 predecessors, ConocoPhillips notably asked the RCA not to add the case to the consolidated docket.

ConocoPhillips said that the previous cases have now progressed beyond their initial stages and that adding a new case now would disrupt the current procedural schedule.

That decision could add complexities down the road, though.

FERC also has cases

While the pipeline owners have been asking the RCA to increase shipping rates on oil that stays in Alaska, they have also been asking the Federal Energy Regulatory Commission to increase shipping rates on oil bound to out-of-state markets.

Many of the issues of both sets of cases are similar, particularly in regard to whether and how companies can include the cost of strategic reconfiguration into their rates.

Strategic reconfiguration is a multiyear effort to upgrade pipeline operations.

Because the project is over budget and past deadline, the State of Alaska and Anadarko Petroleum, both of which stand to benefit in different ways from lower shipping rates, believe some of the costs are the result of imprudence and should not be paid by shippers.

The companies that own the pipeline, though, see strategic reconfiguration as a series of projects to reduce costs and increase efficiency, including several successful ventures.

Later this year, the RCA and FERC plan to hold a series of concurrent hearings in Washington, D.C., and Anchorage to discuss issues relevant to both regulatory bodies.






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