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Vol. 15, No. 22 Week of May 30, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Judge doubles TAPS value

State, municipalities could reap $113M in extra taxes from pipeline owners

Wesley Loy

For Petroleum News

An Alaska Superior Court judge has more than doubled the assessed value of the trans-Alaska pipeline system, or TAPS, for a disputed tax year.

It’s a golden victory for state and municipal officials and their lawyers, who for years have battled the pipeline owners over the value of TAPS for property tax purposes.

Superior Court Judge Sharon Gleason’s hefty 170-page ruling, issued May 24, concerns the assessed value of the 800-mile pipeline system only for the year 2006.

Gleason pegged the value at $9.98 billion, which she said is just over half its estimated replacement cost. It’s more than double the $4.3 billion the state Assessment Review Board had determined as the pipeline’s value for 2006.

The pipeline system, which carries Alaska North Slope crude oil from Prudhoe Bay south to the tanker port at Valdez, belongs to five companies: BP, ExxonMobil, ConocoPhillips, Chevron and Koch Industries.

BP is the largest owner at 46.9 percent.

Asked about Gleason’s decision, BP’s Alaska spokesman, Steve Rinehart, said in an e-mail to Petroleum News: “We are reviewing the ruling, so that we can determine our best course forward.”

State revenue implications

“We’re ecstatic,” said Jim Greeley, petroleum property assessor with the state Department of Revenue. Greeley helps calculate the pipeline system’s value each year.

He said in an e-mail: “Though Judge Gleason changed the TAPS value determined by the Department in 2006, that change was based on new information in 2009, while the decision in its entirety largely upholds the Department’s methods, policies, practices, and calculations in administering the value of the TAPS.”

Greeley estimated the implications of the Gleason decision in terms of property tax revenue.

The state and municipalities stand to share in extra tax receipts for 2006 of roughly $113 million, he said. Of this amount, about $56 million would go to the state, and $57 million would go to municipalities including the North Slope Borough, the Fairbanks North Star Borough, and the cities of Valdez, Cordova and Whittier.

The revenue enhancement, of course, depends on whether Gleason’s ruling withstands appeals. The case is expected to land in the Alaska Supreme Court.

Gleason gave the opposing parties 30 days from the date of her ruling to file motions for reconsideration in her court.

Gleason’s ruling follows an arduous nonjury trial that covered more than five weeks and involved dozens of witnesses in the fall of 2009.

The issue was how much the pipeline owners believed they owed in property taxes, versus what the state and local governments aimed to collect.

The 2006 tax bill isn’t the only one at issue. The owners have filed legal challenges to the state’s escalating assessments for each tax year since. The challenges for 2007, 2008 and 2009 have been consolidated into a single case, Greeley said.

State officials have assessed the pipeline’s value for 2010 at $9.2 billion, he said.

The Assessment Review Board recently held a hearing on the 2010 assessment, and the board “is currently in deliberations,” Greeley said. The Department of Revenue is to send out tax bills on June 1.

The Assessment Review Board is a five-member, governor-appointed panel that hears oil and gas property assessment appeals.

A key complaint of the owners is that state officials didn’t use the right method to determine the pipeline value.

In court filings, lawyers for the companies favored an “income approach to value,” where the revenue from tariffs charged for shipping oil through the pipeline is considered.

“The well-accepted principle is that a property is worth what it will earn,” said one company filing from February 2007.

Department of Revenue officials have adopted a different approach known as “replacement cost new less depreciation,” which they say more accurately estimates the full and true value for property tax purposes.

Judge’s view

In her ruling, Gleason included a one-page summary of her determination — based on expert testimony and other evidence presented in court — of the assessed value of TAPS as of Jan. 1, 2006, starting with a replacement cost of $18.7 billion and working in such factors as depreciation to reach an assessed value of $9.98 billion.

She disagreed with the owners that the economic value of TAPS stems mainly from its tariff income, and that the system was worth just $850 million in 2006.

“TAPS was built and is operated to monetize the vast ANS reserves of the producer oil companies by bringing those reserves to market,” Gleason wrote. “It was not constructed, and is not maintained, in order to realize tariff income.”

She added in her conclusion: “The construction of TAPS in the 1970’s cost the equivalent of $24 billion in 2006 dollars. The evidence at trial demonstrated that as of January 1, 2006, the value of the remaining proven reserves on the North Slope was approximately $350 billion. The value of those proven reserves cannot be realized without TAPS, as it constitutes the only viable means of transporting ANS product to market. Clearly, TAPS would be replaced to realize the value of those proven reserves if necessary.”

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