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Vol. 13, No. 44 Week of November 02, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Conoco files tariffs

ConocoPhillips asks for higher intrastate rates on TAPS; Tesoro protests

Eric Lidji

Petroleum News

Another debate over pipeline tariffs could be on the horizon.

In filings with state regulators in early October, ConocoPhillips proposed increasing the rate shippers pay to move oil along the trans-Alaska oil pipeline to destinations within the state. The Regulatory Commission of Alaska is responsible for these intrastate rates, as opposed to interstate rates for oil leaving the state which are set by federal regulators.

North Slope crude bound for in-state markets typically ends up at refineries in North Pole and Valdez, which sit along the pipeline, or a refinery in Nikiski, accessed by tanker.

The newly proposed intrastate rates, which ConocoPhillips asked to go into effect on Nov. 1, would increase shipping charges to those intrastate markets by around 55 percent.

The rate for shipping a barrel of oil between Pump Station 1 and the North Pole refineries would jump from $1.25 to $1.97, while shipping fees between the North Slope and Valdez would increase from $1.96 to $3.03 or $3.05, depending on the final destination.

The pipeline runs 800 miles from the North Slope to a marine terminal in Valdez.

Updating the 2002 rates

State regulators set the current rates in late 2002 as part of an important case that determined previous rates to be too high, and forced the owners of the pipeline to refund nearly $10 billion to shippers. The ripple effects of that decision are still being felt today through appeals to the ruling, and expansions of the arguments behind it.

The trans-Alaska oil pipeline is owned by local subsidiaries of ConocoPhillips, BP, ExxonMobil, Unocal and Koch. And while ConocoPhillips, BP and ExxonMobil produce most of the oil going down the line, independent producers like Anadarko and third-party refiners like Tesoro also use the pipeline, allowing for conflicting interests.

To add a level of complication, state royalties are based on the value of oil after tariffs, meaning the rate directly impacts the amount coming into the state treasury.

As a result, pipeline tariffs have long been a topic of debate in Alaska.

Following a decade of litigation, the state and the pipeline owners reached a settlement in 1985 creating a system for setting rates, but the 1997 case challenged the system, leading to the 2002 decision, subsequent appeals and an on-going federal case on interstate rates.

ConocoPhillips describes the new rates as simply a way to update for six years of changing economics, a time of declining throughput on the pipeline and increased costs.

The pipeline owners typically file new rates annually. This past summer, the RCA rejected the most recent rate increase requested by the companies.

Several factors in the new case could provide fodder for debates: ConocoPhillips filed its rate request alone and not with the other owners; the company is requesting confidentiality for several important documents; the pipeline is undergoing an expensive upgrade that could impact rates; and the 1985 settlement is about to expire.

Tesoro Alaska, Flint Hill Resources and Petro Star, the three refiners in Alaska, have all asked to be involved in the case, as has the State of Alaska.

One rate for intrastate

Regulators design pipeline tariffs to let companies earn a specific amount of revenue based on recovering operating costs and turning a profit through a preset rate of return.

ConocoPhillips is filing rates alone, and not with the other four owners of the pipeline.

Although the 2002 ruling required all owners to maintain one tariff rate for intrastate shipping, it allowed the companies to file individually as long as all the combined rates don’t earn more than the total amount of revenues allowed by state regulators.

However, ConocoPhillips said it could not figure out the rates the other companies planned to propose because of “anti-trust” concerns, and therefore estimated using public information and data from Alyeska Pipeline Service Co., which operates the pipeline.

Through those calculations, ConocoPhillips projects the pipeline should be allowed to bring in $797.9 million in revenues each year for its owners. Of that amount, the company estimates $91.2 million should come from the intrastate ratepayers.

Volumes down and costs up

Blaming declining volumes and increasing costs, ConocoPhillips argues the 2002 rates “no longer adequately compensate” the company. The existing intrastate rates are projected to yield $58.3 million in revenues, with $16.3 million going to ConocoPhillips.

ConocoPhillips largely assigns the shortfall to declining North Slope oil production. The pipeline carried some 1 million barrels of oil every day in 2000, but in 2007 carried only about 740,000 bpd, “without a corresponding decrease in costs.”

But Tesoro believes ConocoPhillips is “disproportionately” charging in-state ratepayers.

Although no one disputes the decline of total throughput on the pipeline, Tesoro claims the figure isn’t relevant for this filing, because the volumes of oil going to in-state markets have increased since 2000, and the intrastate rate only covers those volumes.

The claim is logical, but hasn’t yet been verified in filings.

Alyeska did not have a ready estimate of in-state volumes. Neither did economists with the state Department of Revenue. The Prince William Sound Advisory Regional Citizens’ Advisory Council, an independent monitor of oil operations in Valdez, tracks the oil leaving the pipeline, but some of that oil ends up at the Tesoro refinery in Nikiski.

Thomas Kuckertz with the council estimated between 90 and 95 percent of the oil from the North Slope leaves Valdez, bound either for markets outside Alaska or to the Kenai Peninsula refinery. But considering the increase in state population and demand for fuel, he added, “It seems fairly obvious that the percentage of in-state volumes is going up.”

Comparing the amount ConocoPhillips hopes to earn from intrastate shippers versus the total revenues it believes the pipeline should be earning as a whole, ConocoPhillips assigns roughly 11.4 percent of the oil moving through the pipeline to intrastate shippers.

Requesting confidentiality

Tesoro also challenged the cost estimates ConocoPhillips offered as justification for the rate increase, but the argument is hampered because ConocoPhillips is asking state regulators for confidentiality on six documents used to calculate expenses on the line.

The documents cover the operations and expenses of Alyeska and ConocoPhillips, and the company said it “made every effort to keep the confidential material in its rate filing to a minimum,” and cites state statute as justification for the request at this point.

Tesoro calls these documents “the heart” of the rate case. The company should have access to some information if the RCA includes Tesoro as a party in the any case that proceeds. But Tesoro says it needs to see the information now to make its case.

ConocoPhillips believes regulators should hold off making the information public until later in the case, when it becomes clear which documents are relevant to the debate.

Increases and decreases to tariffs are calculated by applying a preset methodology to a “test year,” using actual data from a recent year to set rates for upcoming years.

But that test year needs to be typical in order for rates to be accurate, and because no year is ever entirely typical, companies and regulators adjust for inconsistencies.

Tesoro is charging that ConocoPhillips did not make some needed adjustments though, including those for declines in throughput caused by a series of unplanned shutdowns.

Another issue is how the cost of Strategic Reconfiguration will factor into the proposed rates. The major pipeline upgrade is over-budget and past deadline. ConocoPhillips is asking regulators to “phase” investigation of the newly proposed rate by first considering costs not related to Strategic Reconfiguration and returning to the issue later.

TSM set to expire soon

The State could become a major player should the case become more than routine because the 1985 settlement is set to expire sometime between next January and 2011.

“The State is concerned that the increased tariff rates (and the underlying components of that rate) that [ConocoPhillips] is requesting will significantly impact tariff rates after the TAPS Settlement Agreement is no longer in effect,” Attorney General Talis Colberg wrote to state regulators in a request to be included in the case.

RCA is required by statute to decide how it will proceed on the rate case by Nov. 3.

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