Flint Hills Resources Alaska LLC has filed a formal complaint with the Regulatory Commission of Alaska and the Federal Energy Regulatory Commission asking the commissions to investigate whether existing quality bank provisions of trans-Alaska oil pipeline tariffs are “just, fair and reasonable.”
The Flint Hills’ complaint is against TAPS owners BP, ConocoPhillips and ExxonMobil.
The owners had not yet responded to the complaint when Petroleum News went to print with this issue.
Flint Hills said the current quality bank formula in the tariff “fails to calculate accurately the relative difference in the market values of the varying qualities of crude oil transported over TAPS as well as the relative value of the Resid cut.”
The quality bank reflects that crude oils of different qualities are shipped on the pipeline, crude oils which are commingled for transportation. The quality bank collects monies from shippers receiving higher quality crude than they ship and uses the funds to compensate shippers receiving lower value crude oil than they ship. The quality bank formula “calculates the relative value of each crude oil stream transported over TAPS by determining the value of the various petroleum products that can be distilled and processed from the stream,” the complaint said.
The Flint Hills North Pole Refinery processes crude oil from the North Slope, extracting “middle distillate products” and returns the remaining oil to the pipeline. The company said it pays in accordance with quality bank methodology “for any diminution in value between the crude oil stream” it receives at the refinery “as compared to the value of the return oil redelivered to TAPS.”
Available benchmarksFlint Hills said there are benchmarks which can be used to test whether the quality bank formula “accurately calculates the relative differences in value of the various ANS crude oils.” Data published by Platts includes the market values of Alaska North Slope crude, ANS coking yields and ANS cracking yields.
“In addition,” the complaint said, “the ‘floor’ value of Resid, a cut remaining after distillation of the lighter products, can be determined by calculating its value when blended with ANS light distillate and sold as FO-380, a type of bunker fuel oil.”
Flint Hills said comparison of benchmarks with quality bank results indicates the existing formula worked from the Nov. 1, 2005, effective date of FERC Opinion No. 481 through December 2008, with the formula consistently calculating “a total value of the products derived from the ANS common stream at Valdez that exceeded the Platts assessed market value of ANS crude, as would be expected.”
During that same period, the quality bank “formula consistently valued Resid higher than its value as a blended component of FO-380, a relationship consistent with a prior finding that the predominant and more valuable use of Resid is as a coker feedstock rather than as a blender,” Flint Hills said.
But beginning in January 2009, the quality bank formula “started to calculate a total value of products distilled and processed from ANS crude that was below Platts assessed market price for ANS crude,” the company said in the complaint.
Flint Hills said the evidence shows that the quality bank formula’s “uneconomic and contradictory results are attributable to its undervaluation of Resid,” which starting in 2009 was valued by the formula at below the market-based value of Resid as a blending agent for FO-380. The company told RCA that conclusion was “inconsistent with the prior finding that the value of Resid as a coker feedstock generally is higher than its value as a blender in FO-380.”
Flint Hills cited Platts’ data as showing that “throughout the entire 2005-2013 period, the market has generally placed a higher value on Resid as a coker feedstock than as a blended component of FO-380.”
What changed?Flint Hills said two changed circumstances are not recognized in the existing quality bank formula, causing it to understate the value of Resid.
First, consumer demand for motor gasoline has declined and lighter crude oils have been more available, which, combined with more stringent environmental laws, “reduced the demand for coking capacity and the value of West Coast refinery assets.”
“Second, the liquid product yields from coking assumed in the existing QB formula are below the yields of an updated coker operating under design conditions.”
Because those changed circumstances have not been incorporated into the Resid calculation, the existing formula is producing “unjust and unreasonable results as to the relative value of Resid,” Flint Hills said.
The company said in its complaint that it wants to see the way the formula calculates the value of Resid changed to reflect coker yields from updated cokers “operating under design conditions” and by reducing the gross value of coker liquid yields only by variable costs, not by fixed capital and operating costs.
Quality bank dates from 1984Flint Hills said the quality bank was approved by FERC and RCA in 1984 “after years to litigation, to compensate shippers experiencing a diminution in the value of crude oil.”
The quality bank initially used a gravity-based methodology, which assumed lighter ANS crude streams are more valuable than heavier streams, but that methodology was challenged in 1989 after a facility was constructed to process substantial amounts of natural gas liquids. While NGLs had a low gravity, those objecting to the gravity measurement said NGLs did not have value comparable to crude oil with a similar low specific gravity.
A FERC presiding judge “concluded that the gravity method for valuing crude oil did not assign an accurate value for NGLs and no longer yielded just and reasonable results,” but before a final decision was issued the parties settled and the 1993 settlement replaced the gravity method with a distillation method.
The distillation method separates ANS crude for valuation purposes into a number of components, or cuts, with proxy market values assigned to each cut and each shipper’s oil “valued in accordance with the volume-weighted values of its component cuts,” the complaint said.
Flint Hills said market values can relatively easily be determined for the five lightest cuts — propane, isobutene, normal butane, natural and gasoline. Valuation for distillate and Resid has been contested and litigated.
Flint Hills’ complaintFlint Hills said the quality bank uses proxies for market values of each cut in the crude streams carried by the trans-Alaska oil pipeline, and argues: “New evidence demonstrates that the existing QB formula fails to calculate accurately the relative difference in the market values of the varying qualities of crude oil tendered in TAPS for transportation in a common stream.”
While there are benchmarks which can be used to evaluate the accuracy of the quality bank formula, Flint Hills said none of the available benchmarks “is perfectly comparable with the valuation by the QB formula.”
From 2005 through 2008 the formula calculated a total value of product from ANS crude oil exceeding the Platts assessed value for ANS crude, but from January 2009 through May 2013, the quality bank formula showed an average of $1 negative difference between the products and ANS crude — the value of the crude was greater than the sum of the products.
Flint Hills said that result “suggests the QB formula no longer reflects actual market conditions.”
The company said the quality bank formula could be undervaluing each product, but said “results since 2009 demonstrate that not all cuts are being equally undervalued. Rather, the undervaluation of ANS crude is attributable to the QB formula’s undervaluation of Resid,” a value which must be inferred because Resid has to be blended to produce residual fuel oil.