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Vol. 19, No. 8 Week of February 23, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

TAPS worth upheld

Owners suffer defeat as Alaska Supreme Court confirms $9.98 billion valuation

Wesley Loy

For Petroleum News

The Alaska Supreme Court has handed the owners of the trans-Alaska pipeline system, or TAPS, a defeat in a case concerning the taxable value of state’s most vital physical asset.

In a 38-page opinion issued Feb. 19 and written by Chief Justice Dana Fabe, the high court upheld former Superior Court Judge Sharon Gleason’s landmark ruling that put the value of TAPS for property tax purposes at $9.98 billion.

The pipeline owners including BP, ConocoPhillips and ExxonMobil had argued TAPS was worth less than $1 billion.

“We find no error in the superior court’s standard or method of valuation of the Trans-Alaska Pipeline System, nor in the specific deductions it made to account for depreciation,” the Supreme Court concluded.

The opinion pertains only to the 2006 tax year. The ruling, however, likely will have importance for subsequent tax years that remain in dispute.

BP ‘disappointed’

Petroleum property taxes are an important government revenue source in Alaska, though not as big as other streams of oil dollars including production taxes and royalties.

BP holds the largest share of TAPS, and a company spokesperson provided Petroleum News this statement on the ruling:

“BP Pipelines (Alaska) Inc. is disappointed with the court’s decision and will evaluate its legal options. Higher taxes like the excessive property taxes upheld by the court harm the long-term economic sustainability of the oil and gas industry in Alaska.”

The Alaska Department of Revenue annually assesses the value of TAPS for property tax purposes. The State Assessment Review Board can adjust those assessments.

In recent years, the assessments have fluctuated considerably, and have led inevitably to court battles.

Dueling valuation methods

The value of the 800-mile pipeline is undeniable. It carries close to 600,000 barrels of North Slope crude oil per day to the tanker port at Valdez, and revenue from this oil funds much of the costs of state government.

No other means exists to carry this oil.

The dispute between the owners and the state essentially boils down to how TAPS should be valued.

The owners have argued the pipeline value should be based on its stream of tariff income for moving oil. And oil throughput on the pipeline has been gradually declining.

The Department of Revenue takes a different approach, preferring to value the pipeline based on its replacement value.

In her ruling on the 2006 tax year, Judge Gleason put the TAPS value at level much higher than even state officials did.

But her valuation still wasn’t as high as municipal governments wanted. The pipeline passes through these municipalities, which share in the property tax collections. A higher TAPS valuation is better from their perspective.

The municipalities, like the TAPS owners, appealed the Gleason decision to the Alaska Supreme Court.

The high court’s opinion upholds Gleason’s view on how best to value TAPS.

“The superior court found that the Trans-Alaska Pipeline System’s primary value is its utility in transporting North Slope oil reserves,” the opinion says.

A tax on oil?

The opinion says the owners implied that Gleason, in effect, had improperly imposed a tax on the value of North Slope oil reserves.

“But the owners have not shown that the superior court considered the value of Alaska North Slope oil reserves for any other reason than to support the conclusion that the Trans-Alaska Pipeline System has a unique use value distinct from its tariff income,” the opinion says.

Gleason found that the owners would rebuild TAPS “not for its tariff income but in order to monetize the Alaska North Slope’s $350 billion worth of oil reserves,” the opinion says. “But the superior court did not include the $350 billion figure as part of its replacement cost calculation. Instead, the superior court used the presence of those reserves to explain its determination that tariff income could not adequately capture the pipeline’s value as a special-purpose property.”

Justice Daniel Winfree, joined by Justice Craig Stowers, dissented in part to the majority opinion.

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