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Vol. 16, No. 15 Week of April 10, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

TAPS worth $7.9 billion

2011 valuation of Alaska’s key asset is 18% lower than 2010 determination

Wesley Loy

For Petroleum News

The Alaska Department of Revenue has pegged the value of the trans-Alaska pipeline system at just over $7.9 billion.

That’s considerably lower than the department’s assessed value in 2010, but still far above what the pipeline owners feel the asset is worth.

The state annually computes the pipeline’s value for property tax purposes.

The statewide tax on petroleum property is an important government revenue source in Alaska, though not as big as three other streams of oil dollars: production taxes, royalties and corporate income tax.

In recent years, the state, the pipeline owners and municipal governments have jousted in the courts over the line’s value.

Assessor sets value

On March 30, James Greeley, state petroleum property assessor in the Department of Revenue, rendered a decision setting the pipeline value for the 2011 tax year.

Petroleum News obtained and reviewed a copy of the 38-page decision.

Greeley put the value at $7,932,979,800.

The department earlier in the year had valued the pipeline at just over $6.7 billion.

Greeley adjusted it upward after considering appeals from the pipeline owners as well as three municipal governments that collect petroleum property taxes based on the state assessment. The three municipalities are the city of Valdez, the Fairbanks North Star Borough and the North Slope Borough.

Greeley’s March 30 determination, known as an “informal conference decision,” can be appealed to the State Assessment Review Board, a five-person panel appointed by the governor to hear oil and gas property tax appeals.

For the 2010 tax year, the SARB set the pipeline’s assessed value at a little over $9.6 billion. That was after the Department of Revenue, in an informal conference decision, put the value at $9.2 billion.

Greeley’s adjusted pipeline value of $7.9 billion for the 2011 tax year is a nearly 18 percent drop from the $9.6 billion the SARB set for 2010.

Wildly differing claims

The 800-mile pipeline is the only means of transporting crude oil and natural gas liquids south from Alaska’s North Slope. Without much debate, the pipeline can be called the state’s most valuable asset.

Alyeska Pipeline Service Co. of Anchorage runs the pipeline, which has been in operation since 1977. Alyeska is a consortium of the five energy companies that own the pipeline: BP, ConocoPhillips, ExxonMobil, Koch Industries and Chevron.

In appealing the Department of Revenue’s initial 2011 assessment, the owners and the municipalities asserted wildly differing claims of the pipeline’s worth, Greeley’s decision indicates.

The owners contended the pipeline was worth only $1.5 billion, far less than the department’s appraisal.

The municipal governments, however, argued the pipeline was worth at least $12 billion, well above the department’s valuation. A higher state assessment means greater property tax collections for the municipalities.

In assigning a value to the pipeline, the department takes into account such factors as estimates of remaining reserves in North Slope oil fields, and how many years of “economic life” the pipeline has left.

Importantly, the department values the line based on the cost to replace it and still move an equivalent volume of oil. This is a fundamental point of contention for the owners, who have argued the pipeline instead should be valued against its tariff income stream.

The pipeline today carries far fewer barrels than it did at the peak of North Slope oil production. Current throughput is roughly 635,000 barrels per day, compared to more than 2 million barrels per day in 1988.

Greeley’s decision document says the owners contended a replacement line with pipe 30 inches in diameter could handle 650,000 to nearly 1.1 million barrels per day. The municipalities, however, emphasized the cost of replacing the current 48-inch design.

The Department of Revenue does consider past sales of small, partial interests in the Alaska pipeline, but this “historical information” isn’t a good indicator of the system’s full and true value, Greeley wrote.

Ongoing litigation

The state’s assessment of pipeline value is under challenge for every tax year beginning with 2006.

After a trial, state Superior Court Judge Sharon Gleason in May 2010 ruled that the pipeline’s value for the 2006 tax year was $9.98 billion, resulting in the owners having to pay tens of millions of dollars in back property taxes.

The owners have appealed the Gleason ruling to the Alaska Supreme Court. The municipalities also have appealed.

For the disputed 2007, 2008 and 2009 tax years, lawyers for all sides are preparing for another trial in Gleason’s court. The pipeline owners have challenged the state’s tax assessments for each of those years as too high.

One strategy lawyers for the pipeline owners have used without success is known as a peremptory challenge. Under Alaska Rules of Civil Procedure, each side in a Superior Court case generally is entitled to a change of judge. In this instance, however, another Superior Court judge has ruled Gleason should stay on the case.

But the owners may yet avoid another potential defeat in her court.

That’s because President Obama, on April 6, nominated Gleason for a seat on the U.S. District Court for Alaska.

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