Pipeline value set

Alaska judge again rules system is worth far more than what owners say

Wesley Loy

For Petroleum News

An Alaska judge on Dec. 30 issued another major ruling in the long-running dispute over the value of the trans-Alaska pipeline system for property tax purposes, and it marked another defeat for the owners.

The 216-page ruling from Superior Court Judge Sharon Gleason of Anchorage came after a nine-week trial this fall focusing on the value of TAPS for the years 2007, 2008 and 2009.

The concluding paragraph of the decision says the “full and true value” of TAPS “with due regard to the economic value of the property based on the estimated life of the proven reserves of gas or unrefined oil then technically, economically, and legally deliverable into the transportation facility” is $8.94 billion for 2007, $9.64 billion for 2008 and $9.25 billion for 2009.

Those figures are far above what the owners argued the system was worth. They asserted the assessed value of TAPS should be no greater than $1.3 billion for any of the three tax years at issue, Gleason’s ruling says.

Second setback for owners

The owners went to court to challenge how state officials calculate the value of Alaska’s most essential industrial asset, which has been carrying North Slope crude oil since 1977.

The ruling is the second in recent times to go against the owners. In May 2010, Gleason pegged the value of TAPS for 2006 at $9.98 billion.

The rulings constitute victories for the state and for municipal governments along the 800-mile pipeline route, as higher valuations mean greater property tax collections.

Bill Walker, an attorney for the city of Valdez, told Petroleum News with respect to the latest ruling: “We’re very pleased with it.”

The five companies holding ownership stakes in TAPS are BP, ExxonMobil, ConocoPhillips, Chevron and Koch Industries. BP holds the largest stake at 46.9 percent.

Steve Rinehart, BP’s Anchorage spokesman, said the company was reviewing the ruling and had no further comment.

The ruling for the 2006 tax year is currently on appeal to the Alaska Supreme Court, and a similar appeal of Gleason’s latest ruling is expected.

Trial covers key evidence

The non-jury trial was highly complex, covering such topics as appraisal theory and featuring numerous expert witnesses and reports.

Some sections of the ruling are blacked out, presumably to protect confidential company data.

Perhaps most significantly, the trial delved into two key areas involved in valuing the pipeline — estimates of remaining North Slope oil reserves, and the technical ability of the pipeline system to continue running as oil production continues to decline.

In these two areas, Gleason made remarkable observations as to whose production forecasts and reserves estimates she found most credible, and the throughput level at which she believes the pipeline can continue operating.

With respect to the latter, Gleason held that she believes the pipeline can continue to operate at least down to a minimum flow rate of 100,000 barrels per day.

That’s a much lower rate than has generally be cited as a cutoff point for the pipeline, which recently has moved an average of just over 620,000 barrels per day.

The operator, Alyeska Pipeline Service Co., has said TAPS flow volume has been dropping at a rate of about 5.4 percent yearly.

Dueling reserves estimates

The judge’s ruling devotes about 25 pages to a discussion of evidence on proven reserves, and the forecasts and estimates offered by the state, the pipeline owners and the municipalities.

In general, Gleason favored the data from the municipalities and their consultant, Dudley Platt, whom she termed “one of the preeminent production forecasters in the state.” Platt for many years, until 2009, did production forecasts for the state Department of Revenue.

The judge said testimony on proven reserves from Roger Marks, a former state economist working for the owners, was “not persuasive.”

She also called the Department of Revenue’s production forecasts and reserves estimates “unreliable” for her purposes in deciding the case.

Consultant Frank Molli succeeded Platt as a production forecaster for the Department of Revenue.

But his “well-by-well analysis and methodology failed to capture significant barrels of oil that should be properly included in forecasts for each of the assessment years,” Gleason wrote. “Mr. Molli also did not save all of the data necessary to permit a complete review of his work product.”

Molli also didn’t prepare a forecast for each of the tax years at issue. Rather, at trial he presented his forecast from the department’s Fall 2010 Revenue Sources Book, which the state’s petroleum property assessor, Jim Greeley, then “adjusted backward” for each of the three tax years, Gleason’s ruling says.

Among her other criticisms, Gleason said Molli did not attempt to incorporate BP’s internal forecasts into his analysis or use them to validate his own results. His failure to do so “had a substantial negative impact” on the weight she gave to his reserves analysis.

Pipeline life to 2068

Gleason concluded the municipalities offered the “best available estimate” of total proven reserves. Using a minimum throughput limit of 100,000 barrels per day, and not counting the undeveloped and disputed Point Thomson unit, Gleason pegged proven reserves for the most recent tax year of 2009 at 7.077 billion barrels, with pipeline life extending to 2068.

The ruling says the taxable TAPS property includes “only the tangible real and personal property” from Pump Station 1 through the Valdez Marine Terminal and does not include intangible property, tankers, crude oil or “any property that is upstream of Pump Station 1.”

The ruling notes that the final cost of TAPS, when completed in 1977, was about $8 billion.

Its design capacity was 1.42 million barrels per day, but with the use of chemical drag reduction agents, it was able to move 2.1 million barrels per day at the peak in 1988.

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The real story on TAPS low-flow threat?

That was a key question for an Alaska judge in determining the taxable value of the trans-Alaska pipeline system — at what point does declining production of North Slope crude oil render the oversized pipeline unusable.

This has been a big issue not only in court but in the ongoing public policy conversation over Alaska’s oil and gas future. The perceived threat that declining oil production could mean taps for TAPS is often cited as a reason to, for example, lower tax rates to encourage exploration spending to find more oil.

North Slope oil production averaged 622,355 barrels per day through the month of December. That’s a far cry from the peak of 2.1 million barrels per day the 800-mile pipeline carried in 1988.

A study the line’s operator, Alyeska Pipeline Service Co., issued in June said the system could continue to run “with reasonably high operational confidence” down to a throughput of about 350,000 barrels per day, provided problems such as freezing water in the oil stream were addressed.

Such freezing can occur because the oil, which enters the pipeline quite warm, is cooling on the long and increasingly slow journey to the tanker terminal at Valdez.

In contrast to the Alyeska study, the Dec. 30 ruling from state Superior Court Judge Sharon Gleason outlines compelling evidence suggesting the pipeline — with various engineering solutions — likely can operate at throughputs of 100,000 barrels per day or less.

Oil by rail

One study completed in 2005 for BP, the largest stakeholder among the pipeline’s five owner companies, contained an option to build a $3 billion, 20-inch pipeline to replace the 48-inch line from the North Slope to Fairbanks. From Fairbanks, oil would then be hauled by railroad south to tidewater for loading onto tankers.

The Alaska Railroad doesn’t extend to Valdez, where tankers load. The tracks do, however, reach the seaside towns of Anchorage, Whittier and Seward.

In order to book proven reserves to the U.S. Securities and Exchange Commission, an upstream oil producer such as BP needs to perform an analysis to determine the financial feasibility of bringing the oil to market, Gleason’s ruling says.

BP’s 2005 study, done by JTG Technology Consortium, concluded that the low-flow limit of the existing 48-inch pipeline was 135,000 barrels per day at Pump Station 1.

The option to downsize the northern section of pipe and move oil by rail south of Fairbanks “would allow reserves to be booked down to 45,000 bbl/d, if justified by high oil prices,” Gleason’s ruling says.

BP used the JTG study to report its reserves to the SEC, the ruling says.

‘Completely unpersuasive’

On June 28, 2010, Carpenter gave BP an update: “I am beginning to think that it looks surprisingly good for ultra low flow below 100,000.”

The final version of the Carpenter study, dated Aug. 16, 2010, concluded TAPS could effectively operate down to throughputs between 100,000 and 70,000 barrels per day by installing heaters at various intervals along the pipeline to warm the oil.

Carpenter determined further reductions in oil flow might be possible by maintaining flow velocity, with one option being “seawater commodity supplementation.”

At trial, the owners argued the minimum TAPS throughput was much higher, Gleason wrote. They referenced Alyeska’s low flow study issued in June and asserted the pipeline has a low flow limit of 300,000 to 350,000 barrels per day.

A shorter useful life for an asset suggests that its taxable value should be lower.

Gleason, however, termed testimony from Pat McDevitt, Alyeska’s project manager on its low flow study, “completely unpersuasive.” She further said the low flow study, in her view, was primarily to study the operating challenges with throughputs down to 300,000 barrels per day, and not to determine a minimum TAPS throughput capability.

Gleason said she found Dan Hisey, Alyeska’s former chief operating officer, more persuasive. Hisey testified that even if heating and other low-flow measures cost the owners hundreds of millions of dollars in coming decades, such investments will be worth it to keep North Slope crude flowing and to provide transportation for future fields and production.

—Wesley Loy