Imprudent projectFERC upholds its 2014 decision criticizing TAPS strategic configuration ALAN BAILEY Petroleum News
In a Nov. 20 order, the Federal Energy Regulatory Commission upheld a 2014 decision, disallowing the recovery through oil shipping rates of a substantial slice of the cost of the trans-Alaska oil pipeline strategic reconfiguration project. Strategic reconfiguration involved the replacement of the original turbine-powered pumps that drove oil through the pipeline by electrically powered pumps, together with the implementation of a more automated pipeline control system.
The extent to which the pipeline owners can recover the huge cost of the project through the pipeline rates has a significant impact on the cost of shipping oil through the pipeline system and on the revenues that the state of Alaska collects from North Slope oil production.
The commission said that the project was imprudent, given inadequate up-front engineering; major cost and schedule overruns; and a failure to demonstrate that claimed benefits from the project have actually been achieved.
2014 decision Essentially, FERC is affirming the 2014 decision by its administrative law judge that only $229 million of the estimated $786 million cost of the strategic reconfiguration project can be recovered through shipping fees. But the commission also now requires the pipeline owners to subtract the estimated cost of upgrading pump station 1, at the northern end of the pipeline, from that $229 million figure - apparently the upgrade of pump station 1 as part of strategic reconfiguration had not started at the time of the 2014 FERC decision.
However, the pipeline owners can now presumably appeal the FERC decision through the court system.
According to the FERC order, the owners assert that the pipeline upgrades are bringing benefits for oil shippers, albeit at a higher cost than was originally estimated. The owners have accepted that they will not recover the entire cost of the strategic reconfiguration project from shipping rates but have claimed that they should be allowed to recover $421 million of the cost. BP, ConocoPhillips and ExxonMobil, pipeline owners, have all told Petroleum News that they are still reviewing the FERC order.
Challenge to rates The FERC case results from a challenge by the state of Alaska, Tesoro Corp. and Anadarko Petroleum Corp. to the pipeline shipping rates filed for 2009 and 2010, at which time the trans-Alaska pipeline was owned jointly by BP Pipelines (Alaska) Inc, ConocoPhillips Transportation Alaska Inc, ExxonMobil Pipeline Co, Koch Alaska Pipeline Co LLC and Unocal Pipeline Co. The pipeline is operated by Alyeska Pipeline Service Co., a company owned by the owners of the pipeline.
The fees that the pipeline owners charge for shipping oil through the line, the oil artery that delivers crude from the North Slope to the Valdez Marine Terminal, for eventual shipment to market, form a key factor in both the economics of North Slope oil production and the oil revenues collected by the state of Alaska. Essentially, the lower the cost of shipping the oil, the higher becomes the oil’s wellhead value on the Slope. A higher wellhead value translates to higher royalties, while lower shipping costs lead to higher tax revenues. And a lower shipping rate benefits oil shippers such as Tesoro and Anadarko that are not also pipeline owners.
Project origins The massive strategic reconfiguration project originated from studies conducted by the pipeline owners and Alyeska in the 1990s, seeking options for upgrading the pipeline’s aging technology. The concept that emerged was the installation of new pumps at four pump stations that would remain in operation along the pipeline’s length, with the pumps to be driven by purpose-built, variable-speed electric motors. The new pumps would be connected into a new pipeline control system that would use modern digital electronic technology.
The pipeline owners and Alyeska said that the new pumping arrangements would better accommodate the declining flow of oil through the pipeline than would the system’s original pumps. By using the variable-speed capabilities of the electric motors and by switching individual pumps in and out of operation at each pump station, it would easily be possible to accommodate variations in the pipeline’s throughput, the owners and Alyeska said. In addition, the new control system arrangement would reduce pipeline operating costs by automating some operational functions and providing more comprehensive data for operational fine tuning and for system maintenance, they said.
According the FERC Nov. 20 order the pipeline owners had claimed potential reductions in personnel and maintenance expenses of $1.1 billion to $1.4 billion over a 20-year period, as a consequence of completing the strategic reconfiguration project.
Inadequate cost estimates Following a conceptual engineering study, in December 2002 Alyeska, with pipeline owner approval, commissioned engineering contractors SNC-Lavalin Constructors Inc. and Hinz Automation to prepare a preliminary engineering design and cost estimate for the pump station upgrade project. And in November 2003 the contractors reported the results of their work. Following pipeline owner approval of the project, in March 2004 the project transitioned from preliminary engineering to implementation, with an estimated total cost of $242 million and an estimated completion date of the end of 2005. In August 2004 Alyeska requested an additional $26.5 million for costs associated with required electrical power at pump stations 1 and 9.
But, as costs escalated and timeframes slipped, the project did not proceed according to plan.
Consequently the original plan to complete all required pump station conversions by late 2005 morphed into a phased approach, with each pump station being converted as a distinct project phase and the first of the conversions, at pump station 9, eventually being completed in February 2007. By 2009 the upgrading of three of the four operational pump stations had been completed, but work at the fourth pump station, pump station 1 at the northern end of the pipeline, has yet to be finished. The most recent published estimate for the cost of the project is $786 million.
Initial FERC decision Following objections by pipeline shippers over the recovery of the cost of the project from shipping rates, FERC and the Regulatory Commission of Alaska conducted concurrent hearings to consider the matter. And in 2014 the FERC administrative law judge, citing a long list of project failings, largely agreed with the shippers’ position. FERC has now upheld that 2014 finding.
FERC said that the up-front engineering design work that led to the sanctioning of the project in 2004 was woefully inadequate, given the scale and complexity of the project. Consequently, the project cost estimates were inaccurate. FERC attributed the problems in part to a combination of a rushed project schedule and the selection of an Alyeska project manager who was ineffective because of his lack of experience in conducting a project of this scale and organizational complexity. Moreover, the plans for the project were based on viewing the pump station upgrades as new “greenfield site” facility installations, rather than the much more complex work of converting existing systems. The electric motors earmarked for the upgraded pump stations were of a new, untested design. And the initial project plan had not finalized plans for power supplies for the motors at pump stations 1 and 9, FERC said.
A third-party consulting firm commissioned by the pipeline owners to conduct an independent review of the project estimates expressed concerns about the clarity of the project scope and the reliability of the estimates, FERC said. Moreover, towards the end of the preliminary engineering study in late 2003 some Alyeska employees had questioned SNC-Lavalin’s expertise in the technology being considered for the project and had also questioned changing project scope and cost estimates. The pipeline owners were also aware that SNC-Lavalin lacked Alaska experience, a factor that led to poor quality preliminary engineering, FERC said.
No urgency While the aggressive timescale for the project put it at significant risk of failing to meet target completion dates, there was, in fact, no particular urgency to conduct the pump station upgrade - the existing, original pumps were in excellent condition and did not require immediate replacement, FERC said. Thus, there had been adequate time to complete “the proper engineering analysis” for the project, the agency said. Nevertheless, despite continuing to document concerns about the project estimates, the pipeline owners continued to sanction escalating project expenditures. Over-optimistic progress reports from the project also compounded the problems, FERC said.
Moreover, during the regulatory hearings over the strategic reconfiguration costs, evidence emerged that the original pump systems could handle anticipated low oil flow rates through the pipeline, FERC said.
FERC also said that Alyeska’s estimates for the potential benefits from the project were unreliable because the estimates depended on the flawed conceptual and preliminary engineering that had led to project sanction. Moreover, Alyeska manpower data for the years following pump station conversion do not provide convincing evidence of overall manpower reductions as a result of the conversions. Estimated cost data used for benefit calculations were questionable. And estimated savings in maintenance costs were based on invalid assumptions, FERC said.
And, although the pipeline owners revisited the project’s estimated benefits when approving a major cost escalation in 2005, those revised estimates continued to be based on incomplete engineering, FERC said.
Disputed cost recovery The owners have argued for a recovery of $421 million from shipping rates, a figure that one of their witnesses presented as a likely cost of the project, had the project been executed prudently.
But FERC has upheld its administrative law judge’s view that the pipeline owners should only be allowed to recover $229 million in costs from pipeline shipping fees, a figure which represents the cost of upgrading the pipeline as estimated in an August 2004 funding approval. The agency is allowing the amortization of this estimated cost but is prohibiting the owners from including in their cost recovery a return on the capital invested. And, in its new decision, FERC requires as a basis for cost recovery the estimated cost of upgrading pump station 1 to be subtracted from the $229 million cost estimate.
The pipeline owners failed in their managerial responsibility to ensure reasonable planning and engineering prior to sanctioning the strategic reconfiguration project, FERC said. Improvident management resulted in a commitment to the project based on an unrealistic cost estimate, about one-third of the actual cost, and similarly unsubstantiated estimates of the project benefits, FERC said.
“Such improvident expenditures should not be borne by the (pipeline) ratepayers,” the commission said.
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