Hilcorp reaches deal for pipeline system

Settlement creates framework for consolidating four Cook Inlet pipelines into a unified system with postage stamp rate

Eric Lidji

For Petroleum News

Hilcorp Alaska LLC and a broad group of regional stakeholders have reached a settlement to consolidate four Cook Inlet pipelines into a single unified system.

The Aug. 29 settlement creates the conditions for consolidating the Kenai Nikiski Pipeline, the Kenai Kachemak Pipeline, Cook Inlet Gas Gathering System and Beluga Pipeline into one system called the Kenai Beluga Pipeline. A newly formed Hilcorp subsidiary called Kenai Beluga Pipeline LLC would operate the unified system.

The consolidation is among the more complicated endeavors in recent Cook Inlet memory. The settlement involved the utilities Chugach Electric Association, Enstar Natural Gas Co., Matanuska Electric Association and Municipal Light & Power, the producers including Aurora Gas, ConocoPhillips, Cook Inlet Energy and Hilcorp, the storage company Cook Inlet Natural Gas Storage Alaska, the refiner Tesoro and the state Attorney General. The Regulatory Commission of Alaska must approve the settlement.

With the settlement complete, Kenai Beluga Pipeline is now preparing an application for a certificate of convenience and public necessity to begin operations by Nov. 1.

The settlement creates an initial tariff of 29.12 cents per thousand cubic feet for the system, which the parties reached by spreading a roughly $17.5 million annual cost of service over 2013 volumes of 60 billion cubic feet. The consolidated system will have a postage stamp rate with a single class of service called “Interruptible Transmission.”

The initial rate is based on current usage of the four pipelines, which are expected to become more efficient as a consolidated system. The settlement requires Kenai Beluga Pipeline to file a rate case by May 30, 2016, using actual costs and volumes from 2015.

The settlement also creates provisions for expanding the capacity of the system.

The four pipelines were built individually, for specific purposes, but had formed an integrated transportation network by the time Hilcorp Alaska arrived in the state.

“Today the markets have changed. Some of the customers have changed,” Hilcorp Alaska pipeline manager told state regulators in June 2013, when the company proposed the idea. “The owners have changed. … This is probably a good time to do this evaluation.”

Hilcorp Alaska acquired complete working interest in all four pipelines through its acquisition of Union Oil Company of California in 2011 and Marathon Oil Co. in 2012.

After Hilcorp officially took over the four pipelines in 2013, customers of the various pipelines encouraged the company to consider consolidating the four pipelines into one system - essentially turning four pipelines into one. They believed an integrated system would improve efficiency, reduce redundancies and deliver cost savings to shippers.

In late 2013, Hilcorp asked the RCA to oversee the inevitably complex settlement conference, which involved essentially every major government and industry stakeholder in the region. The RCA agreed. The parties met from January to April 2014, when they reached a non-binding agreement in principle that formed the basis of the settlement.