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Alaska opens oil pipeline tariff talks Pipeline owners BP, Phillips, ExxonMobil, Williams and Unocal ready to renegotiate 1985 settlement with state Larry Persily Petroleum News Government Affairs Editor
The state of Alaska and the five companies that own the trans-Alaska oil pipeline have agreed to start talks this month to negotiate revisions to the line’s almost 20-year-old tariff structure.
Any reduction in pipeline tariffs could be a plus to the state treasury, with lower transportation costs resulting in higher wellhead values and larger production tax and royalty payments to the state based on those higher values.
Advocates of lower tariffs also say it could encourage additional oil development by lowering the cost for new entrants on the North Slope.
Alaska Attorney General Greg Renkes and the pipeline owners signed the memorandum of understanding Jan. 22-23, calling for negotiations to start sometime in February and acknowledging the talks could take as long as two years.
The memorandum says negotiations will cover the tariff structure for interstate and intrastate shipment of North Slope oil.
“Tariffs have been a controversial and litigated topic throughout the (pipeline’s) life,” the memorandum says, explaining that a negotiated settlement is preferable to fighting the issue before regulatory agencies and eventually in court. Negotiated settlement subject to FERC approval The state and pipeline owners will not negotiate an actual tariff but rather a method for calculating the tariff, which would then be subject to approval by the Federal Energy Regulatory Commission, which regulates interstate oil pipeline tariffs, and the Regulatory Commission of Alaska for in-state deliveries of oil.
The existing tariff structure, or methodology as it is called, includes a provision for the pipeline owners to receive a return on their original investment in the 800 mile line, which opened in 1977. Opponents of the per-barrel methodology argue the tariff structure allows the owners to recover too much money on their investment and say the tariff should be calculated on a more traditional depreciated rate base.
The Alaska pipeline tariffs are calculated under a methodology accepted by the state and owners in 1985 and later approved by FERC. That agreement, called the TAPS Settlement Methodology, expires in 2011, with a provision calling for negotiations on a revised tariff structure to start no earlier than Jan. 1, 2007. The Jan. 22-23 memorandum between the state and owners moves up that date by almost three years. Alternative to lengthy legal battle “Unless successor agreements are executed, the parties anticipate litigation before the Federal Energy Regulatory Commission, the Regulatory Commission of Alaska and ultimately the courts will occur that will be lengthy, costly and recurring, which is not in the parties’ or the public’s best interest,” the memorandum said.
While FERC regulates interstate tariffs, the state regulatory commission governs tariffs for the in-state shipment of oil.
“I believe that starting earlier will benefit all the interested parties, particularly explorers, if we can be successful in establishing lower and more predictable tariffs for the future,” Renkes said in a prepared statement announcing the agreement.
In addition to holding direct talks with the pipeline owners, Renkes said the state will be meeting with legislators, municipalities along the pipeline route, shippers and explorers “to solicit their concerns and ideas” for the state’s position in the tariff talks.
Pipeline owners are BP Pipeline (Alaska) Inc., 46.93 percent; Phillips Transportation Alaska Inc., 28.3 percent; ExxonMobil Pipeline Co., 20.34 percent; Williams Alaska Pipeline Co., 3.08 percent; and Unocal Pipeline Co., 1.35 percent. Williams still at negotiating table Although Williams in November announced a deal to sell its stake to Koch Alaska Pipeline Co., a subsidiary of Koch Pipeline Co., of Wichita, Kan., the sale has not been completed and Williams is still a part owner of the oil line and will be at the negotiating table until Koch takes over. The sale is scheduled to close this spring.
Another subsidiary of Koch Industries Inc., Flint Hills Resources, is buying Williams’ refinery at North Pole, which processes North Slope crude taken from the pipeline.
The state’s negotiating team will include officials from the attorney general’s office and the departments of Revenue and Natural Resources. The statement from Renkes’ office did not say who will serve on the state’s team, and the attorney general was out of state and unavailable for comment, according to Theresa Woelk, his press aide. Negotiations under two-year deadline Provisions in the memorandum include:
• If the parties cannot reach a settlement, the agreement to begin early talks will expire in February 2006.
• The pipeline owners will set up a TAPS Renegotiation Committee to present joint proposals and counterproposals in negotiations with the state.
• Nothing in the agreement prevents any of the pipeline owners from having separate talks with the state at any time for its own interests, as long as the owner notifies the other companies of the private talks. The other companies would then have the option of suspending or continuing the committee’s joint negotiating effort.
• All press releases related to the negotiations will be issued jointly by the state and companies.
• All communications between the parties will be held confidential.
• The state and each of the companies will pay their own costs in the proceedings. Regulatory decision prompted push for early talks The state’s push for an early start on renegotiating the tariff structure was prompted by a November 2002 ruling from the Regulatory Commission of Alaska that said the pipeline owners’ charges for shipment of North Slope oil to in-state refineries from 1997 to 2000 were unreasonable.
The RCA rejected the FERC-approved tariff methodology as it related to depreciation of the line and the owners’ return on their investment.
The RCA ruling said the pipeline charged $1.50 per barrel too much and ordered refunds and a new rate structure. The pipeline owners are appealing the order in state court.
Williams and Tesoro Alaska Co. started the case when they filed a complaint with the RCA in 1997, alleging they were charged too much to move oil to their Alaska refineries.
Pipeline owners collect about $1 billion a year in tariffs on North Slope oil, more than 90 percent of which is shipped aboard tankers to West Coast refineries. The rest is processed instate. The average tariff for interstate shipments in the past fiscal year was about $3.25 per barrel.
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