ARCO Alaska Pipelines’ Yaege explains pipeline business

Competitive tariff system holds down transportation costs and ensures fairness

Tom Hall

PNA Reporter

It’s a rare Alaskan who doesn’t know what an oil pipeline looks like, but few Alaskans are probably familiar with the business aspects of pipeline systems in general, and the trans-Alaska pipeline system in particular.

Many Alaskans may also be unaware that the trans-Alaska pipeline is only one of many pipelines on the North Slope. With the exception of the Oliktok pipeline (which carries natural gas liquids), the other pipelines feed into the trans-Alaska pipeline. The most expensive privately funded construction project ever undertaken (approximately $9 billion), the trans-Alaska pipeline has transported more than 12.5 billion barrels of oil to the Valdez terminal since 1977.

Understandably, the trans-Alaska pipeline owners, besides paying for operating costs, would like to earn a return on their investment. That’s where the business of pipelines comes in.

“I think you’re probably going to recognize that the pipeline business is crucial to the oil industry in Alaska. We provide the way to move those barrels of oil from the production fields to the market,” ARCO Alaska Pipelines Vice President Meg Yaege, told the Alaska Support Industry Alliance Feb. 19. Tariffs, charged to all shippers who use the pipeline, pay for operating costs and provide a reasonable investment return to the owners.

Seven companies have an ownership interest in the trans-Alaska pipeline (see sidebar) and, since the percentages of ownership interests differ among the seven companies, each company may move a proportionate amount of crude through the pipeline.

“ARCO’s 22 percent interest in TAPS entitles us to 308,000 barrels per day of capacity,” said Yaege. With seven companies and only one pipeline, trans-Alaska pipeline owners agreed that they could not have seven companies operating the pipeline. Thus, Alyeska Pipeline Service Co. was hired to operate the pipeline, and each company reimburses Alyeska for its share of operational costs. Alyeska does not have an ownership interest in the pipeline.

Evolution of the pipeline tariff

That meant that the owners had to operate the pipeline for the public good.

“The logic behind this is that it allows not only for fair treatment of all parties, but also that a single line be built, where otherwise, multiple lines might be required,” Yaege said.

The common carrier designation has three major requirements. First, the line must be available to all shippers, not just the owners. Second, all shippers must be treated equally, which means non-owners pay the same tariffs as owners. And third, the tariffs are regulated as a common carrier pipeline by the Alaska Public Utilities Commission for intrastate movement, and by the Federal Energy Regulatory Commission for interstate movement.

Disputes about tariff calculations arose over the years, so, in 1985, the state, the FERC and the trans-Alaska pipeline owners adopted a formula for ensuring the tariffs would be fair. Called the TAPS Settlement Methodology, it was uniquely tailored to the trans-Alaska pipeline and established a formula for maximum tariffs.

“That’s very important,” said Yaege. “TSM does not tell us what tariffs we must publish; it tells us the maximum tariff we are allowed to publish. We then have the option for competitive reasons to come in at any point below that.”

The goals of the tariff settlement methodology were to clarify the tariff calculation process, allow for the recovery of operating costs and capital investment, create an incentive for the operation of the trans-Alaska pipeline after recovery of the capital investment, and manage the tariffs as fields mature and production declines. By front loading, Yaege believes that the last goal prevents tariffs from skyrocketing during declines in production (like now).

She said, “We really do have to work to strike the right balance between recovering our costs and maintaining as low a cost as we can — so that we can ensure that there’s an incentive for continued North Slope exploration.”

Staying competitive on a common carrier pipeline

“Owners calculate their tariffs completely independently based on the entire system, not just on their space,” said Yaege. It is likely then that when all the tariffs are published in a given year, there will be a tariff range from low to high among the owners.

In a process called nomination, producers bid for (nominate) space on the pipeline. Logic dictates that they will seek space from the owner with the lowest tariffs. Similarly, the low tariff owner would want to move its crude on its own space. Yaege illustrated what can happen when the amount of oil nominated exceeds the space allowance of the low tariff owner.

She assumed that companies each had 300,000 barrels of production and the low tariff owner has 400,000 barrels of space. The low cost company, as a producer, would like to move all of its barrels on its low cost space, but it is faced with 1.2 million barrels of nomination and only 400,000 barrels of space.

“Per common carrier laws, all of those companies have to be prorated equally,” Yaege said. “So, at the end of the day, the low tariff company gets to carry one-third of its production (100,000 barrels) to market.”

For the same reason, a high tariff owner would probably use a similar strategy. Yaege said that a common misconception is that trans-Alaska pipeline owners prefer to use their pipeline space to carry their own crude production.

Not necessarily. A high tariff company might prefer to move its production on low tariff space, and leave its own higher tariff space to other shippers. “It’s a competitive, wide-open environment,” Yaege said. “It’s not unusual for one company that owns both production and TAPS capacity to move most of its crude on another carrier’s space.”

The state of Alaska is another wrinkle in the competitive picture because it is at once a producer, a tax collector and a regulator. It would appear, however, that the state in each of its roles has an interest in keeping tariffs as low as possible. Yaege said, “If the tariffs are lower, the taxable value of the oil on the North Slope is going to be higher. And, if the tariffs are lower, then the barrels that the state (as a producer) needs to move to market are going to cost less.” Finally, as a regulator, the state wants lower tariffs to foster competition and continued exploration on the North Slope.

How do the tariffs for North Slope shippers fit into the overall cost scheme for ANS crude? Yaege said that the place to start is to learn how the value of crude is determined. “The value of North Slope crude is determined by the marketplace, not by the producers,” said Yaege. For Alaska, that marketplace is the West Coast where most of the crude is consumed. West Coast customers determine what they will pay, but the producers are going to realize less because of transportation costs. “You can take about $1.50 a barrel off that West Coast price for marine transportation, and you can take about another $2.50 a barrel off for the cost of pipeline transportation,” said Yaege. Out of the remainder, producers also have to pay taxes and operating expenses. With ANS crude prices hovering around $10 per barrel, that doesn’t leave much. “The value of an ANS barrel to both the producer and the state,” Yaege concluded, “is heavily dependent on the cost of pipeline transportation, and as such, managing pipeline costs is critical.”