BP seeks in-state TAPS hike; would close gap with other owners

Every year, for six years, the owners of the trans-Alaska oil pipeline have separately sought increases to rates they charge to ship North Slope crude to markets in Alaska.

All the owners except BP, that is.

While the other owners have been incrementally bumping up their rates year after year since 2008, the operator of Prudhoe Bay and three other producing North Slope units has maintained the in-state shipping rate established after a major regulatory ruling in 2002.

Even though the prior increases remain temporary until regulators officially approve or reject them, the changes have created a disparity between the BP and the other owners.

Now, BP is catching up.

Under a proposed increase, BP would charge $3.97 per barrel to ship oil from the North Slope to North Pole, up from a current rate of $1.25 per barrel. And the current rate of $1.96 per barrel to ship to off-take points in Valdez would increase to $6.31 per barrel to the PetroStar Valdez Refinery and $6.34 per barrel to the Valdez Marine Terminal.

BP wants the higher rates to go into effect on Oct. 23.

While the increase would more than triple the rate BP charges to ship North Slope oil to local markets, the higher rates would still leave BP as the cheapest local shipping option on the pipeline. ConocoPhillips currently charges $4.32 per barrel to ship to North Pole and as much as $6.87 per barrel to ship to Valdez, while ExxonMobil currently charges $4.09 per barrel to ship to North Pole and as much as $6.47 per barrel to ship to Valdez.

Historically, Koch and Union Oil Company of California have owned small stakes in the pipeline system, but Koch recently transferred its 3.0845 percent interest to the three largest owners and Unocal is in the process of transferring its 1.3561 percent interest.

For ratemaking purposes, each company owns an “undivided” stake in the pipeline, meaning each can set its rates individually, so long as the combined rates stay below a certain cap. A company looking to ship oil then “rents” space from one of the owners.

In filings, BP said it needs the increase to offset declining throughput and rising ad valorem taxes — the same reasons the other owners have given for their rate increases.

Between 2000 and 2013, throughput went from 1 million barrels per day to some 550,000 barrels per day while ad valorem taxes went from $57 million to $237 million annually.

Those trends have been consistent year after year, though. As for why BP is looking to increase its rates now, after six years of holding firm, the company declined to elaborate.

BP estimates it would earn nearly $53 million per year under the higher rates, up from some $16.4 million per year under the current rates. The majority of the earnings — some $48.8 million — would come from shipments to the Valdez Marine Terminal with the rest coming from shipments to the Golden Valley Electric Association off take in North Pole. BP does not expect to make local shipments to the PetroStar Refinery in Valdez.

A complex case

The State of Alaska and the owners of the pipeline have long debated the appropriate method for determining the shipping rates. The two sides reached a settlement in 1985, but a 1997 court case challenged the system. In 2002, the RCA decided the previous rates were too high, and forced the pipeline owners to refund nearly $10 billion to shippers.

For years after the ruling, the pipeline owners continued to propose rate changes calculated using the older methodology and the RCA in turn rejected every request.

Starting in 2008, though, ConocoPhillips sought a rate increase calculated under the newer methodology. ExxonMobil, Unocal and Koch quickly followed suit.

As is typical, the RCA approved those increases on a “temporary and refundable basis,” meaning the companies could charge the higher rate while regulators investigated the matter, but ran the risk of having to issue refunds if regulators rejected the increases.

Those four companies continued to seek rate increases year after year, creating an overlapping series of temporary and refundable rates, and high exposure for refunds.

The RCA eventually consolidated 12 cases — three each from the four companies — to consider a range of issues, particularly around whether and how to incorporate the costs of the over-budget Strategic Reconfiguration project into shipping rates. Because many of those same issues are also before the Federal Energy Regulatory Commission, which handles shipping rates for out-of-state-markets, the two bodies held numerous concurrent hearings on the consolidated cases over a period of months last year and this year.

While those cases progressed, though, the pipeline owners continued to file annual rate increases, which the RCA also accepted on a temporary and refundable basis. The fate of those requests will largely depend on what the RCA decides in the consolidated case.

BP, though, considers its request to be “significantly different” than the others, and said the RCA should consider it separately, rather than consolidating it into the larger case.

And BP is also asking the RCA to adopt a “simplified tariff procedure,” a common regulatory practice allowing companies to adjust rates quickly within certain parameters.

The stakes for an increase

The State of Alaska calculates its royalties after deducting tariffs, which means higher shipping rates decrease the amount of revenue the state earns from oil production.

Higher shipping rates also make it more expensive for independent companies on the North Slope. While Anadarko Petroleum Corp. has been fighting increases for years, the North Slope is now home to more independent producers than at any point in its history.

Finally, higher shipping rates increase the cost of running the refineries that buy oil from the pipeline, which is why Tesoro and PetroStar often push back against increases.

—Eric Lidji