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DO&G denies certain royalty deductions Cook Inlet Energy requested transportation deductions for oil movement on the Kustatan line; director finds that a gathering line Kristen Nelson Petroleum News
The state has denied transportation deductions for royalty oil moved on two gathering lines at the Redoubt unit in Cook Inlet.
In a July 16 findings and decision, Bill Barron, director of the Alaska Division of Oil and Gas, withdrew a 2006 director’s decision and denied transportation deductions for royalty oil moved on the Redoubt and Kustatan pipelines.
Both lines, Barron said in the decision, are “upstream from the point of production,” and under terms of the leases and applicable regulations, “associated costs are not eligible deductions for calculating royalty value on oil production” from the Redoubt unit.
Forest Oil Corp. constructed the Redoubt and Kustatan pipelines in 2002 and 2003, the decision said.
The Redoubt Pipeline carries unprocessed fluids from the Osprey platform to the Kustatan Production Facility where gas, water and sediment are removed from the crude oil, producing marketable pipeline quality oil.
The processed oil is transported from the production facility to the Cook Inlet Pipeline at the Trading Bay Production Facility on the Kustatan Pipeline.
Neither of the pipelines is regulated by the Regulatory Commission of Alaska or the Federal Energy Regulatory Commission.
Original request from Forest Oil The original request, for transportation deductions for royalty oil for both the Redoubt and Kustatan pipelines, came from Forest Oil Corp. in 2006.
In 2006 the director determined that the Redoubt Pipeline primarily performed a gathering function and that those costs were not deductable for valuing royalty oil.
The director in 2006 also determined that Forest’s proposed methodology for determining deductions on the Kustatan Pipeline was unsound and “concluded that he would accept the deductions if based on modifications to Forest’s proposed methodology.”
Forest appealed the decision to the Department of Natural Resources commissioner, but while that appeal was pending Forest sold its interest in the Redoubt unit and associated pipeline and processing facilities to Pacific Energy Alaska Operating LLC. That company subsequently petitioned for bankruptcy.
Cook Inlet Energy acquired the Redoubt and Kustatan pipelines and other Pacific Energy Alaska assets, including the leases at the Redoubt unit, out of bankruptcy and in 2011 approached the division requesting a transportation deduction for the Kustatan Pipeline.
2012 finding The director said in the July 16 finding and decision that neither the lease agreements nor the applicable regulations allow for a transportation deduction against the value of royalty oil produced at Redoubt and transported via the Redoubt and Kustatan pipelines.
“Pipelines located upstream of the point of production are not entitled to a transportation deduction,” Barron said in the decision.
He said that by statute, the state’s royalty is free of lease and unit expenses, including, among other things, the cost of gathering; the leases similarly provide that royalty paid in value will be free of all lease expenses, including, among other items, gathering.
By the terms of the leases and state regulations, “a transportation deduction for royalty valuation purposes is permitted only for reasonable costs of transportation downstream from the ‘point of production’,” Barron said. “Costs upstream of the point of production are not allowed as a deduction for royalty valuation purposes.”
Under the Redoubt unit leases and state regulations, Cook Inlet Energy “is not entitled to deduct transportation costs incurred upstream of the point of production,” he said, and the point of production “is where the oil is first metered and enters a regulated pipeline, i.e. the interconnection between the Kustatan pipeline and the CIPL — the first regulated pipeline that transports oil from the Redoubt Unit.”
Eligible affected parties have 20 calendar days to appeal the decision to the DNR commissioner.
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