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Regulatory commission agrees to hear Cook Inlet gravity bank issue Forest goes after Cook Inlet Pipeline, charging carrier’s gravity bank provisions are discriminatory Kristen Nelson Petroleum News Editor-in-Chief
The Regulatory Commission of Alaska said July 19 that it will hear a complaint by Forest Oil Corp. against Cook Inlet Pipeline Co. concerning handling of gravity bank issues.
The commission appointed Janis Wilson as the administrative law judge in the proceeding, set an Aug. 3 deadline for others wishing to intervene and scheduled a prehearing conference for Aug. 17.
The commission said Forest filed a complaint against the pipeline in April, asserting that the pipeline was not applying its gravity bank agreement equitably.
Forest told the commission that the pipeline, owned 40 percent by Forest, 40 percent by Unocal and 20 percent by Mobil Pipeline Co., is used by three shippers — Forest, Unocal and ExxonMobil — to move crude oil to the Drift River Terminal. Forest said the pipeline “transports crude oil from the Granite Point, McArthur River, West McArthur River, Trading Bay and Redoubt Shoal fields on the west side of Cook Inlet,” and also said that Tesoro Alaska Co. is the sole purchaser of the crude transported by the pipeline.
The commission said the pipeline “established a gravity bank to adjust for differences in gravity among the crude oil produced from the various oil fields connected” to the pipeline. Provisions of the gravity bank are contained both in the tariff filed with the Federal Energy Regulatory Commission and in the tariff filed with the commission, although none of the oil is currently shipped outside of Alaska.
Crude oils have different American Petroleum Institute gravities, and oils of different gravity have different values. Gravity banks exist so that shippers of different oils are compensated, or charged, based on the API gravity of the oil they ship. Forest told the commission that the gravity bank methodology is “designed to facilitate equitable adjustment among shippers for gravity differentials arising from the common stream operation and that the intent of the gravity bank was to place each shipper in approximately the same economic position it would have been in had it been delivered the same crude oil that it originally tendered for shipment on” the pipeline. Forest told the commission that “the gravity bank was never intended to create a preference or advantage for certain shippers or a prejudice to others.” Redoubt oil has lower gravity Forest told the commission that oil from Redoubt Shoal has a lower gravity than other Cook Inlet oil, “and that this should lower the overall gravity, and therefore the price, of the other commingled crude oils transported” on the pipeline. But, Forest said, crude oil purchaser Tesoro told Unocal and ExxonMobil that it would not decrease the prices it paid them due to commingling of Redoubt Shoal crude. Forest said even though Unocal and ExxonMobil do not receive a reduced price for their commingled crude oil, Forest is charged by the gravity bank, creating a “windfall” to Unocal and ExxonMobil.
Forest told the commission that Cook Inlet Pipeline is not applying its tariff as written, because that tariff has provided, since 1986, “that the gravity differential adjustment value is 1 cent for each one-tenth degree of API below 40 degrees gravity…” Forest said that the pipeline’s tariff requires oil with an API gravity higher than 40 degrees to be treated as 40 degree oil for purposes of calculating the gravity differential, but the company said it received calculations in January which indicated the pipeline was not complying with the 40-degree cap as required by the tariff, and said the pipeline confirmed that since 1989 the gravity differential had been applied to all crude oil, regardless of gravity. Forest said the pipeline told it that as of March 1, 2004, “the gravity differentials for all crude oils will be calculated only up to a maximum API gravity of 40 degrees.” Forest’s request to the commission The commission said Forest has requested that it suspend the pipeline’s gravity bank methodology or require that any gravity bank payments be refundable until the commission issues its final order in this matter. Forest has requested that the commission investigate “whether applying the current gravity bank methodology to Forest’s Redoubt Shoal crude oil provides an undue windfall, preference or advantage to Unocal and ExxonMobil or unreasonably prejudices and disadvantages Forest.”
Forest wants the commission to declare the pipeline’s gravity bank “unjust, unreasonable, unduly discriminatory and unlawful” when applied to Forest’s Redoubt Shoal crude. It wants the commission to direct the pipeline to amend its tariff so that the gravity bank methodology does not apply to Redoubt Shoal crude.
It wants a refund of “gravity bank windfalls” it paid on Redoubt Shoal crude, an amount it has told the commission exceeds $300,000.
Forest wants the commission to find that it was subjected to “an unlawful rate, service, or practice in violation of the Alaska Pipeline Act,” and direct that Forest receive a refund of excess gravity bank payments it made as a result of the pipeline’s failure to adhere to its tariff, a sum which Forest told the commission amounts to more than $75,000 for 2003 alone. Unocal the Cook Inlet operator Cook Inlet Pipeline told the commission that it is currently operated by Unocal Pipeline Co., and has been since 1995 when Unocal took over from Mobil. The pipeline said separate divisions of Unocal manage the pipeline and ship crude oil on the system, respectively Unocal Midstream and Trade and Unocal Alaska.
The pipeline said its tariff provides that gravity payments are made between shippers, not through the pipeline, and said the shippers have a separate gravity bank agreement and Unocal Alaska is the gravity bank administrator. The pipeline said it calculates amounts and notifies each shipper of its debits and credits, but “it is the shipper’s responsibility to ensure that the amounts are correctly paid and received.” The pipeline said the gravity bank “is a zero-sum calculation” and payments made and received each quarter should be equal.
The pipeline told the commission that if Forest is at a disadvantage, it is because of its contract with Tesoro, not because of any discriminatory practices by Cook Inlet Pipeline. The pipeline said that if it acceded to Forest’s request that the gravity bank not apply to Redoubt Shoal crude oil, then the gravity bank provisions would discriminate among shippers, thus, “Forest is seeking a preference which common carriers are not permitted to convey to shippers.”
The pipeline told the commission “that if Forest is disappointed with the price it receives for its crude oil, it should renegotiate its contract with Tesoro.”
Cook Inlet Pipeline said it began applying the 40-degree API cap on all shipments beginning March 1. The pipeline said it applied the 40-degree API cap from 1986 through 1989, but that in October 1989 it began to treat all crude by adjusting its value by 1 cent for each one-tenth degree difference in gravity. No shipper challenged the application of the 40-degree API cap until Forest raised the issue, the pipeline said. It also said “it cannot locate individuals who could explain the purpose of the original provision or why, starting in 1989, the 40-degree API cap was no longer applied.”
The pipeline said the commission does not have the authority to issue refunds for past periods, that the 40-degree cap has been resolved going forward, and noted “that Forest, as an owner and shipper, could have requested an accounting of the 40-degree API cap calculations at any time but apparently chose not to do so.”
The commission said Forest has argued “the underlying justification for the gravity bank no longer exists as to Forest’s Redoubt Shoal crude oil.” The company also said that just because a tariff provision has been in existence for some time does not make it “just and reasonable.”
The commission said Forest has demonstrated there is good cause for it to investigate, and it has instituted an investigation.
Forest has alleged, the commission said, that the pipeline is being operated to the benefit of affiliated interests of shareholders owning a majority of the line (Unocal and Mobil), over the interests of a minority shareholder. “If that is the case,” the commission said, the pipeline “is engaging in a discriminatory practice contrary to statute.” A carrier must operate in accordance with its tariff, and has a duty to change a tariff that is discriminatory.
The commission said it has “good cause to investigate” whether the pipeline’s “current gravity bank tariff provisions are just and reasonable and nondiscriminatory.”
It also appears, the commission said, that the pipeline “may have violated its gravity bank tariff provision governing the calculation of gravity differentials.” Since the calculation has been done in two ways, one of the ways may have been incorrect, or both ways of interpreting the provision may be correct and the tariff provision too vague. “In either case,” the commission said, “there is good cause for us to investigate…”
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