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Briefs reveal details of SR fight After weeks of hearings, the owners of the pipeline and the State of Alaska summarize their cases about Strategic Reconfiguration Eric Lidji For Petroleum News
The trans-Alaska oil pipeline always does things big. So when the biggest private infrastructure project in United States history attempts the biggest upgrade in its 35-year life, it isn’t entirely shocking that a big debate ensued.
The Federal Energy Regulatory Commission and the Regulatory Commission of Alaska recently wrapped-up weeks of concurrent hearings to consider whether the five companies that own the 800-mile pipeline should recoup the full cost of that overdue and over-budget project, or whether they should have to eat hundreds of millions of dollars.
The Strategic Configuration project was an attempt to modernize pipeline operations in preparation for an era of lower throughput, and to save significant money in the process.
The owners of the pipeline acknowledge that Strategic Reconfiguration hasn’t gone as planned, but insist the effort is slowly reaching its original goals. The third parties that depend on the line believe the owners dumped millions into an imprudent project.
BP Pipelines (Alaska) Inc., ConocoPhillips Transportation Alaska Inc., ExxonMobil Pipeline Co., Koch Alaska Pipeline Company LLC and Unocal Pipeline Co. each own undivided stakes in the pipeline from the North Slope to Valdez, and also own Alyeska Pipeline Service Co., the consortium they formed in the 1970s to operate the pipeline.
On the other side are three dissimilar parties that share an interest in keeping transportation tariffs low: the State of Alaska, which calculates its royalty share on oil after producers have paid shipping rates; Tesoro Corp., which buys North Slope oil for its Kenai Peninsula refinery; and Anadarko Petroleum Corp., which pays shipping rates to move its North Slope crude oil but doesn’t also own an interest in the pipeline.
Preparing for a new era The seed for Strategic Reconfiguration came from the sharp declines in pipeline throughput in the 1990s, according to Alyeska. With each barrel suddenly costing more to move, and aging facilities coming up for replacement, Alyeska sought to fundamentally overhaul its operations and potentially save a lot of money in the process.
“Under any scenario, additional investment was going to be necessary to upgrade the control systems and modify the existing facilities to better match throughput levels. But depending on what investment was made, there could be cost savings opportunities as well,” the pipeline owners wrote in a post-hearing brief to regulators in early March.
Those savings would come by replacing the pump stations along the pipeline with models that could remotely operated. That would greatly reduce the round-the-clock staffing levels unique to the remote northern pipeline, and thus greatly reduce operating costs.
This became known as the “electrification” option, but Alyeska also considered a “hybrid case” that involved retrofitting the existing equipment. “Would there be advantages to reconfiguring the pump stations with the same modern equipment that would be used if TAPS were being constructed new (electrification), rather than trying to upgrade the design and equipment that had been in place for 25 years (hybrid)?” the owners wrote.
After comparing the cost, the technical feasibility at various flow rates, and particularly the personnel and maintenance savings of each, the owners determined that “electrification of the pump stations offered the most favorable cost-to-benefit result by a wide margin.” They estimated it would save $1.1 billion to $1.4 billion over 20 years.
Original estimate $242 million The owners sanctioned the electrification plan in early 2004 at a cost of $242 million.
The owners touted their efforts on the project, saying they received the blessing of an independent consulting firm in the planning stages and of state and federal regulators along the way. “That is not to say that everything went as planned,” they acknowledged.
“Among other things, labor and materials shortages led to delays and escalating costs; a significantly greater amount of work needed to be done in a ‘brownfield’ operating environment than had been anticipated; and the lead contractor failed to deliver the leadership personnel and engineering staffing it had promised,” they wrote in the brief.
In its brief, Alyeska insists that the owners “took appropriate steps to address each of these conditions as soon as they became evident,” but also noted “these conditions unquestionably resulted in a substantial increase in the project’s projected costs and a delay in its completion date, and they impacted the TAPS Carriers more than any other stakeholder. If viewed fairly, however, the issues that arose show only that the TAPS Carriers and their expert advisors were imperfect forecasters, not imprudent managers.”
Alyeska reappraised the program in 2005, when it realized it might need to ask the owners for more money, but found that “even with the cost growth and the delay in realizing the anticipated cost savings, the project continued to show material net benefits that made the additional funding appropriate.” The carriers approved the supplemental funding, bringing the total project expenses to around $575 million as of March 2011.
“SR, in other words, continued to be a viable and prudent project even with a cost and timeline considerably less favorable than originally projected,” according to the brief.
‘A markedly lower cost’ The state couldn’t disagree more. “All of the evidence in this case has shown that this project was mismanaged from its initial conception to the present,” it wrote in its brief.
According to the state, the studies Alyeska performed in the late 1990s “expressly considered and rejected conversion to electric pumping equipment” and concluded the owners could hit their cost saving goals by automating the existing equipment. “If the TAPS Carriers had pursued and executed prudently the Hybrid option, the SR Project would have been completed by now at a markedly lower cost,” the state wrote.
The state believes the owners decided electrification was the best option and essentially ignored any evidence suggesting otherwise, an imprudent decision. Now, according to the state, the project won’t be completed until 2014 and will cost around $786 million.
Anadarko and Tesoro also filed a post-hearing brief, but the document is confidential.
Prudence is a tricky subject in utility law and ratemaking cases, essentially requiring some proof that the decision was flawed, and not simply the outcome.
The question is whether Alyeska made prudent business decisions when it sanctioned and carried out Strategic Reconfiguration, a question that Alyeska says falls to the third parties to prove and must be shown not simply to be an “abstract evaluation of how management performed,” but “whether shippers, and in this case indirectly the State, have suffered quantifiable harm as the result of imprudent acts by the pipeline.”
State: refund $375.3 million As the state sees it, the decision to pursue electrification over the hybrid case “was never warranted, and it was never economically justified,” and therefore the shippers should only have to pay for the estimated cost of the hybrid case. That would remove “at least” $375.3 million from the shipping rates, according to a calculation by the state.
The owners say that the third parties are ignoring the benefits that all stakeholders will reap from the project. And the idea that they plowed ahead despite warnings doesn’t make sense, they wrote, because it doesn’t explain “why the TAPS Carriers would have chosen to undertake a project that offered less net cost savings than an available alternative. The TAPS Carriers would be spending the money of their owner companies, and the consequences of their actions — whether positive or negative — would fall overwhelmingly on their own affiliates, which are the largest ratepayers on TAPS.”
While Alyeska believes the burden is on the third parties to prove that the owners acted imprudently, the state argues the burden is on the owners to prove their rates are just and reasonable. Utilities are given the benefit of the doubt in cases of prudence, but according to the state, “Once the presumption has been rebutted, the burden of proof is again upon the pipeline to show that the costs it seeks to recover were prudently incurred.”
The owners believe there is more on the line than money, and argue that the outcome of the case could establish precedent. “From a policy standpoint, it would clearly be a mistake to send the message to the TAPS Carriers that they should do the bare minimum necessary to keep the system operating, rather than making new investments that are expected to generate lower costs for shippers and greater system reliability,” they wrote.
Now, it’s up to the regulators to decide.
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