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BP challenging Oliktok rates; issue over expected gas volumes
BP Exploration (Alaska) Inc. is challenging a rate increase on the Oliktok Pipeline.
The North Slope producer wants state regulators to investigate the proposed increase, which BP called “unsupported, unjust and unreasonable.” The changes propose a more than six-fold increase in the rate to ship natural gas through the pipeline between the Prudhoe Bay unit and the Kuparuk River unit. According to BP, owner Oliktok Pipeline Co. assumed “unrealistically low” throughput on the pipeline and may have failed to accurately calculate costs that have already been recovered through earlier shipping fees.
“There may be other reasons why the dramatic increases in the revised rates are not just and reasonable which will become apparent upon investigation,” attorneys for BP wrote to the Regulatory Commission of Alaska in an April filing requesting an investigation.
Oliktok Pipeline Co. has only responded to BP in a general way. The company said it “denies all of BPXA’s allegations that Oliktok’s proposed rates are unsupported, unjust, unreasonable, or excessive.” Because the Regulatory Commission of Alaska has already implemented the rates of a temporary basis while it conducts a standard review of the proposal, Oliktok Pipeline felt it would “unnecessarily burden the record” to respond to all the claims now; those questions will be addressed naturally through the investigation.
In its original filings, though, the company had said the initial months of service indicated that throughput was much lower than expected, yielding a $9.2 million revenue shortfall.
Various functions The Kuparuk Pipeline Co. built what is now known as the Oliktok Pipeline in 1980, as a 16-inch crude oil pipeline leaving the Kuparuk River unit. When Kuparuk Pipeline built a 24-inch crude oil pipeline for the field, in 1985, it converted the smaller line to deliver gas from the Kuparuk River unit to Pump Station 1 of the trans-Alaska oil pipeline.
Oliktok Pipeline Co. was created to operate the renamed pipeline. Today, the company is a subsidiary of ConocoPhillips Alaska Inc., which operates the Kuparuk River unit.
That function lasted until 1988, when the Oliktok Pipeline stopped operations. The pipeline resumed operations about 1995, this time shipping natural gas and natural gas liquids the opposite direction, to the Kuparuk River unit, for enhanced oil recovery.
The pipeline made another change in 2014, this time to deliver only gas to the Kuparuk River unit to power field operations. The oil field had typically produced enough associated gas to inject into the field for enhanced oil recovery with volumes left over to power field operations. Declining oil production in recent years meant declining gas production, making imports necessary. Those shipments began in November 2014.
As a 26.36 percent owner (and operator) of the Prudhoe Bay unit and a 38.2 percent owner of the Kuparuk River unit, BP has interests on both ends of the Oliktok Pipeline.
Old charges less than $1 Under the proposed changes, the cost to ship a thousand cubic feet of gas from Prudhoe Bay to the Milne Point connection would increase to $2.55, from 41 cents. The cost to ship a thousand cubic feet of gas from Prudhoe Bay to the Kuparuk River unit would increase to $3.34, from 54 cents. In April, the Regulatory Commission of Alaska approved the increase on a temporary and refundable basis while it considered the matter.
The main argument is over throughput. Generally speaking, when a pipeline is carrying fewer supplies, it must compensate by increasing rates. With regulated pipelines, operators use actual throughput figures from recent years to estimate future shipments.
Those calculations can become complicated when a pipeline is new or beginning new service. BP believes Oliktok Pipeline Co. estimated throughput for the coming year based on initial rates without considering what might happen once service is “fully ramped up.”
On top of that, BP believes throughput will only rise as Kuparuk River unit oil production - and therefore associated gas production - continues to decline as the field ages.
Another point of contention is the age of the pipeline. BP believes Oliktok Pipeline may have calculated the age of the pipeline from 1985, when natural gas shipments began under the Oliktok Pipeline name, rather than from 1980, when the pipeline was built.
- Eric Lidji
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