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FERC investigating Quality Bank The federal regulator will examine the valuation of Resid, but is dismissing the complaint by Flint Hills that launched the matter Eric Lidji For Petroleum News
Federal regulators are investigating whether the Quality Bank formula accurately measures the value of a heavy distillate extracted from the trans-Alaska oil pipeline.
The Federal Energy Regulatory Commission recently dismissed a complaint that Flint Hills Resources LLC made over the formula used to value the various products shipped on the pipeline, but said the refiner raised issues worth examining in greater detail.
Flint Hills believes the formula undervalues Resid, or the residual product that is left behind after all the lighter petroleum products have been distilled from crude oil.
The complaint missed the statute of limitations to file a complaint, according to FERC, but the federal watchdog said the proceedings so far have raised enough questions to justify an independent investigation into how the Quality Bank formula values Resid.
FERC Administrative Law Judge H. Peter Young will hear testimony starting in February 2014 and issue an initial decision on the matter in early May, according to the agency.
Flint Hills also brought the matter before state regulators, but the Regulatory Commission of Alaska is waiting until Jan. 15, 2014, to decide whether it will hear the case.
All mixed up The Quality Bank has been in dispute “almost from its very inception,” as FERC put it.
The fund addresses a basic problem on the North Slope. The stream of crude oil moving though the trans-Alaska oil pipeline contains a mixture of supplies from many producers. Each stream can differ in value depending on the quality of the crude oil and the nature of a pipeline makes it unfeasible — if not impossible — to separate shipments.
Without a mechanism to address this imbalance, a company shipping a barrel of low-quality crude would take a barrel of average-quality crude at the end of the pipeline.
So now, when a company ships crude oil valued below the pipeline average, it pays into the “quality bank” to compensate companies shipping supplies valued above the average.
The Quality Bank formula sets the rates, but setting a formula is tricky.
Initially based on gravity A 1984 methodology used the gravity of oil supplies to determine compensation, but in 1989 some shippers challenged this methodology. They said the increase in natural gas liquids being shipped through the pipeline upended the usefulness of gravity as a measurement tool. A 1993 ruling used distillation to determine the methodology. The methodology broke the production stream into seven products, each valued separately.
A lawsuit over the past decade challenged this ruling, particularly in regard to Resid.
The current methodology assumes Resid will be used for coking, where it is broken into a lighter fuel and asphalt. The value of those two products determines the value of Resid.
Since 2009, the published price of ANS crude has been higher than the Quality Bank value of the finished products extracted from the stream, according to Flint Hills.
The situation is odd, given that a finished product should be more valuable than its raw materials. Flint Hills blamed this discrepancy on the way the Quality Bank formula values Resid, and proposed a new formula that would increase the value of this product.
Continuous litigation The complaint drew limited support.
ConocoPhillips said the proposed change would allow any company to challenge the Quality Bank formula any time it believed that world economic conditions had changed the value of a product, which could bring back the decades of continuous litigation.
Tesoro Alaska and Anadarko Petroleum Corp. offered similar comments, saying the formula allows for the regular changes and corrections in the markets for each product.
Exxon asked FERC to reject the complaint on technical grounds, saying Flint Hills failed to file the complaint within the time allowed for by various laws governing the pipeline.
Flint Hills interpreted the statute of limitations differently, a position shared by PetroStar.
While quibbling with Exxon on the details, FERC ultimately dismissed the Flint Hills complaint because of the statue of limitations, but will consider the matter independently.
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