ConocoPhillips to pay $263M to BP for TAPS cost pooling
In a major milestone in continuing wrangles over the rates that owners of TAPS, the trans-Alaska pipeline, charge for shipping oil in the pipeline, the Federal Energy Regulatory Commission, or FERC, has approved an agreement by the owners over the pooling of costs associated with pipeline operations. And under a settlement between the owners over how pipeline costs were allocated prior to Aug. 1, 2012, the retrospective date that the new pooling arrangement goes into effect, ConocoPhillips has agreed to pay BP $263 million. ConocoPhillips will pay ExxonMobil nearly $9 million, while BP will pay ExxonMobil $1.8 million.
Pipeline ownership Following changes in pipeline ownership over the past year, the pipeline is now owned by BP, ConocoPhillips, ExxonMobil and Unocal. Unocal, a subsidiary of Chevron, has previously announced its intention to sell its relatively small ownership interest in the pipeline to the three other owners, subject to the settlement of a dispute regarding its interests in the cost pooling agreement. And as part of the newly announced settlement, BP has agreed to pay $5 million to Unocal, thus paving the way for Unocal’s departure from pipeline ownership.
The new agreement for cost pooling will only apply to the three remaining owners: BP, ConocoPhillips and ExxonMobil. The official pipeline owners are in fact wholly owned affiliates of these oil companies — the affiliates charge oil shippers fees for transporting oil through the pipeline and pay a share of the costs of pipeline operation. Under the new cost pooling agreement, the costs will be distributed between the affiliate owners in proportion to the volume of oil that each owner ships. The costs to be pooled consist of “non-variable” operating expenses, pipeline property taxes, depreciation and interest payments. Variable operating expenses excluded from the pooling include items such as the cost of fuel used to pump oil through the line — apparently these costs are already allocated back to the owners on the basis of volumes of oil shipped.
Longstanding disputes The concept of cost pooling for TAPS goes back many years and relates to longstanding disputes over the shipping rates that the pipeline owners charge.
When the pipeline started up in 1977 it operated under a rather unusual arrangement in which each pipeline owner’s portion of the line was viewed in effect as a separate pipeline, with the owners competing with each other for shipping business and with each owner free to set its own rate for pipeline use. But, as a single pipeline, the line had to be managed on behalf of the owner companies by a single, jointly owned operating company called Alyeska Pipeline Service Co. Under the original pipeline operating agreement, total pipeline operating costs incurred by Alyeska were allocated back to the owner companies in proportion to each owner’s percentage ownership of the line.
But, given the huge amounts of money in oil company profits and state oil revenues at stake in TAPS shipping fees, the setting of rates for oil shipments on the line was disputed as soon as oil started flowing from the North Slope, with the owners being accused of setting rates that were too high.
In 1985 relative peace was achieved by a settlement involving what was referred to as the “TAPS Settlement Methodology,” or TSM. Under TSM, an initial attempt at pipeline cost pooling across the pipeline owners, a formula involving total pipeline costs and total pipeline throughput determined a maximum rate that pipeline owners could charge for shipping oil. The owners were allowed to set their own rates, provided those rates did not exceed the TSM maximum.
TSM started to fall apart in the early 2000s when the Regulatory Commission of Alaska, the agency that regulates TAPS oil transportation to destinations within Alaska, issued an order, saying that the rates set under TSM were unfair and requiring rates for oil shipped in Alaska to be lowered. In 2005 and 2006 several parties started disputing the rates charged for interstate oil transportation. And in a 2008 order FERC said that TAPS needed to move to a system of uniform rates for all pipeline owners. With all owners basing their rates on essentially identical total pipeline costs, there was no justification for each owner to assess a different rate, FERC said.
Meantime, disputed rates were suspended, with the possibility of refunds to shippers should these rates subsequently be determined to be too high.
But the establishment of a uniform rate requires an agreement over exactly what costs can be recovered from the rate, how those costs are calculated and the basis under which the costs are allocated between the pipeline owners. These considerations led to negotiations over cost pooling arrangements, the result of which is the settlement that FERC has now announced, with fairness in pipeline cost allocation under a uniform rate driving a need to allocate the costs by oil throughput rather than by percentage pipeline ownership.
The settlement over cost pooling does not resolve another major bone of contention, the question of the extent to which the cost of a major TAPS upgrade called strategic reconfiguration can be recovered from TAPS shipping rates. That dispute is the subject of a major investigation still being conducted by FERC and the Regulatory Commission of Alaska.
—Alan Bailey
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