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Vol. 15, No. 7 Week of February 14, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Big Risk, Bigger Rewards: Life expectancy climbs as pipeline ages

With proper maintenance, reasonable costs, conduit for Alaska North Slope petroleum products can flow to tidewater indefinitely

Rose Ragsdale

For Petroleum News

As the trans-Alaska oil pipeline ages, its life expectancy is actually increasing.

When oil first flowed through the 800-mile conduit in 1977, it was expected to transport crude and other petroleum products from Alaska’s North Slope to the ice-free port of Valdez for 35 years or until 2011.

But in 2003, the pipeline got a new lease on life, literally. The federal government renewed its right of way for 30 years, extending the line’s apparent life expectancy to 2034.

Operator Alyeska Pipeline Service Co., acting on behalf of the pipeline’s owners, poured hundreds of millions of dollars into various upgrades and improvements designed to make the conduit more efficient and less costly.

Dubbed the Strategic Reconfiguration program, the upgrades took most of the past decade to complete and culminated nearly 35 years of continuous fine-tuning to pipeline operations. The work also coincided with the line’s average flow of petroleum climbing from about 300,000 barrels per day shortly after startup to peak at 2.1 million b/d in 1989, before gradually decreasing to average about 700,000 b/d in 2009.

In June, a review board of the State of Alaska’s tax division recalculated the pipeline’s economic life, projecting its continued operation until the year 2042.

It’s all about costs

What’s driving this trend toward longevity? In a word: Money.

“As long as you do the maintenance on the pipeline, it’s not a physical or a mechanical issue. It’s an economic issue,” said Jerry Brossia, Authorized Officer for the state-federal Joint Pipeline Office.

Over the years, various forecasts and projections have extended the pipeline’s useful life, coming up with a succession of dates that envision the conduit operating for far longer than original estimates.

The pipeline’s owners have either agreed with or accepted these extensions without protest. They say the huge oil transportation system, which has shipped more than 16 billion barrels and counting of petroleum, is well maintained and its useful life is entirely dependent upon whether operating it continues to be profitable.

The owners, BP Pipelines (Alaska) Inc., ConocoPhillips Transportation Alaska Inc., ExxonMobil Pipeline Company, Unocal Pipeline Company, and Koch Alaska Pipeline Company L.L.C., cite rising costs as a possible deterrent to the line’s continued operation despite recent forecasts calling for at least another 30 years of viable operation. It is costs that are prompting them to seek higher tariffs from shippers on the pipeline, the carriers say.

The shippers, particularly the few that do not have sister companies that own a share of the pipeline, have objected to these sharp increases in the proposed tariffs and taken their arguments to the Federal Energy Regulatory Commission, which regulates interstate tariffs on oil and gas pipelines in the United States.

The pipeline carriers have vigorously defended their proposed tariff increases and the entire issue has evolved into ongoing and complex, multiyear wrangling that is still under regulatory review.

FERC to review life expectancy

After several unsuccessful appeals in 2009, shipper, Anadarko Petroleum Corp., recently succeeded in getting the Commission to reconsider an earlier decision to accept as fact an estimate that the pipeline’s useful life will end in 2034.

The FERC, in an order issued Dec. 10, said the shipper presented new evidence that the remaining useful life of the pipeline may extend beyond 2034 and that the issue does require another review.

“Anadarko cites to (the Alaska State Assessment Review Board) June 4, 2009 Certificate of Determination, where the Assessment Board reviewed the determination of the state tax division and found that “the division properly maintained the economic life of the TAPS at 2042,” the Commission wrote.

“In addition, the Assessment Board recommended that the tax division ‘thoroughly review the economic end life of TAPS every year,’ because: [i]t will likely be proper to extend the estimated economic end life of the TAPS past 2042 in future assessments as additional oil reserves on the North Slope become economically extractable or the estimated minimum mechanical throughput of the TAPS is reduced below 200,000 barrels per day,” the FERC noted.

The Commission also took note of Anadarko’s observation that the pipeline’s owners did not object to the state review board’s conclusions.

Anadarko cited the following testimony of a “Witness Greeley” at the review board’s proceeding:

THE WITNESS: “The Owners approached the Department and said that they were willing to live with the SARB’s determination last year regarding two layers of the forecast and the 2042 end of life.

“The analysis the Department did using the two layers, the SARB – the Department adopted the SARB’s guidance on the two-layer application. And that analysis coincidently ended up at 2042. That’s where it shook out again this year.”

Anadarko also argued that the review board’s findings were significant because the carriers cited them in recent filings where they proposed much higher interstate tariffs to account for the review board’s ruling, which increased the state property tax assessment on the pipeline system; and for costs associated with the strategic reconfiguration program.

The three major carriers, BP, ConocoPhillips and ExxonMobil, filed rate proposals in 2009 that averaged about $1.12 billion, or nearly double the $577 million rate base underlying the 2006 rate that the commission accepted as “just and reasonable” in its Opinion No. 502, issued in June 2008. The 2007 compliance rate accepted by the Commission’s April 16 (2009) Order reflects an average rate base of $719.022 million, and the 2008 compliance rate, currently set for hearing, includes an average rate base of $889.945 million.

Midcentury mark on horizon?

At least one federal agency, the U.S. Securities and Exchange Commission, was presented with information in 2009 that suggests the trans-Alaska oil pipeline could still be pumping oil to Valdez at the middle of the 21st century.

The BP Prudhoe Bay Royalty Trust told the SEC in its annual 10-K report for 2008, filed in February 2009 that BP Exploration (Alaska) Inc. expects continued economic production at a declining rate through the year 2049.

“… However, for the economic conditions and production forecast as of December 31, 2008, the per-barrel royalty will be zero following the year 2020. Therefore, no reserves are currently attributed to the BP Prudhoe Bay Royalty Trust after that date.”

But BP’s production plans and expectations for the Prudhoe Bay area oil fields do not necessarily provide an indication of what BP’s pipeline operating company will do in the future, according to Brossia.

“The people who produce the oil and the people who transport the oil work for two different legal entities,” he said. “The pipeline’s owners are dependent on what the FERC and the State of Alaska allows them to charge for transportation.”

Because the pipeline is a regulated carrier, its owners must base their operating decisions mainly on how their costs change.

“As throughput goes down, the unit cost for shipping a barrel of oil goes up,” Brossia said. “And the people who own the pipeline are starting to question how much money they can make operating it.”

He said this can be confusing for the average person on the street to understand. With current high oil prices, it might appear that the pipeline’s owners are raking in profits, but that isn’t the case. While the carriers are units within their respective oil companies, they must function as separate entities based on their own cost and profit structures while operating a government-regulated transportation system.

“Quite frankly, the FERC and the Regulatory Commission of Alaska have longstanding practices of allowing the carriers a return on their investment of 14 percent,” Brossia said. “It’s all about money.”

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