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Tax dispute ruling could loom large in state oil tax debate

Posted: January 9, 2012 - 12:03am

JUNEAU — The trans-Alaska oil pipeline could have several years of life left or several decades, according to the political debate surrounding lowering production taxes on oil companies.

If North Slope oil production continues to decline, some argue the line, which on average carries about 10 percent of U.S. crude oil production, could become too expensive or hazardous to operate within the decade. However, a judge’s ruling in a recent property tax dispute has determined that the pipeline could be active through 2065.

The line is now carrying about 600,000 barrels a day from Alaska’s North Slope 800 miles south to the terminal at Valdez. But the amount of oil being moved down the line, called throughput, has been steadily declining.

With Alaska’s frigid winters, there’s concern that less oil flowing in the pipeline could cause maintenance and structural problems for the 34-year-old system.

One answer is to get more oil flowing through the line, according to Gov. Sean Parnell, who argues that lowering production taxes on oil companies will spur that development. He’d like to see the pipeline carrying 1 million barrels a day within a decade. The House passed a tax-cut plan last year, and the Senate — which stalled action awaiting more evidence — will decide this session whether to follow suit.

The political part of the debate was amplified by the judge’s findings that there could be a long life for the pipeline even with less oil moving through it — giving supporters of keeping oil taxes where they are new ammunition. The Legislature will reconvene Jan. 17.

State court Judge Sharon Gleason — based in part on filings with regulators and internal studies for majority owner BP Pipelines (Alaska) Inc. — found that the system could likely move oil effectively at a minimum flow rate of at least 100,000 barrels per day. That’s far less than the 350,000 barrels per day estimate cited in a study by the line’s operator last year as a threshold for safe operation, including mitigation efforts for ice and corrosion.

Sen. Joe Paskvan, D-Fairbanks, said the ruling has “blown out of the water” the low-flow study released by system operator Alyeska Pipeline Service Co. Documents reviewed by the court indicate that operation is possible below 350,000 barrels a day minimum, using heaters, and that it can be done economically, he said.

“I don’t know that it (the ruling) directly indicates whether there is or is not an issue with the production tax,” Paskvan said. “But I think that the premise that the pipeline is going to be shut down imminently is a false beginning point.”

Alyeska spokesman Michelle Egan said the low-flow study was never intended to identify the technical or economic limits of the line. Rather, it was to inform operations.

“Our concern is operating it (the line) reliably because the state of Alaska relies on it — operating reliably regardless of the throughput we’re given,” Egan said. “There aren’t any political agendas.”

Still, she said a lot of problems could be avoided if throughput increased, and that increase was sustained over time.

With average throughput at near 600,000 barrels per day, the company has begun recirculating oil at certain points along the line to heat it and keep it moving smoothly. That helps keep it well above the 31-32 degree mark, when issues like ice or gelling can occur, she said.

Alyeska first tried this method last year during a shutdown forced by a leak near a pump station. Alyeska began using it again this winter and plans to continue into spring, she said. She had no estimate on how much the recirculation cost.

Virtually no one wants to see flow rates at the levels discussed in the study or at trial. Oil revenues, as well as federal funding, are among the leading drivers of the state’s economy. The state Revenue Department forecasts a 4.7 percent decline this fiscal year, to average daily production of about 574,000 barrels. It projects an additional 3.3 percent decline next year.

There would have to be new investment in the line — perhaps running into the hundreds of millions of dollars — to take the mitigation steps outlined in the low-flow study, Egan said.

Deputy Natural Resources Commissioner Joe Balash said a 300,000-barrel a day throughput scenario, at today’s high prices, would be a “disaster,” because at that level, the state budget would be in a “dire deficit.” North Slope crude was around $110 a barrel at the end of this week.

“The important thing we are trying to keep focused on is, 100,000 barrels a day, whether possible or not, isn’t where the state needs to be,” he said.

But some lawmakers say it’s hard to know who — or what — to trust.

Gleason, in her order, noted that BP, until 2004, used 300,000 barrels per day as the minimum throughput capacity of the line for booking North Slope reserves to the U.S. Securities and Exchange Commission. The final version of a 2010 study done for BP Pipelines determined the line could effectively operate at throughputs between 70,000- and 100,000 barrels a day, and BP production forecasters used that information to book proven reserves that year.

If companies can prove there’s a very high probability that they will be able to produce the reserves and deliver the revenue associated with producing that oil, it makes their financial statements look better to investors.

BP has been among the companies urging the state to lower its production tax. Its study was not provided during last year’s debate. It also wasn’t provided in earlier legal proceedings in the tax dispute, Gleason said.

A BP Alaska spokesman had no comment on the case. An appeal is being considered.

Sen. Hollis French, D-Anchorage, said he thinks the case damages BP’s credibility.

“It’s hard enough to figure out what’s going on when you have access to the facts,” he said. “It’s even harder when you don’t.”

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