Cost of shipping N. Slope oil to rise

Companies to charge up to $1.50 more to make up for lost production

Posted: Friday, December 22, 2006

FAIRBANKS - Alaska's major oil companies say they will charge up to $1.50 more to ship a barrel of oil down the pipeline starting Jan. 1 to make up for declining North Slope production.

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The increase has created a secondary skirmish in an ongoing dispute with the state over such charges.

Conoco Phillips, BP and Exxon Mobil told the Federal Energy Regulatory Commission in Washington, D.C., earlier this month that they will start charging $5.29, $5.10 and $4.95, respectively, to move an Outside-bound barrel of oil from Prudhoe Bay to Valdez.

The current respective rates are $3.78, $4.08 and $3.93 per barrel.

BP owns half the line while ConocoPhillips has 24 percent and Exxon Mobil holds 20 percent.

Chevron and Koch Pipeline Co., which respectively own 1.4 percent and 3 percent of the line, also asked for increases. Koch, which also owns the Flint Hills Resources refinery in North Pole, will boost rates from $4.41 to $4.75. Chevron's rate goes from $3.92 to $4.63.

"The increase is almost entirely due to lower production volumes predicted for next year," Anchorage-based BP spokesman Daren Beaudo told the Fairbanks Daily News-Miner on Wednesday. "With lower production, the operating costs will be spread over fewer barrels, which increases transportation costs."

Alaska's state government takes a keen interest in the rates, called tariffs, because the state's oil taxes are based on the value of a barrel after transportation costs have been deducted. Slight tariff increases can cut the state's income by millions.

The state filed a brief with FERC last week protesting the Jan. 1 increase. The state says the new rates for shipping outbound oil are obviously unreasonable because they greatly exceed the rates for oil that stays within the state.

"The interstate and intrastate rates from Pump Station No. 1 to the (Valdez Marine Terminal) relate to the transportation of oil over the exact same distance, yet there is up to a $3.33 difference in the rates," the state says in its brief.

The oil companies, in a response filed with FERC Monday, say the states arguments are flawed. The in-state rates are lower because they've been ordered so by the Regulatory Commission of Alaska, which refused to abide by a 20-year-old agreement between the state administration and the pipeline owners, they say. Under federal law, the RCAs ruling isn't reason enough for FERC to block the proposed higher rates, the companies say.

According to the oil companies, the state must prove that the rates are unreasonable before FERC can act to lower them. The state has not done so, they say.

In fact, the state will be unable to do so because the rates follow the settlement agreement that guides how tariffs on the trans-Alaska oil pipeline system are calculated, the companies say.

"Our tariffs were calculated consistent with law and the TAPS settlement methodology," Beaudo said. "As permitted (by the methodology) our interstate rates include recovery of operating costs, which includes taxes and depreciation and a return on investment."

Alyeska Pipeline Service Co., which is owned by the oil companies and runs the pipeline, has spent millions on a "strategic reconfiguration" of its operations in recent years.

The state says mismanagement drove up the costs, which therefore should be excluded from the rate.

The state lists several examples:

• Electrical switch gear for the newly electric-powered pump stations 1, 3, 4 and 9 "failed due to its inability to function in cold temperatures;"

• older-design electric turbines are "likely to be labor intensive to maintain than comparable modern models;"

• and several storage tanks do not meet standards required by the right-of-way lease the pipeline owners have with the federal government.

Also, the state says, an inexperienced design contractor from Canada, unfamiliar with U.S. codes, caused "substantial delays." Generators and motors were inefficiently sized and exceeded vibration limits, the state says.

Fire and gas control equipment at each pump station couldn't operate as designed and had to be replaced, it claims.

The companies say the state has failed to show that decisions made during the reconfiguration were imprudent.

The state also engaged in "wholly speculative allegations regarding the selection of contractors and equipment, design choices and decisions regarding abandonment of facilities," the companies say.

"In making these allegations, the state has utterly failed to show that a reasonable pipeline operator would not have made the same choices at the same point in time," the companies argue. Therefore, the state hasn't met the burden of proving that the companies acted imprudently, the companies say.

Beaudo said the reconfiguration costs are a legitimate operating expense. "The savings in the long run from this investment will far outweigh the costs" to the state, he said.

The state and North Slope oil companies have broader underlying disputes before FERC concerning both the current tariffs and the treatment of strategic reconfiguration costs.

In their brief, the oil companies asked FERC to wrap the latest dispute into those larger arguments.

An Exxon spokesman in Houston said he was unable to obtain information on the issue immediately Wednesday. Calls to ConocoPhillips and a state attorney were not returned Wednesday.

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