ANCHORAGE - Alaska would collect about $110 million more each year if shipping charges for the trans-Alaska oil pipeline were cut to match a recent decision by state regulators.
A lower pipeline charge would also provide a huge boost for new exploration on the North Slope.
"It towers over any incentives the state could rationally do," says Mark Myers, head of the state's oil and gas division. "It's every barrel, and it's long-term." The rate cut would amount to about $1.50 a barrel, Myers said.
The state collects its royalties and severance taxes after pipeline and other transportation charges are deducted.
Alaska's share is about 20 cents on the dollar. So cutting shipping charges by a dollar and a half a barrel - or roughly $550 million a year - would increase the state's take by $110 million annually.
About $77 million would go to the general fund, $33 million to the Alaska Permanent Fund.
For the new governor, it's an intriguing challenge.
"Clearly, there are significant implications whichever way you turn," said John Manly, a spokesman for Gov. Frank Murkowski.
"They're still sorting out what the state's options are," he said. "By the middle of January, he will have identified his approach to this."
Some legislators think the decision by the Regulatory Commission of Alaska could open the door for the state to renegotiate pipeline rates before a long-term settlement agreement ends in 2011. The commission ruled last month that in-state rates for 1997 through 2000 were 57 percent too high. That came after two refiners, Tesoro and Williams, filed a challenge.
"There is huge leverage associated with this if the administration chooses to exercise it," said Rep. Jim Whitaker, a Fairbanks Republican.
An independent producer such as Anadarko, or a refiner, also could ask federal regulators to look at the rates.
"There are multiple third parties with an interest," said Myers of the oil and gas division. "It's logical one of those would go to FERC (the Federal Energy Regulatory Commission)."
Lower transportation costs could trigger a new wave of oil development, both Whitaker and Myers say.
"It's a full, integrated lower cost on your balance sheet. It's monumental if it applies to interstate rates," Myers said. More than 90 percent of Alaska's oil is carried out of state in tankers.
If pipeline charges are lowered, an independent company pumping oil from the North Slope can sell it on the West Coast for the prevailing rate, but pocket an additional dollar and a half a barrel.
The big companies that own virtually all of the pipeline, BP, ConocoPhillips and ExxonMobil, benefit from high pipeline charges. The owners effectively pay themselves to move their own oil. So there's no incentive to reduce rates. Especially because for every dollar they charge, they pocket 20 cents that otherwise would go to the state.
The Regulatory Commission of Alaska determined that through 1996, the pipeline generated $9.9 billion beyond the profit that standard ratemaking rules would allow. If that figure is correct, the state lost about $2 billion.
But high pipeline rates have been a huge drag for non-owner producers, who have beaten a path out of Alaska over the years.
In 1993, Conoco traded out its interest in the Milne Point field, which it had discovered. Executives said then that the company's profits at Milne Point were being sucked up by the cost of moving crude to Valdez.
Pipeline charges have been set in recent years based on a 1985 settlement negotiated during the administration of Gov. Bill Sheffield. That settlement runs through 2011. But all agreements are subject to renegotiation, Rep. Whitaker said.
Independents often are credited with being the driving force in revitalizing the Gulf of Mexico after the major companies lost much of their interest.
Tesoro could mount a challenge to the interstate rates as well, since it owns a refinery in Washington state that uses Alaska crude. Tesoro hasn't decided whether to challenge the interstate rates.
Whether interstate rates under the 1985 settlement are fair has never been tested. The Federal Energy Regulatory Agency accepted the settlement terms because there were no objections to them.
The trans-Alaska oil pipeline is owned by subsidiaries of North Slope producers and one refinery owner. BP has roughly 46.7 percent, ConocoPhillips 28.3 percent once a purchase from Amerada Hess goes through, and ExxonMobil 20.3 percent. Williams Alaska has 3.1 percent and Unocal 1.4 percent.
The pipeline owners, except Williams, have filed a lawsuit in Superior Court asking a judge to overturn the RCA decision.
"We strongly disagree with the RCA's actions," said Daren Beaudo, a spokesman for BP Exploration (Alaska) Inc. "The methodology under which the question arose was previously approved by the state of Alaska and FERC."
A final ruling in state court could be about three years away.
The pipeline owners have asked Superior Court Judge Eric Sanders to rule that the refund order by the regulatory commission is not enforceable until their appeal is resolved. Under the RCA order, the refund is due Jan. 13. Tesoro calculates its refund at $25 million to $30 million, plus interest, for 1997 through 2000. Rates for later years have yet to be decided.
As for the interstate rates, a challenge in the federal arena could take three to five years.