Legislature(2011 - 2012)BUTROVICH 205
02/06/2012 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview: Gleason Decision of 12/30/2011 by Robin O. Brena | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 6, 2012
3:32 p.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Thomas Wagoner, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Bert Stedman
Senator Hollis French
Senator Gary Stevens
MEMBERS ABSENT
Senator Lesil McGuire - excused
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
Senator Joe Thomas
COMMITTEE CALENDAR
Overview: Gleason Decision of 12/30/2011 by Robin O. Brena
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
ROBIN BRENA, Attorney
Brena, Bell and Clarkson, P.C.
Anchorage, AK
POSITION STATEMENT: Presented overview of the Gleason decision.
CRAIG RICHARDS, Attorney
Walker and LeBeck
Anchorage, AK
POSITION STATEMENT: Presented overview of the Gleason decision.
ACTION NARRATIVE
3:32:49 PM
CO-CHAIR JOE PASKVAN called the Senate Resources Standing
Committee meeting to order at 3:32 p.m. Present at the call to
order were Senators French, Wielechowski, Stedman, Co-Chair
Wagoner and Co-Chair Paskvan.
^Overview: Gleason Decision of 12/30/2011 by Robin O. Brena
Overview: Gleason Decision of 12/30/2011
3:33:55 PM
CO-CHAIR PASKVAN said the committee would take up the only order
of business today, a review of the trial de novo of the 2007,
2008 and 2009 assessed valuations of the TransAlaska Pipeline,
known as the Gleason decision of 12/30/2011 by Robin Brena, lead
counsel for the Municipalities, and Craig Richards, counsel for
the City of Valdez.
SENATOR STEDMAN asked what "trial de novo" means.
CO-CHAIR PASKVAN explained that it is a new trial where the
court has the ability to accept new facts and render an opinion
based on them. He invited Mr. Brena to comment.
3:35:22 PM
ROBIN BRENA, Attorney, Brena, Bell and Clarkson, P.C., Counsel
for the Fairbanks North Star Borough and lead counsel for the
municipalities in the 2007-09 assessed valuations case for TAPS,
said he had been involved in tax and oil and gas and pipeline
work for 30 years. He has been involved in every oil pipeline
matter that has gone before the Alaska Supreme Court in that
period; he has represented Tesoro when it questioned the basis
for the TAPS rates and got them cut in half before the
Regulatory Commission of Alaska (RCA), and he represented
Anadarko when they went before the Federal Energy Regulatory
Commission (FERC) and got the rates cut by half. He was involved
in the Cook Inlet pipeline and the Cook Inlet gathering system.
He said he had been involved in complex ad valorem cases and
represented every drilling contractor in the State of Alaska as
to how drilling rigs should be assessed. He has represented
clients with regard to the assessment of tankers and refineries
and represented both Fairbanks and Valdez with regard to the
proper method for assessing the TAPS.
3:36:47 PM
SENATOR STEVENS joined the committee.
MR. BRENA clarified that he was not here on behalf of any of his
clients, but as a resident of Alaska. He grew up in Skagway and
has been an Alaskan his whole life. He has several clients with
several different interests, some of which he has mentioned. He
was offering his own opinions and not the opinions of his
clients.
3:37:33 PM
CRAIG RICHARDS, Walker and LeBeck, Anchorage, Alaska, said he is
a life-long Alaskan and grew up in Fairbanks. He attended
universities back East and has practiced law in Anchorage for
almost 10 years with Bill Walker. Part of his representation in
oil and gas matters, the vast majority of his practice, includes
numerous ad valorem disputes including litigating to the U.S.
Supreme Court whether or not the oil tankers can be taxed at
Valdez and on an ad valorem value of TAPS case since 2004,
including with Mr. Brena most of that time. With Mr. Walker he
has extensively represented the interests of entities trying to
build an LNG pipeline to Valdez. He has been involved in the
Point Thomson unit termination case, the proposal to truck LNG
to Fairbanks and has regularly acted as the owners' bond counsel
for most of the refinancing on TAPS. He and Mr. Walker
represented Valdez in front of Judge Gleason for both the 2006
trial de novo that occurred in 2009 and again more recently for
the trial de novo for the 2007 and 2009 tax years.
CO-CHAIR PASKVAN asked him what "trial de novo" means in the
context of this case.
MR. BRENA replied that he had been involved in this case for
several years. Judge Gleason issued an order concerning the 2006
tax year last year; this year the most recent decision concerned
the 2007 and 2009 tax years. The 2006 trial was five weeks long
and the other one was nine weeks. Trial de novo means that it is
heard anew; over 700 motions were made and included defining
everything. Trial de novo can mean anything from what the
Superior Court is going to completely disregard, hearing the
matter anew based on its own evidentiary record all the way to
deference to administrative proceedings that allow limited
evidence on limited topics. Judge Gleason's findings with regard
to trial de novo were kind of between the two extremes. She gave
deference to the State Assessment Review Board with regard to
the assessing authorities as the courts are prone to do and
plugged facts into the methods that were applied.
3:40:55 PM
He said this has been intense and contentious litigation and had
over a half million pages of discovery. Their presentation will
be in the context of tax policy.
CO-CHAIR PASKVAN stated that all of the documents before them
today and the exhibits themselves will be posted on BASIS. Mr.
Richards said they would provide additional documents on
request.
3:42:29 PM
MR. RICHARDS said their source materials are intended to
illustrate Judge Gleason's decision and the types of information
behind it. She agreed with the municipalities' positions with
regard to the market structure and the integrated nature of the
operations on the Alaska North Slope combining upstream
(production) and midstream (transportation) assets. She largely
agreed with their perspective on the reserves and the production
profiles associated with them as well as their perspective with
regard to what the minimum capacity of TAPS is to operate. She
essentially adopted their positions on those key elements that
are matters of concern to legislators.
He said she also shared many of their concerns with trying to
get reliable information to make good decisions and he fought
very hard to make some of that information public so it could be
shared with Alaskans.
3:43:52 PM
In the 2006 case, the state had assessed TAPS at $4.2 billion
and Judge Gleason ultimately assessed it at about $10 billion.
The 2007, 2008 and 2009 assessments were $4.5 billion, $6.1
billion and $9 billion, and as a result of her decisions those
assessments went from $8.9 billion to $9.6 billion depending on
the year.
3:44:29 PM
SENATOR FRENCH said he didn't recall what the tax consequences
of the Judge's decision were and asked how much more the
pipeline owners would have to pay.
MR. RICHARDS replied the state levies a statewide oil and gas
tax of 20 mils or 2 percent of the assessed value. About half of
that goes to the state and the other half is split up between
the municipalities involved in the case. It amounts to roughly
$180 million.
SENATOR FRENCH recalled that industry came in with an opening
valuation for TAPS of $1 billion in what he calls the "Gleason
2" decision.
3:46:26 PM
MR. BRENA replied their position was that the value of the
pipeline was $850 million in 2006 with slight variations for
2007 through 2009 slightly at around $1.2 billion. Their case
advanced about a quarter of the state's assessment and about a
tenth of what Judge Gleason found.
SENATOR FRENCH said it's funny that the state would be so far
off from the Judge's valuation and odd that the state wouldn't
have a better idea of what the pipeline was worth. Typically,
the assessors go as high as they can, the taxpayers go as low,
and then you pick some number in the middle; but here you have
the taxpayer low, the assessor medium and the final decision is
above that. It would be like if his house is worth $300,000 and
him having the nerve to look the mayor of Anchorage in the face
and saying its worth only $30,000.
MR. RICHARDS responded that from the mid-1980s to 2005 the value
of TAPS wasn't set through a rigorous assessment process, but
more by negotiation between the oil companies and the state. It
wasn't really until the municipalities injected themselves into
the process, because their tax bases were going down, that this
rigorous process of valuing the asset became an issue. It just
took a couple of years to work out how to go from the old
methodology to a more standard methodology for these sorts of
long-lived special purpose properties.
3:49:15 PM
SENATOR FRENCH asked what has prevented this issue from being
sort of an annual dispute.
MR. RICHARDS replied that was before his time, but his
impression is that the state treated it as a negotiation. Once
you accepted the TAPS Settlement Method (TSM) (with accelerated
depreciation built in) or an income methodology as the basis of
valuation and other features that were going to result in that
value going down, the state was just in the process of
negotiating with the North Slope producers every year how much
it should go down. Very little intellectual inquiry went into
whether or not TSM really reflected a meaningful way to value
this asset. The first real appeal in the 2005 case forced
intellectual rigor to be applied to that issue.
3:50:21 PM
MR. BRENA said these matters can be litigation intensively and
puts millions of dollars in tax revenue at risk. For example, a
proper cost study to determine what beginning points should be
used in applying the cost approach to value costs millions of
dollars for facilities like this. This type of litigation is not
undertaken lightly, but when the value gets so far off, people
get involved. The state got half of the increase and the
municipalities got the other half. It wasn't just limited to
those municipalities; Anchorage, for example, received increased
tax revenues as a result of this litigation even though it did
not participate.
CO-CHAIR WAGONER wondered how relevant this discussion was and
said he thought they were going to have a presentation so the
Alaskan people understood that the pipeline wasn't in any real
dire threat of shutting down any time soon. He asked if the
decision would be appealed to the Supreme Court.
MR. BRENA replied probably.
3:54:12 PM
The overview consisted of the following parts:
Market structure
-integrated operations with concentrated market power
-stages of developing the resource
-barriers to competitive entry
The Life of TAPS
-Price of ANS crude oil
-reserves and throughput
-minimum mechanical throughput
Access to information
Conclusion
3:56:30 PM
MR. BRENA said the production of Alaska North Slope oil is a
very integrated operation by three major companies and it is
important to understand the stages of development for the Alaska
North Slope and where in the evolutionary process the resource
is, because at different stages there are different market
players and participants with different incentives. In terms of
applying tax policy he said it is important to understand what
stage you are at. He would talk about the TAPS rates and how
they are barriers to competitive entry. He said he would talk
about that within the context of other major oil basins like
North Dakota and the Gulf that both have hundreds of shippers,
secondary marketers and independents in full play developing
those fields. Hundreds of holes are being drilled and compared
to here where after 35 years of operation on TAPS there is one
independent shipper and a few independent producers, only one of
which isn't associated with one of the major three and only one
of which ships down TAPS and takes their oil directly to the
market. The purpose is to inquire whether or not the marketplace
has been allowed to work on the North Slope, because "you don't
want to be in the position of incenting people through tax
policy to do what the market could otherwise do."
MR. BRENA said market structure, the stage of development and
the barriers to entry that exist for independents are preventing
the market from working as fully in Alaska as it does in other
locations and could be addressed by tax policy.
The key things that determine TAPS' life are the production
profile and the ability of the pipeline to continue to operate;
those economics are ultimately what determines its life. For
instance, for every $10 increase in the price of oil the life of
the Prudhoe Bay field decreases by 5.5 years. The life of the
Prudhoe Bay field, and perhaps Kuparuk (development of its heavy
oil), will determine the life of TAPS. The other satellite
fields will come on and go off before getting to its end. He
would talk about the price of ANS crude oil and its projections,
the reserves and throughput, and Judge Gleason's decision as
well as the minimum mechanical throughput in terms of what the
physical capacities of the pipeline are.
SENATOR FRENCH asked what allowance should be made for the
possible introduction of OCS oil into the pipeline. The state
doesn't get any tax revenue from it, but it does extend the life
of the line.
MR. BRENA replied that he hoped the state could negotiate some
way to realize some of those revenues off the OCS. But,
certainly, he said additional throughput from any field extends
the life of this facility. And as the life is extended more
development opportunities surface.
3:59:33 PM
He said he would talk about what they don't know, too, because
Judge Gleason's decision was based on things they do know such
as proven reserves, existing technology and what can legally be
deliverable today. An example of what they don't know is that
that while 9.6 billion barrels of proved reserves is what
justified the construction of TAPS and 16 billion barrels of oil
has been produced through 2009, the proved reserves are still
between 7 billion and 8 billion. The proved reserve estimates
have gone down only by 2 billion barrels; this is because of
field growth, additional sources, additional technology
(directional drilling) and different opportunities.
MR. BRENA said when Judge Gleason looked at the proven reserves
she assumed that no others would come on line and no technology
would be developed. In many ways, it is the floor; and if anyone
were betting money, they wouldn't bet that the world would
remain stagnant for the next 40 years when they have seen what
has happened in the last 30.
4:01:19 PM
MR. BRENA said the last major area he would chat about is access
to reliable information and said, "I cannot tell you how
incredibly difficult it is to get reliable information in order
to litigate these cases, and that is with the full power of the
court, with taking depositions, with doing everything that we
can do...with regard to the reserves, with regard to the
capacities of these facilities."
He said he is in different cases where the life of TAPS is at
stake. The life of TAPS is important in setting the
transportation rate for TAPS, because it is used to determine
the depreciation allowance that goes into each year's rates. On
July 10, he started a hearing before the FERC (concurrently with
the RCA) with regard to what the life of TAPS is for the purpose
of setting just and reasonable rates. Another whole cycle of
discovery will become available in the summer because of it. He
said, "I can't imagine a more intensively litigated issue in
Alaska in the last five years than the one we're sitting here to
discuss today. Just about every expert that has an opinion has
testified or been crossed. And if somehow they've missed it,
then we're going to take another run at it this July."
Notwithstanding that, he said there is a great deal of
information that Judge Gleason relied on that is not public and
that he couldn't share with them. And the FERC and the RCA would
rely on information that they cannot share either. It goes
specifically to producer reserve information and production
profiles, the kinds of things that are tightly held by the
industry.
MR. BRENA said he would talk about access to information because
that is the bedrock for sound public policy. In forming tax
policy that is going to impact Alaska's future for generations
to come they should "have absolutely reliable information,
particularly when the tax policy is to benefit the people that
are known to have the information.
SENATOR STEVENS remarked that it is difficult to make honest
decisions when you don't have all the information and asked if
keeping information is unusual in this industry and if other
states have access to this information.
MR. BRENA replied that everybody likes "to keep the keys to the
realm closely held" and he didn't blame anyone for doing that.
Within the context of litigation he signed confidentiality
certificates, but his perspective is should the information be
shared with policy makers who have literally billions of dollars
of tax policy questions to resolve before them. In his case,
less money was at stake, but a mechanism is available to get
that information so that the record and the decisions that are
made are not inconsistent. In this case, you have public
information that is highly unreliable, private information that
is used by industry for its decision making (which is probably
most reliable because it's the way they run their businesses)
and information that is shared with investors that is based on
very strict parameters. This committee would making more
important decisions than the Judge did with less information and
if he were on it, he would very much want direct access to the
reliable information and have it reviewed by who can distill it
down so that legitimate policy questions can be asked and
answered.
SENATOR STEVENS stated that it's hard to make good decisions
about Alaskans "without knowing who is telling you the truth."
MR. BRENA said the FERC and the RCA will be making decisions
about what parts of the information they are going to use on
life of line issues that will be public and non-public. If the
committee feels it should be shared, they should express that
and it would be supportive of his considerable efforts to make
this information public.
4:08:21 PM
MR. RICHARDS said the Department of Revenue has access to some
information and doesn't have access to other information. Some
of the information it has access to it doesn't share with this
body or the public at large, but at the end of the day, the
legislature is the policy maker that justifies the reduction in
taxes. So, it seems incumbent that those that have the
information that seek reductions in taxes to bring it forward to
justify why it's appropriate to do so.
4:08:56 PM
MR. BRENA said as a practical matter, if the people with the
information don't advance it, the way the courts deal with that
under the Civil rules and legal precedent is it permits a
"negative inference" to be made. If you have information that
would support your case or that is relevant to it that you don't
advance, then the assumption is that you're not advancing it
because it doesn't support your position. If you have an
information void and who you're litigating with has access to
the information and they are not advancing it, the court takes
that into consideration and if he were a policy maker he would
certainly take that into consideration.
4:10:06 PM
MR. BRENA said he had Mr. Eyre, an expert in unitary appraisal,
identify an integrated economic unit and explained that
sometimes that unit involves more than just what is being
assessed and the parts can't easily be separated. So, one way to
approach valuation using an income approach is to look at the
income for the whole unit and then try to assign the value that
is created to its parts; one way to do that can be done by
investment. That is not an approach that Judge Gleason adopted,
but she said it was helpful in her case. The beginning point for
such a unitary analysis had remarkable consistency between the
owners' position and the municipality position. Mr. Eyre did a
cash flow and net present value analysis of ANS oil based on
that so he could determine what the value of the Alaska North
Slope was. He determined that the value of that income stream on
an integrated basis, taking into consideration the upstream
production as well as TAPS (the mid-stream transportation
corridor), was between $40 billion and $50 billion.
The owners advanced a gentleman named Dr. Smith who criticized
Mr. Eyre and said it should be 10 percent lower. But for the
purposes of this conversation it doesn't really matter whether
of TAPS is $35 to $45 billion or whether it's $40 to $50
billion, because they trying to frame whether it's "kind of
reasonable." Dr. Smith thought the entire Alaska North Slope was
worth $36.4 billion in 2007 and $46 billion in 2009 (these
values heavily shift based on the price of crude oil and
production). Mr. Eyre's valuation went from $40 to $50 billion
and Dr. Smith's went from $36 to $46 billion. The way they
allocated that system value to TAPS was quite different, but the
way they determined the entire integrated value was quite
similar.
One way to frame this is to say in 2009 Dr. Smith estimated the
total value of the assets to be $46 billion and Mr. Eyre
estimated $50 billion, a $4 billion difference. TAPS is assessed
at about $10 billion and the entire upstream assets are assessed
between $9 and $10 billion. So, the entire tax scheme is
capturing only half, about $20 billion, when both experts agree
that the integrated operations are worth between $46 and $50
billion. That's taking $20 billion off the table. You could say
that the taxpayers are underpaying their taxes by half even
today with the increased valuation of TAPS.
SENATOR FRENCH asked if these values represent the value of the
crude oil flowing through the pipeline.
MR. BRENA answered yes.
MR. RICHARDS added without taking gas into account, and after
taking out royalty and all state and federal taxes. It's
effectively the discounted cash flow value to the working
interest owner after taxes are paid.
4:17:40 PM
MR. BRENA said this number represents taking multiple billion
dollars a year in free cash flow, assuming you get it every year
into the future, in this case 2060; so it's a discounted cash
flow value. It's the value of the annuity.
SENATOR FRENCH said it's not just one year's production; it's
all of the future years of production brought back to this year.
MR. BRENA said this is the value based on what is known of the
income stream over time discounted back or what is known as the
income approach.
SENATOR STEDMAN clarified that the Revenue Source Book doesn't
go into the net cash flow to the industry; it's just cash
expectations of income for the state both restricted and
unrestricted. The point that is being made is that this value is
extremely sensitive to changes in the state's tax structure.
4:18:24 PM
SENATOR WIELECHOWSKI said this is essentially the companies'
profit at a net present value and asked if PPT (put in place in
January 1, 2007) and ACES (put in place in January 1, 2008/09)
was factored in somewhere.
MR. RICHARDS replied yes.
SENATOR WIELECHOWSKI asked if it is based on economically
recoverable oil.
MR. RICHARDS replied they are based on the proven reserves as
defined by the court, which is not too far off from how the SEC
might use that phrase in the internal company reserves report.
MR. BRENA remarked it is a very narrow definition.
SENATOR WIELECHOWSKI asked if it is safe to assume that as the
price of oil fluctuates the projections for decades fluctuate.
MR. BRENA replied yes.
SENATOR WIELECHOWSKI asked if he knew the price of oil they were
predicting when they did these numbers.
MR. RICHARDS replied this is the EIA's price forecast that is
adopted for each year; it is a variable but escalating for each
of those years and assumes a 1 percent real growth in oil price
after the end of its 20-year forecast.
4:20:05 PM
MR. BRENA said when they get into the life of TAPS and the price
of ANS crude portion they will have each of the EIA forecasts in
charts and source materials on all of the projections including
the one that came out last week.
He said the take-away point from this is the question of whether
a $10 billion value is reasonable for TAPS given that it is an
essential part of an integrated operation that is producing a
$40 to $50 billion value and given that all the upstream assets
are assessed by the state in the $9 to $10 billion range.
MR. RICHARDS said that part of the explanation of that shortfall
is that in the 1970s the state had a minerals reserves tax that
was deleted in the 1980s. So, unlike in Anchorage where a person
pays tax on the value of the improvements on his land, on the
North Slope they don't pay a tax on the value of the mineral
estate. So, the value of the leases isn't captured in the ad
valorem setting. That is one of the reasons put forward for this
big gap between the values of what is being taxed and the total
value of the unit.
4:22:22 PM
MR. BRENA said he shared that analysis in order to, at a very
broad level, say that a $10 billion value seems to be a more
rational value than a $1 billion value. Another way he tends to
think about it is that the court accepted a very detailed cost
estimate of $20 billion to replace the functionality of TAPS
today. The question is would it be replaced if it just
disappeared today with 7 to 8 billion barrels of proven
reserves? Times that number by $100 bbl and there are $700
billion of proven reserves on the Alaska North Slope and he
didn't think that would be stranded "over a $20 billion check."
He said solutions for low flow issues have to be considered
within the context of the value of the oil behind the pipe and
that: "There is $700 billion of proven reserves sitting in the
North Slope. Is it going to find a market? Yes. Is it going to
be stopped from finding a market over a $20 billion cost? No.
And it's not economically rational to say otherwise."
4:26:13 PM
Another way to frame the value is that owners say it would cost
$20 billion to replace the pipeline, but would they replace
something that is only worth $1 billion? He thought they would
spend $100 billion. In another context, owners changed out 16
miles of transit lines (from 16 inches to 28 inches) as a result
of corrosion problems at a cost of greater than $600 million
(with infrastructure and camps in place) with no tariff. TAPS,
by comparison, with its 800 miles of 48 inch pipe is worth way
more than $1 billion. He said it's pretty clear that Judge
Gleason's decision is conservative with regard to value and that
the TAPS owners have been underpaying their taxes for decades.
MR. BRENA stated that he didn't come here to argue about the
value of TAPS, but he wanted to give them some idea of his frame
of reference. Finding no questions he went into the market
structure overview.
4:28:41 PM
Market Structure Overview
-Integrated operations with market power
-stages of development
-barriers to competitive entry
4:29:44 PM
MR. BRENA stated understanding that the North Slope is an
integrated operation and what that means in terms of the
economics is important in determining its value. The Big Three
own 95 percent of TAPS and 96 percent of all production on the
North Slope and will continue so into the foreseeable future.
What that market power actually means is as important as the
stages of development and barriers to competitive entry are.
He said the questions is why TAPS has been in operation for over
35 years and independent production from the North Slope is less
than 30,000 barrels a day and why independent production from
this particular basin is virtually non-existent when it's what
is driving the Gulf of Mexico and North Dakota. TAPS has one
independent shipper; all the other shippers ship on their
affiliated producers. So, BP, the producer, transfers its oil to
BP, the shipper, who ships its oil on BP, the pipeline company,
that goes to Valdez and puts its oil on BP, the tanker, that
then is delivered to the market and the refinery that uses that
oil. That is as integrated an operation as you can get and each
of the Big Three has that same structure. Judge Gleason
recognized that dominance.
MR. BRENA noted two reports by Dr. Ciccetti and Mr. Sullivan, a
retired FERC litigator who is now a private consultant, on the
dominance of Alaska's three major companies and how the North
Slope has had very little independent activity after 35 years of
operation.
4:32:26 PM
SENATOR WIELECHOWSKI asked if he could identify impediments to
independent oil companies coming into the Alaska market.
MR. BRENA replied to some degree yes and to some degree no. If
an independent decided to bid on a lease and drill a hole on the
North Slope they would need access to field facilities and there
have been situations where independents have had to build
pipelines right next to a pipeline that is operating at half
capacity or less. That is a barrier to entry. He likened it to
the telecom solution that required dominant market participants
to share facilities. This was also partially addressed in the
ARCO merger when certain companies had an obligation to make
field facilities available under reasonably economic terms and
conditions.
He said that potential pinch points to drilling are access to
field facilities and common carrier transportation. Some
specific terms and conditions in the conditions of TAPS work to
the disadvantage of independents. For example, it has storage
penalty provisions. If a small company takes its oil down to
Valdez it takes a while to build up a tanker-full, and yet
penalties are imposed depending on the utilization of the Valdez
Marine Terminal if the oil stays there too long. Well, if you're
shipping 1,000 barrels a day because you're just coming on line
and a tanker is 400,000 barrels, it will take a few days to
build up enough oil to bring in a tanker. In order to do that,
you have to pay storage penalties if the facility utilization is
above a certain point.
4:36:33 PM
Another example can be found in the "new shipper provision" in
Unocal's tariff where an independent is limited to 10 percent if
the system is maxed out to capacity. Even then the owner company
could nominate 5 percent. So, it would take 10 years of
nominations to be in the same position as the person who
controls the tariff and controls the pipeline.
MR. BRENA said another huge barrier to entry is excessive
profits on transportation. For every dollar added to the tariff
a dollar per barrel is subtracted from the profitability of your
field. If a group is trying to drill a 100-million barrel field,
$1 of additional tariff reduces the economics of that field by
$100 million. As examples he recalled when the price of oil was
a little lower and the TAPS tariff was a little higher that
Milne Point was given up and the long history of excessive
charges in terms of transportation corridors and access to
facilities. In the recent RCA case, Tesoro cut the rates in half
lowering the profitability on TAPS by $2 barrel, which in turn
increased the value of every barrel of oil on the North Slope by
$2 barrel. That had a huge impact in terms of barrier to entry.
4:39:47 PM
He said Judge Gleason noted the RCA held that in 1997 dollars
that TAPS had overcharged cost based rates by $13.3 billion and
surmised if the transportation costs off the North Slope had
been $13.3 billion less, would there have been more activity on
the Alaska North Slope? Of course, there would have been a huge
impact. Mr. Brena said after spending 30 years litigating
transportation rates and tariff provisions he had a lot of
examples. Further he stated:
The market dominance that happens by three companies
isn't happening by accident; it's happening by design;
it's the best way for them to optimize their
shareholder value. I don't fault them for doing it,
but it's not the best for the development of the
resource and it's not the best for independent
participation and an open and competitive market place
in the Alaska North Slope.
4:41:05 PM
As another example of barriers to entry, he said if independents
are going to ship 1 percent on TAPS, they have to "line fill."
This means they are obliged to fill their 1 percent as a
shipper. TAPS, a 48 inch pipeline that is 800 miles long, holds
90 million barrels of oil or so. The line fill obligation
requires maintaining working capital equal to their percentage
of shipment in TAPS. Tesoro Refinery, as an example, has 500,000
barrels of line fill at $100 a barrel. That's $50 million of
working capital tied up just for the privilege of transporting
oil through TAPS.
These are realistic barriers to entry, Mr. Brena said, and
obviously faster permitting and those kinds of things also have
an effect, but the real things that move the economic barometer
are what he is trying to focus on. As a practical matter what
an independent producers does is just sell it to one of the Big
Three for a price that reflects the discount associated with
that market dominance. All of which are significant barriers to
entry.
CO-CHAIR WAGONER said he didn't see charging for warehousing oil
as a negative and asked how that differs from a wheat farmer who
doesn't belong to the local grain growers, but rents space from
one to store his wheat until he sells it. It's a charge that the
companies take into account as part of their business plan prior
to going into the development of oil resources on the North
Slope.
MR. BRENA said that is a fair comment, but it's also a system
for a company that is big enough to never incur that penalty,
but if you're small enough so the oil needs to be accumulated in
order to get a tanker-full, it is a charge they will be exposed
to. So, if you're looking at barriers to entry for small
companies that is a penalty that a major oil company does not
have because their volume is such that they don't have to store
it in order to get access to the market. In a grain situation,
it can be sold whenever and in whatever size truck or rail car
is available. If the wheat farmer had to rent an entire train,
then TAPS would be more comparable to a grain situation.
4:45:55 PM
SENATOR STEVENS asked what "pinch point" means.
MR. BRENA replied that he is using the term casually and not
technically. He means what the challenges are if people in this
room want to produce Alaska North Slope crude oil - in what
arenas and what types. You have to analyze permitting, timing
and access to field facilities, whether those facilities are
open or closed to your use and under what terms and conditions
they are and whether you have to duplicate facilities that are
underutilized in order to get into the market.
The next area of analysis he talked about were the midstream
assets, the transportation and common carrier pipeline, to get
the oil from the North Slope to the market. The analysis has
three major focuses: tankers, common carrier pipelines and field
facilities. He calls those pinch points because he believes that
market dominance shows up as a competitive advantage in each of
those arenas and therefore, they need to be discussed and
thought about separately.
4:47:29 PM
MR. RICHARDS said another example of where state tax policy
creates a barrier to entry is that severance taxes allow a
deduction based on the cost of transportation, and since TAPS
was built this deduction has created a governmental incentive to
get the tariff as high as possible. If you're paying the tariff
to your affiliated shipper, you don't really care what the
tariff is because it goes out of one pocket and into another.
So, the integrated shippers' incentive is to get the tariff as
high as possible, which has a negative side effect of hurting a
third-party guy, because they will have to pay that when the
cost of transportation might be significantly lower.
MR. BRENA expanded that an integrated owner wants a high tariff
strategy, because it optimizes tax deductions from the state. He
said a 1977 BP Tariff Memo in the Source Materials has a frank
internal discussion explaining that they want the highest tariff
rate possible, not because it has anything to do with operating
the pipeline, but because it is integrated economics. An
independent is paying that high tariff not from his left pocket
to his right pocket, but to another company as a real cost
creating a significant competitive advantage for the owner that
has production and transportation alignment. So, if there is an
extra dollar of profit, it costs the independent a dollar more
to get their oil to market than it costs the integrated
producer.
Depreciation also advantages the owners, because when someone
builds a pipeline it's a sunk cost; it's money that has already
been spent and it's just a matter of whether they get to deduct
it or not. For the independent it's not a sunk cost; they have
to share in the cost of actually building the facility as it
goes along. Then there are the operating costs. One would think
nobody would go out and spend a dollar, but if they spend a
dollar and it increases their operating costs, 25 percent of
which are subsidized by the state in ACES, there would be less
resistance to the idea.
4:53:50 PM
MR. BRENA said [BP] recently spent $700 million for the purpose
of strategic reconfiguration of TAPS and they are trying to
include that amount in their rates; they're self-nominating and
that gets included in their rates they will be able to deduct it
for a total of $1 to 1.2 billion in deductions. The state is
aggressively opposing them, but the fact is that the integrated
players aren't very efficient when it comes to building
pipelines and when it comes to major reconfiguration it's just
as bad. Building TAPS was originally estimated to cost $800
million and the final cost was $8 billion; strategic
configuration was originally estimated to cost $224 million and
is now running over $700 million and it's not done yet.
4:55:13 PM
SENATOR STEDMAN asked how long the 1977 memo has been in the
public realm.
MR. BRENA replied that he put it in docket number P97.4
established in 1997 and it has been in the public realm since
the early 2000s.
SENATOR STEDMAN recalled how the legislative members had talked
loosely about the impacts of tariff many times and this is the
first time he has seen it.
MR. RICHARDS remarked that the preamble to the TAPS Settlement
Agreement (TSA) says the same thing.
MR. BRENA stated that he worked an awful long time to get cost
based regulation in Alaska, which is what the statutes provided
should be the case from the beginning. It took tens of millions
of dollars of resources.
4:57:32 PM
SENATOR FRENCH said the 1977 memo is shocking - as bald a
statement as you can possibly get to game the tariff system to
take advantage of the State of Alaska. He commended him for his
work.
4:59:07 PM
MR. BRENA responded that he doesn't blame any company for
optimizing its shareholder value. If he were running a business
and had an opportunity to obtain market dominance and obtain
advantages over a competitor through integrated operations, he
would do that. However, the legislature has its role, which is
for the public good and the regulator has its role. Recognizing
this is important for everybody and it should balance out. In
the case of TAPS it didn't for 30 years.
CO-CHAIR PASKVAN asked him to reflect on comparing Alaska's
market structure to North Dakota's.
MR. BRENA responded that Mr. Sullivan's testimony (slide 21)
talks about 180 shippers in the Enbridge system and marketers
that buy and sell at different points from the fields. He
compares that with Alaska that has one independent shipper, no
resellers and no marketers at all - and Alaska has been around
longer. After 35 years of operation you would expect a more open
and competitive marketplace on the Alaska North Slope than what
is there. The other basins have opened up faster and a lot more
thoroughly.
Were he a policy maker he would want to know what needs to be
done to attract independents to the North Slope. One of the
dilemmas is they are being asked to pass specific tax policy in
a closed market. "You sure don't want to be giving away Alaskan
tax dollars in order to solve a problem that an open market
place could solve." He said it doesn't make a whole lot of sense
to try to talk someone into doing something that he doesn't want
to do it.
He didn't think they needed to go as far as the Gulf of Mexico
and North Dakota but just look at Cook Inlet. It was essentially
closed for a lot of years by a few major producers of gas.
5:05:21 PM
MR. BRENA said he represented Agrium in trying to keep the plant
open. The first thing he did was open up the infrastructure. The
SIGS system was private, so any independent on the other side of
the Inlet that had gas, Agrium couldn't buy it because they had
no way to get it to market. They had to sell it to one of the
people that had control of the pipelines coming across the
Inlet, in this case it was SIGS. They got SIGS subject to
regulation by the RCA so that Agrium could make deals with the
independents. The next step was Enstar, but it had gone into
some long-term contracts. So, they sold gas to the export market
through the LNG facility.
Today the pipelines are open so independents can make it to the
market and Enstar, after years of urging, is now having
competitive bids for excess amounts (spot market). So if someone
found some gas, there is a place to put it. With a combination
of those things and a more aggressive tax policy to encourage
development, Cook Inlet is having tremendous independent
activity. The major are not the leaders. It has to do with what
stage the basin is in of its development. The major fields are
done; so they have to get control of the infrastructure in a way
that makes it accessible to the independents that come in as the
next wave of potential producers that are interested in the
incentive and have a different cost structure - and want to
develop the resource. He said that BP announced years ago that
it was not doing any more exploration in Alaska and it closed
down its exploration office; it's now using its interest in the
Alaskan fields to fund exploration and developments in other
parts of the world.
5:08:33 PM
MR. BRENA said Cook Inlet is a good example of where majors
aren't interested. Large predators need large prey. Their cost
structure demands that they go after billion-barrel fields
wherever they are in the world. That is their role in the
marketplace. Now in Prudhoe with regard to oil and Cook Inlet
with regard to gas it's the independents' turn at bat. All they
need to do is have an open market situation so they can get
access to field facilities and reasonable transportation rates.
That would go a long way to opening up the Alaska North Slope
Basin in the same way the Cook Inlet has been opened up and is
now effectively working.
MR. RICHARDS added that Exxon hasn't drilled a well in Alaska
except Pt. Thomson, which the state made them drill, since the
early 1980s and asked if any amount of tax policy going to make
Exxon decide to explore up here.
5:10:21 PM
CO-CHAIR PASKVAN said that was an interesting point; he thanked
them for their presentation and adjourned the meeting at 5:10
p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| BRENA_2012-02-06 FINAL.pdf |
SRES 2/6/2012 3:30:00 PM |
|
| BACKGROUND_1977 BP High Tariff Memo.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Cicchetti Report.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_BP Royalty Trust.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Gleason Decision.2007-2009.pdf |
SRES 2/6/2012 3:30:00 PM |
|
| BACKGROUND_Carpenter Study.Redacted.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Haines Testimony.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Hisey Powerpoint.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Hisey Report.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Hite Report.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_JTG Report.Redacted.PUBLIC.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Larkspur Report.Redacted.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Modisette Report.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Platt Rebuttal Report.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Platt Report.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Platt.Unpredicable Wells.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Sullivan Report.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Van Dyke Report Excerpts.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |
| BACKGROUND_Van Dyke Report.pdf |
SRES 2/6/2012 3:30:00 PM |
Brena Presentation |