Commission Must Revisit Alaska Oil Valuation

     (CN) — A refiner raised a valid issue with the Federal Energy Regulatory Commission’s method for valuing crude oil that flows through the Trans-Alaska Pipeline System, the D.C. Circuit ruled.
     Stretching 800 miles from the North Slope oil reserves to a shipping terminal in Valdez, Alaska, the Trans-Alaska Pipeline System was built from 1974 to 1977 for about $8 billion.
     Oil companies deposit crude oil from their fields on the North Slope into the pipeline but these deposits are commingled in the pipeline, so high quality crude deposits are degraded in quality by the time they get to Valdez.
     To compensate high-quality depositors for their loss, the Federal Energy Regulatory Commission oversees a system for compensating oil companies for the difference in quality between their input and output, known as the Quality Bank.
     The Quality Bank assigns each company’s crude oil a value based on the quality of its “cuts.”
     Because refiners divert a larger percentage of the higher quality cuts for processing, they are charged for reducing the common stream’s value. This charge is distributed to oil companies who receive lower quality oil at Valdez than they initially contributed.
     One refiner, Petro Star, objected to the bank’s methodology for valuing the heaviest and lowest quality of these cuts, called resid. With refining, resid can be processed into petroleum “coke.”
     In Petro Star’s view, calculating the value of resid by assuming a long-term return of 20 percent on capital undervalues resid relative to the prices of other cuts. The refiner presented evidence that existing coking facilities have been sold at prices far below what would be expected if the 20 percent rule was accurate.
     Several major oil companies intervened in favor of maintaining the status quo.
     The D.C. Circuit ruled Tuesday that “the Commission failed to respond meaningfully to evidence presented by Petro Star, rendering its decision arbitrary and capricious.”
     Judge Sri Srinivasan, writing for the three-judge panel, was particularly convinced by Petro Star’s showing that that sum of Quality Bank’s price for all nine cuts exceeded the market price for a barrel of North Slope crude oil, when a valid pricing system should approximately match the market price.
     “In light of Petro Star’s showing concerning the purported less-than-a-barrel anomaly, we conclude that Petro Star offers ‘sufficiently compelling’ evidence that warrants a reasoned response,” Srinivasan said.
     The panel rejected intervener Alaska’s argument that Petro Star must provide an alternate viable methodology of calculating the value of resid and refiners’ fees to bring a valid challenge.

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