Billions in future costs for pipeline removal need to be examined with Hilcorp purchase

The oil companies that built the trans-Alaska pipeline promised 45 years ago that they would remove the pipeline when it was no longer useful and restore the right of way. The companies renewed that promise in 2003 and sometime in this century they may be called upon to spend billions to haul it away.

The companies have already paid themselves handsomely for doing that work, as an agreement with state and federal regulators allowed all of the money to be collected in advance through extra shipping charges for “dismantling, removal and restoration or DR&R. For decades, the consumers of Alaska oil paid fees so that one day the pipeline could be removed, an arrangement that also allowed the oil companies to qualify for significant tax deductions.

One of the grave mistakes made by regulators decades ago was that there was no requirement for the companies to set the money aside in a designated account.

Fairbanks scholar and journalist Richard Fineberg, who spent years trying to untangle the pipeline money trail, estimated in a 2003 report that the advance payments over-collected by the companies amounted to an interest-free and tax-free loan that could be worth tens of billions by 2034 or 2044.

We don’t know when the owners will be called upon to remove the pipeline or exactly how the owners will proceed.

This question has taken on new urgency now because of the proposed sale of BP’s Alaska operations to Hilcorp, the company owned by Texas billionaire Jeff Hildebrand.

The Dunleavy administration and the Legislature don’t appear to have a handle on the so-called DR&R issue, given the level of secrecy and infighting among the pipeline owners about the handling of this future commitment.

For instance, a prolonged court fight in Texas among the pipeline owners about how to handle dismantling costs has prevented Unocal from selling its 1.3 percent share of the pipeline since 2012.

The court case, which has drawn no public attention in Alaska, illustrates that the comments made so far by BP and Hilcorp about pipeline removal responsibilities need to be examined and questioned.

BP has said that it will retain all of its removal obligations, while Hilcorp will assume responsibility for removal expenses that occur after the sale becomes final.

But the Texas case shows that this division of responsibilities is nowhere near as simple as the companies have claimed to the Regulatory Commission of Alaska.

Unocal announced in 2012 that it wanted to sell its tiny piece of the pipe because it "no longer meets the company’s core strategic needs."

It has taken seven years for Unocal to sell because of a disagreement about who should pay for future dismantling and removal costs.

The case was argued in Texas because the pipeline builders decided nearly a half-century ago to use Texas law to govern their rights and obligations. This is an exceptionally complicated dispute about contract interpretation.

Unocal said that it should not have to be responsible for 1.3 percent of the pipeline removal costs because that obligation should be assumed by the remaining owners once it leaves the business.

The three major pipeline owners, BP, ConocoPhillips and Exxon, disagreed, claiming Unocal was trying to stiff them. The Unocal plan was to transfer the obligation for “zero dollars, and keep the money it collected to perform that obligation.”

“Unocal seeks to rid itself of a costly obligation, not just for free, but at a profit, contending it can keep the increased tariffs it collected over the years to pay DR&R as it accrued,” the major owners said.

“Unocal’s self-serving contract construction is not excused by the fact that its interest in TAPS is small. If Unocal were the one left holding the bag, the larger interest holders surely could not invoke the ‘basic nature’ of the TAPS contracts to force a 1.36% owner like Unocal to assume the multi-billion-dollar DR&R liability for free,” they said in 2018.

A Texas court of appeals ruled in favor of Unocal, forcing the major owners to take on the 1.3 percent Unocal share of future removal costs. The Big 3 appealed to the Texas Supreme Court, which rejected their claims.

“Instead of trying to sell its interest to a third party,” the major pipeline owners said, Unocal said its agreement as an owner “required the remaining owners to assume all of Unocal’s DR&R obligations for the existing TAPS assets, with no corresponding payment from Unocal.”

The appeals court said that Unocal was right and that the obligations for removal of the pipe would shift to the remaining owners once Unocal was out of the picture.

In August 2018, the Texas Supreme Court rejected the claims of BP, ConocoPhillips and Exxon and ordered them to pay costs. This raises a major question about paying the bills in the distant future.

The companies had made the alarming statement that the appeals court decision “strongly incentivizes the remaining owners to end TAPS operations to ensure that no one else can try to walk out on their DR&R obligation for free.”

After the loss in Texas the pipeline companies continued to negotiate and reached a deal this year that would allow Unocal to sell its 1.3 percent. The companies have now filed with the Regulatory Commission of Alaska for expedited approval of the sale by January.

The documents do not reveal whether any changes have been made to the way in which the companies will approach DR&R in the future.

This entire issue needs to be understood by the state in the context of the $5.6 billion Hilcorp purchase of BP’s assets in Alaska. In light of the Texas decision allowing Unocal to escape the DR&R costs, the state needs to better understand the legal implications of what the major owners called the “loosey-goosey incorporation principles” employed in the successful arguments of Unocal’s lawyers.

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