Brattle Analyses Relied on by FERC to Uphold Quality Bank Valuation Methodology in Trans-Alaska Pipeline Dispute

Spanning 800 miles from Alaska’s North Slope to the state’s southeastern coast, the Trans-Alaska Pipeline System (TAPS) commingles the crude oil of multiple shippers into a common stream for transportation to the Port of Valdez. Along the way, two Petro Star refineries withdraw oil from the common stream and reinject unused portions, which often contain higher proportions of a lower quality cut called Resid. Due to the commingling and refining activity, the quality (and, hence, value) of crude oil a shipper receives at a delivery point is different than the quality that the shipper initially injected. The TAPS Quality Bank (QB) provides a payment system that makes shippers economically whole at the delivery point for the quality changes by compensating those receiving lower-quality crude oil and charging those receiving higher-quality crude oil.

In a dispute between Petro Star and certain TAPS shippers over the valuation of crude oil quality differences, a Brattle team evaluated the reasonableness of the QB methodology used to value the Resid cut in relation to changes proposed by Petro Star. In a decision issued in December 2023, the Federal Energy Regulatory Commission (FERC) largely agreed with Brattle’s analyses and testimony, rejecting Petro Star’s proposals to adjust the methodology at issue.

Background

In 2020, Brattle was retained by Venable LLP on behalf of joint TAPS shippers ConocoPhillips Alaska, Inc., Exxon Mobil Corporation, Hilcorp Alaska, LLC, and the Standard Oil Company to evaluate the justness and reasonableness of the TAPS QB methodology for valuing the Resid cut.

The TAPS QB was established to ensure equity among the shippers who might receive a lower quality crude oil than they originally injected in the pipeline. The QB provides monetary adjustments to account for the differences in quality, using market-based approaches to determine values for nine different “cuts” of crude oil composition.

One of these cuts, Resid, is a highly viscous material that does not have a published market price, though a further refinement process called coking can ensure higher quality products can be derived from the Resid cut. Under the QB methodology, Resid’s value is determined by taking the market price of the refined products – derived from coking the Resid – and subtracting out the current processing costs of a hypothetical coker.

Following a FERC-initiated investigation into the reasonableness of the QB methodology as well as court proceedings in the US Court of Appeals in which Petro Star protested FERC’s orders, FERC re-set the matter for hearing. Petro Star proposed multiple adjustments that would significantly reduce coker cost deductions and increase the estimated value of Resid – meaning Petro Star’s refineries would have to pay less than they currently do under the existing QB methodology.

Led by Principals Matthew O’Loughlin and Jake Zahniser-Word, the Brattle team analyzed both industry evidence as well as the market-based values of coker capital costs embedded in the QB methodology, and Mr. O’Loughlin testified in front of FERC in October 2021. In their analyses and testimony, Brattle’s experts presented extensive market-based evidence that the coker capital costs embedded in the QB methodology were not too high, as Petro Star claimed. Brattle instead found that real-world cokers currently recover coker margins higher than those reflected by the QB methodology.

Outcome

In a decision issued in December 2023, the Commission – based on the “compelling” evidence presented by Brattle and others – rejected Petro Star’s allegations that the QB methodology overestimated the coker cost deduction and therefore undervalued Resid.

Multiple parties have appealed the decision to the Court of Appeals, DC Circuit. It is likely that Brattle’s findings will be considered in defending the decision and in supporting ConocoPhillips Alaska’s appeal for the decision to be modified in order to reflect the increase in the capital costs in the Resid QB valuation formula.