CIPL operates a 42-mile pipeline system, a tank farm, and a shipping terminal on the west side of Cook Inlet, which currently provides the sole route to market for company’s oil production. When CIE began operations in 2010, CIPL hiked its shipping rate from $4.06 per barrel to $14.57 per barrel. CIE felt this increase was excessive and brought a complaint in front of the Regulatory Commission of Alaska (RCA). CIPL and CIE ultimately negotiated a settlement agreement which allowed CIE to pay a rate calculated from a maximum total revenue requirement of $17.3 million per year through 2014 and immediately reduced CIE’s rate to $6.57 bbl. This number is revised annually to adjust for variations in system throughput.
“The published rate for 2012 is $4.07 per barrel, but we’ll be paying $3.21 because of the maximum revenue requirement in our settlement,” explained David Hall, CEO of CIE. “That means their spending has continued to balloon, and that the rate is lowering due to the recent extended amortization put in place by Hilcorp and projections of increased throughput.” Hall went on to explain that the increased expenditures were primarily the result of projects undertaken by CIPL to partially reactivate the crude oil tank farm at Drift River.
Those projects included $18.5 million spent this summer to raise the 20-foot berm designed to protect the tanks from volcanic mudslides an additional 15 feet. The Drift River tank farm sits in the flow path of an active volcano, Mt. Redoubt, which erupted violently in 1991 and 2009. The 2009 eruption halted oil movements through the system for 6 months. The facility then reopened, but operated without the tank farm, which caused much higher shipping costs because tankers could not be fully loaded.
Hilcorp had hoped to reactivate two of the seven, 270,000-barrel tanks by October. However, the company will likely only be able to use one tank for the time being due to concerns by Alaskan environmental regulators and the public.
“Even with the reduced CIPL tariff, we believe there is a compelling business case to be made for the Trans-Foreland Pipeline,” said Scott Boruff, CEO of Miller. “Even if that tariff went to a buck, you still have to add on the cost of a tanker to move the oil to market, and that is another $2 – $5 a barrel. Then you’ve got the business interruption risk of the volcano, and the environmental risks. The Trans-Foreland Pipeline will be a safer, more reliable and more cost effective way to move crude, and I’m pleased that Miller is leading the charge on making the Cook Inlet a better place to operate.”
Miller Energy Resources, Inc. is a high growth oil and natural gas exploration, production and drilling company operating in multiple exploration and production basins in North America. Miller’s focus is in Cook Inlet, Alaska and in the heart of Tennessee’s prolific and hydrocarbon-rich Appalachian Basin including the Chattanooga Shale. Miller is headquartered in Knoxville, Tennessee with offices in Anchorage, Alaska and Huntsville, Tennessee. The company’s common stock is listed on the NYSE under the symbol MILL.