Imagine you're a homeowner and your property taxes are too high. You come up with an inventive argument to lower your bill: Because your two children recently left for college, your house isn't getting as much use. Two bedrooms are empty. So you claim you should be able to pay taxes for a one-bedroom house instead of the three-bedroom house you actually own.
Good luck if you ever try that ploy. Everyone knows an argument like that wouldn't fly in the real world.
But it's basically what the state's major oil producers -- BP, ConocoPhillips and Exxon Mobil Corp. -- tried to pull in 2010 in one of their persistent and ongoing attempts to lower the value of their 800-mile trans-Alaska oil pipeline, and the property taxes they pay on it.
Every year, the oil producers try to set the pipeline's value as low as possible. It's part of an annual skirmish involving the companies, the state's petroleum property tax assessor and municipal governments that, like the state, own land along the pipeline route.
Helping resolve the kerfuffle is the State Assessment Review Board -- made up of five members serving indefinite terms at the pleasure of the governor -- as well as the state Superior Court.
Much like a homeowner might dispute the assessed value of his or her home in order to pay less taxes, the oil companies each year argue that the pipeline is worth less than the state or the municipal governments claim.
That battle is playing out again this year. The oil producers -- primarily BP, Conoco and Exxon -- argue the pipeline is worth a measly $2.25 billion.
The Alaska Division of Revenue argues it's worth $7.2 billion. The municipal governments, which collect property taxes on the pipeline just like the state, claim the line is worth $13 billion.
The review board issued a decision Wednesday setting the 2013 value of the pipeline at $11.9 billion.
But that won't settle the matter. As is typical, the smashup will likely head to the Superior Court. From there, the Alaska Supreme Court will take it up, trying to set tax valuations years after they've originally been assessed.
For comparison's sake, the four 2013 values proposed so far are much lower than the $21 billion worth of crude that will move down that pipeline this year alone. They are also much lower than the relative value of all other oil pipelines in the state, the board noted in its decision.
Use the same method applied for valuing those other pipelines, and the trans-Alaska pipeline would be worth $30 billion.
Historically undervalued
For industry observers, the board's decision provides an intriguing look at recent history -- a Cliff Notes version spanning a dozen years of disputes -- with the state Revenue Department clumsily trying to walk a line between the low value sought by the oil producers and the high value sought by the municipal governments.
The pipeline has been historically undervalued in the past, according to the board.
Recent Superior Court decisions showing the pipeline has a longer life than the companies have predicted -- in part because there's more crude in the ground than the oil companies and the state like to predict -- have helped contribute an increase in the line's value, from $3 billion in 2004 to $9.3 billion in 2009, the most recent year for which the Superior Court has attempted to settle the matter.
The higher valuation means more in property taxes to the state and the municipal governments: the city of Valdez, Fairbanks North Star Borough and the North Slope Borough.
The rise in the pipeline's value has come even though oil production has dwindled sharply. In 2004, average production was nearly a million barrels a day, almost double the current production rate.
That falling production leads us to the producer's creative attempt three years ago to lower the pipeline's value. They paid a Canadian engineering firm, Stantec, to determine the replacement value of Alaska's main vein if it were only 30 inches in diameter, according to the board's decision.
Never mind that the line is actually much bigger -- 48 inches wide -- and can carry much more oil.
The producers argued that the drop in oil flow meant the pipeline would operate more efficiently if it were 30 inches, so that size should serve as the basis for the pipeline's value for tax purposes.
The board found that setting a value based on a smaller, hypothetical line -- one that provides far fewer options for moving oil than the actual line -- wasn't useful. The Superior Court agreed, according to the board's decision.
The Superior Court decided it was a "radical departure from basic appraisal principals," said Robin Brena, who represents municipal governments in the dispute.
"I have a four-bedroom house but now me and my wife are just using one (bedroom), so I don't see why my taxes don't go down to a quarter of what they were," Brena said in jest, mocking industry's argument.
In 2011, the state had initially used the industry's 30-inch study to assess the pipeline's value for that year. But after complaints from both the pipeline owners (who wanted a lower value) and the municipalities (who wanted a higher value), the Revenue Department ditched that approach and raised the line's value.
Bruce Tangeman, deputy revenue commissioner, said the 30-inch approach is realistic when you consider that the replacement value should be based on how much oil there is to currently move.
"It's not two million barrels anymore," he said, referring to when daily production peaked in the late 1980s.
The latest battle
As for the 2013 assessment, the review board provides several criticisms of the Revenue Department's approach.
The department ignored decisions by the Superior Court that would affect the pipeline's value, has relied on sources of information rejected by the court, and without proper justification has adopted new approaches to setting the pipeline's value.
Instead of relying on a study approved by the court and the board, the department asked the oil companies to have Stantec update the 30-inch study so it applied to a 48-inch line, according to the board.
That updated study was flawed, the board found. That's in part because there were only slight differences in major costs between the hypothetical, smaller line and the 48-inch line, such as pipeline installation costs.
To come up with its 2013 assessment, the Revenue Department then blended the oil-funded study with the board-approved study, leading to errors, according to the board.
The board was surprised the Revenue Department accepted the updated "Stantec cost study without rigorous examination." Relying on that study wasn't prudent and would result in a "step backward to the historical undervaluation" of the pipeline, according to the board's decision.
In its 2013 estimate, the department also came up with an earlier end-of-life projection for the pipeline than the one the board and Superior Court have found is proper. Also, the department failed to account for billions of barrels in proven reserves the board and the court have found to be available for transportation in the pipeline.
Tangeman, the Revenue Department's deputy commissioner, said the decision by the board is just "step one of a very long process" and the matter will "ultimately be debated in court." The state has a very good system in place, one that undergoes year-round scrutiny, he added.
Tangeman pointed out that the board's proposed value for 2013 has risen dramatically from the 2012 value of $8.2 billion that was agreed upon by the municipalities, the Revenue Department and the oil producers. For example, the board's 2013 value for the pipeline jumped to $11.9 billion, a 45 percent increase. The state's increase from the 2012 consensus value is a more appropriate 13 percent, he said.
"A lot of work goes into the number the state uses for its assessment," he said. "There's no political bias put into it, and it's a very deliberative process that the state goes through."
Contact Alex DeMarban at alex(at)alaskadispatch.com
(Correction: This story originally said in error that the hypothetical pipeline studied by oil companies was 30 inches in circumference. It is 30 inches in diameter.)