Miller Energy Resources (Miller) (NYSE: MILL) announced that the rate it pays to move crude oil on to market on the Cook Inlet Pipeline system (CIPL) will be lowered from $6.17 per barrel to $3.21 per barrel beginning January 2013. While Miller’s wholly-owned Alaskan subsidiary, Cook Inlet Energy (CIE) plans to significantly increase throughput through the CIPL system in 2013 as a result of its ongoing drilling program, this tariff reduction would result in savings in excess of $1 million even if the company’s production remained flat through 2013. With this price reduction on CIPL shipping charges and the lower per barrel charges to ship oil to the Tesoro refinery as a result in increased production, from 2010 to the present we have reduced our per barrel transportation charges by more than $14 per barrel. These reductions, including the most recent one, have had and will continue to have a significant positive impact on our cash flow and the PV-10 values of our reserves, as well as expanding the economic lives of our oil reserves.
“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”
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.
Source: Business Wire
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