Earlier this month, Alyeska Pipeline announced that they were going to layoff 130 people, as part of a reorganization effort to cut costs.

As much as I hate to see people lose their jobs, there is a silver lining for the rest of us. When the cost of transporting oil goes down, the value of our royalty and taxes go up.

# Cost Savings

To know how much money we are talking about, we need to know how much money these 130 people were making. Unfortunately, that is not public information.

However, I can piece together some scraps of data and get a decent idea. For example, I can calculate the wage and benefits for the average person working for a pipeline company in the United States.

It works out to $152,680 on average. I figured that out by dividing the BEA reported wage and benefits for all pipeline workers in the US by the BLS estimate of the number of pipeline workers in the US.

If we hit that number with a 30% cost of living adjustment, it comes out to $197,480.

Another approach would be to use the Oil and Gas sector jobs in Alaska as a proxy for pipeline workers. Taking the same approach as before (but without the need for a cost of living adjustment since I have Alaska specific data), I get $212,891.

Since the pipeline company doesn’t have so many high paying jobs (like reservoir engineers and geologists), that number is probably a little high. So let’s call it $200,000 per employee to get in the ballpark.

$200,000 x 130 = $26,000,000

I’m guessing this reorganization will save the company something like $26 million per year in personnel costs.

# Dividing the Pie

The next question is: who gets those savings? Well, we can get a pretty good guess at that figure too.

#### Tariff Reduction

A tariff is how much the pipeline company charges for shipping oil down its infrastructure. It’s a set fee for each barrel of oil shipped (currently around $6 a barrel).

Because TAPS is a regulated pipeline (FERC regulates interstate rates, RCA regulates intrastate rates), they are only allowed to recover actual costs plus an allowable return on the capital the owners put into it.

Basically how it works is you divide all the costs of running and maintaining the pipeline by the number of barrels that flow through it. It’s actually a lot more complicated than that, but it’s the general idea.

So, when the cost of operations go down, the shippers will need to revise their tariffs to account for a reduction in cost. And we can estimate what impact a $26 million cost savings will have on the cost of transportation.

My most recent estimate for FY19 oil production is 516,872 barrels per day. Let’s just use that for now. Multiply that rate by 365 days and you get 188,658,258 barrels of oil for the year.

To get a per barrel cost reduction, we just divide one by the other.

$26,000,000 / 188,658,258 = $0.14

So, we can expect the TAPS tariff to fall by something like 14 cents per barrel as a result of these layoffs.

The number may actually be higher, if the company is also finding non-personnel cost savings through its efficiency measures. But for now, let’s just look at the personnel cost impact.

#### Impact on Taxes and Royalties

The tariff is a transportation deduction for the purposes of taxes and royalties. We take the sales price and subtract the cost of transportation in order to determine the “wellhead” value.

If we didn’t do that, then the companies would be paying taxes on the costs of transportation. Our royalty contracts don’t allow that, and our tax code mimics the lease agreement in this regard.

So, there are two flow-through impacts from a reduction in transportation costs. First, our royalty barrels become more valuable. Second, there is a higher taxable revenue number that gets plugged into the tax forms.

Dealing with royalties first, there are about 24 million royalty barrels per year that belong to the State. That means that an increase of $0.14 in value for each royalty barrel will net a little over $2 million to the General Fund and another $1 million to the Permanent Fund each year.

The remaining increase in value flows through to the tax system. By increasing the value of each taxable barrel, the amount of taxes that are due also increases.

In the current tax system, the marginal tax rate is always 35% (unless you are paying the minimum tax or you cross certain price points and lose some credits). So, it’s easy to calculate the impact at current prices. The State gets 35% of the increase.

$26 million – $3 million = $23 million x 35% = $8 million

That means we can increase our production tax estimates by about $8 million per year.

And then the State’s tax system gets a second bite at the apple. The remaining $15 million of net revenue gets added to the corporate income tax form. So, the State takes another 9.4% of the remaining revenues.

9.4% of $15 million is $1.4 million.

# Bottom Line

While it’s unfortunate when people lose their jobs, there is a silver lining for the State.

All told, the State will receive almost half of the cost savings that the Pipeline owners are able to generate.

While $12 million in UGF each year will be a rounding error in the budget books, we shouldn’t overlook the fact that it’s enough money to pay for about 100 teachers, troopers, and technicians. And adding an extra million bucks to the Permanent Fund each year doesn’t hurt.

So thank you to Alyeska Pipeline for your efforts to push down costs. We know that’s never an easy thing to do.

Jim HoppenworthAnother excellent article, Ed. Well stated.