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North Pole refinery threatens shutdown Possible FERC adjustment to trans-Alaska pipeline tariff could increase royalty oil cost; change in contract would cost state By Wesley Loy Anchorage Daily News
The owner of the state’s largest crude oil refinery has threatened to shut down the plant unless it gets a major financial concession from the state.
State officials say Flint Hills Resources, operator of the refinery at North Pole, is asking for a break that could cost the state up to $100 million.
Flint Hills buys oil from the state to run its refinery. Under the supply contract, Flint Hills can be obligated to pay more money to the state if federal regulators adjust rates for transporting oil through the trans-Alaska pipeline, which passes near the refinery. The transportation rate is a factor in setting the price of the oil Flint Hills buys.
Refinery executives worry the Federal Energy Regulatory Commission, with encouragement from the state, early next year might adjust the tariff such that Flint Hills would have to make an additional, crippling payment to the state for underpaying for state oil.
Flint Hills Chief Financial Officer Anthony Sementelli sent a letter to the state in February asking that the supply contract be altered so that the retroactive payment wouldn’t be required. Sementelli said the possibility of a huge supplemental payment for oil the refinery had already bought, processed and sold jeopardizes the refinery. Flint Hills: company wants price certainty “It is important that everyone understand that we are not asking for a subsidy or handout,” Sementelli wrote. The company just wants to know, firmly, what its crude oil costs, he said.
Sementelli asked state officials to respond quickly on whether they agreed to the contract change, as such a change would need legislative approval before lawmakers adjourn May 9.
State oil and gas division Acting Director Bill Van Dyke, in a letter back to Flint Hills on Feb. 24, declined to agree to the contract change.
He said all parties, including Flint Hills, knew when the oil supply contract was negotiated in early 2004 that disputes before the FERC over pipeline tariffs were likely and could affect the oil price retroactively.
Before the state could agree to alter the contract, the state first would have to do a study on whether giving Flint Hills a break was in the best interest of the state.
The state, along with a hired consultant, also would need to examine financial information from Flint Hills to verify how a big back payment would affect the refinery.
“I am sure you must recognize that without this information and our analysis we cannot agree to any new proposal,” Van Dyke wrote Sementelli. “We do not share your opinion that the only information we need is your assertion that you will shut down the refinery if we fail to agree to your request as you had indicated in discussions with my staff last August.” Much of output is jet fuel Jeff Cook, a Flint Hills spokesman, said the North Pole refinery is a vital economic asset not only for the Interior, but also Anchorage.
Much of the refinery’s output is jet fuel, which Cook said is hauled on railroad cars to Anchorage to supply the airport, a global air freight hub.
Van Dyke suggested in his letter that, to reduce uncertainty about a ballooning, retroactive payment pending the FERC decision, the refinery could agree to pay the state a bit extra for its oil and the state would act as a “bank” that could repay the money if the FERC ruled in a way that favored Flint Hills.
Cook said that idea wouldn’t help much.
Flint Hills is a subsidiary of Kansas-based Koch Industries Inc., a large, privately held company involved in refining, pipelines, chemicals and many other enterprises.
Flint Hills bought the North Pole refinery from The Williams Cos. in 2003 as part of a $265 million transaction.
The oil the state sells to Flint Hills is royalty oil, which is the state’s share of crude oil pumped from beneath state land. In general, the state gets 12.5 percent of the oil produced from Prudhoe Bay and other North Slope oil fields.
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