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Vol. 19, No. 6 Week of February 09, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

Flint Hills closing

Refiner closing North Pole plant due to high costs, contamination dispute

Eric Lidji

For Petroleum News

Flint Hills Resources Alaska LLC will gradually stop processing crude oil at its North Pole refinery over the coming months, the company announced on Feb. 3.

The company said it made the decision because an outstanding liability dispute on top of difficult market conditions made the long-time refining operation “impossible.” The dispute concerned a groundwater contamination incident discovered several years ago.

The refiner plans to stop producing gasoline on May 1 and stop producing jet fuel and other refined products from its sole remaining crude processing unit no later than June 1.

Flint Hills will continue to market jet fuel through its terminals at the Anchorage and Fairbanks airports and will maintain a staff of 35 to operate its 30 million gallon storage facility in North Pole for local distribution, but said it would supply both operations from third parties. The company also said it would “entertain offers for the assets associated with the refinery as an ongoing enterprise or as a terminal/marketing operation.”

The company said it would try to find positions for its remaining employees at its other refineries in the Lower 48, saying it has been “growing rapidly in other locations.”

Hope and concerns

The refinery has made no secret in recent years about its unease over the local market conditions for its services. The company idled its processing unit No. 3 in 2010 and processing unit No. 1 in 2012, citing “challenging economics and rising crude prices.”

Still, some recent moves suggested the outlook might be improving.

In December 2012, when Flint Hills backed away from a plan to truck liquefied natural gas to the Interior to reduce its costs, the company credited increased efficiencies associated with idling units and a heat recovery system installed to maximize energy use.

And last year the state approved a five-year extension to its royalty oil contract with Flint Hills, agreeing to sell between 18,000 and 30,000 barrels per day through March 2019.

Those glimmers meant little after years of higher crude oil prices and an ongoing dispute over groundwater contamination caused by a previous operator, according to Flint Hills.

A monitoring effort in 2001 revealed the chemical sulfolane within legacy petroleum contamination from the refinery. The Alaska Department of Environmental Conservation believed efforts to remove petroleum from the groundwater would also remove the chemical, but kept an eye on sulfolane levels. The effect of the chemical on human health remains relatively unknown because of limited testing, according to the state agency.

Flint Hills discovered “significantly higher than expected” levels of sulfolane when it tested groundwater and private drinking wells near its North Pole facility in 2009.

Flint Hills began providing drinking water to residents, and the company and government environmental agencies both worked on the immediate cleanup effort, but recently the two sides have been debating the way forward. The disagreement concerns both liability for the contamination and the strategy for cleaning up a poorly understood substance.

Cleanup strategy rejected

In 2012, Flint Hills proposed a strategy for cleaning up drinking water supplies. Without standards for sulfolane, Flint Hills used a risk assessment to determine that 362 micrograms per liter would be “fully protective of human health and environment.” The DEC rejected the proposal, preferring a more stringent level of 14 micrograms per liter.

Flint Hills requested an adjudicatory hearing to discuss the matter and a suspension of certain aspects of the cleanup effort under after the hearing was resolved. The state was scheduled to decide on that request after taking public comments through Feb. 10.

Earth Resources Corp. of Alaska built the refinery on state land in 1976 and began operations the following year. The company MAPCO acquired Earth Resources in 1980 and Williams Alaska Petroleum Inc. acquired MAPCO in 1998. Williams bought the land beneath the refinery in 2004, before it sold the entire facility to Flint Hills Resources.

“Our company has spent an enormous amount of money and resources addressing soil and groundwater contamination that was caused when Williams owned the refinery and the State of Alaska owned the land underneath it,” Flint Hills Resources Alaska Vice President Mike Brose said in a statement. “So far, neither Williams nor the State of Alaska have accepted any responsibility for the cleanup. With the already extremely difficult refining market conditions, the added burden of excessive costs and uncertainties over future cleanup responsibilities make continued refining operations impossible.”

North Pole residents “will continue to be protected from sulfolane exposure” through “alternative water sources” provided by the company, according to Brose. The company “will also continue to meet our regulatory commitments to operate our groundwater remediation system to actively remove sulfolane from the aquifer on site,” he said.

The blame game

The dispute is ripe for finger pointing.

In a statement that singled out “the Obama Administration’s environmentalist friends,” Rep. Don Young said, “At a time when we should be encouraging expanded production and value added manufacturing of the abundant energy resources our state and nation have been blessed with, we see companies like Flint Hills shuttering their operations due to deteriorating conditions caused by diminished supplies and onerous regulation.”

The Alaska Democratic Party, though, bemoaned the spending of David and Charles Koch, the brothers who founded the Flint Hills Resources parent company Koch Industries. The brothers regularly contribute money to conservative political causes.

“Fairbanksans and Interior Alaska know actions speak louder than words: The Koch Brothers are closing the refinery and tossing Alaska aside while choosing to invest hundreds of millions in political attacks. It shows how little they care about Alaska and Alaskans,” state party Chair Mike Wenstrup, of Fairbanks, said in a statement.

Local leaders expressed a mixture of shock and anger.

“We will be looking to the governor for his leadership in the coming days, which will hopefully address the Department of Environmental Conservation decisions that forced Flint Hills into making this announcement,” Rep. Pete Huggins, a Fairbanks Republican and chair of the Interior Delegation of the Alaska Legislature said in a statement. And Rep. Tammie Wilson, a Republican from the area, said, “More stringent regulations hit close to home. Unrealistic expectations by the DEC played a major role in the closing.”

In addition to concerns about job losses, the delegation also worried whether the decision would keep the U.S. Air Force from investing in the nearby Eielson Air Force Base.

Gov. Sean Parnell said the Alaska Department of Labor and Workforce Development is working with Flint Hills to find employment opportunities in Alaska for the workers.

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