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Tesoro elects not to buy North Slope crude for Nikiski Refinery Price, transportation cost and quality factor into company’s decision not to extend oil purchase contract with state of Alaska Steve Sutherlin PNA Contributing Writer
Tesoro Alaska Petroleum Corp. is no longer purchasing Alaska North Slope crude oil from the state of Alaska for use in its Nikiski refinery.
Tesoro’s current three-year contract to buy about 35,000 barrels of North Slope crude per day from the state expired on Dec. 31.
Price was the main issue although other factors such as quality and transportation costs affected the decision not to sign a new contract, Ron Noel, Tesoro Alaska’s assistant general counsel, told PNA.
The state offered oil to Tesoro at essentially the same price that the state’s other major refiner Mapco Alaska Petroleum Co. pays under its own five-year contract approved by the legislature and signed earlier this year, said Kevin Banks, petroleum market analyst for the state. “Tesoro’s perception that the price of ANS crude is too high is driven by its situation which differs from that of Mapco,” Banks told PNA. The state sells its oil at pump station No. 1, so the basis of the price paid by both companies originates at the same marketplace, Banks said. Crude oil not the same at Valdez as at pump station No. 1 But Mapco receives its refinery stock at North Pole and puts unused oil byproducts back into the pipeline, creating a lower quality product at Valdez where Tesoro takes its oil, Noel said.
In 1977 the North Pole refinery was much smaller and the pipeline was pumping about 2 million barrels per day. Today, Noel said, there are only 1.2 million to 1.3 million barrels flowing through the line daily while the Mapco refinery needs have grown to approximately 150,000 barrels per day. Mapco and the smaller Petro Star refinery along the pipeline route remove high demand products like jet fuel and diesel and return the unneeded part of the oil to the line. It’s often referred to in the industry as “renting the oil,” Noel said. “One out of four barrels have been through the crude unit by the time the oil gets to Valdez,” he said. Quality bank adjusts for quality The state’s “quality bank” program adjusts for changes in quality along the pipeline route, said Banks, the state’s petroleum market analyst. Essentially, he said, Tesoro indicated that the quality bank wasn’t working and it wanted the state to fix the problem by charging Tesoro a lower price than Mapco pays. But that wouldn’t be fair, Banks said.
Noel said that the quality bank doesn’t effect Tesoro. “It has to do with people who take material out and put it back in,” Noel said. Transportation costs a factor in Tesoro decision The high cost of Prince William Sound operations made it less attractive for Tesoro to tanker the oil from Valdez to Nikiski, Noel said. In addition, he said, the state’s pricing formula under the contract just expired was based on delivery to pump station No. 1 with pipeline transport charges taken out.
Actual transport cost is not known until audits are completed, Noel said. “Five or six years down the road when the audit works out the state sends not just a bill but a bill with 14 to 15 percent interest added,” he said. “You don’t know what the price of crude oil is (until then).” Future supply sources to be determined “I don’t think Tesoro has made a final decision (on supply sources),” Noel said. “That will evolve.” Tesoro is expecting 32,000 barrels per day of Cook Inlet production, he said.
Tesoro may tap its Anacortes, Wash., refinery for gas oil feedstock, a concentrated source of jet fuel and diesel obtained by feeding crude into the Anacortes refinery’s hydrocracker. Nine to ten thousand barrels per day of the hydrocracker concentrate yields finished product comparable to that of 40,000 barrels of crude, Noel said.
Tesoro is also exploring the use of foreign crude, he said. The company has already brought in sweet light crude from Sakhalin Island and may obtain more depending on the success of the Sakhalin II project.
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