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State worried about quality bank Attorney General’s office believes recent FERC decision could place Alaska refineries at a competitive disadvantage By Eric Lidji For Petroleum News
The state of Alaska is worried that a recent federal ruling to uphold the existing Quality Bank methodology may further harm Alaska’s already fragile oil refining industry.
The state is “very concerned” that the May 8 ruling could have the effect of “locking into place competitive distortions” by prohibiting parties from proposing alternative methodologies. “Free and open competition is important to protecting the interests of all consumers of refined products in Alaska,” the office of Alaska Attorney General Michael C. Geraghty wrote in a June 9 response to an initial Federal Energy Regulatory Commission ruling on the matter. “The Commission should not adopt a ruling that could allow the TAPS Quality Bank methodology to negatively impact such competition.”
Last September, Flint Hills Resources Alaska LLC filed a complaint against the owners of the trans-Alaska oil pipeline, saying that the existing Quality Bank methodology undervalued Resid, a residual product left behind after lighter petroleum products have been distilled from crude oil. FERC dismissed the complaint on technical grounds, but launched an investigation into some of the questions Flint Hill raised in its complaint.
At any given time, the pipeline contains numerous oil shipments of various qualities. The Quality Bank system prevents oil companies from profiting when they ship lower quality crude. Without such a mechanism, a company shipping less-than-average crude through the pipeline would unfairly collect average crude from the other end. Instead, those companies now pay into a “bank” to compensate shippers of greater-than-average crude.
Established with the beginning of the pipeline in 1977, the system has been debated and tweaked ever since to reflect changing market conditions. The current formula breaks the crude oil production stream into seven distillate products and values each separately.
Disconnected from market Among Flint Hills’ main arguments against the existing methodology was the relationship between the price of Alaska North Slope crude oil and the price of its constituent products. Given that finished products should be more valuable than raw materials, the combined value of all the products included in the Quality Bank should be greater than the price of Alaska North Slope crude. But since 2009, they have not.
At a February 2014 hearing, a Flint Hills witness said that this inversion should have prevented West Coast refiners from purchasing Alaska crude - presumably because it would be cheaper to buy the products individually. Seeing as how those refiners continue to use Alaska crude, the methodology must be “broken,” according to the witness.
FERC Administrative Law Judge H. Peter Young rejected this argument. In his decision, he said only the Quality Bank valuation of Alaska North Slope crude - as opposed to the actual market value - was relevant to a discussion of the Quality Bank methodology.
Additionally, Flint Hills said the methodology should stop deducting certain capital costs when it calculates the value of Resid, given that many refiners simply ignore such “sunk” costs. But Young also rejected this argument, saying it would create a disparity between those products that require additional processing, such as Resid, and those that do not.
By upholding the methodology this way, Young essentially said that future parties could not challenge the methodology by proposing a superior one, according to the state.
Given that the current Quality Bank methodology is based on a “simplified hypothetical distillation refinery,” as opposed to actual refiners under actual market conditions, “parties should be free to challenge the TAPS Quality Bank methodology by proving that an alternative methodology is superior to the existing methodology,” the state wrote.
If users have the ability to propose “superior alternatives,” the Quality Bank methodology could be changed to promote better competition, according to the state. This ability is especially important, the state added, given the “fragile and small” state of the Alaska refining industry. While the matter was under review, the state noted, Flint Hills ceased its Alaska refining operation due to “extremely difficult refining market conditions.”
The state wants the system to be flexible enough to respond to market conditions. “To be sure, the State is not advocating that the methodology needs to be adjusted for changes in market circumstances that prevent the recovery of capital costs for a transitory period of time,” the state wrote. “Parties should be allowed to prove, however, that market circumstances will not allow the recovery of capital costs for a material time period.”
Flint Hills Resources and PetroStar Inc. challenged the decision on similar grounds.
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