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Flint Hills pursues Alaska refinery State proposing fixed royalty price, wants concessions in exchange Kristen Nelson Petroleum News Editor-in-Chief
The state of Alaska has begun negotiations to continue sale of royalty oil to the Williams' refinery in North Pole. There are two unusual things about the negotiations, Alaska Gov. Frank Murkowski told a press conference Aug. 4: the state is talking with Wichita, Kan.-based Flint Hills Resources, a potential buyer of Williams' Alaska assets, and the state is offering a fixed price in exchange for a number of non-price related commitments.
Williams' two contracts for state royalty oil, totaling 56,000 barrel per day, expire in December. It is negotiating sale of its Alaska assets to Flint Hills, which would need to be assured of a steady supply of crude oil. That contract is for as much as 70,000 barrels a day because it will replace the two Williams contracts, as well as a contract under which Williams is buying crude directly from a North Slope producer, Williams spokesman Jeff Cook told Petroleum News Aug. 6.
Williams put the properties on the block in June 2002, saying it was selling “niche refineries” in Tennessee and Alaska. The Alaska sale includes the 215,000 barrel per day refinery, which produces 70,000 barrels per day in refined product and puts the rest back into the trans-Alaska oil pipeline; 29 convenience stores; a 3 percent stake in the trans-Alaska oil pipeline system; and two associated petroleum products terminals — one at the Port of Anchorage and the other at Fairbanks International Airport. Koch Industries subsidiary The potential purchaser, Flint Hills Resources, is a wholly owned subsidiary of privately owned Koch Industries. It operates refining complexes in Pine Bend, Minn., and Corpus Christi, Texas, with a total processing capacity of nearly 600,000 barrels of crude oil per day.
The company also has interests in Canada, including Calgary-based crude oil marketing, trading, transportation and storage activities primarily focused on providing Canadian crude to the Pine Bend refinery. Flint Hills also has an investment in an oil sands development, held by TrueNorth Energy, another subsidiary of Koch.
Flint Hills is also a producer of petrochemicals and related products, with primary manufacturing facilities at the Corpus Christi refining complex, and oversees crude oil gathering and other operations to help secure crude oil supply for its refineries. It markets gasoline, jet fuel, diesel, heating oil and other petroleum products. Unusual RFP conditions In addition to negotiating with the potential, rather than actual, owner of the North Pole refinery, the state is also negotiating a different sort of sale.
This is the first request for proposals to sell royalty oil, Murkowski said, which “gives the buyer certainty in price.” The buyer will pay a firm price, plus a per-barrel premium included in the bid. “And unlike past royalty-in-kind contracts, this contract will not require the buyer to make numerous unlimited retroactive price adjustments.” The only retroactive adjustments will be for tariff quality bank adjustments.
In exchange for this certainty in terms, however, the state is asking for several things, including: commitment to level of investment, timing and production targets for modernizing the North Pole refinery; commitment to level of investment and timing for Port of Anchorage tank farm improvements; and commitment to a posted wholesale price in Anchorage and Fairbanks which will bring parity to gasoline prices in those cities.
The governor said gasoline refined in the Fairbanks area and shipped to Anchorage costs less in Anchorage than it does in Fairbanks. The state is asking that parity of wholesale prices be included in the royalty contract. Leveraging the state's position Murkowski said in a statement that in addition to negotiating a good price for the state's royalty oil, “we want to leverage our position to further benefit Alaska and the Interior. We are asking for commitments from Flint Hills to increase Alaska hire in their operations and to make capital investments to upgrade their refinery and their tank farm in Anchorage.”
Charlie Cole, a member of the Alaska Royalty Oil and Gas Development Advisory Board, said the governor “drove a hard bargain with respect to the parity between posted prices of gasoline in Fairbanks and in Anchorage.”
There was resistance, Cole said, and the argument was made that the market should establish prices.
“But the governor said, well, when the market does not act rationally, then one must question the operation of a free market.” Cole said the governor pointed out that gasoline was refined in Fairbanks and then shipped to Anchorage, which adds a transportation cost.
But gasoline is cheaper in Anchorage than in Fairbanks.
Cole said after the Flint Hills' people at the meeting listened to the governor's explanation, they understood “the reasons for the governor's proposal in this regard.” Cole said he thought the governor would be able to achieve that term in the contract.
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