Flint Hills leaves Quality Bank case

The refiner withdraws from case after FERC upholds existing Quality Bank methodology and denies rehearing request

Eric Lidji

For Petroleum News

Flint Hills Resources Alaska LLC has withdrawn from a case challenging the methodology used to calculate Quality Bank payment for the trans-Alaska oil pipeline.

The refining company gave notice two weeks after the Federal Energy Regulatory Commission upheld an earlier ruling to maintain the existing methodology. The ruling also denied a request from Flint Hills to have another hearing on a similar matter.

In late August 2013, Flint Hills filed a complaint against the owners of the trans-Alaska oil pipeline concerning the methodology for establishing payments into the Quality Bank.

The Quality Bank prevents shippers on the pipeline from unfairly benefitting or suffering when they ship crude oil supplies of higher or lower quality than the pipeline average.

The current methodology measures value by dividing the crude oil production stream into seven distillate products and valuing each product separately. According to the complaint, the methodology had been undervaluing a certain residual product since 2009.

FERC dismissed the complaint, saying Flint Hills had missed a two-year statute of limitations. But FERC was intrigued by issues raised in the complaint and launched an independent investigation into the Quality Bank methodology. Flint Hills was a party to the new investigation but also challenged the dismissal and asked FERC for a rehearing.

In an initial decision issued May 8, FERC Administrative Law Judge H. Peter Young upheld the existing Quality Bank methodology. On Nov. 20, FERC affirmed the earlier decision and also denied Flint Hills’ request for a rehearing of its original complaint.

Commissioner Norman C. Bly agreed with the bulk of the FERC ruling but said his colleagues had erred by rejecting the original Flint Hills complaint for being untimely.

What is Resid worth?

Refining involves distilling various products from crude oil at various temperatures.

The existing Quality Bank methodology defines Resid as anything remaining once crude oil is heated to nearly 1,050 degrees Fahrenheit. Through coking, a refiner can further break Resid into additional marketable products and residues. The existing methodology values Resid by valuing all of those products and subtracting any production costs.

According to Flint Hills, changes in the market should have necessitated a change in the way Resid is valued. Specifically, Flint Hills argued, Resid is now primarily blended with other oils to make FO-380, a fuel oil used on shipping vessels rather than used as a feedstock in the coking process. Starting in January 2009, the existing methodology valued Resid below its market value for creating FO-380, according to Flint Hills.

Given that Flint Hills filed its complaint in late August 2013, FERC decided that the company had missed the two-year statute of limitations on Quality Bank matters.

Flint Hills argued that each payment under the methodology should start the clock over.

The Nov. 20 FERC ruling denied that claim, saying that Flint Hill was required to issue its complaint within two years of realizing that the methodology might be flawed. On this matter, Bly sided with the company, writing that statutes of limitation concerned timing, and “Flint Hill claimed its rights were violated each month when it was required to pay Quality Bank adjustments pursuant to an allegedly unjust and unreasonable formula.”

The subsequent investigation considered many intricacies of the refining process. A major point of debate, though, concerned the burden of proof. In his initial decision, Young said Flint Hills and its ally PetroStar Inc. must prove the flaws in the existing methodology in addition to proposing a “superior” methodology. Neither alone sufficed.

The state of Alaska had questioned this particular ruling, saying it would have the effect of “locking into place competitive distortions,” which could harm the local economy.

Nevertheless, FERC upheld the initial decision. “Clearly, if a rate or practice can be deemed just and reasonable even with the existence of superior alternatives, a subsequent showing of an alternative approach does not necessarily render the pre-existing methodology unjust and unreasonable,” FERC Secretary Kimberly D. Bose wrote.

The FERC ruling will likely have greater implications for Alaska as a whole, and the refining industry in particularly, than it will for Flint Hills, which raised the matter.

In February 2014, Flint Hills announced plans to close its North Pole refinery.