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Vol. 12, No. 48 Week of December 02, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Conoco: ULSD facility won’t be built

State of Alaska’s tax changes blamed; Revenue Commissioner Pat Galvin says facility wouldn’t have qualified under 2006 PPT

Kristen Nelson

Petroleum News

A proposed upgrade to a North Slope topping plant to produce the ultra-low-sulfur diesel required to meet federal government standards of no more than 15 parts per million of sulfur has been canceled in the wake of production tax changes passed by the Alaska Legislature Nov. 16.

ConocoPhillips Alaska had proposed upgrading its Kuparuk topping plant — one of two such facilities that produce diesel on the North Slope — to produce sufficient ULSD to meet the needs of North Slope operators.

BP Exploration (Alaska), which operates the other North Slope topping plant, and ConocoPhillips signed an agreement with the State of Alaska in mid-2005 for the transition to ULSD on the North Slope. The companies agreed to transition to ULSD in 2008, two years ahead of the deadline mandated by the Environmental Protection Agency under an exemption EPA granted for rural Alaska, areas off the road and ferry system.

ConocoPhillips Alaska spokeswoman Natalie Knox Lowman told Petroleum News Nov. 27 that the topping plant upgrade was put on hold over the summer “pending the outcome of the special session” of the Alaska Legislature, called by Gov. Sarah Palin to consider changes to the Petroleum Profits Tax the state put in place in 2006.

PPT, a tax on net profits, allows capital and operating deductions. Under the governor’s proposed changes to PPT, Alaska’s Clear and Equitable Share, or ACES, the topping plant upgrade would not qualify as a capital deduction.

That provision was part of the bill which passed the Legislature Nov. 16.

Department had been queried

Commissioner of Revenue Pat Galvin told the House Finance Committee during ACES hearings Nov. 7 that the department had been asked by a taxpayer about deduction of costs for the topping plant upgrade.

He said the department viewed this as a deduction for “construction of a manufacturing plant” for fuel and addressed the issue of whether the plant costs should be deductible, or just the cost of the fuel itself.

Galvin said the department “determined that no, it’s not an appropriate lease expenditure because … the construction of the plant isn’t itself directly related to production. It’s just directly related to a fuel source that’s going to be used.”

Because the administration was coming to the Legislature with proposed oil tax changes, rather than just putting the decision in regulations the department included it in the bill, “so that we don’t end up in a situation where the regulations are challenged and we end up in a long-term conflict” over the issue, he said.

Galvin said if the state allowed deductions for the topping plant upgrade, it would be picking up almost 50 percent of the cost. “You’re basically in competition with other manufacturers in the state,” he said.

He also said that if the topping plant credit had been allowed, state credits for facilities not directly related to oil and gas production might “begin to creep out to all supporting activities that go into that type of operation.”

By disallowing credits for the topping plant upgrade, Galvin said, the state discourages that behavior.

Cancelled in late November

Lowman said ConocoPhillips cancelled the project the week of Nov. 19.

“The project construction no longer makes economic sense under new rules passed with the recent oil tax bill,” she said.

The project wasn’t cancelled in advance of ACES passage because the company didn’t know for sure whether or not it was deductible; prior to the passage of ACES, Revenue wasn’t allowed to give taxpayers upfront information on how its tax decisions were likely to go.

ConocoPhillips is required to use ULSD on the North Slope by 2010, Lowman said, and does not yet have supply agreements in place for ULSD. She also said the company does not know whether there will be enough ULSD available in Alaska to meet needs on the North Slope.

Operators and contractors on the North Slope and businesses in Deadhorse — and any others needing diesel supplies — “will now have to contract for their own supplies of ULSD.”

Lowman said ConocoPhillips does not know how many truckloads of ULSD will be required to supply the North Slope. “We do know that the amount of traffic will be substantially increased on the Haul Road on a daily basis,” she said.

Tesoro state’s only ULSD producer

Tesoro Alaska began producing ULSD at its Nikiski refinery this summer, dedicating a $63 million distillate desulfurization unit which made the company the sole Alaska manufacturer of ULSD.

The distillate desulfurization unit has a “nameplate production capacity of 10,000 barrels per day,” Tesoro said in a statement. It is designed to manufacture diesel with less than 5 parts per million of sulfur.

As for supplying North Slope ULSD needs, “People in my compare feel fairly confident that there’s not going to be a supply shortage and certainly not in the near term,” Kip Knudson, Tesoro Alaska manager, external affairs, told Petroleum News Nov. 29.

Knudson said he didn’t know what the total requirement would be for North Slope ULSD use, but said Tesoro is “fairly certain supply will not be an issue.”

Tesoro has some flexibility, he said. While its nameplate capacity is 10,000 bpd, the company has multiple options to produce ULSD incremental barrels with existing units as well as with additional investment.

Others could also produce ULSD.

Tesoro made its ULSD investment without tax credits, he said, and other companies have that option. There are also a lot of companies in the Pacific Northwest making ultra low sulfur diesel: “any refiner could make that investment tomorrow,” he said.

Tesoro supplies its retail stores, branded dealers and jet fuel to the airport. Most of its other business is with wholesalers, Knudson said, so Tesoro doesn’t know where that fuel ends up. As for North Slope supply, companies there could be signing contracts with all manner of companies, he said. “Our primary business is manufacturing.”

Tesoro has a products pipeline from Nikiski to Anchorage — that is its only “true transportation business,” Knudson said. Fuel is distributed from hubs at Nikiski and the Port of Anchorage to both trucks and barges. The transportation route discussed in the Legislature was for ULSD to go to Anchorage via Tesoro’s product pipeline, to Fairbanks by railcar and to the North Slope by truck.

Knudsen said “fuel distribution companies are very clever and competitive,” and while one distribution system was discussed in the Legislature, “I’m sure there are people thinking about others right now.”

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