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Vol. 24, No.52 Week of December 29, 2019
Providing coverage of Alaska and northern Canada's oil and gas industry

Kenai refinery celebrates 50th birthday

Once again Marathon is a big player in the Cook Inlet basin, owning and operating Alaska’s largest oil refinery and LNG plant

Kay Cashman

Petroleum News

In 1969, the Cook Inlet basin was in its prime, producing 225,000 barrels of oil a day. In September of that year Alaska got rich on its biggest North Slope lease sale to date, which followed the giant Prudhoe Bay oil discovery, netting $900 million for a state whose general fund held a little more than $41 million.

Enter Tesoro, a small company from San Antonio, which bought out Alaska Refining Co., owner of a tract of land on the inlet, 60 miles southwest of Anchorage at Nikiski. Included in the deal was a contract with the state of Alaska to refine its oil. Basically, Tesoro would purchase 15,000 barrels of crude per day from the state, which had the option of receiving its royalty (12% in cash or in kind).

The Kenai refinery also had a contract to produce jet fuel for the U.S. Air Force and diesel fuel for the Alaska market.

Tesoro moved quickly with construction of the Kenai refinery, which opened for business on Nov. 15, 1969, and began turning Alaska oil into quality transportation fuel to support the burgeoning population of the young state.

Operating with a staff of 17, the refinery received and processed oil from Cook Inlet basin’s on and offshore fields at a pace of 17,500 barrels a day, at first manufacturing only diesel and jet fuel.

“We put significant money into the Alaska refinery … our initial investment was close to $20 million,” Tesoro founder Robert West later recounted.

Statehood

Over the next 5 years the Kenai refinery built a pipeline to deliver products directly to the Anchorage airport and the Port of Anchorage and began to diversify its product lines.

The Kenai refinery and statehood for the Territory of Alaska were directly attributable to the 1957 Swanson River oil discovery, drilled by ConocoPhillips Alaska predecessor Richfield Oil in partnership with Marathon Petroleum, which today owns and operates the Kenai refinery. (In 1954, when Richfield, Marathon, and partners filed for leases in the Swanson River area, Marathon was Ohio Oil Co.)

The Swanson River discovery well tested at 900 barrels of oil a day and was the first modern commercial oil discovery in Alaska. with first oil revenues of $3 million hitting state coffers in 1959

The field provided the financial basis Congress required to make Alaska a state in that same year.

Joined by North Slope crude

Cook Inlet oil production peaked in 1970 and was soon swamped by North Slope crude that started moving down the trans-Alaska pipeline in 1977. The Kenai refinery was the first to refine North Slope oil.

Another milestone for the refinery was in 1971 when the first of several service stations was built at an Anchorage shopping center.

Since then, there has been more than a billion dollars of investment in the refinery that expanded its capacity, complexity and improved its environmental performance, including completion of a hydrocracker in 1980 and the launching of a ULSD, or ultra-low sulfur diesel, project in late November 2005.

In further demonstrating its “commitment to producing and providing cleaner fuels for Alaskan consumers,” Tesoro said it was investing $45 million to construct a DDU, or distillate desulfurization unit, at the Kenai refinery.

The DDU had a design capacity of 10,000 barrels per day and went online in 2007.

Name, ownership

In 1962, Marathon Petroleum changed its name to Marathon Oil.

On July 1,2011, Marathon Oil announced the spin-off of its downstream, refining and marketing assets to a separate, independent entity called Marathon Petroleum, which operates primarily in the U.S. Midwest, Northeast, East Coast, Southeast and Gulf Coast.

Marathon Petroleum is headquartered in Findlay, Ohio. Today the company operates the nation’s largest refining system with more than 3 million barrels per day of crude oil capacity across 16 refineries.

The exploration and production portion of the company, under the Marathon Oil name, became an independent E&P company on July 1, 2011.

Marathon was formerly a major Cook Inlet E&P player. It sold most of its Cook Inlet oil production in 1996 and focused on natural gas.

In early 2012, Marathon Oil sold the balance of its Alaska assets to Hilcorp Alaska. The company had been operating in Alaska for almost 58 years, but its focus as Marathon Oil was on liquids-rich resource plays.

In 2017, Tesoro changed its name to Andeavor following its acquisition of Western Refining.

On Sept. 24, 2018, Marathon Petroleum and Andeavor stockholders voted to approve the merger of the two companies - a transaction in which Marathon acquired all outstanding shares of Andeavor.

At closure Marathon Petroleum had an initial enterprise value of more than $90 billion.

All Alaskan workforce

Today the Kenai refinery at Nikiski employs 250 Alaskans, has a refining capacity of 68,000 bpd and produces gasoline and gasoline blendstocks, jet fuel, diesel fuel and heavy fuel oils, propane and asphalt.

A 70-mile, 48,000 bpd common-carrier products pipeline transports jet fuel, gasoline and diesel fuel to the Port of Alaska in Anchorage and the Ted Stevens Anchorage International Airport. Wholesale delivery occurs through terminals in Kenai, Anchorage, the Nikiski dock and the Port of Alaska.

It distributes these fuels from Nikiski to North Pole through a series of pipelines

In addition, the refinery supplies the network of Tesoro and USA Gasoline stations throughout Alaska.

Crude oil is delivered to the refinery by truck, double-hulled tankers through Cook Inlet and pipeline from the Kenai Peninsula and Cook Inlet.

The success of the refinery today and tomorrow is important to Alaskans. “Energy matters. It matters to the residents, to the government, to business - we find our role incredibly important in being that reliable supplier of quality fuel products that helps Alaskans,” said Cameron Hunt, Kenai refinery general manager in November.

“I am extremely proud of our team. We know that every day, we must earn our license to operate in our community. There is a deep-seated commitment with each of our employees, who take safety and environmental stewardship very seriously,” Hunt said.

HSE, community

A supporter of the Cook Inlet Regional Citizens Advisory Council, Marathon is the largest member of the Cook Inlet Spill Prevention and Response Team, conducting regular drills focused on safety and environmental protection.

Marathon invested $44 million to reduce gas flare flow by 50% and to-date, only one employee has had an Occupational Safety and Health Administration recordable injury in 5 years (2 million man-hours).

The refinery’s API Tier 1 and Tier 2 Process Safety performance has been better than the industry first quarter average for more than 9 years.

Marathon has provided more than $600,000 in significant investments for science, technology, engineering and math, or STEM, education, public safety and environmental programs on the Kenai Peninsula and across Alaska.

The company has served as Signature Sponsor of “Caring for the Kenai,” a nationally recognized contest for Kenai Peninsula high school students, as well as sponsored the Kenai Peninsula Borough Upstream Academies focused on STEM education for at-risk middle school students.

Furthermore, Marathon has sponsored a marine simulator upgrade for the Alaska Maritime Training Center to allow for critical training in a safe and controlled environment.

Marathon is also a strong supporter of local needs organizations from the Boys and Girls Club to the Kenai Peninsula Food Bank.

Once again Marathon has become a big player in the Cook Inlet basin. Whether you refer to it as Kenai, North Kenai or Nikiski, two of Alaska’s key refiners and export facilities are located there and owned by Marathon - the state’s largest oil refinery and the LNG plant.



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