Engineering News

Alaska Refinery's Struggles Cause for Concern
January 05, 2009

A shutdown of the Flint Hills Resources refinery at North Pole has potential to rattle the Anchorage economy, and state officials are working with the company to find a way to keep the plant going.

Flint Hills, part of Kansas-based Koch Industries Inc., has indicated its aging refinery is struggling financially because of last year's record high prices for crude oil used to make such products as jet fuel, heating oil and gasoline.

The company has put the refinery up for sale, and other options include converting it into a receiving station for distributing but not making fuels, said Koch spokeswoman Katie Stavinoha.

Last year, the company also mentioned possibly upgrading the refinery, but such an investment has now been deemed "not economically justified," she said.

State and local officials are worried about the fate of the refinery, located 360 miles north of Anchorage.

Two key enterprises have the most cause for concern:

--The Alaska Railroad.

Nearly every day, a train hauling mostly jet fuel makes the run from North Pole to Anchorage. These fuel shipments are vital business for the railroad, generating $41 million, or 36 percent of its combined freight and passenger revenue in 2007.

--The Ted Stevens Anchorage International Airport.

The Anchorage airport is one of the world's busiest pit stops for cargo jets, and they and other aircraft drank down 864 million gallons of jet fuel in 2007. The Flint Hills refinery makes roughly 60 percent of the jet fuel pumped at the airport, state officials say.

If the refinery were to cease production, the Alaska Railroad couldn't run as many trains, would have to cut its payroll dramatically, and would need to raise rates for moving passengers and other freight such as coal and gravel, said railroad board chairman John Binkley.

At the airport, fuel sellers likely would have to ship in more fuel from Outside suppliers, which could push up prices and make Anchorage less attractive as a stop for international air cargo carriers, state officials said.

"Flint Hill is one of our star assets," said Bill Popp, president of the Anchorage Economic Development Corp. He's hoping the state will work in earnest to find ways to keep the refinery making fuels.

STATE BUYOUT?

On Dec. 10, Gov. Sarah Palin announced the state had launched a "cooperative effort" to help Flint Hills. A press release from her office suggested the refinery could end up as part of the Alaska Railroad, a state-owned corporation.

But that's not the ideal outcome, Binkley said later in the month.

"No, the railroad doesn't want to buy a refinery," he said. "And the railroad doesn't want to be in the refinery business. But the railroad wants there to be a refinery at North Pole, Alaska."

The refinery started up in 1977, the same year the nearby trans-Alaska oil pipeline began carrying Prudhoe Bay crude oil.

The refinery uses a 2 1/2 -mile spur line to tap the big pipe for crude that's cooked into finished products. Flint Hills buys the oil at market rates, plus a premium of more than $1 a barrel, from the state, which receives a royalty share of North Slope production.

Jet fuel is the refinery's biggest product, accounting for about 60 percent of its total output. It also makes a lot of heating oil, plus a dab of gasoline.

In terms of capacity, the North Pole refinery is the state's largest. Flint Hills has owned it since July 2004, when it bought the plant from the Williams Cos.

NO SWEETHEART DEAL

Kevin Banks, the state's oil and gas director, negotiated the 2004 contract to sell state oil to Flint Hills for up to 10 years.

In October, two top Flint Hills executives, president Brad Razook and chief financial officer Tony Sementelli, came up from the company's Wichita headquarters to meet with Banks and other state officials.

They wanted to talk about ways the state might provide some relief for the refinery, which struggled in 2008 as oil cost in excess of $100 a barrel, Banks said.

The executives didn't provide a wish list, Banks said, though ideas include changing the oil supply contract to, for example, get rid of the premium the state collects on each barrel.

Flint Hills has agreed to turn over financial information to prove it's been losing money, he said.

The state has hired a Dallas energy consulting firm, Baker & O'Brien, to help analyze the Flint Hills data, a process that could take three to six months, according to the governor's office.

State officials want to see how the plant fares not only when oil prices are high but when prices are much lower, as they are now, Banks said.

One way the state could help Flint Hills would be to lower the sales price of its royalty oil. But Banks said the courts have held the state can't give select companies a "sweetheart deal" on state resources.

PAST THREATS

Might the state simply buy the refinery?

"It's an option that would be considered," Banks said.

Asked what, exactly, Flint Hills wants from the state, Stavinoha, the company spokeswoman, said only: "We're open to a broad range of options." She declined to make the executives, Razook and Sementelli, available for an interview.

Flint Hills has approached the state before with threats to shutter the plant unless it received state concessions. In early 2006, Sementelli sent a letter seeking a change in the state oil supply contract.

"We are not asking for a subsidy or handout," he wrote, but noted the continued operation of the refinery was in jeopardy.

State officials refused Sementelli's request.

Aside from Flint Hills, the state's only other major refinery operator is Tesoro Corp. of San Antonio, Texas, which runs a plant at Nikiski on the Kenai Peninsula. Tesoro's top product also is jet fuel for the Anchorage airport, but it also makes much of the state's gasoline.

The high cost of crude oil made life miserable last year not only for motorists filling up their cars and trucks, but also for refiners, said Tesoro spokesman Kip Knudson.

"Flint Hills is thought of as a highly competent operator," he said in December. "I would assume they've struggled for three quarters like we have."

Koch Industries, which owns Flint Hills, is a large but privately held company. Publicly traded Tesoro has seen its stock price plunge by more than 70 percent last year.

Source: Anchorage Daily News, Alaska; Knight Ridder/Tribune Business News

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