Refinery tax credit bill signed, renews Tesoro royalty contract
The Tesoro refinery in Nikiski will benefit from a tax credit bill signed by Gov. Sean Parnell on July 29. New investments will be eligible for a 40 percent tax credit under the legislation. The bill also renews Tesoro’s royalty oil purchase agreement with the state.
A new Alaska law granting refiners a 40 percent tax credit for new investments was signed July 29 by Gov. Sean Parnell along with a resolution urging the governor to resolve disputes over the Quality Bank, a mechanism that compensates Trans-Alaska Pipeline System shippers for changes in oil quality.
The law will benefit Alaska refiners Tesoro Alaska Petroleum Co., which operates its refinery at Nikiski, near Kenai, and Petro Star Inc., which operates two small refineries near Valdez and Fairbanks.
House Bill 287 and House Concurrent Resolution 22 were passed in the Legislature’s 2014 session. HB 287 also extends a state royalty oil contract for Tesoro. The company has a contract to purchase 15,000 barrels per day of royalty oil for the Nikiski refinery that would have expired in February 2015. The law signed by Parnell extends to contract to Jan 30, 2016.
Tesoro will also benefit from the tax credits but the bill was mainly passed to help PetroStar, which has been hit hard financially by having to make payments to the Quality Bank.
Parnell introduced HB 287 earlier this year to extend the Tesoro royalty contract but added the refinery tax credit provision after Flint Hills Resources, operator of another refinery near Fairbanks, announced it would close its plant because of deteriorating economics. Flint Hills shut its refinery in June.
The new state law allows the credit to be applied against the state corporate income tax up to a cap of $10 million a year. If there are unused tax credits, which could occur if the credits exceed the tax liability in any one year, the refineries can cash in the credits with the state.
Parnell said the new law will strengthen the state’s small refining industry.
“We support Alaska’s oil being refined for Alaskans’ use and the jobs that come with it. By providing a more favorable climate for in-state refining, we can have a more secure future in refining,” ensuring fuel for home heating and transportation, he said.
In a statement, Doug Chapados, PetroStar’s CEO, said “The closure of the Flint Hills Refinery underscored the importance of making sure that the remaining Alaska refineries have the resources to remain healthy and viable.
“Petro Star is a small business, and the only Alaska-owned refiner. These past years, Petro Star has found the Alaska marketplace to be very challenging, and the State has expressed its desire to help.”
The TAPS Quality Bank remains as a major threat to Petro Star, he said. PetroStar takes crude oil from TAPS to make products like jet fuel, diesel and heating oil in its two PetroStar refineries and returns unused parts of the crude to the pipeline.
Because the quality of the oil returned is less than the crude oil taken in (parts of the crude were extracted to make products) Petro Star must compensate other shippers in TAPS, through a “penalty” payment, for the degradation of the crude oil flowing in the pipeline “downstream” from the refineries.
Tesoro is not affected by the Quality Bank because it takes oil from sources like Cook Inlet and even overseas as well as the North Slope and does not return unused oil to TAPS.
“The penalties extracted from Petro Star (and formerly from Flint Hills) are an immense burden for any company operating refineries on TAPS,” Chapados said. “Over the last few years, the Quality Bank penalties that Petro Star is required to pay have increased dramatically,” and no one can say the bank is functioning as it was intended.
Flint Hills and Petro Star have initiated a proceeding before the Federal Energy Regulatory Commission to attempt changes in the Quality Bank, but have so far been unsuccessful. The companies argue that certain factors in the Quality Bank mechanism are unfair.
The resolution passed by the Legislature and signed by Parnell Aug. 29 states, “The absence of refineries in the state would directly an indirectly negatively affect the labor market in the state, negatively affect the state’s general fund, jeopardize the security of Alaska’s military bases, and drive up the long-term cost of fuel products,” in the state.
“The TAPS Quality Bank and the cost of adjustments that must be paid by refineries in the state have, for many years, been subject to prolonged and recurrent litigation before the Federal Energy Regulatory Commission and the Regulatory Commission of Alaska.”
HCR 22 asks the governor to seek a resolution to the disputes before January 2015, “in a manner that will provide long-term Quality Bank stability and reduce the cost of Quality Bank adjustments paid by in-state refiners of North Slope crude oil.”