Alaska's largest oil refinery, owned and operated by Flint Hills Resources Alaska, continues to struggle operationally, with the North Pole facility shutting down one of its three production units again in mid-August.
That refining unit had shut down in March, a move company spokesman Jeff Cook described then as "unprecedented."
"We did bring that back on line in May, but shut it down again due to the downturn in demand for jet fuel at the Anchorage airport," he said. "The drop in demand at Anchorage, between the volcano (Mount Redoubt) and the world economy, has been pretty dramatic."
None of the 170 jobs at the North Pole refinery were affected by the latest shutdown, which will continue until demand for jet fuel rebounds at the Anchorage international airport, Cook said.
With a processing capacity of up to 220,000 barrels of crude oil per day, the North Pole refinery is the largest in Alaska. The production unit that has been shut down was part of a $70 million refinery expansion project completed in late 1998 by prior owner Williams Co. to produce more jet fuel.
Cook said the new production unit had not been shut down prior to this spring, other than for scheduled maintenance.
The financial health and future of the North Pole refinery has been discussed for more than a year by Flint Hills, state employees, legislators and others interested in the Interior's industrial operation.
Flint Hills President Brad Razook sent an e-mail to employees in May 2008, bringing the facility's fiscal woes to light. He outlined three options being considered for the facility: sell it, reconfigure it or expand the facility to increase volume and reduce operating costs.
All three options now seem to be ruled out.
"We will continue normal operations for the foreseeable future, assuming it's profitable," Cook said Sept. 2, declining to comment further.
Flint Hills, a subsidiary of Wichita, Kan.-based Koch Industries, purchased the North Pole refinery in mid-2004 from Williams, along with the company's two petroleum terminals in Fairbanks and Anchorage.
Koch Alaska Pipeline Co., another subsidiary, purchased from Williams a 3 percent interest in the Trans-Alaska Pipeline System.
At the time of the refinery purchase, Flint Hills negotiated a 10-year contract with the state of Alaska to purchase up to 77,000 barrels per day of the state-owned royalty oil flowing through TAPS from the North Slope.
Terms of that oil contract and possible modifications to that agreement have been the center of discussions that started in mid-2008, when Flint Hills, citing months of financial losses, renewed its request for price reductions in the premium paid for state-owned oil sold to the refinery.
Initially state officials denied the request, saying they had no proof of the refinery's financial struggles. In mid-summer, after some political pressure by elected representatives concerned about Alaska's largest refinery operation, efforts to share financial information began between Flint Hills and the state through Dallas-based independent consultant Baker & O'Brien.
The exchange of financial information and state analysis concluded this spring, with the state paying the consultants $150,000 for their work on the negotiations, according to Alan Dennis, a royalty manager in the state's Division of Oil and Gas and the lead working on the negotiations with Flint Hills.
That consulting expense is in addition to state employee time dedicated to the effort, not only by workers in the Department of Natural Resources, but also at the Alaska Railroad, which was named as one entity that could potentially operate the refinery if the state purchased the facility.
No sale proposal was finalized, and no specific requests for royalty oil price reductions or other economic inducements were made by Flint Hills representatives at the end of the talks this spring, Dennis said.
"At this point, they are making some amount of money in refining that they deem reasonable," he said. "It's not as much as they would like it to be, but I don't think they have any plans to do anything different."
Describing the talks with state officials as a "cooperative and constructive exchange," Cook said in late August that royalty oil price modifications were not the focus of the discussions. "The focus was to have the state understand the challenge we face," Cook said.
When questioned about the state's expense for the consultants, Cook said that his company "did not request they go hire a consultant. We brought up a number of different issues."
Oil prices in the state contract with Flint Hills are based on the monthly average of spot prices for Alaska North Slope oil, reduced by $1.55 per barrel for a location differential. That contractual location differential is 15 cents a barrel higher than the amount that is deducted from royalty oil kept in value, which is typically sold to North Slope producers. That 15 cent per barrel figure is the premium frequently referred to in the Flint Hills contract.
The price calculation also includes a reduction for a tariff allowance and line loss, and a per barrel increase for the quality bank adjustment, which allows the Flint Hills refinery to return to TAPS the heavier crude oil products not processed at its North Pole facility for distribution within Alaska.
