Despite a steadily declining price for crude oil in recent weeks, the state of Alaska and Flint Hills Resources continue talks on the refiner's request for reductions in its purchase of North Slope-produced royalty oil processed in the company's North Pole plant.
“It appears they have been doing fairly poorly, although they are doing better as the oil price declines,” said Kevin Banks, director of the state Division of Oil and Gas. “We're still working to get our arms around to what extent any changes in our contract might help them.”
Earlier this summer, Flint Hills made public its request for relief in its royalty oil contract with the state of Alaska, saying that the company's North Pole refinery was losing money.
Flint Hills purchases the state's royalty oil from North Slope production, a feedstock that is transported to the North Pole refinery from the Trans Alaska Pipeline System via a 4.6-mile looped feeder pipeline.
Flint Hills heats the crude oil, taking out the lighter and more valuable parts of the raw petroleum product and returning the heavier residual to TAPS. The refinery pays a quality bank adjustment within the complex sales contract formula with the state, which accounts for using only a portion of the North Slope crude.
“It's such a simple refinery - no more complex than (neighboring refinery) PetroStar, just bigger,” Banks said. “We're seeing that the operations that are doing better in the climate of increasing oil prices are the more complex refineries, they have a greater suite of choices about what to make.”
Additionally, the Flint Hills refinery in North Pole must use a portion of its crude feedstock as a fuel to run the operation, unlike refineries in the Lower 48, which typically use natural gas for their heating fuel source, he added.
Flint Hills Resources in Alaska is a subsidiary of Wichita-based Koch Industries Inc., which is planning an early 2009 shutdown of a Texas chemical plant, which employs about 395 full-time workers, the company said in a news release.
Earlier this year, Flint Hills sent an e-mail to employees, telling them that the company was considering three options for its Alaska operation: reconfigure the plant, invest in upgrades to increase volume or sell the facility and terminals.
A decision is expected by the end of the year, according to a company spokesman.
“Their timeline has some flexibility in it,” said Banks. “If we come back in a few weeks and say, 'There's something to what you've been saying,' it will put a big impact on their working through their plans and their process.”
State officials earlier this summer denied the Flint Hills request to lower royalty oil prices, as they had no evidence of the refinery's financial woes. Tom Irwin, commissioner of the Department of Natural Resources, said in June that he would consider renegotiating royalty oil prices if Flint Hills would provide requested financial information.
The state hired Dallas-based Baker & O'Brien to work as an independent consultant during the information exchange and possible contract renegotiations.
“A considerable amount of information has been delivered by Flint Hills. It hasn't been a smoothly paved road, but people at the top are motivated,” said Banks. “This is so antithetical to their culture as a privately owned company.”
The state and its consulting team continue to receive information from Flint Hills and are putting together an analysis that Banks anticipates would be ready for legislators to consider after the start of the next legislative session in January.
“There's a certain limit to what DNR can do to help their situation, given the constraints that govern royalty oil,” Banks said. “But there might be something outside of royalty oil that might help, some sort of a more global solution.”
Flint Hills acquired in early 2004 from Tulsa-based Williams Co. assets in Alaska, including the North Pole refinery, petroleum terminals in Anchorage and Fairbanks, a 3 percent interest in TAPS and 26 retail fuel and convenience stores throughout Alaska. Koch Industry subsidiaries were involved in the purchase of the pipeline ownership and the retail stores.
At the same time, Flint Hills signed a 10-year purchase contract for state royalty oil and since then, has asked for financial relief several times. The company first sought some forgiveness on money it might owe the state from retroactive TAPS tariff adjustments.
Now, Flint Hills wants the price for the oil they buy reduced, saying they pay a premium under the existing contract and that high price is contributing to poor profit margins.
The royalty oil contract is posted on the state's Web site, an agreement that currently allows Flint Hills to purchase up to 77,000 barrels per day of the state's royalty oil for 10 years.
Oil prices 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 which is deducted from royalty oil kept in value, Banks said, oil that typically is 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.
Alaska North Slope crude prices have been slipping in recent weeks, falling to $35 per barrel in early December.
