Reaction to refinery incentives proposal is mixed

JUNEAU — Alaska Gov. Sean Parnell has proposed tax credits, a form of a state subsidy, to help Alaska refineries hit by adverse market forces and penalties imposed for returning unused oil to the Trans-Alaska Pipeline System.

Not all of the state’s refiners are on board with it, however. Tesoro Corp., owner of a refinery at Nikiski, near Kenai, said it is still studying the specifics of Parnell’s idea but has mixed views.

“We urge caution in changes to the tax code that might affect the competitive playing field,” Tesoro spokesman Matt Gill said.

The reference is to how tax credits proposed by Parnell would help a competitor, PetroStar, at Tesoro’s possible expense.

PetroStar operates small refineries near Fairbanks and Valdez and is owned by Arctic Slope Regional Corp.

The governor is resisting some proposals from refiners, however, including one that would have the state sell royalty oil at a discount. Alaska Natural Resources Commissioner Joe Balash said such a move would open up a Pandora’s box of problems and could result in the state losing more than $100 million dollars of annual royalty revenue.

One proposal Parnell put forth in his March 31 announcement is allowing an in-state refinery a tax credit against state corporate income tax liability for qualified infrastructure expenditures and also a credit based on the volume of refined products produced and sold in retail markets.

Parnell’s announcement stated his proposals could be added to pending legislation. The session is scheduled to end April 20 but lawmakers are aiming to adjourn by Good Friday, April 18.

Parnell defended the move to help the in-state refineries in a statement issued March 31: “By creating a more favorable tax climate, we have the opportunity to keep an industry strong that provides jobs for Alaskans, adds value to Alaska’s oil, secures our military’s source of fuel, and helps make Alaskan resources accessible to Alaskans.”

Balash said the credit linked to volume would kick in at a threshold of 17,500 barrels of product per day, which would be worth about $15 million per year to a refinery. 

Also, the refiners’ tax credits would be transferable, Balash said, meaning they can be sold if the company does not have sufficient corporate income tax liability to use the credits.

Alternatively, the refiner would be able to cash them in with the state and be paid, Balash said. A similar tax credit and state cash payment system is currently in effect for oil and gas explorers in Alaska, as an incentive. Parnell’s proposed incentives have a five-year sunset clause.

A second proposal allows an oil producer on a state lease to sell crude oil to an in-state refinery, and to use the contract price to determine the royalty value owed the state.

Tesoro said it supports this part of the proposal, Gill said.

Balash said, “an important part of this is that we would relieve the lessee of a provision currently in leases that royalty payments are based on a ‘higher-of’ requirement, meaning that if other producers get higher values for crude oil in the market, the state royalty is paid by all producers based on that price.”

The new proposal would set the value on the actual contract sales price with the in-state refiner, he said. It would be an inducement for Alaska producers to sell to refineries in the state.

A similar procedure has been in place in Cook Inlet for sales of natural gas by producers to public utilities, in that the royalty value is linked to the contract sales price, Balash said.

Jeff Cook, a spokesman for Flint Hills Resources, said the proposals, “will not change plans for Flint Hills Resources (to close its refinery) but they could be a factor in helping us find a buyer for our refinery.” 

On Feb. 4, the company announced it would cease all refining operations at its North Pole refinery by June 1, which has thrown the state supply picture into flux on everything from jet fuel to asphalt.

Flint Hills supports the initiative overall, however.

“The governor’s proposed incentives should have positive impacts in maintaining an in-state refining industry,” Cook said.

“I had a good conversation with Commissioner Balash regarding the governor’s refinery incentives and I’m encouraged,” said Rep. Doug Issacson, R-North Pole. “The incentives should improve the possibility of the sale of Flint Hills North Pole refinery, but more importantly at this moment, the incentives, if approved, could keep open the Petro Star and Tesoro refineries.”

Parnell has been under pressure from Interior Alaska community leaders and legislators to do something to help Flint Hills.

“It’s in the best interest of the state to retain local jobs and increase the economic and social stability of our communities. The incentives have a five-year sunset component that will give us sufficient time to evaluate their effectiveness.”

“We must keep our focus on the strength and vibrancy of our businesses and our communities and not bleed either dry by having a complete fixation on getting maximum dollars into the state treasury,” a reference to the state’s policy of maximizing value in the sale of state royalty oil.

The company has said its decision to close is linked mainly to economic pressures as well as the ongoing cleanup costs from a chemical leak inherited from the prior owners than is spreading underground from an aquifer and has led to competing claims over who is liable for the expense.

Flint Hills and PetroStar have also been hit by penalties for quality differentials for unused portions of crude returned to TAPS.

Both companies pay penalties to the Quality Bank, a financial accounting mechanism for TAPS shippers and the state that adjusts for quality differentials of crude oil moving through the pipeline.

The two refiners take crude oil from TAPS and use part of the oil to make jet fuel, gasoline and diesel, and returning unused portions of the oil to the pipeline. Because the return oil has the effect of somewhat degrading the oil moving south to Valdez, payments are made to the Quality Banks to compensate other TAPS shippers and the state for differences in quality.

Parnell has also so far resisted proposals from the refiners that he push for changes in the formulas that govern the Quality Bank, which is also regulated by the Federal Energy Regulatory Commission.

Flint Hills has been under commercial pressure for several years due to the loss of its jet fuel market at Anchorage’s international airport. Air carriers there have moved to import less expensive jet fuel from overseas rather than buying from Flint Hills.

Tesoro produces gasoline, jet fuel and ultra-low sulfur diesel at its Kenai Peninsula refinery. The company is supplied by Cook Inlet oil producers, but also purchases North Slope royalty oil from the state, which takes some of its oil royalty in-kind in order to supply in-state refiners. A bill is pending in the Legislature that would extend Tesoro’s royalty oil contract.

Flint Hills produces jet fuel, gasoline and heating oil at its plant near Fairbanks. PetroStar produces jet fuel at both its North Pole and Valdez refineries as well as heating oil at North Pole and ultra-low sulfur diesel in Valdez.

Updated: 
11/21/2016 - 9:14am