Alaska's refineries: battling high crude prices, low demand.

• Author: Hollander, Zaz
• Position: OIL & GAS

It's a real head-scratcher for Alaska drivers--gas prices flirt with $4 a gallon while one of the country's prime sources of crude bubbles from the North Slope.

Alaska's got the oil. But it's not cheap, even to in-state refineries. Plus cooler crude coursing through the Trans-Alaska Pipeline System necessitates higher energy bills for refineries that must heat the raw product to separate it into petroleum products.

We also don't have many refineries. Just two produce gasoline for retail markets, and only one in serious quantity--Tesoro Petroleum Corp.'s Kenai facility produces the majority of gas consumed in Alaska. And we have seriously low demand, given the state's small population. Alaska sits at the bottom of the list when it comes to state by state gas demand, especially in winter. Think Alaska's supply of crude oil should make for cheaper prices at the pump? Think again, the state's refiners and economists say. A combination of pricey crude and limited markets means it is unlikely Alaska can refine its way to lower gas prices, they say.

"It's a cost-driven decision," says Joyce Lofgren, a petroleum economist with the state Tax Division. "Just refining more isn't going to be helpful. If they refine more than is demanded, then they end up having to store or ship or find other markets for the products."

There are actually six refineries in Alaska: Tesoro at Nikiski; Flint Hills Resources at North Pole; Petro Star Inc. which operate refineries at North Pole and Valdez; and two small refineries operated by ConocoPhillips and BP on the North Slope that supply products only to support equipment and operations at the Kuparuk and Prudhoe Bay units.

Here's a quick look at Alaska's three commercial refining companies and the market factors driving operations.

Alaska's Gas Supplier

Tesoro opened Alaska's first oil refinery in Nikiski in 1969 to process Cook Inlet oil. Things have changed since then. Tesoro Corp., headquartered in San Antonio, Texas, is a Fortune 150 and Global 500 company with 5,200 employees scattered across seven refineries in the West, plus North Dakota and Hawaii.

The company's Kenai refinery employs 550 people in refining and marketing, according to corporate information. North Slope crude arrives via tankers from Valdez. A 75-mile, 10-inch pipeline traverses Cook Inlet from Nikiski to Tesoro's Port of Anchorage terminal to move jet fuel for use at the airport.

But the 72,000 barrels-per-day capacity refinery doesn't specialize in Cook Inlet crude any more. Today, the refinery processes mostly North Slope crude due to declines in Cook Inlet production. Crude oil runs by...