Why oil prices are so high: short supply, small market and outdated refineries.

• Author: Bradner, Mike
• Position: OIL & GAS

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Alaskans are not happy about fuel prices, but they should ponder what life would be like without in-state refiners that supply Alaska that would leave the state dependent as it once was on a long fuel-supply line from the Pacific Northwest.

Prices are indeed high, but companies operating refineries that supply Alaska are caught in a complex web of increasingly expensive environmental mandates by the government, aging equipment, small markets, expensive transportation and volatile crude oil prices--all which have squeezed margins. It can't be assumed that Alaska will always have several in-state refiners.

IN-STATE REFINERIES FACE CHALLENGES

Flint Hills Resources, owner of a refinery at North Pole near Fairbanks, is facing problems and makes no secret of its disappointment with profit margins. The company is studying several options, including selling the refinery. The company hopes to reach conclusions by the end of 2008. "Our future is uncertain," Jeff Cook, Alaska public affairs manager, told an Oct. 23 State legislative hearing.

The Tesoro Corp. refinery near Kenai shouldn't be taken for granted either. The company has its own set of challenges, which include expensive new environmental requirements and a dwindling supply of light Cook Inlet crude oil for which the refinery was originally designed. Several years ago, the company studied the idea of closing the Alaska refinery and supplying the company's retail outlets from Tesoro refineries in Washington state and Hawaii.

Tesoro opted to keep the Kenai refinery open and since then has made substantial investments to upgrade the plant, but the company now faces new environmental requirements and the need for new investment. PetroStar Inc., which operates two small refineries at North Pole and Valdez, faces similar challenges.

OTHER CHALLENGES

In Fairbanks, Flint Hills supplies gasoline and diesel to Interior Alaska markets, but mainly produces jet fuel for commercial airline customers at the Anchorage and Fairbanks international airports, where it is the dominant supplier. Tesoro also supplies jet fuel to Anchorage's airport.

Petro Star, owned by Arctic Slope Regional Corp., produces jet fuel, diesel and home-heating oil, but no gasoline. PetroStar's main customer for its jet fuel is the military.

Cook explained his company's dilemma to the State legislature: "Our refinery is a topping plant, meaning it lacks the sophisticated processing capability to turn all the crude oil that comes into the plant into refined products," Cook said in a presentation to the House Judiciary Committee.

"The North Pole refinery takes in between 180,000 to 220,000 barrels per day of crude oil. We heat that crude oil to distill it into a few basic products, which we retain to sell. The rest of the stream is then returned to TAPS. As a result, we keep...