Alaska refineries face turbulent times: cap-and-trade promises dire consequences.

• Author: Liles, Patricia
• Position: OIL & GAS

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Alaska's four in-state fuel refineries are facing turbulent times, thanks to volatile crude oil pricing, changes in regulatory rules and continued efforts by State lawmakers to impose price controls on retail products.

These external forces are whacking a natural resource industry that already faces some unique challenges operating in Alaska--declining supplies of feedstock, a small and basically stagnant market for retail products and a dramatic demand fluctuation between summer and winter seasons.

Reaction to these challenges by owners of the four in-state refineries has varied in recent years.

The privately owned Flint Hills refinery located in North Pole is Alaska's largest crude oil processing plant, with a capacity of processing up to 220,000 barrels per day. Koch Industries acquired the North Pole refinery in 2004 and since has requested financial assistance in its negotiated contract to purchase oil from the State of Alaska. Additionally, the company has sought a buyer for the facility. More recently, a portion of the plant has been shut down, due to declining demand for jet fuel.

Tesoro Corp., which operates a 72,000-barrel per day refinery in Kenai, spent more than $60 million two years ago to install equipment in order to produce federally mandated, ultra-low-sulfur diesel fuel.

Whether the Kenai refinery will receive another shot of capital investment to meet a new environmental regulation beginning in 2011 regarding benzene in gasoline has not yet been determined, according to Kip Knudson, manager of external affairs for Tesoro Alaska.

"In other industries, investments are made to grow the business or make it smarter. We're just trying to keep up with new regulatory requirements thrown at us," he said.

And Petro Star Inc., which operates the state's smallest refinery located in North Pole and another facility in Valdez, is recovering from a debilitating fire that shuttered the company's Valdez facility last December. Rebuilding work this year reached a milestone in mid-August, when a new crude column was set upon its foundation. The facility should be back in operation by early October, according to a company press release.

Additionally, Petro Star's owner, Arctic Slope Regional Corp., is planning to install next year equipment capable of producing ultra-low-sulfur diesel fuel at the Valdez facility, a decision made by ASRC board members in 2008.

The capital investment for the ultra-low-sulfur project is estimated at $150 million, according to ASRC's 2008 annual report, spending that is the Native corporation's single largest investment to date.

"This investment will replace current diesel production and provide for a slight increase in overall capacity, which we believe will result in an increase to future earnings," ASRC stated in its 2008 annual report.

FLINT HILLS FINANCES

Alaskans understand many economic trends in the state are tied to crude oil prices. High prices mean more State revenue, usually...