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Liability questions loom large in Flint Hills refinery sale conditions

Dermot Cole
Flint Hills Resources has told potential buyers of its North Pole Refinery (pictured) that several conditions would have to be met to reduce the company’s liability, including action by the state to allow a higher level of sulfolane pollution, and a public water system expansion to be 90 percent financed by someone other than Flint Hills. Courtesy Flint Hills Resources Alaska

FAIRBANKS -- Flint Hills Resources has told potential buyers of its North Pole Refinery that several conditions would have to be met to reduce the company’s liability, including action by the state to allow a higher level of sulfolane pollution on the 240-acre site.

Flint Hills said it would pay 10 percent of the cost of extending a public water system to the North Pole neighborhoods where sulfolane has spread. This is a reasonable percentage, Flint Hills said, because the state and the former owner of the refinery, the Williams Companies, share financial and legal responsibilities.

“There is no question that the off-site sulfolane came from spills that happened when Williams owned the refinery and the state owned the land,” Flint Hills said.

In addition, Flint Hills said there is “fecal coliform contamination in North Pole residential groundwater wells, meaning there is a water quality issue outside of sulfolane.” Removing sulfolane from the water, “won’t make it fit to drink,” the company said.

Flint Hills says it has spent more than $70 million on cleanup, with $25 million of that not covered by insurance. In a document filed Dec. 23 with the state Department of Environmental Conservation, Flint Hills said it has “spent over $55 million to address sulfolane issues since 2009,” some of it covered by insurance.

Sulfolane, a solvent used in making gasoline, has been detected in private wells in an area about three miles long and two miles wide. Most of it entered the groundwater, research reports say, through leaks in lagoons and drains over a period of many years.

The long-term solution for North Pole residents is a public water system, along with “institutional controls, such as municipal ordinances, restrictive covenants, easements or comprehensive plans that prohibit or limit access to the groundwater for use as drinking water.”  The company said it would spend up to $25 million on a public water system expansion, which would mean the total cost of the project is $250 million.

Flint Hills, a subsidiary of Koch Industries, bought the refinery in 2004 from Williams, an energy company based in Tulsa, Okla.

In an e-mail sent Tuesday to various Fairbanks elected officials, as well as Alaska Railroad executives and private business leaders, Flint Hills outlined these and other sale conditions. A buyer would take over cleanup activities on the refinery property and the “state would release (Flint Hills) from liability for on-site contamination and protect it from contribution claims.”

The company said it would lower its sale price to take into account the liability a potential buyer would assume by taking over the facility. Flint Hills is asking the state to allow sulfolane pollution levels of 350 parts per billion for groundwater and 943 parts per billion in the soil on the refinery grounds.

“These are the numbers the state was using before anyone knew that sulfolane migrated off-site,” Flint Hills said in the summary of conditions.

In 2012, after studying the sulfolane problem and assessing the health impacts, the state Department of Environmental Conservation proposed a cleanup level of 14 parts per billion of sulfolane for drinking water.

Flint Hills has responded that 362 parts per billion should be the standard for drinking water. Only three of the private wells tested in the North Pole area have shown levels above that amount. Hundreds were tested. 

Flint Hills said the higher sulfolane levels should be allowed on the refinery property because no one will be drinking the water. Plus, any buyer would need to know its potential liability and have confidence it could produce gasoline in the future and use sulfolane “without the fear that an incident will result in a massive cleanup liability driven by a drinking water standard that is so low (14 ppb.)”

A Flint Hills official said that one Alaska-based group has expressed interest in the property, and there have been many inquiries. On Feb. 4, Flint Hills announced that it would stop refining oil in the spring, leading to the loss of 80 jobs and the transformation of the property into an oil terminal. But there has been talk about what would need to happen to keep it going.

“Time is of the essence,” wrote Jeff Cook, regional director of external affairs for Flint Hills, in the e-mail to political and business leaders. 

 “We will begin decommissioning the extraction unit integral to gasoline production on May 1, 2014, and decommissioning of the balance of crude unit two on June 1, 2014, which impacts production of jet fuel, heating fuel, asphalt and some specialty fuels.  Having a buyer in place as close to May 1, 2014, as possible will provide the best assurance of continued operation of the refinery.”

The refinery has told the state it will not be taking any royalty oil in June. One big impact, in addition to the loss of about 80 refinery jobs, is that the railroad expects to see a decline in freight revenue of about $11 million this year.

Flint Hills said it would recognize the liability that a potential buyer would assume by lowering the sale price of the property. But the state would also have to act, as a “buyer needs certainty that it won’t be assuming liability for off-site contamination that it didn’t cause.”

“These conditions will require a dedicated and timely effort by Governor Parnell and his administration, along with encouragement and support from all those interested in seeing the refinery continue in operation,” Cook said.

“The state would release a buyer and protect it from contribution claims for off-site contamination existing before closing, except to the extent, and only to the extent, the buyer has additional releases that impact groundwater off-site or fails to operate the on-site groundwater remediation system,” Flint Hills said.

Williams has told investors it and Flint Hills both made claims under the policy issued in connection with the sale and is likely to face some liability.

“Due to the ongoing assessment of the level and extent of sulfolane contamination and the ultimate cost of remediation and division of costs between the named responsible parties, we are unable to estimate a range of liability at this time,” Williams told investors.

The company said it could face a liability ranging from an insignificant amount up to $32 million in the court case it has with Flint Hills. A Fairbanks Superior Court judge ruled against Flint Hills in that case in November, saying the statute of limitations had passed.

Contact Dermot Cole at dermot(at)alaskadispatch.com. Follow him on Twitter @dermotmcole