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Facing big losses, railroad board urges lawmakers to keep Flint Hills running

Members of Alaska Railroad Corp.'s board of directors warn that the closure of the Flint Hills refinery, the railroad's biggest customer, will lead to increases in energy costs and the price of asphalt and freight shipping. Loren Holmes photo

Warning that the closure of the Flint Hills refinery will cost the railroad its biggest customer and $11 million in 2015 alone, members of the Alaska Railroad Corp. board of directors urged the public to contact lawmakers and the governor’s office to keep the refinery operating.

“It just appalls me that the state is going to allow this to happen,” said board member John Binkley of Fairbanks during a meeting of the railroad’s board on Thursday. “There are so many ramifications to the closing of the refinery and what is symbolizes for Alaska. If we have to export a raw material to some other destination in the Lower 48, add value there and bring it back as product to Alaska, that is a sad commentary on our state if we allow this to happen.”

The Parnell administration has taken heat for saying little about the shutdown after it was announced by Flint Hills early this month. Parnell responded to the criticism more than a week ago, telling the Fairbanks daily newspaper that his administration is “on it” and that behind-the-scenes discussions were underway to keep the refinery open.

Concerns over potential shutdown hung over the meeting, with some board members speaking in passionate and personal terms about the potential economic problems it will cause the state. After the meeting, they headed into an executive session to discuss potential solutions in private.

A Parnell administration official who serves on the railroad board, Susan Bell, commissioner of the Department of Commerce, Community and Economic Development, attended the Anchorage meeting over the phone.

After some board members questioned the state’s involvement, she spoke up: “I want to be sure my silence isn’t broadcasting a lack of concern, and certainly for the communities and our economies, this is a significant issue. From my perspective, but also from the board’s sake, I wanted people to be aware that the governor’s office, the governor himself,” and especially Larry Hartig, commissioner of the Department of Environmental Conservation, “have been very engaged.”

All options are on the table for a possible solution, she said, including discussions over royalty oil contracts and getting inexpensive natural gas to the refineries in Fairbanks to help lower refining costs.

Parnell told the Fairbanks Daily News-Miner that the state is reviewing the price it sets for royalty oil sold to Flint Hills. Another discussion involves the DEC and cleanup levels at the refinery, the source for sulfolane pollution that has contaminated drinking water in many homes.

The announced closure, planned for early this summer, will cost some 80 jobs at the refinery and will significantly reduce the railroad’s freight service from Fairbanks to Anchorage starting June 1, once the refinery is no longer shipping products south.

Flint Hills has said gasoline production would end by May 1, with jet fuel and heating oil production ending no later than June 1. It has blamed the shutdown on factors such as high energy costs, the high price of Alaska North Slope crude oil, and the liability associated with the sulfolane plume.

The railroad estimates it will receive $6 million less in revenues in 2014 if the shutdown occurs and petroleum products have stopped flowing by June 1. That loss will grow to $11 million during the full calendar year in 2015. In 2013, the railroad saw total revenues of $144 million.

The railroad expects to see some increased freight moving north from Anchorage: Flint Hills has said it plans to ship petroleum products to Fairbanks. But those increased shipments won’t offset the loss of the southbound freight, officials said.

The railroad will be hard-pressed to cut enough costs to make the difference, said Bill O’Leary, railroad CEO: “This is going to have a significant impact on the Alaska Railroad. Flint Hills is and has been our largest customer for many, many years.”

If the shutdown occurs, asphalt prices will be higher in the Interior, affecting state paving projects in that region, said Binkley.

Heating fuel prices are expected to rise by at least 20 cents a gallon in Fairbanks, said board member Jon Cook, adding to the high energy prices he and other residents have already been paying.

He said the PetroStar and Tesoro refineries are also “at risk.”  

“I’d encourage you to contact your representatives and the governor’s office and see what we can do to hopefully retain Alaska jobs and mitigate this impact,” said Cook to the audience, nothing that he wasn’t speaking as a board member but as an individual.   

“The best thing we can do to not have to make some decisions that we’re going to have to make as a board is to keep these refineries running. And the state needs to make a fair shake on royalty oil, but frankly, it doesn’t need to be on the backs of consumers in Fairbanks trying to heat their houses,” he said.

He added that the closure is not all the state’s fault and that market forces are at play, such as the high cost of energy to refine crude oil and the high price of that crude.

Bill Sheffield, vice-chair of the railroad board, said Flint Hills might not have been in this situation had inexpensive natural gas been available to reduce the refinery’s high energy costs.

He said “The governor’s office in the last few years has never really talked to (Flint Hills) until now,” he said, with the railroad board urging that conversation.

Binkley said he hopes “people get fired up about it and demand that our administration and legislators do something to rectify this.”

Bell, with the Parnell administration, noted that the state has been working on plans to reduce natural gas costs, including the long-term solution of a gas pipeline.

Part of the meeting focused on the railroad's 2013 financial performance, which turned out better than expected, with net income coming in at $14 million, more than $9 million above the expected amount. That’s in part thanks to reductions in staff and greater operating efficiency, such as running longer trains, officials said.

In one bright spot, more freight is moving up on rail barges from the Lower 48. Part of that is due to increased activity on the North Slope, something that’s expected to continue, said O’Leary.