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State's valuable royalty oil may go to Tesoro after Flint Hills is shuttered

Pat Forgey
The Flint Hills refinery in North Pole is due to close later in 2014. What will happen to the state royalty oil that had been processed by the refinery? Courtesy Flint Hills Resources Alaska

JUNEAU -- Closing North Pole's Flint Hills refinery will make more of Alaska's valuable royalty oil available to Tesoro's Nikiski refinery, but if the state sells that oil to Tesoro or another buyer, it may be harder for a new owner to restart the refinery southeast of Fairbanks.

Flint Hills' royalty oil contract is due to expire soon.

Tesoro is already using some state royalty oil and would like to buy more if Flint Hills oil becomes available, said Joe Balash, commissioner of the Department of Natural Resources.

“We are investigating with Tesoro whether and how we might increase their royalty volumes, if there are additional royalty volumes, but we have not closed on anything yet,” he said.

First, Flint Hills would have to relinquish its oil, which the company will not need following its announced closure, due to begin in May. However, the Flint Hills plant is for sale, and a new owner would presumably need royalty oil.

The state's oil producers, ConocoPhillips, BP and Exxon Mobil Corp., don't have extra oil to sell, said Jeff Cook, the Flint Hills spokesman. That makes Flint Hills’ royalty oil important.

“There isn't any other oil available, the producers use all of their own oil, the producers have their own refineries,” he said.

If Flint Hills can't get state oil, there is nowhere else to look.

“We're different than Tesoro,” Cook said.  “They sit on the water, they get oil out of Cook Inlet, they get oil from anywhere off the ocean, which we can't.”

Royalty oil is the 12.5 percent share of production that under most North Slope leases is retained by Alaska. The state can either take its royalty oil as the value of the oil produced, or they can take ownership of the oil itself, known as taking that oil “in kind.”

To help Alaska refineries, the state has taken the oil “in kind,” selling it to local refiners to ensure they have a steady supply.

Flint Hills, though, has announced that it is closing because it can't operate successfully, even with the royalty oil. That frees up its share of royalty oil, and Balash said the state now wants that oil to go to Tesoro, the state's most important refinery, or another Alaska refinery.

Rep. Doug Isaacson, R-North Pole, said he supports the state selling royalty oil to Tesoro or another Alaska refinery, but worries about the uncertain impact on the ability of a new Flint Hills owner to keep operating or restart the refinery.

“If they are not using it, then we should send it to someone who can use it in-state, which in my opinion is better than sending it out of state because we are putting Alaskans, our friends and neighbors, to work and we're benefiting our communities,” he said.

But Isaacson said he wants the state to make sure that the loss of royalty oil doesn't limit Flint Hill's options.

“What that means to a potential buyer is uncertain,” he said.  “That's in the administration's hands,” he said.

For Flint Hills to lose access to royalty oil, it must notify the state for three consecutive months it will elect to not take its designated share, according to Balash and Cook. The first month’s election has already been made, they said.

Last year, Tesoro signed a royalty oil contract with the state, an amount limited by what was available, Balash said.

Recently, Tesoro told a legislative review committee that it would like to continue to use the state's royalty oil and would be a dependable customer.

“We've been here 45 years; we have no plans to be elsewhere,” said James Tangaro, Tesoro's vice president in Kenai. “We're a big part of the community, and we intend to stay that way,” he said.

Balash endorsed Tesoro, too.

“It's the largest, most sophisticated in the state. They produce ultra low sulfur diesel. They have a diverse product line that includes jet fuel to Ted Stevens International Airport (and) a lot of gasoline,” he said.

Rep. Mike Hawker, R-Anchorage, noted Tesoro’s prominence in the community as well.

“You folks supply 35 percent of the jet fuel, that or higher, and 60 percent of the gasoline consumed by Alaskans,” he said.

House Speaker Mike Chenault also weighed in with an endorsement of Tesoro, one of his district's top employers.

“Maintaining in-state production of refined fuel products is critical to the economic security of our state,” he told legislators.

Isaacson said that keeping refining in state is so important Alaska should negotiate a new royalty oil contract under which Flint Hills could operate profitably.

“The buyer could elect to keep the old contract, which I would not advise, or request a new contract” -- or the new buyer could find a private contract, he said .

Alaska Division of Oil and Gas Director Bill Barrons said that if Flint Hills gives up its contracted royalty oil any new owner would have to reopen negotiations with the state as part of a new contract, but it was too early to speculate on how those negotiations would go.