FAIRBANKS -- Alaska Gov. Sean Parnell on Monday proposed tax credits worth up to $20 million a year for each in-state refinery and a potential reduction in state royalty payments to boost the fortunes of the industry. A press release from the governor said it "could result in tens of millions of dollars toward a healthy in-state refinery industry."
The plan would allow companies to lower their corporate income taxes with a $15 million credit per refinery and a 10 percent credit on infrastructure improvements. The maximum under both programs would be $20 million per refinery, per year. Companies that don't use the full amount or have a big enough tax liability would be able to have the rest paid to them directly.
The financial aid package appeared in the form of a six-page amendment to a routine bill related to a Tesoro royalty oil contract, submitted by the governor's office to the Senate Finance Committee. There is nothing in the amendment linking state assistance to consumer prices.
The Arctic Slope Regional Corp., which owns the two Petro Star refineries, would stand to gain up to $40 million under the tax credit provisions. Companies that don't use the full amount of the tax credit or have a big enough tax liability would be able to have the rest paid to them directly, according to the proposed amendment.
The proposed tax credits come as Flint Hills Resources prepares to close its refinery in North Pole this spring. Flint Hills said the closure will happen, but the financial aid brightens the prospect for a sale.
"While these proposals do not change the plans for Flint Hills Resources Alaska, the governor's proposed incentives should have a positive impact on maintaining and encouraging in-state refining," Flint Hills said in a statement. "And the proposals, if enacted, could be a factor in finding a buyer for our refinery."
The proposed revision to royalty calculations would apply to contracts after Jan. 1, 2015. It says the state may enter into agreements with lease holders "to use or accept as a price for the oil an amount that is not less than the price established in the contract between the lessee and an in-state refiner. . ."
Terms of the royalty oil contract between Flint Hills and the state, set to go into effect Tuesday, had provided that "the state will receive a price for its oil that will be no less than the amount the state would have received, on average, if it elected to keep its royalty in-value."
The new five-year contract, approved by the Legislature a year ago, is for 30,000 barrels a day until 2019. It is about half of the royalty oil now received by the state.
The Arctic Slope Regional Corp., which could be the largest beneficiary of the proposed changes, praised the move by the governor. The proposals would go a "long way toward stabilizing the aftershocks of the Flint Hills Resources closure announcement," Rex Rock Sr., president and CEO of Arctic Slope, was quoted as saying in a press release.
Doug Chapados, president of Petro Star, said the proposal "is providing a clear path forward by creating an environment conducive to investment rather than further contraction. This is a step in the right direction to sustain an industry vital to Alaska."
Alaska has six in-state refineries, with four producing products for the consumer market. A state report last year said the Flint Hills refinery produced about 1 million gallons, with jet fuel accounting for nearly 70 percent of that. Most of it was shipped to Anchorage on the railroad.
The Flint Hills and Petro Star refineries have been paying about $110 million a year to what's called the "quality bank," a program set up to take into account the lower quality oil returned to the pipeline from the refineries. They use the most valuable parts of each barrel and return about 70 to 75 percent, a segment that is not as valuable as what they use.
Flint Hills has proposed a change in the quality bank methodology that would reduce the payments by Flint Hills and Petro Star by nearly $40 million a year, a change opposed by Tesoro and the major North Slope producers.
Dermot Cole can be reached at dermot(at)alaskadispatch.com. Follow him on Twitter at @DermotMCole