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Parnell administration wants to bail out ailing refineries with tax breaks

Lisa Demer

A fast-track Parnell administration proposal to give tax breaks to Alaska oil refineries is moving through the Legislature despite concerns about an estimated cost of $150 million or more over five years and questions about the effectiveness of the strategy.

The proposal would offer a tax credit -- essentially a subsidy -- amounting to $10 million a year to a refinery that invests at least $25 million in its plant. The credits would be offered for five years.

Backers say the help is essential to ensure the survival of Alaska refineries. They say their concern extends far beyond direct refinery jobs to other elements of the state economy, including the Alaska Railroad and the military.

The question, said state Rep. Tammie Wilson, R-North Pole, is this: "Do we think it's important to have in-state refineries?"

Critics of the subsidies say yes, but not this way. The tax breaks would come just as the state is faced with budget deficits of $1 billion to $2 billion a year. The subsidies won't guarantee that distressed refineries will survive, and would benefit a Tesoro refinery that's not in trouble and hasn't asked for help, argued state Rep. Les Gara, D-Anchorage, who proposed low-interest loans instead.

Four oil refineries now operate in Alaska, but one, the Flint Hills refinery in North Pole, is preparing to shut down because of high operating costs and an expensive problem with a groundwater contaminant called sulfolane, an industrial solvent is used in gasoline production.

Two other refineries run by Petro Star Inc. -- one in North Pole and one in Valdez -- are also in financial crisis, according to testimony before the House Finance Committee.

The fourth refinery, Tesoro Refinery and Marketing LLC's Kenai operation, is in better financial health and simply wanted the underlying legislation so that it could continue to purchase state royalty oil, the company says.

Flint Hills, which is owned by the billionaire industrialist Koch brothers, announced on Feb. 4 that it would close this spring. Gasoline production will shut down May 1, and production of jet fuel and other products will end by June. Some 81 employees will lose their jobs, Flint Hills spokesman Jeff Cook said this week.

The closure announcement prompted Natural Resources Commissioner Joe Balash to check whether Petro Star, which had been warning of financial pressures for a couple of years, also was in danger, he told the Daily News.

Petro Star, which is owned by Arctic Slope Regional Corp., and Flint Hills had shared the costs of operating small pipelines that carry oil from the big trans-Alaska pipeline to their plants, where they extract the most valuable components and return the rest to the big pipeline.

Flint Hills, with the bigger operation in North Pole, picked up 85 percent of that $4.5 million annual small pipeline expense, Balash said. He wondered whether Petro Star would now have to come up with nearly $4 million on its own.

"I reached out to (Petro Star chief executive officer) Doug Chapados and asked if my understanding of that pipeline impact was correct," Balash said. Chapados told him it was.

"Then I asked, 'Given the tough year you just had, are you guys going to be the next to announce your closing?' "

"We don't know," Chapados told him.

The Parnell administration's tax credit proposal first emerged in the Legislature on April 9 -- 11 days before the scheduled end of the session -- in the House Finance Committee. It came in the form of an amendment proposed on behalf of the administration by Wilson and Rep. Steve Thompson, R-Fairbanks, to an otherwise noncontroversial oil royalty measure, House Bill 287.

The credits first proposed provided even bigger tax breaks, including a $15 million annual subsidy without any requirement for investment. Committee members balked at that.

On Monday -- six days from the end of the session -- Wilson and Thompson unveiled the scaled-back version of up to $10 million in subsidies per refinery but only as a way to recover expenses.

Rep. David Guttenberg, D-Fairbanks, said in the Finance Committee hearing Monday that he reluctantly supports the tax credits but is frustrated that the Legislature didn't have a chance to thoroughly explore the economics of refineries.

"What I object to is the fact that in this 11th hour -- 11th hour and 53 minutes -- this is thrown on the table in front of us where there is no comprehensive understanding of what it is that refineries face in Alaska competitively, efficiency issues and all of those things," Guttenberg said.

Gara, backed by Republican Reps. Alan Austerman of Kodiak, and Mia Costello of Anchorage, offered a different approach that would have created a low-interest loan program instead of subsidies.

"I don't want to underestimate the problem," Gara said in an interview. "The problem is real. We need to keep Petro Star in business, if we can."

But the subsidy approach provides up to $10 million per refinery whether or not the money is needed and whether are not they owe the state any taxes at all. That's reckless spending at a time the state cannot afford it, he said.

"The solution proposed by this bill is fiscally insane," Gara said.

He had proposed low-interest loans through the Alaska Industrial Development and Export Authority. The money would not have to be repaid for five years, giving the refinery time to get on its feet, Gara said.

Austerman called the original Parnell administration proposal "a giveaway of beaucoup bucks." It's still too generous even in the more limited form, he said this week in the House Finance Committee. He tried to turn the subsidy into a tax credit that would only be allowed as a reduction of taxes, not a cash payment if no taxes were owed.

The other eight members of the Finance Committee rejected the loan approach, saying it wasn't enough help. Everyone but Gara and Austerman rejected limiting the tax credit.

The financial pressures on Alaska's refineries are complex and relate in part to a quirk in oil pricing that has elevated Alaska North Slope crude to about $10-a-barrel above the price oil producers are getting in the Lower 48, Balash said.

Tesoro wanted the underlying legislation so it could continue to buy the state's oil, what's called the royalty share, for its refinery. It gets most of its oil from the North Slope producers, shipping it from Valdez to the Kenai on double-hulled tankers, but the state share guarantees supply at a time North Slope production is dwindling, said Matthew Gill, Tesoro Alaska's external affairs manager.

"Our priority is just getting the royalty contract approved," Gill said. "We had no intention of coming down and asking for any incentives."

Tesoro will pay the state more for the oil than the state would get at the wellhead from producers, both the company and Balash said.

But if the refinery subsidy becomes law, Tesoro likely will seek the benefit, Gill said. For instance, Tesoro plans to spend $50 million on a pipeline to bring oil from the west side of Cook Inlet to the east side for processing, he said.

The subsidy comes too late for Flint Hills, but could help make the refinery more attractive should a buyer emerge, Cook said.

"We should have been doing this a year ago," Wilson said.

The refinery subsidy, and the royalty oil sale measure, cleared the House Finance Committee Tuesday.

Reach Lisa Demer at ldemer@adn.com or 257-4390.


By LISA DEMER
ldemer@adn.com
Contact Lisa Demer at LDemer@adn.com or on