Politics

Legislative 'quality bank' resolution misses deadline

FAIRBANKS -- The Alaska Legislature unanimously approved a resolution last April calling upon the Parnell administration to ask the federal government to reduce the "quality bank" payments made by Alaska refineries by Jan. 1, though there was never any strategy, timetable or realistic hope of achieving the goal.

The bank is an accounting system under which oil companies are compensated for reductions in the value of oil processed by refineries. About 75 percent of the oil that is taken out of the pipeline for refining is returned to the line, but it is of reduced value because the refineries take the most valuable portions of the liquid. The quality bank payments by the refineries for the returned oil are intended to guarantee that oil placed into the pipeline on the North Slope retains the same value when it leaves the pipeline in Valdez.

The resolution, sponsored by Rep. Tammie Wilson and others, said the state should seek resolution of disputes about payments by this week in a manner that "will reduce the cost of quality bank adjustments paid by in-state refiners of Alaska North Slope crude oil."

No one involved in the complicated administrative process with the Federal Energy Regulatory Commission believed that a change would take place or that a non-binding legislative resolution would reverse decades of court rulings and administrative precedent.

Former Gov. Sean Parnell signed the resolution July 29 in Kenai, along with a bill that makes a subsidy available to in-state refineries.

On May 8, FERC Administrative Law Judge Peter Young said in a 78-page decision that there was no reason to change the quality bank methodology. He said that arguments made by Flint Hills and Petro Star were based in part on analysis that he called "completely illegitimate." He said the key witness for Flint Hills did not understand the methodology of the formula or its purpose. On Nov. 20, the commission upheld Young's initial decision.

In any case, the FERC proceeding is ending, as Flint Hills has dropped its protest, saying it is no longer in the refinery business in Alaska and it "no longer has an interest in quality bank matters." If Flint Hills manages to sell the refinery, a new operator may find it hard to make the same arguments against the quality bank, as the major oil companies said they supported the idea of Flint Hills withdrawing as long as any "successors-in-interest" would have to agree with the findings.

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Flint Hills did say that a change in the quality bank formula "would make the refinery more attractive to a prospective buyer," but it notified FERC Dec. 4 that it wanted out.

The major North Slope oil companies, as well as Tesoro and the staff of FERC, successfully argued that the existing payment system is appropriate. Flint Hills and Petro Star said it was flawed.

Flint Hills, which had the largest refinery in Alaska, paid the most, while Petro Star, which has two small refineries in Fairbanks and in Valdez, continues to make payments. Tesoro, which has a refinery in Kenai, does not make quality bank payments and it opposed changes to the system.

The quality bank "threatens the viability of a competitive Alaska refining industry. That threat in turn will affect Alaska consumers and Alaska businesses as well as significant civil and armed services operations in Interior Alaska," Petro Star said in June.

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.

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