The Daily News and others have repeatedly and understandably questioned why the price for gasoline is higher in Alaska than in the Lower 48.
The short answer is that the fuel market in Alaska is unlike any other in the United States. In-state refiners must deal with cost disadvantages that out-of-state refiners do not face.
Unlike most other refineries, Flint Hills Resources is restricted to purchasing and processing crude from one source -- Alaska North Slope. We cannot shop for lower-cost crude oil when the market fluctuates.
We pay the state a premium on top of the fair market value for the crude. The premium was a fair exchange with the State in return for our long-term, 10-year royalty oil contract. Unfortunately, these premiums have been significantly higher than the forecast when our royalty oil contract was signed in 2004.
Our refinery is unique. It is a "topping plant" -- a relatively simple refinery. We do not have the sophisticated equipment needed to refine the entire barrel of crude oil into usable products. Since the market is small and uncertain, making additional investment in our plant is not a viable option.
We have to return the unrefined portion of our crude oil to the TransAlaska pipeline. The oil we return to the line is more difficult to process, and thus worth less to other refiners, so we have to pay a surcharge to compensate for the lost value.
This surcharge, known as the "quality bank," cost us $180.5 million in 2008, or about 25 cents per gallon for each gallon sold ($10.80 per barrel). This more than offsets our transportation savings for crude delivered to the West Coast. Refiners in states such as Washington do not face these costs.
In recent years, litigation has retroactively changed the price charged for shipping oil through the trans-Alaska pipeline. When shipping rates decline, it raises the price we must pay the state for crude. We have had to reserve millions to pay the State of Alaska for increased crude costs. These retroactive costs have been billed well after we refined and sold the refined products.
We also pay significantly higher electricity costs than refiners in Washington. They benefit from hydroelectricity, paying some of the nation's lowest electric rates.
High crude oil prices also drive up our energy costs to run our refinery. At the peak of crude oil prices, we were paying about $24 per million BTU to run the refinery. That was some 70 percent of our costs. Refineries powered by natural gas were paying closer to $8 per million BTU with their energy costs representing about 30 percent of total refining costs.
With the temperature of North Slope crude steadily dropping, we consume much more energy to refine it. In 1994, the incoming crude temperature was more than 100 degrees F. This past year, temperatures were in the range of 40 to 50 degrees F.
Yet another real threat to our business is the proposed price control legislation at a time our business faces other serious challenges.
Demand is down more than 30 percent at the Anchorage airport, due to the world economic recession, impacts from Mount Redoubt volcano and landing alternatives that were developed for airlines during the volcano. That demand decrease caused us to shut down our largest crude unit last March for more than two months; we will shut the unit down again this fall for an indefinite period due to lack of anticipated demand.
Considering these factors, enacting price-gouging laws that have the same effect as price controls would be very counterproductive and ultimately not in the interest of Alaska consumers or producers. Prices may decline, but the lower prices will inevitably create risky shortages as suppliers cut production to avoid losing money.
We are working hard to deal with the challenges that we have outlined. Particularly, we and everyone else in Fairbanks and North Pole urgently need a cheaper supply of energy, such as natural gas from the North Slope.
One advantage we have in addressing all these issues is the excellent working relationship we have with the state Department of Natural Resources and our shared interest to work toward solutions that are mutually beneficial for the state and our company.
In the interim, this much is clear: Our business can be ended by price control legislation, which will leave Alaska consumers with fewer choices than they now have. The uncertainties inherent in the proposed legislation and the specter of heavy fines most certainly threaten the viability of our refinery.
Jeff Cook is director of Flint Hills Resources Alaska operations.
By JEFF COOK