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State, Flint Hills reach proposed royalty oil deal

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Posted: Thursday, February 21, 2013 12:00 am

FAIRBANKS — The state has reached a tentative five-year deal to sell royalty oil to Flint Hills Resources’ North Pole refinery.

The contract, negotiated between Flint Hills and the Alaska Department of Natural Resources, would allow the refinery to purchase as much as 30,000 barrels of oil per day from the state for the next five years. The oil is a royalty Alaska receives for oil and gas exploration on state-owned lands and is removed from the trans-Alaska oil pipeline as it passes by the North Pole refinery.

The deal, if approved by the Legislature, would begin in 2014. It would replace a 10-year contract due to expire next year.

The price Flint Hills would pay under the new contract is based on several factors, including the selling price for North Slope crude and added pipeline tariffs. The contract also will slice $2.15 off the price of each barrel of oil to Flint Hills, mostly reflecting the reduced transportation costs needed to deliver it directly to the refinery. That’s a reduction of an additional 50 cents per barrel from the current contract.

The agreement comes amid dwindling production at the refinery, which has idled two of its three processing units since 2010. Flint Hills officials have said the refinery struggles to remain competitive because of its dependence on crude oil as a power source. Most refineries have access to cheaper natural gas to fuel their operations.

Kevin Banks, the director of DNR’s Division of Oil and Gas, said the state recognizes Flint Hills’ financial position. He said DNR wanted to reach a reasonable deal that would sell oil at a competitive rate and keep the refinery viable.

“We were interested in negotiating a contract that would ideally keep these guys in business,” Banks said. “We’re threading something of a needle.”

Banks said the shorter five-year term of the contract was a concession to DNR, with Flint Hills seeking a longer deal. He said the state wasn’t comfortable committing most of its royalty oil to a single party for a decade.

Flint Hills spokesman Jeff Cook said the refinery will testify in support of the proposed contract.

“It gives us a price that’s fair to us and in the state’s interest,” Cook said.

Cook said it’s important that a deal to maintain the supply of crude to the North Pole refinery is reached now, since Flint Hills needs that supply to negotiate supply contracts. Flint Hills, for example, is a major supplier of fuel to Ted Stevens Anchorage International Airport.

The North Pole refinery produces nearly 1 million gallons of refined petroleum products per day, roughly two-thirds of it in the form of jet fuel. It also produces gasoline, heating fuel, asphalt and some specialty fuels.

The DNR report notes that Alaskans pay the highest prices in the U.S. for gasoline, along with the second-highest for diesel and home heating fuel. The new contract with Flint Hills isn’t expected to change that.

“It is not likely that the proposed sale will materially reduce the price paid by Alaskan consumers for refined petroleum products,” the report states. “However, the absence of a sale would, at least in the short term, require the importation of refined petroleum products. Such importation would not decrease the price of energy.”

The deal still could be modified after a round of public comments and a hearing before the Alaska Royalty Oil and Gas Development Advisory Board. The contract will be forwarded to the Legislature for a yes-or-no vote by March 22.

The royalty board will hold a hearing on the proposed contract at 1 p.m. Feb. 26 at the Noel Wien Public Library auditorium. A link to the DNR report is available online at

Contact staff writer Jeff Richardson at 459-7518. Follow him on Twitter: @FDNMbusiness.

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