Kenai Refinery To Make Low-Sulfur Fuel

Two Alaska refinery operators will join forces on a $45 million project to start making and distributing clean-burning, low-sulfur fuel.

FAIRBANKS, Alaska — Two Alaska refinery operators will join forces on a $45 million project to start making and distributing clean-burning, low-sulfur fuel.

The three-year project involves upgrading Tesoro Corp.'s Kenai refinery to make low-sulfur diesel. Flint Hills Resources, which operates a refinery at North Pole, will contribute $15 million toward the cost and will receive up to 6,000 barrels of low-sulfur diesel and gasoline per day.

The arrangement means Flint Hills will scrap plans to expand its own North Pole refinery to make the clean fuel. According to Flint Hills spokesman Jeff Cook, it proved more cost-effective to partner in upgrading Tesoro's refinery than to spend $200 million to expand the North Pole refinery for making low-sulfur diesel.

The expansion would have meant a huge construction project employing about 400 workers.

Flint Hills will spend another $8 million to build receiving and distribution facilities at its Anchorage and North Pole properties to handle the clean fuel from Tesoro, Cook said. Tesoro will send the fuel to Flint Hills' Anchorage storage facilities. The fuel will then be sent by rail car to North Pole.

U.S. Environmental Protection Agency regulations mandate a change to low-sulfur road diesel beginning late next year.

In spring 2004, Flint Hills announced plans to purchase the North Pole refinery and other Alaska assets owned by the Williams Cos. In order to purchase state royalty oil to process in the refinery, Flint Hills entered into an agreement with the state that included the provision the company would spend $100 million to expand the North Pole refinery or pay to upgrade another Alaska refinery.

Flint Hills had not given the expected North Pole expansion contract out by early summer, and contractors who were looking for the work expressed disappointment. At the time, Cook said costs had doubled, so the company was looking at all its options.

The Tesoro agreement announced Tuesday was the company's decision.

"I wish they were building the facilities at the refinery," said Kevin Banks, a senior commercial analyst with the state Division of Oil and Gas. "I thought we were going to see some real development up there."

Banks acknowledged that the Tesoro deal was likely the best approach because, in terms of volume, low-sulfur road diesel is not in high demand statewide. Most of the diesel made in the state heats homes, runs generators or runs marine craft.

"Even in negotiations (with the state), Flint Hills recognized a clean fuel project at the North Pole refinery could be way too expensive and so they wanted to be in the position to acquire diesel from somewhere else," Banks said. "The contract allows that option."

Another state official, Tom Chapple, air quality director for the state Department of Environmental Conservation, said Wednesday he was pleased to hear of the joint plan by Tesoro and Flint Hills because it satisfies the need for clean diesel in Alaska.

Alaska's other refinery, Petro Star, in North Pole, will not upgrade its facilities to produce the low-sulfur diesel either, said Jim Boltz, Petro Star's chief executive officer.

"We do make a very small amount of highway diesel," Boltz said. "It's such a small amount that we will purchase it, from wherever."

Tesoro's Kenai refinery already has much of the equipment needed to produce low-sulfur fuel, said Kip Knudson, Tesoro spokesman. That's why the project will cost the company $45 million, instead of Flint Hill's estimate of $200 million, to build the unit at the North Pole refinery, he said.

Actual groundbreaking will occur next year, but work on the expansion has begun. Specific parts have already been ordered so they can be manufactured in time for construction, Knudson said. "We're excited to make this investment," he said.

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Source: Knight Ridder/Tribune Business News

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