Refinery on thin ice

Tesoro ponders fate of Nikiski operation

Posted: Thursday, February 17, 2000

Tesoro Petroleum Corp. has started a two-month study to determine whether it should improve the efficiency of its Nikiski refinery -- or close and sell it.

Bruce A. Smith, chairman, president and chief executive of the San Antonio, Texas, company, made that announcement Wednesday during a discussion of Tesoro's dismal fourth-quarter financial report. Tesoro reported a fourth-quarter loss from continuing operations of $23.6 million, compared with earnings from operations of $4.3 million during the fourth quarter of 1998.

"Clearly, we are disappointed with our fourth-quarter results," he said. "... Our plans to develop and implement programs that will allow Tesoro to sustain profitability during periods of low margins have been accelerated."

Ron Noel, vice president and general counsel for Tesoro Alaska Petroleum Co. in Anchorage, said managers are examining the Nikiski refinery.

"Tesoro has put in place a 60-day review, looking at cost-cutting and also looking at whether it would make economic sense for Tesoro to close or sell the Kenai refinery," he said.

One option, if the refinery closes, is to import fuel to supply its retail outlets and distribution system. In 1998, Tesoro Petroleum Corp. bought refineries in Washington and Hawaii.

Tesoro Alaska operates roughly 31 company-owned service stations and also sells its gasoline and diesel through roughly 150 independently owned Tesoro stations statewide.

Tesoro also sells home heating fuel through distributors in Anchorage, the Kenai Peninsula and other cities, and sells marine fuels over its Nikiski dock to barges from companies such as Petrol Marine and Delta Western.

Noel said it may make more sense to supply Alaska from refineries Outside, where refining costs are cheaper. He said the Kenai refinery lost close to $3.3 million in the fourth quarter.

"If you look back at the last 10 years, we've averaged a 3 percent return on capital employed in Alaska, which is unacceptable," he said. "You could put that money in a bank and you'd get a better return."

Smith said Tesoro's three-year goal is to improve its return on capital employed to 12 percent. He blamed the dismal fourth-quarter results on the 10-year high in crude prices resulting in production cuts among members of the Organization of Petroleum Exporting Countries, coupled with the failure of gasoline and diesel prices to keep pace.

The price of crude has more than doubled from around $12 per barrel a year ago to nearly $30 per barrel today, said Rod Cason, refinery manager.

Smith said profit margins at Tesoro's Alaska and Hawaii refineries fell from $6.10 per barrel during the fourth quarter of 1998 to $3.40 per barrel during the fourth quarter of 1999.

"In contrast, fourth-quarter 1999 margins for our West Coast operations improved to approximately $5.35 per barrel, or almost 90 cents per barrel higher than the same quarter in 1998," he said.

Tesoro Alaska's shaky finances were further rocked when the state of Alaska sent a bill for $24 million in royalty payments it says were miscalculated 16 years ago, along with another $3 million tab for disputes over tariffs through Cook Inlet pipelines.

John Shively, commissioner of the Department of Natural Resources, said the $24 million bill stems from a revaluation of oil delivered to Tesoro after the state audited the books of the companies that produced it. There was no dishonesty on Tesoro's part, he said.

Cason said he was overwhelmed by the reaction from refinery workers when he announced the 60-day review on Wednesday.

"I've had at least 15 or 20 employees come to me and say, 'We're here, we'll do whatever it takes to show we're profitable,'" he said. "It's a difficult time for us, but they're not going to lay down and roll over."

Borough assembly member Jack Brown, who represents Nikiski, said closing the refinery, which employs 175 people, would be devastating.

Jeff Sinz, Kenai Peninsula Borough finance director, said Tesoro's assets here are assessed at nearly $90 million, and Tesoro pays more than $1 million per year in property taxes.

Noel said the Nikiski refinery produces roughly 70 percent of the gasoline used in Alaska and a substantial fraction of the state's diesel and jet fuel.

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