Tesoro, KPB spat continues
Tesoro Alaska's manufactures petroleum products at its Nikiski refinery. Company officials have disagreed with tax assessments from the Kenai Peninsula Borough for the last five years.
Photo by M. Scott Moon
After a dispute that has cost the Kenai Peninsula Borough $60,000, Tesoro may have to pay the borough more taxes this year than it originally hoped. And the issue isn't resolved yet.
The borough's board of equalization decided Aug. 2 to uphold the assessor's value of the refinery of $124 million. This equals $1.5 million in property taxes for the refinery alone. This does not include taxes for the plant's land and the personal property.
Sitting on its highest profits in five years, Tesoro fought the assessment saying the refinery is worth $60 million. This is $10 million more than Tesoro said the plant was worth last year.
The conflict lies largely in conflicting opinions on the future of the plant and how its bottom line was calculated.
"We're disappointed with those decisions," said Steve Hansen, vice president of refining for Tesoro Alaska. "I would like to have property tax stability."
Hansen said the company is still deciding what its next course of action will be. He said they could either appeal the decision to the Superior Court or accept the ruling.
Tesoro is still appealing last year's decision.
Every year, the borough assesses the value of the four industrial plants in North Kenai based on the fair market value of the plant.
The final value is used to determine the amount of property tax paid. If the borough's value is different than what the company thinks it is worth, then the issue goes to the board of equalization, which makes a final ruling. Figures are used from the previous year to determine the property's assessment.
This is the fourth time since 1995 that Tesoro has appealed the refinery's assessed value. The oil refinery's property taxes have increased 83 percent since 2000, Hansen said.
When the refinery's assessment was calculated, three factors were considered: the cost to replace the refinery, the income it generates and a comparison to other refineries.
Borough assessor Shane Horan said the income generated by the refinery played a big role in the borough's final number this year.
Tesoro's North Kenai refinery is sitting on its highest gross sales and profits in five years, according to the borough assessment.
The refiner's gross sales topped $1 billion in 2004 — almost $400 million higher than they were the previous year, according to the assessment. Its profits were about $85.8 million in 2004, according to the assessment. In 2003, profits were about $39.2 million, according to the assessment.
"In the reconciliation of all three approaches, the income was felt to be the most reliable indication of value for that refinery," Horan said.
He said the data gleaned from income and expense information was more reliable than trying to compare other refinery sales. He likened comparing refineries to comparing apples and oranges.
Horan said in reflecting full and true value, a typical buyer for the refinery would look at the income from the property to make an investment decision.
Hansen said Tesoro thinks the borough left out some important factors in its calculations, though. The borough used a five-year average of the refinery's operating costs, and Hansen said the borough should have used today's expenses.
Also, he said the borough's calculations of the refinery's gross margins did not reflect a $25.5 million expense of cutterstock the refinery purchased. This is a product used to improve the quality of the product from the bottom of the barrel.
If these had been factored in, it would have lowered the refinery's bottom line, Hansen said.
The decision issued by the board of equalization states Tesoro argued the assessor should decrease the refinery assessment to reflect the decline in Cook Inlet crude oil production. The refinery consumes all of the crude oil produced in the inlet.
"I think it's very relevant that as Cook Inlet (production) continues to decline, it will have a big impact on the financials of the refinery," Hansen said.
He pointed out that Tesoro does not produce crude and has to compete with other buyers to purchase it. Because of declining inlet production, Hansen said the refinery is increasingly replacing it with foreign crude, which is more expensive.
The board's decision says the assessor was not concerned about a future source of crude oil for the refinery because it has access to North Slope crude.
Hansen said North Slope producers have their own refineries and this supply is not reliable for Tesoro.
Tesoro's consumption of North Slope crude has increased from about 1.5 million barrels of crude in 2000 to about 10.3 million barrels in 2004, according to the assessment.
During the same period, the refinery's consumption of Cook Inlet crude decreased from about 11.3 million to about 8.4 million barrels of crude.
"Cook Inlet is declining and ANS (Alaska North Slope crude) is declining," Hansen said. "There's only so much ANS available. We can't fill the refinery with ANS."
Right now, about 50 percent of the crude processed at the refinery is from the North Slope, Hansen said.
There is "absolutely" a future for the refinery beyond Cook Inlet crude oil production, said Dudley Platt.
Platt is an Alaska-based petroleum engineer that has done production forecasting on the Cook Inlet and North Slope oil fields since 1989.
Platt said Tesoro can buy high quality crude from around the world and can find ways to continue to tap North Slope crude as they have done in past years.
Last year, Tesoro had record high profits, the highest ANS crude charge and lowest Cook Inlet crude charge in years, he said.
He said Tesoro is well on its way to being equipped to handle the type of heavy crude oil that is produced on the North Slope.
Last week's decision was for the assessment of the refinery only. However, a complete assessment includes the refinery, land and personal property — such as office and heavy equipment.
In addition to the $60,000 spent so far, the assembly is considering appropriating an additional $30,000 to cover the cost of Tesoro's appeal on their personal property assessment.
A date for this hearing has not yet been set.
This year the borough, with the help of a contractor, audited Tesoro's North Kenai refinery. The audit concluded that the value of the personal property was about $6.4 million this year. Tesoro claims its personal property this year is worth about $431,000.
"Whatever the cost to the borough, we have to deal with that," Gary Superman, chair of the board of equalization, said about the cost of the appeal. "It's fair and legal, and they deserve due process."