Fueling concern: The production question

Refiners grapple with declining crude in Cook Inlet

Posted: Wednesday, September 21, 2005


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  Tesoro's Nikiski refinery uses pipelines to ship product to Anchorage. Clarion file photo by M. Scott M

A Boeing 737 jet takes off from Ted Stevens International Airport. Rising fuel costs affect the profitability of airlines and the cost of air travel and shipping.

Photo by M. Scott Moon

Editor's note: The following is the final in a series of stories about what effect high fuel prices are having on the Kenai Peninsula.

A handful of contract workers hustled around Tesoro Alaska's dock in the rain earlier this month as they did some maintenance on hoses to get ready for a shipment of crude oil.

The dock was empty — minus the workers. Long steel arms stretching about the length of a football field on either side of the dock gave an indication of the size of the enormous tanker that would bring precious oil to refinery to be turned into fuel for cars, trucks and airplanes and other products.

Tesoro's North Kenai refinery, built in 1969, is one of four Alaska oil refineries collectively providing the majority of the gasoline, diesel and jet fuel Alaskans — and the Alaska economy — rely on to do business. But with crude oil production declining in the Cook Inlet, what will happen to the refinery?


Tesoro's Nikiski refinery uses pipelines to ship product to Anchorage.

Clarion file photo by M. Scott M

"History is proof the refinery will survive," said Kip Knudson, external affairs manager for Tesoro Alaska.

Knudson is referring to an increase in the amount North Slope and foreign crude oil consumed at the refinery. Historically, the North Kenai refinery relied heavily on Cook Inlet crude to make its products. Since it came online, it has consumed all of the crude oil produced in the region. This is still true today.

But this production has been on a steep decline. Without new exploration and development, projections show oil production in the Inlet will cease around 2016.

The decline in Cook Inlet crude oil production already is having an impact on Tesoro as it increases the amount of crude purchased from other places. According to a Kenai Peninsula Borough tax assessment of the refinery, Tesoro's consumption of North Slope Crude oil has increased from about 1.5 million barrels of crude oil in 2000 to about 10.3 million barrels in 2004.

"Everybody in the state has got to understand that if there is no Cook Inlet crude, our prices go up," Knudson said.

Industry and government folk acknowledge the importance of Cook Inlet crude oil production, and the refinery, on Alaska's economy.

The Alaska Oil and Gas Association said it is important to encourage exploration and development of crude oil to meet Alaska's current and future needs.

The Kenai Peninsula Borough wants the refinery to stick around.

"Without Tesoro's refinery, we would find ourselves having to import a significant portion of our refined fuels like gasoline and diesel," said Bill Popp, oil gas and mining liaison for the Kenai Peninsula Borough.

Popp said Tesoro plays a pivotal role in Alaska's economy by producing energy for the Cook Inlet basin, the Railbelt and the aviation industry. He added that the company is also a significant employer in the borough.

Alaska's refining industry was born from in-state crude oil production and has filled what the industry calls a niche market — meaning they produce primarily for Alaska's needs.

The other three refineries are in North Pole and Valdez.

According to an e-mail from the Alaska Oil and Gas Association, Alaska refineries originally were designed to primarily make products such as gasoline, diesel fuel and asphalt.

Over the years, an increase in air traffic at Ted Stevens International Airport has changed Alaska refiners' market. Now, the dominant demand for refined crude oil comes from jet fuel with Alaska consuming four times more jet fuel per day than gasoline, AOGA said. In most places in the United States, the ratio would be opposite, it added.

Anchorage is the fourth largest airport in the world consuming about 60,000 barrels per day of jet fuel, AOGA said. By comparison, other major airports like the Seattle, Minneapolis and Memphis airports consume about half that amount, it said.

AOGA estimated that at least 60 percent of each Alaska refinery's daily production is commercial and military jet fuel.

Roughly one-third of the production at Tesoro's refinery is jet fuel — higher than it was when the refinery first started, Knudson said.

In fact, he said Tesoro thinks its production of jet fuel has helped make the Anchorage airport much more of a success because it creates large volumes of competitively priced jet fuel.

Knudson said the airport will continue to contribute to Tesoro's economic success in the future.

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