The State of Alaska s Refining Industry Barry Pulliam Managing Director Econ One Research, Inc. Anchorage, Alaska December 2016 Econ One Research, Inc. 1
Econ One Research, Inc. In Alaska Three Decades Working in Alaska Advisors to State of Alaska s Departments of Law, Natural Resources and Revenue Consulted with Alaska Legislature Regarding Petroleum Tax and Gas Development Issues Analyzed Competitive Issues Relating to Transportation Services, Refining and Gasoline Pricing Prepared Report on the State of Alaska s Refining Industry for the Department of Natural Resources and Senate Finance Committee Econ One Research, Inc. 2
Econ One Research, Inc. Outside Alaska Worked with Major Oil-Producing States, Including Texas, Louisiana, New Mexico, Oklahoma and California Analyzed Competition in the Refinery Industry on the West Coast for the State of California Consulted with the Federal Trade Commission Regarding the Refinery Industry Worked with Producers and Refiners in the Lower 48 Econ One Research, Inc. 3
Topics Industry Basics Significant Challenges Product Markets and Logistics Refined Product Prices Economic Impact Econ One Research, Inc. 4
Alaska s Refineries ConocoPhillips BP TAPS Tesoro Petro Star Flint Hills (Closed) Crude Throughput 72 MBD 82 MBD 87 MBD Capacity Refined Product 72 MBD 25 MBD 26 MBD Petro Star Flint Hills (closed) Tesoro Petro Star Note: Approximately 70% of Petro Star and Flint Hills throughput is re-injected into TAPS as return oil. Econ One Research, Inc. 5
Alaska and the U.S. West Coast are Part of PADD V * * PADD stands for Petroleum Administration for Defense Districts. Econ One Research, Inc. 6
Alaska s Refiners are Part of Broader Market that Includes West Coast and Asian Refineries Alaska (3): 97 MBD Capacity Puget Sound (5): 625 MBD Capacity Alaska Refiners use ANS and Cook Inlet Crude Oil; ANS is also a Significant Feedstock for West Coast Refiners No. California (5): 817 MBD Capacity Alaska Refiners Supply Product to Alaska; West Coast and Asian Refiners also Supply Product to Alaska Hawaii (2): 144 MBD Capacity So. California (7): 1,103 MBD Capacity Alaska Refiners Export Heavy Products to the West Coast Econ One Research, Inc. 7
Significant Challenges Facing Alaska s Refiners Small in Scale and Technologically Simple Inability to Upgrade Heavy End of Barrel; By-Product Demand for Largest Volume Product (Jet Fuel) Declining Compete in Broader Market With Declining Demand; Creates Surplus Capacity Among Outside Competitors Distant from Other Potential Markets (Distance Cuts Both Ways) Fuel Costs Significantly Higher Than Outside Competitors Few Supply Alternatives, Particularly for TAPS Refiners Econ One Research, Inc. 8
Tesoro (Socal) Chevron (Socal) Chevron (Nocal) BP (Wash.) Tesoro (Nocal) Shell (Nocal) ExxonMobil (Socal) Valero (Nocal) Shell (Wash.) Phillips 66 (Socal) Phillips 66 (Nocal) Tesoro (Wash.) Phillips 66 (Wash.) Par Petroleum (Hawaii) Alon USA (Socal) Valero (Socal) Tesoro (Kenai) Chevron (Hawaii) US Oil (Wash.) Kern (Bakersfield) San Joaquin (Bakersfield) Petro Star (Valdez) Greka Energy (Coastal) Lunday-Thagard (Socal) Petro Star (North Pole) (Thousand Barrels Per Day) Alaska Refineries are Small Relative to Typical West Coast Refineries 400 350 300 250 Alaska Hawaii California Washington 200 150 Alaska 100 50 0 Note: Petro Star capacity is calculated as 30% of crude throughput capacity; ~70% of throughput is re-injected into TAPS as return oil. Source: Petro Star; Tesoro; Energy Information Administration; Oil and Gas Journal. Econ One Research, Inc. 9
Complexity Alaska Refineries are Much Less Complex Than Typical West Coast Refineries 14 12 Very Complex 10 8 6 4 Simple 2 0 California Average Washington Average Hawaii Average Tesoro (Kenai) Flint Hills (North Pole) Closed Petro Star (North Pole) Alaska Refineries Petro Star (Valdez) Source: Oil and Gas Journal; Energy Information Administration; Penn World. Econ One Research, Inc. 10
Product Demand in Alaska is Significantly Different Than on the West Coast Other Gasoline 13% 13% 12% 12% 16% 16% Distillate 30% 30% 54% 54% Jet Fuel 41% 41% 18% 16% 18% 16% Alaska West Coast Source: Energy Information Administration, SEDS (2014). Econ One Research, Inc. 11
As Percentage of 2006 Demand (Percent) Product Demand Has Declined on the West Coast and in Alaska Over the Past Decade 120% 100% West Coast Down 12% Alaska 80% 60% Down 31% 40% 20% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Energy Information Administration, SEDS (2014). Econ One Research, Inc. 12
(Million Gallons Per Year) Jet Fuel Demand is Down by Nearly Half While Demand for Other Products is Flat 3,000 Jet Fuel Gasoline Heavy Oil / Distillate Other 2,500 2,000 1,500 Jet Fuel Down 47% 1,000 500 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Energy Information Administration, SEDS (2014). Econ One Research, Inc. 13
Product Movement Into and Out of Alaska 25 cpg 10 cpg Econ One Research, Inc. 14
Cost of In-State Product Movement Can Be Significant Via Pipeline Via Barge Via Truck Via Rail Petro Star Flint Hills (closed) 20 cpg 16 cpg Tesoro 2 cpg Petro Star 10 cpg Econ One Research, Inc. 15
(Dollars Per Gallon) Gasoline Prices in Alaska and Hawaii are Similar Before Addition of Retail Taxes $4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 City Anchorage Honolulu Seattle Past Decade (2006-2015) $3.07 3.01 2.70 Post- Flint Hills (2014-2015) $2.99 3.01 2.66 Last Month (Nov. 2016) $2.18 2.24 2.08 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Nov. 2016 2016 Source: AAA; OPIS. Econ One Research, Inc. 16
(Dollars Per Gallon) Jet Fuel Prices are Similar in All West Coast Locations $3.50 3.00 2.50 2.00 1.50 1.00 0.50 State/Area Alaska Washington West Coast Average (2006-2014) $2.61 2.55 2.56 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Energy Information Administration. Econ One Research, Inc. 17
(Million Dollars) Employment and Earnings for Alaska s Refining Industry $100 $94 M 90 80 70 60 $49 M Induced & Indirect $70 M Alaska Refiners Account for Approximately 10% of Non-Seafood Manufacturing Jobs in the State 50 40 30 20 10 $45 M Direct $35 M $35 M Highly-Skilled Jobs with Average Earnings of ~ $136,000 Per Year Total Direct and Indirect Wages of $70 Million Annually 0 With Flint Hills Without Flint Hills Source: Econ One Estimates using IMPLAN model and BLS data.. Econ One Research, Inc. 18
(Million Dollars) Annual Contribution to Alaska's Economy $250 200 $199 M Alaska s Refineries Contribute More than $150 Million Annually to the State s Economy 150 100 50 0 With Flint Hills $153 M Without Flint Hills Closure of Flint Hills Refinery Removed ~$50 Million of Economic Activity Annually Refining Industry is Key Supplier to Military, which Accounts for $2.5 Billion Annually in Economic Activity in Alaska Source: Econ One Estimates using IMPLAN model and BLS data. Econ One Research, Inc. 19
(Million Dollars) Annual Revenues Received by State and Municipal Governments from Refining Industry $35 30 25 20 15 Total $33 M Taxes $10 M Total $22 M Taxes $8 M Alaska Refineries Provide the State and Municipal Governments with Over $20 Million in Additional Revenues in the Form of Taxes and Royalty in Kind (RIK) Purchases Annually 10 5 0 RIK $23 M Prior to Flint Hills Closure RIK $14 M Current RIK Purchases Provide the State with ~$1.75/bbl More than Royalty in Value (RIV) RIK Volumes Likely to Increase Source: Econ One Estimates. Econ One Research, Inc. 20