JUNEAU – A bill extending state tax credits to oil refineries in the state has been expanded to include the Agrium Corp. fertilizer plant in Nikiski.

Tesoro Corp.’s refinery in Nikiski is also among the refineries that could benefit from House Bill 287, now in the House Rules committee. The bill would also extend Tesoro’s contract to purchase state royalty crude oil from the state.

Agrium is considering reopening its plant, which manufactured fertilizer and ammonia from natural gas until 2007. House Speaker Mike Chenault, R-Nikiski, proposed the amendment to add Agrium to HB 287 in a Rules committee meeting Wednesday morning.

The bill was originally introduced by Gov. Sean Parnell to grant Tesoro its extension to buy royalty oil.

PetroStar Inc., which operates two small refineries at North Pole, near Fairbanks, and at Valdez, asked the governor to support state incentives to aid in-state refineries, which are facing commercial challenges. The company, a subsidiary of Arctic Slope Regional Corp., is confronted by many of the same problems faced by Flint Hills Resources, operator of another refinery at North Pole, which has decided to close its refinery.

Parnell agreed to support incentives, in the form of tax credits and a provision to encourage producers to sell oil to in-state refineries, and supported the language being added to the Tesoro royalty oil bill, which has been in the House Finance committee.

The committee felt the tax credit proposals were too generous, however, and scaled them back.

Parnell at first proposed a tax credit for refined products that are produced by in-state refineries based on the volumes of products produced, in effect an operating subsidy.

That was removed by the House Finance Committee but a second part of the incentive proposal, a 10 percent refinery investment tax credit, was increased to 40 percent.

PetroStar said the tax credits would help it in financing capital improvements that would make its two refineries more competitive, but it is not clear that the new scaled-back proposal is enough to help the company.

The two PetroStar refineries face difficulties, the company said, because of high crude oil prices and payments that must be made to the Quality Bank, a mechanism that compensates companies that ship oil through the Trans Alaska Pipeline, as well as the state of Alaska, for any degradation of the quality of oil in the pipeline.

The two PetroStar refineries face economic difficulties because of high crude oil prices and because payments must be made to the Quality Bank, a mechanism that compensates companies that ship oil through the Trans-Alaska Pipeline System, as well as the State of Alaska, for any degradation of the quality of oil in the pipeline.
PetroStar takes crude oil from TAPS and removes parts of the oil to make jet fuel, diesel and other products, and returns the unused part of the crude oil, which has less value, to the pipeline.

Tesoro does not have the Quality Bank problem because it does not take crude oil from TAPS and return unused oil to the pipeline. Also, Tesoro’s refinery has equipment to use more of the crude oil for products that does PetroStar’s smaller refineries.

Under tax credit proposal a refinery would take its credits against its Alaska corporate tax liability, but if there are more credits than tax owed the credits can be turned into the state and paid in cash.

As an example, a $25 million investment by PetroStar would net tax credits for $10 million. If $25 million were invested in both of the company’s two refineries, a total of $50 million, PetroStar could be paid $20 million, either as an offset to state corporate tax liability or in cash.

Tesoro, which didn’t ask for the state’s financial help, would get $10 million if it invested $25 million.

Tesoro spokesman Matt Gill said his company’s priority is the part of HB 287 that extends the royalty oil contract.  “We don’t oppose the tax credits, and in fact we support them now in an effort to help out our Interior refineries,” Gill said.

Tesoro did have concerns with the earlier version of the incentive that included a direct tax credit subsidy out of concerns “for how it would affect the competitive playing field,” Gill said. But this concern is reduced now that the incentive program is scaled back, Gill said.

Fairbanks legislators are concerned about PetroStar’s North Pole plant since it is the main supplier of jet fuel to Eielson Air Force Base. Fairbanks has been courting the U.S. Air Force to keep the base open and to attract a squadron of new-technology fighters to Eielson.

Loss of a local supplier of jet fuel could imperil those efforts, said state Rep. Doug Isaacson, R-North Pole. “If Eielson goes, there goes a third of Fairbanks’ economy,” he said.

The bill raised some critical voices in the Finance Committee, however. Rep. Alan Austerman, R-Kodiak, co-chair of the committee, said he is concerned that a refinery that is unprofitable — thus paying no state corporate income tax — would receive state payments.

Democrats in the Republican-controlled Legislature are voicing criticism of creating a new state subsidy program when the state faces huge budget deficits and spending on services like education face cuts.

Anchorage state Sen. Hollis French, D-Anch., and Rep. Les Gara, D-Anch., object particularly to Tesoro being included in the program because the company has not asked for any help.

 “This is a $10 million gift to Tesoro,” Gara said.

 Chenault’s amendment in the Rules Committee adds the words, “hydrocarbon processing facility” to the bill, which would allow Agrium to quality for credits if it reopens its shut-down fertilizer plant.

The tax credit would help Agrium to some extent but it would not be a decisive factor in a decision to reopen the plant. What is most important, the company has said, is securing long-term supplied of gas at a price that would allow the company to profitably manufacture fertilizer and ammonia.

Agrium has been conducting engineering and environmental studies related to a possible reopening of the plant, which was built in 1969 and operated until being closed in 2007 when natural gas supplies in Cook Inlet became scarce. Now more gas discoveries are being made, which might make the manufacturing of urea fertilizer and ammonia feasible again, Agrium has said.