The State of Alaska’s Refining Industry - Alaska Oil …

1 Econ One Research, Inc. 1 The State of Alaska s Refining Industry Barry Pulliam Managing Director Econ One Research, Inc. Anchorage, Alaska December 2016 Econ One Research, Inc. 2 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 3 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. 4 Topics Industry Basics Significant Challenges Product Markets and Logistics Refined Product Prices Economic Impact Econ One Research, Inc. 5 Alaska s Refineries Flint Hills (closed) ConocoPhillips BP Tesoro Petro Star 72 MBD 82 MBD 87 MBD Capacity Note: Approximately 70% of Petro Star and Flint Hills throughput is re-injected into TAPS as return oil.

3 TAPS Petro Star Tesoro Petro Star Flint Hills (Closed) Crude Throughput Refined Product 72 MBD 25 MBD 26 MBD Econ One Research, Inc. 6 Alaska and the West Coast are Part of PADD V * * PADD stands for Petroleum Administration for Defense Districts. Econ One Research, Inc. 7 Alaska s Refiners are Part of Broader Market that Includes West Coast and Asian Refineries Alaska (3): 97 MBD Capacity Hawaii (2): 144 MBD Capacity So. California (7): 1,103 MBD Capacity No. California (5): 817 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 Alaska Refiners Supply Product to Alaska ; West Coast and Asian Refiners also Supply Product to Alaska Alaska Refiners Export Heavy Products to the West Coast Econ One Research, Inc.

4 8 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. 9 Alaska Refineries are Small Relative to Typical West Coast Refineries Source: Petro Star; Tesoro; Energy Information Administration; Oil and Gas Journal.

5 050100150200250300350400 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 Hawaii California Washington Note: Petro Star capacity is calculated as 30% of crude throughput capacity; ~70% of throughput is re-injected into TAPS as return oil.

6 Alaska Econ One Research, Inc. 10 Alaska Refineries are Much Less Complex Than Typical West Coast Refineries 02468101214 CaliforniaAverageWashingtonAverageHawaii AverageTesoro(Kenai)Flint Hills(North Pole)ClosedPetro Star(North Pole)Petro Star(Valdez)Complexity Source: Oil and Gas Journal; Energy Information Administration; Penn World. Very Complex Simple Alaska Refineries Econ One Research, Inc. 11 Product Demand in Alaska is Significantly Different Than on the West Coast 41% 16% 30% 18% 16% 54% 13% 12% Source: Energy Information Administration, SEDS (2014). Alaska West Coast 41% 30% 16% 13% Other Gasoline Distillate Jet Fuel 16% 18% 54% 12% Econ One Research, Inc.

7 12 Product Demand Has Declined on the West Coast and in Alaska Over the Past Decade Source: Energy Information Administration, SEDS (2014). 0%20%40%60%80%100%120%200620072008200920 102011201220132014As Percentage of 2006 Demand (Percent) Alaska West Coast Down 31% Down 12% Econ One Research, Inc. 13 Jet Fuel Demand is Down by Nearly Half While Demand for Other Products is Flat Source: Energy Information Administration, SEDS (2014). 05001,0001,5002,0002,5003,00020062007200 8200920102011201220132014(Million Gallons Per Year) Other Heavy Oil / Distillate Gasoline Jet Fuel Jet Fuel Down 47% Econ One Research, Inc.

8 14 Product Movement Into and Out of Alaska 10 cpg 25 cpg Econ One Research, Inc. 15 Flint Hills (closed) Tesoro 20 cpg 10 cpg 16 cpg Cost of In- State Product Movement Can Be Significant Petro Star Petro Star Via Barge Via Truck Via Rail Via Pipeline 2 cpg Econ One Research, Inc. 16 Gasoline Prices in Alaska and Hawaii are Similar Before Addition of Retail Taxes Source: AAA; OPIS. $ (Dollars Per Gallon) Nov. 2016 Anchorage Honolulu Seattle $ $ City Post- Flint Hills (2014-2015) Last Month (Nov. 2016) $ Past Decade (2006-2015) Econ One Research, Inc. 17 Jet Fuel Prices are Similar in All West Coast Locations Source: Energy Information Administration.

9 $ (Dollars Per Gallon) Alaska Washington West Coast $ Average (2006-2014) State /Area Econ One Research, Inc. 18 Employment and Earnings for Alaska s Refining Industry Source: Econ One Estimates using IMPLAN model and BLS 0102030405060708090$100 With Flint HillsWithout Flint Hills(Million Dollars) $45 M $49 M $35 M $35 M Alaska Refiners Account for Approximately 10% of Non-Seafood Manufacturing Jobs in the State Highly-Skilled Jobs with Average Earnings of ~ $136,000 Per Year Total Direct and Indirect Wages of $70 Million Annually Induced & Indirect Direct $94 M $70 M Econ One Research, Inc.

10 19 Annual Contribution to Alaska 's Economy $199 M $153 M 050100150200$250 With Flint HillsWithout Flint Hills(Million Dollars) Alaska s Refineries Contribute More than $150 Million Annually to the State s Economy Closure of Flint Hills Refinery Removed ~$50 Million of Economic Activity Annually Refining Industry is Key Supplier to Military, which Accounts for $ Billion Annually in Economic Activity in Alaska Source: Econ One Estimates using IMPLAN model and BLS data. Econ One Research, Inc. 20 Annual Revenues Received by State and Municipal Governments from Refining Industry Source: Econ One Estimates.