Flint Hills Resources has a guaranteed supply of state royalty oil for its refinery at North Pole, east of Fairbanks in Alaska’s Interior.

Gov. Sean Parnell signed legislation June 11 approving a new contract to supply royalty oil to the refinery. The contract, which is for five years, allows Flint Hills to draw up to 30,000 barrels per day of state oil from the trans-Alaska pipeline system near the refinery.

Parnell signed the bill during a visit to the refinery.

“Extending the state’s contract with the refinery is good for the Interior and good for Alaska,” Parnell said at a signing ceremony. “Many industries across Alaska rely on the fuels that Flint Hills produced, and the extension of this contract will keep Alaska’s economy growing.”

Parnell put his signature to Senate Bill 86, which passed the state Legislature April 9.

The contract provides for a five-year extension, following the initial five-year primary contract term, if Flint Hills agrees to make a major capital investment at the refinery or if the company signs contracts to purchase liquefied natural gas proposed to be trucked from the North Slope, according to Kevin Banks, the state’s commercial manager in the Division of Oil and Gas.

Banks and other officials with the division negotiated the contract extension, which required an approval by the state Legislature.

The LNG trucking plan is a state-backed initiative to supply LNG to new gas distribution facilities in Fairbanks, and having Flint Hills as a major customer for LNG as an energy source for the refinery would help the economics of the overall project.

An alternative is for Flint Hills to invest in new facilities to upgrade the refinery, but Flint Hills spokesman Jeff Cook said his company likely will be participating in the LNG trucking project.

Flint Halls has faced a number of adverse circumstances in recent years that have required the company to scale back fuels production at the refinery.

One was a set of low-sulfur requirements for gasoline and diesel produced by refineries that were economically challenging for Flint Hills to meet. Second, commercial airlines operating through Ted Stevens International Airport in Anchorage, previously major customers for jet fuel for Flint Hills, began large-scale purchases of jet fuel imported from overseas and delivered to the port of Anchorage.

State royalty oil is the major source of crude oil for the Flint Hills refinery, which makes diesel, gasoline and jet fuel mainly for local markets in Alaska’s Interior, including to small rural communities along the Yukon River.

Petro Star Inc. operates a second, smaller refinery also at North Pole, but the company is able to purchase crude oil from producers and is not reliant on state royalty oil.

Under its oil and gas leases the state has the option of taking its one-sixth or one-eighth royalty either in kind, in the form of oil or natural gas, or in value, with cash paid by the producing company.

The state has traditionally sold its royalty oil to Alaska-based refiners as a way of guaranteeing a long-term oil supply.

Tim Bradner is a reporter for the Alaska Journal of Commerce.