Refineries sprout in North Dakota

Daily News Article   —   Posted on April 11, 2013

image839(by Ernest Scheyder, Reuters) – On a…North Dakota prairie in late March, Governor Jack Dalrymple drove a bulldozer into the…earth and broke ground on the first new refinery [to be built in the U.S.] since 1976. The state’s two U.S. senators, as well as dozens of other politicians and investors, stood nearby wearing hard hats, eagerly sharing hopes that this new refinery will help resolve North Dakota’s diesel demand problem.

Thanks to the Bakken shale formation, an extensive layer of oil-rich rock two miles deep, [and recent developments in hydraulic fracturing, also known as fracking, which extracts this shale oil from deep under the earth], North Dakota produces more crude oil than any state except Texas. But because the state only has one refinery, it imports more than half of the roughly 53,000 barrels of diesel consumed each day by rigs that [extract shale] oil [from] the ground, and trucks and trains that transport it. That daily need is forecast to hit 75,000 barrels by 2025, making the new refinery (from MDU Resources Group Inc and Calumet Specialty Products Partners) critical for the energy sector in the state.

Despite producing thousands of barrels of oil each day, North Dakota relies on refineries on the U.S. Gulf Coast and elsewhere for much of its diesel. Dalrymple and others are counting on the MDU/Calumet [refinery] project attracting a new wave of investors eager to construct refineries [near the Bakken shale].

“Diesel fuel is something that’s highly valued around North Dakota,” Dalrymple, a Republican, said in an interview after the groundbreaking. “Refineries will allow us to use our Bakken crude right here at home.”

When it comes to the economics and politics of building a refinery, North Dakota is an unusual case. The state has one of the lowest population densities in the United States and has little of the political or environmental opposition that’s [put an end to] all other refinery projects since Jimmy Carter was president.

MDU and Calumet hope to be making about 8,000 barrels of diesel per day within 20 months, far less than refineries on the Gulf Coast. The smaller size of the refinery will make it easier to build, and its modular [prefab] design will give the owners the option of moving it in future should market conditions change. The plant will be built by Ventech, an engineering firm that designs diesel refineries specifically for use in remote locations.

Refineries are usually built near major population centers, but North Dakota refineries will cater to a different kind of market. Forecasts indicate there will be good demand for diesel for a long time.

Even the most-conservative analysts estimate North Dakota has at least 50 years supply of oil thanks to recent developments in hydraulic fracturing, also known as fracking.

The state Department of Mineral Resources forecasts that North Dakota’s oil output will hit 850,000 barrels a day by early next year. As of last September, about 64 percent of oil produced in the state is transported via diesel trucks from more than 8,000 oil-producing wells, according to the state’s pipeline authority.

THREE PROJECTS

[Including the MDU/Calumet refinery], there are three refinery proposals on the table. The second project, a $450 million refinery planned by the three affiliated American Indian tribes of the MHA Nation, will use a mix of tribal funds and tax-exempt Tribal Economic Development Bonds through the U.S. Department of the Treasury [to build the refinery]. “We want to be able to control our own natural resources and our own destiny,” said Richard Mayer, head of the MHA Nation refinery project. The tribes, which hope to break ground by May on their refinery, strictly control access to oil drilling on their land.

A third planned refinery was proposed seven years ago, by Dakota Oil Processing. After some private investors in South Korea withdrew support in 2012, the company asked the state to backstop its bonds, a controversial proposal as no other state supports private refinery loans.  (When it seemed for a time that no new refineries would [be built], North Dakota politicians [considered] … using state funds to back [what some said were risky] refinery loans to attract investors.)

Members of the state senate’s finance and taxation committee said they seriously considered the request, which was sponsored by one senator. They ultimately decided against it when MDU and Calumet announced they would use their own money for their $300 million refinery.  “The MDU-Calumet refinery took a lot of pressure off the state legislature, because we need diesel here,” said Jim Dotzenrod, a state senator. “We didn’t want to set a precedent of using tax dollars” to support refinery projects.

Dakota Oil cannot break ground on its refinery until it secures private financing…

FEDERAL GOVERNMENT REGULATION OF THE REFINING INDUSTRY

The [ability to make a profit from] the refinery business is [getting harder]. Many investors [in refineries lost money] five years ago when oil prices neared $150 per barrel and [some] U.S. refineries were forced to close. [Also, the refining industry is one of the most highly regulated in the country and has been struggling for years to maintain minimal profit margins. According to a March 2011 Department of Energy report, in the past 20 years, federal regulations were a significant factor in the closing of 66 U.S. refineries.] …

Still, with North Dakota diesel prices around $4.50 per gallon, a local supply of abundant Bakken oil that is roughly 4 percent cheaper than benchmark crude, and rising demand, diesel refining is a tempting proposition.

It’s not clear how much cheaper locally produced diesel would be, as prices can vary depending on location, weather and access. But the [location] is persuasive. “The cost of moving diesel on a truck to a retail site is much less if you’re selling near the refinery,” said Argus Research Group analyst Phil Weiss.

Dave Goodin, MDU’s chief executive, said the opportunity to supply diesel “in our own back yard” was too attractive to pass up. The company, based in North Dakota’s capital, Bismarck, is already one of the largest power providers in the region. MDU will supply oil from its own drilling operations, and Calumet, which runs several refineries throughout the United States, will help operate the facility.

Officials at the three refinery projects believe there is room for all three in the market, pointing to the need for diesel to power many of the machines drilling for oil and farming for wheat, still a major part of the state’s economy. The three refineries would, if built, supply a total of roughly 26,000 barrels of daily diesel production, less than the state imports currently and far less than projected demand.

Regional leaders are hoping that fact alone fuels more interest in the North Dakota refining business. “If the MDU/Calumet refinery works as a prototype,” said Tom Rolfstad, the economic development director in Williston, North Dakota, “you’ll see a whole lot more of them.”

Reprinted here for educational purposes only. May not be reproduced on other websites without permission from Thomson Reuters. Visit the website at Reuters.com. 


Background

REFINERY INDUSTRY MOST HIGHLY REGULATED BY THE GOVERNMENT:

  • American refineries are closing and more closures are likely, often because of overly-burdensome government regulation as well as lower gasoline demand.
  • Several refineries in Pennsylvania are idle and possibly closing if no buyers come forward.
  • The refining industry is one of the most highly regulated in the country and has been struggling for years to maintain minimal profit margins.
  • In the face of even more regulations from the Environmental Protection Agency (EPA), who are imposing carbon-emission regulations as well as proposing overly-strict ozone regulations and other regulations, more closures are likely.
  • Not only do EPA’s federal standards impose burdens on the industry, but state and local regulators are also part of the problem.
  • According to a March 2011 Department of Energy report, in the past 20 years, federal regulations were a significant factor in the closing of 66 U.S. refineries. 
  • (from instituteforenergyresearch.org/2012/05/03/over-regulation-of-the-nations-refineries)