Owning a refinery in the middle of the fastest growing shale crude basin sounds like a good idea. Calumet Specialty Products LP thinks so – they purchased the 14.5 Mb/d San Antonio refinery in December 2012 located at the heart of the Eagle Ford. Since then Calumet has set about expanding production and organizing more efficient crude transportation. But owning such a small refinery near the largest refining region in the world has its risks. Today we describe how location and crude supply advantages help keep this refinery competitive.

Calumet purchased the San Antonio refinery with a view to exploiting abundant local crude supplies. The company is no stranger to small refineries in shale production centers. They already have a 50 percent stake in a joint venture in the Bakken with MDU Resources, Inc known as Dakota Prairie Refinery (currently under construction). That venture is one of three small plants being constructed in the Bakken that we described in an earlier post (see If You’ve Got The Money). Since it is considerably harder to get past the environmental permitting hurdles to build new plants in the Gulf Coast region (see All I Need is The Air That You Cleaned) it made more sense for Calumet to buy an existing asset in the Eagle Ford.

Calumet acquired the San Antonio refinery in December 2012 from NuStar Energy, LP who are selling their refining and marketing assets in favor of lower risk fee based operations such as pipelines and terminals. NuStar in turn purchased the San Antonio refinery out of bankruptcy in April 2011. Previous owners AGE Refining ran the plant primarily to produce jet kerosene fuel under contract to the local Air Force base. According to Energy Information Administration (EIA) records as of January 2013 the refinery had basic atmospheric distillation capacity as well as a catalytic reformer and desulphurization units (see Refining 101 for more on refinery processes).

When Calumet purchased the San Antonio refinery it produced ultra-low sulfur diesel (ULSD), jet fuel, reformates, naphtha, and vacuum gas oil as well as specialty solvents. Although reformates and naphtha are major ingredients in gasoline blending the refinery had no capability to produce finished gasoline. During October 2013, Calumet completed a project allowing the refinery to blend heavy reformates, light naphtha and ethanol to produce up to 3 Mb/d of higher-value finished gasoline. Calumet is also in the process of expanding the refinery’s crude unit to increase total capacity from 14.5 Mb/d to 17.5 Mb/d by early 2014. Incremental refinery production will be a combination of jet fuel, ULSD and an additional 1 Mb/d of gasoline.

But compared to building a small refinery in North Dakota where there is very limited competition to supply the booming diesel market, the Calumet San Antonio purchase looks like an altogether tougher proposition. The refinery has no shortage of competition supplying refined products in Texas. There are at least 3.7 MMb/d of refining capacity in the Texas Gulf Coast region including a large Valero refinery about 50 miles away in Three Rivers, TX and three refineries in Corpus Christi. Much of the competing capacity comes in the shape of far larger world-class complex refineries that are successfully holding their own against international competition at the Gulf Coast. In contrast the tiny 14.5 Mb/d San Antonio refinery has no economies of scale and is considerably less complex. To compete against Gulf Coast Goliaths this San Antonio “David” needs compelling market advantages to succeed. As we shall see, those advantages come from being located close to abundant Eagle Ford production – keeping transport costs down - and the ability to exert greater control over the quality of their crude supplies.

You can see on the map below that the San Antonio refinery is close to the heart of Eagle Ford shale crude oil production (the green dots on the map are crude wells). And the refinery is configured to process the very light sweet crude that comes from this region (see Too Much Too Soon? for more on how light Eagle Ford crude is and why that is a challenge). Even so despite its proximity to Eagle Ford production, crude deliveries to the San Antonio refinery were made by truck until NuStar purchased the asset in 2011 – meaning 80 trucks/day delivering to a location close to downtown San Antonio – seven days a week. That system was not particularly efficient and prone to traffic congestion. To fix that challenge NuStar built a pipeline from San Antonio to a crude truck unloading terminal 12 miles to the south in Elmendorf, TX that has 200 MBbl of storage capacity. That took the crude trucks out of the City but supplies were still being trucked to Elmendorf from crude production centers 50 miles south – costing at least $2/Bbl in transportation.