If You’ve Got The Money We’ve Got The Crude – Bakken Refinery Rush Cools Down

The 20 Mb/d Dakota Prairie refinery commenced operation on May 4, 2015 – becoming the first brand new U.S. crude processing plant to startup in nearly 40 years. The rationale behind this refinery and plans for others like it was surging demand for diesel driven by the shale oil boom in North Dakota. However the market conditions that prompted interest in building refineries in the Bakken region have changed considerably in the past year and led to an unprofitable first quarter for Dakota Prairie. Today we explain why the new refinery made sense at one time and what has changed in the past year.

Despite the oil price crash last year (2014) and consequent fall off in drilling - North Dakota is still producing over 1.1 MMb/d of crude as of September (according to the North Dakota Industrial Commission – NDIC) – the vast majority of which (all but about 100 Mb/d) leaves the State for Midcontinent or Coastal refineries by rail or pipeline. Up until May 2015 the only refinery operating in North Dakota was the Tesoro Mandan facility that processes about 70 Mb/d of crude. As we have previously described - the lack of local refining capacity in a state sitting on top of bounteous crude supplies as well as the prospect of high margins - attracted the attention of several companies looking to build new refineries. We first covered the topic back in April 2013 when plans for three new refineries were getting off the ground (see New Refineries in North Dakota). A year later in June 2014, at least 5 companies were planning to build “micro” refineries that hoped to process 20 Mb/d of crude each (see The North Dakota Refinery Rush). Since then the first of those refineries – the Dakota Prairie facility owned by a joint venture between MDU Resources Group and Calumet Specialty Products – has come online (on May 4, 2015) and is processing about 19 Mb/d of Bakken crude (operating at 95% of capacity). The Dakota Prairie refinery is the first Greenfield (built from new) refinery constructed in the U.S. since 1976. However - as we shall see – changing demand for diesel fuel in North Dakota and a reduction in the price advantage for Bakken crude made the new refinery’s first quarter unprofitable and appears to have chilled progress on the other projects.

One of the main drivers behind the various plans to build new refineries in North Dakota was increasing demand for diesel fuel since the oil shale boom took off in the Williston Basin during 2011. Monthly sales/delivery data from the Energy Information Administration (EIA) for distillates - that include ultra low sulfur road diesel (ULSD) as well as heating fuel - show average monthly North Dakota consumption jumping 27% from 34 Mb/d in 2010 to 43 Mb/d in 2011 and increasing further every year to a peak of 55 Mb/d in 2014. The increase in diesel demand in North Dakota corresponded to increased drilling and production in the State as truck traffic to and from well completions (carrying water and sand as well as other equipment) and oil tanker trucks carrying oil from producing wells to rail or pipeline terminals all consumed more ULSD. Where no utility service existed (often the case in remote locations) drillers rely on diesel generators to power rigs. In addition the significant use of rail transport to get crude to market after 2012 in North Dakota boosted demand for diesel to power locomotives (see Crude Loves Rock’n’Rail). Since the Tesoro Mandan refinery only produces about 20 Mb/d of ULSD the State is net short diesel and the lack of pipeline delivery infrastructure means additional supplies usually have to be trucked in from refineries in the Rockies (see Rocky Mountain High for more on these refineries).

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