There is plenty of crude oil in North Dakota but the State does not refine enough of it to meet rising demand for diesel caused by booming energy industry activity. The latest North Dakota Pipeline Authority data shows oil production in February 2013 up 40 percent since February 2012 to 778 Mb/d. Demand for diesel increased 35 percent between February 2010 and February 2013. North Dakota’s only refinery produces less than half the diesel the State consumes. To help remedy that disparity the first new refinery to be built in the Lower 48 since 1977 is under construction today and two more new refineries are planned. Today we look at the refinery economics.
The trend line on the chart below shows rising demand for distillate fuels in North Dakota since 2009. Distillate fuels are refined products derived from the middle distillate range of crude oil components – nowadays mostly ultra low sulfur diesel - ULSD (see Gulf Coast Crack Habit for more on distillates). Demand for diesel has increased as a result of all the drilling equipment and trucking activity associated with booming oil production. At the moment the 68 Mb/d Tesoro Mandan is the only refinery in the State and it produces about 20 Mb/d of distillates. That means that North Dakota is importing diesel from other States at the same time as being the second highest oil producing State behind Texas. Seems kind of crazy.
Source: EIA and RBN Energy (Click to Enlarge)
Historically North Dakota’s low population meant that only the Mandan refinery was needed. Now the demand for refined products – especially diesel - is rising and more refining capacity is required. But building new refineries is not an exercise for the faint hearted. It means navigating through a permitting jungle to get the necessary approvals. One company in North Dakota has jumped the necessary hurdles and commenced construction. Two more projects are proceeding slowly through the permitting and financing process.
Dakota Prairie Refining LLC will operate the first of these refinery projects and is now under construction and slated for completion by the end of 2014. Dakota Prairie is a joint venture between MDU Resources Group, Inc. and Calumet Specialty Products Partners, L.P. The first of these two companies, MDU owns a conglomerate of industrial and utility assets in North Dakota including WBI Energy Inc the local utility that will supply gas to the refinery and Fidelity Exploration and Production Company that will supply Bakken crude oil. Calumet manages 11 specialty product and refinery businesses in the US. The facility is located near Dickinson, ND and will process 20 Mb/d of Bakken crude and produce approximately 7Mb/d of ULSD.
North Dakota’s Mandan, Hidatsa and Arikara (MHA) Nation will own and operate the second new refinery project that is called Thunder Butte Petroleum. They plan to start construction in May 2013 on a 20 Mb/d refinery on the Fort Berthold Indian Reservation near Makoti, ND. This $450 MM facility will refine Bakken crude oil into diesel, gasoline and propane.
A third 20 Mb/d refinery owned by Dakota Oil Processing is also planned. This project - called the Trenton Diesel Refinery - received an air quality permit but has no start-up date yet because its $200 MM financing has not yet been completed. The refinery will primarily produce distillates and naphtha. The Trenton Refinery will be located approximately 16 miles southwest of Williston, ND at a location known as Marley Crossing that is adjacent to the Trenton Savage Services BNSF rail terminal.
One of the reasons the developers of these refineries believe they will be able to get the necessary permits is that they are quite simple plants that cause less environmental emissions. They are primarily atmospheric distillation units that only process crude oil through a distillation tower (see Complex Refining 101 Part 1). This type of refinery is sometimes referred to simply as a topping plant – inferring that it is not a “real” refinery at all. These new refineries are also tiny in scale and therefore relatively inexpensive to build – in the hundreds of $ millions rather than $ billions.
The North Dakota location provides a number of advantages in addition to the nearby mountain of crude supplies. Natural gas produced locally in North Dakota can be used to heat the refinery distillation towers. [Abundant low priced natural gas has become a strong competitive advantage to US refiners since the shale gas revolution]. The need to produce ultra low sulfur diesel is helped by the fact that Bakken light sweet crude has very low sulfur content (less than 0.5 percent). Apart from demand for diesel products there is local demand for heavier distillates to be used as drilling lubricant. All the rail terminals built over the past two years to load crude oil in North Dakota (see The Bakken Terminals) provide a ready route to market for petroleum products that are not needed locally. For example lighter naphtha and natural gasoline output from these refineries can be shipped by rail to Western Canada as diluent for bitumen crude (see It’s A Bitumen Oil).