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Vol. 17, No. 19 Week of May 06, 2012
Providing coverage of Bakken oil and gas

California refiner loves North Dakota oil

Rose Ragsdale

For Petroleum News Bakken

The April 8 edition of The Californian features an article about a strategy being used by a refiner in the heart of California oil country of buying large amounts of crude from North Dakota and paying to have it hauled by train to Bakersfield, Calif., where it’s turned into mostly gasoline and diesel for the California market.

The ingenious part of this approach is that the company is turning a bigger profit using midcontinent crude than if it were buying roughly the same grade oil strictly in Kern County, Calif., the article by John Cox reported.

More refiners will likely follow

Strange as it may seem to purchase oil from afar when so much crude is produced nearby, there’s every reason to believe other refineries will soon follow 26,000-barrel-a-day Kern Oil & Refining’s lead, according to Cox.

“I know that there are a number of people looking at it and looking at making arrangements,” oil marketer Bob Devine told the publication.

At least one large West Coast refinery is considering the move. Tesoro Corp. said it was spending $50 million to build new rail loading and unloading facilities at its 120,000 bpd refinery in Anacortes, Wash. The upgrade would allow it to receive up to 30,000 bpd of North Dakota crude — up from 1,000 to 2,000 bpd now. (The project aimed to cut Tesoro’s use of Alaska North Slope crude. In March, construction began and Tesoro ordered about 800 rail cars, which it said can accommodate another 10,000 bpd of Bakken crude.)

Depending on how widespread the trend becomes, it could push down barrel prices for Kern County oil producers, and potentially lower prices at the pump. It also could reduce California’s growing dependence on oil imported from the Middle East and South America.

Since 1982, California’s use of foreign oil has increased from 6 percent to 50 percent, according to the state Energy Commission. Last year, most of the imported oil refined in California came from Saudi Arabia (29 percent of the state’s foreign oil), followed by Ecuador (22 percent) and Iraq (16 percent).

The commission said it does not know how much crude oil arrives from North Dakota.

A better price

Simple math is the driving force behind the shift, which appears to have begun in 2010. Math, that is, and the technology-fueled oil boom that has outpaced pipeline companies’ ability to deliver oil to refining hubs.

Widespread use of hydraulic fracturing and directional drilling in the Bakken formation has opened up vast oil reserves in and around North Dakota. In just five years, the state’s oil production quadrupled to about 550,000 bpd, bringing it roughly even with California’s production rate.

While California’s 2 million bpd refining industry thirsts for oil, North Dakota is enjoying a glut of Bakken crude, which has contributed to the historic price imbalance. At the end of March, oil from the Bakken was selling at about $92 a barrel, while heavy crude produced in Kern County was selling for about $112 a barrel.

Experts told The Californian that the $20-a-barrel price difference presents opportunities for companies that have been able to re-engineer their plants to make efficient use of light North Dakota crude.

In March, railroad watchers who share their observations on trainorders.com tracked the movement of a train carrying about 60 tankers of Bakken crude into Kern Oil & Refining. That amounts to more than 40,000 barrels of oil in a single shipment.

Refinery consultant Dave Hackett recently examined the economics of shipping midcontinent crude to California on his blog at stillwaterassociates.com. He said Kern Oil & Refining has a strong financial incentive to bring in large volumes of Bakken oil.

“My guess is they’re running as much as they can get,” he told the publication.



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