Minnesota's oldest oil refinery sees a bigger future with Bakken crude.
The refinery on the banks of the Mississippi River in St. Paul Park plans $100 million in upgrades that by next year will boost its refining capability to more than 100,000 barrels of crude oil per day.
With that upgrade, on top of significant investment since 2011, the refinery will be able to refine 29 percent more crude than it did when Marathon Oil Corp. sold it in 2010 to new owners.
Today, 58 percent of the refinery's crude oil comes from North Dakota — a level that's expected to grow. Five years ago, 51 percent of its crude arrived from Canada.
"It was effectively a Canadian crude refinery," said Paul Anderson, vice president of investor relations and business development for current owner Northern Tier Energy. "Five years ago, Bakken was barely known — it was a very small stream, a very small part of our business strategy when we bought the refinery from Marathon."
The tilt toward North Dakota crude seems like a logical step for refineries in the U.S. midcontinent, especially as direct-to-refinery pipelines become available.
Yet it's not possible for refiners to just flip a switch and go from processing heavy crude from Canada to light crude from the Bakken. Differing grades of oil usually are processed separately, using specially configured equipment.
"Most of the Midwest refineries are configured to process heavy oil," said Sandy Fielden, an analyst with RBN Energy, a consulting firm in Houston. "A lot of the investment for Bakken has come late to the party."
North Dakota oil production stood at 1.17 million barrels per day in April, a slight drop from the peak in December, but still more than three times greater than in 2008, when the shale oil boom arrived. Much of that oil has been shipped to coastal refineries. They are set up to process lighter oil, but mostly rely on deliveries via oil trains. Minnesota's two refineries have been entirely served by less-expensive pipelines for decades.
The state's other, significantly larger refiner, Flint Hills Resources' Pine Bend refinery in Rosemount, gets nearly 80 percent of its crude from Canada. In recent years, other Midwest refineries, including Marathon Petroleum's refinery in Detroit and BP's in Whiting, Ind., have invested billions of dollars to process crude from Alberta's oil sands.
Now, midcontinent refiners are starting to focus on Bakken crude. In April, Calumet Specialty Products Partners and WBI Energy opened the $400 million Dakota Prairie Refinery near Dickinson, in western North Dakota, the first new U.S. refinery in nearly 40 years. It will turn Bakken crude into diesel fuel and other products.
Marathon Petroleum recently spent $250 million so that refineries in Canton, Ohio, and Catlettsburg, Ky., can handle more Bakken crude. And Marathon's Robinson, Ill., refinery will boost light crude output by 30,000 barrels per day after a $140 million upgrade next year. Marathon also is an investor in the Sandpiper crude oil pipeline that will deliver North Dakota oil. It is projected to be in service in 2017.
Upgrading St. Paul Park
Northern Tier Energy, which also owns the SuperAmerica retail business, is planning a slate of upgrades to the St. Paul Park Refinery, and expects rapid payback.
One project estimated to cost $30 million will replace 1950s-era desalting equipment, which cleans crude before refining. The refinery also is making a $19 million upgrade that will boost output by up to 4,000 barrels per day of its No. 2 crude processing unit, which handles light crude from the Bakken.
"We will have the capacity of running over 100,000 barrels per day next year," said St. Paul Park Refinery manager Rick Hastings.
The refinery's current capacity is 97,800 barrels per day. In 2011, its daily stream capacity was 84,500 barrels.
Further out, the refinery is planning a roughly $10 million upgrade of the No. 1 heavy crude unit, and about $40 million in improvements to equipment that helps turn poor-quality refining residuals into gasoline, Anderson said.
Separately, a $60 million project is underway at a Clearbrook, Minn., oil terminal to construct four large storage tanks — two each for Northern Tier and Flint Hills. Company officials said they are the first refiner storage tanks built since the 1970s at the terminal, which is a waypoint for nearly all the crude flowing to the two metro refineries.
Seeking out specific oils
Despite the shift toward Bakken supplies, Canadian crude is not exactly in decline. In early June, the Canadian Association of Petroleum Producers forecast their production will increase 43 percent to 5.3 million barrels per day by 2030. But the outlook is less optimistic than a year ago, when the trade group predicted 2030 production at 6.4 million barrels.
Both of Minnesota's refineries are positioned to buy the lowest-priced and most-useful grades from U.S. or Canadian producers. Canadian crude, for example, is better than Bakken oil for making the petroleum base for asphalt used to pave roads, refinery manager Hastings said.
For Northern Tier Energy, some of the most interesting crude-purchasing opportunities are in the Bakken. Since late 2012, the company has operated a cost-saving trucking venture in North Dakota to collect crude oil at wellheads.
From that business, Northern Tier has discovered that some North Dakota wells produce crude whose distinct qualities make it optimal for the St. Paul Park refinery. Now, the company is working to identify wells with the best-suited crude. The strategy is to collect that oil with Northern Tier's trucking fleet, and later possibly build gathering pipelines to move it from well to refinery.
Northern Tier CEO Dave Lamp calls the concept "quality arbitrage" — a way to increase refinery margins by picking a subtly different grade of crude oil. "If you can pick those barrels … there is a significant upgrade in margin," Lamp said at an investor conference in May.
David Shaffer • 612-673-7090