(Part 1 of the interview, which helps set up part 2, is available here.)
I talked to Badlands NGL CEO Bill Gilliam, who wants to build a $4 billion petrochemical plant in North Dakota, on the phone earlier this week for a story that’s running on Sunday. Most of what he said didn’t make it into the story, so I’ve taken portions of the interview and reproduced them here.
Q. So southeast North Dakota doesn’t really fit as a site for the petrochemical plant?
Gilliam: “We don’t think so at this point. There’s certain things where people are saying that with either consumer gas or industrial gas there might be reasons. We feel that southwest, south central or northeast make the most sense.”
Q. What else should I be asking you?
Gilliam: “I’ll go back and comment on it even though I could duck it at this point since you forgot to follow up. I talked about debt. On the equity side, we have talked with lots and lots and lots of institutional sources of equity, and I think we can say that we’re extremely confident that doing this business, with the kinds of margins one can get converting ethane into polyethylene in North Dakota, we have multiple ways of getting all the investment funds we need. It is not something that’s seriously making us spend a lot of time or wring our hands or anything. The enthusiasm for the numbers and for the strategic idea and everything else like that are compelling, and therefore we feel that the capital markets are enthusiastic. They’re staying enthusiastic. We have multiple folks that we’re talking to. There are a number of different ways to add up to the kind of equity number that we need. We’ve had very candid discussions with the retail folks that were our most recent investors, a lot of whom are in North Dakota, many of whom are helping us every day with logistical things in North Dakota. I think they feel that getting the rest of the money is not going to be an issue and is not going to be something that causes them to have dilution that is outside of any expectation. I think this is a very well understood thing, and I just don’t think it’s going to be much of an issue.”
Q. Thanks for helping me out by returning to that subject. How much of the $4.2 billion do you envision being debt, and how much do you envision being equity?
Gilliam: “Very preliminarily, $3 billion of debt and $1.2 billion of equity.”
Q. Judging by your accent, it doesn’t sound like you’re from Williston. Where are you from?
Gilliam: “I am from everywhere. I was born in New York. I lived there a lot as a young, young kid. I lived in different places in Europe in grade school and high school. I went to college in New York as an undergraduate. I’ve lived on the east coast, I’ve lived on the west coast, I’ve lived in between. I lived in Colorado. Lots of different places, and I’ve done business all over the world.”
Q. Where did the idea for this project come from?
Gilliam: “It is a pretty straightforward thing to say, make polyethylene polypropylene from natural gas liquids. A little over four years ago, I was very seriously looking at buying an existing facility that a major manufacturer had mothballed. When that did not come to fruition, and I was in the process of looking at things, when all of a sudden, the shale gas revolution made ethane this huge oversupplied commodity, I started saying, where else could that formula apply? I was always very used to this balance between ethane from oil and ethane from gas kind of sort of being in parity. Propane for polypropylene, whether it’s from oil or from gas, is in parity. But ethane is not. If ethane were to come from oil, it ought to cost 80 cents a gallon instead of 20 cents a gallon. The reason it costs 20 cents a gallon is a) there’s not only so much of it in the gas streams, but also b) that most of the gas processing plants can’t even separate the ethane from the methane. Not only was North Dakota going through this unbelievable growth in oil and gas production, but the natural gas liquid content of the gas in North Dakota is unlike any other gas in the United States. (The ethane content of natural gas in North Dakota is twice the ethane content of gas in other shale fields, Gilliam says.) You’ve got an unbelievable amount of ethane. It’s not like, well, it’s a cheap available commodity in North Dakota. We think Northern Border is full right now (in terms of ethane content, which can be dangerous if allowed to rise too high in pipelines). There’s really no more room (for ethane). In terms of ethane supply and demand in North Dakota, this plant is a vital and integral part of not only the state’s effort to reduce flaring, but an effort to make sure that oil and gas producers and midstreams can solve the issue of the vast amount of ethane that’s being produced.”
Q. Do you have to build a pipeline of your own for ethane?
Gilliam: “What we’ve told the engineers for the $4-$4.2 billion facility, is assume the gas is at your doorstep and it’s 99 percent pure. Obviously we’ve got to do some things to get it there, which is going to cost money, and there are a variety of ways of doing it, but I can just tell you we have very big, very capable companies saying, ‘We’ll do all of that for you.’ We may have some variations on that, but quite frankly we feel that the logistics have to do with the physics of where is it and how do you do it, and then there’s also the economics. We have some very interesting things we’re doing with economics, which we have not disclosed, which we might be disclosing before year’s end, but there are significant incentives that will be available to folks that jump on the bandwagon very quickly. Even today, is for well less than half of the ethane (in North Dakota). You don’t want to be on the side of maybe there’s no real outlet or the ethane, and you weren’t one of the first guys to jump on.”
Q. Do you see this as the first step in maybe the petrochemical industry coming into North Dakota in a lot of other ways, or are there barriers there that somebody like me wouldn’t understand? I wonder if glue or paint will be made in North Dakota some day.
Gilliam: “For polymers, this is the first step. I think this plant could expand. I think this plant could make polypropylene and not just polyethylene, but let me give you a more nuanced answer than that. We look at the difference in the United States between West Texas intermediate crude and brent crude. Brent crude is a world market. What happens now is totally different from five years ago, with India and China taking more crude from the Russias and from the Venezuelas and from the Middle East than we used to take. There’s an artificial price that OPEC tries to maintain, but you have that price. Now you have West Texas intermediate. Here’s some interesting things. If somebody had told me in the 1980s that by 2014 we would be producing more crude oil in this country than Saudi Arabia, I would have looked at them and said, are you from the planet Mars? But we are. Here’s the interesting thing. Has anybody built a new world-scale refinery in the United States in the last 50 years? No. Can you export crude from the United States? No, it’s illegal. Now those are two pretty big macroeconomic issues. There’s a big, big refinery in North Dakota in Mandan operated by Tesoro. It is not a modern world-scale refinery because it doesn’t do what’s called catalytic cracking. Exxon Baytown is a half-a-million cat-cracking refinery. That’s a modern refinery (second largest in the U.S.). If there is in fact going to be a lot more domestic oil production, than I would say in the United States we’re going to see several brand new, very modern, world-scale refineries to take advantage of domestic crude (which would also allow for other types of petrochemical processing), and we’re going to have to change our laws so people can in fact export crude. It makes no sense to not export crude if we’ve got more crude than we can possibly process. That’s the problem right now.”
Q. So either we have to change the law or build more refineries, or are you saying we have to do both?
Gilliam: “I think we’ve got to do both. If anybody said to me, in the next ten years, where do I think two refineries could go? I think one should be in West Texas and one should be in North Dakota.”