North Dakota refinery market getting crowded

Bismarck, N.D.– Before Quantum Energy, Inc. came to Saskatchewan with a refinery proposal at Stoughton, they proposed three refineries in North Dakota and two in Montana.

Lynn Helms is the long-time director of the North Dakota Department of Mineral Resources. He spoke to Pipeline Newson May 23 at the Williston Basin Petroleum Conference in Bismarck, N.D., where he was the co-host of the conference.

Asked on May 23 how far Quantum got into the regulatory process for its three proposed refineries in North Dakota, Helms said, “To the best of my knowledge, they never applied for any air or water permits in the state. They acquired land. They did FEED (front end engineering and design) and looked at the potential for the small, Dickinson-sized refineries.

“Several things have changed since then. One of the major factors is the demand for diesel is way down. Companies have converted a lot of their rigs to dual fuel. Trucking is down because of pipeline transportation of the oil and water, and frac crews are doing dual fuel as well. It’s made the economics of small refineries much, much more difficult. You saw MDU Resources sell their refinery. They were in partnership with Calumet. They sold to Endeavour, which was Tesoro. They merged with Western Refining and became Endeavour, and they were purchased by Mobil.”

The MDU refinery at Dickinson was built a few years ago and sold shortly after it opened.

“You have to think, if there’s an opportunity to make money in the refining business, Mobil is going to be looking at it really hard. They’re going to be the U.S.’s number one domestic refiner. And so the economics are going to be much, much tougher than they are some years ago.

Helms continued, “I think some of these folks’ business model was to get in, get a site located, get the land acquired. Get the permitting process in place. Do the FEED studies, then be able to sell that permit to another company, and so I still wonder if that isn’t the business model we’re looking at. Diversify. Spread your eggs across the landscape. Some are going to work out. Some aren’t. But the economics of that market have become much more difficult with the decreased diesel demand and the new pipelines, two large refinery centres, and export capacity.

“That’s another big change. When they were starting all this business, the export ban was on, and that’s gone now,” Helms said.

Asked if proposing six refineries, including three in North Dakota, was a bit of an overreach, Helms responded, “Again, it might be, depending on the size of the company and their capitalization. I think the approach is to have lots of options on the table and to be able to market one of those options that has good economics to a company like Tesoro, Mobil, Endeavour, Davis, something like that.”

As for the last time his department has heard from Quantum, Helms said, “It’s been over a year. It’s somewhere between a year and 18 months.”

“They were serious discussions where they were looking for data on crude oil production projections, pipeline projections, and trying to find areas where a small, niche-sized refinery could make money, where crude oil was being transported out by rail, or there was a lot of demand for diesel, and those kind of things.

“They were serious discussions about what does oil production look like in various counties, what are the transportation options look like, county-by-county.”

Asked if these all looked like short-term horizons, not 40 years, he said, “I think you’d be correct there.”

He had not heard anything at all regarding a Saskatchewan refinery by Quantum.

North Dakota has two refineries currently, the Mandan and Dickinson refineries, and a third, the proposed Davis Refinery, at Belfield, ND, would be doing a presentation at the conference later that day. (see story in the upcoming July edition of Pipeline News). To that end, Helms said, “Not only have the economics become tougher, there’s some pretty good competition in this area for folks like Quantum.”

That third refinery, Davis, still does not have their air permit from the state. “That’s the one piece that they’re lacking. Based on the information I have, that’s likely and probably not too far in the distant future. They would well ahead of a company like Quantum, who really just acquired land in strategic locations and had done the FEED studies.

Asked if companies with one employee and rent their office by the hour build refineries, Helms replied, “Um, typically no.

“Typically they identify strategic locations and do the FEED studies. They spearhead some of the permitting. But more often than not, somebody else comes in and capitalizes it and builds the refinery.”

“You’re going to need a solid team of 10-15 people and several hundred million dollars to push that thing forward from the FEED study, through the permitting to break ground and get any sort of construction going on.”

That’s before they break ground. Helms said, “You better have your capital together.”