MDU has drilled for oil and natural gas in North Dakota for 90 years, and operates electric utilities as well. When Calumet, which operates small refineries in four states that focus on specialty products such as lip balm and lube oil, approached MDU about building a new plant in 2011, the company immediately saw the value, said John Stumpf, MDU’s vice president of strategic planning.
“Because of the Bakken, demand for diesel in North Dakota has gone from 40,000 barrels a day to upwards of 60,000,” he said. “We’re here purely due to the circumstances that exist because of the Bakken.”
Bakken crude is even more discounted than U.S. benchmark prices. Oil at the wellhead in North Dakota was $17.76 a barrel less than WTI and $28.21 less than Brent, according to the marketing arm of Plains All American Pipeline LP.
The refinery will produce highway-grade diesel for sale to drillers, Stumpf said. It will send low-octane naphtha to Canada to be blended with bitumen for shipment. The heaviest residue will be sent to other Calumet refineries.
The properties of shale oil such as its low density and sulfur content make it relatively easy to process. The Dakota Prairie refinery will consist of a crude distillation unit, a hydrotreater, a sulfur recovery plant, a hydrogen plant and an amine unit.
“It’s not complex chemistry or sophisticated equipment designed to utilize every bit of the barrel,” Stumpf said. “We’re just heating crude up the distillation column, harvesting the distillate cut and converting all of that to diesel fuel.”
The refinery cost will be about $300 million, or $15,000 per barrel of capacity. Motiva Resources LLC spent more than double that per-barrel cost in 2012 to refine an extra 325,000 barrels of high-density, high-sulfur crude at its refinery in Port Arthur, Texas.
Larger energy firms are also investing in shale processing equipment. Valero is looking at spending about $790 million to add 175,000 barrels a day of crude capacity at refineries in Corpus Christi, Houston and Sunray, all in Texas. Kinder Morgan is spending $370 million on two 50,000-barrel-a-day condensate splitters, or simple crude units, on the Houston Ship Channel. At least three other companies have applied for permits in Corpus Christi for expansions or new equipment.
The projects rely on an abundant supply of shale crude. Shale drilling is expensive and there is a risk that if oil prices plunge, so may production, Carroll said.
A second risk is that the government eases restrictions on crude exports, which might also crimp supply.
“These projects would be called into more question if we get increased exports of domestic crude,” said Bill Day, Valero’s San Antonio, Texas-based spokesman. “We would have to take another look at the economic prospects of the projects, whether they are still worth pursuing.”
For now, the Nixon refinery is focusing on expanding the amount of Eagle Ford crude it can process through its tower. Records indicate that the previous owner ran it at 17,000 barrels a day at its peak and with some modifications that may rise to 20,000, Carroll said.
The town around the refinery is booming. The school system, which got an infusion of property tax revenue when the refinery restarted, has built a new library and gymnasium for its high school. The company is talking to the city about buying the volunteer fire department new equipment. Signs advertise new motels and restaurants to come.
“Before the oil boom came in, we were a depressed city,” said George Blanch, Nixon’s city manager. “The refinery has been able to get back on its feet, and they’re even talking about expansion. That’s good for us overall. Every little bit helps in small-town America.”