Teapots boiling in Texas as shale spurs refining revival

Near the only four-way stoplight in Nixon, Texas, smoke rises off a pilot flare at the Blue Dolphin Energy Co. refinery that had sat cold for two decades.

The employee parking lot is full, tanker trucks line up to unload crude and the silver distillation tower thrums. None of that was happening two years ago, when Blue Dolphin reopened the 10,000-barrel-a-day plant. Smaller refineries are known as “teapots” because of their size.

The reason for the resurrection is illustrated across the street -- the Screaming Eagle 1H Well. It’s one of thousands in South Texas, making the Eagle Ford shale formation among the world’s fastest-growing oil patches. Blue Dolphin, Valero Energy Corp., Kinder Morgan Inc. and others are trying to capitalize on the biggest boom in U.S. history by building new crude- processing equipment, reviving mothballed plants and opening new refineries.

“We started this project in 2006, and I can’t tell you how many banks and other financing sources would ask us, ‘Where are you going to get your crude from?’” said Jonathan Carroll, Blue Dolphin’s chief executive officer. “We don’t get that question anymore.”

Directional drilling and hydraulic fracturing in shale formations such as the Eagle Ford and the Bakken in North Dakota helped U.S. oil production grow by a record 1.136 million barrels a day last year to 8.121 million, according to the Energy Information Administration.

Discounted Oil

That and restrictions on exporting crude have reduced the cost of American oil relative to the rest of the world. U.S. benchmark West Texas Intermediate was $97.74 a barrel at 10:29 a.m., compared with $107.31 for European Brent.

The discount has been a boon to U.S. refiners. The top three performers on the S&P 500 Energy Index since the beginning of 2012 are all refining companies: Valero, Marathon Petroleum Corp. and Tesoro Corp.

It’s also crimped profit for producers such as ConocoPhillips and billionaire Harold Hamm’s Continental Resources Inc., which have argued for easing export rules. U.S. refineries are better suited for heavier oil than the light, sweet crude that comes from shale deposits, they say.

Companies will add 500,000 to 830,000 barrels a day of crude and condensate processing capacity to handle more light oil over the next five years, according to projections from Dallas-based Turner, Mason & Co. and Dallas-based Baker & O’Brien, Inc. It’s the largest gain in light-oil refining capacity “since the early days of U.S. oil production,” said Rick Thomas, a consultant with Baker & O’Brien.

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