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Sunday, Apr 08 2012 07:00 AM

N. Dakota oil, brought here, could help gas prices

BY JOHN COX Californian staff writer jcox@bakersfield.com

Something curious is happening here in the heart of California oil country.

A 26,000 barrel-a-day refinery on East Panama Lane is buying large amounts of crude from North Dakota and paying to have it hauled by train to Bakersfield, where it's turned into mostly gasoline and diesel for the California market.

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Where we get our oil

Bringing more domestic crude into California would reduce the state's dependence on foreign oil.

Since 1982, California's use of foreign oil has increased from 6 percent to 50 percent, according to the state Energy Commission. Last year, most of the imported oil refined in California came from Saudi Arabia (29 percent of the state's foreign oil), followed by Ecuador (22 percent) and Iraq (16 percent).

The commission said it does not know how much crude oil arrives from North Dakota.

-- John Cox

That's like selling coals to Newcastle, as the British say. Surely the refinery could find raw material closer to home.

The ingenious part of Kern Oil & Refining Co.'s strategy is, the company turns a bigger profit using midcontinent crude than if it were buying roughly the same grade oil strictly in Kern County.

Strange though this may seem -- and people in the industry admit the situation is more than a little odd -- there's every reason to believe other refineries will soon follow Kern Oil & Refining's lead.

Oil marketer Bob Devine said more California refiners are gearing up to bring in midcontinent crude.

"I know that there are a number of people looking at it and looking at making arrangements," he said.

Depending how widespread the trend becomes, it could push down barrel prices for Kern County oil producers, and potentially lower prices at the pump. It could also reduce California's growing dependence on oil imported from the Middle East and South America.

A better price

Simple math is the driving force behind the shift, which appears to have begun in 2010. Math, that is, and a technology-fueled oil boom that has outpaced pipeline companies' ability to deliver oil to refining hubs.

Widespread use of hydraulic fracturing and directional drilling in what is called the Bakken formation have opened up vast oil reserves in and around North Dakota. The state's oil production has shot up to about 550,000 barrels a day, more than four times the volume achieved just five years ago, bringing it roughly even with California's production rate.

But while California's 2 million-barrel-a-day refining industry thirsts for oil, North Dakota is awash in it. Pipeline companies caught off guard by the boom are estimated to be at least a few years away from connecting Gulf coast refineries with the midcontinent.

In the meantime, a glut of Bakken crude has contributed to a historic price imbalance. At the end of March, oil from the Bakken was selling at about $92 a barrel. Heavy Kern County crude, meanwhile, was going for about $112 a barrel.

The $20 a barrel price difference presents opportunities for companies like Kern Oil & Refining that have been able to reengineer their plants to make efficient use of light North Dakota crude. That's assuming, of course, they spend less money on getting it to the refinery than what they save on buying it.

Kern Oil & Refining did not return calls requesting comment. But industry insiders estimate the company's rail costs at no higher than $18 a barrel, and perhaps less than $15 a barrel.

Not all of the refinery's crude is coming from North Dakota; probably most of its feedstock is locally produced, say consultants and others familiar with the company. But it's still a large amount.

Late last month, railroad watchers who share their observations on trainorders.com tracked the movement of a train carrying about 60 tankers of Bakken crude into Kern Oil & Refining. That amounts to more than 40,000 barrels of oil in a single shipment.

Refinery consultant Dave Hackett recently examined the economics of shipping midcontinent crude to California on his blog at stillwaterassociates.com. He said Kern Oil & Refining has a strong financial incentive to bring in large volumes of Bakken oil.

"My guess is they're running as much as they can get," he said.

At least one large West Coast refinery is looking at doing the same. In July, Tesoro Corp. announced it was spending $50 million to build new rail loading and unloading facilities at its 120,000-barrel-a-day refinery in Anacortes, Wash. The upgrade would allow it to receive up to 30,000 barrels a day of North Dakota crude -- up from 1,000 to 2,000 barrels a day now.

But for how long?

It is unclear how long oil prices will continue to favor midcontinent crude.

Refiners have historically shunned railroads when sending crude over long distances. They prefer to use pipelines, which cost a lot less to operate, or they buy locally.

Industry consultant Horace Hobbs, with Muse, Stancil & Co., said one reason why it makes sense lately to ship crude from North Dakota to California is the high price of oil. If barrel prices fall, so does the price margin, which leaves less room for transportation costs.

Even so, Hobbs predicted that Bakken oil will pencil out in California for a while yet.

"I certainly wouldn't be surprised if this goes on, at least intermittently, for a number of years," he said.

Not all refineries can process Bakken crude, either because they are engineered to run on other grades of oil or because they produce asphalts and other goods not suited to it.

For instance, San Joaquin Refining Co. Inc.'s 15,000-barrel-a-day plant in Bakersfield might like to run Bakken crude to save money, but it can't because it was designed to run on heavy oil produced in the San Joaquin Valley.

"This puts San Joaquin Refining in the position of having to refine the higher priced local crude while some of our competitors enjoy purchasing less expensive crude oil," Mark Del Papa, the refinery's vice president of supply and distribution, wrote in an email.

With more attention being focused on midcontinent oil, some in the industry see implications for local oil producers.

Although California prices tend to reflect global demand, Hackett said purchases of Kern County crude could slip as a result of Bakken deliveries, and that could put downtown pressure on prices.

"If you're a producer," he said, "then you need to know that the boys are looking for alternatives. They're looking for cheaper crude. And it's likely to happen."

There's still no reason to worry, said Tupper Hull, vice president of the Western States Petroleum Association. He said oil prices will find equilibrium as refiners establish new transportation patterns.

"The market tends to balance itself," he said. Top Story | XXXXXXXXXXXX

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