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PN Bakken: California refiner loves North Dakota oil
Petroleum News ^ | Week of May 06, 2012 | Rose Ragsdale

Posted on 05/08/2012 11:12:13 AM PDT by thackney

The April 8 edition of The Californian features an article about a strategy being used by a refiner in the heart of California oil country of buying large amounts of crude from North Dakota and paying to have it hauled by train to Bakersfield, Calif., where it’s turned into mostly gasoline and diesel for the California market.

The ingenious part of this approach is that the company is turning a bigger profit using midcontinent crude than if it were buying roughly the same grade oil strictly in Kern County, Calif., the article by John Cox reported.

More refiners will likely follow

Strange as it may seem to purchase oil from afar when so much crude is produced nearby, there’s every reason to believe other refineries will soon follow 26,000-barrel-a-day Kern Oil & Refining’s lead, according to Cox. “I know that there are a number of people looking at it and looking at making arrangements,” oil marketer Bob Devine told the publication.

At least one large West Coast refinery is considering the move. Tesoro Corp. said it was spending $50 million to build new rail loading and unloading facilities at its 120,000 bpd refinery in Anacortes, Wash. The upgrade would allow it to receive up to 30,000 bpd of North Dakota crude — up from 1,000 to 2,000 bpd now. (The project aimed to cut Tesoro’s use of Alaska North Slope crude. In March, construction began and Tesoro ordered about 800 rail cars, which it said can accommodate another 10,000 bpd of Bakken crude.)

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

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.

A better price

Simple math is the driving force behind the shift, which appears to have begun in 2010. Math, that is, and the 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 the Bakken formation has opened up vast oil reserves in and around North Dakota. In just five years, the state’s oil production quadrupled to about 550,000 bpd, bringing it roughly even with California’s production rate.

While California’s 2 million bpd refining industry thirsts for oil, North Dakota is enjoying a glut of Bakken crude, which has contributed to the historic price imbalance. At the end of March, oil from the Bakken was selling at about $92 a barrel, while heavy crude produced in Kern County was selling for about $112 a barrel.

Experts told The Californian that the $20-a-barrel price difference presents opportunities for companies that have been able to re-engineer their plants to make efficient use of light North Dakota crude.

In March, 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 told the publication.


TOPICS: News/Current Events; US: California; US: North Dakota
KEYWORDS: bakken; energy; oil

1 posted on 05/08/2012 11:12:23 AM PDT by thackney
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To: thackney

Most freepers wouldn’t touch this thread with 10 foot pole


2 posted on 05/08/2012 12:01:19 PM PDT by Ben Ficklin
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To: thackney
The ingenious part of this approach is that the company is turning a bigger profit...

Uh, oh. Big Oil making a profit, how dare they! I demand we outlaw this! [end sarcasm]

3 posted on 05/08/2012 12:05:07 PM PDT by Idaho_Cowboy (Ride for the Brand. Joshua 24:15)
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To: thackney

YOU _ YES YOU - da man. What a great bit of insight. I wonder how many tree hugers in Calif. know that 29% of their oil comes from the dreaded Saudi not the more evil terrible West Tx. or even the friends to the south Mexico ? They have no problem importing workers in their homes, but not oil - what’s up with that?


4 posted on 05/08/2012 12:05:18 PM PDT by q_an_a (the more laws the less justice)
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To: thackney

Time to buy railroad company stock.


5 posted on 05/08/2012 12:33:53 PM PDT by fifedom
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To: thackney

It appears Jerry Brown and the nitwits will have to
implement a massive train tax to slow this down.

Complications from a series of state-ordered well closures have disabled some of Berry Petroleum Co.’s operations in the Taft area and forced the company to lower its 2012 production target.
http://www.bakersfield.com/news/business/economy/x1942474163/Berry-loses-oil-production-at-Midway-Sunset

California to draft regulations for oil and gas fracking
http://latimesblogs.latimes.com/california-politics/2012/05/california-to-draft-fracking-regulations.html


6 posted on 05/08/2012 12:53:09 PM PDT by twistedwrench
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To: fifedom

“Time to buy railroad company stock.”

Hold off on that until Obama announces the October Suprise!

What’s that you ask? Obama will announce the approval of Keystone and the creation of 5,000,000 jobs of course.


7 posted on 05/08/2012 12:53:28 PM PDT by EQAndyBuzz (Would you rather eat dog food or cat food? Guess it's Romney 2012.)
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To: thackney

This post leads to the question of why more oil pipelines don’t run east to west?
I have a pipeline map and considering the population centers on the coast you would think major pipelines to both
coasts would be a matter of economics.

Your thoughts would be appreciated.


8 posted on 05/08/2012 1:30:26 PM PDT by Recon Dad (Gas & Petroleum Junkie)
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To: Recon Dad
This post leads to the question of why more oil pipelines don’t run east to west?

Multiple reasons include the Rocky Mountains.

I think that the West Coast was self sufficient for a significantly long time. By the time they needed imports on the West side of the Rockies, they already needed them on east side as well.

There is not much incentive to transport imported oil from one coastline to another. They can just import their own.

9 posted on 05/08/2012 2:10:39 PM PDT by thackney (life is fragile, handle with prayer)
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To: thackney
I do understand that in the case of the Baaken production the Rockies would be a major impediment and that California was at one time the number two oil state. But you could take a route out of Cushing or Texas and run south.

As to heading east I recently read that the east coast refineries were closing as much due to antiquated facilities as to the high cost of imports. If they could ship oil out of Houston it would be cheaper than the middle east oil they now use. (they can't due to the Jones Act) That begs the point why not a pipeline running either east from Chicago or the gulf.

Your insight is always appreciated.

10 posted on 05/08/2012 3:18:04 PM PDT by Recon Dad (Gas & Petroleum Junkie)
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To: Recon Dad
If they could ship oil out of Houston it would be cheaper than the middle east oil they now use.

Houston is net importer of oil. There is not a surplus to ship out.

You need to keep in mind that much of the Gulf Coast Refineries run on imported oil.

11 posted on 05/08/2012 6:59:55 PM PDT by thackney (life is fragile, handle with prayer)
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To: Recon Dad

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRIPP32&f=M

The link above shows the Gulf Coast region of the US has imported oil for a long time. Although we have a lot (relatively speaking) of oil production, we have even more refineries. So we have no surplus to pipe west.

The glut in Cushing OK is a very new development and the biggest demand is the Gulf. It is more cost effective to add pipelines to the closer Gulf which is what has already started.


12 posted on 05/09/2012 4:55:59 AM PDT by thackney (life is fragile, handle with prayer)
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To: thackney

I did some research and found the following explanation...

US crude production is at its highest in eight years, helping reduce imports. But the US petroleum market is at once global and regional, underscoring how simplistic ideas of energy independence can be in internationally traded commodity markets. The Gulf of Mexico coast, home to 43 per cent of refining capacity and able to consume cheaper crudes, has turned the US into a net exporter of petroleum products for the first time since at least 1949. The inland US, enjoying a surfeit of fresh crude supplies, has been selling discounted petrol into landlocked markets. The west coast is isolated from the rest of the country, while the east coast has historically relied on imported fuel. “The US is really four markets when it comes to products,” says Ed Morse, head of commodities research at Citigroup and a former US oil official.

As big eastern US cities search for replacement fuel sources, Gujarat in India may even hold the advantage over the Gulf of Mexico. The reasons are part infrastructural, part legal.
The Colonial Pipeline, the main petroleum products line running from Houston to the north-east, is nearly full. A planned expansion will add less capacity than that of the Philadelphia refinery destined to close. This leaves tankers, which the Jones Act of 1920 requires to fly the US flag and employ American crews if they are ferrying products between US ports. A debate is raging over whether there are enough, or at least cheap enough, vessels to ship fuel eastwards.
The EIA says a limited number of Jones Act tankers are free to carry refined products from the Gulf to the east coast, while Jones Act barges can cost three times more than hiring a tanker from Europe. Morten Arntzen, chief executive of OSG, a tanker company, counters: “Transportation is a really minuscule part of the delivery cost of gasoline.”


13 posted on 05/09/2012 6:29:55 AM PDT by Recon Dad (Gas & Petroleum Junkie)
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To: Recon Dad
The inland US, enjoying a surfeit of fresh crude supplies, has been selling discounted petrol into landlocked markets.

Please understand that is a very recent development. In 2008, that oil was a premium price over imports due to demand greater than supply (at market prices).

This leaves tankers, which the Jones Act of 1920 requires to fly the US flag and employ American crews if they are ferrying products between US ports.

I disagree with this claim as there is not a US port with a surplus of domestic crude oil. All that have facilities for handling crude are importing crude, they do not have a surplus to ship to another port.

14 posted on 05/09/2012 7:13:08 AM PDT by thackney (life is fragile, handle with prayer)
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To: thackney

This leaves tankers, which the Jones Act of 1920 requires to fly the US flag and employ American crews if they are ferrying products between US ports.

I would think this might be more feasible when the XL is up and running.


15 posted on 05/09/2012 9:53:16 AM PDT by Recon Dad (Gas & Petroleum Junkie)
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To: Recon Dad
This leaves tankers, which the Jones Act of 1920 requires to fly the US flag and employ American crews if they are ferrying products between US ports.

Why would oil companies import oil to Houston from a foreign port to then load on a US tanker to move it to another port?

They will simply continue to import the foreign oil to the different ports. I must be missing what point you are trying to make. What US port do you believe has a surplus of crude oil that could move it by US tankers to another US port?

I would think this might be more feasible when the XL is up and running.

The Keystone XL Gulf Coast Project would deliver an additional 700,000 BPD to the Gulf Coast. Later it will be upgraded to 830,000 BPD.

Gulf Coast Pipeline Project
http://www.transcanada.com/gulf-coast-pipeline-project.html

But the Gulf Coast already is importing 4.5~5 million bpd.

Gulf Coast (PADD 3) Imports by PADD of Processing of Crude Oil
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRIPP32&f=M

With this expansion they are still going to be importing ~4 million bpd. They don't have a surplus to ship crude to another US port.

16 posted on 05/09/2012 10:54:06 AM PDT by thackney (life is fragile, handle with prayer)
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To: thackney

About two weeks ago I read an article on how the east coast refineries would improve their profitibility if they could get tankers from the gulf with WTI, rather then getting their crude from the middle east. But due to the Jones Act could not even if they wanted to.
I’ve looked through all my sites but as of yet can’t find it. If I do I’ll pass it along.


17 posted on 05/09/2012 5:40:04 PM PDT by Recon Dad (Gas & Petroleum Junkie)
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To: Recon Dad
About two weeks ago I read an article on how the east coast refineries would improve their profitibility if they could get tankers from the gulf with WTI

I am sorry but that was written by someone not understanding the market.

WTI is significantly cheaper than imported crude ONLY because it is mostly land-locked AWAY from the coast. The same grade oil, or even the same oil, at the coast is worth essentially the same as the sweet, light imported oil.

It is not cheaper for any other reason. If it was not bottlenecked in relation to supply versus coastal demand, there would be no discount. That was the case just 4 years ago before the Bakken and other West Texas supplies started to really climb.

But due to the Jones Act could not even if they wanted to.

Jones Act doesn't matter when there is no surplus supply on the coast.

Look at the price difference between WTI and LLS (Louisiana Light, Sweet at St. James, Gulf Coast).

Today the LLS is a premium over WTI ~$16.

http://online.wsj.com/mdc/public/page/2_3023-cashprices.html?mod=topnav_2_3000

Four years ago, prior to the over-supply to Cushing, the price difference was less than $4.

http://online.wsj.com/mdc/public/page/2_3023-cashprices-20080509.html?mod=mdc_pastcalendar

WTI is only discounted because it is bottlednecked to the coast. The condition will not last; there are multiple pipeline projects underway to take more oil from Cushing to the Coast. At the time the bottleneck is eliminated, there will not be any significant discount.

But far more important, there is no surplus of supply to ship to another area. 100% of WTI is already being used and is still ~5 million barrels a day short of meeting the area demand. It is not going to get shipped anywhere else.

Please remember, by definition, WTI trading is not only a grade of oil, but also a location, Cushing Oklahoma. The same oil at the coast has a different value.

18 posted on 05/10/2012 5:10:07 AM PDT by thackney (life is fragile, handle with prayer)
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To: thackney

Thank you for your patience, I’m trying to really understand the industry and all its aspects. By reading everything I can I’m trying to self educate.


19 posted on 05/10/2012 11:28:45 AM PDT by Recon Dad (Gas & Petroleum Junkie)
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To: Recon Dad

As you can tell from your readings, many of the people writing about it don’t understand the industry.

I think I have a good understanding of the industry. I have learned that is not the same as understanding (and predicting) the corresponding market.


20 posted on 05/10/2012 11:48:48 AM PDT by thackney (life is fragile, handle with prayer)
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To: Recon Dad
Unless you have been to SE Texas, you cannot imagine the refining capacity that exists along the Texas coast within 30-40 miles of downtown Houston.

At most times, there are three huge tankers docked at the Exxon refinery in Baytown, TX. Sometimes there are four docked. It's the largest refinery in the area, but there are plenty more very large refineries.

21 posted on 05/10/2012 12:22:39 PM PDT by SeaHawkFan
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To: Recon Dad

Pipelines are being built to bring more oil to the Texas coast from the eastern U.S. and the midwest.


22 posted on 05/10/2012 12:34:50 PM PDT by SeaHawkFan
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To: SeaHawkFan
Pipelines are being built to bring more oil to the Texas coast from the eastern U.S. and the midwest.

Can you name or link one crude oil pipeline being built to oil from the eastern US to Texas? I cannot.

23 posted on 05/10/2012 12:45:49 PM PDT by thackney (life is fragile, handle with prayer)
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To: thackney
Had a brain fart. There are pipelines being built to move gasoline and diesel to the east coast.
24 posted on 05/10/2012 12:53:24 PM PDT by SeaHawkFan
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To: SeaHawkFan

Actually, the existing pipelines are being upgraded. I don’t know of any new pipelines from Texas to the East Coast.


25 posted on 05/10/2012 1:07:41 PM PDT by thackney (life is fragile, handle with prayer)
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