“How many stories are you going to write?” asked Lynn Helms after an early morning discussion about marketing the state’s oil.

A lot. The story of adding value to the state’s oil is as dynamic as the market itself. This is the first in an ongoing series of what state and regional leaders are doing to market one of the nation’s most valuable commodities: crude. In this article, Business Watch talked with North Dakota’s key industry experts, including Helms, the director of the state’s Oil and Gas Division. The next article in the March/April issue will examine the companies, pipeline builders, mineral rights owners and oil producers who are building the infrastructure that could one day bridge the gap in the price of North Dakota oil. 

North Dakota recently jumped to the fifth largest oil-producer in the nation, with production in 2008 expected to come in at about 53.6 million barrels; in fact, production recently hit a record 204,000 barrels a day. 

But to keep production profitable, particularly during the recent downward swing of prices, those producers and marketers must have more options for their product: as recently as December, North Dakota sweet crude was trading for $11 less than the NYMEX West Texas Intermediate Crude. When oil is dropping to below $40 a barrel, that price difference is crucial. The goal, experts say, is to stay at 90 percent of the NYMEX price.

“The big thing you can do to add value is to give a crude oil producer two to three options to market their crude,” Helms said. “Then they can maximize the value of their product.”

That means looking at infrastructure, transportation and finding markets for the product, or determining whether refining the product in-state versus sending it out of state maximizes oil’s value.

“Distance to market is always a factor, and the ability to deliver,” said Shane Goettle, commissioner of the North Dakota Department of Commerce. “If you can address those two topics then you can be more competitive.”

North Dakota obviously can’t change its location, so the challenge is, and has been, getting the product out.

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Innovating transportation
In Bowman County, True Companies developed the Belle Fourche pipeline, allowing crude to flow either south or east and connecting it to Enbridge, which resulted in significant increase in the value of the crude and erased any additional discount of product.

Production in the Williston Basin and the Bakken Shale Formation continues to exceed pipeline capacity, so state leaders and developers continue to work on innovative ways to get the product out.

There’s a capacity of 280,000 barrels a day in the pipelines heading to refineries, serving Montana, North Dakota and a small section of South Dakota; those pipelines include the Enbridge Pipeline, the Butte system and the pipeline into the Mandan Tesoro refinery.

That wasn’t enough. As the state began producing more, bottlenecks slowed delivery.

In August 2008, crude began being loaded by rail at four locations: Dore, Stampede, Ryder and Minot.

That allowed 55,000 more barrels a day to crude export, but rail movement is more expensive and means higher discounts on the product, said Justin Kringstad, director of the North Dakota Pipeline Authority.

Enbridge Pipeline is currently undergoing an expansion to be completed by 2010, which will increase its capacity from 110,000 bpd to more than 160,000 bpd, Kringstad said.

A new study, however, could determine the feasibility of connecting to either TransCanada’s Keystone pipeline or the Keystone XL pipelines; the former transports crude from Hardisty, Alberta to Midwest markets, including Wood River and Patoka, Ill. and Cushing, Okla. XL would extend the pipeline from Oklahoma into Gulf Coast markets.

“We would be connecting to the biggest market in the world,” said Helms.

The Pipeline Authority is looking at the proposals for the feasibility study, which is scheduled to be completed by the end of March. If it’s determined to be feasible, that option could still be years away, and the Enbridge expansion won’t be completed for another year.

“The biggest thing is having capacity,” Kringstad said. “Right now, until that 2010 expansion, right now we’re having to use those rail facilities.”

Refining Options
Shortly after the state’s first oil boom in the 1950s, the Mandan refinery was conceptualized and built to capitalize on North Dakota’s newfound oil wealth.

It was constructed specifically to refine the light, sweet crude being pumped out of the ground in the Bakken Shale Formation, which could hold up to 4.3 billion barrels of oil spanning North Dakota, Montana and Saskatchewan, according to a recent government survey.

The capacity of that refinery was initially set at 30,000 barrels a day. Now, that capacity stands at 60,000 barrels a day with the potential for expanding its production of other fuels in the future. But, even with that expansion, North Dakota crude needs to find more places to go.

“Now, they have more oil than they can use,” said Leif Peterson of the exploration in the Williston Basin and the Bakken Shale Formation. Increased refining capacity, either by current expansion or new construction, is an idea that’s been receiving serious consideration over the past couple of years.

Northwest Refining, Inc. recently completed a feasibility study for a refinery in Williston and Three Affiliated Tribes is working on permitting and jurisdiction for the location of their proposed jet fuel refinery. That refinery is smaller and would refine 15,000 bpd of jet fuel, with the potential market of Minot Air Force base.

The Northwest refining study looked at the possibility of a 100,000 bpd refinery, estimating the cost at $1.5 billion, including pipeline expansion. The authors suggested that the refinery be designed to maximize diesel and jet fuel, as the demand for those fuels may be greater than the demand for gasoline.

Mel Falcon, chief executive officer for Northwest Refining, has said it’s better to process the state’s oil production within its borders than exporting.

But the economics of refining crude in-state shift daily, said Helms. When crude was at $140 a barrel in July, building a refinery made sense. Right now, the economics may be working against it.

“The problem is, seven to 10 years from now is when that first gallon of refined product hits the market,” Helms said.

Building a refinery is betting on future markets, determining if the supply of crude will still be available and if the transportation of refined product to bigger markets is feasible. It requires study after study, looking at the design process, the markets, the location.

“I think the first thing is to recognize that there’s still more work to be done,” Goettle said. “The phase one study was really just a preliminary look at the conditions. It’s not as in-depth as it needs to be. It probably gives you just enough information to justify moving ahead with a phase two.”

-Story by Crystal Reid