North Dakota Refining Capacity Study

Abstract

According to a 2008 report issued by the United States Geological Survey, North Dakota and Montana have an estimated 3.0 to 4.3 billion barrels of undiscovered, technically recoverable oil in an area known as the Bakken Formation. With the size and remoteness of the discovery, the question became 'can a business case be made for increasing refining capacity in North Dakota?' And, if so what is the impact to existing players in the region. To answer the question, a study committee comprised of leaders in the region's petroleum industry were brought together to define the scope of the study, hire a consulting firm and oversee the study. The study committee met frequently to provide input on the findings and modify the course of the study, as needed. The study concluded that the Petroleum Area Defense District II (PADD II) has an oversupply of gasoline. With that in mind, a niche market, naphtha, was identified. Naphtha is used as a diluent used for pipelining the bitumen (heavy crude) from Canada to crude markets. The study predicted there will continue to be an increase in the demand for naphtha through 2030. The study estimated the optimal configuration for the refinery at 34,000 barrels per day (BPD) producing 15,000 BPD of naphtha and a 52 percent refinery charge for jet and diesel yield. The financial modeling assumed the sponsor of a refinery would invest its own capital to pay for construction costs. With this assumption, the internal rate of return is 9.2 percent which is not sufficient to attract traditional investment given the risk factor of the project. With that in mind, those interested in pursuing this niche market will need to identify incentives to improve the rate of return.