By DAN MURTAUGH
Near the only four-way stoplight in Nixon, Texas, smoke rises
off a pilot flare at the Blue Dolphin Energy refinery
that had sat cold for two
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-bpd 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. Its one of
thousands in South Texas, making the Eagle Ford shale
formation among the worlds fastest-growing oil
Blue Dolphin, Valero Energy, Kinder Morgan and others are
trying to capitalize on the biggest boom in US history by
building new crude-processing equipment, reviving mothballed
plants and opening new refineries.
We started this project
in 2006, and I cant
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 Dolphins
CEO. We dont get that question anymore.
Directional drilling and hydraulic fracturing in shale
formations such as the Eagle Ford and the Bakken in North
Dakota helped US oil production grow by a record 1.136
million bpd last year to 8.121 million, according to the
Energy Information Administration.
That and restrictions on exporting crude have reduced the
cost of American oil relative to the rest of the world. US
benchmark West Texas Intermediate was $97.76/bbl on Friday
compared with $107.29 for Europe
The discount has been a boon to US refiners. The top three
performers on the S&P 500 Energy Index since the
beginning of 2012 are all refining
Marathon Petroleum and Tesoro.
Its also crimped profit for producers such as
ConocoPhillips and billionaire Harold Hamms Continental
Resources, which have argued for easing export rules. US
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 bpd 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
& OBrien. Its the largest gain in light-oil
refining capacity since the early days of US oil
production, said Rick Thomas, a consultant with Baker
When that capacity comes online, it will absorb some of the
excess light oil that producers want to ship abroad, said
Andy Lipow, president of Houston-based Lipow Oil Associates.
The Nixon refinery was built in 1980, primarily to supply Air
Force bases in the San Antonio area with jet fuel, Carroll
said. It shut around 1990.
Carroll began looking at the plant in 2006, a year after
Hurricanes Katrina and Rita knocked more than 30% of US refining
capacity offline. The
financial crisis delayed funding of the project
, and by the time it
started operating, the Eagle Ford was producing about 451,000
bpd of crude and condensate, according to EIA data.
The Eagle Ford has created its own marketplace,
Carroll said. Its changed the course for others,
and specifically for us, because were right in the
middle of it, wells are literally across the street.
The refinery contracts with Genesis Energy to purchase oil
that it processes into jet fuel, diesel used by drillers and
sold to nearby
Blue Dolphin also has an option to purchase an idled
40,000-bpd refinery in Ingleside, Texas, near Corpus Christi.
Small plants like the ones Blue Dolphin is targeting are
simpler to reopen because they can get all their crude via
tanker truck and have lower emissions
than larger plants,
making it easier to get environment
al permits, Carroll
restarted in late 2012 a
in Somerset, Kentucky,
that was idled in February 2010 when the previous owner
couldnt secure crude supplies. Continental runs mostly
locally produced oil, and can also get Bakken crude by rail
or barge, Missy Shorey, an outside spokeswoman for
Continental based in Wichita Falls, Texas, said when the
In addition to reopening old plants, companies have announced
or filed for permits to build at least three new refineries
in North Dakota, one in Texas and one in Utah, all near oil
Because of all the drilling activity, thats
created demand for fuel to support the drilling itself and
transportation to and from the fields, said John Auers,
vice president of Turner, Mason, a firm of consulting
engineers. You get the benefit of having both
discounted crude and demand for product thats in short
MDU Resources and Calumet Specialty Products are about 30%
complete with building the 20,000-bpd Dakota Prairie plant
near Dickinson, North Dakota, which will be the first new
refinery in the US since 2008. There hasnt been a
refinery built with more than 50,000 bpd of capacity since
Marathon opened its Garyville plant in Louisiana in 1977.
MDU has drilled for oil and natural gas in North Dakota for
90 years, and operates electric utilities as well. When
Calumet, which operates small refineries in four states that
focus on specialty products such as lip balm and lube oil,
approached MDU about building a new plant in 2011, the
company immediately saw the value, said John Stumpf,
MDUs vice president of strategic planning.
Because of the Bakken, demand for diesel in North
Dakota has gone from 40,000 barrels a day to upwards of
60,000, he said. Were here purely due to
the circumstances that exist because of the Bakken.
Bakken crude is even more discounted than US benchmark
prices. Oil at the wellhead in North Dakota was $19.32/bbl
less than WTI and $29.79 less than Brent, according to the
marketing arm of Plains All American Pipeline.
The refinery will produce highway-grade diesel for sale to
drillers, Stumpf said. It will send low-octane naphtha to
Canada to be blended with bitumen for shipment. The heaviest
residue will be sent to other Calumet refineries.
The properties of shale oil such as its low density and
sulfur content make it relatively easy to process. The Dakota
Prairie refinery will consist of a crude distillation
unit, a hydrotreater,
a sulfur recovery plant, a hydrogen plant and an amine
Its not complex chemistry or sophisticated
equipment designed to utilize every bit of the barrel,
Stumpf said. Were just heating crude up the distillation
the distillate cut and converting all of that to diesel
The refinery cost will be about $300 million, or $15,000 per
barrel of capacity. Motiva Resources spent more than double
that per-barrel cost in 2012 to refine an extra 325,000 bbl
of high-density, high-sulfur crude at its refinery in Port
Larger energy firms are also investing in shale processing
equipment. Valero is looking at spending about $790 million
to add 175,000 bpd of crude capacity at refineries in Corpus
Christi, Houston and Sunray, all in Texas. Kinder Morgan is
spending $370 million on two 50,000-bpd condensate splitters,
or simple crude units, on the Houston Ship Channel. At least
three other companies have applied for permits in Corpus
Christi for expansion
s or new equipment.
The projects rely on an abundant supply of shale crude. Shale
drilling is expensive and there is a risk that if oil prices
plunge, so may production, Carroll said.
A second risk is that the government eases restrictions on
crude exports, which might also crimp supply.
These projects would be called into more question if we
get increased exports of domestic crude, said Bill Day,
Valeros San Antonio, Texas-based spokesman. We
would have to take another look at the economic prospects of
s, whether they are still
For now, the Nixon refinery is focusing on expanding the
amount of Eagle Ford crude it can process through its tower.
Records indicate that the previous owner ran it at 17,000 bpd
at its peak and with some modifications that may rise to
20,000, Carroll said.
The town around the refinery is booming. The school system,
which got an infusion of property tax revenue when the
refinery restarted, has built a new library and gymnasium for
its high school. The company is talking to the city about
buying the volunteer fire department new equipment. Signs
advertise new motels and restaurants to come.
Before the oil boom came in, we were a depressed
city, said George Blanch, Nixons city manager.
has been able to get back
on its feet, and theyre even talking about expansion
. Thats good for us
overall. Every little bit helps in small-town America.