As completion of Tesoro’s rail terminal to receive Bakken crude at its Washington refinery draws near, there’s talk within the company of shipping the light, sweet oil to Tesoro’s Alaska refinery where the company pays substantially more for both similar oil from the Cook Inlet basin and lower grade oil from the North Slope. If Cook Inlet basin oil explorers are successful, contract negotiations for their new oil could be tricky if Tesoro, the region’s primary oil buyer, plays its Bakken card.
Alaska North Slope, or ANS, crude generally trades above Brent crude; Brent above West Texas Intermediate, or WTI; and WTI above the Bakken light, sweet crude despite the fact Bakken oil should trade at a premium because it is a better grade of oil than ANS crude, which has easy access to West Coast refinery markets. In addition to having other related transportation challenges, Bakken oil has almost no access to west or east coast refinery markets and restricted access to the Gulf coast.
Currently Tesoro’s Anacortes, Wash., refinery, which can process 120,000 barrels of oil per day, receives 1,000 to 2,000 bpd from the Bakken and 30,000 bpd from the North Slope.
Starting in September, and according to the most recent company information, Tesoro will start shipping 30,000 bpd of the lower cost, higher grade Bakken oil via its “pipeline on rails” to Anacortes, replacing the heavier and more expensive North Slope oil the refinery now receives via tanker.
However, Tesoro President and CEO Greg Goff reminded investors May 3 that the physical design of the Washington rail facility is “designed to take, it could physically take, a unit train every day which would be 60,000 barrels a day. We are currently permitted for less than that, but we are working through the process to hopefully increase the capability to maximize the use of the facility.”
The assumption is the additional oil will be used at Anacortes to replace higher-priced crude from foreign sources, but a Petroleum News contact at Tesoro headquarters says there is some discussion about taking the oil, via tanker, to the company’s Kenai refinery at Nikiski on Southcentral Alaska’s Kenai Peninsula, where it would replace North Slope crude currently being used at that facility. And where a local oil producer recently claimed that crude under its new contract with Tesoro is going to be sold at $14 per barrel more than in the past because the previous contract was tied to WTI, not the price of North Slope oil on the West Coast.
A little history
The Kenai refinery, 70 miles southwest of Anchorage, started operating in 1969. It was designed for lighter Cook Inlet oil, a commodity that has been in decline for several years, forcing Tesoro to use both imported foreign oil and the heavier North Slope crude.
For example, in 2011 the refinery’s crude throughput was 55,000 bpd, but only some 11,000 bpd of that came from the Cook Inlet basin. (The refinery has the capacity to process 72,000 bpd of crude, but some operations use other feedstocks.)
Tesoro buys all local oil production. March output of 10,072 bpd is a far cry from the 227,000 bpd that Cook Inlet produced at its peak in 1970.
Only three fields in the basin have production exceeding 1,000 bpd: Granite Point at 1,947; McArthur River at 3,957; and Middle Ground Shoal at 2,345.
Besides price, downsides of ANS oil
Tesoro said in July 2011 that Bakken crude oil at the Anacortes refinery yielded approximately 16 percent more clean product and less fuel oil than ANS crude, and that during the second quarter of 2011, the price difference between those products averaged approximately $28 per barrel.
Although the price differential decreased in the second quarter of this year, Goff confirmed May 3 that, “as a rule of thumb … Bakken barrels substituted for ANS … will improve the gas and diesel by approximately 16 percent. … We basically reduced the fuel oil production by 16 percent and produced gasoline and diesel.”
At the Kenai refinery about the same percentage of ANS crude can’t be processed because it is too heavy, so it is shipped south via tanker for handling elsewhere, an expense that would help cut the cost of shipping Bakken crude from the West Coast to Alaska.
Goff looking to lower feedstocks
Goff told investors that high-return capital projects such as Anacortes reduce the company’s feedstock costs and improve its yields, enhance the competitive position of Tesoro’s assets and drive significant earnings and cash flow growth.
He said Tesoro is “absolutely focused on capturing projects like the … Anacortes crude supply project; projects that help to dramatically improve our crude oil supply costs.”
A resurgence of exploration in the Cook Inlet basin by Hilcorp, Apache, Furie and Buccaneer reportedly has local Tesoro refinery officials hopeful that more local oil production is in the cards.
But contract negotiations could be trickier if Tesoro plays its Bakken card.