28-03-2016

Meridian Energy Group look to build North Dakota refinery using midstream model

Meridian Energy Group expects to use a fee-based business model at a 55,000 b/d refinery it plans to build in North Dakota, CEO William Prentice said Wednesday. The start-up company has submitted the first round of permits to the state needed to begin construction of the plant, which will run 27,500 b/d of Bakken crude initially.

When completed, the facility will be the state’s third refinery. However, the operating model for the refinery will be very different from that of Tesoro’s 70,000 b/d Mandan refinery and Dakota Prairie’s 20,000 b/d newly built Dickinson refinery, which operate in a more traditional refining model, buying crude and making and selling gasoline and diesel. Some “70% of the capacity planned is dedicated to tolling arrangements,” said Prentice. “People deliver crude to us. We cook it up and give them refined product back.”

Prentice declined to discuss ongoing contract negotiations, but said Meridian is targeting small Bakken producers. He expects to be able to share more details on tolling contract partners in May.

“We give the small producer that little sliver of product and he comes out of the refinery with the same hedge as an integrated oil” company, said Prentice.

“The smaller guys take title to the refined product as they deliver the crude to us,” he added.

Depending on permitting, Prentice said the first phase of the refinery could be up and running in mid-2017.

“We would expect full commercial operations by the end of 2017,” he said.

The remaining 30% of the initial phase will allow Meridian to bring in crude in a way that “allows us to modify our product slate, create specialty chemical products” depending on market conditions, said Prentice.

“We can come up with an idea that we test and match it up with markets,” he added.

The second phase of the refinery will add 27,500 b/d of heavier crude processing capability at the facility, with the capability to process crude with an API down to the mid-30s.

Meridian Group got its start after one of its current principals went home to North Dakota and saw the abundance of crude and lack of refineries.

North Dakota produced 1.12 million b/d of crude in January, down from 1.15 million b/d in December 2015 and 1.19 million b/d produced in January 2015, according to data from the North Dakota Pipeline Authority. About 7% of Bakken crude was used by regional refineries in January 2016, the NDPA said. While production has fallen, less Bakken crude has been railed to refiners on the US Atlantic and Gulf coasts recently as waterborne imports have become more profitable.

The Dakota Prairie refinery, which began selling diesel in June 2015, has been challenged by a low price environment for diesel and naphtha. The plant was built to capitalize on the region’s growing need for diesel to run the rigs and trucks involved in drilling in the Bakken.

Last week, rigs active in the Williston Basin, where the Bakken Shale is located, totaled 31, down from 99 rigs in the same week in 2015, according to Baker Hughes data.

Prentice said while evaluating the project, it because clear to the group that there was a competitive opportunity.

“The refining industry has become comfortable in the way in that it acts with markets,” said Prentice about the traditional refining model.

The company’s project “will be the next wave of refineries,” he said.