CHS capitalizes on current oil margins by upgrading infrastructure

2013-11-04T00:15:00Z 2013-11-05T07:02:07Z CHS capitalizes on current oil margins by upgrading infrastructureBy TOM LUTEY tlutey@billingsgazette.com The Billings Gazette

After years of discount rates on Canadian crude, Billings refineries may see a price change in the tide of oil as the supply bottleneck eases.

Shipping conditions for Canadian tar sands oil, as well as crude from the Bakken are improving and that’s likely to thaw the asking price now frozen at low levels because of delivery issues.

Carl Casale, president of CHS Inc., said it’s inevitable that Canadian and Bakken oil will begin flowing more freely into the United States.

As shipping options improve, refiners with good access now will pay more, he said, speaking recently to economists at Montana State University.

“There’s so much crude oil trapped in the mid-continent right now and trapped up in Canada — and we have one refinery in Laurel that is served by a pipeline out of Canada. Pretty good place to have one,” Casale said. “And we have one that sits in McPherson, Kan., just north of Cushing, Okla., where all the crude oil gets trapped. It’s literally at the end of the pipe and you have to move it by rail or by train after that.”

Casale, who spoke recently at Montana State University’s October Economic Outlook Conference, touched on what’s known as the “bitumen bubble.”

Delivery challenges have at times pushed Canadian crude prices $40 a barrel lower than the West Texas Intermediate, an oil grade used as a pricing benchmark. The same has been true for Bakken crude on the U.S. side of the border.

“One of the real differences about the Bakken is that the delivery infrastructure is not in place,” said Paul Polzin, an economist with Montana Bureau of Business and Economic Research in Missoula.

“When you look at plays in Texas and the gas play in Pennsylvania, they’re right next to refiners or right next to pipelines. So, there’s a negative premium for Bakken crude.”

Shipping crude by rail cut the bitumen bubble’s effect by half earlier this year, but when Canadian production increases, the bottleneck issues resurface and prices drop.

The Keystone Pipeline, dedicated to Canadian crude with onramps planned for Bakken oil, would open the supply to more refiners, but increase expenses for those with access now.

“When Keystone XL gets built to Texas and the Gulf Coast, that will pull crude past us and we probably won’t enjoy the same refining market that we do today,” Casale said.

“The leg that’s going to impact us is the last leg from Cushing, Okla., down to the Texas Gulf Coast. Has it been approved yet? Uh. I’d like you all to join the Sierra Club and boycott the pipeline,” he joked. “No. obviously it should get built, but it hasn’t. If they said ‘go ahead’ tomorrow, it would probably be a couple years before we would see it.”

CHS has been expanding its refining ability to meet what it sees as a growing demand. Casale said CHS’s Kansas refinery is now fully owned by the company. Buying out its partners and improving its infrastructure has allowed the cooperative to add nearly a new refinery’s worth of production to its operations, Casale said.

In Laurel, the cooperative boosted its diesel production 5,000 barrels a day by adding new equipment.

Spokeswoman Lani Jordan said the agricultural demand for large purchases of diesel prompted the Laurel improvements.

Currently, 75 percent of CHS profits come from the energy sector, with agriculture business accounting for the other 25 percent, according to Casale. Historically, profits from the two sectors were equal. The company is adding a fertilizer plant, which should return profits between agriculture and energy to an even split.

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