UPDATE 2-Fifth of Bakken oil bound for Philly refinery, more could come

Thu Oct 3, 2013 5:39am IST

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* CEO of PES says expects economics of using Bakken to stay

* PES will be "by far" the largest consumer of Bakken oil - CEO

* PES could also rail Permian, Utica oil

* Statoil is "regular supplier" of Bakken to PES

By Sabina Zawadzki

PHILADELPHIA, Oct 2 (Reuters) - Philadelphia Energy Solutions' 350,000 barrel-per-day Pennsylvania refinery is now processing a fifth of all oil produced in North Dakota's prolific Bakken shale oil formation and the plant could take more from there or other sources.

Just a year after the company bought the plant, rescuing it from the threat of a shutdown due to the high cost of imported crude, the refinery is sucking up 190,000 bpd of North Dakota Bakken crude, CEO Philip Rinaldi said on Wednesday.

About 160,000 bpd of that crude was arriving direct to the refinery on two unit trains a day while the other 30,000 bpd was coming by rail then barge, he said at an event in Philadelphia marking the opening of a rail offloading point at the refinery.

PES had previously said it expected to rail in 140,000 bpd of Bakken crude to the refinery. PES is a joint venture of Carlyle Group and Energy Transfer Partners .

"We're actually bringing in 190,000 barrels per day of Bakken crude because we're bringing in some by a different route which ... comes partially by train and partially by barge," Rinaldi told reporters.

"We've pre-invested in this railroad track so that we have the stage to bring in a third train that would bring us to 240,000 barrels per day," he said.

As he spoke at the site, a train of 120 cars, 1.5 miles (2.4 km) long and carrying 80,000 barrels of Bakken crude slowly rolled in. The train was operated by CSX Corp and the crude came from the oil fields of Statoil, he said, calling the Norwegian oil company a "regular supplier."

Rinaldi stressed the investment into the rail project was to allow the refinery flexibility to move a variety of lower-cost domestic crude including oil from Texas's Permian Basin and the Utica shale field in Ohio, depending on the economics.

"We think this is a better way to bring crude oil by long distances because this is all about flexibility for crude," he said.

"So, right now crude from the Bakken and North Dakota is a very good thing but, you know what, times change, and if the better crude starts moving down to the Utica, we can take it by rail. If it's in the Permian Basin, we can take it by rail. So we're connected everywhere and we don't get locked in."

However, when asked whether a diminishing spread between U.S. and Brent crude oil futures could make the Bakken crude less attractive, Rinaldi said while the spread was an important indicator, "it really doesn't drive" the economics of Bakken.

He said with production of 850,000 bpd, "that crude has got to get to the market and the only really meaningful way it will get to the market is by rail ... We will be by far the largest consumer of Bakken crude oil. I think those economics will stay because they're necessary to clear that area."

TURNAROUND

In 2012, the plant was on the verge of closure, hobbled by the high cost of importing all of its feedstock from abroad such as the North Sea and Africa, rather than using cheaper domestic crudes. It was a problem shared by other East Coast refineries.

Sunoco Inc shuttered a 178,000-bpd refinery in Marcus Hook in the same state in 2001 and Hess Corp's 70,000-bpd refinery shut in February this year.

So diversifying its own crude supplies has been core to the turnaround of PES's fortunes. PES had annual revenues of $15 billion, Rinaldi said, adding that he was "happy" with the profits though not disclosing the amount.

Rinaldi later told Reuters the refinery was currently buying West Texas Intermediate (WTI) crude oil from the Permian Basin, although did not specify at what rates, and was setting up rail connections to bring WTI out of Cushing, Oklahoma.

Overall, however, much of the leftover capacity not supplied by Bakken crude came from the Atlantic Basin, he said, meaning imports from West and North Africa and the North Sea.

JP Morgan supports the refinery by providing temporary financing for PES's purchases of oil until they are delivered to the refinery and buying its refined products, an "activity we could not survive without," Rinaldi said.

In July, JP Morgan said it would try to sell or spin off its physical commodity trading assets and it is unclear where that would leave PES.

In August, Rinaldi said PES has a "multiyear agreement" with JP Morgan, that he did not expect surprises, but that he did not know how JP Morgan's intention to sell would play out. Rinaldi gave no further comment on Wednesday.

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