McPherson oil refinery to undergo upgrade

05/27/2012 5:00 AM

05/27/2012 6:56 AM

Kansas produces about 115,000 barrels of oil a day. More than half of that winds up in McPherson.

That is the location of the National Cooperative Refinery Association refinery, the largest buyer of oil in Kansas.

The NCRA refinery is different from the two other, larger refineries in Kansas – Coffeyville Resources in Coffeyville and the HollyFrontier refinery in El Dorado – as well as most other refineries.

NCRA is owned directly by three mammoth farm cooperatives, the majority of it by CHS of St. Paul, Minn., and indirectly by tens of thousands of farmers and ranchers across the Midwest.

Most of its products are sold to its member farmers and ranchers, but some also are sold in the retail commercial market under CHS’s Cenex brand. The cooperative members are the shareholders and share in the profits.

“We’re unique in the state,” said Galen Menard, NCRA vice president of supply and trading.

On a typical day, NCRA trucks run routes all over the state and into Oklahoma, picking up oil from tanks near oil wells. They inject oil into the company’s pipeline network. It owns the Jayhawk pipeline that runs through southwest and north central Kansas.

The business structure isn’t a problem in driving efficiency, despite the semi-captive market, Menard said.

“We’ve got to be competitive,” he said. “They can look at prices, and if we’re high, they’ll go elsewhere.”

To stay competitive, the company is about to embark on a $550 million replacement of its coker unit. The unit processes dense asphalt-like crude oil so that about 70 percent of it can be reclaimed as gasoline and diesel oil, said Dave Balzer, assistant manager of operations.

The current unit reaches back to the 1950s.

NCRA is in the midst of engineering the project and will begin construction early next year. It expects to complete the project in 2015. The economic impact will be significant in the region.

Some of the equipment will be made in Kansas. And hundreds of contract workers will be needed to build the unit.

“They’ve got to stay somewhere,” Balzer said.

The refinery also recently agreed to pay $700,000 in penalties to the federal and state governments. As a part of the settlement, NCRA agreed to spend about $745,000 to buy emergency response equipment and services for citizens and emergency response agencies in McPherson County.

Fortunately for NCRA, the economics of the refinery have been good of late. Midwestern refineries have benefitted from significant growth in oil production in Canada and the Bakken Field in North Dakota and Montana. The refinery refines about 20,000 barrels a day of Canadian sour crude, which is high in sulfur, and is looking to expand that capacity.

The increased oil production in the central U.S. and Canada has caused a bottleneck at a pipeline hub at Cushing, Okla. That oversupply has presented a buying opportunity for Midwestern refineries. The result is a $16 per barrel difference between West Texas Intermediate crude, which is measured at Cushing, and the world price benchmark Brent Crude.

NCRA saw its sales rise 20 percent in the fiscal year that ended Aug. 31, from $2.8 billion to $3.4 billion as oil prices rose globally. During the same time frame, its profits tripled. Net income rose from $124 million in 2010 and $378 million in 2011.

The Seaway pipeline, with runs between Cushing and the Gulf coast, had been carrying refined product north. It was reversed, and opened Saturday. It is expected initially to carry 150,000 barrels a day.

The plan is for the pipeline eventually to carry up to 850,000 barrels a day. A piece of the controversial Keystone XL pipeline would also be built from Cushing to the Gulf.

If that changes the economics of the refinery, Menard said, well, that’s just part of the ups and downs of a volatile business.

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