N. Dakota oil, brought here, could help gas prices

BY JOHN COX Californian staff writer

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Last Updated Sunday, Apr 08 2012 11:53 AM

Something curious is happening here in the heart of California oil country.

A 26,000 barrel-a-day refinery on East Panama Lane is buying large amounts of crude from North Dakota and paying to have it hauled by train to Bakersfield, where it's turned into mostly gasoline and diesel for the California market.

That's like selling coals to Newcastle, as the British say. Surely the refinery could find raw material closer to home.

The ingenious part of Kern Oil & Refining Co.'s strategy is, the company turns a bigger profit using midcontinent crude than if it were buying roughly the same grade oil strictly in Kern County.

Strange though this may seem -- and people in the industry admit the situation is more than a little odd -- there's every reason to believe other refineries will soon follow Kern Oil & Refining's lead.

Oil marketer Bob Devine said more California refiners are gearing up to bring in midcontinent crude.

"I know that there are a number of people looking at it and looking at making arrangements," he said.

Depending how widespread the trend becomes, it could push down barrel prices for Kern County oil producers, and potentially lower prices at the pump. It could also reduce California's growing dependence on oil imported from the Middle East and South America.

A better price

Simple math is the driving force behind the shift, which appears to have begun in 2010. Math, that is, and a technology-fueled oil boom that has outpaced pipeline companies' ability to deliver oil to refining hubs.

Widespread use of hydraulic fracturing and directional drilling in what is called the Bakken formation have opened up vast oil reserves in and around North Dakota. The state's oil production has shot up to about 550,000 barrels a day, more than four times the volume achieved just five years ago, bringing it roughly even with California's production rate.

But while California's 2 million-barrel-a-day refining industry thirsts for oil, North Dakota is awash in it. Pipeline companies caught off guard by the boom are estimated to be at least a few years away from connecting Gulf coast refineries with the midcontinent.

In the meantime, a glut of Bakken crude has contributed to a historic price imbalance. At the end of March, oil from the Bakken was selling at about $92 a barrel. Heavy Kern County crude, meanwhile, was going for about $112 a barrel.

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