Dec 17, 2007 - 04:08:58 CST
In the early 20th century, North Dakota farmers felt they were being abused by the moneyed interests in Minneapolis and Eastern cities. While the farmers worked their fields, they watched bankers and millers reap the real profits from afar.Their solution: Petition the government to start a state-owned bank and a state-owned mill, to give local farmers a fairer shake.
Some 85 years later, gubernatorial candidate Tim Mathern is pitching a similar solution as the cure to a summer of soaring gasoline prices. Mathern, a Democratic state senator from Fargo, has pledged to spearhead the construction of a state oil refinery if he's elected next fall.
"This would be a big, bold step to help us use our oil resources to greater benefit North Dakota," he said.
Such an undertaking would make North Dakota's state government one of the first entities to act on growing national concern over a lack of refining. However, building the nation's first government-owned refinery could cost the state as much as its $2.5 billion biennial general fund budget and take upward of 10 years.
Mathern said the idea would alleviate a similar situation to that faced by farmers in the early 20th century. Today, he said, North Dakota oil producers have to ship their crude out of state - where they face a price penalty because of the difficulty of pipeline transportation - while consumers here are paying some of the highest prices in the nation for gasoline.
Mathern's comments come after a period from June to October where gas prices in North Dakota ran as much as 14 percent above the national average, according to statistics compiled from gasbuddy.com.
A state-owned refinery could prevent a repeat of this summer, he said.
But building one would be anything but easy. And it definitely wouldn't be cheap.
Because a refinery hasn't been built in the U.S. for more than 30 years, the pricing of such a project remains in the realm of estimates.
One estimate from API -formerly known as the American Petroleum Institute - pegs the cost at $24,000 per daily barrel of production. Using these numbers, Tesoro's 60,000-barrel Mandan refinery would cost $1.44 billion if it were built today.
But existing project proposals suggest it may be even more expensive to build a refinery that is big enough to be profitable because of today's high building costs.
In Elk Point, S.D., the private Dallas energy firm Hyperion Resources wants to build a giant 400,000-barrel refinery at an estimated cost of $8 billion. In Yuma, Ariz., a group called Arizona Clean Fuels wants to build a 150,000-barrel-per-day refinery that it estimates will cost $3.5 billion.
The Arizona project has been in the works for eight years, but construction has not begun. Indeed, API refining issues manager Cindy Schild said construction of any new U.S. refinery would take at least 10 years, even if everything from permitting to securing an oil supply goes smoothly.
Mathern acknowledges that a state refinery would be a much larger project than anything attempted in the past, adding that the state may want to see an oil and gas company with refinery expertise as a minority partner. But he said big thinking needs to prevail.
"We have a history of taking on big projects," he said, citing the state bank and state mill.
Don Larson, who's running the re-election campaign of Republican Gov. John Hoeven, said Hoeven thinks it would be more efficient to develop the state's energy resources by encouraging private sector investment.
"If the private sector is willing to make an investment, then it's the right approach for the government to simply help that along," Larson said.
He said efforts such as Hoeven's Empower North Dakota Program and the state Oil and Gas Research Council are already accomplishing this task.
In October, the state Industrial Commission awarded $40,000 in Oil and Gas Research Council funds to study the feasibility of building a refinery in Williston. Mel Falcon, owner of a Williston water business, formed Northwest Refining Inc. in 2006 to explore the idea.
The governor's office also has been working with the Three Affiliated Tribes on its proposal to build a small 15,000-barrel per day refinery on the Fort Berthold Indian Reservation and with American Lignite Energy on a potential 30,000-barrel per day coal-to-gasoline conversion plant.
But would more refining capacity - either public or private - really lower gas prices in North Dakota?
Critics of Mathern's plan point to the fact that Tesoro's Mandan refinery already produces more gasoline than the state consumes.
And the lag time of 10 years or more means it could come online in a drastically different gas price environment than the one North Dakotans are seeing today.
"A new refinery is certainly not a solution in the short-term," said Schild, of the API.
She said a complex and ever-changing global marketplace of drillers, refiners and retail sellers are responsible for getting gasoline into your automobile. Inserting a government-owned entity into this system could disrupt it in unforeseen ways and actually lead to higher prices for North Dakota consumers, she said.
Paul Sankey, an oil and gas equity analyst with Deutsche Bank Securities in New York, also expressed doubt about the economic viability of a state-run refinery. While it could lower pump prices, the net effect for North Dakota taxpayers probably will be negative because of the historical inefficiency of government-run operations, he said.
Sankey also questioned the wisdom of building in an area that already refines more gasoline than it consumes and of using a long-term project to answer recent concerns over high gas prices.
"Governments tend to react right when the problem is at its worst and make it worse," he said.
If the state were to build a refinery, it likely would be managed by the Industrial Commission. The commission - made up of Hoeven, Attorney General Wayne Stenehjem and Agriculture Commissioner Roger Johnson - serves as the board of directors for the state bank and state mill.
Johnson said the Industrial Commission's successful stewardship of these institutions show that Wall Street and the oil industry are wrong in saying government can't manage a business.
He said a state refinery would be very similar to the mill. It's being conceived at a time when an industry with a few out-of-state players - milling in the early 1900s, oil today - drives down the price that North Dakotans receive for the commodities they produce and drives up the price for the finished products they buy.
"I think we've got a good track record through good times and tough times," Johnson said. "I don't see why a state refinery would be any different."
(Reach reporter Jonathan Rivoli at 223-8482 or jonathan.rivoli@bismarcktribune.com)
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