Article published Jan 6, 2008

Big plans in pipeline for little Great Falls refinery

By JO DEE BLACK

Tribune Business Writer

The future of an oil refinery established in Great Falls almost 80 years ago lies some 650 miles north in the oil sands of Alberta.

The future of one of the smallest players tapping into that large reserve, second only to those in Saudi Arabia, depends on the Great Falls refining company on the north shore of the Missouri River, one of the smallest in North America.

Connacher Oil and Gas, a young Calgary-based company, bought Montana Refining Co. from Texas-based Holly Corp. 18 months ago.

"It's the closest refinery in the United States to the oil sands," said Cameron Todd, vice president of refining and marketing for Connacher. "It helps mitigate our risk (in the oil sands)."

Connacher bills itself as the little guy in a big boy's game — the Alberta oil sands.

The oil sands contain bitumen, molasses-like oil that needs to be heated to be extracted. In 2005, oil companies invested $10 billion in oil sands projects, which produced 966,000 barrels of oil a day, according to the Alberta government's energy department.

Connacher officials expect to be responsible for about 1 percent of that production — 10,000 barrels a day — by this time next year.

The company focuses on being efficient with its resources since it doesn't have the advantages of larger companies, such as being able to buy resources in bulk, Todd said.

Connacher is also focused on becoming fully integrated — capable of both extracting and refining heavy oil. Natural gas is used to extract heavy oil, and Connacher owns natural gas production too.

That business philosophy is one of the reasons Montana Refining Co. attracted Connacher's attention.

The refinery has the capacity to handle 10,000 barrels of oil a day, making it one of the smallest refineries in the country.

"But this refinery can handle a very nasty barrel of crude oil," Todd said.

He uses the term "nasty" for heavy oil, because it doesn't flow easily like oil extracted from traditional wells.

Phillips Petroleum Co. bought the refinery in the late 1940s and used the site for several pilot projects. Those projects provide the refinery with unique heavy-oil-processing capabilities today, including its ability to make asphalt to buyers' specifications. For example, Montana Refining Co. was a primary supplier of asphalt for the Great Falls International Airport's recent runway upgrade.

Alberta's oil sands production is taxing North America's heavy-oil processing capacity, so it sells at a discounted price when compared with conventional light sweet crude.

Heavy oil currently sells for about $45 to $50 a barrel, while light sweet crude is getting almost $100 a barrel.

When the difference between the prices of the two products is wide, as it is now, the Great Falls refinery is more profitable. That's because the lower raw-product cost allows the refinery to retain more of the selling price, in this case up to about $30 a barrel.

"If the discount is narrower, the oil sands project does well," Todd said, since heavy oil is selling at a higher price.

The oil extracted from Connacher's oil sands project isn't the same oil being processed at Montana Refining Co. But by offsetting the oil sands production with an equal amount of refining capacity, Connacher mitigates the risks associated with swings in the market price of heavy oil.

Montana Refining Co. was established in the late 1920s. At the time, the refinery was located outside the city limits on the shore of the Missouri River, along dirt roads with access to plenty of water. The Anaconda Co. metal refinery was not far away.

Today, the oil refinery is sandwiched between one of the city's busiest shopping centers, Wal-Mart, and the River's Edge Trail.

It's a location the new owners say they are mindful of as they prepare for the future.

The oil sands are forecasted to increase production more than three-fold to 3 million barrels of oil a day by 2020, reaching 5 million barrels per day by 2030.

Connacher's goal is to grow production to 53,000 barrels a day by 2014. That goal includes production in its current location in the oil sands, as well as from increased exploration elsewhere.

That means Connacher needs to expand its refining capacity, and the Montana Refining Co. is on the short list of facilities it's looking at to reach that goal.

The refinery sits on 60 acres, seven of which are used for oil processing. There's open space on the property for the refining capacity to expand. There also are asphalt storage tanks, which are used seasonally and can be relocated off site, Todd said.

Connacher is weighing a 15,000-barrel-per-day expansion at the Great Falls refinery against other options, including a refinery in Canada and other U.S. sites.

There have been preliminary discussions — mostly fact finding inquiries — with the Montana Department of Environmental Quality about expansion permits.

"We would consider an upgrade of that capacity as a large project, a major source modification," said Vickie Walsh of the DEQ. "There will be opportunity for public participation in the permitting process."

Meanwhile, the facility is undergoing long-awaited upgrades under its new ownership.

A $2.5 million project upgraded the boiler fuel system to reduce sulfur emissions.

Wastewater is now treated in an enclosed system rather than ponds — an upgrade costing $2 million.

Efficiency upgrades to reduce production bottlenecks cost another $4 million.

The scale to weigh trucks hauling asphalt is being relocated from across the street to inside the main gate to reduce traffic congestion. A new asphalt holding tank also is under construction.

Two other tanks under construction will house ultra-low sulfur diesel, a new federal requirement for American refineries. The ultra-low sulfur fuels, which contain 15 parts per million of sulfur compared with the 500 parts per million for other diesel products, need to be completely segregated from other refinery products.

The most capital, $20 million, is slated to be spent in 2008 to increase Montana Refining Co.'s hydrogen plant capabilities to 5 million cubic feet.

"Hydrogen is used in the process to strip the sulfur out of heavy oil," Todd said.

It's the sulfur in the oil and sulfur dioxide in the exhaust gas that creates the distinctive, nose-crinkling odor at the refinery.

Todd said that odor should be less noticeable, or at least not as imposing, as it was 18 months ago.

Federal rules that took effect a year ago reduced the amount of sulfur emissions allowed.

In 2006, the refinery's estimated sulfur dioxide emission was 774 tons, said Robert Gallagher, a DEQ environmental engineer.

"Although the actual emission inventory data from production during 2007 has not been collected yet by the DEQ, MRC should have significantly lower emissions of sulfur dioxide because federally mandated pollution-control devices have been added at the facility," he said.

Montana Refining Co.'s quarterly reports estimate the sulfur dioxide emissions for the first nine months of 2007 at 6.12 tons. Emissions for all of 2007 will be calculated by late-February.

"My goal is to keep getting lower and lower when it comes to emissions," Todd said.

One of the most visible changes at the refinery will take place on the perimeter of the operation.

Estimates are being gathered on the cost to replace the current concrete barrier that runs along the fence on Smelter Avenue and 10th Street North with an eight-foot-high, architectural concrete fence.

"It's the kind used in housing developments," said Dexter Busby, Montana Refining Co.'s environmental manager. That project will be tackled if the estimates are affordable.

Another job intended to improve the refinery's aesthetics on the southern side is a sure thing.

The project isn't finalized, but will include irrigation and new vegetation along the River's Edge Trail.

A dirt lot across 10th Street North from the refinery is due for reclamation work intended to stop sediment from washing into the storm drains and eventually into the river.

The cost estimate is about $300,000, and part of the funding may come from a fine Montana Refining Co. will pay for past emission violations.

"Most of those violations occurred under the previous ownership," said Chad Anderson of the DEQ. "Others were the result of that owner's delay in installing catalysts and other equipment to comply with new federal sulfur emission restrictions."

The DEQ allows fines to be applied to supplemental environmental projects if they do things such as improve the environment or reduce pollution.

"It's a cost-share program," Anderson said. "Anywhere from 10 percent up to 80 percent of a project can be paid for from funds from a (DEQ) fine."

The capital injection and infrastructure improvements are a welcomed part of the new ownership, said Fred Janicke president of Local 491 United Steelworkers, which represents the union workers at Montana Refining Co. He's been at the refinery for almost 24 years.

"The oil business is year-to-year. It's boom or bust," he said. "They (Connacher) have long-range plans for the plant, and that's great. They are putting money into this site, and that's real good to see."