March 12, 2012 / 8:28 PM / 5 years ago

Tesoro CEO lifts volumes of Bakken rail project

5 Min Read

SAN DIEGO, Calif (Reuters) - Tesoro Corp's (TSO.N) Bakken crude rail shipping project will be able to transport more than first estimated to its refinery in Washington State by the end of 2012, and could increase even further in the future, Chief Executive Greg Goff said on Monday.

The $50 million project aims to cut Tesoro's use of Alaskan North Slope crude oil at its 120,000 barrels-per-day (bpd) refinery in Anacortes, Washington, while boosting shipments of North Dakota's Bakken crude to 40,000 bpd from the current 1,000 to 2,000 bpd.

The project had targeted shipping 30,000 barrels per day, but Tesoro ordered about 800 rail cars that can accommodate another 10,000 bpd, Goff said.

"Almost a year ago, we put in an order to have about 800 rail cars built. Those 800 rail cars were to accommodate 40,000 barrels per day of movement," Goff told Reuters in an interview at the annual meeting of the American Fuel and Petrochemical Manufacturers in San Diego, California.

Construction began on the unloading facility within the last month, and once built it will accommodate every-other-day rail shipments.

"We need to test the delivery system and how everything fits together," Goff said.

Depending on how well it works, the company can consider increasing shipments to once a day.

"Physically, if it works like we planned, you can go to every day," he said. "But you have to get the rail cars, and rail cars are in tight supply right now."

The project involves use of Tesoro's position in the booming Bakken shale oil play, where the company operates a crude oil gathering system, to expand crude supply at the refinery. Bakken crude is cheaper than ANS.

Goff said the ideal crude for Anacortes is Canadian, as it arrives more efficiently via the TransMountain Pipeline. But that pipeline is full, he said, but Bakken crude's higher discount to West Texas Intermediate makes it more cost effective than ANS even with rail shipping costs.

Goff also said Tesoro's $35 million expansion at its 58,000 bpd refinery in the heart of the Bakken play in Mandan, North Dakota, is on track to increase capacity by 10,000 bpd by the end of the second quarter this year.

He said the company is planning no further capacity expansions of the plant, as they would need "massive investments" and the Northern Tier market is "pretty well situated."

"For us, there isn't an opportunity there. It will be a finely balanced machine when all is said and done," he said.

Hawaii Refinery Sale

Other changes in Tesoro's portfolio include the company's decision to sell its 94,000 bpd Hawaii refinery and its associated logistics and storage systems. It is one of seven U.S. refineries on the block.

The company will solicit "as many interested parties as possible" and ask that they submit bids in an auction process, but Goff said it would be several months before Tesoro will be able to gauge the level of interest.

"It's not something people are clamoring for," he said.

The company is interested in acquisitions in the areas where Tesoro already operates, which encompass the Midwest, Rockies and West Coast regions of the United States. The company is not interested in expanding into the Gulf Coast or struggling East Coast regions, Goff said.

Since Goff took the helm of Tesoro nearly two years ago, he has focused on better connecting the dots between refining and marketing. A slew of deals to buy or contract with service stations near its operations is on target to give up to 85 percent of its output to secure, profitable, ratable channels, Goff said.

He said those channels include Tesoro's own gasoline stations, wholesale agreements or long-term contracts with customers the company supplies. That reduces dependence on selling products on the open market.

"In the past, the company was too dependent upon going to the open market, the spot market or just not having good secure customers," Goff said.

So any assets the company might have its eye on acquiring would have to fit into that integrated system that includes refineries with ready crude supply and largely locked up customers for products.

"The only refinery we have that doesn't have good crude supply is Hawaii," he said.

Reporting By Kristen Hays

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