Oil Sands Truth: Shut Down the Tar Sands

2 new (tar sands) oil refinery plans in the pipeline (Arizona, South Dakota)

2 new oil refinery plans in the pipeline
Dirk Lammers, Associated Press

(10-12) 04:00 PDT Elk Point, S.D. --

The United States hasn't built an oil refinery on a new site in more than 30 years, but a pair of projects eyeing out-of-the way corners of South Dakota and Arizona are slowly working their way up to the big leagues.

The journeyman is Arizona Clean Fuels Yuma, a $3 billion, 150,000-barrel-a-day refinery first pitched for the middle of the Arizona desert more than a decade ago. Officials who have worked through years of siting, permitting and financing delays are now hoping to have the plant up and running by 2012.

The rookie is the Hyperion Energy Center, a $10 billion, 400,000-barrel-a-day facility looking at a tract of pristine farmland in southeast South Dakota for operation in 2014.

Both want to process thick, high-sulfur crude extracted from the Alberta oil sands of northern Canada into gasoline and diesel, but they face an uphill battle as the refining industry typically grows through expansion.

"It's been more cost-effective to expand than to build new, and it makes sense because you have a lot of the existing infrastructure in place," said Cindy Schild, refining issues manager for the American Petroleum Institute.

But the shift toward tar sands oil could create a niche opportunity - especially at a Midwest site reasonably close to the Canadian border - to streamline the movement of crude and refined products, said Mary Novak, managing director of energy services for Global Insight.

"And it's probably a very limited opportunity, which is why like one refinery might make it," Novak said.

Dallas-based Hyperion Resources found its opportunity in southeast South Dakota, which is close to major markets, rail and highway transport and an abundant water source, the Missouri River. The privately owned company also touts South Dakota's "excellent business climate."

Hyperion, with the help of South Dakota economic development officials, spent about a year courting support from city, county and business leaders as it sought to have Union County rezone nearly 3,300 acres of farmland for its facility.

Realizing an oil refinery would face strong "not in my backyard" opposition from the rural precincts around the site, proponents campaigned hard for a June referendum in the state's more populated southeastern tip by touting the promise of 1,800 permanent jobs.

The argument resonated well in North Sioux City, once the corporate and manufacturing home to computer-maker Gateway Inc. until an industrywide slump in the early 2000s led to significant job cuts. Voters there approved the rezoning request by a 73 percent margin, and support was even higher, 81 percent, around the wealthy planned community of Dakota Dunes.

Those numbers led Hyperion to a 58 percent election-night victory, and the company now has its sights set on final approval of an air quality permit application given initial approval by the South Dakota Department of Environment and Natural Resources.

Preston Phillips, a Hyperion executive, said that its application contains many self-imposed restrictions and that the refinery will rank among the cleanest and most environmentally friendly in the world.

Getting that permit would be a huge step, Novak said, as local support and an air quality permit are a refinery project's biggest hurdles.

"The rest of the permitting process is probably a little bit easier," she said.

That's typically true, said Denny Larson, a California-based environmental advocate working to clean up U.S. oil refineries, but he expects the Hyperion project to receive more federal scrutiny than usual.

In permitting a refinery, a state agency must require certain Environmental Protection Agency floor protections as required under the federal Clean Air Act, and Larson believes that process is being rushed.

He said it's no accident Hyperion picked South Dakota, which has never had a refinery nor developed a regulatory structure.

"Expect things to go rapidly at the South Dakota level, but then there's going to be challenges and lawsuits that are going to slow things down," Larson said.

Kyrik Rombough, natural resources engineering director for the state environmental agency, said although South Dakota has never permitted an oil refinery, it regularly deals with emission and air toxin issues. He said that, as with any new industry seeking a permit, it just takes a little more time to research and get familiar with terminology and operations.

"We have engineers and scientists on staff that can review it," Rombough said. "They understand the concepts. It just takes a little more time to get familiar with that and then move forward."

If Hyperion is able to secure the final air quality permit, the company would then turn its attention to shoring up financing for the $10 billion project.

It's like a home builder who wants to borrow money to put up a house - a bank's not going to lend the cash until the builder can produce a building permit, Phillips said.

"We can't finalize our financing until we have those necessary approvals," he said. "And the two critical ones are the local zoning and the air quality permit."

But it's important not to ignore the pink elephant in the room - financing, said Ian Calkins, spokesman for Arizona Clean Fuels Yuma.

The Arizona company continues to negotiate with two potential major funders as it enters a design and engineering phase that will take a tremendous amount of investment capital. Even if the economics of the project make sense, investors need to be in it for the long haul, Calkins said.

"There is money out there. However, most of the money out there is seeking short-term financial gain," he said. "We've gotten to the point where investors want to know what's happening in the next quarter.

"A project like this, when you're anywhere from five to eight years out, it becomes very difficult to gain investor approval."

Phillips said while Hyperion is focused on securing final approval of the air quality permit, it is also working on financing, marketing, crude supply contracts and pipeline routes.

"It is more than a minimum economic scale to build a dedicated pipeline so that we wouldn't have to be relying on any third-party pipeline project for the success of the refinery," he said.

The Arizona refinery also would use Canadian crude, but it would take a detour through Mexico. Plans now call for shipping the oil down the Pacific Ocean to an offshore port off the Baja peninsula, then piping it through Mexico into Arizona.

The Yuma refinery already has received its state air quality permit, but the document will have to be updated and reissued because the company recently shifted its location two miles east to avoid a tribal land lawsuit.

Industry officials estimate the Canadian oil sands could yield as much as 175 billion barrels of oil, which would make the country second only to Saudi Arabia in crude oil reserves.

Oil sands production in western Canada has grown fourfold since 1990 and exceeded 1.2 million barrels a day last year, according to the Canadian Association of Petroleum Producers. That could grow to 3 million barrels a day by 2015.

Although no new refinery has been built in the U.S. since 1976, the industry has continued to increase capacity through plant expansion.

"If you look at it over time, too, we've been adding the equivalent of a 200,000-barrel-a-day refinery for the past 10 years, and we'll continue to do that going to forward," Schild said. "So whether that's done in expansion or new, is really just up to the company and what might make sense."

Marathon Oil Corp. in June received approval to begin a $1.9 billion expansion of its plant in southwest Detroit, allowing it to process heavier Canadian crude and increasing its capacity to 115,000 barrels per day.

Richmond officials in July approved a Chevron Corp. plan to upgrade equipment at its refinery that would will allow the company to refine a wider range of oil.

Not everyone is happy about the shift to the dirtier Canadian oil supply.

Three environmental groups in early September filed a lawsuit claiming the California city's environmental review concealed that the project would lead to more air pollution and higher risks for major accidents and oil spills.

In Indiana, an environmental group filed a lawsuit in July asking a federal judge to halt BP's $3.8 billion expansion of its refinery along Lake Michigan. BP said it would go ahead with the expansion plan despite the legal challenge.

Larson said turning bottom-of-the-barrel sludge into gas and jet fuel is a dirty, intensive process.

"So in the equation, there is no way around it that versus a cleaner slate of crude, you are going to produce more pollution. You just can't get around that," Larson said. "So if you want a cleaner refinery, you would start with the cleanest crude stock you could get."

Both Hyperion and Arizona Clean Fuels Yuma say their refineries will emit far fewer pollutants than older refineries, as none has been built from the ground up using the latest technology.

Calkins said some existing facilities have not sought expansion because they don't want to self-impose costly upgrades.

"You find that a lot of the existing oil refineries don't incorporate new environmental technologies unless they want to expand," Calkins said. "Because when an expansion is sought, that then triggers a whole new set of environmental laws that are then required on that facility for its existing emissions control equipment."


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