North Dakota legislators mull state oil refinery

By Janet McGurty

NEW YORK, Jan 23 (Reuters) - North Dakota legislators are studying building the country's only state-run oil refinery to steady fuel prices and boost demand for locally produced crude.

Sandwiched between Minnesota and Montana along the Canadian border, the snowy farming state is the No. 8 U.S. oil producer thanks to advances which have enabled companies to extract crude oil from the giant Bakken Shale formation.

A group of Democratic North Dakota legislators is now looking into a state-run plant to refine oil from the deposit, where companies such as Marathon Oil Corp (MRO.N) produce about 130,000 barrels per day of light, sweet oil.

"In 2006, when we started to hit this formation, we had 30,000 barrels per day which had nowhere to go. Both the refinery and the pipelines were full," said Shirley Meyer, a member of the state's house of representatives, adding a study resolution was introduced during the house's last session.

North Dakota currently has just one refinery, Tesoro Petroleum Corp's (TSO.N) 58,000 barrel-per-day plant in Mandan, which uses less than half the state's oil output and falls short of meeting the state's roughly 70,000 bpd of fuel demand.

Options to ship the North Dakota crude out of state have been limited by space constraints along the Enbridge pipeline, which has forced producers to discount the selling price for the state's oil.

"That is one of the reasons we formed this committee," said Meyer, adding that refinery could be built as a public-private partnership or be fully-state vested like North Dakota's state-owned bank and mill.

The refinery could also help alleviate occasional shortages of No. 1 diesel, a crucial fuel to farmers in the agricultural state but which buyers had trouble finding in early January.

"In North Dakota, if you are a farmer and you can't get No. 1 diesel you are in trouble," said Meyer. "It was a huge wake-up call to a lot of North Dakotans."

The No. 1 diesel fuel, used in winter because it does not gel up, powers virtually every kind of farm equipment from combines to pickup trucks, Meyer said.

Meyer said that public response to the initial announcement of the Democratic task force was very positive, with callers to a local radio station supporting the idea by a margin of 10 to 1.

"We have a state bank and mill and elevator. It's nothing but a positive for the state," she said. "Hopefully, we can pull this off."

Republican Gov. John Hoeven supports building new refining capacity but is looking for a private-sector facility with state support through incentives.

"We support additional refinery capacity," said Don Canton, a spokesman for the governor. "But $2 to $3 billion for a small to medium refinery is a huge amount of money with a high risk." (Reporting by Janet McGurty; Editing by Matthew Robinson and Matthew Lewis)