No one has built an oil refinery in the United States for 30 years. But some say eastern Utah's most promising resource is being held hostage by powerful Wasatch Front refineries, and support is building for a facility dedicated to home-grown product in this part of the state.
Utah lawmakers are looking closely at a proposal to build a small refinery on the Ute Indian Reservation — and studying the underlying David-and-Goliath market issues that may make it necessary.
"I have a number of questions that still need to be answered," says Utah Senate President John Valentine. "But the need is obvious and real."
Others, including state officials, say the near-stalemate is simply the way the market works.
The controversy, which has been simmering for the past year, pits the five Salt Lake-area refineries against about a dozen smaller Utah oil producers.
Salt Lake-area refineries have shunned a type of crude oil called "black wax," the type drawn from the state's Uinta Basin, in favor of a cheaper crude imported from Canada. In addition, refineries are paying less and less for the Utah oil.
"There is a clear problem with the existing refinery capacity taking the additional production that we can do in Utah," said Valentine, R-Orem.
The result is a refinery plan backed by most oil producers in eastern Utah that is now being publicly promoted by the Ute Tribe and John Jurrius, a Texas oil man supervising the tribe's finances and oil interests.
"We are looking for some light at the end of the tunnel," Jurrius said. "We have absolutely got to do something — and we've got to have some help."
The issue sets up the age-old argument about market forces versus the state's responsibility to bolster economic development, make good use of natural resources and support local businesses.
The Deseret Morning News made numerous requests for interviews to individual refineries and to Lee Peacock, head of the Utah Petroleum Association. None of the requests was acknowledged.
No place to go
"Rocky Mountain oil refineries are enjoying record profit margins, while local oil and gas exploration companies are experiencing 30 percent reductions in their crude oil prices from the Salt Lake refineries, if the refineries will even accept black wax production," according to a report written by local oil producers.
Though well suited for making gasoline and diesel fuel, the black wax crude produced in the Uinta Basin has a consistency that makes it difficult to transport. It can travel only about four hours in an insulated truck before it solidifies. Producers in the basin can't ship it farther than Salt Lake City.
Salt Lake refineries currently accept about 17,000 barrels of black wax crude a day, which amounts to 20 percent of the available capacity for that product, according to Utah oil producers. Essentially, producers say, they could supply five times as much if refineries weren't buying cheaper non-Utah crude.
"We are building this huge inventory, and we are having to shut wells," Jurrius said of the eastern Utah oil producers. "That's bad for the state."
He doesn't want to direct blame at the refineries, but Jurrius said the trouble is "economically tearing our head off.
"If they want to use their capacity in a different way, that's fine, but it's still a huge problem for the state, and the state should be saying, 'Let's solve this problem."'
U.S. Rep. Jim Matheson, D-Utah, said it is "incredibly frustrating" to see high gas prices while a Utah resource like black wax crude sits with no place to send it.
"I think we need more refinery capacity," he said. "If we had that, it would create price relief for Utah consumers."
There are currently 132 refineries in the country. Hurricane Katrina wiped out 20 percent of the nation's refining capacity.
Rep. Joe Barton, a Texas Republican, has led a push in Congress to fast-track refinery construction. Federal Election Commission documents show Jurrius is a contributor to Barton's political campaign.
President Bush, on the heels of Hurricane Katrina, also urged more refinery construction.
But with property, permitting, environmental and transportation concerns to consider, actually fostering that type of construction is arduous.
Although more than 200 refineries have closed nationwide in the past 25 years, capacity has increased through expanded facilities. Matheson said that might be a better way to go than building entirely new refineries. He co-sponsored legislation he believes would encourage investment by allowing refineries to write-off capital expenses in one year rather than over time, giving them a tax benefit in that year. It has not come up for a vote.
Energizing the economy
When Jurrius moved to eastern Utah in 2000, he remembers driving past the row of businesses that supply equipment and support to the oil and gas industry. All was quiet. In the past year, business has been booming in the basin. Companies can't find enough workers, and the hub communities of Vernal and Roosevelt can't build houses fast enough.
"What drives that economy?" Jurrius asks. "It's not tourism. It's the energy business."
Certainly oil production is part of the state's booming economy, said Gayle McKeachnie, the governor's rural affairs adviser. "If it goes down, it will affect state revenue, local tax valuation and all of that."
A group of Uinta Basin oil producers will meet with Gov. Jon M. Huntsman Jr. next month to "explain their dilemma," McKeachnie said. "We're trying to find out where the truth is and what might be done," he said.
Though the decision to increase refining capacity lies with private industry, McKeachnie said that if it affects the price of gasoline, the state "might do something to encourage an expansion or building." Regulation, taxes or economic development incentives could be considered, he said. No one has yet asked for any of those things.
What Jurrius and others want is state support of federal legislation that could speed up refinery construction on Ute land.
Otherwise, this newly energized economy of eastern Utah could falter, he and others say.
State Sen. Beverly Evans, who has represented Uinta Basin residents for 20 years, is worried about members of her community.
"They are losing money," she said. "Because they just don't have anywhere to take their product, they aren't producing nearly as much as they could."
Outside competition
Some companies are actually moving out and shutting down wells.
Today, more than 400,000 barrels of Newfield Exploration oil is in storage. The company decided not to sell for the low price Salt Lake refineries are offering. The Houston-based company announced last week that it closed 165 wells.
Pulling out two drilling rigs capable of sinking 600 wells over five years would amount to the loss of an estimated 900 million barrels of oil. Federal, state and local governments would be out some $93 million in taxes and royalties, according to Jurrius' estimates.
"It's going to shut off the oil production engine if we aren't careful," Valentine said.
State officials have discussed tar sands and oil shale. "The trouble is we don't have the refinery capacity to produce what we have now," he said. "I think it's going to be a major impediment to future production."
Although Utah's refiners and their representatives did not respond to inquiries for this story, according to a document produced by Big West Oil Co., also known as Flying J, in North Salt Lake, the decision to buy or not buy black wax crude is an economic one.
It says there currently is a "surplus of black wax crude in the Uinta Basin because Utah refiners have other more economically attractive options."
What refineries opt for is bargain-priced Canadian crude oil, which started coming across the border about two years ago.
"That trickle has become a torrent, and it has disrupted the market," said Duane Zavadil, vice president for government and regulatory affairs at Bill Barrett Corp., a Denver-based oil and gas company.
"I think it's a long-term trend. As long as there's capacity, the Canadians, where they can compete with an advantage, are going to soak that up."
Oil refineries, he said, aren't doing anything illegal.
"The refiners aren't compelled to give us top dollar" for Uinta Basin black wax, Zavadil said. "They're simply making as much money as possible."
The only way for local oil producers to compete, he said, would be with a refinery dedicated to black wax.
"We hope something happens," he said. "We have some very difficult decisions to make."
Barrett, which produces up to 1,000 barrels a day, and its partners in the Uinta Basin have scaled back exploration and development to focus on more profitable sites.
"When we see a situation like that in Utah, we just have to go somewhere else," Zavadil said.
Mineral landowners in the basin, including the Ute Tribe, which draws 65 percent of its income from black wax production, can't pick up and leave.
"They just see their lifeblood draining away," Zavadil said. "We don't see a solution to this issue. We see a worsening condition of the displacement of the domestic product."
A muffled boom?
Cameron Cuch, a member of the Ute Tribe and an analyst for Ute Energy, says a pullout of rigs will put the community on the economic skids.
The state and the governor touted a platform to bring big business to Salt Lake City and the Wasatch Front, Cuch said. But a great deal of business takes place off the Front, and particularly in the Uinta Basin.
McKeachnie noted that The Church of Jesus Christ of Latter-day Saints plans to spend more than $1 billion making over downtown Salt Lake City.
"Oil and gas companies spend that every year," he said. "That's a big boost to our economy."
But spending could be slashed if there aren't markets for the oil.
"That could be cut drastically if they aren't able to refine their product and have to discount it," Cuch said. "There's no benefit to the consumer."
Furthermore, lost wages, local business investment and sales and individual income-tax revenues could cost the state and Uintah and Duchesne counties an estimated $231.5 million, according to oil producers' estimates.
"I think this story needs to be told over and over," Evans said. "Because people, unless they live out there, do not understand the issues and the lack of capacity."
Market forces
Two weeks ago, about a dozen eastern Utah oil companies met in Denver with members of Huntsman's energy policy staff and the state Division of Oil, Gas and Mining.
Producers laid out their concerns, argued their case and talked about the proposed refinery. The response from the governor's energy policy adviser, Laura Nelson, was underwhelming, Jurrius said.
"We were told we could walk over to the DEQ (Utah Department of Environmental Quality) and get a permit for a refinery," he said. "And the state has a higher fiduciary responsibility than that."
John Baza, director of the oil and gas division, attended the Denver meeting. Although Nelson had a family emergency this week and was unavailable to comment for this story, Baza said she was clear about her thoughts on a new refinery.
"If in fact the marketplace requires that a refinery be built ... if a refinery is reasonable and appropriate, then the state stands ready to do the permitting and the processing and the regulatory part of that to help achieve that goal," Baza said.
Jurrius is looking for sturdier support than that and said that Huntsman promised to protect rural economic development.
"If I am leading this state, if I am an advocate for what's happening and development inside this state, then something has to be done here," Jurrius said.
Baza says his job is not energy policy but rather supervising well permits and production data bases. "But I doubt there is anyone at state government that is going to be looking seriously at pushing for a refinery."
Besides, Baza said, the market is working as it should. "When I hear people say, 'Our drilling is going to be curtailed because we can't get the value for our product in Salt Lake City ... that represents an appropriate market response."
State incentives or tariffs against imports haven't worked here in the past, he said.
"It may benefit a specific stakeholder interest for a brief period of time, but it will cost another stakeholder's interest in the long run," he said.
"If the state's worried about about balancing all of that, we have to be very concerned about favoring, say, a producing industry over a refinery industry."
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