Oil-by-rail fight in Washington threatens California gasoline prices

VANCOUVER Washington Mon Jul 21, 2014 11:51am EDT

People fill up their tanks with gasoline at a Costco Gas Station in Carlsbad, California October 5, 2012.  REUTERS/Mike Blake

People fill up their tanks with gasoline at a Costco Gas Station in Carlsbad, California October 5, 2012.

Credit: Reuters/Mike Blake

Related Topics

VANCOUVER Washington (Reuters) - California's chance to keep a lid on some of the nation's highest gas prices and join in the spoils of a domestic oil production boom is threatened by quickly growing opposition to a rail terminal in Washington state.

The hitch in the long-planned project by Tesoro Corp exemplifies growing problems for moving crude oil on trains around the country after a string of fiery rail crashes.

While the proposed Keystone XL pipeline is the marquee battle between pump prices and environmentalist concerns, crude-by-rail is a growing issue and has a more immediate effect on domestic consumers and refiners. The cost of delays from the crude-by-oil fight may be steepest in California, an isolated market increasingly dependent on foreign oil.

Tesoro's project aims by mid-2015 to start sending up to 360,000 barrels per day of North American crude, including North Dakota Bakken and Canadian heavy, to the rail port, where all or most of the oil would ship out on tankers and barges to California refineries.

That oil costs up to 25 percent less than some foreign barrels, and the Tesoro project could replace about a fifth of California's crude -- around 40 percent of its imports.

Other states have slashed costs by using railroads to tap cheap crudes from the booming fields of North Dakota and Canada, but California refineries still depend on arguably the country's most expensive crude, because there are few pipelines connecting it to the rest of the country.

Tesoro executives, who want to send cheaper crudes to their Carson refinery near Los Angeles as well as to other refiners, say they remain confident the project will go through. Others aren't so optimistic.

"If you had asked me eight months ago if this would happen, I'd have said yes," said Mark Luitwieler, co-owner of Houston-based commodity terminal and railroad logistics company Peaker Energy. "Today, there’s a lot of hair on that one."

"ADVANTAGED" CRUDE

California drivers recently paid $4.09 per gallon compared to $3.47 in Texas, according to U.S. Energy Information Agency data, a reflection of the extra expense of making California's boutique blend of less-polluting fuel and higher crude costs.

Refiners in California say that cheaper supplies from the middle of the country will help fight rising costs. Greg Garland, chief executive of independent refiner Phillips 66, in April said getting such "advantaged" crudes was top priority in California.

Tesoro's rail-to-ship option is, in essence, a continental-scale workaround to sending crude directly to California. Obtaining permits to build crude offloading facilities in the Golden State has proven tough for companies including Alon USA Energy and Valero Energy Corp, which in March withdrew an application for a project in the Wilmington area of Los Angeles.

Kinder Morgan Energy Partners started moving crude in February to a former ethanol rail terminal in Richmond, California. Planned volumes are a fraction of what Tesoro aims to bring through Washington, but in any case opponents are suing to halt operations pending an environmental review.

Communities nationwide, and not just ones near refineries, are voicing concerns about accidents as crude-by-rail grows nationwide, said Denny Larson, executive director of Global Community Monitor in San Francisco.

"This has become a uniter," he said. "They realize they don't have to have a refinery to be impacted."

ESCALATING COSTS

Without the railport in Vancouver, Washington, the California refineries would have to buy more foreign oil as production from their traditional, less expensive sources in Alaska and Canada decline.

Though the United States is enjoying greater energy independence, 51 percent of the 1.7 million barrels of crude processed daily in California is imported, mostly from the Middle East, South America and Africa, according to the California Energy Commission.

Imported volumes have risen 17 percentage points over the last decade.

As U.S. benchmark prices crude costs around $100 a barrel, annual purchases in California may total some $62 billion. Billions could be saved as inland North American crudes often sell at discounts of 15 to 25 percent to the U.S. benchmark and the main European rate, Brent, which is more expensive.

There are no easy alternatives to the railport.

New pipelines over the U.S. Rockies or crossing Canada to ports in British Columbia would cost billions of dollars and generate a whole new wave of environmental opposition.

Developing new oil patches in California is unpopular and technologically difficult.

While the California Energy Commission projects that crude delivered by rail could rise to 25 percent of California's demand by 2016 from about 1 percent now, oil industry representatives point to a history of permitting problems on such projects.

Washington Governor Jay Inslee has the final say on the rail terminal, and he is waiting for analysis of the project to be done before speaking publicly, a spokesman said. But protests are growing. The Vancouver city council recently voted 5-2 against the Tesoro project, a non-binding signal.

City Council member Larry Smith, one of the five opponents,

said there were concerns about railcar security and whether local emergency responders could handle a spill or a crash.

The project has been delayed about six months to mid-2015 as Tesoro awaits word from the state on what the company needs to provide for an environmental impact study. That delay pushed costs to a range of $150 million to $190 million from $100 million.

Jared Larrabee, general manager of Savage Companies, Tesoro's partner on the project, said the companies have sought to ease concerns at some 100 community forums and will do more.

In the meantime, much of the Tesoro project is ready to go. The Vancouver port beefed up its rail infrastructure, including a huge loop track now earmarked for Tesoro, in the mid-2000s to handle mile-long trains carrying grains and iron ore, said Todd Coleman, the port's executive director.

Tesoro said the project will bring about 120 permanent jobs.

But environmental and safety concerns keep growing: Gov. Inslee has asked the state Department of Ecology to analyze oil-by-rail risks and develop spill response plans for Vancouver and nearby counties.

(Additional reporting by Rory Carroll in San Francisco; Editing by Terry Wade and Peter Henderson)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
To insure safety of railroad tanker cars, the US-DOT and the ICC must have all rail companies and others comply with the latest version of rail tank cars immediately. Safer tank cars have been around for a while but Owners have delayed switching out old unsafe tank cars because they don’t want to embed more money. Greed takes lives, once again.

Jul 21, 2014 1:10pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.