The plan to build a massive oil import terminal in San Pedro was based on facts that, a few years ago, seemed incontrovertible: Oil production in California and the rest of the United States was falling, meaning refiners in the state would need to import more crude by ship from overseas.

But the North American oil boom of the past few years has made those facts either debatable or plain wrong. And that’s pushed Houston’s Plains All American Pipeline LP to scrap its plans for a $500 million oil terminal at the Port of Los Angeles that would have served foreign oil tankers.

In its quarterly earnings announcement earlier this month, the company said it had stopped work on the project. Executives cited a number of factors, from the economic downturn to permitting problems. But the biggest issue is the fundamental shift in where California may get its oil in the future. Instead of coming by ship from the Middle East, much of it could come by rail from the Middle West and other domestic areas.

With increased oil production in Texas and the Dakotas, California refineries could soon be importing oil from those regions, or even using more oil produced in the state, reducing or eliminating the need for a new terminal built to handle imports from the Middle East. Hence the company’s decision to halt the project.

“It sounds like a no-brainer for Plains,” said Rusty Braziel, president of Houston energy consultancy RBN Energy LLC. “L.A. basin refineries that are still importing a significant quantity of barrels from global markets, that can be displaced by good old U.S. crude from the West Texas Permian Basin. It’s on the cusp of happening.”

California’s oil supply has historically been cut off from the rest of the country. With no oil pipelines feeding into the state, refiners have had to rely on in-state wells or on oil imported through seaports. But Braziel and others said the rise of hydraulic fracturing or “fracking” has created a glut of relatively cheap domestic oil that refiners, including those in Southern California, are looking to tap. Fracking technology allows oil companies to extract oil and gas by pumping water and chemicals into rock formations at high pressure.

The oil from Texas and the Dakotas isn’t here yet, but a refinery in Washington state is already importing crude from the Dakotas by rail tanker cars. A refinery in Bakersfield plans to start doing the same next year. Executives from Houston oil storage and transportation company Kinder Morgan Energy Partners LP said last month that they might turn an existing natural gas pipeline that serves California into an oil pipeline that would bring West Texas crude to the state.

For reprint and licensing requests for this article, CLICK HERE.

Prev