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.
What’s more, after about two decades of declining oil production in California, this year the state’s output will either hold steady or even rise. With oil prices still high and more companies using fracking to exploit a massive oil-bearing shale formation in California, the state could be importing less oil overall in the next few years.
Becca Followill, an analyst at US Capital Advisors LLC in Houston who follows Plains All American, said the canceled terminal project is just the latest example of how the fracking boom has turned the energy industry on its head. Companies that once wanted to import natural gas to the United States are looking to export, and pipelines that once carried imported oil to Oklahoma from tankers that docked at Gulf Coast ports now flow in the opposite direction.
In a report that garnered a good deal of attention two weeks ago, the International Energy Agency predicted that in about seven years the United States will overtake Saudi Arabia as the world’s biggest oil producer.
“There is a sea change going on right now in the way crude is moved and the way people view U.S. production,” Followill said. “The dynamics are absolutely amazing.”
Plains All American, which operates oil pipeline and storage facilities that serve refineries, planned to build its import terminal on the edge of Pier 400, the newest part of the Port of Los Angeles. The half-billion dollar terminal would have been one of the biggest private construction jobs in the county, nearly the same price as downtown L.A.’s JW Marriott and Ritz Carlton hotels at L.A. Live.
The pier was built 12 years ago on a man-made peninsula jutting into the harbor, and was designed in part to be home to an oil terminal, one with water deep enough to handle oil tankers carrying about 2 million barrels of crude.
Oil from the Middle East is commonly transported on such ships, but they can’t dock at the Port of Los Angeles. In Southern California, only the Port of Long Beach can accommodate tankers that size.
Pacific Energy Partners, a company that later merged with Plains All American, proposed the oil terminal project in 2003. The permitting process took several years. Port and state officials supported the project.
By this time last year, Plains All American had construction permits from the port and the South Coast Air Quality Management District.
It’s unclear what might happen to the land now.
Port spokesman Phillip Sanfield said harbor officials were surprised when Plains All American executives told them earlier this month that they were scrapping the project.
“The port was notified a few days before they announced it,” Sanfield said. “From our perspective, the project had been approved and entitled.”
Still, in the company’s Nov. 5 earnings announcement, executives said permitting problems were partly behind the decision to end the project. But they also acknowledged “an industry shift in the outlook for availability of domestic crude oil.”
Plains All American executives declined to comment for this article, but energy consultant Braziel said the availability of cheap oil in Texas and the Dakotas likely played a big part in the company’s decision.
The oil-rich Bakken Shale formation of North Dakota lacks pipeline capacity to carry the region’s production. As a result, Braziel said oil producers are shipping oil by rail. That means it can be sent to destinations beyond where it goes now – oil hubs in Oklahoma and refineries on the Gulf Coast.
While transportation by rail is more expensive than by pipeline, oil from the Bakken region or from the Permian Basin in Texas can sell for between $20 and $30 less per barrel than oil imported from foreign markets, offsetting the added cost.
Tupper Hull, a spokesman for the refiners trade group Western States Petroleum Association in Sacramento, said that lower price is the key for West Coast refineries interested in Bakken or Texas oil.
“It’s attractive from a pricing standpoint for folks,” he said. “That reflects the good news of what’s taking place in this country.”
Importing oil by rail requires building terminals for loading and unloading tank cars. At least one company is already planning such a facility in California. Dallas refiner Alon USA, which owns small refineries in Long Beach and Paramount, said in August that it would seek to build a rail oil terminal at its Bakersfield refinery, specifically to import Bakken oil.
Increased oil production in California could also cut demand for seaborne oil imports. The Plains All American terminal was planned with the assumption that the state’s oil production would continue to fall, as it has since the mid-’80s. But oil production is on pace to rise slightly this year and could increase in the years ahead.
Federal officials have estimated California’s massive Monterey Shale formation, which stretches nearly the length and width of the state, could yield more than 15 billion barrels of oil – or enough to supply America’s total oil needs for 26 months. The petroleum association’s Hull said California might still need more port terminals, but he acknowledged that California could see gains in oil production that could cut into demand for them.
Plains All American took a write-down for the quarter of about $125 million, with most of that attributed to the end of the terminal project. That indicates the project is unlikely to return.
But the changes in oil production that led the company to scrap the plan might not prove durable. Geologists say it might be harder to get oil from the Monterey Shale formation than from oil-bearing formations in other parts of the country.
Gordon Schremp, a fuel analyst with the California Energy Commission, said moving oil to California in rail cars could become too costly if prices for domestic crude rise.
“The discount must continue to be able to move it by rail car,” he said. “How long will the discount last? That’s a very good question.”
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