The boom in United States oil production was supposed to make the construction of oil terminals at ports a thing of the past. Not so fast.
Now Dutch oil storage giant Royal Vopak NV wants to turn an empty lot at the Port of Long Beach into a huge deep-water terminal so tankers from overseas can offload oil.
That comes as a surprise after Plains All American Pipeline LP dropped plans for a similar oil terminal at the Port of Los Angeles last year, citing decreasing dependence on imported oil as well as permitting issues. The Houston company in November abandoned its $500 million terminal plan, writing off $125 million, in favor of rail projects to deliver domestic crude across the country. A Plains executive said it will be “interesting” to see if Vopak’s plan plays out.
But Vopak said it can make its terminal work at the port despite the falling demand for foreign crude. Company executives had been keeping a close watch on the Plains project at Pier 400 and believe that there’s demand for another terminal. Vopak’s sole business is storing and handling liquid fuel products, so when Plains pulled out, the company saw an opportunity to increase its market share.
“We’ve been interested all along,” said Michael LaCavera, general manager for Vopak on the West Coast. “We have potential customers very interested in having another berth capable of deep-water oil imports.”
The Long Beach Board of Harbor Commissioners earlier this month approved basic terms for the Vopak project, allowing the company to start an environmental impact study. The new terminal would be built on 28 acres at two berths on the east end of Pier T, known as Pier Echo, which the Navy used as a shipyard until the 1990s. The project is expected to take four-and-a-half years.
The terminal would bring in 21 million to 55 million barrels of imported oil a year, depending on how many customers it gets, increasing the amount of oil going through the port by 11 percent to 28 percent. (Plains’ would have handled 51 million barrels.) Vopak’s would be the fourth oil terminal at the Port of Long Beach and increase Vopak’s presence in Southern California, where it currently has two locations – one at the Port of Long Beach and one at the Port of Los Angeles.
Vopak, which has almost 4,000 employees worldwide, will invest $120 million for land-side improvements for the first phase of construction. The company would not say what the total project would cost.
The port said it would conduct about $37 million in dredging as part of the project to accommodate big tankers coming to the terminal. This would be the first new oil terminal at the port since 1983.
The plan for the new terminal runs counter to trends in the oil industry. America’s reliance on foreign oil is declining because of the increased use of hydraulic fracturing, or “fracking.”
In fracking, oil companies pump water and chemicals at high pressure into rock formations to extract oil, letting firms tap once-inaccessible resources. California could soon be bringing in more crude from Texas and the Dakotas, and oil production in California might also be on the verge of a surge. Those factors would shrink the need for foreign imports.
Indeed, total U.S. petroleum imports in January fell 5.4 percent to 10.4 million barrels a day compared with the same month last year, according to the American Petroleum Institute.
Vopak’s LaCavera acknowledged that demand for foreign crude oil has fallen. Still, demand hasn’t disappeared and the company’s investment will be smaller than Plains’.
“We’ll have a terminal that is sized for the market,” he said. “There’s still substantial demand.”
The changing industry is not the only challenge for new terminals. The permitting process and environmental challenges held up the Plains plan for years, said David Wright, a vice president for Plains who worked on the Pier 400 project, which had been in the works for more than a decade.
It took several years to get the permits for Pier 400 and to clear other regulatory hurdles, which Vopak will need to address as well.
Wright is skeptical about Vopak’s prospects for the terminal.
“It will be interesting to see if it goes forward,” he said.
As Vopak prepares to build at the port, other companies are trying to get oil from the middle of the country to Southern California by pipeline and rail. Kinder Morgan Energy Partners LP of Houston has said that it might turn an existing natural gas pipeline into an oil pipeline to bring West Texas crude to the state.
Plains last year announced $1.1 billion in expansion projects, including a rail terminal in Bakersfield that will serve refineries on the West Coast when it’s finished in 2014.
Rusty Braziel, president of Houston energy consultancy RBN Energy LLC, thinks that Plains is making the right choice for its business.
“Rail shipments into the Southern California market make a lot of sense, so that’s where Plains is putting their money,” he said.
Plains will benefit from rail lines that will give it better flexibility to distribute to the highest bidding refineries, said Ethan Bellamy, an analyst with Robert W. Baird & Co. in Denver who covers Plains.
Plains has a rare opportunity to be one of the key players reducing the need for imports as the United States increases production, Bellamy said.
Vopak, on the other hand, wants more capacity to handle oil from global importers.
Bellamy said he didn’t see why the company was acting now, although he understood that Vopak is trying to find new revenue.
“I would certainly not be investing in import infrastructure,” he said. “But it may make sense for them as part of their broader global portfolio.”
A recent report by JP Morgan on Vopak said that the only way for the company to increase revenue was to build more capacity.
Also, there’s the possibility that Vopak could serve exporters: The new terminal could work in the company’s favor if California production increases to the point where oil gets sent to foreign markets.
The state’s Monterey Shale formation beneath the San Joaquin Basin could yield more than 15 billion barrels – enough to supply the nation’s needs for 26 months.
“We’re not there yet,” said Tupper Hull, spokesman for refiners trade group Western States Petroleum Association in Sacramento. “If and when that puzzle is solved, the scale of the resource would significantly change our energy security.”
LaCavera said any prospect of exporting oil is years away.
Meanwhile, Hull said, even as production ramps up in the rest of the country, that oil is not getting to California yet and the state still relies heavily on imports.
“That suggests there’s a need to maintain a tanker infrastructure, even during this renaissance in oil production,” he said.
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