Rail Projects Boosting Oil Flow to California Refineries

Photographer: Eddie Seal/Bloomberg

Rail tanker cars in Corpus Christi, Texas. Close

Rail tanker cars in Corpus Christi, Texas.

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Photographer: Eddie Seal/Bloomberg

Rail tanker cars in Corpus Christi, Texas.

California, the third-biggest refining state in the U.S., is about to see a flood of oil by rail from places such as Canada and North Dakota as suppliers seek to tap a market isolated from the rest of the country.

The Western U.S. may bring 500,000 barrels of light oil by rail a day in 2015 as the region’s refiners seek to replace shrinking output in California and Alaska and more costly foreign imports, Mark Smith, Tesoro Corp. (TSO)’s vice president of development, supply and logistics, said at a conference yesterday in Glendale, California. California refineries can run 1.63 million barrels a day, the most in the U.S. after Texas and Louisiana, government data show.

The region has become one of the most depending in the nation on foreign oil as the West lacks pipeline access to crude from shale supplies in the middle of the country. Companies from Alon USA Energy Inc. (ALJ) to Valero Energy Corp. (VLO) are looking to tap the market with projects that would bring more crude into the West by rail.

“The West Coast is one of the last frontiers where foreign imports really have a stronghold, and there’s not a lot of alternatives,” Smith said yesterday at the Crude By Rail 2014 conference organized by Houston-based American Business Conferences. “Obviously there is a huge opportunity here” for oil shipped by rail.

Bakken Prices

It costs $9 a barrel to send North Dakota’s Bakken crude to Washington and $4 to $5 more to carry it by ship from there to California, according to Valero, the world’s largest independent refiner. Tesoro said the cost of delivering a barrel by rail from the Bakken to California would range from $9 to $10.50.

Royal Dutch Shell Plc posted a price of $88.33 a barrel yesterday for Bakken crude in North Dakota. Alaska North Slope oil typically used in West Coast refineries cost $109.70 at 12:05 p.m. New York time today, according to data compiled by Bloomberg.

California may get more than one-quarter of its crude from Canada and U.S. states other than Alaska should six proposed rail-offloading projects win approval, state Energy Commission data show. Companies including Valero, Phillips 66 (PSX) and Plains All American Pipeline LP (PAA) support the projects.

Rail Economics

The state is already bringing in record volume of oil from Canada by rail, totaling 709,014 barrels in December and comprising 67 percent of rail receipts, the Energy Commission’s website shows. Total oil-by-rail volumes to California, the most populous U.S. state, from all sources surged in the fourth quarter to a record 2.83 million, almost double the amount from the three months earlier.

West Coast rail terminals can unload 210,000 barrels a day, Smith said, and almost all the refineries in Washington state have their own offloading complexes.

“Wait until some of these crude-by-rail projects get constructed in California,” said Gordon Schremp, senior fuels specialist at the Energy Commission. “I wouldn’t be surprised to see those kinds of Bakken deliveries having very low rail economics if all six rail projects get their permits.”

Proposals to build new oil-by-rail complexes in the western U.S. are coming up against increasing scrutiny from state and local regulators following a series of derailments involving crude, including the July explosion of a train carrying Bakken that killed 47 people in Lac-Mégantic, Quebec.

The city of Benicia, California, delayed Valero’s plans to build a rail-offloading station at the 170,000-barrel-a-day Benicia refinery in Northern California to perform an environmental review. Valero, which planned to finish the project by late 2013, said Feb. 13 that it now expects to start the service by the first quarter of 2015.

Environmental Review

“That is somewhat dependent on the permitting process,” Joseph Gorder, Valero’s president and chief operating officer, said at the Credit Suisse Global Energy Summit in Vail, Colorado.

The city of Pittsburg, California, is reopening parts of an environmental review of WesPac Energy LLC’s proposal to upgrade a fuel terminal that would be capable of unloading crude from five trains a week. The Irvine-based company, which jointly owns the project with Oiltanking Holdings Americas Inc., planned to begin work on the rail terminal this quarter.

Pittsburg decided based on public comments that more information is required for the review, Joe Sbranti, the city manager, said in a Feb. 18 letter to WesPac.

Washington state regulators reversed the approval of two terminals in November that would have allowed companies to unload oil from rail cars at the Port of Grays Harbor and load them onto marine vessels.

Rail Safety

Companies including Tesoro, the largest refiner on the West Coast, have pledged to improve the safety of moving crude by rail by using newer rail cars and better routing.

Tesoro, based in San Antonio, Texas, said Feb. 6 that it’s replacing aging tanker cars with “DOT-111” cars designed after October 2011. Its fleet will consist entirely of the new cars with reinforced shields by mid-2015, the company said.

To contact the reporter on this story: Lynn Doan in San Francisco at ldoan6@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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