First of two parts
A pair of rail terminals planned near Bakersfield may soon give Kern County a central role in California's shift from heavy reliance on foreign oil to greater use of domestic sources.
Separate projects by Plains All American Pipeline LP and Alon USA Energy Inc. would offload a combined 220,000 barrels per day -- providing 13 percent of the state's current oil consumption compared to the less than 1 percent California now gets by rail -- and redirect most of that into pipelines leading to Los Angeles County and Bay Area refineries.
Costs of the projects were not available. But industry observers say the plans would be California's first train-to-pipeline facilities and among the West Coast's largest terminals for receiving crude by rail. The facilities are part of a broader push to both solve and capitalize on the logistical bottleneck created by the Midwestern fracking boom.
Both California and Bakersfield have been bringing in more crude by train from North Dakota and other midcontinent oil producers for the past several years.
That pace would greatly increase if Plains and Alon win approval for their plans. It could mean less expensive gasoline for California consumers. For local oil producers, it could mean somewhat lower barrel prices.
There is some concern, however, that increasing oil shipments on Kern's already busy rail system would raise the risk of an accident. Last summer, an oil shipment derailed in Quebec, killing more than three dozen people and prompting new rules for hauling hazardous materials by rail. Changes were proposed to make tank cars more resistant to punctures.
Another tank car accident occurred late Thursday when several cars in a 90-car train derailed and exploded in rural Alabama, spilling their crude oil cargo into the surrounding wetlands and igniting an intense fire. No one was injured.
Oil pipelines can also cause fatal accidents. But regulators point to improved train and pipeline safety records. Local authorities expressed confidence in Kern's emergency preparations in case of a derailment.
NEGOTIATING THE BOTTLENECK
The Bakersfield area is considered a good location for rail-to-pipeline terminals, and not only because of its existing oil infrastructure. Getting permits to begin construction is seen as easier here than in large, densely populated cities less accustomed to the energy business.
"Bakersfield is the best place for the rail terminals because there is real estate available and far less (railroad) congestion than LA or San Fran," California oil marketer Bob Devine wrote in an email. "Also, there is pipeline access to both the Bay Area refiners and to the LA Basin refiners from the Bakersfield area."
The rail projects would help address a bottleneck that, starting in 2011, created an unprecedented price disparity between Kern's heavy oil producers and the nation's lighter benchmark, West Texas Intermediate.
Thelogistical problem developed when oil produced by hydraulic fracturing, or "fracking," in North Dakota's Bakken shale formation created a bonanza that overwhelmed the Midwest's pipeline network. The resulting glut lowered prices in the midcontinent, but not on the West Coast.
As recently as last month, Bakken oil was selling for about $90 per barrel, or $7 less than heavy Kern County. Last year, the difference reached as much as three times that amount.
Plains and Alon are betting that such regional price imbalances will persist in North America's changing oil market.
There's no guarantee of that amid infrastructure projects such as the Keystone Pipeline, proposed to connect an Oklahoma oil hub with refining centers along the Gulf Coast. Competition for oil deliveries would also come from half a dozen large rail terminals planned in Washington state and an equal number of proposed port terminals there and in Oregon that would move oil from trains onto California-bound barges and ships.
The Bakersfield projects would beunique on the West Coast in that they wouldn't just accept oil shipments by rail for processing nearby, but also transfer it to pipelines for delivery to refineries far away.
Orange County industry consultant Dave Hackett said the changing environment means refiners must act fast "so that by the time the (pipeline builders) finally catch up, the guys here will have paid for their project."
Shipping crude through pipelines is considerably cheaper, and less polluting, than sending it by rail. But no pipelines connect California with oilfields east of the Rockies.
One such pipeline idea was floated recently by a major pipeline company, Houston-based Kinder Morgan. It considered investing an estimated $2 billion to build an underground link between Midland, Texas and Barstow, with branches leading to Bakersfield and the Los Angeles area. But the company announced in May that it was "shelving" the 277,000-barrel-per-day project because West Coast refineries "weren't interested enough."
Observers attributed the lack of interest to rail terminals' relatively low price tag, their short construction time and, most importantly, the flexibility they give refiners to bring in oil by rail from almost anywhere in the country. That could prove useful in coming years as Canada prepares to increase its oil exports and additional drilling is done in shale formations in Colorado, New Mexico, Utah and elsewhere.
Dallas-based Alon proposes to build a 150,000-barrel-a-day, double-loop rail terminal at its Rosedale Highway plant that would handle an average of two "unit trains" per day, each more than a mile long and so named because they can be offloaded from a single point. The company says it would refine about half the incoming oil, about 3 million gallons a day, on sitethen store and ship the rest through existing, on-site pipeline access points to refineries in Northern and Southern California.
The terminal would be accompanied by a larger plant reconfiguration that involves changing the refinery's industrial plumbing so it can return to processing oil. Since Alon bought it in 2010, the plant has refined only byproduct trucked and hauled by train from its sister facilities in southern L.A. County. The Bakersfield refinery has been idled almost all year in anticipation of the proposed changes.
Kern County's Planning and Community Development Department is preparing an environmental review of the project. Alon's CEO told analysts Friday he hopes to receive full approval by next spring and have the terminal built by the start of 2015.
Houston-based Plains bought its project south of Bakersfield late last year from a Pasadena rail facility builder named U.S. Development Group. Though designed to transfer 140,000 barrels a day to refineries in L.A. County, it would initially take only half that amount, or one unit train.
Because the terminal's six-mile pipeline would run through county right-of-way, Kern's planning department is processing what's called a franchise application by Plains, as well as reviewing the project's environmental impacts. The project is expected to go before the county Board of Supervisors for a vote within a few months.
BOARDING THE TREND
Already a 26,000-barrel-a-day refinery on East Panama Lane brings some midcontinent oil into the Bakersfield area by rail. Kern Oil & Refining Co.'s plant has accepted midcontinent crude since at least early 2012.
But not all California refiners would benefit from a big influx of light, Midwestern crude -- at least, not without significant investment in a plant reconfiguration.
Facilities like San Joaquin Refining Co. Inc.'s 15,000-barrel-a-day plant in Bakersfield are specifically set up for heavy oil, which is more plentiful locally than light crude but harder to transport and refine.
"There is a saturation point for light crude refining in California," oil marketer Devine wrote. "A great deal of refinery retrofitting would be required to accept light crude beyond the current capacity."
But as long as favorable market conditions continue, expect to see more rail-to-pipeline terminal proposals, said Gordon Schremp, senior fuels specialist at the California Energy Commission.
"You'll see more of it," he said," and it's just a question ... of if the discount remains high enough ... it can make these projects pay off."
Next: Amid a new focus on rail safety issues, plans are moving ahead to increase track capacity over the congested Tehachapis.