California oil producers face a loss of production this year because of constraints on pipeline and tanker transportation to Los Angeles area refineries.
The potential bottleneck is occurring at a time when Outer Continental Shelf production is near capacity from Chevron Corp.'s Point Arguello project at the same time production is increasing from Exxon Corp's nearby Santa Ynez Unit (SYU) expansion. Both megaprojects must compete for pipeline space with onshore crude producers, notable, in California's San Joaquin Valley (SJV).
Recent developments limiting transportation options include:
- An indefinite shutdown of Four Corners Pipe Line Co.'s 50,000 b/d Line No. 1, damaged by the Jan. 17 earthquake.
- Loss of a tanker permit by Chevron and partners for offshore Point Arguello production, The group had been allowed interim tankering of Point Arguello crude pending an agreement with an onshore pipeline to carry the field's crude, but that interim permit was rescinded after a deadline for the agreement passed. Chevron, Texaco Inc., and Anschutz Corp. earlier this month committed to send an average 110,000 b/d for 10 years through the proposed Pacific Pipeline System Inc. (PPSI), a $150 million, 130,000 b/d pipeline from Central California to Los Angeles refineries (OGJ, May 16, Newsletter).
- Permanent shutdown of Exxon's offshore storage and treatment (OST) facility, which since 1981 has used tankers to transport about 20,000 b/d of SYU production from the Santa Barbara Channel to Los Angeles.
The OST, the first commercial floating production system in the U.S. placed in the Santa Barbara Channel in 1981 after a decade of precedent setting legal and political battles was shut down Apr. 4.
OPI International Inc., Houston, earlier this month acquired the OST and a related shuttle tanker from Exxon.
PRODUCTION CONCERNS
Point Arguello produced 73,000 b/d in April, about 12,000 b/d less than its potential peak production and 5,000 b/d less than pre-earthquake averages.
Chevron expects the field to produce 78,000 80,000 b/d this month, mainly because of improved oil prices and the need to boost cash flow.
Onshore producers have not vet had to reduce production to any great degree, said John Donovan of the California Independent Producers Association (CIPA), "but the longer Line No. 1 is shut in, there's a very real chance of curtailed production."
Although Exxon's SYU is poised to increase production to a peak of 85,000 b/d from a previous 20,000 b/d via the OST and therefore increase competition for limited pipeline capacity, it has been temporarily, delayed by hearings on final permit conditions in Santa Barbara County. Meantime, it has sent small volumes of incremental SYU output through the All American Pipeline (AAPL), which extends from Santa Barbara to Texas with spurs to southern California pipelines to the Los Angeles basin. For May, Exxon has nominated 40,000 b/d to Los Angeles.
OPTIONS
Four Comers' Line No. 63, which runs roughly parallel to Line No. 1 from Kern County to Los Angeles, is taking up some of the slack by blending heavy crudes with lighter crudes to total 80,000 b/d and continuing a policy of prorating nominations by 38%. The company estimates it is handling at least 60% of pre-earthquake production via Line No. 63.
"We just can't get all the oil we want to Los Angeles," Chevron's Mike Marcy said, noting that almost half the company's OCS crude is being sent to northern California and Texas refineries.
Larry Perkins, Chevron's Point Arguello project coordinator, said, "We're losing significant money on the oil that's going east to Texas. There's quite a penalty in not having an adequate transportation system to Los Angeles."
Shortly after the earthquake, Chevron cited the disaster emergency and asked Santa Barbara County if it could resume tankering of Point Arguello crude on grounds that the quake damage to Line No. 1 seriously limits transportation options. It was rejected by the county (OGJ, Jan. 31, Newsletter). Chevron later revived the request for an emergency tanker permit, but it was again turned down on grounds "that there's just no emergency," said Bill Douros, county energy division director.
In both cases, the county claimed Point Arguello producers had other pipeline options, involving destinations to northern California and Texas. But for Exxon and Chevron, those options aren't economic because of the increased transportation costs at a time when crude oil prices have slumped in recent months.
Last week, Chevron opted for a third try on the interim tanker permit, this time going straight to the California Coastal Commission (CCC). It sent a letter to CCC contending that the permit is warranted under the earlier agreement with the state because the Point Arguello group's agreement with PPSI amounts to signing a throughput and deficiency agreement, the main condition of the original interim tanker permit.
Because the transportation bottleneck is primarily to the Los Angeles area, producers also are using other California refineries at San Luis Obispo, Bakersfield, and San Francisco, as well as filling storage.
OCS and onshore producers can use AAPL to take crude to Texas refineries, but the added cost has so far limited that option to small amounts, especially with California heavy crude prices in recent months hovering as low as $6/bbl. California heavy crude postings in early May rebounded to about $8 9/bbl, just enough to keep production from being shut in and thus maintain the tight competition for transportation.
Bob Devine of Enron Oil Trading & Transportation Co. thinks the independents "will really be hard-pressed starting in May."
Onshore producers have significantly increased trucking their crude to Los Angeles because pipeline space is so limited and dominated by OCS producers, Enron's Devine said. San Joaquin Valley producers hope the situation won't worsen, said CIPA's Donovan, "but the longer Line No. 1 is shut down, there's a very real chance of curtailed production."
Especially frustrating is that the independents have enough pipeline capacity to move all San Joaquin crude to northern California, but refiners there don't want the heavy crudes that account for most of the valley's production, Devine said.
The situation is likely to worsen this summer, particularly if SYU production increases.
The only possibilities of near term relief, Devine said, depend on Chevron regaining its tanker privilege and/or Exxon taking its Sant Ynez Unit crude to Texas instead of competing for Los Angeles destinations.
The transportation bottleneck should eventually be eased but probably not before this time next year, when Four Comers expects to complete expansion of Line 63's capacity to 110,000 bid via three new pump stations.
In addition, the Chevron group's support of PPSI, connecting with AAPL to Los Angeles, will help ease the bottleneck. But that plan still needs environmental assessment and permits that aren't expected until at least next year. However, if and when construction permits are approved for PPSI, Chevron may be snowed to resume interim tankering through 1995.
OST SHUTDOWN
Exxon's OST processed 130 million bbl of oil in its 13 years, but can no longer be used due to permit conditions that finally allowed the company to process oil onshore after 20 years of trying. Shutting down the OST means Exxon can no longer use tankers from the Santa Barbara Channel.
Sold to OPI unit Offshore Pipelines International Ltd. under a salvage contract, the 50,000 dwt converted tanker is headed for berthing in Ensenada, Mexico, sometime this summer, where it will be "up for grabs," said OPI Vice President John Riddler. In addition, OPI acquired SeaRiver Maritime Inc's shuttle tanker, the S/R Jamestown, from Exxon.
Terms of the contract with Exxon include title transfers on both vessels and salvage of the mooring base and single anchor leg mooring system (SALM). Amount of the contract was not disclosed.
The OST and shuttle tanker had been operating in 490 ft of water in the Santa Barbara Channel. The 743 ft OST is designed to process crude from Hondo A platform as well as generate power for the platform and itself. The S/R Jamestown is 687 ft long and was modified in the early 1980s to provide shuttle services between the OST and a nearby marine terminal.
OPI has taken possession of both vessels. The S/R Jamestown was delivered to Guaymas, Mexico, and the OST will be demobilized to Ensenada after salvage operations are complete. OPI expects salvage operations on the mooring base and SALM to be complete in mid July.
Currently, OPI is considering a number of options for the two vessels, including sale of the total package, contract leasing, or continued operation through partnership agreements.
Formerly the Esso Newcastle and renamed the Exxon Santa Ynez, the OST was the first floating production vessel to incorporate oil and gas processing equipment with power generation facilities to service the vessel and platform. It separates oil and water and uses treated gas for generating electricity.
The OST was also the first to use a SALM in U.S. waters, plus acting as a transfer link for oil, gas, water, and electric power between the vessel and subsea pipelines to Platform Hondo A in 840 ft of water.
TROUBLED HISTORY
Although its eventual fate is unknown, the OST's past is weighted with legal and political battles that reached the highest levels of the federal government, setting a tone of acrimony over Offshore California development that persists to this day.
Exxon had always preferred processing offshore crude onshore since it discovered the Hondo, Prescado, and Sacate fields in 1969 70 simply because it could produce more crude cheaper and more safely. But its plans were stymied by the infamous 1969 oil spill caused by Union Oil Co. of California's Platform A well blowout 25 miles south.
The spill spawned legislation that required environmental impact statements for offshore drilling, and Exxon's plan was the first OCS project required to submit an EIS. State and county agencies at the time insisted on unprecedented air quality and pipeline conditions unacceptable to Exxon.
Santa Barbara County's Board of Supervisors and voters approved the onshore processing plan in 1975, but it was appealed to the newly formed California Coastal Commission, which insisted that any oil be transported by onshore pipeline. And for the first time, the federal Environmental Protection Agency attempted to assert jurisdiction over OCS air emissions instead of the Department of the Interior.
The OST was Exxon's fallback plan, installed just outside the 3 mile limit and outside the jurisdiction of the state and county. Ironically, Exxon won the OST battle, but the industry lost the regulatory wars that now give local, state, and federal agencies increased control over offshore air emissions and favor onshore pipeline transportation over tankers.
Exxon eventually won permission to install the OST through federal court decisions and cabinet level intervention, but the unique vessel could process only as much as 25,000 b/d Of oil from Hondo Platform A, while Exxon wanted to add three later trimmed to two over permitting concerns more platforms and produce 85,000 90,000 b/d.
It cost Exxon $2 billion and another decade of political combat to do that, but success finally came with start up in December 1993. The keys to success included an Exxon designed cogeneration plant that dramatically reduced air emissions, a promise to use onshore pipelines, and a pledge to remove the OST.
The SYU expansion includes platforms Harmony and Heritage. Onshore in Las Flores Canyon, 20 miles west of Santa Barbara, the expansion includes a 100,000 b/d treatment plant, a 21 MMcfd gas stripping plant, a 49,000 kw cogeneration plant, two storage tanks with a combined capacity of 540,000 bbl, and a state of the art water treatment system.
Exxon paid $94 million in 1968 for SYU leases covering about 83,000 acres that are estimated to hold as much as 500 million bbl of oil and 1 tcf of gas.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.