California's Pacific Pipeline wins key approvals

July 15, 1996
Southern Calfornian Crude Oil Pipeline Proposals [39557 bytes] The proposed Pacific Pipeline has won key approvals from California state and federal agencies as the environmentally preferred option to carry both Outer Continental Shelf (OCS) and San Joaquin Valley (SJV) crude to Los Angeles area refineries. The U.S. Forest Service late last month denied an appeal by the Los Angeles City Council of its March decision approving the controversial project. Still pending at presstime was the

The proposed Pacific Pipeline has won key approvals from California state and federal agencies as the environmentally preferred option to carry both Outer Continental Shelf (OCS) and San Joaquin Valley (SJV) crude to Los Angeles area refineries.

The U.S. Forest Service late last month denied an appeal by the Los Angeles City Council of its March decision approving the controversial project. Still pending at presstime was the city's appeal of the California Public Utilities Commission's (CPUC) approval of the project.

The $170 million project is also financially backed and has throughput commitments totaling 102,000 b/d from a group of four companies-Anschutz Corp., Chevron Corp., Texaco Inc., and Unocal Corp. It is designed to carry as much as 130,000 b/d of oil along a 132 mile inland route from Kern County to refineries in the Los Angeles area.

Despite such backing, construction is not yet assured. It faces a likely court challenge by the city of Los Angeles and tough competition within the industry (see related story, next page). The history of similar projects is also stacked against success for the Pacific Pipeline, notably the Angeles Pipeline project of the 1980s that was dropped due to intense local opposition and legal challenges. That scenario still looms for any new pipeline proposal in southern California.

In addition, the issue of transporting California crude to refineries is a fast-moving target, undergoing a number of changes since Pacific Pipeline System Inc. (PPSI) was proposed (OGJ, May 23, 1994, p. 34). Originally, the pipeline was proposed along the California coast from Santa Barbara to Los Angeles primarily to transport OCS crude. It was later changed to an inland route beginning in the San Joaquin Valley area to garner larger production options and profits from SJV giant oil fields.

Point Arguello disappointment

That route switch may well be vindicated, especially in light of Chevron's disclosure in May that its Point Arguello project reserves were significantly overestimated.

Chevron said Point Arguello reserves ultimately could be only 200 million bbl vs. the previously estimated 500 million bbl. Production has fallen to only 52,000 b/d from a peak of 89,000 b/d in August 1993.

The new estimates are likely to cause Chevron to close early what had been conceived as a 25 year project, perhaps as soon as the year 2000, giving it only a 10 year life. "We miscalculated the recoverable reserves in the 1970s," said Chevron's Mike Marcy, when 3D seismic technology was not readily available. Another factor in the reserves estimate cut was a problem with rapid water coning in the highly fractured Miocene Monterey, Marcy said.

Chevron has an opportunity to purchase a 10% share in PPSI, Marcy said, and has supported it financially. But in light of the dramatically lower reserves, PPSI "would have to be permitted and built in a timely fashion" for Chevron to continue pouring money into it, Marcy said.

Other concerns

Another factor that may lessen PPSI's appeal was a May 28 ruling by a federal judge asserting Santa Barbara County could not ban Exxon Corp. from transporting its OCS crude by tanker from San Francisco to Los Angeles, after the oil leaves the county's jurisdiction via pipeline. Since then, Exxon has not proceeded with tankering but has negotiated a throughput agreement with PPSI.

The scramble to corner a larger share of the transportation market is sparked by rising demand. At the same time, however, that situation is muddled by a range of issues, including declining supplies of Alaskan North Slope (ANS) and SJV crude, lack of additional offshore projects, limited tanker options, higher truck and train transport costs, and the new ability to export domestic oil.

PPSI has filed tariff rates of 95/bbl for the five firms with throughput commitments and $1.05 for others. That compares with other transport costs pegged at $2.45/bbl by train, $2.40/bbl by truck and $2/bbl via tanker (Chevron's El Estero terminal to El Segundo).

Responses

"We are very pleased with the (CPUC) decision, " said Wally Fassler, Chevron regional vice-president. "It presents a win-win situation for everyone. It will enhance safety, help clean the air, reduce surface traffic, create jobs, and save money."

PPSI's proposal was considered the best alternative in a final environmental impact statement (EIS), released in January, that analyzed new route changes and 15 options. It also was endorsed by a CPUC administrative law judge, Angeles National Forest officials, and, most recently, the full CPUC. It still has to win franchise agreements with various Los Angeles-area cities, including Los Angeles itself.

"Now, we have to sue," said Los Angeles City Councilor Mike Hernandez after the CPUC decision.

PPSI's Tom Walker believes that attitude is putting politics over public benefit. He contends "the council has acknowledged that pipelines are better." Other alternatives "are a hodgepodge" of new and existing pipelines that need upgrading, he added, while PPSI will be "state-of-the-art."

Opponents' claims

Los Angeles area opponents have a long list of complaints and a history of killing pipeline projects. They cite:
  • Continued refining "in a basin that already has among the nation's worst air quality."
  • A possible spill they contend could contaminate most of Los Angeles' water supply.
  • Allegations of "environmental racism" tied to claims the route would run mostly through low-income and minority communities.
  • Inadequate insurance for cleaning up spills.
  • The "superiority" of using existing pipelines and/or a different route such as that proposed by Cajon Pipeline Co.
  • No legal guarantees that a new pipeline would reduce existing truck and train transport.
  • A view that new refineries should be built closer to crude sources such as Santa Barbara County and the San Joaquin Valley.

Proponents' claims

In contrast, backers agree with these EIS findings:
  • The pipeline would not increase refining but simply replace declining ANS and SJV production.
  • Air pollution might decline if truck and train transport is reduced.
  • Refinery emissions are in fact limited by statute.
  • PPSI would build a modern pipeline with fiber optic leak detection.
  • About 80% of OCS and SJV crudes is going to Los Angeles refineries anyway.
  • A new state law (AB 1868) signed last October guarantees financial responsibility in case of spills.
As for "environmental racism," the report emphasizes PPSI's route "follows existing utility corridors, roads and railroads," and an analysis shows the route "is evenly distributed among communities." There is no doubt the route passes through low-income communities, but that's "the very nature of land use trends," since "areas adjacent to industrial zones are usually less desirable for residential development." To help make PPSI more palatable to Los Angeles area opponents, the sponsors have offered use of its fiber optic cable network, saving taxpayers millions of dollars. Los Angeles could complete its communications network used for police and fire calls and video education, Walker said.

Competition

In addition to community opposition, PPSI faces competition from other projects, notably Cajon's plan and various options by ARCO Pipeline Co. (formerly Four Corners Pipeline Co.).

All envision being the project that increases pipeline capacity to handle the relatively new OCS production from Chevron and Exxon projects in the Santa Barbara Channel that was earlier estimated at 170,000 b/d but is currently about 140,000 b/d. Other factors in the need to add transport capacity are the loss of ARCO's Line No. 1, damaged by the 1994 Northridge earthquake, abandonment of Exxon's Santa Barbara offshore storage and treatment facility in 1994, and limited ability of producers to gain tanker permits from California.

The shortfall in pipeline capacity is being offset somewhat by an upgrade of ARCO's Line No. 63 on a pro rata basis, increased truck and train transport, and shipping some heavy crude to San Francisco and Texas at an economic disadvantage.

"If we believed the Pacific Pipeline was going to be built, we wouldn't be doing any of these (options)," said Glen Sweetnam, vice-president of ARCO Pipeline's western region. Even if PPSI garners necessary building permits, Sweetnam said the options will come down "to a market test." He believes ARCO's proposals and Cajon "could be constructed more quickly, cheaper, and with less new construction."

Sweetnam said demand for the PPSI proposal may be an illusion, especially since SJV and ANS production is diminishing with only OCS crude contributing to increased production. The relevant production pool is 740,000 b/d-600,000 b/d SJV, 140,000 b/d maximum OCS-100,000 b/d of which is used locally and about 100,000 b/d is moved to Texas, leaving 540,000 b/d about equally split between Los Angeles and San Francisco refineries.

Competitors respond

Cajon Pres. Dale Holder believes his company's route is superior because, while longer, it's been improved to include a tie-in with an existing pipeline owned by Southern California Edison that in October 1994 won permission from CPUC to carry crude oil. That line was originally built to serve power plants that are now fired by natural gas. This option means less new construction, faster or equal start-up time, the fact that it already has virtually all building permits, similar safety features to PPSI, and a route that goes through fewer low-income areas than PPSI.

But CPUC decided the Cajon plan has "the major disadvantages of substantially higher energy consumption for pumping and heating, higher air pollutant emissions due to by far the longest oil transport distance (286 miles Cajon, 132 miles PPSI), smaller pipeline diameters, and the lack of insulation on the much older (SoCal Edison) system."

ARCO's proposals to upgrade and/or reverse existing pipelines to Los Angeles are absent from the report's executive summary. Line 90 reversal wasn't addressed "because they said it wasn't available," Sweetnam said, since it still carries ANS crude. But ARCO disclosed in May that it will reverse the line, claiming it could be done in the same time frame as PPSI, which hopes to start construction by next year and estimates 10 months to build. ARCO has begun work on line reversal and says it could be on line as early as second quarter 1997.

The All American Pipeline "is not taking sides on any alternative," said AAPL's Mike Madden. AAPL extends from Santa Barbara to Texas and was conceived to take OCS oil to the Gulf Coast. That scenario has changed dramatically because Exxon switched its refinery destination from Texas to Los Angeles due to lower costs and strong demand in California.

Thus, AAPL has "indefinitely postponed" a West Texas-Gulf Coast segment.

Only about 63,000 b/d of OCS oil is taken to Texas today, but AAPL's California segment is the prime connection with virtually all options, existing or proposed, to Los Angeles area refineries.

Although designed to carry 300,000 b/d, its average throughput has been only half that.

This month PPSI will be working on gaining final permits and franchises from Los Angeles area jurisdictions, unless the city of Los Angeles decides to take CPUC's decision to the state supreme court. Los Angeles is already asking for a rehearing of CPUC's decision. Ultimately, if Los Angeles refuses to grant franchise agreements, PPSI can appeal to the CPUC, which in turn could use the power of eminent domain, thus raising the specter of yet another drawn-out court battle.

If PPSI is delayed in court, the Cajon and/or ARCO proposals could win by default.

Copyright 1996 Oil & Gas Journal. All Rights Reserved.