PIPELINES SCRAMBLING TO TRANSPORT ADDED CRUDE FROM CALIFORNIA OCS

An imminent surge in California Outer Continental-Shelf oil production of perhaps 100,000 b/d has pipeline companies scrambling to compete for the right to transport the crude to market. Recent start-up of interim tanker transport of crude from Point Arguello oil field in the Santa Barbara Channel will allow production there to rise to about 85,000 b/d from about 55,00060,000 b/d-but only for 3 years. Perhaps by yearend, production from two new Exxon platforms in the Santa Ynez Unit, also in

Sept. 6, 1993

11 min read

An imminent surge in California Outer Continental-Shelf oil production of perhaps 100,000 b/d has pipeline companies scrambling to compete for the right to transport the crude to market.

Recent start-up of interim tanker transport of crude from Point Arguello oil field in the Santa Barbara Channel will allow production there to rise to about 85,000 b/d from about 55,00060,000 b/d-but only for 3 years.

Perhaps by yearend, production from two new Exxon platforms in the Santa Ynez Unit, also in the channel, will boost unit flow to a peak of 90,000 b/d from about 20,000 b/d.

FIERCE COMPETITION

The competition among pipelines has been fierce, with a number of proposed and existing projects vying for the right to move the added volumes of offshore crude to market in Los Angeles area refineries.

Recent developments have resulted in one major pipeline proposal stymied-Pacific Pipeline, intended as the shortest route to Los Angeles from Santa Barbara. Its rival, All American Pipeline (AAPL), has obtained tariff and throughput agreements covering transport of all of Exxon's Santa Ynez Unit (SYU) oil (90,000 b/d) and part of Point Arguello production beginning in 1996.

Chevron (20,000 b/d) and Texaco (15,000 b/d) committed their peak production for transport in AAPL, while the other Point Arguello partners, controlling 50,000 b/d more at peak production, are continuing negotiations. That left Pacific Pipeline without continued financial support, forcing it back to the drawing board.

Although the offshore producers prefer tankering because of lower costs and more market flexibility, accommodating the increased production via tankering may not be politically possible. In fact, the interim permit for Point Arguello requires a halt to tankering in 3 years as well as a commitment in the weeks to come to finance more pipeline capacity.

Although Exxon is currently tankering 20,000 b/d from its offshore storage and treatment (OS&T) facility in Hondo field, that must cease when the onshore Las Flores oil and gas processing plant goes on line as expected this year. Despite Exxon's commitment to AAPL, it has applied for a tanker permit similar to Chevron's in the interim, presumably to have the flexibility of tankering even after it has removes the OS&T.

POLITICAL PRESSURE

The concept of at least one or more new pipelines to Los Angeles refineries is strongly backed by the state of California and most focal governments and environmentalist groups as an alternative to increased tankering.

The state hopes new pipeline capacity will end the need for tankering and crafted Chevron's temporary tanker permit to accomplish that. The permit allows tanker transport of as much as 50,000 b/d only until 1996 and requires at least 40,006 b/d to be shipped by existing pipeline networks until then.

Because of political pressure against increasing tanker traffic in the Santa Barbara Channel, industry has pumped millions of dollars into various pipeline plans, including three major proposals and a host of minor interconnections.

The California Coastal Commission's (CCC) tanker permit governs the pace of the pipeline race. First deadline for a conditional agreement, which involves financing a pipeline plan through the environmental impact report stage, must be met by Sept. 15, which Chevron accomplished by supporting the Cajon project.

The more stringent throughput and deficiency (T&D) contracts must be signed by Feb. 1, 1994, or the tanker permit aborts. T&D agreements mean producers and shippers must agree to rate and throughput terms, including a minimum sum whether or not any production is transported.

CONFLICTING REPORTS

There were conflicting reports last month about whether AAPL had a throughput agreement with Chevron (OGJ, Aug. 23, Newsletter). At first Chevron insisted the AAPL agreement was strictly a tariff agreement, apparently trying to make the distinction that a T&D agreement was not in hand.

However, Chevron later acknowledged that it does have a throughput commitment with AAPL. It's uncertain whether Point Arguello producers still must sign a T&D contract by the Feb. I deadline covering a proposal to move crude to Los Angeles in order to avoid violating the interim tanker permit.

George Hargreaves, president of AAPL parent and Goodyear Tire & Rubber Co. unit Celeron Corp., said AAPL may not have a T&D agreement with Chevron, but that's not needed.

"We don't think there is a need for a T&D because there is no deficiency we're already here," he said. "But we do have a throughput agreement with Chevron. As of Jan. 1, 1996, we're going to get all their oil for 14 years."

Hargreaves pointed out that a proposed pipeline project would require a T&D agreement to obtain financing. Further, under terms of the throughput agreements, any project that would move Point Arguello crude would have to interconnect with AAPL.

He also noted that the remaining Point Arguello producers still negotiating a throughput agreement are merely trying to work out legal language that identifies them as shippers vs. producers.

AAPL, which started up in 1987, currently transports about 210,000 b/d of crude.

QUESTIONS REMAIN

Since AAPL beat Pacific Pipeline to rate agreements, the playing field has dramatically changed in recent weeks. But key questions remain:

Which of the various pipeline options to Los Angeles will succeed?
Is there room for more than one option?
Will a new pipeline resolve the long, bitter battle between tanker and pipeline proponents in California?

Looming behind the public debate is a drama among industry players who are obliged to cooperate by government regulations-sharing processing facilities and requiring common carrier pipelines-vet are competing for the West Coast market.

"Conventional wisdom holds that only one new pipeline Lo Los Angeles will be chosen," said Four Comers Pipeline Co. Vice Pres. Dan Reyneveld.

However, Cajon Pipeline Pres. Ron Hinn said his pipeline plan could be downsized to handle just inland California oil if one of the other rivals wins out.

POOR ECONOMICS

Part of the puzzle is a thin profit margin.

Santa Barbara Channel oil tends to be fairly low in gravity-about 18-21- and high in sulfur content. That reduces its market value, at the same time increasing shipping costs and causing more air quality and refining problems in the Los Angeles basin.

In addition, estimates of additional federal Offshore California oil production at peak in the mid-1990s have shrunk from a 1987 Department of Interior estimate of 340,000 b/d to only 170,000 b/d today.

The precarious economics has spurred competition, even among colleagues.

Six of Point Arguello's 13 partners obtained permits to bypass the Gaviota marine terminal (GMT) storage facilities for a direct spur line to AAPL, thus saving more than $1/bbl. The remaining partners have sued them, claiming irreparable harm and arguing the by ass is unfair competition, unsafe, and jeopardizes their investment in GMT.

The bypass spur, if laid, also would force a rate increase on the remaining partners.

In addition, neither AAPL nor the Point Arguello project is making money-AAPL because it has operated at much less than its 300,000 b/d design capacity and Point Arguello because of low oil prices and permit delays. AAPL's $900 million investment, however, was significantly boosted by the August contracts signed with Exxon, Chevron, and Texaco.

"We expect to make money. We're close to break even now," Hargreaves said.

As for Point Arguello's $2.6 billion investment, at least half has been written down, Chevron said, and will never make money.

Aside from project economics tied to expectations of $30/bbl oil, further losses were incurred when the Gaviota processing plant was finished in 1989 but sat idle until July 1991 because of other permitting hassles.

The $60 million Gaviota terminal will make a relatively low rate of return, said Dan Mihafik, GMT manager, because the fees are simply a function of how much oil goes through it.

Another development that may have helped AAPL strike a deal with Chevron and Texaco came from a California superior court judge's July 27 decision that would transform their two heated proprietary pipelines originating in the San Joaquin Valley to common carrier status (OGJ, Aug. 23, Newsletter). The decision, now on appeal, could make available additional pipeline capacity of 280,000 b/d in the San Joaquin Valley.

TANKERING VS. PIPELINES

Chevron and Exxon prefer tankers to pipelines, mainly because of lower costs and market flexibility. But local, state, and federal political realities against the higher risk tankers have thwarted that choice.

Some environmentalists don't believe industry is serious about building a new pipeline.

"Once tankering begins, it will be almost impossible to stop," said attorney Linda Krop of the Santa Barbara Environmental Defense Center. Krop noted that Exxon's recent tanker application is for 5 years, not 3 as granted Chevron, although that may be changed now that Exxon has committed to take its oil through AAPL.

State and local governments have been careful not to favor one pipeline option over another, except to require use of the existing AAPL connection to Four Comers' Line 63 to Los Angeles to minimize tanker transport (see map, OGJ, Feb. 15, p. 40). Nor does the powerful Santa Barbara environmental coalition favor one over another, although it does claim existing capacity is enough to forbid even temporary tankering.

AAPL is sitting on the sidelines, said Bruce Murchison, AAPL chief operating officer, opting not to prefer one pipeline proposal over another, especially now that it's beaten Pacific Pipeline.

"There are no major differences between the pipeline alternatives," said J. Lle Reed, Pacific regional director of the Minerals Management Service, commenting that various environmental effects among the projects 11 equal out."

WHICH LINK TO L.A.?

Now that the major battle is no longer AAPL vs. Pacific Pipeline, the fight is over which connection to Los Angles will prevail.

The draft environmental impact statement for Pacific Pipeline, conducted for the California Public Utilities Commission by Aspen Environmental Group consultants, gives the environmental edge to reversing Four Corners Line 90, followed by Cajon.

Chevron recently decided to support Cajon, while Exxon's preferred fallback is Line 90. It is not known vet if Pacific Pipeline will enter the race by changing its plan to connect to AAPL to Los Angeles.

Politically, the edge belongs to the swiftest and least controversial, however, and that status is tough to pin down. AU the rivals claim they will be in a position to sign T&-D contracts by the Feb. I deadline. Economically, industry may choose the option with the lowest tariff and the best throughput deal-factors now under negotiation.

Four Corners thinks it has the edge because it has two existing pipelines, thus avoiding the public controversy of laying a new line. Not only can it reverse Line 90, Reyneveld said, but the company is thinking of expanding Line 63 to handle as much as 100,000 b/d.

Cajon, however, is ahead in the permit race. It's the only one that has a certified environmental impact report.

"We've got a plain vanilla pipeline," Cajon's Hinn said, citing advantages of a "back door" route into Los Angeles along established corridors, thus reducing opposition, and the ability to handle OCS as well as San Joaquin Valley crude.

The battle for new pipelines in California garnered attention from state agencies and Gov. Pete Wilson, who wanted the tanker vs. pipeline controversy to end, partly because of the state's fiscal and jobs crises. Wilson backed a facilitation process that culminated in the interim tanker permit to Chevron and partners last January.

Still, Santa Barbara County felt that wasn't enough.

"We are concerned that without a concerted effort toward development of new pipeline capacity, including your assistance ... no new pipeline will be constructed," the county said in a letter to Wilson. "We are also concerned that Chevron's tankering permit has encouraged more tankering from Santa Barbara. Like Chevron, Exxon has now asked to begin tankering."

But it was the private sector that finally gained ground by hammering out agreements with the AAPL. There was no political intervention in the negotiations "as far as we know," said Murchison.

"Everybody got tired of pushing and shaving," Murchison said. "The bottom line is that this (set of agreements) is the best deal for these guys."

Exxon seemed to echo that sentiment. In a statement announcing its agreement with AAPL, it said, "The AAPL system provides the ability to move Santa Ynez Unit crude to 'Los Angeles, San Francisco, Central California, and east to the Gulf Coast."