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California Oil Imports Debate Heats Up

The 'not in my backyard' mentality is in conflict with the stark issues of supply and demand.

During a gathering last summer in Southern California, various municipal authorities, oil company representatives and neighborhood residents met to discuss the pros and cons of petroleum import terminals in their areas.

At one point in the discussion, outright frustration suddenly pierced a thin veil of diplomacy in the meeting room.

"The representative from the California Energy Commission threw his presentation materials down onto the podium and stormed out of the room in disgust," according to Lynn Westfall, chief economist of refiner

Tesoro

(TSO)

, who was also in attendance at the event.

At issue was the growing resentment by environmentalists and neighborhood groups toward oil import terminals in their areas -- at a time when the demand for those imports is rapidly increasing.

California is becoming the testing ground in which powerful interest groups are butting heads over energy policy. Officials across the country are watching the debate in California closely, because the state frequently acts as a precursor for nationwide shifts in key public policy issues.

On one side of the debate are interest groups who want to squeeze out petroleum import terminals from important California ports such as those of Los Angeles and Long Beach. Among other things, they argue that pollution from inbound tankers and on-land storage tanks is hazardous to the nearby environment and can be deadly to the residents who live nearby.

The other side has economists representing the state, oil producers like

Chevron

(CVX) - Get Chevron Corporation Report

and refiners like

Valero

(VLO) - Get Valero Energy Corporation Report

and Tesoro. These groups argue that unless new import terminals are built or existing terminals are expanded, California and others who depend on its ports will soon find themselves lacking the essential infrastructure necessary to support their growing need for traditional energy supplies.

The crux of the debate rests on the issue of who gets to decide what items enter and leave major ports. While ports are typically municipal bodies with power ceded to them by cities, the decisions that port authorities make do not only affect local concerns. Rather, their decisions trickle through to a broad base of stakeholders, many of whom are not given the right to elect or choose those who make the original decisions.

A number of things make California special in the energy debate. First, it has a left-leaning, politically charged constituency that is large enough to affect nationwide policy decisions through its voting and consumer habits. These groups can be rabidly antagonistic toward oil companies and their attempts to expand or build new infrastructure.

Second, California houses enormous ports that draw more than 40% of all goods brought into the U.S. The decisions made by these ports not only affect what enters and leaves the marine terminals in California, but also affects oil imports that ultimately flow into bordering states like Arizona, Nevada and Oregon.

Energy industry and environmental leaders all know that whatever policies are chosen in California could quickly be adopted as the benchmark nationwide.

Gov. Schwarzenegger's administration has taken steps for California to lead the country in promoting environmental awareness through such measures as higher gas mileage for automobiles and reduced emissions of greenhouse gasses such as carbon dioxide.

However, recent publications and presentations made by the California Energy Commission, whose members are appointed by the governor's office, are uniform in asserting that, even under the best-case scenarios for the advancing adoption of clean energy sources, the demand for fossil fuel imports coming through California's port systems will increase in the intermediate and long term.

A CEC report published last September concluded that the supply and demand for oil and refined products in California are expected to increase dramatically in the coming years. Crude imports are estimated to rise as much as 34%, or 138 million barrels per year, from 2005 levels by 2015. Imports of petroleum products like jet fuel are expected to grow by 116 million barrels a year by 2015.

The report gives a number of reasons why this is the case. For one, the amount of oil produced in the state is declining rapidly, thus forcing California to rely on sources of crude from outside its own borders.

Also, many of the existing refineries in California are expanding to accommodate greater amounts of raw crude. This process, known as "refinery creep," increases the amount of raw crude that California's refineries can convert into petroleum products like motor gasoline.

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John Geesman, a former member of the CEC who resigned last week, isn't optimistic that California's energy infrastructure, including its marine terminals and storage facilities, will be able to accommodate the higher quantities of crude and petroleum products being imported if those imports reach the high levels that the CEC has forecast.

"We are going to have to run like hell just to keep up," Geesman said in a telephone interview.

Geesman blames the conflicting objectives of the cities that operate the ports and the state agencies that set broader policy goals for the quandary. "Ultimately, the state must assume more control over port facilities for the conflicts of interest to be reconciled," he said.

Even under an executive administration that is well known for acting pragmatically, there is currently little incentive for the state to go head-to-head with cities and port authorities in order to win control of the ports. Such a move would appear to be a handout to the oil industry, Geesman said.

"Only when Californians are confronted by extremely high gasoline prices and lines at the gas pumps will they realize that their attitude toward energy infrastructure was a mistake," says Geesman.

While gasoline prices are traversing near all-time highs around $3 a gallon, they have not yet had a material effect on consumer spending habits. This has left officials at the major ports like the Port of Los Angeles free to maintain their squeeze on petroleum infrastructure.

The first to succumb in Los Angeles was the Westway terminal, which stored 110,000 barrels of aviation fuel and 100,000 barrels of biodiesel at its peak. After a long battle in which officials at the port and the city of Los Angeles reportedly threatened the company with the power of eminent domain, Westway is closing its doors for good in July.

Geraldine Knatz, the executive director of the Port of Los Angeles, has proposed that an educational marine research center be built on the site once Westway ceases operations.

The Port of Los Angeles is also currently involved in a lawsuit with

Kinder Morgan

(KMP)

terminals, which has operations in the port, and is delaying the approval of a long-planned, $1.5 billion expansion of another marine import terminal owned by TraPac.

Oil industry officials say that they realize that it is impossible today to make energy infrastructure decisions without considering the concerns of neighborhood and environmental groups.

"The cities of Los Angeles and Long Beach obviously must address the concerns of their constituents," says Joe Sparano, president of the Western States Petroleum Association. "However, the fact that ports that are at full capacity for liquid imports are actively working to reduce that capacity is absurd."

The broad antagonism toward petroleum infrastructure in ports is not just a West Coast phenomenon, according to Jim Benton, executive director of the New Jersey Petroleum Council. "The exact same problems facing import terminals out west are being felt in the ports of New York and New Jersey. The pressure is coming from all levels of power and government."

Bill Day, director of media relations at Valero, agrees. "Marine infrastructure around the country is greatly in need of upgrading and expansion. The amount of crude coming into the U.S. is growing, but our infrastructure is getting older. It is becoming a struggle just to handle existing capacity," he said.

Peter Warren, chairman of the port and environment committee at the Coastal San Pedro Neighborhood Council, has been an outspoken critic of many of the expansion plans at the ports of Los Angeles and Long Beach. He argues that the likelihood of getting cancer near the TraPac is significantly higher than normal.

However, Warren says he is not a full-time antagonist of the ports. "These are our lungs, but they are also our jobs," Warren said in an interview. "We want the ports to succeed, but we want them to use 21st century technology and be ecologically sensitive while doing so. The ports insist that they are doing this, but all they really want is to do things on the cheap."

There is currently one new deepwater marine import terminal making its way through the planning and permitting stage in California. Called the Pier 400, Berth 408 project and proposed by Pacific L.A. Marine Terminal LLC, the terminal would reside in the Port of Los Angeles. The project is now going through a tedious environmental impact study. If completed, Pier 400 would be the first new marine import terminal constructed in California in over 30 years.

Pier 400 is designed to transfer 350,000 barrels of crude oil a day to local refineries and storage facilities. While that will be a major addition to the existing capacity in Southern California, some experts say that the additional throughput provided by Pier 400 won't be enough to accommodate the state's demand for crude oil by the time it is constructed.

The project is currently slated to begin operations in 2010, according to Dave Wright, who is vice president of

Plains All American Pipeline

(PAA) - Get Plains All American Pipeline, L.P. Report

and is also the lead project manager for Pier 400. "That will be cutting it really close to meet the CEC's forecasted demand for crude oil that year," he says.

Wright says that he has a deep respect for those who are monitoring the potential environmental impact of the Pier 400 project. "The environmental and greenhouse gas issues have added a whole new layer of dialogue to the project management process," he says. "It can be frustrating, but it is necessary, and when you get to the end of it you have a more transparent, well-balanced project."

However, Wright doesn't have patience for those who write off any infrastructure expansion proposal simply because of anti-oil political beliefs.

"Many people don't have a clue how precarious our situation is regarding the impact on our economy if we don't deal with these issues effectively," he insisted.