United States: Crude-By-Rail Update: Largest West Coast Terminal Proposal Suffocating Under Delay

The largest proposed crude-by-rail (CBR) transloading facility on the West Coast recently survived a major hurdle to its ultimate construction and operation—a lease extension. But with the proposed project enduring nearly three years of permitting delay while navigating Washington State's Energy Facility Site Evaluation Council (EFSEC) process, the lease extension may come as too little too late.

The trials and tribulations of the proposed project highlight the difficulties large-scale energy-infrastructure projects confront, particularly on the West Coast. Simply put, American infrastructure projects need to be made a priority on political, legal, and regulatory agendas. Without such prioritization, much-needed projects will continue to wither away in permitting purgatory, and ultimately the American consumer will suffer. This proposed project is but one example. 

CBR Traffic Booms; Outlets for Mid-American Crude Needed on West Coast

The proposed facility dates back to the April 22, 2013, formation of a joint venture (JV) between a Fortune 100 refiner and a nationally leading logistics company. As crude prices soared, many midstream companies explored ways to bring mid-American crude to the United States' refining hubs, particularly on the West Coast. According the Energy Information Administration, WTI closed at $88.81 per barrel on the day the JV was publicly announced.

The JV targeted the Port of Vancouver USA in Washington State. The project was originally envisioned as a 120,000-barrel-per-day facility that would offload crude oil received by rail and transfer the oil to marine vessels for transport to West Coast refineries.

When the JV began the EFSEC process on August 29, 2013, the proposed project had grown to a 360,000-barrel-per-day facility. At full capacity, the proposed project would have been capable of handling almost 20 times the actual CBR inflows to California in August 2013.1 WTI closed at $108.51 per barrel on the day the permitting process began.

The Permitting Process Languishes; Commodity Prices Nose Dive

Although the applicable regulations mandate that the EFSEC provide a recommendation for approval or disapproval within 12 months of an application, the deadline proved too ambitious for the proposed project and the required environmental review.2 Had the proposed project cleared the EFSEC process on time, a recommendation would have been made by August 29, 2014. WTI closed at $97.86 that day.

But after 16 months, the EFSEC estimated that it would not reach a recommendation for another year – or until December 31, 2015. Fast-forwarding to that date, WTI closed at $37.13.

December 31, 2015, came and went, and the permitting process continued to drag. Finally, on March 11, 2016, the EFSEC issued an order setting a final hearing projected to last a total of 19 days, concluding at the end of July 2016. WTI closed under $40 per barrel on the date of the order.

Lease Extension; Extracting Extra Rent

With crude prices wallowing at generally uneconomical levels for most mid-American production, the proposed project hit another roadblock: its lease with the Port of Vancouver USA was set to expire before the EFSEC made a recommendation on the project.

The original lease contained a deadline for all environmental review and permitting to be completed by August 1, 2016, with the potential penalty of termination.3 Because the EFSEC hearing would not conclude until July 29, 2016, the proposed project had little chance of obtaining a permit prior to the lease deadline.

Facing the potential waste of over three years of work, the JV secured a roughly eight-month extension to complete the EFSEC process before the Port of Vancouver USA could cancel the lease. But the extension came at a price:

  • The monthly rent increases from $50,000 to $100,000 per month, starting on May 1, 2016.
  • The proposed project can only have one CBR facility, not two as previously envisioned.
  • The JV only has 30 months to resolve any legal challenges to the proposed project.
  • The crude that moves through the facility must be "pipeline grade" and destined for domestic ports.

Although the concessions are potentially a small price for the JV to pay in order to keep a $210 million construction project alive, the stipulations create additional roadblocks for the proposed project.

First, the JV is forced to pay increasing rent for a project that has generated no revenue at a time when falling commodity prices have ground CBR traffic to a standstill.

Second, the JV will now have to rework its economic projections based on the forfeiture of expected CBR capacity and the loss of the option to export crude out of the United States. The export ban – insisted upon by one port commissioner – may rest on questionable legal grounds, however, according to Port of Vancouver USA legal staff.4

Third, the 30-month litigation clock puts the JV at risk of another lease-extension negotiation – one that can, and almost certainly will, be influenced by special-interest groups that want to see the proposed project fail. The EFSEC record is replete with special-interest group objections to the proposed project.5 And it is likely that, if the proposed project clears the EFSEC process, special-interest groups will take the fight to the courtroom.

On the bright side, the proposed project secured some breathing room with the lease extension, keeping the possibility of mid-American crude supplies alive for California and other West Coast refineries. But the proposed project is being squeezed from the macroeconomic, regulatory, political, and, eventually, legal environment; faced with such adversity, the long-term viability of the proposed project remains uncertain.

Footnotes

1 See Gabriel Collins, California Crude Trains: How Much Oil Is Actually Coming In and Where Is It Coming From?, Ex. 1, North American Shale Blog (Mar. 23, 2015).

2 See Wash. Admin. Code § 80.50.100(1)(a).

3 See Blake Sobczak, Leasing Dispute Spells Trouble for Largest Oil-By-Rail Proposal, E&E News (Apr. 13, 2016), http://www.eenews.net/energywire/2016/04/13/stories/1060035496.

4 See Brooks Johnson, Port of Vancouver Extends Oil Terminal Lease, The Columbian (Apr. 15, 2016), http://www.columbian.com/news/2016/apr/15/vancouver-port-expected-to-extend-oil-terminal-lease/.

5 See Recent Activity, Tesoro Savage Vancouver Energy Project, Energy Facility Site Evaluation Council, http://www.efsec.wa.gov/Tesoro-Savage.shtml (last visited Apr. 19, 2016).

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