Tesoro is doubling down on its US west coast operation despite an uphill battle with state regulators to build a new Washington rail terminal that is key to thriving in the toughest US refining market.
Only the Port of Vancouver can affordably deliver the scale of Tesoro's 360,000 b/d vision for shaking up the US west coast crude market, chief executive Greg Goff told Argus in a recent interview. No party could afford permitting and constructing a similar project from scratch, he said.
"There is nothing like it on the west coast," Goff said. "To do something like that somewhere else would be a greenfield development, and permitting that would be very, very difficult."
Refiners need every edge to compete on the lucrative and challenging US west coast. The massive domestic market, led by California demand, offers few opportunities to tap overseas buyers and some of the toughest fuels and operating regulations in the country. West coast access to cheaper North American crude supplies has lagged all other regions, and older domestic production in California and Alaskan North Slope has waned.
But as peers considered leaving California, Tesoro expanded to become the state's largest refining capacity. Operating in such an environment demands total commitment, Goff said.
"To be successful in California, recognizing the regulatory environment and the demands, you have to be in a leading position out there," Goff said.
California alone consumes almost 11pc of US gasoline supply. Even small increases in same-store sales and gasoline supply volumes seen recently in the region represent large selling opportunities. And current US Census data suggests the population and petroleum demand will continue to grow. Tesoro purchased BP's California operations in 2013, including a 260,000 b/d refinery in Carson, and has expanded state marketing arrangements while touting high refinery run rates.
"The fundamentals of the west coast are very, very attractive," Goff said. "I think at the same time, you have to acknowledge it is a demanding, challenging environment."
California gasoline dropped faster and earlier than other states ahead of the 2008 recession and has been slower to return. The state wants petroleum demand to fall even further in favor of electric or alternative fuel vehicles.
Carbon and greenhouse gas regulations in place now could reduce coastal gasoline demand by more than 400,000 b/d by 2030, according estimates by supporters of the policies. Such a drop represents a 15pc of current refining capacity and nearly two-thirds of Tesoro's west coast refinery throughputs.
These are not the policies of a single, aggressive administration. Republican governor Arnold Schwarzenegger's administration passed the structure of the regulations, and Democratic governor Jerry Brown has moved them forward. Oregon and Washington have taken steps to adopt California fuel policies to expand carbon-reduction policies across the region.
Refiners operating in the region expect the policies to stay, with some minor modification. The environment demands an export market to help soak up current capacity, but freight costs and market access make that more difficult than in the US Gulf coast. Tesoro sees exports to Mexico and the west coast of South America as opportunities that exist only when domestic demand does not.
"It doesn't speak for a need for a lot of new capacity in the west coast, I can tell you that," said Tim Taylor, president of Phillips 66, which operates 359,000 b/d of refining capacity in the region.
Tesoro wants Vancouver to make the crude supply environment more competitive. Crude railed through the facility would load onto tankers for transport to any US west coast facility. Work on the project began two years ago. Permitting remains under state review. But the refiner and joint venture partner Savage have faced stiff opposition to the plan. Vancouver's city council already formally opposes the Tesoro-Savage project and all US railed shipments of Bakken crude. Environmental groups have sued the port, accusing it of violating Washington open government laws to approve a lease for the terminal. And a decade-long plan to redevelop an industrial site neighboring the terminal into riverfront residential and office property adds pressure against Tesoro's plans for crude supply.
Goff invites comparisons to the federal review of TransCanada's Keystone XL pipeline project.
"We're very responsive and provide them everything they need," Goff said. "We do it with a high sense of urgency, actually. But at the end of the day, it's in their hands."
Tesoro was one of the first outside the midcontinent to capitalize on rising Bakken production. Permitting work began in 2011 and railed deliveries began arriving in regular volumes at its 120,000 b/d refinery in Anacortes, Washington, in 2012.
The permitting delays have forced the company to watch advantages it recognized four years ago move to the US Atlantic coast. Roughly 1mn b/d of railed crude offloading capacity have come online on the US Atlantic coast since Tesoro began taking deliveries at Anacortes. West coast operators have managed to start up less than a quarter of that volume over the same period.
Crude imports from outside North America to US refineries have withered in almost every region over the period, and especially in the US Atlantic coast, according to the Energy Information Administration. But the US west coast, lacking sufficient infrastructure to tap domestic and Canadian production, has seen little change in its crude supply. The region excluding Hawaii has trimmed overseas imports by 3pc since 2011. The US Atlantic coast, excluding two shuttered refineries, slashed imports over the same period by 27pc.
Like TransCanada, Tesoro can only try to win over the public and wait for the government review process to finish.
"It's a little bit frustrating," Goff said. "You can make good decisions, but it takes a long time here."
Moving Bakken to the west coast by rail will not live or die with the Vancouver Energy project. Tesoro itself will add 25,000 b/d of railed heavy crude at its California refineries. Phillips 66, Valero and Shell all rail offloading facilities under some stage of review. Alon USA late last year won county approval of a railed offloading facility in Bakersfield, California.
But none of the projects bring the volume needed to drive the kind of competitive environment Tesoro expects to back out Mideast Gulf and Russian crudes from the coast, he said.
"The other opportunities are a lot smaller in scale," Goff said. "Which helps. It just doesn't have the same impact. They're very positive, they achieve some of the same things, and the cumulative impact of people doing small projects adds up. But this is super-efficient and it just adds advantages it's hard to get anywhere else."
Boosting crude competitiveness is by no means the refiner's last hope. Refined product exports may hold only meager promise compared to the US Gulf coast, but the refiner plans to sell mixed xylenes to Asian petrochemical customers from its Anacortes refinery. Tesoro has shipped naphtha to Asian markets and backhauled jet fuel to its Kenai, Alaska, refinery. The company has uncovered new uses for the North American crudes it can access, such as the stranded waxy crudes from the Uintah basin in Utah. Tesoro can run the light, sweet but highly paraffinic Uinta production directly into its fluid catalytic cracking units at Salt Lake City and Anacortes, cutting energy costs and allowing the company to continue some production during maintenance on crude units. And Tesoro has for five years looked for bolt-on advanced biofuels production technologies that would seamlessly provide blending options for the company, a project it first tried in Hawaii with UOP Honeywell in 2010.
But Goff does not consider retreat as an option. The company would not expand farther east than west Texas or the US central corridor, and look for pieces that would quickly integrate into the company's existing downstream business.
That leaves few potential candidates, and Goff said the company knew of none for sale. US Gulf coast facilities and their overseas markets hold no interest for him.
"We drive a very integrated business," Goff said. "You don't need an integrated business on the Gulf coast."
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