California refiners’ efforts to increase badly needed crude-by-rail service seem to have been derailed. Thank vociferous environmental lobby opposition and regulatory roadblocks for that result—in addition to narrowing price spreads that have slowed crude-by-rail interest elsewhere.

It wasn’t supposed to be this way, according to a new RBN Energy research report.

RBN rated California as a model market for domestically produced, rail-transported crude oil—at least on paper. California’s in-state oil production has been dropping for years. Meanwhile, Alaska North Slope production has dropped to less than half of its peak in the 1980s. That Alaska oil has been the base feedstock for most West Coast refineries since the late 1970s. But even a comparative trickle of railborne crude has nearly dried up. Crude imports from as far away as the Middle East take up most of the slack.

“Although California refineries initially met the criteria that spurred development of crude-by-rail shipments to other coastal regions (lack of pipeline infrastructure and wide crude price differentials between stranded inland supplies and coastal alternatives), neither rail shipments nor terminal build outs have made much of a dent in the Golden States’ crude supply,” the report said. “At their height in December 2013, crude-by-rail shipments into California reached 36,000 barrels per day (bbl/d)—just 2% of the state’s 1.9 million barrels per day (MMbbl/d) refining capacity—and they have since dwindled to a trickle.”

Efforts by refiners and midstream service providers to improve terminal infrastructure have not fared well in the state’s circuitous permitting process. In February, Valero Energy Corp's proposed oil-by-rail project to serve its Benicia, Calif., refinery, across the bay from San Francisco, was quashed by local planners, the first such facility on the U.S. West Coast to end a years-long efforts for permits with a flat-out rejection. Benicia’s planning commission unanimously rejected Valero’s request to build the project following four public hearings that were dominated by scores of opponents.

Valero said it would evaluate an appeal. It first proposed building a rail terminal at its 145,000 barrels per day (bbl/d) Benicia refinery to offload as much as 70,000 bbl/d of U.S. and Canadian crude three years ago.

Down the coast from San Francisco Bay, Phillips 66 Co. has cut the size of a proposed 25,000 bbl/d terminal that would serve its Santa Maria refinery at Arroyo Grande, Calif., located about 150 miles northwest of Los Angeles. San Obispo County’s planning commission is expected to rule on the revised request in May. Its staff has recommended for rejection.

There have been a handful of rail terminals permitted, built and put in operation, RBN noted. Tesoro Logistics has a 40,000 bbl/d rail terminal to serve its parent’s Martinez, Calif., refinery. Kinder Morgan has a 72,000 bbl/d rail terminal that can feed the same plant, although by truck.

Proposed crude-by-rail projects in California have faced opposition lawsuits designed to stall and block the needed rail terminals. The suits typically allege noncompliance with the California Environmental Quality Act (CEQA)—a tactic that has produced success.

“Undoubtedly, CEQA review presents its own delays and costs to industrial development. But if approached in the correct way, the CEQA process offers a significant opportunity to build a favorable foundation for crude-by-rail terminals and potentially forestall opposition lawsuits,” said a review written by attorneys Gabriel Collins and Alexander Obrecht for Midstream Business.

“First, CEQA’s requirement that the environmental effects of a proposed project must be weighed against a baseline presents an opportunity to convert readily available industrial sites to transloading use. Second, proactively engaging in CEQA review—although often dilatory and costly—allows the project proponent to sidestep a successful tactic in opponents’ litigation strategy,” they said.

But opponents have responded accordingly, the attorneys note.

“One pending suit requests the invalidation of the Kern County Board of Supervisor’s EIR [environmental impact report] of the Alon Bakersfield Refinery Flexibility Project. The lawsuit alleges that the EIR’s baseline for environmental analysis should be based on current shutdown conditions of the Bakersfield refinery—which has not operated since 2008—not the conditions that the refinery was properly permitted for and operating at in 2007.

“This lawsuit demonstrates that CBR developers must not only comply with the procedural aspects of CEQA but must take an active role in the substance of the CEQA review as well,” they added.

RBN noted railed crude “volumes shipped to the Golden State are tiny compared to those shipped to the Pacific Northwest,” even though Washington State also has had active opposition to crude by rail by a strong environmentalist lobby. Tesoro Logistics has an ongoing application under review for an enlarged terminal at the Port of Vancouver, Wash. Meanwhile, Tesoro moves significant volumes of Bakken crude west to supply its refinery at Anacortes, Wash.

Washington has had crude-by-rail traffic that peaked well above 200,000 bbl/d, nearly seven times the volumes of rail traffic headed for California’s much-larger refinery network, RNG added.

RBN concluded its report by noting that “crude-by-rail terminals are not welcome in California and getting a permit is akin to finding a needle in a haystack. Together with the worsening economics of crude by rail caused by narrowing crude price differentials, the net impact is that crude by rail to California is going to be negligible at best for the foreseeable future.”

Paul Hart can be reached at pdhart@hartenergy.com.