Export Plan for State’s Oil Under Attack

It’s dirty oil and there is too much of it. Now, a group of Californians is proposing to export up to 5% of the state’s grimy crude to the Far East.

Wait a minute. Isn’t this country running out of oil? Are we supposed to tear up the Alaskan wilderness looking for oil to replace the gunk that someone wants to ship from Bakersfield to Singapore?

The movement of oil around the globe could encounter its share of mine fields. Some are the real thing, as in the Persian Gulf these days, and some are political.

And given the importance the Reagan Administration has attached to finding and pumping more domestic oil to limit dependence on imports, an Interior Department spokesman calls the California plan politically risky.

Strengthen Producers

But it seems to have economic logic on its side. And, says Roy Greenaway, chief of staff for Sen. Alan Cranston (D-Calif.), “You can’t ignore the facts just because it’s difficult to explain politically.”

The whole export idea is a reflection of California’s unique, ongoing crude oil glut and the nasty nature of much of the state’s home-grown crude. There is not much of a market for the oil here, and consultants say the state’s struggling independent oil producers could get perhaps $3 more per barrel and long-term contracts from such places as Japan, Korea and Singapore.

That would tend to strengthen those producers and supposedly encourage them to explore for more domestic oil--theoretically expanding U.S. oil reserves rather than merely raiding them for the benefit of other countries. Meanwhile, the crude couldn’t be legally exported until deals were struck to import equivalent amounts of oil.

“This country will always be a net importer,” says E. C. (Gene) Kozlowski, a Los Angeles oilman and president of the California Independent Producers Assn. “The question is how to maximize the value of our domestic reserves.”

The plan has the ancillary virtue of exporting the air pollution that comes from burning the thick, sulfur-ridden oil mined from the San Joaquin Valley. It is so dirty, for instance, that it is effectively banned from electric power plants in Southern California.

But whatever the advantages, the oilmen are wading into murky trade and political waters.

The soon-to-be-filed application to export perhaps 50,000 barrels per day of heavy California crude has run up against a congressional effort to ban all crude exports on grounds that domestic oil supplies are too precious. It has also riled local independent refiners, who stand to pay higher prices for their crude or, they contend, lose some business altogether.

And given the rarity of crude oil exports from this country, the proposal is viewed with great suspicion by those--including consumer groups and the domestic shipping industry--who have succeeded for more than a decade in blocking the export of crude from Alaska’s mammoth North Slope oil fields to Japan.

Double Exports

The ban on North Slope exports was imposed by Congress in return for permission to build the 800-mile Trans Alaska Pipeline System, an arrangement put together in 1973 in an atmosphere of oil shortages and sharply rising prices. Though the California plan is modest, it would more than double the nation’s current measly exports of crude.

“After all this time, we would hate to spring a leak over in California,” said Howard Marlowe, a Washington lobbyist and director of a group called Coalition to Keep Alaska Oil. “It would be the proverbial camel’s nose under the tent.”

The California proposal comes as U.S. and Canadian trade negotiators last week agreed on asweeping new free-trade plan that, among other things, would permit the export of up to 50,000 barrels a day of North Slope crude to Canada--a proposal that is already drawing fire in Congress.

There are few limits on exporting oil after it’s been refined into gasoline or other products, but hardly any crude is sent out of the United States. The exceptions are about 18,000 barrels a day of Michigan crude oil to Canada and a recently approved, largely symbolic deal that has led to the export of 3,600 barrels a day of crude from Alaska’s Cook Inlet, a smaller, separate oil field from the North Slope, to the Far East.

Meanwhile, the country is importing more than 5 million barrels of crude daily, more than one-third of its oil needs, and the total is rising.

Although there are instances where exports would make economic sense, reliance on imported oil and shrinking domestic reserves have generally made crude exports politically unacceptable. Permission to send crude out of the country must also meet some stiff tests under the Export Administration Act and the Energy Policy and Conservation Act.

Among other things, such exports must be matched by equivalent imports to make the transactions “energy neutral;” have a positive effect on consumer oil prices; require a finding that the product can’t reasonably be processed in this country, and fit various definitions of the national interest.

Cases on Both Sides

In the California crude oil plan, an official in the Commerce Department says, “Whichever side of the fence you’re on, you can make a case.”

The proposal has been advanced by the California Independent Producers Assn., made up of small and mid-size oil producers that control about one-fourth of California’s 1 million barrels of daily crude-oil production.

The group says about two dozen of its member companies have voiced interest, and that collectively they need a market for up to 50,000 barrels per day of crude. Much of it would be sold for fuel oil, probably for ships’ bunker fuel.

The barrels actually produced by the independent oil firms might never get to the Far East. But in a business that trades its main product like baseball cards and mixes it like cheap wine, the gooey oil from Kern County might be swapped for similar petroleum that would end up serving industries or power plants in Japan, Mexico and other Pacific Rim nations.

That the nation encourages the export of refined oil products while erecting steep barriers for crude stems, in part, from a perceived national security need to keep refineries in business. In this case, the domestic refineries would be bypassed in favor of foreign-based ones.

It is no surprise that the trade group for the nation’s independent refiners is bitterly opposed to the plan. The refiners note that it would increase the nation’s already high dependence on imported oil, and contend that it would raise California’s oil prices by forcing them to buy costlier crude oil.

They also portray it as a first step in a scheme to ultimately export several hundred thousand barrels of California crude per day. The description of the type of crude that the producers propose to export--that with a certain degree of thickness, or viscosity--would apply to some 750,000 barrels a day, or about three-fourths of California’s entire production.

Scope Minimized

But most of that oil is produced by the big oil firms, which supposedly have less economic interest in exporting because their own California refineries are captive markets for their crude. The independents minimize the scope of their plan, dismissing it as an effort to find a market for a relative handful of barrels of dirty oil that nobody else wants.

Nonetheless, skeptics say an export license for any California crude would amount to a foot in the door.

“If they can narrow it down to 30,000 or 50,000 barrels a day, we’re not going to object,” says lobbyist Marlowe. “But it would be hard to prevent Mobil from doing the same thing.”

“What happens if you export all that crude and the refineries go out of business?” asks Scott Lovejoy, director of the West Coast division of the American Independent Refiners Assn. About a dozen small California refineries have closed since 1982, leaving 28 in business.

Indeed, the export debate between the producers and refiners has become a bit of a brawl.

Lovejoy likes to raise the specter of California crude ending up in Communist North Korea, for example. And Cranston’s office says it was the refiners who conveyed word that the oil producers proposed to use the same Japanese trading firm, C. Itoh & Co., that handled the controversial sale of top-secret submarine technology from Japan’s Toshiba to the Soviet Union.

The oil producers recently severed ties with C. Itoh as a result, and are looking for another trading company. The change in the cast has delayed the filing of an application for an export license.

Meanwhile, the two sides accuse each other of exporting some heavy California crude oil illegally.

‘Passing a Candle’

Certain California crude comes out of the ground in a form virtually identical to heavy fuel oil, usable “as is” for ships’ bunker fuel, but it can’t be legally exported until it has been refined. The refiners say some producers export the stuff anyway. But the producers accuse the refiners of “passing a candle under” some heavy crude--that is, pretending to refine it--then selling it for export as a refined product.

It’s an open secret within the industry that someone is doing it, and “we’re proposing to do it legally,” says William R. Miller of Laguna Niguel, a longtime oil lawyer who represents the independent oilmen.

Miller adds: “The refiners are trying to lay all kinds of terrible things at the door of our little export program, but I dispute that any refinery would close because of this project. I do not believe that any discernible impact will be felt by any California refiner. They don’t understand our proposal.”

Exporting refined products, some of it made from foreign crude, generates the economic benefits that go along with the export process--notably creating American jobs. But the notion of exporting crude pumped right out of the subterranean United States continues to stir political opposition, even in today’s oversupplied world market.

Indeed, the evidence is that the glut will vanish within two or three years while U.S. production falls sharply. In part, the Reagan Administration proposes to deal with the predicted shortfall by opening up the Alaska National Wildlife Refuge to oil exploration.

Congressional OK Uncertain

But Congress must approve that. And while believing that the California export plan makes economic sense, an aide says Interior Secretary Donald P. Hodel “recognizes there are severe political problems” with the proposal as long as the government is sounding alarms over dwindling U.S. oil reserves and urging oil drilling in the Alaskan wilderness.

One version of the trade bill now being hashed over in a House-Senate conference committee contains an amendment by Rep. Howard Wolpe (D-Mich.), that would ban any crude-oil exports from the United States. Intended mainly to close a loophole in the ban on North Slope exports, the measure would block California’s would-be exporters as well.

Cranston’s office has been lobbying Wolpe to rewrite the amendment so that it wouldn’t hamstring the California plan, and Wolpe aides indicate that he is willing. The trade bill is to be enacted this fall.

“My boss wonders what we’re doing sending oil overseas when we are becoming increasingly dependent on imported oil,” says Wolpe aide Lauren Kenworthy. “But we are aware there are some special circumstances for the California producers, and that there may not be a domestic market for that oil. It’s fair to say my boss is sensitive to the California situation. We don’t want to impose some stupid law on people.”

As for Cranston, never considered a particular ally of the oil business, aides say he isn’t endorsing the export plan but simply arguing that it should rise or fall on whether it meets the current requirements of the Export Administration Act.

“All we’re trying to do is say that current law should apply. It’s an extremely difficult test to meet,” said Clair Thorne, another Cranston aide.

40% of Crude Alaskan

It might seem fair enough to link the state’s export scheme to questions of national energy security, but as in everything else, California’s oil market is a world apart.

Banned from sending their 1.9 million barrels per day of North Slope oil production to foreign ports, the big oil companies send at least half of it by tanker to California. With no pipelines to carry oil from California to other big national markets, the Alaskan crude competes with California’s less desirable, home-grown oil--and wins.

Some 40% of the crude fed into the state’s refineries last year was Alaskan, says the California Energy Commission. The oversupply has left some California oil in the ground and helped to drive the state’s crude prices well below the national average.

When major grades of crude around the world bottomed out at about $10 per barrel during the price collapse of 1986, some Kern County oil was fetching just $5.

Though the causes are still disputed after years of studies and court battles, the price disparity persists between crude oil of identical characteristics in California and elsewhere. Consumers who wonder why the price of gasoline here is often higher than the national average despite the lower crude prices can blame a host of factors, according to a recent study by the U.S. Energy Information Administration.

Refining of heavy crude is more complicated and thus more costly, for example, and stringent air-quality standards in the Los Angeles Basin add costs for refineries that don’t exist in other regions. But even after taking into account such unique factors, the state’s refineries, on average, boast higher profit margins per barrel than elsewhere, the study found.

The refiners’ Lovejoy dismisses as “insane” the idea that the state’s refiners are getting rich, asking: “If the margins are so high, how come all these refiners are going out of business?”

Even with the government’s blessing, some worry that the venture could founder on the mundane problem of getting the oil from Kern County to port for a reasonable cost. Trucking it, for instance, would cost about $2 a barrel and “they’d almost be behind before they started,” said longtime industry consultant James McDonald of Los Angeles.

Even here, the national security issue rears its head.

The only available pipeline running over the mountains to the Los Angeles or Long Beach ports also carries oil from the federal government’s own Kern County oil patch, the Elk Hills Naval Petroleum Reserve.

Normally, other crudes are blended with the Elk Hills oil in the pipeline. By the time it gets to storage tanks, several batches of oil are hopelessly mixed. Predictably, Uncle Sam won’t allow even a few drops of his own oil to be exported. Thus the independents can’t share the pipeline.

That’s the chief reason the independents are talking about a swap for similar crude oil produced elsewhere in Southern California, someplace linked directly to a port.

“That San Joaquin barrel will probably never make it to Japan,” says attorney Miller.

WHERE THE REFINED OIL GOES California 89% Elsewhere in U.S. 9% Outside of U.S. 2%