Chevron Balks at Tanker Deal Requiring Pledge on Pipeline

After two days of grinding hearings, the Santa Barbara County Board of Supervisors on Tuesday agreed to allow Chevron Corp. to ship Point Arguello crude oil via tanker south along the environmentally sensitive California coast to Los Angeles.

The terms pleased environmentalists. But Chevron, which has wanted to use tankers for years, immediately rejected the board’s proposal, saying too many strings remained attached.

It was the latest skirmish in the lengthy, increasingly bitter dispute between Chevron, which operates the field offshore from Santa Barbara, and the environmentalists and county government.

For Chevron, the gloom hovering over the U.S. oil business has only worsened the prospects for the battered Point Arguello project, once predicted to be the country’s next Prudhoe Bay.

In Tuesday’s offer--which was a ruling on Chevron’s third application for a tanker permit since 1989--the county said Chevron can use tankers temporarily, but only if the oil company first signs a binding agreement to ship oil through a pipeline that would be built in the interim. Such an agreement would allow a pipeline company to obtain construction financing.

But Chevron wants to commit itself only after shipping enough oil to test the market among Los Angeles refineries for Point Arguello crude, a market it did not doubt a decade ago. The company says the existing pipeline system does not have enough spare capacity--or heaters to allow the flow of its heavy crude--to allow a meaningful market test.

But environmentalists and the county--wary of any more disasters like the 1969 Santa Barbara well blowout that spilled 235,000 gallons of oil--strongly believe that transport by pipeline is safer than by tanker. Both have been relentlessly suspicious that once tanker shipment begins, Chevron will attempt to continue the traffic--which is cheaper than by pipeline--unless it is contractually bound to a new pipeline when built.

“There’s a whole history here of promising to build a pipeline and reneging on that promise,” says Bob Sulnick, executive director of the American Oceans Campaign.

Several pipelines have been proposed over the years for transporting Point Arguello crude south. The proposed Cajon Pipeline would drop down to Los Angeles from the existing, and underused, All American Pipeline that runs from Santa Barbara to Texas.

The existing Four Corners Pipeline which pumps oil from Los Angeles to the All American Pipeline could be reversed. But Chevron prefers a new Pacific Pipeline, proposed by Southern Pacific Transportation Co. along its railroad right-of-way.

“We are absolutely certain that there is a market” for Point Arguello crude, says Chevron spokesman Michael Marcy, “but until we can get significant volumes of that crude in that market . . . it’s a problem for the Pacific Pipeline system.”

In 1979, large oil reserves discovered off the Santa Barbara coastline prompted a consortium of oil companies to eventually spend more than $2.5 billion on wells and facilities, at a time when the nation’s oil industry saw great promise in exploring the western states. At the time, many believed that oil prices would be as high as $80 a barrel by now.

Chevron, the operator of the consortium, always intended to ship crude to the refineries of Los Angeles, which serve the world’s largest market for auto fuel. Chevron and the other Point Arguello producers went to extraordinary lengths to gain access to the Point Arguello site.

The consortium, including Phillips Petroleum Co. and Texaco Inc., paid almost $750 million--still a record in the industry--in lease bonus payments to the federal government for the right to explore off Point Arguello at the time.

The producers also agreed to almost 200 special conditions required by the county for a permit, not least of which was relocating a public school, an action that Chevron says added $23 million to the cost. Chevron also built a $20-million desalination plant and paid millions to preserve rare butterflies and the endangered Gaviota tarweed.

Meanwhile, the producers have repeatedly run up against the Santa Barbara County Board of Supervisors and various environmental organizations--including GOO (Get Out Oil), Santa Barbara’s Environmental Defense Center and the Santa Monica-based American Oceans Campaign.

Chevron estimates that the three years its oil production has been limited by these groups’ resistance to its tanker plans has cost it as much as $350 million.

Chevron began producing oil in Point Arguello in June, 1991, though still banned by the county from using tankers directly to Los Angeles. The company has since been shipping some oil by an elaborate and expensive route--by pipeline to Bakersfield and north to San Francisco Bay, returning south by tanker along the length of the California coastline to Chevron’s El Segundo refinery.

Today, oil prices are one-fourth of the earlier forecast. And expensive improvements to Chevron’s El Segundo refinery, in preparation to accept the heavy, sulfurous Point Arguello crude, now make it more difficult and costly to use the existing pipelines to get it there.

“When you weave it all together, it’s a horrible project economically,” says Douglas F. Henderson, executive director of the Western States Petroleum Assn. The oil companies have already written off big losses against their taxes, Henderson notes.

Chevron and the other producers, some oil industry experts say, now just want to see a little cash flow from their expensive and frustrating investment.

Proposed Tanker Route

Chevron sends some crude oil through the All American Pipeline to a junction near Bakersfield, then through the Texaco pipeline to Martinez and back down to Los Angeles by tanker. Mobil’s pipeline is unavailable. Some extra capacity exists on the Four Corners Pipeline 63 that connects the All American Pipeline with Los Angeles, but not enough to handle full Point Arguello production. Four Corners 90 could be reversed to flow to Los Angeles, but Chevron prefers the Pacific Pipeline proposal. In the interim, Chevron is proposing to move its oil by tanker along the coastline from Gaviota to Los Angeles for the three years it would take to build a pipeline.

Source: Santa Barbara County Board of Supervisors staff report, Chevron Corp.