State’s access to oil now a federal issue

As California becomes increasingly reliant on oil from elsewhere, state and federal officials are trying to figure out how to get enough energy to the West Coast if disaster strikes.

The need became clear in August, when corroded BP pipelines threatened to halt supplies from an Alaskan oil field that fed West Coast refineries. The Bush administration quickly offered to tap the Strategic Petroleum Reserve to offset the shortfall and blunt a price spike that pessimists predicted would yield $4-a-gallon gasoline.

Ultimately, the outage was half as bad as first thought, and consumers in the West were hit with a relatively small price hike. It was a lucky turn of events that spared federal officials from facing an uncomfortable fact: In an oil-supply crisis, the western U.S. would be on its own.

The U.S. stockpile along the Gulf Coast, the nation’s $23-billion oil insurance policy, would be of little use to California in a crunch. The massive cache of crude isn’t connected to the West by pipeline and is at least 16 days away from California by tanker.

For federal energy experts, the BP scare “was sort of a wake-up call,” said Gordon Schremp, senior fuels specialist at the California Energy Commission.

Now, after spending more than 30 years focused on the Gulf Coast, strategic reserve officials are weighing their options in the West for the first time.

“The reserve has to take a closer look at how it can respond to a crisis on the West Coast, such as what happened with BP and the Alaska production,” said David Johnson, director of planning and engineering in the Energy Department’s office of petroleum reserves.

“It’s becoming a big issue. The West Coast is a growing demand area,” he said. “We have to have a plan of some sort to meet their needs.”

Johnson and reserve economist Jeremy Cusimano visited California in March, and Cusimano returned this month to get a feel for the region’s supply challenges.

The news was grim.

Oil-rich California, once self-sufficient, now relies on imports for 60% of the oil that flows through its refineries -- roughly 20% from Alaska and 40% from Saudi Arabia, Ecuador and other foreign countries. With oil production declining in California and Alaska, state officials expect foreign oil imports to more than double during the next 15 years.

That kind of dependence is a concern not just for California, but also for Arizona and Nevada, which get most of their fuel from California ports and refineries. A major supply disruption at the Los Angeles-Long Beach port complex -- whether from an accident, a terrorist act or an earthquake -- would be quickly felt across the West.

“If we lose one of our major crude oil import facilities, there would be significant consequences,” Schremp said. “There would be a turndown in refinery production ... with significant price impacts and some economic harm.”

The government’s new willingness to rethink its reserve strategy is driven primarily by the growing thirst for foreign oil on both coasts. But it also reflects a recognition that energy companies are holding smaller backup inventories of oil and fuel and that the nation’s crucial network of ports, pipelines and refineries is maxed out and vulnerable.

Recent events show that such worries aren’t unfounded.

This year a fire at a Texas refinery crimped the flow of gasoline into Arizona from the east, forcing California to send extra supplies to Phoenix for the last few months -- further straining regional fuel inventories. Last week BP acknowledged that a water pipeline problem forced it to shut down a quarter of its production in the same Alaskan oil field that made news last year.

Philip K. Verleger Jr., an economist who helped the Ford administration launch the Strategic Petroleum Reserve in 1975, believes a federal oil inventory in the West is overdue.

“If the United States is going to put any more oil in the reserve,” he said, “it should be on the West Coast.”

Not everyone thinks a West Coast reserve is necessary.

Executives at Tesoro Corp. are among the doubters. And that hesitancy is of particular note because, with no oil of its own and three West Coast refineries to feed, Tesoro is more vulnerable to disruptions than its larger brethren.

Lynn Westfall, chief economist at San Antonio-based Tesoro, downplayed the Alaskan oil disruption late last year as “a blip,” and said that the Strategic Petroleum Reserve could provide indirect help to the West by adding oil to the worldwide mix.

“If you release crude from the SPR, it will free up crude somewhere else that we can then access,” said Westfall, who said he conveyed that view to reserve officials in a recent meeting.

“Plus, we’re not subject to things like hurricanes out here that might cause a release from the SPR.”

For California and other Western states, any federal help is years away, if it’s coming at all. The new reserve study is tied to President Bush’s January proposal for a second expansion of the petroleum reserve starting in 2015.

Johnson’s team, which will make recommendations by the end of the year, also is assessing needs on the East Coast and whether there should be a federal reserve of gasoline, diesel or jet fuel in addition to crude oil. “All the options are still on the table,” Johnson said.

The first expansion ordered by Bush -- to 1 billion barrels of oil from the current 727-million-barrel capacity -- has been mapped out. It’s set to begin in 2010 and would add oil at two existing facilities and a new site in Mississippi.

The oil reserve was created more than 30 years ago in response to the Arab oil embargo and was meant to protect the country against a similar supply cutoff.

There were no worries about the West Coast. California had plenty of oil, and until 1998, the federal government owned a good portion of it as part of the Elk Hills Naval Petroleum Reserve near Bakersfield. That supply, sold to Occidental Petroleum Corp. in 1998, was never available for immediate use because it was held underground in its natural state and would have to be pumped out in traditional fashion.

Federal officials have sold oil from the strategic reserve only a few times: after Hurricane Katrina in 2005, in 1996-97 for nonemergency price relief and during the 1990-91 war in the Persian Gulf.

Some in California believe the state would have more use for a government-owned gasoline bank that could release fuel in a daily auction, boosting in-state inventories and loosening refiners’ control over supplies.

Stillwater Associates, an Irvine consulting firm, studied that option for the California Energy Commission in 2002, concluding that a gas bank would be costly but would save consumers money by reducing price volatility and blunting the effects of price jumps caused by refinery outages.

The oil industry opposed the idea, and state energy officials declined to study it further, citing concerns over unintended consequences.

“We still see price spikes that are driven by lack of supply, and I would argue that it’s worse now than when we first looked at it,” said David Hackett, president of Stillwater.

“I think it’s time to look at it again.”

The federal government, which in 2000 provided oil from the strategic reserve to establish a heating oil reserve in the Northeast, doesn’t seem interested in contributing to a West Coast gasoline stockpile.

Johnson said he had reviewed the gas bank study. “It’s good if the state wanted to do that,” he said. “But I don’t think it’s a federal issue.”

Johnson’s group is focused on crude oil in the West, but he has concerns. There are no salt formations to provide low-cost oil storage, and that leaves the option of building large, above-ground tanks somewhere near the state’s refineries.

“It doesn’t look good on the West Coast, environmentally and in terms of trying to build something out there,” he said. “It would be very hard.”

But Energy Secretary Samuel Bodman said recently that he hadn’t ruled anything out.

“This is a 20-year program, so it will be a number of years before all the questions get asked and they all get answered,” he told reporters at an energy conference in February. “We’re in the very early stage of looking at it.”

elizabeth.douglass@latimes.com