Tesoro Corp. (NYSE:TSO) and Savage Companies announced Monday that they will be teaming up to build a new facility at the Port of Vancouver in the state of Washington. The program will facilitate the transport of cheap North American crude oil by rail to the Tesoro refineries on the West Coast. A marine offloading dock will also be added to the port.
This latest move will further position Tesoro’s West Coast refineries to benefit from the lower crude oil prices coming out of Central America and Canada.
The facility will cost between $75 million and $100 million and should be operational by 2014. It will be able to move 120,000 barrels of oil per day (bpd) at its inception, reports Reuters, with the ability to maximize capacity at 280,000 bpd.
Tesoro is a Texas-based refining company that operates seven refineries in the Western U.S. at a daily capacity of 675,000 bpd. The new facility would focus on advantageous crude oil prices coming out of Montana and North Dakota’s Bakken shale, and from Western Canada.
Savage, a privately owned company with headquarters in Salt Lake City, Utah, will design, construct, and operate the port facility. Currently, the company transports bulk cargo in the U.S. and parts of Canada.
The two companies have worked together for nearly a decade on other ventures.
The project is awaiting approval from regulators and the port of Vancouver commission.
Crude Oil Distribution
The idea behind this venture is to distribute crude oil to refineries that otherwise would miss out on low prices from the inland U.S. and Canada. Tesoro will buy and ship the crude through rail straight to its port facility.
This project follows one in February by Global Partners LP (NYSE:GLP) that further shows the desire to push crude West from the Bakken and other similar shale deposits, where output continues to increase. At the same time, production from California and Alaska is straining.
From Bloomberg:
“It illustrates the changing dynamics,” Dave Hackett, president of Irvine, California-based oil consultant Stillwater Associates, said yesterday in a telephone interview. “The market keeps running into bottlenecks and keeps having to solve the logistics problems and figure out how to get around the bottlenecks by building additional capacity.”
According to Bloomberg, Valero Energy Corp. (NYSE:VLO) recently told investors that carrying crude by rail from the middle of the country to the West Coast would cost $13 a barrel. If oil was shipped to any other port, it would be less cost effective.
And the reason projects are being directed towards Washington and not right next to the refineries—in, say, California—is because California law is very stringent in handing out permits. It would take too long.
Rail Transport
And why use railroads?
That answer is simple. Unless the Keystone XL is approved, there isn’t one oil pipeline that runs internationally from the U.S. to Canada. Everything that is transported from U.S. refineries must be done by train.
We’ve already got an established railroad, whereas pipelines take time and money to construct; companies have decided they might as well use what they’ve got until it doesn’t prove useful anymore.
Because pipeline infrastructure is so scarce, the railway business is gaining a monopoly on transport rights and is set to reap the rewards from the shale boom.
Canadian Pacific Railway Ltd. (NYSE:CP) ships crude from North Dakota’s Bakken and also supplies the sand for fracking the rock. At this time last year, shipments had increased 90 percent from the year prior, and 2013 sees only greater demand for rail transportation.
BNSF, a Berkshire Hathaway (NYSE:BRK.A) company, also ships crude oil from the Bakken.
And Phillips 66 (NYSE:PSX), a subsidiary of ConocoPhillips (NYSE:COP), joined the railway transit ranks last year.
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Rail Unloading Plants
In addition to the Port of Vancouver plant, Tesoro also has a plant in Anacortes, Washington, where its rail-unloading operation can process 50,000 bpd of crude, a number it reported this quarter. And the company owns refineries in Northern California, Los Angeles, and Alaska, according to Bloomberg, that can process 339,000 bpd combined.
Tesoro has also reached an agreement to purchase a BP Plc (NYSE:BP) refinery in Carson, California that processes 266,000 bpd.
Tesoro is steadfastly committed to bringing in oil delivered by the shale boom.
Global Partners also recently purchased a crude oil and ethanol complex in Oregon that has rail-unloading capability of 200,000 bpd. The company is positioned on the East Coast as well, where a rail-unloading plant operates in New York.
With the country working in unison and refiners to the West starting to reap the same rewards that others have seen, and with production increasing every day, it’s chuga chuga chuga chuga, $! $!
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