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California refineries struggle for supplies

December 19, 2012
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Oil Refinery_121912The surge in U.S. shale gas production is taking over the country, but in California refineries are struggling to reduce costs and cope with the difficult market conditions. While cheaper crude may be essential for boosting production in plants across the Eastern states, the situation is not that positive in California, Reuters reports.

There are a series of obstacles that may delay or even entirely prevent the shipment of significant quantities of light crude to the state over the next few months. California has the toughest permitting rules in the United States and very complex carbon emissions limits. Combined with the lack of suitable pipeline infrastructure, this might mean that refineries in California are not supplied in time to catch up with plants in the rest of the country, leaving the state behind in terms of sector development. Experts estimate that shipments are not likely to start flowing toward California before the end of the next year, when prices may not be as low as they are at present, Reuters said.

The conditions on the Californian market are already forcing processors to take drastic measures. Alon Energy USA Inc, a refiner that specializes in asphalt, had to close its refining system in Southern California in October and November due to lack of demand for its products. However, the company is planning to construct a facility to bring in inland crude by rail in the second half of 2013. It is the only California-based refiner that has expressed interest in building a rail offloading facility and has applied for a permit, although others are also considering the option.

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Other companies are looking for opportunities to capitalize on the price slump following the boost in shale gas production. According to Richard Kinder, chief executive of Kinder Morgan Energy Partners LP, the company is interested in converting part of a natural gas pipeline, which is currently underused, to carry crude to Southern California. If the $2 billion project is given the green light, 400,000 barrels per day could start flowing into the state from West Texas. However, industry experts estimate that completion of the project might take a year or even two.

The biggest problem is distance. California is located remotely from major shale gas fields and this is an obstacle by itself. Transport by water is also impossible, as there are no big waterways flowing west. However, even worse, there is no reliable pipeline infrastructure and providing such infrastructure would take time and resources, Reuters said.

So far the state has been mostly dependent on imported crude, which now makes up about half of Californian demand but accounted for just 10 percent of supplies in 1995. The rest of the demand has been met by now running-low local fields and shipments from Alaska. The question is, will Californian refiners manage to beat the clock and stay in business?

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