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Refineries Push Back Against Washington Crude-By-Rail Law; IMO 2020 Cited


File this one under the category of "be careful what you wish for."

In a letter to the federal Pipeline and Hazardous Materials Administration (PHMSA) filed as part of a long series of comments by many made to the federal agency, Phillips 66, a leading refiner, brings up the impact on IMO 2020 if a Washington state law on crude by rail is allowed to stand. 

The Washington law, SB5579, which went into effect earlier this year, limits crude oil by rail deliveries into the refineries around Puget Sound through both a cap on off-loadings from existing facilities and limits on a technical specification known as Reid Vapor Pressure (RVP). The RVP limit is written to clearly target shipments of crude oil from the Bakken field of North Dakota and Montana by rail into Washington. Various reports put movements of Bakken crude oil into Washington at 160,000 to 175,000 barrels per day (b/d).

North Dakota and Montana are challenging the law as a state usurping federal regulatory power in violation of earlier federal statutes regarding the movement of hazardous materials over the rails. Among the many letters sent to PHMSA, which has been asked to make an administrative ruling on the legality of the Washington law, is the one from Phillips 66. 

Phillips 66 (NYSE: PSX) operates a 121,000 b/d refinery in Ferndale, Washington. In its letter to PHMSA, Phillips 66 says it offloads about 35,000 b/d of Bakken crude oil to feed Ferndale. But because of the restrictions under the Washington law, Phillips 66 said its off-loadings since the law went into effect in July have dropped dramatically. 

Bakken crude oil is low in sulfur. Its sulfur content is generally less than the new limit of 0.5% sulfur that is at the heart of IMO 2020. Ships previously could burn marine fuel up to 3.5% sulfur. Under IMO 2020, unless a ship has a scrubber to capture sulfur emissions, it must burn fuel of no more than 0.5% sulfur. This means that Bakken crude oil, as a refinery feedstock, is well-suited to produce marine fuels compliant with IMO 2020.

By restricting offloadings of rail cars and sticking an RVP limitation on crude-by-rail that is aimed at Bakken crude oil, "Phillips 66 has drastically reduced the scheduled deliveries of crude oil to be unloaded at the Ferndale refinery rail rack for the remainder of the year," Phillips 66 said in its letter to PHMSA. That includes a 30-day period in which it expects to not offload any crude. 

The problem then is that since meeting IMO 2020 regulations is a top priority for refiners as the oil market approaches the January 1 launch date, what replaces the shipments of crude oil by rail into Washington refineries? And that's where Phillips 66 says that environmentally, the solution to that question will be worse than what advocates of the Washington law sought in the law's  passage.

"Using the crude oil rail facility to access a rateable and reliable supply of low-sulfur crude oil from the Bakken shale formation was a key component of our plan for supplying the marine transportation market with the more environmentally friendly bunker fuel required by IMO 2020," the letter said. 

And while its attempt at a pun might not have been intended, the company goes on to say: "SB5579 has derailed those plans."

Other sources of crude oil to replace the Bakken crude railed in will be from Russia, Saudi Arabia and West Africa, the Phillips 66 letter states. "Though these foreign crude oils are of similar quality in terms of sulfur content, their relatively significant distance from the Ferndale Refinery will result in (as compared to Bakken crude oil): increased transportation emissions; increased vessel traffic in the Salish Sea; increased transportation costs; and crude oil input interruption for the refinery."

What the letter doesn't say is that environmentally, the laws governing crude oil output from the Bakken are almost certainly more rigorous than those to be found in Russia or West Africa, if not Saudi Arabia.The oil that will be used in Ferndale instead of Bakken crude will probably have been produced in a less environmentally friendly manner. 

The letter goes on to say that the regulations will disadvantage Ferndale and other Washington refineries compared to the global refiners it competes with. It reduces "optionality," the ability of refiners to easily switch among input and output slates depending upon market signals. "Ultimately, optionality can be reduced to the point where it threatens the manufacturer's viability."

Marathon Petroleum (NYSE: MPC), which operates a refinery in Anacortes, Washington, also submitted a letter to PHMSA on the North Dakota/Montana petition. That refinery is roughly the same size as that of Ferndale. Its letter focuses heavily on the question of jurisdiction and whether the state of Washington has a right to implement its rules, which it says is a "poorly concealed attempt to ban the rail transportation of Bakken crude from outside the state...for use within the state."

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