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Saturday, July 31, 2004 - Page updated at 12:00 A.M.
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Foreign oil flowing into state's refineries

By Brandon Sprague
Seattle Times business reporter

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BLAINE, Whatcom County — To help meet Washington's soaring demand for gasoline this summer, a tanker nearly three football fields long arrives at the BP Cherry Hill refinery roughly every three days and offloads hundreds of thousands of barrels of crude oil — usually enough to make more than 10 million gallons of gasoline.

On most days, the massive ships carry oil from Alaska's Prudhoe Bay.

But on a day earlier this month the ship was the British Osprey, arriving after several weeks at sea with a mix of crudes from Indonesia and Kuwait. The previous day, the British Laurel had docked with oil all the way from Iraq.

Washington once may have enjoyed an economic advantage as home to the U.S. refineries closest to Alaska, but in today's global energy market, that edge has all but disappeared.

The state's refineries are fed a growing amount of imported crude, while other countries also bid for Alaska's output. For instance, the Cherry Hill refinery near Anacortes produces one-fifth of the state's gasoline supply, and imports 30 percent of its crude from foreign sources, executives said.

That puts Washington squarely into the ebb and flow of international oil markets.

"They are not our refineries," said Tim Hamilton, a petroleum consultant based in McCleary, Grays Harbor County, who frequently locks horns with the industry. "They're international refineries that happen to be located in Washington. The oil companies can export the gasoline, refuse to produce it, or charge $5 per gallon if they wish."

Until recently, foreign crude imports were a rarity in the Puget Sound area. When the Alaska North Slope fields were producing at their peak — 2 million barrels a day in 1988 — Washington and California did not need to import any international crude since they were already awash with supply from the north.

But Prudhoe Bay is experiencing "a serious and steep production decline," said Joe Sparano, president of the Western States Petroleum Association (WSPA), which represents oil companies. Crude shipments from Alaska to the Lower 48 have fallen by 50 percent in the past 20 years, to 900,000 barrels per day, Sparano said, and the amount is going down daily.

Nearing end of its cycle

Most oil fields have a life span of 30 years, and Prudhoe Bay is simply nearing the end of its economic cycle, said Frank Holmes, spokesman for the WSPA. "As a field matures, there is less and less oil in the ground. It's just a natural decline."
 
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Meanwhile, consumption continues to rise at 2 percent a year.

Washington has five refineries. The four largest are owned by international oil companies BP, Royal Dutch/Shell and ConocoPhillips, and by Western independent Tesoro Petroleum. The smallest is owned by a longtime regional refiner, privately held U.S. Oil & Refining of Tacoma. Together these refineries process 607,000 barrels of crude a day.

As recently as 1998, gasoline in Washington was pennies cheaper — before taxes — than it was in such states as Minnesota, Montana, South Dakota and Colorado. In April of this year, though, Washington's price hovered at least a nickel above the prices in those states.

Now Alaskan oil is bought and sold on the commodities market of the New York Mercantile Exchange like every other type of crude, and its price is therefore susceptible to labor problems in Nigeria or sabotaged pipelines in Iraq. And as the flow of Alaskan oil slackens, Washington refineries are increasingly exposed to such international perturbations.

"As our market tightens," Sparano said, "we will feel those effects of global events even faster and faster."

Those effects include, some say, demand from other regions. In April, even as gasoline prices started to top $2 per gallon in Washington, oil companies began exporting small amounts of West Coast crude oil to China, the Energy Information Administration reported.

The nature and origin of crude oil shipped to Washington refineries are an especially sensitive issue given the record-high gas prices in Washington this summer. Oil companies, which released second-quarter earnings this week, insist it is mainly the cost of crude oil that is driving gasoline prices.

To compensate for the Alaskan decline, Washington's refineries are casting their nets farther — to Venezuela, Bahrain, even Iraq — to find substitutes. And since January, BP has been importing steadily increasing amounts of Basrah Light, a heavy sulfur — or "sour" — crude from newly flowing fields in Iraq. BP imported 942,000 barrels of Iraqi crude in April, up from 465,000 barrels in January.

"Now we are processing a variety of crudes that we call opportunity crudes, that are often cheaper than [Alaska Northern Slope] and that give us some other options," said Mike Torpey, an engineer at the refinery.

And some of those imports travel a long way. The journey from the Middle East typically takes 25 to 30 days, as opposed to three to five days from Alaska's oil port at Valdez.

Does it make economic sense to bring oil so far? Oil producers say it can, thanks to the shifts of supply and demand.

"The crude oil is marketed on a worldwide basis, so if you can get a deal on a tankerload of Iraqi crude, you buy it," said Frank Holmes, Sparano's colleague at WSPA. It's a market constantly in flux, he said: "Some of these loads are bought and sold while they're in transit."

Worth the expense

The average spot price on the Organization of Petroleum Exporting Countries' basket for crude so far this year has been $32.78 a barrel, 8 percent cheaper than the $35.80-per-barrel average price for Alaska North Slope.

That $3 differential is worth the expense of transporting the oil via supertanker. "It's costly to transport crude, but it's certainly not a deal-breaking expense," said Greg Nothstein, an energy-policy specialist for the state Department of Community, Trade and Economic Development.

Still, some experts are surprised that oil tankers would be coming to Washington from such a distance. "The logic is if you are in the Middle East, you go to Asia," said Mike Berdett, a senior petroleum analyst at the U.S. Energy Information Administration. "But then again, sometimes you could end up with crazy economics and get coals going to Newcastle," he added, referring to the adage about the foolishness of bringing coal to the coal-producing center of England.

Oil traders, some of whom work for the oil companies themselves, watch the prices in different regions and will divert cargo to the most profitable destination.

"If they see a tanker headed for New York Harbor and they observe prices rising on the West Coast, they'll call the ship captain and say, 'You aren't going to New York — you're heading West,' " said Keith Leffler, an economics professor at the University of Washington.

While crude from Alaska is declining, the demand for gasoline and other refined fuels is rising steadily, especially on the West Coast.

Washington's five refineries are already running at peak production and are not equipped to handle more, oil-industry proponents say.

"We are shooting for 97 or 98 percent [of peak capacity] but you can't have any hiccups, burps — or you're done," said Torpey, the BP engineer.

Washington traditionally refines more gasoline than consumers buy in the state and is therefore a net exporter of gasoline.

The Evergreen State supplies upward of 90 percent of Oregon's gasoline, and while refineries are tight-lipped about how much is sent to California, Leffler said, it is "not a trivial amount."

The dynamic of high demand and low supply on the West Coast will not change any time soon.

In fact, the market may only tighten.

In October, Shell plans to shutter its Bakersfield refinery — one of four it operates on the West Coast — which produces 2 percent of California's supply.

Shell spokesman Stan Mays said, however, the closure won't reduce Washington's supply, because Shell's refinery in Martinez, Calif., will pick up the slack.

Even so, spikes in the global oil market and ever-increasing demand for gasoline are bound to put further pressure on the state's refineries.

"Whenever there is a little perturbation or spike, that's when we sit up and notice," said UW's Leffler, "but really what we have is a system on the edge."

Brandon Sprague: (206) 464-2263 or bsprague@seattletimes.com

Crude-oil prices up

WASHINGTON — Crude oil prices rose again yesterday as concern continued about disruptions to world production.

The price of benchmark crude oil for September delivery closed at $43.80 a barrel on the New York Mercantile Exchange, up $1.05 from Thursday. It was the highest closing price in the 21 years the exchange has sold the contracts, surpassing Wednesday's record high of $42.90. Adjusted for inflation, however, the cost of oil remains well below peak prices in the late 1970s and early 1980s.

The Washington Post

Copyright © 2004 The Seattle Times Company

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