Proposed crude-by-rail (CBR) projects in California increasingly face opposition lawsuits designed to stall and derail the terminals. The suits often focus on alleged noncompliance with the California Environmental Quality Act (CEQA)—a tactic that has produced success.[1] Undoubtedly, CEQA review presents its own delays and costs to industrial development. But if approached in the correct way, the CEQA process offers a significant opportunity to build a favorable foundation for CBR terminals and potentially forestall opposition lawsuits.

HOW CAN CEQA REVIEW PRESENT AN OPPORTUNITY?

First. CEQA’s requirement that the environmental effects of a proposed project must be weighed against a baseline presents an opportunity to convert readily available industrial sites to transloading use. Second, proactively engaging in CEQA review—although often dilatory and costly—allows the project proponent to sidestep a successful tactic in opponents’ litigation strategy. But first, let us pause to discuss what CEQA requires and how opponents have successfully used CEQA against CBR projects.

WHAT DOES CEQA REQUIRE?

Much like the National Environmental Policy Act in the federal context, CEQA requires government agencies to analyze the environmental effects of projects they approve.[2] CEQA applies to “discretionary projects proposed to be carried out or approved by public agencies.”[3] CEQA also does not require environmental review for purely ministerial functions and other categorically excluded decisions.[4]

If CEQA applies, the lead agency must determine whether the decision will have a significant environmental effect.[5] Decisions that will not result in significant environmental effects require the agency to prepare a negative declaration.[6] Decisions that will result in significant environmental effects require the agency to prepare an Environmental Impact Report (EIR).[7]

According the California statute, “The purpose of an [EIR] is to provide public agencies and the public in general with detailed information about the effect which a proposed project is likely to have on the environment; to list ways in which the significant effects of such a project might be minimized; and to indicate alternatives to such a project.”[8] To measure the effects of a project, “an EIR must delineate environmental conditions prevailing absent the project, defining a “baseline” against which predicted effects can be described and quantified.”[9]

Despite the traditional stigma of unnecessary cost and delay, if CEQA applies, proactive engagement with the EIR process can be used as a central part of a holistic strategy that focuses on community relations and transparency to address and prepare for general political opposition, which, if left unaddressed, is likely to fuel legal challenges.

HOW DO OPPOSITION GROUPS USE CEQA AGAINST CBR PROJECTS?

The first wave of lawsuits against CBR projects attacked the approving agencies’ failure to comply with CEQA at all—i.e., the agencies classified the approval of CBR transloading as a ministerial function falling outside the requirements of CEQA.[1] In response to one lawsuit, the Sacramento Air Quality Management District admitted that it violated CEQA by issuing a permit without a full environmental review. In response to this first wave of lawsuits, CBR developers should engage their approving agency to ensure that noncompliance with CEQA does not delay or impose additional costs to CBR projects.

A second trend in anti-CBR lawsuits appears to be emerging: Opposition groups are alleging substantive failures in EIRs related to the baseline against which CBR projects should be measured. One pending suit requests the invalidation of the Kern County Board of Supervisor’s EIR of the Alon Bakersfield Refinery Flexibility Project. The lawsuit alleges that the EIR’s baseline for environmental analysis should be based on current shut-down conditions of the Bakersfield refinery—which has not operated since 2008—not the conditions that the refinery was properly permitted for and operating at in 2007. This lawsuit demonstrates that CBR developers must not only comply with the procedural aspects of CEQA but must take an active role in the substance of the CEQA review as well.

Once courts begin ruling on the merits of CBR terminal siting and operations cases, the precedents could further embolden CBR opponents and prompt additional challenges. CBR developers should use the EIR process to build a foundation that will both avoid litigation and help mitigate the risk of legal attacks on future projects. Below we outline two core legal strategies that CBR terminal developers can use to blunt attacks by oppostiion groups and help reduce litigation burdens and keep projects on track.

Approach One: Seek Sites With High Historical Volatile Organic Compound Emissions

Sites with high recent historical emissions of VOCs are strong candidates for CBR terminal siting because crude-by-rail operations emit far less per barrel of throughput. In concrete terms, such locations come with a “high baseline” for determining emissions thresholds. This concept succeeds in legal terms because the fundamental goal of the Environmental Impact Report process is to “inform decision makers and the public of any significant adverse effects a project is likely to have on the physical environment.”[10]

To do this, the EIR must define a “baseline” against which the project’s anticipated effects can be described and quantified.[11] This requirement, and the California judicial decisions addressing it, potentially offer a unique solution for CBR operators seeking to site projects near dormant oil refineries and declining oilfields. Alon USA’s dormant 70 kbd refinery near Bakersfield is a case in point. The company recognizes the potential opportunity and according to its investor disclosures, has received a permit to build a 140 kbd facility (two unit trains per day), capable of unloading light and heavy crudes.[12]

Terminal opponents claim that the EIR process for a CBR terminal proposed at the site should use the refinery’s “currently non-operational conditions as the baseline for measuring impacts.”[13] If this approach were followed, the CBR facility would likely not be able to receive an operating permit due to tight emissions restrictions driven by existing ozone and particulate pollution problems in the San Joaquin Valley. Fortunately for prospective projects in the area, the opposition groups’ legal position on what constitutes a proper EIR baseline is very likely incorrect.

A number of California courts clearly state that a property’s recent historical use can provide a “realistic measure of existing conditions” for the purposes of an EIR impact assessment.”[14] Their position remains true even when the historical use occurred many years prior and/or has been intermittent. California courts make liberal time allowances for historical use analysis of mining and natural resource projects because they recognize that such endeavors are subject to macro-level fluctuations in supply, demand, and price that are unpredictable and beyond project operators’ control.[15]

The Alon Bakersfield refinery mentioned above—mothballed due to wild global oil price swings and declining local crude oil supplies—presents exactly such a fact pattern. Two core factors make it well situated for adding additional CBR unloading capacity. First, the high VOC baseline set by the refinery’s air permits. And second, the fact that declining San Joaquin Valley crude oil production has freed up at least 200 kbd of space in a pipeline network that can access coastal refineries in Northern and Southern California that crave price-advantaged crude feedstocks but have severe NIMBY issues (Exhibit 1).

Exhibit 1: Declining San Joaquin Valley Crude Oil Production

Click here to view the image.

Source: California Department of Conservation, Authors’ Analysis

Approach Two: Proactively Seize the CBR Narrative and Embrace the EIR Process

Currently, the strongest opposition to CBR development is in the major metro areas along the California coast. In this market space, Kinder Morgan has already picked the low-hanging fruit with its Richmond terminal (re-purposed from handling railborne ethanol shipments). Anti-CBR officials and private groups will fight tooth and nail against future CBR projects in these areas, as Valero has discovered to its chagrin with multiple delays to its proposed CBR terminal at the Benecia refinery.

Proposals for new CBR terminals and operational expansions at existing facilities will almost certainly spark lawsuits. The best legal strategy is to de-fang the plaintiffs. Three concrete actions can seriously weaken the majority of terminal-specific claims. First, terminal builders should immediately launch an EIR, as this pre-empts attacks based on improper issuance of air permits. As shown by the InterOil Sacramento case in November 2014, legal attacks based on air quality boards’ ministerial issuance of a permit without an EIR are sufficient to cause agencies to withdraw their approvals.

It is better to pre-empt injunction suits by conducting an EIR upfront, since courts are increasingly likely to force review anyway. What’s more, avoiding the EIR fight reduces the risk of future operational disruptions and also streamlines the litigation process by many months. This in turn helps accelerate the terminal permitting process and will likely ultimately help get CBR terminals online more quickly than if they tried to initially obtain an air permit without an EIR, then were forced to halt construction or operations and start the EIR process months down the road, with money invested and emotions high.

Engaging the EIR process head-on while planning CBR projects also allows industry to frame the conversation.  Over time, greater information transparency by terminal operators will help improve the industry’s public perception and the public’s trust by giving terminal neighbors, voters, and policymakers an alternative—and more accurately framed—perspective. Consider the following example: it sounds ominous that a unit-train class CBR terminal such as Global Partners’ Clatskanie, Oregon facility can emit approximately 70 tons per year of volatile organic compounds (“VOCs”).[16]  Yet according to EPA data, 25 gasoline service stations emit roughly the same amount of VOCs annually as a large CBR facility.[17]

The comparison can be taken even deeper into the CBR opponents’ lair. A simple search reveals that in the city of Portland, OR, one of the most environmentally-conscious large cities in the U.S. and located roughly 60 miles from the Clatskanie terminal, there are more than 100 retail service establishments selling gasoline. Collectively, these have the potential to emit roughly as many VOCs in a year as a crude by rail facility handling approximately 350 kbd—four times the daily volume Clatskanie typically receives.[18]

This is just one example of the potential objective facts that can be used to inform an EIR report. An EIR must include basic required elements, but the format allows substantial freedom in how they are addressed, allowing industry to highlight the true nature of the project and to place it in an accurate context. One such piece of context is that relative to other crude oil and refined product infrastructure, CBR terminals are high-throughput, low-VOC emissions ventures (Exhibit 2).

Exhibit 2:  VOC Emissions vs. Facility Throughput

Logarithmic scale, Base 10

Click here to view the image.

Source: EPA, Oregon DEQ

Conclusion

Crude by rail traffic has dropped because price differentials in many cases are presently insufficient to support arbitrage between coastal refineries and the shale fields. However, the current lull period offers an excellent opportunity for terminal developers and traders to upgrade the arsenal of legal and regulatory they will need as they move to capture future CBR opportunities when prices recover.