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Glut of western oil: Details emerge on Calumet terminal in Superior to help fill crude transportation shortfall

The Algoma Central tanker Algonova sails off the coast of Nova Scotia in 2011. The double-hulled Algonova is among the tankers currently hauling oil on the Great Lakes. Calumet LLC, owners of the Superior oil refinery, are considering building a $25 million crude oil transfer dock in Superior where oil would be loaded onto tankers and barges and moved across the Great Lakes to refineries in Ontario, Michigan, Ohio and even the East Coast.

DULUTH, Minn. -- So much oil is being pumped out of western Canada and North Dakota these days that there isn't enough room to fit it all into pipelines.

Even with oil companies pouring the black gold into thousands of rail cars every day, and building new rail stations and laying track, rail cars can't handle the load.

So officials at Calumet LLC, owners of the Superior oil refinery, are considering building a $25 million crude oil transfer dock in Superior, where oil would be loaded onto tankers and barges and moved across the Great Lakes to refineries in Ontario, Michigan, Ohio and even the East Coast.

Despite concerns about the potential for environmental catastrophe, Calumet seems well on its way to moving oil out of the Twin Ports by boat.

Calumet will seek permits and do preliminary work this year and would conduct dredging, dock, pipeline and storage construction in 2014 and be ready to ship oil by March 2015.

It's estimated that, because of the small size of the supply pipeline, the terminal could fill a single tanker or barge about once every three or four days.

If the dock is built, it won't be the first time oil has been shipped through the Twin Ports.

Before the Superior refinery opened in 1951, served by a pipeline from western Canada, most of the gas and diesel used in the area came here by tanker boat. And after the pipeline was built, Alberta crude was often shipped out of the Twin Ports by tanker. The last big loads of petroleum coming into Superior, Amoco gasoline, ended in 1992.

"Everything old is new again," said Dave Podratz, general manager of Calumet operations in Superior.

'Awash in oil'

The idea of a Superior terminal was first made public by Calumet on Jan. 25. Since then, company officials have released more details about how the project might move forward and what it might look like.

Oil purchased by Calumet would run from Alberta and North Dakota to Superior over existing Enbridge Energy pipelines. Calumet would then move the oil into its own short pipeline system from the refinery area to a new waterfront facility at the former Georgia Pacific Plant. Calumet already has a lease agreement with Elkhorn Industries, which owns the site.

Calumet wouldn't refine any of the oil transferred onto boats; it can make enough money simply transferring crude from pipeline to boats. At least for a few years.

The transfer from pipeline to water-based transportation makes sense because Enbridge can bring 500,000 more barrels a day into Superior than it can send out, Podratz said.

And shipping by Great Lakes vessel is about one-third the cost of moving oil by rail car -- about $3.50 a barrel compared to $9 a barrel for rail, according to Calumet's estimates.

"The Upper Midwest is awash in oil. They have more oil than capacity to move it," Podratz said in detailing the plan. "We have a window of opportunity here to help move it to market."

Podratz said the Superior oil terminal will have a relatively short life expectancy -- about five to 10 years after completion -- because pipelines are still the fastest and cheapest way to move crude oil. Several companies, including Enbridge, have major pipeline expansions and new routes currently being planned.

"In fact, if Keystone XL goes ahead fast, this (Superior terminal project) probably goes away," Podratz said. "Pipelines are still the easiest and cheapest way to move oil. They just can't put pipelines in fast enough or to enough places to handle the supply right now."

Rail cars, barges and ships also can haul oil to more refineries than pipelines, allowing oil companies to sell to the highest bidders.

The idea was first raised a year ago by a shipping company and an Ontario refinery on Lake Erie that wanted more oil, Podratz said. That refinery eventually backed out, but Calumet liked the concept and has kept the ball rolling. Since Calumet issued a press release on the possible Superior terminal last month, Podratz has received calls from both refineries and the companies that own tankers and barges.

"There's a lot of interest," he said. "But no one has signed on yet."

Cheaper by boat

Part of the attraction is that North Dakota crude from the Bakken oil fields is trading at a deep discount compared to North Sea or even Gulf of Mexico crude -- as much as $25 a barrel cheaper, making transportation costs much less of an issue in the Midwest.

North Dakota crude can be sent by rail car to the Gulf Coast more cheaply than oil produced in the Gulf Coast, Podratz noted. Western Canadian heavy oil is even cheaper, as much as $46 per barrel less.

"Transportation can be as much as 30 to 60 percent of the final cost of delivered raw materials, so it is easy to see the value in waterborne transport: three times better than rail, and trucks are really not even in the ballpark for long distances and high volumes," said Dale Bergeron, maritime extension agent for Minnesota Sea Grant in Duluth.

"And imagine the chance for pollution and accidents when loading and unloading each rail car in a string of 120," he said. "Handling cargo is like handling data. The more it is touched, the more errors and accidents occur."

There's already a small but viable pipeline from the refinery that runs north along Hill Avenue to the waterfront. The 6-inch, 1950s-vintage pipe needs some repairs but is still in good shape and is permitted to move oil, Podratz said.

Calumet would need permission to extend that line 1,500 feet to the Elkhorn docking site, where Calumet would build two 150,000-barrel storage tanks to hold oil to be loaded onto tankers or barges.

The tanks would be surrounded by a dike capable of holding all the contents if they should somehow spill. The company also would be required to have oil-containing booms to deploy if oil spilled in the bay.

Nothing new

Shipping oil and refined petroleum on the Great Lakes is nothing new.

In 2010, 3.7 million tons of oil and petroleum products were shipped either to or from U.S. Great Lakes ports, and much more that moved only between Canadian ports, according to the U.S. Army Corps of Engineers.

A large amount of petroleum currently moves on Lake Superior through Thunder Bay, Ontario, by Great Lakes tankers. And millions of gallons of gasoline refined in Illinois are shipped out of Green Bay to move across Lake Michigan every year.

Podratz said his company's investigations show ample fleet capacity on both the U.S. and Canadian sides of the lakes, noting Canadian tankers loaded in Superior would have to unload in Canada under U.S. maritime regulations. On the U.S. side, barges pushed by tug boats would be a common mode to move the crude oil to U.S. ports.

The typical tanker is just more than 400 feet long and can hold about 77,000 barrels, such as the Algocanada, owned by Canada-based Algoma Tankers. A typical barge is about the same length and can hold up to 118,000 barrels. They must be pushed with a large tug.

The potential waterborne terminal would be the second big oil transfer expansion in recent years by the Superior refinery. Last year, Calumet completed a huge new rail car oil-loading terminal, adding 18,000 feet of new track in a $10 million project that allows them to fill 100-car unit trains with oil headed to eastern refineries. Calumet moved 160,000 barrels by rail out of Superior in January alone.

"We're already moving oil out of pipelines and onto the rail system," Podratz noted.

Prepared for spills

Critics of additional Great Lakes crude oil shipments say one disaster would be too much for an already-fragile ecosystem. They cite the massive cleanup and damage caused by the 2011 pipeline spill into the Calumet River near Lake Michigan.

While supporters of waterborne oil transport say shippers have a stellar history of safety, skeptics note that Alaska residents were told not to worry before the Exxon Valdez crash, as were Gulf Coast residents before the BP spill there.

"Everyone I've talked to is concerned about this idea. There's potential for such a major problem if there's a spill," said Le Roger Lind, North Shore resident president of the Save Lake Superior Association. "It's such a huge expense to clean them up, and they never really seem to get them completely cleaned up. ... For such a small economic impact for our community, such a small number of actual jobs, the potential damage is just too much."

The requirements for transporting oil on the Great Lakes became tougher in the 1990s, including requiring double-hulled transport vessels. The federal government also requires terminals to have the on-site ability to clean up any oil spill that happens at their facility.

In addition, Calumet would be required to have a fast-response oil cleanup contractor on call to be at the scene within 24 hours, said Lt. Judson Coleman of the U.S. Coast Guard's Marine Safety office in Duluth.

Coleman said his station also has 2,000 feet of oil boom to contain spills. And the Coast Guard Cutter Alder stationed in the Duluth harbor has the ability to deploy a boom that can vacuum oil off the surface of the harbor.

Coleman noted that there have been relatively few spills on the Great Lakes in recent years, and none that were very large.

"The track record is pretty good, knock on wood," Coleman said. "But we're ready if that changes."

About Calumet

Indianapolis-based Calumet processes crude oil and other raw materials into lubricating oils, solvents and waxes used in consumer, industrial and automotive products -- including Chapstick and WD-40.

The company's Superior refinery, acquired from Murphy Oil in 2011, was built in 1951 and now has 180 employees. It turns western crude oil into gasoline, diesel, kerosene, heating oil and asphalt.

In addition to Superior, Calumet has 10 facilities in five states -- Louisiana, Montana, Pennsylvania, Texas and Missouri.

Calumet also is in the process of building a diesel fuel refinery near Dickinson, where, ironically, there is a shortage of truck fuel amid a glut of unrefined crude oil.