India, South Korea, the Middle East: Where California will get its gasoline when Phillips refinery shuts down

California for decades produced enough gasoline to supply almost all of its own needs, but the era of self-sufficiency is coming quickly to an end.

The Phillips 66 refinery complex in Wilmington and Carson now produces 1.3 billion gallons of gasoline annually, which will leave a huge gap to be filled after its planned closure late next year. With no pipelines into the state, and no plans to add new refineries, California will need to make up for the deficit by imports via ocean tanker — in what analysts say will be a costly endeavor, and one with inherent risks of supply disruptions.

“This is going to make California even more dependent on a longer supply chain. Not only will we see average upward pressure on prices, but probably volatility to prices as well,” said Skip York, chief energy strategist for industry consultant Turner, Mason & Co.

California imports about 1.1 billion gallons of gasoline annually, or 8% of its supply, following other refinery closures or conversions in recent years. With the loss of the Phillips plant, the state will need to import as much as 17% of its supply to make up the deficit.

The potential sources include South Korea, Japan, India and other Asian refineries; Britain and the Netherlands; Saudi Arabia and the United Arab Emirates.

A gasoline tanker’s voyage to California from Singapore, another gasoline supplier, would take 30 to 40 days, York said, and supply chain snags — caused by a typhoon, or a war, or a worldwide outbreak of some virus — could add weeks to that lengthy schedule if not disrupting it entirely.

Even before the Phillips news, the state was fretting about possible supply shocks should more refineries shut down. When Phillips 66 announced the planned closure last week, it pledged to “work with California to maintain current levels and potentially increase supplies.” No details were offered, either by the company or by state officials.

Unlike most states, California has no pipelines to import refined gasoline from other U.S. refineries, making the state what policymakers call a “fuel island.” And there are no pipelines to move gasoline between Northern California and Southern California — making the Southland even more of an archipelago.

Gasoline refineries on the U.S. Gulf Coast are an unlikely source: The federal Jones Act requires that only U.S.-flagged ships may transit from one U.S. port to another, an expensive proposition given that the vessels must be manufactured in the United States and manned by U.S. crews. Even more unlikely is the opening of new refineries in California, given state mandates on all-electric cars and trucks.

Some replacement gasoline could come from refineries in Washington state, using Jones Act-approved vessels, but most gasoline will have to be shipped in from other nations, York said.

Shipping gasoline also adds to environmental problems. Ocean vessels are heavy polluters, most of them running on what’s called heavy fuel oil — thick, tar-like residue left over after refining other petroleum products. And while the state is committed to major reductions in greenhouse gases, it doesn’t count emissions released by ocean tankers sailing more than 100 miles from the California coastline, so most of the emissions from tankers delivering gasoline won’t be included in the state’s greenhouse gas reduction calculations, similar to the way the federal government counts emissions.

Most of the unrefined crude oil processed in California arrives by ships from foreign ports. State policies have drastically reduced the amount of crude pumped from California’s oilfields, and foreign imports account for more than 60% of the total, over a third of that from Iraq and Saudi Arabia.

The gasoline that California produces and imports is the world’s cleanest — or least dirty, anyway. In the early 1990s California began requiring cleaner-burning gasoline, known as CARBOB. The state Energy Commission said the California blend has reduced pollution, cleaned the air and improved health — including an 80% reduction in cancer risk associated with gasoline pollution. But the state’s unique blend comes at extra cost, and some overseas refineries may have to adjust their processes to accommodate increased demand.

For years, the state has anticipated the closure of gasoline refineries as car buyers turn to electric vehicles. That transition will take decades, though, and policymakers were hoping the pace of refinery closures would closely track a falloff in gasoline demand, keeping the need for imported fuel to a minimum.

So the Phillips 66 announcement came as a surprise.

The company said it’s closing the Wilmington-Carson refinery for strategic reasons. A spokesman said it produces “lower profitability compared to other assets in our portfolio.”

He declined to say why it’s less profitable, but the company’s most recent annual report offers some hints, saying that California’s energy policy could lead to “potential adverse effects on our refining, marketing and midstream operations in California, which may be material to our results of operations, financial condition, profitability and cash flows.” However, the spokesman said a recent price-gouging bill had no effect on the decision.

With the shutdown of the Phillips 66 facility, California will be down to eight refineries, from 11 five years ago.

In 2020, Marathon converted its Northern California refinery to renewable diesel, taking about 1.4 billion gallons of gasoline out of annual production. This year, Phillips converted its own Northern California refinery to renewable diesel, taking about 872 million gallons out. Already, the California Energy Commission said, gasoline imports have increased in the Bay Area.

The decline of the refinery industry does have state officials concerned. In a report this year, the Energy Commission said that “peak demand and supply capacity for gasoline is very tight” and that “a strategy to bolster the State’s imports of gasoline will be imperative to avoid potentially systematic undersupply problems.”

Meantime, Gov. Gavin Newsom has gone on the warpath against the oil industry. He’s called two special legislative sessions over two years to pass what he called “price gouging” legislation. The 2023 bill created a special unit to investigate refinery pricing practices and potentially fine violators. This month, he signed a bill authorizing state agencies to require minimum levels of storage at California refineries.

Assemblymember Gregg Hart (D-Santa Barbara), author of the gasoline storage bill, acknowledged that costs to consumers are inevitable in any serious attempt to combat climate change. The costs of not addressing climate change are becoming clear as insurance prices rise for flooding and wildfire threats. “How we measure costs to consumers is a complicated thing and an easy thing to demagogue,” he said. “We’re trying to transition to electric vehicles to reduce climate emissions because we have to. There are not other options.”

Such views draw counterarguments from state Sen. Shannon Grove (R-Bakersfield), who represents oil-rich Kern County. The state continues to hold the sixth largest oil reserves in the U.S., but she believes state polices are affecting refinery operators’ investment decisions. She said she wonders how importing gasoline and oil by ship and importing gasoline helps the Energy Commission’s stated goal of a “reliable supply of affordable and safe transportation fuels.” According to Grove, state laws and regulations make California refineries more environment-friendly than substitute refineries overseas.

“Instead of sending [oil] 120 miles in a pipeline to a refinery that delivers to a gas station, you’re extending the supply chain which adds to volatility and expense,” she said. “It’s not as if we’re not using [oil and gasoline] here, we’re just not getting it from people who have jobs here.”