Building a Coal Terminal on the West Coast
- Published: Saturday, 18 December 2010 23:06
By David Gambrel
Building a terminal of world class proportions is an extremely serious undertaking today, much more so than it was even 10 years ago. The term “world class” is rather loosely defined, but people in the shipping and terminal business immediately know what it means. With regard to terminals it means Panamax or larger vessels may be fully loaded without delay, and may sail without concern for vessel safety. It also implies a certain well-known promptness in the loading process, and professionalism in communicating loading procedures with the vessel.
Why the Renewed Interest in Building a Coal Terminal on the West Coast?
Skyrocketing prices for metallurgical and steam coals have caused great excitement in the coal world, causing many to believe new coal demand in China and India will enable western coal mines to finally get into the international market. During the last three months of 2009 the average coal price reported by China rose 30%, hitting a level of about $104 in January 2010. Is the Asian economic engine moving so fast we had better hurry up and jump into the Pacific Rim with new supplies of coal, no matter what kind of coal we have to sell? Should we hurry up and build the first new coal terminal on the West Coast since 2006, when a U.S./Japanese consortium finally closed their nearly new $150 million terminal (LAXT) in the Port of Los Angeles? If that super terminal failed so quickly, what should we do to make sure our new terminal will not fail? Do we have any idea how Australia and Indonesia are gearing up to meet new demand? We have lots of work to do before we book our first flight to the West Coast.
Before Jumping into the Future, Let’s Take a Lesson from the Past
Two modern coal terminals were built on the West Coast in the last two decades of the twentieth century. One at the Port of Portland was built and failed within the 1980s, leaving barely-used equipment that had to be sold. Participants in the LAXT consortium were aware of that failure, but went ahead and built one of the finest coal terminals in North America, the only U.S. terminal capable of loading a 275,000 dwt vessel. Coal giant Peabody Energy dropped out of the consortium before the terminal was built, but other participants forged ahead and built it. It was commissioned December 4, 1997, and it stopped shipping coal in 2003.
Some blame the early demise of LAXT on the refusal of the Japanese markets to guarantee they would take throughput tonnage, and on the partners’ belief they could make it work anyway. At the time it was built neither China nor India were significant coal buyers, so Japan was the major Pacific Rim market. Since a diversified group of Japanese companies were interested in investing in the terminal, many felt the Japanese electric utilities should be willing to guarantee they would take enough tonnage to put the terminal on solid footing. They were not.
The LAXT partners built an excellent world-class terminal, but it never made enough money to pay the rent. It passed all of the environmental requirements, and made excellent use of the Terminal Island backlands, but it was ahead of its time. Do we have a consortium ready to soak up the risk of another $150-$200 million investment? Do we have long-term coal buyers lined up? Do the Asians value Powder River Basin (PRB) coal, if that is what we wish to sell?
Infrastructure changes are taking place worldwide, massive changes that could affect shipping costs and competition. Do we know about the expansion of the Panama Canal to permit passage of larger vessels, and the expansion of terminal capacities in Australia? What about the Columbia River Channel Deepening Project? What about the breath-taking speed at which Indian ports (i.e., Gangavaram) are being modernized to take larger vessels and more coal?
Before getting too excited about looking for a new export terminal site, should we not make a rational decision about demand for our particular coal? Do we have metallurgical or high-Btu steam coal to sell, or do we hope the new Asian market is now so huge and undiscriminating we can sell low rank sub-bituminous coals into it? Will there be sufficient demand to justify a new coal supplier, or is this just another pipe dream to expand markets unrealistically? Let us not forget the same China that threatened to export coal 10 years ago is now viewed as a buyer with deep pockets and endless demand. How long will this last?
Table 1 helps the reader get a feel for the Pacific Rim competition in the steam coal market. We acknowledge there is currently no operating coal terminal in Los Angeles or Seattle, but the site search team may wish to review potential terminal sites in these areas. Korea and Taiwan are not included, but may play an important part in market studies. While there are several factors that determine freight rates, for the purpose of a first-order cost estimate we can assume rates are directly proportional to sailing times. Obviously, a ship sailing from Los Angeles to Hong Kong is going to take almost four times as long as one leaving the Samarinda anchorage, and will cost much more per ton.
Our initial delivered cost estimates must be done on a cents-per-million-Btu basis. There is wide variance in the Btu values of the U.S. and foreign competing coals and that variation can only be accounted for in a comparison of heating values. We should calculate the cost of rail, terminal and ocean shipping and compare the results with delivered costs of Australian and Indonesian coals, our chief competitors in the Pacific Rim.
We should use realistic ocean shipping numbers based on projected Panamax and Capesize freight rates, bearing mind that shipping rates generally decrease as vessel size increases. Our cost estimates will inevitably increase, not decrease, as we learn more. If we are nowhere near the competitive cost numbers we need, then we proceed at our own peril, as others have done before. If we do not really know what is going on in the world, we proceed at our peril. Lots of very smart men have been down this road recently. Maybe we should talk to some of them.
What Are the Basic Requirements of a World Class Terminal?
To summarize very quickly, if our prospective site does not have at least 42 ft of water at berth, in the turning basin, and in the channel, it will not be a competitive site. Ships should be able to sail fully-loaded from our berth, so our site should accommodate a vessel of Panamax or larger size. Few major customers are going to take coal in smaller shiploads, and they are all sending that message by expansion plans. Ocean freight simply costs too much in smaller-sized vessels.
The water depth required to give a loaded Panamax vessel 2 ft of keel clearance is roughly 42 ft (12.8 m) fresh water, but this varies according to water temperature and salinity. In the past this requirement ruled out San Francisco Bay as a possible coal terminal site, but that did not stop some property owners from offering their sites. The water is well over 100 ft deep at the Golden Gate Bridge, but is only dredged to 38 ft (11.5 m) channel depth in the Bay.
One should also take account of the fact that the Panama Canal is now being expanded, and larger vessels (called New Panamax vessels) will soon be traversing the Canal. Expansion of the Canal is now projected to be complete in 2014. The expanded Canal will enable much larger bulk vessels to cross from Atlantic to Pacific and vice versa, and will enable Venezuelan and Colombian coals to compete more effectively with coal exported from the western United States. The New Panamax vessels will quickly become part of the world’s ship supply inventory, so one would be advised to consider their increased size and depth before investing heavily in a new terminal that will handle a Panamax, but nothing larger. Safe Bulkers of Athens, Greece, announced in July 2010 it entered into a shipbuilding contract for the construction of a Chinese-built, dry bulk Panamax-class vessel of 76,000 deadweight tons with an expected delivery date in 2013.
It is always desirable to have an on-shore location for a ship-loading terminal because better weather protection is available for the vessel. However, depth requirements may make it necessary to locate the actual berth off-shore, such as the ship loading berths at marine oil terminals near Cherry Point, Wash., which are all located offshore at distances of 1,500 ft to 2,500 ft from shore. While it was not located offshore, the ship loading berth at LAXT was located 5,845 ft from the coal storage and handling facility, showing it is not necessary to have the berth next to the coal storage area. LAXT coal was conveyed dust-free by covered conveyor belts.
Pacific Rim markets include at least five countries: China, Japan, India, Korea and Taiwan. Most of the Chinese coal terminals will accommodate Capesize vessels, but many coal-loading terminals cannot provide the depth needed to load them. Those that can load them will have a cost advantage over those that cannot for the same distance travelled. Water depth at most of the Japanese steel mills exceeds 45 ft, and at many of them the water depth exceeds 55 ft. Indian coal terminals have always tended to be shallower, but an energetic building program will soon produce several terminals capable taking deeper-draft vessels.
It would do little good to build a coal terminal up a shallow river that could only be served by Panamax vessels on a high tide, yet that may have contributed to the early demise of the Port of Portland coal terminal. There were other contributing factors, such as very long rail distances and resultant high rail rates. However, no Panamax captain wants to be caught 100 miles upriver in a channel that is maintained to only 40 ft depth, depending on the tide to get out into the open ocean without a full load. Channel depth was a serious restraint to competition, but the Columbia River Channel Deepening Project is now complete, and the Panamax captain can sail fully loaded with the new depth of 43 ft. It will be limited to Panamax vessels.
Sufficient Land and Railroad Access for Class I Heavy Loads
The other half of the delivery equation is the railroad that serves the mine and the terminal. Locating a nice deep site for a ship loading berth is not enough; there must be a modern railroad connected to it. It should have the capability of handling the long heavy trains that are loaded in the western mines, and it should not be a constant traffic impediment with lots of grade crossings. The site for the railroad loop track, dump house and spare tracks will require an estimated 120 acres of property, and the coal storage and office facilities will require another 25 acres. This does not include the belt line out to the ship terminal and the terminal itself. The terminal could require another 2 to 3 acres for the ship loader and the pier. To be competitive the loop track must be capable of holding at least two unit trains of 120 to 150 cars. An estimate of at least 140 to 150 acres should be used for a basic space requirement.
Coal trains approaching the harbor area at LA/Long Beach were restricted to about 98 cars due to the steep downhill approach starting near San Bernardino. On a cost per ton basis they could not compete with the 125 to 135 car Powder River Basin trains headed back east, but they did not need to. They needed to compete with Australian and Indonesian transportation, and it turned out they could not. The site chosen for the ship loading berth should have railroad access that does not have such economic restrictions. Moreover it should avoid, if possible, the need for the train to cross a long and mountainous terrain.
A major impediment to traffic flow into and out of the ports of Los Angeles and Long Beach was removed with the completion of the 20-mile Alameda Corridor in 2002. The Alameda Corridor is a 20 mile (32 km) freight rail “expressway” owned by the Alameda Corridor Transportation Authority, connecting the national rail system near downtown Los Angeles to the ports of Los Angeles and Long Beach, running parallel to Alameda Street. The corridor eliminates more than 200 grade crossings and greatly improves access to the ports.
Railroad consolidations occurring in the last 15 to 20 years have resulted in shrinking the number of Class 1 railroads serving the West Coast to only two: BNSF (Burlington Northern Santa Fe) and UP (Union Pacific). Both railroads serve destinations in California, Oregon and Washington, but not the same port destinations. UP serves three California ports: Richmond, Long Beach and Los Angeles, and could serve ports along the Columbia River east of Portland; it has no port access in Washington. BNSF serves ports in Los Angeles and Long Beach, Calif.; Portland, Ore., and west along the Columbia River to Kelso, Wash.; and could serve ports from Olympia to Blaine, Wash. Railroad rate competition could exist in all but Washington.
The UP serves western coal mines in four states: Utah, Colorado, Southwest Wyoming and 10 of the southernmost mines in the Southern Powder River Basin (SPRB) of Wyoming. BNSF serves mines in Montana, New Mexico, North Dakota, Utah and the entire Southern Powder River Basin (SPRB) of Wyoming. With the exception of one mine served by both carriers all the coal is less than 1% sulfur. A significant amount of the tonnage deliverable by both carriers is produced in the Southern Powder River Basin (SPRB).
Do Not Overlook the Tried and Proven Sites
Site selection is much easier if one does not try to do it from scratch, studying the Pacific coast until promising locations are found. Virgin sites will all be defended by environmental groups, as will most of the oil terminal sites. California has more than 80 oil terminals, but that does not mean that any are good sites for a modern coal terminal, even on a physical basis.
The LAXT terminal site on Terminal Island still has excellent access to BNSF and UP service. The berth provides 72 ft of water in a weather-protected location. Most of the equipment is gone, but the loop track and dock are still there. It was not environmental problems that caused LAXT’s closure, but the failure to meet the Port of Los Angeles’ MAG (minimum annual guarantee) requirements. Perhaps Pacific Rim coal demand has increased to the point where the MAG may now be met, or the Port of Los Angeles may be willing to negotiate better terms.
The Port of Portland may be willing to resurrect its coal terminal under acceptable terms now that they have 43 ft of channel depth. Other terminals along the Columbia River are reviewing the possibility of building coal terminals. In the state of Washington one might look at Bellingham and Cherry Point, places where industrial usage of the waterfront was established long ago, and where permitting may be difficult but not impossible. Permitting would certainly be easier at these locations, but do not expect it to ever be easy. As the site of five marine oil terminals Cherry Point has long been under heavy scrutiny by governmental and environmental interests.
Finally, Realize the World Has Changed Since the Last One Was Built
There will often be parties who have “ideal” properties to offer, and every property should be subjected to a rigid test. This can be a serious and complicated matter, particularly if the offering party is a well-known company of high regard and reputation. One should always assume property owners offer in good faith, and do not know minimum depth requirements for coal vessels. Nevertheless, the basic requirements (depth, acreage and Class I rail connections) must be met as a minimum.
Surprisingly, the closing of the LAXT terminal a few years after its construction was not due to environmental reasons, even though it lay on Terminal Island in the pristine waters of San Pedro Bay. Environmental monitoring organizations never found a violation there. However, many of the LAXT partners never heard of “global warming,” and environmentalists had not yet gotten this anti-industry ball rolling when LAXT was being planned and built.
It was also not due to union problems, and it had some tough ones. The original contractor who won the Operating & Maintenance contract underestimated the strength and resolve of the labor union, and this cost both money and time. The next attempt to build a coal terminal in Los Angeles Harbor, if one is made, should take a hard look at winning the hearts and minds of the union people that would be working there before committing to construction.
It is not the purpose of this article to go into political matters; only to point out that political problems will exist and must be dealt with wisely. The realities of the late 1990s, when LAXT was built, are not the realities of today. Finding a site that meets all the physical requirements will be but a small part of the job. Global warming, climate change, and a host of other scare phrases will be used by people who now genuinely believe the Chinese will burn high sulfur coal and send their unclean stack emissions back to us. In many cases their fear is so great they will do everything in their power to stop any new development. If LAXT or Portland is chosen as potential sites, we will also have to deal with the recent memory of failed coal terminals, and may now have to convince a skeptical city government to help us.