California county planners oppose Phillips 66 oil-by-rail project

By Kristen Hays

HOUSTON (Reuters) - County planners want to squash Phillips 66's proposal to transport heavy crude by rail to one of its California refineries, saying it is too risky to public health and the environment.

The staff of San Luis Obispo County's planning commission this week recommended that commissioners reject the project because of "significant and unavoidable" impacts from toxic emissions and contaminated water to fires and explosions if trains derail or leak.

That recommendation came a week before a public hearing Feb. 4-5 on whether to grant permits allowing the company to build the 41,000 barrels per day project first proposed in 2013.

It is one of several rail projects on the U.S. West Coast that have undergone lengthy environmental reviews while facing heated opposition in light of fiery crude train crashes since mid-2013.

"We understand that there are concerns about the project and we look forward to addressing questions" in the review, Phillips spokesman Dennis Nuss said on Tuesday.

The Benicia Planning Commission will hold a similar hearing Feb. 8, with more if necessary, on Valero Energy Corp's proposed 70,000 bpd rail project - also delayed pending reviews - at its refinery there.

Unlike other proposals that aim to receive both light inland U.S. and Canadian heavy crude via rail, the Phillips project would handle just heavy crude at its Santa Maria refinery in Arroyo Grande, California.

That plant is built to process heavy oil produced in California. Once initially processed, it moves via pipeline more than 200 miles north to the company's refinery in Rodeo near San Francisco to turn into fuels. The two plants' combined capacity is 120,200 barrels per day.

Phillips proposed the rail project because California oil output is shrinking and the company wanted another source of crude. The company had hoped to start up in 2014, but environmental reviews pushed final consideration of permits to 2015 and then this year.

Crude by rail has declined since mid-2014 as U.S. oil prices slid more than 70 percent and discounts of domestic crude to global crudes that once topped $20 narrowed to less than $1.

Cheaper domestic crude helps cover extra transportation costs of rail, but a narrow spread entices coastal refiners to take imports instead.

Last month Phillips started up its own joint-venture rail loading terminal in North Dakota, shipping crude loaded on railcars from trucks to its New Jersey refinery, Nuss said.

(Reporting By Kristen Hays; Editing by David Gregorio)