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The management of an international joint venture : the case of the long beach coal terminal Olsen, Laurence Roach 1983

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THE MANAGEMENT OF AN INTERNATIONAL JOINT VENTURE THE CASE OF THE LONG BEACH COAL TERMINAL By LAURENCE ROACH OLSEN M.Sc, The U n i v e r s i t y of B r i t i s h Columbia, 1983 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE i n BUSINESS ADMINISTRATION i n The Faculty of Graduate Studies We accept t h i s t h e s i s as conforming t o the required standard THE UNIVERSITY OF BRITISH COLUMBIA August 1983 © Laurence Roach Olsen, 1983 In presenting t h i s thesis i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library s h a l l make i t f r e e l y available for reference and study. I further agree that permission for extensive copying of t h i s thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. I t i s understood that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission. Department of comnarf.fi The University of B r i t i s h Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date A u g u s t 25, 1983 DE-6 (3/81) A B S T R A C T This paper examines the organizational structure of a m u l t i - p a r t i c i p a n t j o i n t venture established t o develop a coal terminal at Long Beach, C a l i f o r n i a . The analysis focuses on the e f f e c t of the organization structure upon decision-making and management during the development process. The effectiveness of the decision-making framework i n r e s o l v i n g many of the i n s t i t u t i o n a l and operational problems i s described. The multi-dimensional aspects of the transpo r t a t i o n problem are also highlighted. The project was i n i t i a t e d t o plan, develop, and construct a modern coal export terminal at Long Beach Port. Such a terminal would provide a cost e f f i c i e n t t r a n s f e r of steam (or thermal) coal from r a i l t o seaborne shipping modes. The coal would o r i g i n a t e p r i m a r i l y i n the States of Utah, Colorado, Wyoming and New Mexico. New e l e c t r i c generating plants i n Japan, Taiwan and South Korea would be the destination f o r the coa l . A number of factors make t h i s coal terminal project an excellent opportunity t o i n v e s t i g a t e features of organizational structures and consequent decision-making i n a multi-owner system. These are: a) Steam coal had a r e l a t i v e l y new and f a s t growing market according t o Far Eastern demand projections. b) The project involved a j o i n t venture with f i v e partners representing diverse i n t e r e s t s . c) A major organizational structure had t o be developed i n a short time period. d) The proposed Long Beach terminal l o c a t i o n would be subject t o many i n s t i t u t i o n a l obstacles. ( i i ) e) The coal terminal represented the l a s t " l i n k " i n the coal "chain" as other transport components i n the l o g i s t i c s system were already i n place. f ) There existed a c r i t i c a l planning and development horizon f o r t h i s very c a p i t a l intensive project. The development of the organization and the expected basis f o r the project's v i a b i l i t y are o u t l i n e d . The r e l a t i v e advantages and disadvantages of competitive terminal locations on the U.S. west coast and i n Canada and A u s t r a l i a are described. I r o n i c a l l y , the transportation of the coal i s the l e a s t constraining aspect of the project. The r e a l problems i n the project are not r e l a t e d t o the physical transportation systems. They r e f l e c t a large number of i n s t i t u t i o n a l problems which must be resolved through a decision-making framework complicated by a multi-owner organization structure. The r o l e s of various owners, contractors, and i n d i v i d u a l s are considered i n r e l a t i o n t o the major problems of environmental permitting, project finance, technology, and energy market r i s k s . The l i t e r a t u r e on i n t e r n a t i o n a l j o i n t ventures, d i s t r i b u t i o n channels, and the theory of channel structures i s reviewed and compared t o various frameworks involved i n the Long Beach project. I t i s concluded that there are a number of s i m i l a r i t i e s between the p a r t i c i p a n t s i n a d i s t r i b u t i o n channel and the members i n a m u l t i - p a r t i c i p a n t j o i n t venture. An analysis i s made of other possible operating formats which may have permitted a l e s s cumbersome decision-making process and s t i l l allow f o r the diverse i n t e r e s t s of the partners. ( i i i ) TABLE OF CONTENTS Page ABSTRACT i TABLE OF CONTENTS i v LIST OF TABLES x LIST OF FIGURES x i ACKNOWLEDGMENT x i i CHAPTER ONE  INTRODUCTION A. Purpose 1 B. Background to U.S. Steam Coal Trade with P a c i f i c Rim Countries 2 C. Outline 7 End Notes 11 Tables and Figures 12 CHAPTER TWO  PACIFIC RIM MARKET"FOR STEAMING COAL  PART I-- EMERGENCE OF THE TRADE A. Decreasing Dependence on O i l 15 B. D i v e r s i t y of Energy Forms and Sources 18 1. Nuclear Energy 22 2. Natural Gas 24 3. Hydroelectric Power 25 4. Additional O i l and Gas Sources 25 5. A d d i t i o n a l Renewable Energy Sources 26 6. Ad d i t i o n a l Energy Forms from Coal 26 C. Balance of Payment Issues 27 PART II - PRESENT MARKET A. V o l a t i l e Market History 28 B. Slowed Economic Growth of P a c i f i c Rim Countries 29 C. Energy Conservation 31 (iv) PART I I I - SUPPLY AND DEMAND Page A. Supply by Major Resource Owners 32 1. A u s t r a l i a 34 2. South A f r i c a 34 3. Canada 35 4. China 36 5. United States 37 B. Demand by Japan 38 1. Demand for E l e c t r i c Power 38 2. Supply of E l e c t r i c Power 39 3. Fuel Consumption 40 C. Comparison of Pr i c e Components, P r i c i n g Philosophies, and 41 P r i c i n g of the Major P a c i f i c Rim Supplies. 1. Coal Cost Components 41 2. P r i c i n g Philosophies of the Major Suppliers 44 3. Prices of Steam Coal i n the P a c i f i c Rim Market 48 D. Forecast of Changes i n Comparative Prices 51 E. Terminal as a Function of CIF P r i c e 54 End Notes 57 Tables and Figures 60 CHAPTERTHREE POTENTIAL WEST COAST TERMINAL LOCATIONS  PART I'- POTENTIAL'TERMINAL SITES A. Introduction 78 B. P o t e n t i a l Development Locations 84 1. Port of Vancouver, Washington 85 2. Port of Kalama, Washington 86 3. Portland, Oregon 87 4. A s t o r i a , Oregon 87 5. Coos Bay, Oregon 88 6. Stockton, C a l i f o r n i a 89 7. Port of Los Angeles 89 8. Long Beach 90 (v) Page C. The Long Beach Example 92 End Notes 98 Tables and Figures 100 CHAPTER FOUR MANAGING"A'JOINT~VENTURE & ISSUES IN ORGANIZATIONAL  DEVELOPMENT AND STRUCTURE INTRODUCTION 104 PART I - MULTI-ORGANIZATIONAL DECISION MAKING A. The Planning/Conceptual Phase 104 B. P a r t i c i p a n t s and Role 108 1. Equity P a r t i c i p a n t s 108 (a) The Port of Long Beach 108 (b) Upland Industries Corporation 112 (c) C. Itoh and Company 114 (d) Crowley Maritime Corporation 116 (e) Metropolitan Stevedore Company 118 2. Contractor P a r t i c i p a n t s 121 (a) Engineering 121 (b) Environmental Permitting 126 (c) Geotechnical Consultant 129 (d) F i n a n c i a l Advisor/Consultant 131 (e) O i l F i e l d Operator 132 (f) Secondary Engineering Contractor 132 (g) Systems Consultant 134 C. Summary 135 PART I I ' - MANAGEMENT"STRUCTURE A. Long Beach International Coal Project 137 1. J o i n t Committee 137 2. J o i n t Co-ordinators of the Executive Committee 139 3. Engineering Sub-committee 140 4. Finance Sub-committee 140 5. Marketing Sub-committee 141 6. Environmental Sub-committee 142 7. Legal Sub-committee 143 8. Government A f f a i r s Sub-committee 144 (vi) Page B. PBT J o i n t Venture 145 C. Effectiveness of Management Structures 146 D. Ownership Issues and D i v e r s i t y of Objectives 153 1. O i l Well Relocation 156 2. C a p i t a l Costs Versus Operating Costs 157 3. Terminal P r i c i n g Compared with Other 159 Ex i s t i n g / P o t e n t i a l Terminals 4. Diverse Objectives of the P a r t i c i p a n t s 160 Regarding the Terminal Ownership and Operation 5. Partnership Versus Corporation 162 6. Debt/Equity Ratios 162 7. Return on Investment/Return on Equity 163 Requirements 8. Unanimous Versus Majority Vote i n PBT 163 E. Conclusion 164 End Notes 165 Tables and Figures 167 CHAPTER FIVE MANAGING A JOINT VENTURE; THE LEGAL AND INSTITUTIONAL ENVIRONMENT A. Introduction 171 B. The U.S. P o l i c y and Regulatory Framework 172 1. f o r Coal Production 172 2. f o r Coal Use 173 3. f o r Coal Transportation 173 C. External Development Issues 176 1. Environment 176 (a) Federal Framework 178 (b) State Framework 180 (c) Major Environmental Issues for the Long Beach Project 181 (d) Managing the Permitting Process 188 B. F i n a n c i a l Issues 192 1. Project Finance 192 2. F i n a n c i a l Structure 196 3. Financing A l t e r n a t i v e s 198 (a) D i r e c t Project Loans 199 (b) Yen Funding from Japan F i n a n c i a l Markets 201 (c) Off-Balance Sheet Financing 204 (d) Deciding on the Financing Mix 208 ( v i i ) Page C. Foreign Investment Partner 213 D. Legal and Restraint of Trade Implications 217 E. Socio-Economic Aspects 219 F. Technology and Energy Market Risks 221 1. The Market for O i l 222 2. The Nuclear Option 223 3. Coal Slurry Transport 224 4. Shallow Draft C o l l i e r s 224 5. Coal Derived Sources 225 G. Conclusion 225 End Notes 227 Tables and Figures 229 CHAPTER SIX  PROJECT IMPLEMENTATION AND CONTRACTING A. Introduction 238 B. Par t i c i p a n t s 238 C. Implementation 239 1. Corporation Versus Partnership 240 2. Engineering Contracts 240 3. Marketing Programme 242 4. Financing Issues 244 5. Organizational Start-Up 249 6. Commencement of Union Negotiations 250 D. Contracting 250 1. The Terminal Contract 251 2. The Contract as a Solution to Unresolved I n t e r n a l / 253 External Problem During the Development Phase 3. The Framework for Negotiations 256 E. Supply/Demand V a r i a b i l i t y 260 F. Conclusion 264 ( v i i i ) CHAPTER SEVEN CONCLUSION Page A. Introduction 265 B. The Market 266 C. The U.S. Source 267 D. M u l t i - P a r t i c i p a n t J o i n t Ventures 268 E. Organizational Issues 268 F. I n s t i t u t i o n a l Problems 270 G. Behavioral Aspects of J o i n t Venture Management 271 H. The Project Future 273 BIBLIOGRAPHY 275 (ix) LIST OF TABLES TABLE Page 1.1 P a c i f i c Rim Steam Coal Demand 13 1.2 Delivered Coal Prices to Japan 14 2.1 Projected Generating Capacity by Fuel Source 61 2.2a Volume and Composition of Japan TPE 62 2.2b Volume and Composition of Japan TPE 63 2.3 Volume and Composition of Taiwan TPE 64 2.4 Volume and Composition of Korean TPE 65 2.5 S e n s i t i v i t y of U.S. Coal Exports 66 2.6 E l e c t r i c i t y Generation Cost Estimates 67 2.7 E l e c t r i c i t y Sector Coal Imports 68 2.8 Coal Content 69 2.9 World Coal Reserves 70 2.10 Steam Coal Market Shares 71 2.11 Western States Coal Reserves 72 2.13 Thermal Coal Demand Comparisons 74 2.14 Steam Coal Prices i n Japan (1981) 75 2.15 Ranges of Coal Cost Components 76 2.16 Comparison of R a i l and Ocean Shipping Distances 77 5.5 E f f e c t i v e Interest Costs U.S. Dollar/Yen 234 (x) LIST OF FIGURES FIGURE Page 2.12 M.S. Coal F i e l d s 73 3.1 P o t e n t i a l West Coast Terminal S i t e s 101 3.2a U.S. West Coast R a i l Routes 102 3.2b Puget Sound Port Locations 103 4.1 LBICP Organization Structure 168 4.2 PBT Organization Structure 169 4.3 LBICP Development Time Schedule 170 5.1 Table of Contents for EIR/EIS Study 230 5.2 Export Credit Financing Format 231 5.3 Overseas Investment Credit Financing Format 232 5.4 Yen Syndicated Loan Financing Format 233 5.6 Safe Harbor Lease Format 235 5.7 Leveraged Lease Format 236 5.8 Parent Company Guarantee Format 237 (xi) ACKNOWLEDGMENT I would l i k e to take t h i s opportunity to thank my Thesis advisors, Dr. Trevor Heaver, Dr. B i l l Waters, and Dr. Dean Uyeno f o r t h e i r assistance during the preparation of t h i s t h e s i s . Their patience, guidance, and support are much appreciated. I would also l i k e to thank Louise Gauthier f o r typing the manuscript with i t s many changes. ( x i i ) CHAPTER I INTRODUCTION A. PURPOSE The purpose of t h i s t h e s i s i s to examine the organizational structure of a mu l t i - p a r t i c i p a n t j o i n t venture established to develop a coal terminal at Long Beach, C a l i f o r n i a . The analysis focuses on the e f f e c t of the organization structure upon decision making and management during the development process. The effectiveness of the decision making framework i n r e s o l v i n g many of the i n s t i t u t i o n a l and operational problems i s described. The multi-dimensional aspects of the transportation problem are also highlighted. The "transportation" involves unloading coal from r a i l cars, s t o r i n g the coal i n open p i l e s , reclaiming the c o a l , and loading i t aboard ocean going vessels. The t o t a l transport distance at the terminal w i l l be l e s s than one mile of conveyors. The paper demonstrates that the transport of the coal from the t r a i n s to the ship i s the l e a s t t e c h n i c a l l y , o p e r a t i o n a l l y , or f i n a n c i a l l y c onstraining problem. In r e s o l v i n g the transportation problem (so that terminal development and construction can proceed), organizational and i n s t i t u t i o n a l boundaries represent the major b a r r i e r s to completion. These boundaries r e l a t e to the i n t e r f a c e between various governmental, i n s t i t u t i o n a l , f i n a n c i a l , l e g a l , s o c i a l , corporate, p r i v a t e , and other bodies p o l i t i c . A f t e r s p e c i f y i n g the organizational and i n s t i t u t i o n a l (1) boundaries, the th e s i s i d e n t i f i e s the e f f e c t s of these boundaries on the decision making process during the planning, evaluation, and implementation of the project. The organizational structure i s discussed as i t r e l a t e s to the framework f o r the decision making process. The number of p a r t i c i p a n t s (5) involved i n the Long Beach pr o j e c t present some i n t e r e s t i n g organizational problems. The multi - o r g a n i z a t i o n a l decision making framework w i l l be discussed and r e l a t e d to some examples of i n t e r n a t i o n a l j o i n t venture management and d i s t r i b u t i o n channel theory. B. BACKGROUND TO U.S. STEAM COAL TRADE WITH PACIFIC RIM COUNTRIES Coal presently supplies more than 25% of the world's energy requirements. Indications are that t h i s resource w i l l need to provide between 50% and 60% of the energy required by the world i n the next 20 years i f the growth of the world economy i s to be sustained. ^ By accommodating these incremental energy needs coal w i l l "act both as a bridge to the energy systems of the future and as a foundation f o r the continued part that coal w i l l play i n the next century".2 In the United States, coal i s emerging as a s t r a t e g i c national energy resource. In p a r t i c u l a r , the Western States are preparing f o r the prospect of a major steam coal trade development with the P a c i f i c Rim a l l i e s i n Japan, Taiwan and South Korea. Interest i n the export p o t e n t i a l of steam coal to the P a c i f i c Rim has been stimulated by a number of forecasts which i n d i c a t e an increased general l e v e l of demand plus an (2) increased U.S. market share i n t h i s trade. See Table 1.1 f o r P a c i f i c Rim demand forecast. The steam coal trade from the U.S. West Coast to the P a c i f i c Rim countries represents a new market. To f a c i l i t a t e the development of t h i s export trade a l o g i s t i c s system i s required which i s capable of moving the coal from the o r i g i n a t i n g mine i n the Western United States to the inventory l o c a t i o n of the ultimate user. As with most low valued bulk commodities, the l o g i s t i c s system and r e l a t e d transportation costs form an important part of the product's a b i l i t y to compete f o r a market share. In the case of the U.S. west coast c o a l , the transportation costs represent from 40% to 60% of the de l i v e r e d p r i c e of the product. Improvements i n the transportation system r e s u l t i n g i n lower costs can s i g n i f i c a n t l y a f f e c t the competitiveness of p a r t i c u l a r sources of c o a l . See table 1.2 f o r recent CIF p r i c e s compared to net mine cost. It i s important to d i s t i n g u i s h between thermal and m e t a l l u r g i c a l c o a l . Thermal or steam coal i s used almost e x c l u s i v e l y as a b o i l e r - f i r i n g f u e l f o r e l e c t r i c i t y generation purposes. I t consists of both subbituminous and bituminous v a r i t i e s with a heating range between 7,500 and 13,000 BTU's per pound.^ M e t a l l u r g i c a l coal i s used p r i m a r i l y f o r the production of s t e e l and i s derived from high v o l a t i l e bituminous coal with an excess of 13,000 BTU's per pound. This t h e s i s concentrates on thermal coal as a new export market segment to the P a c i f i c Rim. The Western United States presently has several l o g i s t i c a l systems c o n s i s t i n g of producing coal mines, r a i l r o a d s , port f a c i l i t i e s , t r a d i n g (3) mechanisms, and purchasers. These systems are capable of handling export trade to a maximum l e v e l of approximately f i v e m i l l i o n metric tons of steam coal per year. For the trade i n steam coal to grow beyond t h i s f i v e m i l l i o n metric ton per year l e v e l i t i s necessary that a large United States West Coast coal port be constructed. The need f o r such a f a c i l i t y has been a matter of continuing concern f o r both the pu b l i c and pri v a t e sector i n the United States over the past several years. To assess t h i s market development and possible impacts on the United States' economy, Federal and State Governments have p a r t i c i p a t e d i n several major studies which examine the world energy needs during the next twenty years, the emerging steam coal export trade, and the p o s s i b i l i t i e s f o r U.S. p a r t i c i p a t i o n . The most notable of these reports are: (1) The MIT World Coal Study "(WOCOL) — involved a large number organizations from 16 major coal using and producing countries. These groups spent one and one-half years assessing the use of coal as an energy source during the next two decades; 4 (2) The Inter-Agency Coal' Export' Task' Force — established by President Carter and headed by the Department of Energy f o r the purpose of i d e n t i f y i n g courses of action which could be followed by various Government and pri v a t e organizations as a means of incre a s i n g U.S. coal exports; 5 (3) The" Westpo study — prepared on behalf of the Western Coal Export Task Force under the auspices of the Western Governors P o l i c y O f f i c e . This study included p a r t i c i p a t i o n by users, producers, transport industry, and State Governments i n an attempt to provide a comprehensive assessment of demand i n P a c i f i c Basin Countries and expand the long term large volume coal trade between the United States and the P a c i f i c Rim users.6 (4) Following the p u b l i c a t i o n of these reports, there has been a p r o l i f e r a t i o n of a r t i c l e s and interviews i n support of the West Coast steam coal export expansion. Concurrent with these major studies, preliminary i n v e s t i g a t i o n s were also being made by r a i l r o a d s , coal producers, P a c i f i c Rim t r a d i n g companies, and a large number of p u b l i c ports. These inv e s t i g a t i o n s involved t e c h n i c a l , contractual, permitting, f i n a n c i a l , and other issues which would need to be resolved p r i o r to construction of a coal export terminal on the West Coast. The general conclusion has been that the major constraint against expanding the trade to a l e v e l above f i v e m i l l i o n metric tons per year i s the lack of a modern port f a c i l i t y . The producers, r a i l r o a d s , and ship owners presently have excess capacity and are extremely i n t e r e s t e d i n promoting the development of a port to f a c i l i t a t e the expansion of the trade to the forecast l e v e l s . This s i t u a t i o n presents an i n t e r e s t i n g opportunity to investigate the development of the port component. The terminal has become a f o c a l point far exceeding i t s importance i n the l o g i s t i c s system as measured by the u n i t p r i c e of t h i s function compared to e i t h e r the delivered coal p r i c e or the p r i c e of the other components i n the system. Any proposed port f a c i l i t y designed to handle a throughput of between f i f t e e n and t h i r t y m i l l i o n tons per year represents a very c a p i t a l i ntensive p r o j e c t . Of necessity there w i l l be number of developers involved. Their diverse objectives regarding p a r t i c i p a t i o n i n the terminal p r o j e c t must be reconciled within the constraints of a m u l t i -organizational d e c i s i o n making environment. (5) In s p i t e of the o p t i m i s t i c forecasts, uncertainties remain about the r o l e of United States western steam coal i n the P a c i f i c Rim Markets. The influences of coal p r i c e increases on demand, d e c l i n i n g economic growth, and a temporary o i l glut tend to discourage development of t h i s trade. The a n t i c i p a t e d bonanza i n west coast steam coal has not mate r i a l i z e d . Instead trade l e v e l s and p r i c e s have fluctuated considerably i n a v o l a t i l e market over the past three years. Presently there i s an over-supply s i t u a t i o n . The future trade w i l l remain indeterminant u n t i l there i s a cle a r perception of the p o t e n t i a l market evidenced by a v a i l a b l e long term contracts. This w i l l require a more precise statement of supporting government p o l i c i e s and programmes i n both the U.S. and P a c i f i c Rim user countries. Although the main issue appears to be a trade-off between p r i c e competitiveness and d i v e r s i t y of supply, i t i s generally believed that the p r i n c i p a l P a c i f i c Rim users w i l l not begin to import large q u a n t i t i e s of U.S. steam coal u n t i l the range of CIF p r i c e differences narrows between U.S. and Aust r a l i a n supplies (presently $10.00 per Mtce dif f e r e n c e i n CIF p r i c e ) . ^ The capacity of the producers, r a i l r o a d s , and the ocean shipping sector i s presently adequate to handle the short term forecast trade l e v e l s of steam c o a l . The l a s t remaining l i n k i n an expanded west coast l o g i s t i c s system or "chain" i s the port terminal. There are a number of proposals c u r r e n t l y under consideration f o r the - construction of a large west coast f a c i l i t y but, as indic a t e d e a r l i e r , there are no long term contracts a v a i l a b l e to support the development of t h i s l a s t c a p i t a l intensive l i n k . A number of t o p i c s r e l a t e d to the development process of the Long Beach, C a l i f o r n i a terminal forms the foundation of t h i s t h e s i s . (6) C. OUTLINE The second chapter examines the background to the developing Western United S t a t e s / P a c i f i c Rim steam coal trade. The reasons f o r the P a c i f i c Rim i n t e r e s t i n U.S. steam coal are discussed. Pr i m a r i l y these countries seek to reduce t h e i r energy dependence on imported f o s s i l f u e l s from OPEC countries. This increases the general l e v e l of demand for thermal co a l . The s p e c i f i c demand f o r Western U.S. thermal coal w i l l also be increased by the P a c i f i c Rim objective of d i v e r s i f y i n g t h e i r supply sources through reducing r e l i a n c e on A u s t r a l i a . Balance of payments issues are b r i e f l y discussed i n t h i s section as they support expansion of the U.S. export trade. An examination of t h i s developing export trade would be incomplete without a discussion of the present coal demand i n the P a c i f i c Rim countries. The present f a l l i n g demand i s part of the slowed economic growth i n these countries. It i s hardly i n d i c a t i v e of a healthy, long range stable trade pattern necessary to support major c a p i t a l projects i n the United States. The chapter concludes with an overview of the projected U.S. supply and P a c i f i c Rim demand. A comparison of p r i c i n g between the supply countries i s made in c l u d i n g forecasts of p r i c e trends over the next several decades. The terminal p r i c e i n r e l a t i o n to the delivered p r i c e of the steam coal i s also discussed. Chapter 3 presents a b r i e f d e s c r i p t i o n of the p o t e n t i a l locations f o r a U.S. west coast coal export f a c i l i t y . The present f a c i l i t i e s i n (7) C a l i f o r n i a are described. The planned development programs for p o t e n t i a l new s i t e s are o u t l i n e d i n c l u d i n g the developing companies. The reasons f o r choosing Long Beach as the example for t h i s t h e s i s are enumerated, i n c l u d i n g a d e s c r i p t i o n of the p a r t i c i p a t i n g developers. The fourth chapter introduces the organizational structure f o r the project j o i n t venture. The project developers and major sub-contractors are presented according to d i f f e r e n t r e s p o n s b i l i t i e s i n the conceptual and developmental phases. The r o l e of each of the j o i n t venture p a r t i c i p a n t s i s analyzed according to what they can be expected to contribute to the pr o j e c t . This r e l a t e s p r i m a r i l y to (a) t h e i r f i n a n c i a l / o p e r a t i o n a l strengths and (b) t h e i r mainstream complementary business l i n e s . The objectives of the project group are described. The structure of the organizations they form to oversee the conceptual/planning and development phases of the project are then examined. The committee management concept i s compared to other i n t e r n a t i o n a l j o i n t venture examples i n the l i t e r a t u r e . The functioning of the committee management during the planning conceptual phase i s examined and several a l t e r n a t i v e s are discussed. The chapter concludes with a section on ownership issues between the j o i n t venture partners. Major problems regarding d i v e r s i t y of objectives between the partners are discussed in c l u d i n g resolutions to a number of problems. (8) The f i f t h chapter continues with the discussion of j o i n t venture management r e l a t i n g to the external issues involved i n the l e g a l and i n s t i t u t i o n a l environment. A b r i e f introduction to the p r i n c i p a l U.S. p o l i c i e s a f f e c t i n g the development of the west coast steam coal trade i s presented. This i s followed by an in-depth discussion of a number of external development issues. Although there are a great many external issues f a c i n g the developers, i t was decided to concentrate on a few of these i n d e t a i l f o r the purpose of the t h e s i s . The environmental permitting and f i n a n c i a l issues are discussed i n the greatest d e t a i l . The i n s t i t u t i o n a l problems i n these areas are presented along with proposed so l u t i o n s . The external issues regarding a foreign j o i n t venture partner, l e g a l , r e s t r a i n t of trade, socio-economic terminal aspects, and e f f e c t s of new technology or a l t e r n a t i v e energy forms are also discussed i n d e t a i l . The s i x t h chapter addresses the key issues of implementation and contracting once a de c i s i o n to proceed with the project has been reached. A f t e r the p a r t i c i p a n t changes during t h i s phase have been outlined, the major implementation problems are discussed. The p r i n c i p a l areas of a c t i v i t y w i l l i n i t i a l l y be the s e l e c t i o n of an engineering management company, the commencement of a marketing program, and the completion of the financing package. The organizational s t a r t up and union negotiations are also addressed. In the contracting section, a d e t a i l e d examination i s made of the terminal throughput contract. Special attention i s devoted to the commercial, operational and l e g a l terms of t h i s document as they r e l a t e to the terminal performance. The contract can be a method of r e s o l v i n g problems (9) which form a r e s i d u a l part of the development process. This aspect of the contract i s discussed with examples. A de s c r i p t i o n i s given of the basic coal sales terms. How these terms a f f e c t the negotiations with the terminal operator are presented i n r e l a t i o n to the acceptance of r i s k by the negotiating p a r t i e s . The chapter concludes with a section which examines the p o s s i b i l i t i e s of v a r i a t i o n s of supply and demand over a long term contract period. The r i s k s and r e s p o n s i b i l i t i e s f o r these v a r i a t i o n s are discussed i n l i g h t of the r i s k s a n t i c i p a t e d at the time of contract signature. The seventh and concluding chapter returns to the concept of the e f f e c t of the organizational structure on the decision making processes. The organizational and i n s t i t u t i o n a l boundaries w i l l be generally reviewed as complicating issues to the transportation problem. A synthesis of the management structure f o r the pro j e c t and i t s effectiveness i s presented. This includes comments regarding how the developers can a s s i s t i n f i n a l i z i n g an e f f i c i e n t western coal l o g i s t i c s system. This discussion also includes the fragmentation of the present U.S. system and what the possible formation of U.S. tr a d i n g companies can do to increase the communication and e f f i c i e n c y within t h i s system. In c l o s i n g , a number of projections are made regarding the progression of the terminal development i n the near term. A number of conceptual issues are h i g h l i g h t e d concerning what support any terminal w i l l require p r i o r to f i n a l construction decisions. (10) END ""NOTES 1. World Coal Study, Volume 1, Coal -- Bridge to the"Future, Report of the World Coal Study, C a r r o l l L. Wilson, Project Director (Cambridge, Mass.: B a l l i n g e r Publishing Co., 1980) p. x v i . 2. Ibid., p. x v i i . 3. B.T.U. - B r i t i s h Thermal Unit, an energy u n i t defined as the amount of heat rquired to r a i s e the temperature of one pound of water from 62 degrees Fahrenheit to 63 degrees Fahrenheit. 4. World Coal Study, Volume 1, Coal'--"Bridge to the Future, Report of the World Coal Study, C a r r o l l L. Wilson, Project Director (Cambridge, Mass.: B a l l i n g e r Publishing Co., 1980) p. 125. 5. U.S. Department of Energy, Interagency Coal Export Task Force, Interim Report of "the Interagency Coal Export Task "Force, Draft for Public Comment, January, 1981 p. 262. 6. Western Governors' P o l i c y O f f i c e , Western Coal Export Task Force, Western U".S." Steam CoaT Exports' "to "the " P a c i f i c Basin, (New York, McGraw-Hill, 1982) p. 74. 7. MTCE — Metric ton of coal equivalent i s defined as metric ton of coal with a s p e c i f i c heating value of 12,600 BTU per pound. (11) TABLES AND FIGURES (12) TABLE 1. 1 Forecast of P a c i f i c Rim Demand for Steam Quality coal to 1990 and Estimates of Market Share f or U.S. Western Case. (i n m i l l i o n metric tons) PACIFIC RIM TOTALS (a) 1981 (b) 1985 (c) 1985 (d) 1990 (e) 1990 Tot a l Demand Total Demand Estimate of Western U.S. Mkt Share Total Demand Estimate of Western U.S. Mkt Share E l e c t r i c Power 6.1 34.3-37.7 3.6 77.5- 92.5 13.3-16.3 Cement 11.1 17.4-19.1 2.3- 2.6 20.8- 22.5 2.8- 3.1 Iron & Steel 4.0 5.5 1.0- 3.0 7.0 1.2- 3.5 Other 3.6 8.4 1.6 12.4 1.4- 2.6 24.8 65.6-70.7 8.5-10.8 117.7-134.4 18.7-25.5 Source: Western Governors P o l i c y O f f i c e , Western Coal Export Task Force, Western U.S. Steam Coal Exports to the P a c i f i c Rim Basin, (New York, McGraw-Hill, 1982). p. 85 (13) TABLE 1.2 Delivered Western Coal Prices To Japan - 12/81 NET TON MINE CIF - Japan - M/T Utah Colorado $20.00 $62.30 $66.40 $22.00 $64.50 $68.60 $24.00 $66.70 $70.80 $26.00 $68.90 $73.00 $28.00 $71.10 $75.20 Source: Presentation of Thomas E. Boettger, President, Western Associated Coal Corp. At P a c i f i c Rim Coal Trade Conference, January 18-19, 1982, Honolulu, Hawaii. (14) CHAPTER"2 PACIFIC"RIM"MARKET"FOR STEAMING"COAL PART"I- ---'EMERGENCE OF"THE"TRADE A. DECREASING ENERGY'DEPENDENCE"ON"OIL The Organization of Petroleum Exporting Countries (OPEC) was created i n 1960 by a small number of petroleum exporting countries which were d i s s a t i s f i e d with the way the major o i l conglomerates were c o n t r o l l i n g the industry p r i c i n g structure. From t h i s meager beginning OPEC has expanded to include 13 o i l producing countries. Commencing with i t s "declaratory statement of p o l i c y " made i n 1968,^ OPEC has e f f e c t i v e l y gained control of the o i l from the major companies. I t has then used c a r t e l economics to b u i l d huge foreign currency reserves at the expense of Western i n d u s t r i a l powers and e f f e c t i v e l y r e a l l o c a t e d a sizeable portion of the world's product. The continuing rapid e s c a l a t i o n of o i l p r i c e s combined with the Arab o i l embargo during the autumn and winter of 1973/74, plus the rapid one hundred and t h i r t y percent e s c a l a t i o n of o i l p r i c e s i n 1978 and 1979, opened the eyes of Western i n d u s t r i a l i z e d nations to t h e i r energy v u l n e r a b i l i t y . This perceived v u l n e r a b i l i t y has been the prime factor behind the r e -emergence of coal use for energy purposes. Many expect continuing o i l p r i c e e s c a l a t i o n combined with an almost c e r t a i n s c a r c i t y of o i l and other (15) conventional f o s s i l f u e l s ( n a t u r a l l y or p o l i t i c a l l y ) within the next several decades. The i n d u s t r i a l i z e d nations are re-assessing t h e i r energy requirements and p o t e n t i a l sources of supply. Their concerns are j u s t i f i e d as the stakes are very high; an overdependence on f o r e i g n supplied energy resources can m a t e r i a l l y a f f e c t a country's standard of l i v i n g , i t s i n d u s t r i a l base, and i t s general economic health. The energy c r i s i s i s a r e a l i t y , to believe otherwise could lead to a national energy catastrophe i n le s s than a generation. With these serious circumstances surrounding energy planning, coal has become a c r i t i c a l item i n most long range energy budgets. As many as ten years ago industry spokesmen could foresee an impending f u e l c r i s i s but were confident that conservation measures could resolve the problem. They did not forecast the rapid growth of energy requirements i n a l l sectors of the world economy. At that time, there were few forecasts regarding coal as a major energy source. Instead there were predictions of a "sick coal industry" characterized by the i n c o m p a t i b i l i t y of the energy requirements and the environmental goals.^ The use of coal as an energy source i n the medium and long term i s now a v i r t u a l c e r t a i n t y . Nowhere has the need for greater coal use become more apparent than i n the Far Eastern nations of Jthe P a c i f i c Rim. These countries ( p r i n c i p a l l y Japan, Taiwan and South Korea) are not endowed with an adequate natural resource energy base and must look to external markets to secure t h e i r f u e l s . Japan, Taiwan and Korea were forecast to import 86%, 82%, and 63% r e s p e c t i v e l y of t h e i r t o t a l primary energy i n 1980. (16) 70%, 71%, and 61% of t h i s t o t a l primary energy r e s p e c t i v e l y would be supplied by imported o i l . ^ H. P. Drewry reports that f o r e l e c t r i c i t y generation i n Japan during 1978, o i l constituted 59% of the f u e l , hydro-e l e c t r i c 13%, nuclear 11%, natural gas 11%, and coal 6%.4 Japan, Taiwan, and South Korea are presently embarking on a major f u e l source d i v e r s i f i c a t i o n program which w i l l r e s u l t i n the increased use of coal as w e l l as l i q u i f i e d natural gas, h y d r o e l e c t r i c power and nuclear energy. As a l t e r n a t i v e s to o i l , these sources are being considered i n terms of d i v e r s i f i c a t i o n of product and supplier. Their p r i n c i p a l objective i s to accomplish a smooth t r a n s i t i o n from o i l - f i r e d e l e c t r i c i t y generation and cement production to c o a l , nuclear, natural gas, and hydro-e l e c t r i c power. The plans for reducing o i l consumption w i l l lead to a large increase i n LNG imports and the continuation of the nuclear and h y d r o e l e c t r i c development programs. However, i n order to f u l l y r e a l i z e t h e i r goals of energy d i v e r s i f i c a t i o n i t i s forecast that the Far Eastern countries w i l l become one of the l a r g e s t markets i n thermal energy c o a l . I f the expansion of coal f i r e d generating capacity and developments i n the cement and s t e e l i n d u s t r i e s proceed as planned, Japan alone w i l l require 34 m i l l i o n tons of steam coal by 1985, i n c r e a s i n g to 65 m i l l i o n tons by 1990. 5 Table 2.1 i n d i c a t e s c l e a r l y the desires of these nations to reduce o i l as a f u e l f o r t h e i r e l e c t r i c generating capacity. In the period from 1980 to 1990 Japan intends to reduce i t s o i l dependence from 47.4% of projected generating capacity to 24%, Taiwan from 60.3% to 26% and South Korea from (17) 61.6% to 12.1%. 6 Tables 2.2, 2.3, and 2.4 show the d e c l i n i n g o i l energy use i n the broader spectrum of To t a l Primary Energy (TPE). As a percentage tage of TPE from 1980 to 1990 o i l changes from 70% to 52% i n Japan, 71% to 42% i n Taiwan, and 61% and 17% i n Korea.^ The forecasts of energy shares by resource are dependent on a number of key f a c t o r s : (a) the growth and demand for e l e c t r i c i t y over the period; (b) the general economic growth and health of the various economies; (c) the uninterrupted expansion of nuclear development programs as forecast; and (d) some s t a b i l i t y i n the crude o i l markets. Most of the studies on t h i s t o p i c have covered a number of scenarios r e l a t i n g to: (1) d i f f e r e n t economic growth rates, (2) d i f f e r e n t o i l p r i c e e s c a l a t i o n l e v e l s , and (3) moratoriums on nuclear expansion. The thesis w i l l concentrate on an approximation of the base case, (4-6% GDP growth, 2-3% o i l p r i c e e s c a l a t i o n , and continued nuclear expansion).^ Under an o i l and nuclear energy s h o r t f a l l s i t u a t i o n , i t i s forecast that s u b s t i t u t i o n of coal would cause imports of thermal coal to Japan, Taiwan and Korea to increase by 38%, 57%, and 54%, r e s p e c t i v e l y above the base i n d i c a t i o n s i n the period 1980-1985.9 B. DIVERSITY"OF"ENERGY FORMS"AND SOURCES Even i n the most p e s s i m i s t i c economic growth scenario, i t i s apparent that the P a c i f i c Rim countries of Japan, Taiwan and Korea, w i l l s u b s t a n t i a l l y increase t h e i r imports of steam coal consistent with the objec t i v e of reducing t h e i r energy dependence on o i l . The coal user companies and (18) responsible government agencies are de f i n i n g and implementing import s t r a t e g i e s which d i v e r s i f y the energy supply among d i f f e r e n t forms and su p p l i e r s . Several studies have concluded that the supply d i v e r s i t y issue i s as important to the three main P a c i f i c Rim importing nations as the delivered p r i c e . This has yet to be proven through t h e i r purchasing p o l i c i e s . ^ According to the U.S. Department of Energy, Inter Agency Task Force, the P a c i f i c Rim purchasers are seeking to s a t i s f y a number of c r i t e r i a p r i o r to entering into long term contracts with any supplier nation or company. Their preferences are as follows ( i ) A p o l i t i c a l l y stable country where the government i s prepared to support the continuous export of coal f or the term of the contract. ( i i ) A reasonably harmonious management/labour r e l a t i o n s h i p i n the coal producing sector. ( i i i ) A supply or mine owning company that i s of a s i z e , character, and corporate structure that a long term contract w i l l be honored throughout i t s l i f e . F i r s t a group of countries and companies w i l l be selected according to the above c r i t e r i a . I t w i l l then become the task of utility/cement company purchasing agents, regional purchasing agencies (eg. EPDC),^ user group (19) purchasing committees (eg. JCDC),^ tra d i n g companies, and government departments ( in the case of n a t i o n a l l y run power companies i n Taiwan and Korea), to develop and pursue a steam coal purchasing program i n c l u d i n g but not l i m i t e d to some of the following factors (excluding p o l i t i c a l issues f o r the present t i m e ) : ^ ( i ) Supplies to be drawn from sources meeting the c r i t e r i a as per numbers 1, 2, and 3 above. ( i i ) P r i c e to be one of the purchasing determinants but not nec e s s a r i l y the most important. ( i i i ) 40-80% (or some defined range) of requirement to be f i l l e d by long term 10-15 year contracts. (iv) Balance of requirement to be purchased on spot-5 year contracts attempting to absorb the f l u c t u a t i o n i n demand plus take advantage of favourable market conditions when they e x i s t . (v) Negotiate with lowest cost producers f i r s t to e s t a b l i s h "market" or "world p r i c e " to be used on subsequent transactions. The P a c i f i c Rim countries want to avoid getting themselves i n t o another OPEC s i t u a t i o n and are i n d i c a t i n g a preference f o r purchasing t h e i r coal (20) from as many producers as pos s i b l e . There i s a premium to be paid f o r t h i s d i v e r s i t y of supply. If cost was the only purchasing determinant i n t h i s market i t i s reasonable to presume that A u s t r a l i a would be the si n g l e long term contract supplier. Present i n d i c a t i o n s are that Japan, Taiwan, and Korea accept paying a premium for t h i s d i v e r s i f i c a t i o n f l e x i b i l i t y ; they are presently i n the process of attempting to stimulate the Western United States and a number of other countries to p a r t i c i p a t e i n t h e i r Far Eastern steam coal market. By increasing supply, a p r i c e decline could be expected i f demand were held constant. However, demand i s forecast to increase. A d d i t i o n a l l y , the newer f a c i l i t i e s are considerably more c a p i t a l i n t e n s i v e , and sometimes more operationally expensive than the present i n s t a l l a t i o n s . This new tonnage could increase the market c l e a r i n g p r i c e (more w i l l be s a i d on t h i s t o p i c l a t e r i n the chapter). As noted e a r l i e r , the energy d i v e r s i f i c a t i o n p o l i c i e s apply to energy forms as well as supply sources. The prospect of nuclear, natural gas, and h y d r o e l e c t r i c energy w i l l be discussed b r i e f l y with a mention of other energy sources p r i m a r i l y as d e r i v a t i v e s of these three or c o a l . As per Tables 2.1, 2.2, 2.3, and 2.4, i t i s forecast that the natural gas, nuclear and h y d r o e l e c t r i c resources w i l l represent a s u b s t a n t i a l share of both the e l e c t r i c generation source energy and the t o t a l primary energy. Each of these energies are forecast to increase t h e i r share s u b s t a n t i a l l y during the period from 1980 to 1990. Table 2.5 shows the s e n s i t i v i t y of western coal exports to v a r i a b l e s such as reduced power growth, reduced nuclear, and increased coal market share. (21) 1. NUCLEAR"ENERGY I t i s recognized that the future growth of nuclear capacity w i l l have a sub s t a n t i a l impact on coal f i r e d e l e c t r i c i t y generation, as every 1,000 MW increase i n capacity w i l l reduce coal consumption by approximately 2.5 m i l l i o n tons.15 At the time of the o i l c r i s i s , the i n d u s t r i a l i z e d Western countries saw nuclear power as the most a t t r a c t i v e a l t e r n a t i v e . This was p a r t l y because the programs were already well advanced, but also because i t appeared to represent a secure energy source. Recently, the an t i c i p a t e d b e n e f i t of the nuclear energy option has been brought i n t o serious question and planned capacity i n most areas scaled down. Even though o f f i c i a l projections of nuclear energy capacity continue to be reduced, the contribution of the nuclear power source i s expected to increase s i g n i f i c a n t l y during the period 1980 to 1990. In a recent study ( e n t i t l e d Energy P o l i c i e s and Programs of the I.E.A. Countries), the International Energy Agency forecast that nuclear power w i l l quadruple between 1978 and 1990 i n absolute terms and increase from 11% to over 25% of t o t a l e l e c t r i c i t y g e n e r a t i o n . ^ Although the I.E.A. does not concentrate s o l e l y on the three p r i n c i p a l P a c i f i c Rim nations, i t does h i g h l i g h t the impact the nuclear option could have on the use of s o l i d f u e l s such as c o a l . The I.E.A. study forecasts there w i l l be l i t t l e change i n the proportion of e l e c t r i c i t y generated from coal through the mid 1980's, which, on the basis of the f u e l inputs foreseen, remains at 37.5%.^ O i l ' s share of f u e l i n g e l e c t r i c i t y output from the countries covered by the I.E.A. study, reduces from 21% i n 1978 (22) to 18.5% i n 1985 and approximately 11% i n 1990. 1 8 S i m i l a r l y , the share of natural gas f a l l s from 11% to 5% over the same period. ^ 9 The I.E.A. appears to have underestimated the coal energy use i n the P a c i f i c Rim country of Japan, and does not address Taiwan or Korea. C. Itoh forecasts that i n 1980 o i l supplied 44% of e l e c t r i c a l power but t h i s w i l l decrease to 17.6% i n 1990 and 11% i n 2000. 2 0 Coal forecasts could be conservative i f the forecasted nuclear power growth proves to be overly o p t i m i s t i c . 30% to 50% of new power cur r e n t l y being planned i n Japan, Taiwan and Korea i s to be nuclear. However, i t should be noted that according to Westpo data nearly 60% of the cur r e n t l y planned 35,000 megawatt a d d i t i o n a l nuclear capacity i n Japan had not received o f f i c i a l authorization as of June, 1981. Ad d i t i o n a l delays as a r e s u l t of t h i s authorization process, combined with the current r a p i d l y changing e l e c t r i c i t y demand forecasts, could see the nuclear option decrease as a proportion of t o t a l energy requirements. 2^ In l i g h t of the demand uncertainty, coal f i r e d stations may represent a better a l t e r n a t i v e given the smaller investment and shorter lead times required to construct and bring a plant i n t o operation. Providing the end user with more f l e x i b i l i t y i n h i s power planning system may be an important a t t r i b u t e of c o a l . Table 2.6 shows the I.E.A. comparative cost estimates f o r new o i l , nuclear and c o a l - f i r e d e l e c t r i c i t y generation. Nuclear cost i s $.065 per m i l l i o n BTU, coal i s $1.13 and o i l i s $3.33. 2 2 In any event the nuclear power industry i s i n trouble, economically, environmentally, and t e c h n i c a l l y . Its future development i s clouded with (23) serious u n c e r t a i n t i e s and r e s o l u t i o n depends l a r g e l y on the domestic p o l i c y decisions of the representative P a c i f i c Rim Governments. 2. NATURAL"GAS Natural gas i s a clean and e f f i c i e n t f u e l favourable f o r use i n r e s i d e n t i a l , commercial and l i m i t e d i n d u s t r i a l a p p l i c a t i o n s . In 1978 natural gas provided approximately 17% of the world energy supplies or the equivalent of 21 m i l l i o n b a r r e l s per day of o i l equivalent.23 Natural gas w i l l l i k e l y not maintain an increased share of world energy requirements over the next two decades. A great deal of the natural gas reserves are located i n OPEC countries which can be expected to put c e i l i n g s on the l e v e l of exports to support continued high gas and o i l p r i c e s . A d d i t i o n a l l y , regulations and p r i c i n g structures ( r e l a t e d to r e s i d e n t i a l and commercial use) have impeded the development program f o r natural gas discoveries i n Western nations and w i l l l i k e l y continue to hamper i t s expansion. The c a p i t a l intensive and s p e c i a l i z e d nature of the development and shipping of natural gas also serve to impede i t s development. Trade i n l i q u i f i e d natural gas i n 1978 was 500,000 ba r r e l s per day o i l equivalent (BDOE) which could increase to 1.5 m i l l i o n b a r r e l s per day o i l equivalent (MB DOE) by 1985. To get to 5 MBDOE by the end of the century would require massive new investments.^ 4 Table 2.2 in d i c a t e s that between 1985 and 1990 natural gas as a percentage of t o t a l primary energy w i l l change from 7% to 9% i n Japan, information for Taiwan and Korea i s not a v a i l a b l e . (24) HYDROELECTRIC POWER Hydroelectric power i s the p r i n c i p a l renewable energy source that c u r r e n t l y provides a s i g n i f i c a n t amount of commercial energy. This type of energy produces approximately 20% of the world e l e c t r i c i t y needs and 5% of the t o t a l world energy needs. 2 5 With most prime locati o n s already developed i n Western nations, the largest growth p o t e n t i a l appears to be i n developing areas. New technology and reworking of e x i s t i n g f a c i l i t i e s could make i t possible that t h i s energy source w i l l maintain i t s 5% share of the world energy supply at the year 2000. In regard to the P a c i f i c Rim countries t h i s source w i l l have a n e g l i g i b l e e f f e c t on the import steam coal requirements. ADDITIONAL OIL AND"GAS"SOURCES Unconventional sources of gas i n coal beds, shales, t a r sands, and geo-pressurized formations may contain very large amounts of energy. A large resource base also e x i s t s f o r unconventional o i l i n o i l shale, t a r sands, and heavy o i l . 2 ^ The development of these energy sources i s characterized by very high c a p i t a l costs and long lead times. As technological innovations make way f o r less expensive developments of these f u e l sources, i t i s reasonable to expect that they w i l l p a r t i c i p a t e i n supplying a part of the world's energy needs. Their introduction on a commercial scale can be expected l a t e i n t h i s century with an ant i c i p a t e d rapid development e a r l y i n the next century. (25) ADDITIONAL"RENEWABLE"ENERGY"SOURCES Energy technology i n solar water and space heating, s o l a r generated e l e c t r i c i t y , photovoltaic energy conversion, biomass conversion, windmills, ocean-thermal energy, wave energy, t i d a l energy, and geothermal energy provide only small amounts of commercial energy today.27 These sources could provide substantial promise f o r the future. Although many of these technologies are i n the infancy of t h e i r development there e x i s t s the p o s s i b i l i t y f o r major innovations over the next several decades. It i s u l t i m a t e l y p o s s i b l e , and may be a necessity that these renewable sources become a p r i n c i p a l source of world energy supplies by the middle of the next century. ADDITIONAL ENERGY"FORMS~FROM COAL As with a d d i t i o n a l renewable energy sources there are a number of developing technologies r e l a t i n g to using derivatives of coal as energy forms. Some of the technologies are considered to have near term commercial p o t e n t i a l and have been involved i n lengthy t e s t i n g programs. The speed of use of these technologies w i l l be p r i m a r i l y dependent on the p r i c e of non-coal f u e l s as these coal d e r i v a t i v e s w i l l be high cost sources. (a) Synthetic f u e l s - This involves using coal to produce a s o l i d , l i q u i d or gaseous product. Liquefaction has been tested since 1962 (Solvent Refined Coal Process) and several (26) t e s t plants are now operating i n the range of 50 tons per day. G a s i f i c a t i o n has been used commercially i n Europe f o r some time with new highly e f f i c i e n t processes f o r developing synthetic natural gas from co a l . (b) Methanol production - although t e c h n i c a l l y developed, energy recovery i s approximately 40-50% which makes cost of r e s u l t i n g energy very high. In addition to the d e r i v a t i v e energy forms, the use of coal i s also being improved through t e c h n o l o g i c a l advances such as F l u i d i z e d Bed Combustion and C o a l / O i l mixtures. These improvements are f a c i l i t a t i n g operating e f f i c i e n c i e s i n the use of c o a l , expanding i t s range of uses, and reducing environmentally damaging by-products. C. BALANCE OF'PAYMENTS "ISSUES Presently there e x i s t s a trade d e f i c i t of approximately 18 b i l l i o n d o l l a r s between the United States and Japan, 4.3 b i l l i o n d o l l a r s between the United States and Taiwan and .4 b i l l i o n d o l l a r s between the United States and South K o r e a . 2 8 With the world economic slowdown well entrenched and the overvalued U.S. d o l l a r holding strong as a r e s u l t of continued high i n t e r e s t r a t e s , the prospects f o r improving these trade imbalances are dim. With the exception of m i l i t a r y products, i t i s u n l i k e l y that the United States could export mechanized equipment, machinery, or semi-finished (27) products to any of these countries which have an equally s k i l l e d and considerably l e s s expensive labour force capable of making the same products. The only reasonable a l t e r n a t i v e appears to be i n the export of raw materials of which coal promises to present a r e a l i s t i c option. The export of the thermal coal from the United States Western mines can have a two-fold e f f e c t on the balance of payments s i t u a t i o n . The f i r s t i s the obvious reduction i n the trade d e f i c i t through payments f o r the cargoes flowing to the P a c i f i c Rim. Secondly the new mines may s e l l incremental production or inventory to domestic United States u t i l i t i e s and industry thereby reducing the need for imports of foreign o i l or other energy supplies. With the West Coast steam coal trade l e v e l s that are presently being discussed, and assuming an F.O.B.T. p r i c e i n 1982 d o l l a r s of $60/ton (assuming ocean carriage i n foreign f l a g and owned vessels) trade c r e d i t s would accrue i n the amount of 558 m i l l i o n d o l l a r s i n 1985, 1.32 b i l l i o n d o l l a r s i n 1990, 2.1 b i l l i o n d o l l a r s i n 1995, and 2.86 b i l l i o n d o l l a r s i n the year 2000.29 PART"II ---"PRESENT"MARKET A. VOLATILE"MARKET"HISTORY The past three years have represented a very v o l a t i l e period f o r West Coast steam coal exports to Japan, Taiwan, and Korea. The trade was nearly zero i n 1979, grew to 1.5 m i l l i o n tons i n 1980, and to 5 m i l l i o n tons i n 1981. 3" I t i s now forecast to decline to approximately 4 m i l l i o n (28) tons i n 1982. 3 1 Unfortunately the rapid increase i n demand from the West Coast (c o i n c i d i n g with labour problems i n A u s t r a l i a ) has not given supply and demand nor p r i c e s a chance to s t a b i l i z e i n t h i s market. During t h i s time frame the P a c i f i c Rim buyers f e l t that they were being charged exorbitant CIF p r i c e s for the coal to take advantage of t h e i r shortage predicament. 3 2 Conversely, the U.S. suppliers i n d i c a t e d that the P a c i f i c Rim countries were purchasing inventories at p r i c e s below f u l l cost and that the r e a l p r i c e of replacement tonnage i n the future would be considerably more expensive. These diverse market views have impeded the long-term volume contracts that are needed to develop t h i s trade and have re s u l t e d i n a c y c l i c a l spot market which has not been b e n e f i c i a l to either suppliers or users. With inventory sold during 1981 and promises of a continued growth market i n 1982, Western mines increased production, new mines were opened, and the transportation sectors geared up only to face a slackening f i r s t quarter and p o t e n t i a l 1982 annual demand. There i s presently a serious oversupply problem and buyers are taking advantage of e x c e l l e n t p r i c e s i n purchasing mine inventory once again. U n t i l these swings are arrested i t i s u n l i k e l y that a stable U.S./Pacific Rim trade pattern w i l l develop. B. SLOWED'ECONOMIC"GROWTH"OF"PACIFIC"RIM"COUNTRIES With the worldwide economic slump becoming more entrenched, the P a c i f i c Rim nations of Japan, South Korea and Taiwan have not been exempt from the (29) slowdown of regular trade patterns. Due to t h e i r large export base, t h e i r economies are more susceptible to f l u c t u a t i o n s than countries which are l e s s oriented to foreign trade. A d d i t i o n a l l y , p r o t e c t i v e trade laws and other actions are being implemented by many of these countries' trading partners as a method to curb imports and stimulate t h e i r own lagging economies. As r e c e n t l y as 1978 the economies of Japan, Taiwan and South Korea were forecast to grow at 6%, 6.5%, and 7% throughout the period to 1990, with e l e c t r i c generating energy requirements growing at 8%, 9.5%, and 11% r e s p e c t i v e l y . 3 3 I t now appears that each of these economies w i l l grow at approximately 4-5% and forecast energy requirements w i l l decrease a l s o . If Japan's growth decreased from 5% to 4% i n 1990, coal (MTCE) 3 4 imports would decrease by 20%. 3^ In Taiwan i f growth decreased from 6% to 4% coal imports would decrease 3% i n 1990 and i n Korea i f growth declined from 7% to 5% coal imports i n 1990 would decrease 24%. 3^ This slower economic growth and i t s impact on the demand f o r e l e c t r i c i t y i n the P a c i f i c Rim countries w i l l have a major e f f e c t on the growth of the steam coal trade. Many of the coal conversion projects are only i n the planning stage and can be deferred or cancelled i f necessary should e l e c t r i c i t y demand f a l l below forecasts. See Table 2.7 f o r i n d i c a t i o n s of planned versus fi r m e l e c t r i c power industry generating f u e l requirements. U n t i l i t i s better known what r e a l growth these economies w i l l experience and the r e s u l t a n t energy requirements, i t i s l a r g e l y speculation as to the l e v e l s of West Coast steam coal trade which w i l l m a t e r i a l i z e . (30) C. ENERGY CONSERVATION The World Coal Study predicted that conservation may well become of the the world's l a r g e s t energy "resources". 3^ This w i l l become p a r t i c u l a r l y important as energy becomes more expensive and thereby increases the value to an economy of a conserved energy u n i t . The i n i t i a l 10-15% of energy savings are obtainable by r e l a t i v e l y simple short-term measures such as car pools, better i n s u l a t i o n , better b u i l d i n g codes, improved heating controls. To expect a d d i t i o n a l gains beyond these immediate measures w i l l require c a p i t a l investments and substantial lead times. These decisions must be made during the process of the turnover of a p a r t i c u l a r country's c a p i t a l stock and must be implemented as part of a nat i o n a l and l o c a l strategy p o s s i b l y enhanced through tax and other f i n a n c i a l incentives as well as p o l i c i e s and regulations. In the past energy conservation has been a reactionary process and t h i s w i l l need to be changed i f i t i s to play a major r o l e i n the d r a f t i n g of a country's energy budget. The world coal study and many other recent reports have included i n t h e i r forecasts that major e f f o r t s at conservation w i l l become a r e a l i t y c a r r i e d out as matters of national concern. They have gone further to say that by year 2000, conservation could reduce energy consumption to l e v e l s 20-30% below what otherwise would be r e q u i r e d . 3 8 (31) PART - i n - SUPPLY "AND" DEMAND A. SUPPLY"BY"MAJOR"RESOURCE"OWNERS In the discussion of any bulk commodity such as coal an important d i s t i n c t i o n must be drawn between the terms "resource" and "reserves". According to the International Energy Agency, geological resources are taken to mean resources that may become of economic value at some time i n the f u t u r e . 3 9 The IEA describes t e c h n i c a l l y and economically recoverable reserves to mean reserves that can be regarded as a c t u a l l y recoverable under the t e c h n i c a l and economic conditions p r e v a i l i n g today. 4^ This paper w i l l deal s t r i c t l y with reserves, recognizing that they are constantly changing i n the l i g h t of new exploration e f f o r t s . As an example, the estimates of the world's coal reserves have increased by approximately 185 b i l l i o n tons of coal equivalent (TCE) as a r e s u l t of the increased exploration since the f i r s t o i l shock of 1973 and 1974.41 Coal i s c l a s s i f i e d by rank and grade. Rank generally r e f e r s to the degree of metamorphism or c o a l i f i c a t i o n (percentage of f i x e d carbon and heat content) of the c o a l . Grade r e f e r s to the amount of chemical impurities present i n c o a l . The rank of a p a r t i c u l a r coal source i s determined by the conditions of formation and the age and depth of the c o a l . The grade i s determined p r i m a r i l y by the presence of impurities such as sulphur, ash, and trace elements. See Table 2.8 f o r i n d i c a t i o n s of rank and grade determination of coal q u a l i t y . (32) Although coal deposits are d i s t r i b u t e d throughout the world, ten countries presently account f o r approximately 90% of the world's estimated r e s e r v e s . 4 2 Table 2.9 indicates the l e v e l of coal reserves provided by the International Energy Agency, World Coal Study, and a more recent ICF study. I t can be seen that i n the short period from 1978 to 1980 the reserve forecast has r i s e n from approximately 637 b i l l i o n tons i n the IEA Study to 662 b i l l i o n tons i n the World Coal Study up to 766 b i l l i o n tons i n the ICF Study. I t i s presently a n t i c i p a t e d that there w i l l be few new major coal reserves found i n developed countries which presently maintain a mature coal mining industry. It i s expected, however, that there w i l l be larger reserves i d e n t i f i e d as further exploration i s made of the known resources. The major suppliers of steam coal to the P a c i f i c Rim countries w i l l be A u s t r a l i a , Canada, the U.S.A., South A f r i c a , and China. Their market shares w i l l vary i n the future according to p r i c i n g p o l i c i e s and p o l i t i c a l s i t u a t i o n s . The Department of Energy International Coal Export Task Force forecasts the r e l a t i v e supply shares to be as indic a t e d i n Table 2.10. Each of these countries c l e a r l y has the s u f f i c i e n t reserves to compete as a major p a r t i c i p a n t i n the P a c i f i c Rim market. There are a number of drawbacks r e l a t i n g to the supply from each country which w i l l continue to r e i n f o r c e the P a c i f i c Rim countries' desire to d i v e r s i f y t h e i r purchase o r i g i n s . The following represents a number of pos s i b l e concerns with respect to each of the supplying c o u n t r i e s : 4 3 (33) A u s t r a l i a a) Labour disputes have been common i n A u s t r a l i a , though t h e i r costs have as yet not been s i g n i f i c a n t . The prospect of major work stoppages could l i m i t A u s t r a l i a n coal production and hence t h e i r a b i l i t y to meet contracted commitments. b) A growing domestic demand (presently l e s s than exports) could bring some protectionism from the c e n t r a l a u t h o r i t i e s . c) The A u s t r a l i a n J o i n t Coal Board i s responsible for regulating coal supply to insure that the opening of new mines does not b r i n g i n s t a b i l i t y to the market. Decisions by the Board to r e s t r i c t export q u a n t i t i e s could lead to supply shortages and higher costs f o r A u s t r a l i a n c o a l . d) The c a p i t a l costs for new coal mines are substantial and a v a i l a b l e funds i n A u s t r a l i a may prove to be l i m i t e d . The A u s t r a l i a n Govern-ment requires that foreign c a p i t a l investment i n any p r o j e c t be l e s s than 50%, and i n d i c a t i o n s are that the required c a p i t a l formation would not be a v a i l a b l e i n the A u s t r a l i a n private sector to fund the remaining development costs. South"Africa a) Coal mining i s presently dependent upon inexpensive non-white labour. Mining methods tend to be l e s s e f f i c i e n t than the more c a p i t a l (34) intensive methods used i n competing countries. Labour unrest and r a p i d l y e s c a l a t i n g costs could hamper t h e i r a b i l i t y to produce su b s t a n t i a l amounts of coal i n the future. b) With the country's continued i s o l a t i o n due to i t s apartheid p o l i c i e s , the government w i l l l i k e l y be concerned with energy s e l f - s u f f i c i e n c y and as a r e s u l t may regulate the l e v e l of coal exports i n the future. c) The imposition of domestic p r i c e controls could l i m i t supplies by denying adequate rates of return. d) The s i g n i f i c a n t p o l i t i c a l unrest and the black n a t i o n a l i s t movement i n South A f r i c a w i l l c e r t a i n l y a f f e c t the perceived s t a b i l i t y by the purchasing P a c i f i c Rim nations. This could l i m i t t h e i r willingness to enter into long-term coal throughput contracts. e) P a c i f i c Rim countries' moral and p o l i t i c a l objections to the apartheid p o l i c i e s of the South A f r i c a n Government may prevent them from dealing on a s u b s t a n t i a l basis with t h i s country. 3. Canada a) The f e d e r a l / p r o v i n c i a l d e l i n e a t i o n of t h i s country's p o l i t i c a l frame-work means that the provinces have control over t h e i r i n t e r n a l coal production. B r i t i s h Columbia and Alberta, presently the two l a r g e s t coal producing regions, have very d i f f e r i n g p o l i c i e s on coal (35) development. The continued debate over federal versus p r o v i n c i a l c o n t r o l of energy resources may cause the P a c i f i c Rim countries to perceive a degree of i n s t a b i l i t y i n t h i s supply source. b) Inland transportation systems from the mines to the West Coast ports i n B r i t i s h Columbia are presently nearing capacity u t i l i z a t i o n . There i s concern by P a c i f i c Rim users that large amounts of a d d i t i o n a l capacity w i l l not be a v a i l a b l e to service t h e i r needs through the year 2000 should a substantial requirement f o r a d d i t i o n a l supply m a t e r i a l i z e . 4. China a) The amount or q u a l i t y of the reserves presently a v a i l a b l e i n t h i s country are r e l a t i v e l y unknown but are thought to be vast i n c l u d i n g high q u a l i t y deposits. b) The transportation i n f r a s t r u c t u r e i s i n i t s infancy. It i s not known how much time or c a p i t a l w i l l be required to f a c i l i t a t e the e f f i c i e n t movement of the coal from mine to terminals when the f a c i l i t i e s are a v a i l a b l e . c) The government has t o t a l and u n i l a t e r a l control of a l l natural resources. They could change p o l i c i e s i n favour of r e s t r i c t i n g exports and supplying more domestic energy requirements with l o c a l l y produced c o a l . ( 3 6 ) 5. United States a) Although the United States i s perceived as the most stable long range supplier of steaming c o a l , f e d e r a l p o l i c i e s that support the export of t h i s energy resource are not completely i n place. b) There appears to be excess capacity i n the production, land, and sea transportation. The lack of a large West Coast terminal w i l l present a bottleneck i n any s u b s t a n t i a l increased trade l e v e l s . c) Presently the United States steam coal i s the highest p r i c e d source of the P a c i f i c Rim a l t e r n a t i v e s . Prospects f o r a reduction i n t h i s p r i c e do not appear favourable. The consuming nations w i l l need to be prepared to pay a premium f o r the s e c u r i t y of using U.S. c o a l . d) A growing domestic requirement may absorb present production and l i m i t export tonnage a v a i l a b i l i t y . e) In the Western United States, the supply of steaming coal w i l l o r i g i n a t e p r i m a r i l y from Utah and Colorado. Wyoming, Montana and New Mexico may enter the export market l a t e r i n t h i s century as technological advances are made. These advances w i l l need to r e l a t e to processes that remove the moisture and other contaminants from the coal p r i o r to i t s shipment to the end user. Improvements i n b o i l e r technology may also permit the burning of these lower q u a l i t y f u e l s . (37) f) The reserves i n these f i v e States are indicated i n Table 2.11 and the general reserve areas on Figure 2. 12. It i s evident that s u b s t a n t i a l reserves e x i s t to more than adequately cover any export l e v e l s which should be required f o r the P a c i f i c Rim countries. Utah and Colorado have the most mines presently i n operation and currently have excess capacity. The short term forecasts of U.S. p a r t i c i p a t i o n i n the P a c i f i c Rim steam coal market can adequately be covered. The coal from Utah and Colorado w i l l be p r i n c i p a l l y shipped through terminals i n Northern and i n Southern C a l i f o r n i a . B. DEMAND"BY"JAPAN The forecasts of the P a c i f i c Rim demand for steaming coal have var i e d s i g n i f i c a n t l y . Table 2.13 compares the Department of Energy forecast i n 1978 with the 1980 Westpo forecast and recent C. Itoh forecasts. I t can be seen that the forecast demand for 1990 U.S. west coast coal has increased from 33.1 MTCE i n 1978 projections to 69 MMT i n 1981 proj e c t i o n s and decreased to 61 MMT i n 1982 pro j e c t i o n s . The most recent forecast from the M i n i s t r y of International Trade and Industry (MITI) i n Japan d i f f e r s from the Westpo demand forecast f o r 1990 by 6 m i l l i o n tons. Changes i n the forecast were explained as f o l l o w s : 4 4 1. Demand"for Electric"Power (i ) T o t a l demand for e l e c t r i c power i n 1990 has been decreased by 12.5% due to the d r a s t i c change i n the i n d u s t r i a l structure of the Japanese economy. (38) ( i i ) T o t a l demand for e l e c t r i c power i n 2000 has been increased by 2.8% compared with the previous forecast. This i s caused mainly by the r e l a t i v e l y higher rate of growth of the demand fo r public use. ( i i i ) The share percentage of e l e c t r i c power i n the t o t a l energy demand w i l l increase gradually. (iv) The peak load demand w i l l increase f o r the following reasons: (a) Popularization of home a i r conditioners. (b) Demand by i n d u s t r i e s that need continuous operation w i l l decrease. (For example: aluminum smeltering). (c) Demand by i n d u s t r i e s that operate i n the daytime w i l l increase (for example: machinery manufacturing). 2. Supply of"Electric"Power ( i ) Nuclear power generation w i l l be developed as the main source of e l e c t r i c power. ( i i ) C o a l - f i r e d and LNG-fired e l e c t r i c power generation w i l l be ranked next to nuclear e l e c t r i c power generation. (39) ( i i i ) O i l - f i r e d e l e c t r i c power plants w i l l not p r i n c i p a l . be constructed i n 3. Fuel Consumption Forecast of annual Japanese f u e l consumption i s as follows: 1980 1990 Coal (10 3 tons) 9,780 42,000 LNG (10 3 tons) 13,440 31,500 LPG (10 3 tons) 740 2,200 O i l (10 3 l i t r e s ) 5,250 3,900 There appears to be continuing strong i n d i c a t i o n s of demand f o r steaming coal from the United States West Coast. The forecasts are based on estimates of e l e c t r i c i t y demand, cement production, and general economic growth. These estimates also r e f l e c t the objectives of s u b s t a n t i a l l y i n c r e a s i n g nuclear powered e l e c t r i c generation and reducing o i l consumption. As i n d i c a t e d i n e a r l i e r sections of t h i s paper, these estimates are subject to substantial change. The s e n s i t i v i t y of proposed coal exports from the U.S. West Coast i s very high i n r e l a t i o n to changes i n economic growth rates, nuclear developments, o i l supply reductions, or e l e c t r i c i t y demand reductions. (See Table 2.5 f o r s e n s i t i v i t y of coal to these items.) (40) This v o l a t i l i t y of demand i s p a r t i c u l a r l y important to those groups considering the development of a major U.S. West Coast export terminal. A l l other components of the l o g i s t i c s system for steam coal are dealing b a s i c a l l y with sunk costs f o r the short term and are prepared to accept the most o p t i m i s t i c P a c i f i c Rim estimates of demand f o r U.S. c o a l . From the point of view of a port development program costing i n the range of $250 m i l l i o n (1982 d o l l a r s ) , the establishment of some minimum guaranteed export coal quantity to these P a c i f i c Rim countries i s required. These commitments w i l l need to be s u b s t a n t i a l l y supported by better evidence than c u r r e n t l y a v a i l a b l e i n published forecast reports from various U.S. and f o r e i g n sources. C. COMPARISON"OF'PRICE"COMPONENTS,~PRICING"PHILOSOPHIES, AND  PRICING"OF THE"MAJOR"PACIFIC"RIM"SUPPLIERS. 1. Coal"Cost"Components The major determinants of the p r i c e of a ton of coal are as follows: ( i ) Mining costs regarding geologic conditions, i . e . depth of overburden, seam thickness, presence of water, open p i t or underground mining. ( i i ) Technology employed at the mine, i . e . short w a l l , room and p i l l a r , continuous or long wall mining methods. ( i i i ) Capacity of the mine and economies of s c a l e . (41) (iv) Labour p r o d u c t i v i t y . (v) Age of the mine and c a p i t a l intensiveness of operation. (vi) Wage l e v e l s of l o c a l workers. ( v i i ) Q u a l i t y of the c o a l . ( v i i i ) Loading equipment at the mine, i . e . capable of loading a complete unit t r a i n . (ix) Inland transportation system, distance, grade, r e s i d e n t i a l sections, etc. (x) Terminal handling f a c i l i t y , i . e . s i z e of f a c i l i t y , storage, ship s i z e c a p a b i l i t y , loading speed etc. (xi) Ocean shipping distance. ( x i i ) Unloading technology. ( x i i i ) A d d i t i o n a l marine or inland transport to inventory l o c a t i o n . (xiv) Carrying costs of inventory. (xv) Willingness of buyers to pay the p r i c e . (42) In the P a c i f i c Rim export markets, (excepting short term aberrations caused by s t r i k e s or p o l i t i c a l f a c t o r s ) , the coal mining industry i s generally assumed to approximate perfect competition. The long term contract p r i c e i s assumed to represent the cost of production plus a normal return to c a p i t a l . On t h i s premise, the mine owner would be w i l l i n g to s e l l coal on a long term contract basis where an acceptable l e v e l of return to c a p i t a l was achieved a f t e r h i s operating costs were covered. The rate of required return w i l l also be r e l a t e d to r i s k s the mine owner accepts f o r e s c a l a t i n g costs beyond h i s c o n t r o l . I f t h i s i s not the case, the Theory of Exhaustible Resources in d i c a t e s that should the market p r i c e of a resource r i s e f a s t e r than the rate of i n t e r e s t , the producer i n keeping with h i s p r o f i t maximizing c r i t e r i o n , would leave the resource i n the ground i n order to achieve higher return at a l a t e r period.45 The p r i c e of coal imported by the P a c i f i c Rim countries i s impacted s u b s t a n t i a l l y by costs of the transportation system regardless of the country of o r i g i n . For the United States West Coast, t h i s i s of p a r t i c u l a r concern as the transportation system costs can represent 60% of the delivered coal p r i c e . To be competitive i t i s important that the supply countries keep transport costs at a minimum. To achieve minimum costs involves the port as a c r i t i c a l i n t e r f a c e between the two higher cost modes of r a i l and ship. To the extent that a port terminal i s designed to allow these other modes to e f f i c i e n t l y discharge/load the cargoes, i t w i l l have a material e f f e c t on the d e l i v e r e d p r i c e of the c o a l . (43) 2. PRICING"PHILOSOPHIES"OF 'THE"MAJOR"SUPPLIERS. There are a number of approaches taken to the p r i c i n g of steam coal i n the P a c i f i c Rim market. These can be divided i n t o categories of short and long run contract d e l i v e r i e s . In the short run, t y p i f i e d by the spot market presently experienced on the U.S. West Coast, the p r i c i n g i s made at the equilibrium point of short term supply and demand. The p r i c e s tend to f l u c t u a t e considerably i n t h i s market. The coal delivered can be incremental mined tonnage sold at a higher than market p r i c e to cover some emergency need (e.g. caused by problems i n other supply c o u n t r i e s ) . The coal can also represent sale of inventory at lower than f u l l cost ( i . e . s e l l i n g the product at a p r i c e which covers only v a r i a b l e costs i n an e f f o r t to dispose of the inventory). In such a case the Far Eastern buyers would be taking advantage of an opportunity i n the system to acquire low valued product. The long run supply u s u a l l y involves long term contracts and i s predicated on a much more stable exchange of the product. According to the Interagency Coal Export Task Force the p r i c e of coal i n t h i s s i t u a t i o n can be f i x e d through e i t h e r a guaranteed rate of return basis or at world market p r i c e . 4 ^ The guaranteed rate of return s i t u a t i o n i s s i m i l a r to what has been described e a r l i e r i n the theory of resource depletion. The mine owner would be prepared to s e l l the product at a p r i c e which covers h i s cost of operation plus a return to his invested c a p i t a l above the present rate of i n t e r e s t i n the c a p i t a l markets. To achieve t h i s return a contract would e s t a b l i s h a base l e v e l p r i c e . E s c a l a t i o n clauses would (44) cover the cost component increases basis the r i s k acceptable to the producer for a p a r t i c u l a r l e v e l of return. A world market p r i c e contract involves an agreement between the p a r t i e s to consider the range of p r i c e s being offered by various suppliers on some pe r i o d i c basis (e.g. annually, semi-annually e t c . ) . They w i l l attempt to reach an agreement f o r the p r i c e of the throughput commitment f o r that period within a range of established guidelines. Presently there i s no published data concerning the world p r i c e of steam coal (a good project fo r an information s e r v i c e ) . I t i s l e f t to negotiations between the contracting p a r t i e s to resolve the acceptable ranges. This can be extremely dangerous to any producer i f the ultimate users want to include i n the range the p r i c e s of a p a r t i c u l a r supplier (e.g. South A f r i c a ) which may be s e l l i n g excess inventory as a r e s u l t of a downturn i n a non-competing ( i . e . European) market. This demonstrates again the v o l a t i l i t y of the market. A d d i t i o n a l l y these world p r i c e type contracts are usually "evergreen" i n that they can be cancelled i f the p a r t i e s are unable to reach agreement on the p r i c e range. This gives the developer of a new mine or transport project l i t t l e comfort that there w i l l be a continued f i n a n c i a l return f o r the l i f e of the project. I t appears the guaranteed rate of return p r i c i n g system i s preferred by both producers and buyers. They f i n d some s t a b i l i t y i n the a b i l i t y to approximate the long term p r i c e f o r t h i s energy source. There are, however, impediments to the continued use and ultimate success of t h i s mechanism. A number of examples of these have been noted by the Inter Agency Coal Export Task Force as f o l l o w s : 4 ^ (45) (i) A u s t r a l i a n producers are regulated by the government coal boards which have a strong influence on the s e l l i n g p r i c e based on t h e i r perception of a P a c i f i c Rim market p r i c e . ( i i ) Although coal sales from Canada are cu r r e n t l y unregulated, there e x i s t s a p o s s i b i l i t y that t h i s energy source w i l l f a l l within the purview of the federal a u t h o r i t i e s as does the export of o i l and natural gas. ( i i i ) South A f r i c a c u r r e n t l y has a p o l i c y of f o r c i n g producers to s e l l at a government estimated world market p r i c e to preclude ruinous inter-company competition. The United States appears to be one area where the guaranteed rate of return type contract w i l l continue to be used. This i s a r e s u l t of the current fragmented market which d i f f e r s s i g n i f i c a n t l y from other producing countries. This fragmented supply and transport sector i s a feature of the current P a c i f i c Rim steam coal trade p a r t i c u l a r to the United States and Canada. Excepting the U.S. and Canada, t h i s new market f o r energy coal i s characterized by a number of very large traders i n both the supply and purchase countries. As an example on the purchasing side, the Japanese e l e c t r i c u t i l i t y i n d u s t r i e s have formed a j o i n t venture c a l l e d the Japanese Coal Development Corporation (JDCD) which i s responsible f o r the following items: ( i ) Purchasing 50% of the required steam coal as a c e n t r a l purchasing agency. (46) ( i i ) I n vestigating investment opportunities i n mines, land transport, port f a c i l i t i e s , and ocean transport which w i l l f a c i l i t a t e the continued supply of coal to the Japanese e l e c t r i c u t i l i t y industry. ( i i i ) Overseeing the l o g i s t i c s system i n terms of d e l i v e r i e s and inventory s i z e s of steaming co a l . JCDC has designated one major tra d i n g company to look a f t e r the Canadian and U.S. market; another to look a f t e r the Au s t r a l i a n market; and another to look a f t e r the South A f r i c a n market. Taiwan and Korea presently each have one major government owned e l e c t r i c power corporation which controls a l l purchasing of steam coal f o r e l e c t r i c i t y generation purposes. I t also appears that i n Taiwan and Korea, one major cement company w i l l also act for the others as a c e n t r a l purchasing agency f o r the purchase of steam c o a l . The number of p a r t i c i p a n t s involved i n the supply of steam coal to the P a c i f i c Rim market i s very small. A u s t r a l i a has f i v e or s i x coal exporting companies of major s i g n i f i c a n c e , South A f r i c a has s i x or seven, Canada has approximately f i v e of which two are presently dominant and China w i l l l i k e l y have only one. According to the ICE Task Force the steam coal market i n the P a c i f i c Rim i s characterized by large s e l l e r s f a c i n g large buyers except i n the United States t r a d e . 4 ^ This large number of producers and s e l l e r s i n the U.S. market w i l l continue to make t h i s a fragmented supply source. The p r i c i n g w i l l be based on the (47) p o l i c i e s of each producer r e l a t e d to costs of production and required c a p i t a l return.- This type of d i v e r s i t y represents f l e x i b i l i t y and sec u r i t y to the P a c i f i c Rim nations which are looking to the U.S. Western States to accommodate approximately 15-20% of t h e i r steam coal imports over the next twenty y e a r s . 4 9 Discussion i n t h i s section has r e l a t e d p r i m a r i l y to the F.O.B. mine p r i c e and the contracting r e l a t i o n s h i p between the producer and ultimate user. The mine mouth p r i c e greatly a f f e c t s the marketability of the steam c o a l . However, the e f f e c t s of the transportation costs on the f i n a l d elivered p r i c e can be the deciding f a c t o r regarding a p a r t i c u l a r mine's a b i l i t y to compete i n the market. 3. PRICES"OF"STEAM'COAL'IN'THE'PACIFIC RIM MARKET There are s i g n i f i c a n t differences i n the delivered p r i c e of coal i n the P a c i f i c Rim countries depending on country of o r i g i n . These p r i c e s w i l l be examined to give a better understanding f o r the d i f f e r e n t i a l s that presently e x i s t and how these differences r e l a t e to the i n d i v i d u a l components i n the l o g i s t i c s system. Table 2. 14 ind i c a t e s the 1981 C & F p r i c e of steam coal i n Japan o r i g i n a t i n g from Canada, the United States, South A f r i c a , A u s t r a l i a , and China. The p r i c e s have a $12.71 per M/T maximum spread or 19% of the average p r i c e . Table 2.15 indicates the ranges of F.O.B. mine costs, inland transport, terminal, and ocean f r e i g h t charges which make up the (48) d e l i v e r e d coal charge. Table 2.16 presents the r a i l and shipping distances f o r the supply countries. I t i s reasonable to expect that the United States West Coast coal would be comparatively expensive i n the P a c i f i c Rim market. This i s because of the greater land and ocean shipping distances involved. I t should be noted, however, that these p r i c e i n d i c a t i o n s are near term p r i c e s i n a market which r e f l e c t s a r e l a t i v e l y new U.S. industry competing with r e l a t i v e l y mature export mining i n d u s t r i e s i n A u s t r a l i a , South A f r i c a and Canada. There could be l e s s pressure on the United States inland transportation system to p r i c e on a basis which allows the products to compete. In South A f r i c a and A u s t r a l i a the railways are regulated by the government r e l a t i n g to a supportive p o l i c y of increasing or at l e a s t maintaining a p a r t i c u l a r l e v e l of coal export trade. The market fragmentation i n the United States appears to be hampering the product's a b i l i t y to compete i n these foreign markets. The present p o t e n t i a l steam coal supply areas of Utah and Colorado are geographically located such that a terminal i n Southern C a l i f o r n i a w i l l l i k e l y be the export s i t e . The only r a i l service to Southern C a l i f o r n i a from these areas i s Union P a c i f i c Railroad. To date the U.P. Railroad has shown no compunction about ex t r a c t i n g a d d i t i o n a l rents from the export c o a l . The question of whether the r a i l r o a d p r i c i n g i s preventing coal from moving of f the West Coast i s a hotly debated issue. I t appears that the r a i l r o a d p r i c e s are so high i n the short term that they are r e s t r i c t i n g the sales p o t e n t i a l of the Western producers. Long term contracts are being (49) "discussed" not "negotiated" i n the present s o f t coal market. The Union P a c i f i c Railroad (and others) have indicated a willingness to p r i c e t h e i r services f o r long term contracts at a l e v e l which w i l l allow the coal to move. The development of the Western U.S. export coal l o g i s t i c s system through Southern C a l i f o r n i a involves many small and medium size coal producers and a near-monopoly r a i l r o a d . I t can be further a n t i c i p a t e d that the f i r s t major export terminal w i l l also be a pseudo-monopoly ( i t w i l l i n i t i a l l y only face competition from smaller l e s s e f f i c i e n t ports with ship s i z e l i m i t a t i o n s ) . In t h i s environment the p o t e n t i a l f o r a systems approach i s not promising. This means that p a r t i c i p a n t s i n the coal sales or purchase programs are constantly changing negotiating p r a c t i c e s and transaction terms. For example a Japanese trading house w i l l negotiate independently with the mine, r a i l , port, and ocean shipping to s e l l CIF c o a l . This process d i f f e r s from an agent or producer that s e l l s FOBT basis t h e i r perceived a b i l i t y to negotiate better r a i l and terminal rates. Conceptually t h i s i s a d i f f i c u l t issue to analyze. The Far Eastern buyers recognize that a fragmented system w i l l have a higher cost. This does not however mean i t w i l l have a s i g n i f i c a n t l y higher p r i c e . The P a c i f i c Rim coal purchasers have indicated a preference f o r the fragmented system 5^ because they can exert more leverage on the i n d i v i d u a l l o g i s t i c components. If i t i s assumed that the Western U.S. coal l o g i s t i c s system (50) i s as t e c h n i c a l l y and operationally e f f i c i e n t as i t s competitors we are r e a l l y t a l k i n g about system p r i c i n g . The buyers prefer to negotiate p r i c e s with the l o g i s t i c s components i n d i v i d u a l l y . This may r e s u l t i n s l i g h t l y higher costs than i f the system were pr i c e d according to long run average cost but i t does appear to give the buyers a sense of commercial s e c u r i t y . This s e c u r i t y from 'system' p r i c e increases appears to be unique to the United States and w i l l l i k e l y not change even when long term contracts are a v a i l a b l e . The number of producers and sales agents plus the l e g a l consequences of c o l l u s i o n / r e s t r a i n t of trade seem to be b a r r i e r s to a system development i n the coal chain. The a b i l i t y to compare p r i c e s of d e l i v e r e d coal i s hampered by the many measures used by both producers and s u p p l i e r s . The United States tends to deal i n short and long tons whereas the other supplying nations deal i n metric tons. With the substantial range of heating values and contaminants inherent i n c o a l , the only e f f e c t i v e measures of the comparable c o a l p r i c e i s on a d e l i v e r e d p r i c e basis per B.T.U. or metric ton of coal equivalent (MTCE). Although these exclude any measurement of operating e f f i c i e n c i e s that may be gained from a coal with l e s s sulphur or other chemical impurities i t i s presently the best comparative measure a v a i l a b l e . I t i s d i f f i c u l t to locate t h i s type of data f o r a l l the supplying countries. D. FORECAST OF"CHANGES'IN COMPARATIVE"PRICES Doubts presently e x i s t about the a b i l i t y of the p r i n c i p a l coal producing countries to increase the export a v a i l a b i l i t y of steam coal f a s t enough to (51 ) keep pace with the growth of import demand i n the P a c i f i c Rim countries during the next two decades. This f e e l i n g i s generated despite i n t e n s i f i e d exploration and development programs by various i n d u s t r i e s and governments. The reserve base i n most countries i s adequate (as i n d i c a t e d e a r l i e r i n the chapter). However, the lead times required to b r i n g new mines i n t o production and develop new i n f r a s t r u c t u r e are long and the costs are very high. A d d i t i o n a l l y , there are a number of serious p o l i t i c a l , s o c i a l , and environmental constraints which have to be overcome p r i o r to various supply countries entering a new threshold l e v e l of expanded trade. I t also appears probable that i n the years ahead, major supplying countries w i l l become concerned with meeting domestic steam coal energy requirements as they continue to reduce t h e i r dependency on o i l . A d d i t i o n a l l y as the expense of these new mines and f a c i l i t i e s increases s u b s t a n t i a l l y , there w i l l be a need for foreign c a p i t a l to support these developments as p r i v a t e domestic c a p i t a l formation may not be adequate ( t h i s s i t u a t i o n i s presently occurring i n A u s t r a l i a ) . As i n d i c a t e d e a r l i e r the present P a c i f i c Rim steam coal market f o r the United States i s not representative of a long term stable market. Such a market w i l l need to develop i f the P a c i f i c Rim purchasers are to pursue t h e i r p o l i c i e s of d i v e r s i t y and s e c u r i t y of supply. The v o l a t i l e marketplace presently has many producers without long term contracts and s e l l i n g on the spot market below f u l l cost to reduce t h e i r inventory and cover t h e i r short term v a r i a b l e costs. This business environment cannot (52) continue i f there i s to be a healthy western coal export business i n the United States. The purchasers must consider signing longer term throughput contracts to prevent these c y c l i c a l swings i n supply and demand. The economic l i f e of c a p i t a l equipment designated f o r major projects i n t h i s l o g i s t i c s system i s 20-25 years. Although the United States i s presently at a p r i c e disadvantage compared to the other major suppliers of the P a c i f i c Rim countries, ICF and other analysts f e e l that t h i s U.S. p r i c e disadvantage w i l l be eliminated eventually. Their thinking i s predicated upon the "catch-up theory" which pre d i c t s that because of the s u b s t a n t i a l l y higher reserves i n the United States, p r i c e s f o r U.S. coal (based on costs of developing t h i s incremental supply) w i l l r i s e more slowly than the other supply countries. The U.S. steam coal supply curve i s les s steeply sloped than those i n Canada, South A f r i c a and Australia.^1 As low cost resources are depleted i n the other supply countries, they w i l l be forced to develop more expensive mining sources. The e f f o r t s to develop these marginal areas w i l l be more expensive than the United States e f f o r t s to develop e a s i l y a c c e s s i b l e reserves. The U.S. long run supply curve can also be expected to be f l a t t e r than that f o r steam coal from other countries. Adding to the forecasts f o r improved U.S. competition over the long run are several transportation f a c t o r s . F i r s t l y , there w i l l be a number of large U.S. West Coast terminals b u i l t which w i l l allow better u t i l i z a t i o n of the r a i l r o a d and ocean shipping sector equipment. These terminals w i l l also allow deeper dra f t ships which can take advantage of economies of (53) scale presently l i m i t e d to the other competing countries. Secondly, as mentioned e a r l i e r , there are labour problems i n A u s t r a l i a and South A f r i c a which could increase t h e i r operating costs more quickly than the United States. The present market disadvantage experienced by the United States may not continue throughout the l i f e of a long term contract. Considering again the tables i n the p r i c i n g section, i f the modern port terminal were to reduce r a i l charges by $2.00 per ton due to operational e f f i c i e n c i e s and shipping costs by $7.00-$8.00 per ton due to larger ship c a p a b i l i t i e s , the U.S. would be competitive at the present time and could p o s s i b l y expect d i s t i n c t advantages i n the future. E. TERMINAL COST AS A FUNCTION"OF"CIF PRICE From Table 2. 15 i t can be seen that the terminal p r i c e as a percentage of d e l i v e r e d coal p r i c e ranges from 7.0% i n A u s t r a l i a to 4.1% i n South A f r i c a , 5.4% i n Canada, and 9.1% i n the United States. Although t h i s small percentage would appear to make the terminal function the l e a s t important component i n the coal l o g i s t i c s system, t h i s i s c e r t a i n l y not the case. To define the terminal function i n perspective, i t i s necessary to consider i t as the interchange point of the r a i l r o a d and shipping modes. At the present time the United States West Coast primary coal export terminals at Los Angeles and Long Beach have no loop track c a p a b i l i t y . This means the u n i t t r a i n s must be s p l i t i n t o i n d i v i d u a l cars, shunted to the s i d i n g s , and gravity fed to s i n g l e car rotary dumps. (54) These systems can take twelve to f i f t e e n hours to unload one u n i t t r a i n thereby s u b s t a n t i a l l y decreasing the r a i l r o a d equipment u t i l i z a t i o n and increasing costs. From the seaborne side they are located at water depths which w i l l allow the loading of panamax vessels or s l i g h t l y l a r g e r . With loading rates of 2,000 tons per hour or l e s s , these vessels are not loaded e f f i c i e n t l y . The terminal cost on the West Coast of the United States (considerably higher than most other coal loading ports i n the world) i s i n the region of $4.00-$6.20 per ton (depending on d i r e c t or i n d i r e c t d e l i v e r y ) . If new terminals are designed to allow the rapid turnaround of r a i l equipment through the e f f i c i e n t use of a loop track and double rotary car dump, the o v e r a l l r a i l rate on a dedicated u n i t t r a i n basis could be reduced the equivalent of the t o t a l throughput charge of the terminal. A d d i t i o n a l l y by constructing a new terminal f a c i l i t y i n deep water, (where dredging costs are c a p i t a l i z e d as part of the project rather than waiting f o r the U.S. f e d e r a l dredging 20 + year lead time) the terminal w i l l allow e f f i c i e n t loading of vessels i n the 120,000-150,000 ton deadweight range. The economies of scale here can again reduce the delivered p r i c e of coal by more than the cost of the t o t a l terminal throughput charge. (This i s not the case at the present time due to the i n s t a b i l i t y of the ocean f r e i g h t market caused by a substantial overcapacity i n the panamax c l a s s . In the long run, however, economies of scale w i l l p r e v a i l i n t h i s market.) In perspective, although the throughput charge for the terminal function i t s e l f i s not high i n r e l a t i o n to the delivered CIF p r i c e , the (55) e f f i c i e n c i e s which the terminal f a c i l i t a t e s i n the r a i l and seaborne functions can act to reduce the delivered p r i c e by an amount greater than the terminal charge. I t i s f o r t h i s reason that the proposed new terminal i n Long Beach i s such a c r i t i c a l f a ctor promulgating the continued expansion of the U.S. steam coal export trade. This remaining l i n k i n the system i s extremely c a p i t a l i n t e n s i v e . Part of the construction expenses may be incurred i n an e f f o r t to improve the e f f i c i e n c i e s of the complementary transport modes which i n t e r f a c e at the terminal. Although these costs can contribute to an o v e r a l l reduction i n the delivered p r i c e of c o a l , they may or may not contribute to an increased return to the developers. The f a b r i c of the U.S. i n s t i t u t i o n a l and regulatory system causes b a r r i e r s such that l o g i s t i c s components are unable to function as a true system i n regard to the development and construction of t h i s f i n a l and important l i n k to the coal chain. It i s the purpose of t h i s t h e s i s to examine the o r g a n i z a t i o n a l and i n s t i t u t i o n a l boundaries involved i n the development of an e f f i c i e n t system. (56) END"NOTES 1. Dankwart A. Ruslow and John F. Mugno, OPEC -- Success""and  Prospects, Council on Foreign Relations, (New York: New York U n i v e r s i t y Press, 1976), p. 28. 2. Richard A. Passman, "Coal as a Major Energy Source", Coal Production and Transportation, Seventh Annual Conference, 1981. p. 94. 3. U.S. Department of Energy, (prepared by Zinder-Neris Inc.), F i n a l Draft to the Interagency Coal Export Task Force, U^S;"Coal"Exports"-" The"Far  East, November, 1980. Chapter 1, Part VI, Section 2, and Chapter 2, Part VI. 4. H. P. Drewry (Shipping Consultants) Limited, Research D i v i s i o n , The"Growth of"Steam Coal"Trade, "A Review and Forecast of International Trade i n Thermal Coal and Shipping Requirements: 1980-90", 1980. p. 30. 5. Western Governors P o l i c y O f f i c e , Western Coal Export Task Force, Report of the Demand Task Group, WesterhCoal"Exports"to the P a c i f i c " B a s i n , 1982, p. 6. 6. Ibid., p. 14. 7. U.S. Department of Energy, (prepared by Zider-Neris Inc.) op. c i t . , Chapter 1, Part VI, Section 4, and Chapter 2, Section VI. 8. Ibid., Chapter 1, Part VI, Section 2, and Chapter 2, Section VI. 9. Ibid., Chapter 1, Part VI, Section 3 and 4, and Chapter 2, Section 6. 10. J e f f r e y T. Williams, Utah"and"Colorado"Exports"to"the"Pacific Rim, Utah Energy O f f i c e , Resource Development and Environment, Utah L e g i s l a t i v e P r i n t i n g O f f i c e , 1981, p. 1. 11. U.S. Department of Energy, (prepared by Zinder-Neris Inc.), op. c i t . , s e c tion 0.2.15. 12. E.P.CD. - E l e c t r i c Power Development Corp., a j o i n t government-u t i l i t y venture which functions as a wholesale supplier of power to 9 regional u t i l i t y companies. EPDC i s financed 70% by the government, and 30% by the u t i l i t i e s , and w i l l play a major r o l e i n the c o a l - f i r e d plant development i n Japan. 13. JCDC - Japan Coal Develoment Corporation, a corporation formed by the Independent E l e c t r i c U t i l i t y companies and EPDC. Its purpose i s to organize and coordinate the a c q u i s i t i o n and transportation of approximately 50% of the import steam coal required by the E l e c t r i c U t i l i t y members. (57) 14. U.S. Department of Energy (prepared by Zinder-Neris Inc.), op. c i t . , s e ction 0.2.14. 15. Organization f or Economic Co-operation and Development, Inter-na t i o n a l Energy Agency, Steam Coal"Prospects"to"2000, 1978, pp. 53-53. 16. Ibid., p. 52. 17. Ibid., pp. 20-22. 18. I b i d . , p. 30. 19. Ibid., p. 30. 20. C. Itoh and Co. Ltd., "Report to the Long Beach International Coal Project Marketing Subcommittee", June 1982. 21. Western Governors P o l i c y O f f i c e , op. c i t . , p. 12. 22. Organization for Economic Cooperation and Development, op. c i t . , p. 61. 23. World Coal Study, Coal"--"Bridge to the"Future, C a r r o l l L. Wilson, Proejct D i r e c t o r , (Cambridge, Mass.: B a l l i n g e r Publishing Co., 1980), p. 76. 24. Ib i d . , P« 77. 25. Ibid., P« 81. 26. Ibid., P« 78. 27. Ib i d . , P« 81. 28. U.S. Department of Commerce, FT-990, "Highlights of U.S. Import and Export Trade" U.S. Trade Digest f or Calendar Year 1981, p. 72. 29. These c a l c u l a t i o n s use U.S. exports i n 1985 and 1990 from the Westpo Report, op. c i t . , p. 6, and for 1995 and 2000 exports uses Central Puget Sound Economic Development D i s t r i c t , (prepared by CH2M-Hill), Puget  Sound"Coal"Export"Opportunities"and"Issues, E r i k Johnson, Executive Director, 1982, p. 25. 30. Report to the Long Beach International Coal Project, Marketing Subcommittee, made by Metropolitan Stevedore Company, A p r i l , 1982. 31. I b i d . 32. Report to the Long Beach International Coal Project, Executive Committee, made by C. Itoh and Company, June, 1982. 33. U.S. Department of Energy, (prepared by Zinder-Neris Inc.), op. c i t . , sections 1.6.1-1.6.6 and 2.6.1. (58) 34. MTCE - M i l l i o n tons of coal equivalent, a ton of coal equivalent i s a metric ton with a s p e c i f i c heating value of 12,600 BTU per pound. 35. U.S. Department of Energy, (prepared by Zinder-Neris Inc.), op. c i t . , sections 1.6.2-1.6.15. 36. Ibid., sections 2.6.1-2.6.10. 37. World Coal Study, op. c i t . , p. 80. 38. Ibid., p. 80. 39. Organization f o r Economic Cooperation and Development, op. c i t . , p. 33. 40. Ibid., p. 33. 41. World Coal Study, op. c i t . , p. 35. 42. Ibid., p. 35. 43. U.S. Department of Energy, (prepared by ICF Incorporated), Draft for the Interagency Coal Export Task Force, The " "Prospects" f o r " World "Coal  Trade:""An"Analysis arid"Review"of"the"Literature, August, 1980, pp. 135-138. 44. Report to the Long Beach International Coal Project, Executive Committee, made by C. Itoh and Company, June, 1982. 45. F. M. Peterson and A. C. Fisher, " E x p l o i t a t i o n of Extracted Resources: A Survey", The Economic 'Journal, V o l . 87 (December 1977), pp. 681-721. 46. U.S. Department of Energy, (prepared by Zinder-Neris Inc.), op. c i t . , sections 0.1.18-0.1.20. 47. Ibid., section 0.1.21. 48. Ibid., s ection 0.1.16. 49. Western Governors P o l i c y O f f i c e , op. c i t . , p. 17. 50. Report to the Long Beach International Coal Project, made by C. Itoh and Company, A p r i l , 1982. 51. U.S. Department of Energy, (prepared by ICF Incorporated), op. c i t . , Chapter 5. (59) TABLES AND FIGURES (60) Table 2.1 PROJECTED GENERATING CAPACITY BY FUEL SOURCE, 1980-1990 JAPAN, TAIWAN, KOREA Country and Megawatts Percent of Total Fuel Source 1980 1990 Change 1980 1990 Change Japan Coal 5,260 29,560 24,300 4.2 12.6 22.3 Nuclear 15,510 50,902 35,410 12.4 21.7 32.4 O i l 59,480 56,330 (3,150) 47.4 24.0 (2.9) Other 45,110 97,750 52,640 36.0 41.7 48.2 Tot a l 125,360 234,560 109,200 100.0 00.0 Taiwan Coal 980 4,550 3,570 10.7 27.0 46.5 Nuclear 1,272 5,144 3,872 13.9 30.5 50.5 O i l 5,527 4,376 (1,151) 60.3 26.0 (15.0) Other 1,387 2,772 1,385 15. 1 16.5 18.0 T o t a l 9,166 16,842 7,676 100.0 00.0 Korea Coal 725 5,945 5,220 7.7 26.6 40.4 Nuclear 587 8,917 8,330 6.3 39.9 64.4 O i l 5,787 2,693 (3,094) 61.6 12. 1 (23.9) Other 2,292 4,770 2,478 24.4 21.4 19.1 T o t a l 9,391 22,325 12,934 100.0 00.0 Tot a l Coal 6,965 40,055 33,090 4.8 14.6 25.5 Nuclear 17,369 64,963 47,594 12. 1 23.7 36.7 O i l 70,794 63,399 (7,395) 49.2 23.2 (5.7) Other 48,789 105,292 56,503 33.9 38.5 43.5 143,917 273,709 129,792 100.0 00.0 Source: Western Governors P o l i c y o f f i c e , Western Coal Exports to the P a c i f i c Basin, 1982, p. 270. Note: "Other" f u e l source includes l i q u e f i e d natural gas (LNG), h y d r o e l e c t r i c i t y , and geothermal energy. (61) TABLE 2.2a Japan: Volume and Composition of TPE, 1980-1985 (Based on GDP Growth of 5.0 Percent Annually) T r i l l i o n s of Btu 1980 1981 1982 1983 1984 1985 To t a l Primary Energy 16,725 17,419 18,142 18,895 19,679 20,496 Domestic Production: Nuclear 786 900 1,030 1, 181 1,353 1,550 Hydro-Geothermal 856 895 936 979 1,024 1,071 Other 716 761 809 859 914 971 Sub-Totals 2,358 2,556 2,775 3,019 3,291 3,592 Imports: O i l 12,740 11,990 12,240 12,490 12,740 12,990 Gas 775 884 1,008 1, 151 1,313 1,498 . Other 72 Imported Coal 1,852 1,989 2,119 2,235 2,335 2,344 Imported Coal i s the Residual Source: U.S. Department of Energy The Interagency Task Force  on United States Coal Exports, 1980, p. 285. (62) TABLE 2.2b Japan: Volume and Composition of TPE, 1985-1990 (Based on GDP Growth of 4.0 Percent Annually) T r i l l i o n s of Btu 1985 1986 1987 1988 1989 1990 To t a l Primary Energy 20,496 21,217 21,964 22,737 23,537 24,366 Domestic Production: Nuclear 1,550 1,773 2,029 2,321 2,655 3,038 Hydro-Geothermal 1,071 1,132 1,197 1,265 1,337 1,415 Other 971 1,021 1,075 1, 130 1,189 1,254 Sub-Totals 3,592 3,926 4,301 4,716 5,181 5,707 Imports: O i l 12,990 12,910 12,830 12,750 12,670 12,591 Other 1,570 1,761 2,006 2,355 2,847 3,422 Coal Imports 2,344 2,620 2,827 2,916 2,839 2,646 Imported Coal i s the Residual Source: U.S. Department of Energy The Interagency Task Force  on United States Coal Exports, 1980, p. 260. (63) TABLE 2.3 Taiwan: Volume and Composition of TPE, 1980-2000 (Based on GDP Growth of 4.0 Percent Annually) T r i l l i o n s of Btu 1980 1985 1990 2000 Tot a l Primary Energy 1,138 1,358 1,621 2,309 Domestic Production: 200 268 358 641 Imports: Crude O i l & Products 812 833 673 466 Coal 62 163 452 904 Other 64 94 138 298 O i l Imports represent the Residual Source: U.S. Department of Energy The Interagency Task Force  on United States Coal Exports, 1980, p. 58. (64) TABLE 2.4 Korea: Volume and Composition of TPE, 1980-2000 (Based on GDP Growth of 5.0 Percent Annually) T r i l l i o n s of Btu 1980 1985 1990 2000 Total Primary Energy 1,353 1,583 1,926 2,850 Domestic Production: 502 762 1,089 1,708 Imports: Petroleum & Products 823 470 334 263 Coal 28 351 503 879 Source: U.S. Department of Energy The Interagency Task Force  on United States Coal Exports, 1980, p. 50. (65) TABLE 2.5 S e n s i t i v i t y Analysis Western U.S. Coal Exports 1985-2000 M i l l i o n s of Tons A l t e r n a t i v e Projections 1985 1990 1995 2000 CPSEDD Projection 10.9 26.6 37.7 51.8 Reduced Power Growth 10.4 23.3 31.4 41. 1 Reduced Nuclear Growth (more coal growth) 13.0 30.6 43.2 59. 1 Increased Market Share f o r Western U.S. Coal 12.3 36.5 53.3 73.3 Reduced Power Growth and Increased Market Share 11.8 31.5 43.5 57.0 Source: CH2M H i l l Projections, i n Puget Sound Coal Export  Opportunities and Issues, 1982, p. 72. (66) TABLE 2.6 Cost Estimates for E l e c t r i c i t y Generation i n New Baseload Nuclear, O i l and Coal-Fired Power Stations 1976 Dollars; Average Cost per KWH for 1st 20 years Operation f o r Plants Commissioning i n 1986 Nuclear Fuel O i l Bituminous Coal Low Sulphur High Sulphur Without 100% 50% Avg. Cost per KWH f o r PWR HFO HFO FGD FGD FGD 20 years ($mills) "2 x 1100 mw Conventional 100% FGD C a p i t a l Cost 14.9 7.5 9.6 9.6 12.4 11.0 Operation and Maintenance 2.4 2.0 4.2 2.2 5. 1 3.6 Fuel 6.5 31.0 29.0 10.8 11.3 11.1 Tot a l Avg. Cost per KWH at 5500 h/a 23.8 40.5 .42.8 22.6 28.8 25.7 7000 h/a 20.7 38.9 40.8 20.6 26. 1 23.3 6000 h/a 22.6 39.9 42.0 21.8 27.8 24.8 5000 h/a 25.3 41.2 43.8 23.6 30.0 26.8 4000 h/a 29.5 43.3 46.4 26.2 33.4 29.8 3000 h/a 36.3 46.7 50.8 30.6 39. 1 34.9 Cost of Construction $/KW $700 $350 $450 $450 $580 $515 Avg Fuel Cost for 1986-2006 $ per Toe (10 7 kcal) $25.79 $132 $118 $45 $45 $45 $ per 10 6 Btu $ 0.65 $3.33 $2.97 $1.13 $1.13 $1.13 Heat Rate Btu/Kwh 10,000 9,325 9,715 9,500 9,880 9,690 Kcal/Kwh 2,620 2,350 2,445 2,395 2,490 2,440 Source: International Energy Agency Steam Coal Prospects to 2000, 1978, p. 112. TABLE 2.7 PACIFIC RIM ELECTRIC POWER INDUSTRY COAL IMPORT FORECAST, 1985-2000 M i l l i o n s of Tons Country 1981 1985 1990 1995 2000 Japan Firm Planning Stage To t a l 3.8 12.0 2.5 14.5 27.0 19.0 46.0 27.0 37.7 64.7 27.7 48.7 76.4 Taiwan Firm Planning Stage To t a l 2.3 9.8 0 9.8 12.4 7.6 20.0 12.4 17.9 30.3 12.4 46.0 58.4 Korea Firm Planning Stage To t a l 1.7 7. 1 0 7. 1 7.5 3.3 10.8 7.5 9. 1 16.6 7.5 12.8 20.3 Other 0 6.3 15.3 26.9 39.5 Tot a l P a c i f i c Rim 6. 1 37.7 92.1 138.5 194.5 Source: Westpo, 1982, f o r 1981, 1985, and 1990, p. 264. CH2M HILL, 1982 f o r 1995 and 2000, p. 70. Note: "Firm" means plants c u r r e n t l y i n operation, conversions under construction or planned, and new plants under construction. "Planning Stage" means new plants that are not as yet under construction. (68) TABLE 2:8 Source: U.S. Minerals Yearbook, Metals, Mineral and Fuels. U.S. Department of the I n t e r i o r , 1961, p. 185. o o o Li an i te B Ol o ca o —• tz O - I o n ro - » L i a n i t e A A' Subbi tuminous C v E r_ H i g h - v o l a t i l e C | bituminous i 4_ M i a h - v o l a t i l e S bituminous< Med iun -Vc la t i l e bituminous T Low-vo la t i l e bituminous i o o o o o O O 3 O O O O O O o o o o O — i o o o c : o o o L i a n i t e A Subbituminous C Suboituminous f\ Hiah-vo l a t i l e C bituminous! s H i a h - v o l a t i l e 3 bituminous H iah-vo la h \tW I i I'll J i l e A Bituminous edi Med ium-vo la t i l e bituminous M R P * : L o w - v o l a t i l e bituminous V \ \ Sen- i a r t h r a c i t e / 1 1 1 >wmm Anthr_c i te (69) TABLE 2.9 WORLD TECHNICALLY AND ECONOMICALLY RECOVERABLE COAL RESERVES mtce International WOCOL D.O.E. Country Energy Agency 1976 1980 CETF 1980/81 United States 177,000 166,950 166,950 China 99,000 98,883 98,883 U.S.S.R. 110,000 109,900 109,900 United Kingdom 45,000 45,000 India 33,000 12,427 . South A f r i c a 27,000 . 43,000 53,160 Germany 35,000 34,419 Poland 21,000 59,600 59,600 A u s t r a l i a 27,000 32,800 60,050 Canada 10,000 4,242 49,945 Others 53,000 55,711 172,105 Totals 637,000 662,932 766,593 mtce — one m i l l i o n metric tons of coal equivalent defined as having 12,600 Btu per pound. Source: International Energy Agency Steam Coal Prospects to 2000, 1978, p. 175. Report of the World Coal Study Coal-Bridge to the Future, 1980, p. 48. Department of Energy Coal Export Task Force Report, 1980, p. 250. (70) TABLE 2.10 MARKET SHARE OF STEAM COAL TRADE IN THE PACIFIC RIM USA A u s t r a l i a South A f r i c a China Canada A l l others Japan 1985 15 30 20 15 10 10 1990 15 30 20 15 10 10 2000 25 25 10 12 12 16 South Korea 1985 - 50 50 - -1990 - 50 50 - - -2000 - 50 50 - - -Taiwan 1985 20 60 - - 20 -1990 20 60 - - 20 -2000 20 60 - - 20 -Source: U.S. Department of Energy, Interim Report of the Interagency Coal  Export Task Force, 1980, p. 32. (71) TABLE 2.11 COAL RESERVES IN THE 5 PRINCIPAL WESTERN PRODUCING STATES M i l l i o n s of Short Tons State Bituminous Sub-Bituminous L i g n i t e Anthracite Total Colorado 62,203 18,492 90 81,785 Montana 2,363 132,151 87,533 — 222,047 New Mexico 10,948 50,801 6 61,755 Utah 28,222 156 — 28,378 Wyoming 13,235 108,319 — 121,554 Totals 116,971 309,919 87,533 96 515,519 Source: U.S. Geological Survey B u l l e t i n 1136 Coal Reserves of the United States -- A Progress Report January 1, 1960, p. 90. (72) TABLE 2.12 Source: Department of the I n t e r i o r , Energy Perspectives 2, June 1976, p. 104. TABLE 2.13  COMPARISON OF THERMAL COAL DEMAND  FOR JAPAN, TAIWAN, AND KOREA Report I.E.A. 1978 mtce WOCOL 1980 mtce D.O.E. CETF 1980 mmt WESTPO 1981 mmt MITI/C. ITOH 1982 mmt Japan 1981 — — 9.4 17.9 15.1 1985 13.7 6.0 27.5 34.0 32.0 1990 33. 1 — 62.7 63-69 61.3 2000 76.5 53.0 90-107.8 107.6* — Taiwan 1981 — — 4.7 4.5 1985 — 7.0 3.5 10.6-14 9.0 1990 — 12.0 15.8 18.1-27 12.5 2000 — 54-65 37.7 69.0 — Korea 1981 — — 0.5 1.7 3.7 1985 — 14.0 8.7 13.1-14.8 8.3 1990 — 30.0 15.8 18.6-20.3 13.0 2000 — 69-88 46. 1 38.2* — * CH2M HILL 1982 projections mtce: metric ton coal equivalent at 12,600 Btu/lb. mmt: m i l l i o n metric tons Sources: I.E.A. Steam Coal Prospects to 2000, M.I.T. WOCOL Report, p. 70. D.O.E. Interagency Task Force on Coal Exports, WESTPO Report, Japan M i n i s t r y of International Trade and Industry and C. Itoh Report of A p r i l 1982 (74) TABLE 2.14 STEAM COAL IMPORT PRICES TO JAPAN DURING 1981 Source Tonnage Share C&F Average Pr i c e ($) U.S. United States 18.20% $ 74.50 China 10.21% $ 68.00 U.S.S.R. 2.19% $ 62.87 Canada 9.79% $ 61.79 South A f r i c a 10.85% $ 67.82 A u s t r a l i a 48.76% $ 69.01 Source: C. Itoh & Co. Report of June 24, 1982 (75) TABLE 2.15 RANGE OF COAL COST COMPONENTS FROM VARIOUS SUPPLIERS TO JAPAN (1980 U.S. ($) PER TONNE) •Western U.S. Queensland New So. Wales W. Canada S. A f r i c a F.O.B. Mine $19.00-23.00 $23.00-28.00 $21.00-26.00 $18.00-26.00 $14.00-22.00 R a i l $19.00-23.00 $5.00-10.00 $4.50-9.00 $13.00 $6.00 Port Handling $5.00-6.15 $3.00-4.00 $3.00-4.00 $2.00-3.00 $1.00-2.00 Ocean Shipping $15.70 $8.40-12.15 $13.95 $9.15-13.15 $11.80-18.30 Demurrage - - $3.00-8.00 - -T o t a l Delivered Cost $58.70-67.85 *1982 U.S.$ per short ton $39.40-54.15 $45.45-60.95 $42.15-55.15 $32.80-48.30 Sources: 1. Western Coal Routes to Long Beach and Portland, Bechtel report of March 1982. 2. W. G. Waters II "Transportation and Market Prospects i n World Coal Trade", Presentation at the Canadian Transport Research Forum, Montreal, P.Q., May 26, 1982. TABLE 2.16 COMPARISON OF RAIL AND"OCEAN SHIPPING DISTANCES FOR PACIFIC" RIM SUPPLY COUNTRIE S SHIP (to Japan) RAIL Representative distance to Port (miles) A u s t r a l i a Queensland 1 Queensland 2 New South Wales Western A u s t r a l i a South A u s t r a l i a Tasmania 4065 4065 4270 4270 4800 120 220 250 100 500 100 Canada Northeastern B.C. ) Southeastern B.C. ) Alberta Mountains/Foothills) Alberta P l a i n s ) 4265 700-760 680-730 680-750 800-850 South A f r i c a Northern Transvaal ) Southern T r a n s v a l l ) Natal ) Orange Free State ) 7800 740 292 204 436 United"States Colorado ) Utah ) New Mexico ) Montana ) Wyoming ) 5400 1200-1750 800-1350 700-1000 800-1600 1200-1650 Sources: 1. D.O.E. Interagency Task Force on U.S. Coal Exports, Utah Energy O f f i c e , Utah and Colorado Coal Exports to the P a c i f i c  Rim, 1980, p. 34. 2. H. P. Drewry (Shipping Consultants Ltd.) The Growth of Steam  Coal Trade, 1980, p. 60. (77) CHAPTER 3 POTENTIAL IK "S;"WEST"COAST"TERMINAL"LOCATIONS  PART I"- POTENTIAL"TERMINAL"SITES INTRODUCTION Westpo and other recent reports have projected that the West Coast of the United States w i l l export 8.5-10.8 m i l l i o n tons of steaming coal i n 1985, 18.7-25.5 m i l l i o n tons i n 1990, and 45-55 m i l l i o n tons i n 2000. 1 To f a c i l i t a t e the development of t h i s trade, a major port f a c i l i t y must be constructed. Such a f a c i l i t y represents the f i n a l c r i t i c a l component i n the Western U.S. Coal l o g i s t i c s system. Although more than one port f a c i l i t y w i l l be needed l a t e r i n the century to accommodate the larger tonnages, a f a c i l i t y must be constructed within the next three to four years which i s capable o f: (a) e f f i c i e n t l y handling u n i t t r a i n s ; (b) achieving a loading rate of 6-10,000 tons per hour; (c) accommodating 60 foot d r a f t ocean vessels; and (d) providing a minimum storage c a p a b i l i t y of 700,000 metric t o n s . 2 With the economies of the U.S. West Coast States slowing down, e s p e c i a l l y i n Oregon and Washington, every port planning commission and board of harbour commissioners has been under pressure to investigate the p o s s i b i l i t y of developing a new port f a c i l i t y i n t h e i r area. During 1980/81 almost every conceivable bulk loading l o c a t i o n on the West Coast (78) had a f e a s i b i l i t y or impact study i n progress. The Westpo report i d e n t i f i e d 26 s i t e s i n the following areas: 3 7 s i t e s i n Puget Sound 6 s i t e s along the Columbia River 2 s i t e s on the West coast of Oregon and Washington 7 s i t e s i n the San Francisco Bay area 3 s i t e s i n Southern C a l i f o r n i a 1 s i t e i n Alaska Other studies have indi c a t e d as many as 30 locations i n v e s t i g a t i n g a coal port opportunity (see Figure 3.1 f o r West Coast map and terminal locations.) The World Coal Study indi c a t e d that "the steam coal trade with the P a c i f i c Rim i s at l e a s t as much a transportation business as i t i s a coal mining business". 4 Chapter 2 stated that the greatest leverage a v a i l a b l e to make the U. S. steam coal more competitive i n the P a c i f i c Rim l i e s i n the completion of an e f f i c i e n t large scale port f a c i l i t y . Presently, the lack of t h i s type of port on the West coast i s c e r t a i n to constrain the growth of the steam coal trade. If the United States supply market was not characterized by such a large number of mine owners and traders, a system could possibly be developed based on a l o c a t i o n which minimized the delivered costs of coal given the constraints of ship s i z e l i m i t a t i o n s , r a i l distances and, most (79) importantly, o r i g i n of the c o a l . There are currently no long term steam coal contractual commitments from the P a c i f i c Rim purchasers. This causes some question as to the l e v e l of trade that w i l l m a t e r i a l i z e . With near/medium term mine supply locations not i d e n t i f i e d and new mine location s to s a t i s f y long term commitments postponed, i t complicates the port planning and development process and continues to support multiple port planning e f f o r t s . To further complicate t h i s issue, each of the candidate West Coast port development groups have a membership which includes e i t h e r a resource owner, a r a i l r o a d , or a port operator. The objectives of these p a r t i c i p a n t s may not n e c e s s a r i l y r e l a t e to being part of a p r o f i t making coal terminal but rather to use the port as a v e h i c l e to promote the business i n t e r e s t s f o r t h e i r primary business l i n e s . By ensuring the f i r s t port development i s e i t h e r near a p a r t i c i p a n t mine l o c a t i o n , or on a p a r t i c i p a n t r a i l r o a d l i n e , the P a c i f i c Rim buyers w i l l be forced to set purchase c r i t e r i a according to the established port l o c a t i o n whether or not i t i s the optimal port s i t e . This s i t u a t i o n could n u l l i f y any prospect of a 'systems approach' to the most favorable port l o c a t i o n . The preceding paragraph i s not meant to diminish the importance that these other l o g i s t i c s system p a r t i c i p a n t s take an active i n t e r e s t i n the new port f a c i l i t y developments. Without t h i s support, along with very aggressive port harbour commissioners and executives, there would be very l i t t l e i n t e r e s t generated i n an export coal terminal. Such a p r o j e c t , at the present time, does not represent a f i n a n c i a l l y sound investment (80) without the existence of long term contracts covering some minimum break even p o s i t i o n . Levels of thermal coal exports from the West Coast are expected to increase s u b s t a n t i a l l y . I t i s obvious that the present port f a c i l i t i e s on the U. S. West Coast are incapable of processing such throughput l e v e l s . They are unable to allow neither the e f f i c i e n t operations of the i n t e r f a c i n g r a i l and ocean shipping modes nor do they have adequate storage requirements necessary f o r the forecast volumes. The present e f f e c t i v e capacity of the U. S. West Coast i s 5 to 6 m i l l i o n metric tons per y e a r . 5 These port f a c i l i t i e s are located i n the Southern C a l i f o r n i a San Pedro basin at the Ports of Los Angeles and Long Beach. The Port of Los Angeles export coal terminal i s located on the East Channel at berths 49 and 50. I t i s owned by National Metal & Steel Corporation (part of the Shapiro family) and operated by American Bulk Loading Enterprises Inc.(ABLE). There i s 51 fee t of water depth at the berth f o r a length of 800 fee t and the terminal i s served by Union P a c i f i c , Southern P a c i f i c , and Sante Fe Railroads. (U.P. i s the main l i n e o r i g i n a t i n g i n many coal producing areas.) There i s no loop track so cars from u n i t t r a i n s must be fed one by one into the non-indexed si n g l e car rotary dump. The maximum capacity i s approximately 2,000 metric tons per hour with a storage capacity of 70,000 to 120,000 tons. The f a c i l i t y i s extremely o l d and was i n i t i a l l y designed to handle i r o n ore, i r o n p e l l e t s , copper and zinc ores. These other bulk products are presently handled at the f a c i l i t y with c o a l . This operation has a h i s t o r y of s i g n i f i c a n t down (81) time f o r re p a i r and maintenance. I t i s u n l i k e l y t h i s f a c i l i t y could handle more than 2 m i l l i o n tons of thermal coal per year.^ The other e x i s t i n g export f a c i l i t y i s located i n Long Beach on the Southern Basin of the Long Beach Harbour at Pier G (berths 212-215). The Pier G f a c i l i t y i s owned by the Port of Long Beach and operated by Metropolitan Stevedore Company. Again, the e x i s t i n g f a c i l i t y i s extremely o l d and was designed i n i t i a l l y to handle i r o n ore. The main function of the terminal at the present time i s the export of petroleum coke from captive storage warehouses at the port. Petroleum coke i s a r e s i d u a l by-product of the l o c a l r e f i n i n g processes. The water depth at the p i e r i s 40-45 f e e t and they can reach 50 feet by breasting o f f 8 f e e t . ^ The berth length i s 2,100 f e e t . There i s open ground storage of approximately 135,000 tons and the maximum loading rate i s 2,000 metric tons per hour. The Port of Long Beach has entered into an agreement with a f a b r i c a t o r and construction company to i n s t a l l a new 5,000 ton per hour loader at Pier G during early 1983. The cost of t h i s project i s budgeted at 18 m i l l i o n d o l l a r s . The objective i s to gain more f l e x i b i l i t y i n handling petroleum coke, c o a l , and other major and minor bulks through the Pier G f a c i l i t y . If a new terminal i s constructed no coal would be handled at G. The Long Beach terminal i s served by the Union P a c i f i c , Southern P a c i f i c , and Santa Fe Railroads, but the Union P a c i f i c i s the p r i n c i p a l r a i l r o a d with e i t h e r d i r e c t or interchange access to many of the coal f i e l d s i n the Western States. (82) Of the 26 Ports indicated i n Figure 3.1, only a few are continuing with development programs. If each of these ports had proceeded with t h e i r development plans, the United States would have a West Coast coal export terminal capacity of 100 m i l l i o n tons by 1985. It i s not a s i g n i f i c a n t expense to announce a development program and undertake an i n i t i a l i n v e s t i g a t i v e or conceptual study. However, once an engineering study and environmental assessment have been started, the developers can a n t i c i p a t e spending 3 to 4 m i l l i o n d o l l a r s to f i n a l i z e t h i s phase. Many of the indic a t e d locations have not proceeded with t h i s more expensive i n v e s t i g a t i o n and w i l l not go beyond t h e i r i n i t i a l announcement made i n 1980 or 1981. The port development programs which are continuing are dependent on a number of important f a c t o r s p r i o r to making any further major c a p i t a l commitments. Most w i l l complete t h e i r engineering and environmental studies and defer further consideration u n t i l there are some long-term throughput contracts a v a i l a b l e . The most important factors involved i n the intermediate stages of development are: (i ) Determination of a functional terminal design and r e a l i s t i c cost estimates. ( i i ) Securing adequate financing packages (for both the i n i t i a l i n v e s t i g a t i v e programs and the down stream terminal construction). (83) ( i i i ) Completion of s a t i s f a c t o r y environmental impact assessments. (iv) Conclusion of a s a t i s f a c t o r y operating agreement with a stevedoring company (operating costs and t h e i r e s c a l a t i o n are a major component of any terminal cost.) (v) Securing long term throughput contracts to cover an agreed break even l e v e l f o r the depreciable l i f e of the assets. B. POTENTIAL"DEVELOPMENT"LOCATIONS Figure 3.2 shows the Western United States primary coal deposit and production areas i n c l u d i n g the major port development proposal s i t e s and the s e r v i c i n g r a i l r o a d s . In general, Southern C a l i f o r n i a i s the preferred hauling distance from Utah, Arizona, New Mexico and most Colorado l o c a t i o n s . Northern C a l i f o r n i a and the Northwestern States port s i t e s are the shortest distance from Wyoming, Montana and some Colorado l o c a t i o n s . The ports i n the Northwest range from 1,100-1,400 miles from coal sources. The Southern C a l i f o r n i a ports range from 800-1,100 r a i l miles from the producing areas. Distance, however, i s only one of the factors r e l a t i n g to the land transportation cost. Another extremely important f a c t o r i s the Westbound grades involved i n t r a v e r s i n g the coast and i n t e r i o r mountains en route from the coal producing locations to the proposed ports i n the P a c i f i c Northwest. Because of these gradients the Union P a c i f i c and Burlington Northern Railroad have indicated they w i l l use seventy-five car u n i t t r a i n s as opposed to the eighty-four to one hundred car u n i t (84) t r a i n s used i n the Southern C a l i f o r n i a sector. There i s no economical way the grade increases may be changed. The only a l t e r n a t i v e a v a i l a b l e i s su b s t a n t i a l increases i n l i n e haul power (thereby s i g n i f i c a n t l y i n c r e a s i n g c o s t s ) . The Southern C a l i f o r n i a locations also appear to have a comparative advantage i n ocean shipping. The ocean transport distance to Japan from Southern C a l i f o r n i a i s approximately 4,850 miles compared to 4,300 from most Northwest port l o c a t i o n s . The economies of scale of the larger vessel s i z e c a p a b i l i t y of Long Beach and Los Angeles w i l l e a s i l y overcome t h i s distance disadvantage. There are some deep water ports i n Puget Sound but these appear to be plagued with environmental problems. Resolution of these problems w i l l extend the planning horizon s i g n i f i c a n t l y f o r these s i t e s . At the present time there are a number of ports which have ac t i v e development programs. They are pursuing the P a c i f i c Rim markets to secure long term throughput contracts to be used as the financing base f o r the development programs. The following paragraphs provide a b r i e f synopsis on each of these l o c a t i o n s : 1. Port of Vancouver, Washington — A group c o n s i s t i n g of the Port, Westmoreland Resources Incorporated, Penn V i r g i n i a Corporation, and Morrison-Knudsen have joined together to develop t h i s terminal l o c a t i o n . I t w i l l r e l y p r i n c i p a l l y on the Westmoreland Corporation coal deposits i n the Powder River Basin which would be marketed (85) through t h i s port f a c i l i t y . Morrison-Knudsen i s involved i n the pro j e c t to generate business f o r t h e i r port engineering construction d i v i s i o n (presently experiencing a very slow period i n terms of a c t i v i t y ) . The proposed s i t e i s 42 acres (owned by the Port) at the junction of the Columbia and Williamett Rivers approximately 93 miles from the P a c i f i c Ocean. A two-phase development i s proposed. The i n i t i a l phase would handle approximately two to three m i l l i o n tons per year and expand to eight m i l l i o n tons per year at a future date. The i n i t i a l storage i s planned at 150,000 tons with an expansion c a p a b i l i t y of 300,000 tons. The project i s forecast to cost $40-50 m i l l i o n and w i l l include one 2,500 ton per hour ship loader and a rotary car dumper. The operational s t a r t date i s planned f o r l a t e 1984. Trade would be based on the use of panamax vessels given the 39 feet maximum channel depth i n the Columbia River and bar. The r a i l r o a d s s e r v i c i n g t h i s s i t e are the Burlington Northern and Union P a c i f i c . 8 2. The Port of Kalama, Washington — The developers are the Port of Kalama and P a c i f i c Resources Incorporated (PRI). P a c i f i c Resources hopes to use t h i s f a c i l i t y as a ve h i c l e to expedite sales of t h e i r coal resources from the western United States. The s i t e i s located at Mile Post 72 of the Columbia River and consists of 175 acres upon which PRI presently holds an option to proceed with a long-term lease. The development plan i s predicated upon a 5-15 m i l l i o n ton per year throughput with storage capacity of about 10% of t h i s amount. Again, the maximum vessel s i z e on the Columbia r i v e r i s (86) panamax. This f a c i l i t y i s envisaged to cost $70-80 m i l l i o n and w i l l include two to three 3,000-5,000 ton per hour loaders. The f i n a l environmental impact statement was released i n early 1982 and the comment period w i l l be e x p i r i n g soon. Their plans i n d i c a t e a startup date i n 1984. The s e r v i c i n g r a i l r o a d s are Burlington Northern and Union P a c i f i c . 9 3. Portland, Oregon — This l o c a t i o n i s being developed by P a c i f i c Coal Corporation (owned by the American Guaranty F i n a n c i a l Corporation), and the Port of Portland. The s i t e i s located on 100 acres of land d i r e c t l y across the r i v e r from the proposed coal terminal s i t e at Vancouver, Washington. Phase I i s indicated to be 12 m i l l i o n tons per year with Phase II increasing to 18 m i l l i o n tons per year throughput c a p a b i l i t y . Storage i s planned f o r 5-10% of annual throughput. The development i s projected to cost between $60 and $80 m i l l i o n . The environmental and construction permits are presently i n hand and a ground breaking ceremony was held i n early 1982. Dravo^" are i n charge of the design and construction and plans were to complete the terminal i n l a t e 1983. These have been delayed given the current slowdown i n coal sales to the P a c i f i c Rim and there i s no construction a c t i v i t y at the present time. Their development plans c a l l f o r one 6,000 ton per hour loader and a s i n g l e rotary car dump. The s e r v i c i n g r a i l r o a d s are Burlington Northern and Union P a c i f i c . The maximum ship s i z e w i l l be panamax v e s s e l s . ^ 4. A s t o r i a , "Oregon — The developers of t h i s l o c a t i o n are Burlington Northern, Nerco, PanOcean Bulk C a r r i e r s Limited, and the Port of (87) A s t o r i a . Located 10 miles from the mouth of the Columbia River, there may be a p o s s i b i l i t y of dredging i n l a t e r stages to allow vessels above panamax s i z e . The 85-acre s i t e i s planned to accommodate a 10 m i l l i o n ton per year terminal with 600,000 ton storage c a p a b i l i t y and two 2,500 ton per hour loaders. The project i s forecast to cost between $50 and $60 m i l l i o n and an operational startup date i s a n t i c i p a t e d i n 1985. Burlington Northern i s the only s e r v i c i n g r a i l r o a d to t h i s l o c a t i o n . ^ 2 5. Coos Bay, "Oregon — The Port of Coos Bay has joined with Canasia Coal Company to develop a coal f a c i l i t y planned to handle 3-4 m i l l i o n tons by 1983 and 12 m i l l i o n tons by 1988. The p r o j e c t i s i n the permitting and d e t a i l e d engineering phase. The environmental impact analysis i s under way. The developers plan to i n i t i a l l y export 1-1/2 - 2 m i l l i o n tons per year of Canasia's Oregon coal ( a f t e r cleaning). This would be supplemented by 4-5 m i l l i o n tons per year of Utah and Colorado c o a l . I f the a n t i c i p a t e d Powder River B a s i n ^ 3 development takes place, they also plan on 5-6 m i l l i o n tons per year of t h i s coal i n the 1990's. The harbour depth i s 35 feet which can accommodate 50,000 deadweight ton bulk c a r r i e r s . This could be deepened f o r approximately $30-40 m i l l i o n which could be included as a p r o j e c t cost. The advantage of t h i s l o c a t i o n i s i t s shorter r a i l distance and avoidance of crossing some of the mountain ranges required i n shipment to the Columbia River and Puget Sound port l o c a t i o n s . The r a i l distance from P r i c e , Utah to Coos Bay and Long Beach, C a l i f o r n i a i s approximately equal.14 (88) 6. Stockton, C a l i f o r n i a — The developers of t h i s p r o j e c t are the Port of Stockton, Crowley Maritime Corporation, and Metropolitan Stevedore Company. The permitting i s complete and construction i s about 80% f i n i s h e d . This project, i n c l u d i n g a loop track, rotary dump p i t , and 4,000 ton per hour loader, i s scheduled f o r f u l l operation by October, 1982. I t i s located on 100 acres of land at the Port of Stockton and i s projected to handle 2.5 m i l l i o n tons of coal per year i n the f i r s t stage. Expansion to 5 m i l l i o n tons per year i s a n t i c i p a t e d l a t e r i n the decade. Storage capacity w i l l be 300,000-400,000 tons and w i l l depend on the amount of other bulk cargos such as copper concentrate and soda ash that share the terminal and storage areas. This terminal was o r i g i n a l l y designed to handle copper concentrate. I t has been redesigned to handle coal and now a n t i c i p a t e s c o n t r o l l i n g a small share of the export steam coal market given the early start-up date. The r a i l r o a d s s e r v i c i n g t h i s l o c a t i o n are Southern P a c i f i c , Western P a c i f i c , and the Sante Fe. With d r a f t l i m i t s of 32 fe e t the maximum shipment s i z e i s 30,000 t o n s . 1 5 7. Port of" Los Angeles — The port i s presently seeking intere s t e d investors and operators i n t h e i r p o t e n t i a l f a c i l i t y but as of yet do not have any j o i n t venture members. They have retained the Long Term Cre d i t Bank of Japan as f i n a n c i a l advisors on the p r o j e c t . This bank i s also a s s i s t i n g with some of the marketing and attempting to secure long term contracts to be used as a financing base. The development plans include an i n i t i a l c a p a b i l i t y of 15 m i l l i o n tons per year (89) i n c r e a s i n g to 20-30 m i l l i o n tons per year by 1990. The s i t e would be 200 acres of land that i s currently being reclaimed through dredging on Terminal Island. Plans c a l l f o r two 4,000-6,000 tons per hour ship loaders and a storage c a p a b i l i t y of 2-3 m i l l i o n tons. With the land preparation costs included i n the project development i t appears the t o t a l costs would be i n the region of $450 m i l l i o n . Terminal construction would not be complete u n t i l 3-5 years a f t e r the l a n d f i l l completion ( e a r l i e s t 1987-1988). With very l i t t l e dredging the f a c i l i t y could handle 65-foot depth vessels, t h i s would allow 150,000-200,000 ton vessels to c a l l . The r a i l r o a d s s e r v i c i n g t h i s terminal are Union P a c i f i c , Southern P a c i f i c , and Santa F e. 1^ 8. Long Beach — There are two developments at t h i s l o c a t i o n . The f i r s t i s an expansion of the present P i e r G f a c i l i t y which includes a new ship loader and s l i g h t l y more storage. This w i l l increase i t s throughput c a p a b i l i t y to 4-6 m i l l i o n tons per year. A d d i t i o n a l l y a group c o n s i s t i n g of Union P a c i f i c Land Company, the Port of Long Beach, Crowley Maritime Corporation, Metropolitan Stevedore Company and C. Itoh, have formed a j o i n t venture to develop a 100 acre s i t e on the north side of the C e r r i t o s Channel. The conceptual engineering has been completed, and a design and construct b i d package i s being prepared. Environmental permitting i s nearly complete. The terminal f a c i l i t y i s designed around a 15 m i l l i o n ton per year i n i t i a l throughput increasing to 30 m i l l i o n tons. The storage w i l l be 700,000 tons with two 6,000 ton per hour ship loaders. Development costs are estimated to be i n the region of 250 (90) m i l l i o n U.S. d o l l a r s and terminal operation i s forecast to commence i n l a t e 1985. Plans c a l l f o r dredging the approach channel and berth t o 65 f e e t and c a p i t a l i z i n g t h i s as a p r o j e c t cost. This would enable 150,000-170,000 deadweight ton c o l l i e r s to load coal at t h i s l o c a t i o n . I t i s served by Union P a c i f i c , Southern P a c i f i c and Sante Fe r a i l r o a d s . These Southern C a l i f o r n i a locations are approximately 800 miles from the coal f i e l d s i n Utah and 1,000-1,200 from the f i e l d s i n Colorado. More d e t a i l w i l l be given on the Long Beach l o c a t i o n and development l a t e r i n the paper.^ 7 As can be seen from the port projects o u t l i n e d above, there does not appear to be any general b e l i e f that the f i r s t West Coast export terminal should be a deep water l o c a t i o n . H. P. Drewry projects that i n the next 10-15 years, 30% of the West Coast export coal w i l l be c a r r i e d i n panamax si z e v e s s e l s . ^ This supports the claims of most Columbia River developers that the l i m i t a t i o n to panamax s i z e vessels i s not an i n h i b i t e r to the growth of the P a c i f i c Rim export trade through t h e i r ports. A d d i t i o n a l l y , the P a c i f i c Rim purchasing p o l i c i e s as out l i n e d i n Chapter 2 i n d i c a t e that only a small number of ports or r e c e i v i n g centers w i l l be capable of handling the larger tonnage vessels. Most forecasts i n d i c a t e that i n the long run there w i l l be a requirement f o r more than one coal export terminal on the United States West Coast. The immediate questions to be answered are: where should the f i r s t terminal be located; and should i t be a deep or medium draf t port f a c i l i t y . I t i s u n l i k e l y that any of the port projects w i l l proceed (91) without at l e a s t some amount of base cargo throughput guarantees. I t appears that the f i r s t p r oject to proceed w i l l be one that can take advantage of transportation economies i n the near term to make the U.S. product more competitive i n the P a c i f i c Rim markets. Such a l o c a t i o n should minimize the inland transportation costs and take advantage of s e a l i f t p r i c e d i f f e r e n t i a l s a v a i l a b l e between panamax and larger size v e s s e l s . One of the more favorable locations f o r the f i r s t West Coast export terminal i s the C e r r i t o s Channel Project at Long Beach, C a l i f o r n i a . The advantages of t h i s port l o c a t i o n are outlined i n the next section. C. THE -LONG"BEACH EXAMPLE There are two main reasons f o r using the Port of Long Beach as a case study i n t h i s t h e s i s : ( i ) From a purely l o g i s t i c a l point of view, the Southern C a l i f o r n i a San Pedro Bay l o c a t i o n o f f e r s many advantages. The shortest and most l e v e l grade route from the highest q u a l i t y coals i s from Utah/Colorado to Long Beach/ L.A. Other than Los Angeles, t h i s l o c a t i o n i s the only f e a s i b l e deep water l o c a t i o n a v a i l a b l e which does not involve major environmental problems or s u b s t a n t i a l dredging. The climate i n the port area and along the transport c o r r i d o r i s the most favorable of any a l t e r n a t i v e on the Coast. The l o g i s t i c s and operational advantages inherent i n t h i s l o c a t i o n favor i t as the f i r s t large terminal s i t e . (92) ( i i ) This' project represents the most complete development plan to date. Considerable time and c a p i t a l have been spent i n drawing together a j o i n t venture management and operational team. Major progress has been made towards completing the engineering design study, the environmental permitting, and other important terminal aspects. While other terminal locations have slowed down t h e i r development program due to the present s o f t market f o r steam coal i n the P a c i f i c Rim, the Long Beach Project i s continuing on plan and on schedule. The Port of Long Beach management has a reputation f o r operating one of the more aggressive public ports on the Coast i n regard to t h e i r s t r a t e g i c planning a b i l i t i e s and e f f o r t s to expand the port business. For some time the Commissioners of the Port of Long Beach have entertained the objective of expanding t h e i r present coal exporting f a c i l i t y and/or developing a completely new "state of the a r t " export terminal. In July, 1981, they joined with Union P a c i f i c Land Corporation (Upland Industries) to fund a Kaiser Engineers study on the prospect of developing a coal port f a c i l i t y on Union P a c i f i c Land property north of C e r r i t o s Channel. Upland Industries became involved as they saw a p r o f i t a b l e opportunity of l e a s i n g a large block of land to the pr o j e c t . This land i s c u r r e n t l y an o i l d r i l l i n g f i e l d which would allow an a d d i t i o n a l surface area use. The Kaiser Engineers Conceptual Study indicated that f o r a cost of $112 m i l l i o n (1982 d o l l a r s excluding removal and r e d r i l l i n g of o i l w e l l s ) , a modern bulk loading f a c i l i t y capable of 10-15 m i l l i o n tons throughput per year could be constructed on the designated s i t e . The Kaiser Study (93) further i n d i c a t e d that at t h i s c a p i t a l cost l e v e l , the s i t e and operation would be competitive with any other p o t e n t i a l locations on the West Coast. The Port and Upland Industries at t h i s point decided to seek a d d i t i o n a l equity p a r t i c i p a n t s f o r the development of t h i s p r o j e c t . The objective was to locate partners capable of providing cash resources i n addition to expertise and operational assistance i n the areas of terminal operation, maritime shipping, marketing to the end users, plus design engineering and construction. Through a period of negotiated discussions, they approached Crowley Maritime Corporation of San Francisco, Metropolitan Stevedore Corporation of Long Beach, and C. Itoh and Company of Japan. Each agreed that the p r o j e c t represented a reasonable investment opportunity and joined with the Port and Upland on the basis of preliminary equity p a r t i c i p a t i o n l e v e l s . This represented the formal beginning of the Long Beach International Coal Project (L.B.I.CP.) commencing a c t i v i t i e s on the p r o j e c t i n August of 1981. Over the l a s t twelve months, t h i s group has a c t i v e l y pursued a development program. This program has included: a major conceptual engineering study; environmental impact statements; environmental impact reports; p u b l i c hearings; and a f u l l marketing campaign and information program i n both the United States and the P a c i f i c Rim countries of Japan, Taiwan, and Korea. A complete f i n a n c i a l program was also developed to take best advantage of Yen and U.S. d o l l a r financing i n c l u d i n g various import/export c r e d i t f i n a n c i n g and leveraged leases. From an operational point of view, the Long Beach l o c a t i o n o f f e r s a number of d i s t i n c t advantages which are important i n the short term. These (94) advantages w i l l allow transportation savings to be ef f e c t e d to the extent that U.S. West coal can become more competitive i n the P a c i f i c Rim. The demand growth f o r U.S. Western coals by P a c i f i c Rim users i s predicated upon i t s competitiveness with other suppliers. In terms of inland transportation there i s a savings of between 300 and 800 miles of r a i l haul compared to points i n the P a c i f i c Northwest. The Long Beach route also avoids the long and steep grades involved i n transport to the Northwest. These grades require that u n i t t r a i n s are smaller i n cargo component and require s u b s t a n t i a l l y more energy and time to move a very short distance. Other advantages on the transport c o r r i d o r the Southern C a l i f o r n i a l o c a t i o n enjoys are lack of i c e , snow, and r a i n which tend to increase the combustibility of the lower q u a l i t y steam c o a l . 1 9 Moisture and col d temperatures generally shorten coal's s t o c k p i l e l i f e and make i t more d i f f i c u l t to handle through the rotary dump and conveyor systems. The e f f e c t of these items on the p r i c e of the r a i l t r a nsportation i s demonstrated i n the estimated d i f f e r e n t i a l of $6.. 00-$8.00 a ton between Utah and Colorado and Long Beach versus the Puget Sound or other Northwest l o c a t i o n s . 2 ^ There i s also an estimated di f f e r e n c e i n favour of Long Beach of $2.00-$5.00 a ton between Utah and Colorado locati o n s exporting through Long Beach and Wyoming and Montana location s exporting through the Northwestern ports.21 There are also advantages i n ocean shipping to l o c a t i n g a terminal at the Long Beach s i t e . In the short term t h i s advantage i s not as great due to the great surplus of Panamax s i z e vessels. This has caused panamax owners (95) i n t h i s present market to operate at something less than a f u l l cost recovery. They may p r i c e t h e i r vessels on the basis of v a r i a b l e costs to keep them out of lay up and avoid the high r e s t a r t costs of bringing a vessel back i n t o operation. Most large vessels of the 100,000-150,000 deadweight type are b u i l t f o r a s p e c i f i c term contract and there are not a great number a v a i l a b l e on the open charter market. This s i t u a t i o n means that to use larger tonnage vessels i n the short term may require a new b u i l d i n g . This would only be undertaken by an owner i f he could be assured of a long term contract which would include covering h i s operating costs and returning a reasonable p r o f i t to h i s c a p i t a l investment. In comparing the f u l l cost p r i c e of the larger vessel with the v a r i a b l e operating cost p r i c i n g of the panamax ves s e l , the present world s i t u a t i o n i s that the panamax vessel can l i k e l y be chartered f o r les s money per ton of capacity. This present oversupply i n the ocean shipping market i s a short term problem. In the long run, economies of scale should d i c t a t e that vessels i n the 100,000-150,000 ton deadweight category w i l l o f f e r s i g n i f i c a n t transport advantages to the Long Beach l o c a t i o n over other l o c a t i o n s capable of handling only panamax s i z e vessels. In May of 1982, the proj e c t developers determined that, a f t e r taking account of the longer voyage distance from Long Beach to the P a c i f i c Rim over a Columbia River Port, the be n e f i t of using a 125,000 ton deadweight vessel over a panamax si z e vessel f o r the shipment of steam coal would be i n the range of $3.56-$5.00 per ton i n favour of Long Beach. 2 2 (96) Average weather conditions at the terminal l o c a t i o n are also very important. The steam coals a n t i c i p a t e d i n t h i s new export market w i l l be of s u b s t a n t i a l l y lower q u a l i t y than the m e t a l l u r g i c a l coals previously shipped to the P a c i f i c Rim users. The higher sulphur content and inherent moisture i n the steam coal product w i l l present problems f o r terminal locations i n rainy climates such as the P a c i f i c Northwest. These terminals w i l l need to be more concerned about the product storage l i f e , degeneration, and other spontaneous chemical reactions caused by the moisture. The amount of r a i n and general c l i m a t i c conditions i n the San Pedro Basin are very favourable and w i l l enhance the storage l i f e of the steam coal product. I t w i l l also mean l e s s concern to vessel owners who w i l l be putti n g a considerably d r i e r product on board t h e i r vessels and hence w i l l be less concerned about the p o s s i b i l i t i e s of f i r e and/or other chemical/spontaneous reactions. An optimum port l o c a t i o n choice can make a sub s t a n t i a l difference i n the del i v e r e d p r i c e of the product. This i s a c r i t i c a l aspect to the development of the West Coast steam coal export trade. The Southern C a l i f o r n i a l o c a t i o n has several d i s t i n c t advantages as out l i n e d above which have l e d the developers to press on with t h e i r program and receive the continued support of a number of the major purchasing agencies i n the P a c i f i c Rim countries. I t i s e n t i r e l y reasonable to expect that the f i r s t major coal terminal to be b u i l t on the West Coast of the United States w i l l be at Long Beach. (97) END"NOTES 1. Western Governors P o l i c y O f f i c e , Western Coal Export Task Force, Report of the Demand Task Group, Western Coal Exports t o the P a c i f i c Basin, 1982, p. 6. 2. Report to the Long Beach International Coal Project Engineering Subcommittee, made by C. Itoh and Company, September, 1981. 3. Western Governors P o l i c y O f f i c e , Western Coal Export Task Force, Report of the Port and Marine Task Group, Western Coal Exports to the P a c i f i c  Basin, 1982, pp. 7-10. 4. World Coal Study, Coal -- Bridge to the Future, C a r r o l l L. Wilson, Project D i r e c t o r , (Cambridge, Mass.: B a l l i n g e r Publishing Co., 1981), p. 44. 5. Interview on March 16, 1982 with Mr. A l l a n Ide, President and Chief Executive O f f i c e r of Metropolitan Stevedore Company, Wilmington, C a l i f o r n i a . 6. I b i d . 7. Breasting-of f — involves the use of small barges or other f l o a t i n g equipment which acts l i k e a spacer by holding the ship a s p e c i f i e d distance from the p i e r face. 8. Norman R. Linse, " P a c i f i c Rim Transportation Outlook", presentation made at P a c i f i c Rim Coal Trade Conference, Coal Outlook, January, 1982, p. 4. 9. I b i d . , p. 6. 10. Dravo, a major construction and engineering company located i n P i t t s b u r g , Penn. 11. Western Governors P o l i c y O f f i c e , Report of the Port and Marine Task Group, op. c i t . , pp. 143-144. 12. I b i d . , pp. 139-142. 13. Powder River Basin - an area i n Wyoming and Montana that consists of one of the l a r g e s t coal reserve areas i n the United States. The Coal (mostly surface mines) i s of medium q u a l i t y (BTU/lb approx. 7500 and high moisture). 14. J e f f r e y T. Williams, Utah and Colorado Coal Exports to the P a c i f i c  Rim, Utah Energy O f f i c e , Resource Development and Environment, Utah L e g i s l a t i v e P r i n t i n g O f f i c e , 1981, p. 65. (98) 15. This p r o j e c t c u r r e n t l y under my d i r e c t i o n f or CMC partner, i 16. Port of Los Angeles 1981 annual statements. 17. This p r o j e c t was under my d i r e c t i o n f o r the CMC partner. 18. H. P. Drewry (Shipping Consultants) Limited, Research D i v i s i o n , The Growth of Steam Coal Trade, "A Review and Forecast of International Trade i n Thermal Coal and Shipping Requirements: 1980-90", 1980, p. 130. 19. Steam coal generaly has an inherent surface moisture of 5-8%. I f subjected to s i g n i f i c a n t r a i n or other moisture, spontaneous reactions between the a d d i t i o n a l moisture and the sulphur i n the coal can r e s u l t . This reaction can r e s u l t i n the production of a c i d , or the generation of heat which can set the coal a f i r e . 20. J o e l P r i c e , " P a c i f i c Rim Market Overview", presentation at the P a c i f i c Rim Coal Trade Conference, Coal Outlook, January, 1982. 21. I b i d . , 22. Report to the Marketing Subcommittee of the Long Beach International Coal Project, made by the Port of Long Beach, A p r i l , 1982. •(99) TABLES AND FIGURES (100) FIGURE 3.1 c WASHINGTON d ro e POTENTIAL TERMINAL SITES  PUGET SOUND a. Bellingham b. Anacortes c. T u l a l i p d. Everett e. Tacoma f. West Tacoma g. Dupont . COLUMBIA RIVER • o OREGON CALIFORNIA h. i . j . k. 1. m. Longview Kalama Vancouver Portland A s t o r i a Warrenton NORTHWEST COAST n. Grays Harbor o. Coos Bay BAY/RIVERS p. Sacramento q. Stockton r. B e n i c i a s. Selby . t. Richmond u. San Francisco v. Redwood C i t y u SOUTH COAST w. Port Hueneme x. Los Angeles y. Long Beach ALASKA PACIFIC OCEAN w Source: CETF. Report of the Ports and Marine Task Group. (Soros Associates, 1981), p. 375. Seward (101) <4 FIGURE GRAYS HARBOR COLUMBIA RIVER PORTS WARRENTON ASTORIA -LONGVIEW KALAMA VANCOUVER PORTLAND COOS BAY o to SACRAMENTO, STOCKTON BENICIA SELBY RICHMOND SAN FRANCISCO REDWOOD CITY fBN/UP ^ *VJ3N , BN^ B N SP UP WP ISP 'WP .SP UP WP/SP. UP r1 PORT HUENEME LOS ANGELES LONG BEACH Source: As i n Figure #3.2b UP FIGURE '3.2b Source: Puget Sound Coal Export Opportunities and"Issues CH2M HILL February 1982, p. 103. (103) CHAPTER 4 MANAGING'A JOINT VENTURE:" ISSUES IN ORGANIZATIONAL'DEVELOPMENT AND STRUCTURE INTRODUCTION The purpose of t h i s chapter i s to h i g h l i g h t the s i g n i f i c a n t i n t e r n a l problems involved i n e s t a b l i s h i n g a multi-partner j o i n t venture to undertake a complex transport p r o j e c t . The discussion w i l l delve i n t o the d e t a i l e d aspects of the conceptual and operational o r i g i n s of the Long Beach Project. The organizational issues involved i n s e t t i n g up a fun c t i o n a l management framework fo r such a large p r o j e c t are enormous and complex. The complexity of these i n t e r n a l organizational issues i s developed through a discussion of the p a r t i c i p a n t s , sub-contractors and t h e i r respective r e s p o n s i b i l i t i e s . The management structure established by the developers i s presented and discussed i n r e l a t i o n to alternate frameworks. The diverse objectives among the owners are also discussed as they a f f e c t the organizational development. PART I - MULTI-ORGANIZATIONAL DECISION MAKING A. THE PLANNING/CONCEPTUAL PHASE Decision making can be d i f f i c u l t within a sin g l e organization; i n the realm of a multi-organizational j o i n t venture i t can be a t e s t of the cohesiveness of the group and the soundness of the pro j e c t format. (104) William Evan in d i c a t e s "the phenomena and problems of i n t e r - o r g a n i z a t i o n a l r e l a t i o n s are part of the general class of boundary r e l a t i o n s confronting a l l types of s o c i a l systems. A l l such boundary r e l a t i o n s tend to be enormously c o m p l e x . F r i e d m a n & Kalmanoff i n d i c a t e "the c e n t r a l concept of a j o i n t i n t e r n a t i o n a l business venture i s that of pa r t n e r s h i p " . 2 They also i n d i c a t e that a partnership has both "technical and emotional" aspects. 3 The emotional side i s most severely strained during the conceptual planning phase of a project as decisions are made i n an environment of uncertainty. Changes to o r i g i n a l objectives have to be con t i n u a l l y made to allow f o r f i n a n c i a l or operational trade-offs and s o c i a l / p o l i t i c a l s i t u a t i o n changes. Timeliness i s also an important aspect of many decisions. Group decision making can be contrary to t h i s o b j e c t i v e . This i s further exacerbated i n the Long Beach group by s i g n i f i c a n t geographical distances and t r a v e l time involved to allow the p a r t i c i p a n t s to meet on a face to face b a s i s . For the Long Beach International Coal Project (LBICP), f i v e major organizations, the Port of Long Beach, Upland Industries, Crowley Maritime Corporation, C. Itoh and Company, and Metropolitan Stevedore Corporation have formed two i n t e r - r e l a t e d j o i n t ventures. The objectives are to: (a) conceptually design and plan the terminal; and (b) construct and operate the terminal on the C e r r i t o s Channel of the Long Beach Harbour. The nesting of one j o i n t venture within another complicates the development program. However, the i n s t i t u t i o n a l and regulatory f a b r i c of the United States l e g a l system necessitates t h i s type of program f o r a (105) p u b l i c port terminal development. The conceptual/planning j o i n t venture, LBICP, co n s i s t s of a l l f i v e members based on shareholding to be out l i n e d below. This j o i n t venture i s p r i m a r i l y concerned with i n v e s t i g a t i n g the t e c h n i c a l , f i n a n c i a l , and operational f e a s i b i l i t y of a terminal at Long Beach, C a l i f o r n i a , and i t s competitive advantages over other p o t e n t i a l West Coast terminal s i t e s . If the conceptual phase leads to a proceed d e c i s i o n , the subset j o i n t venture, P a c i f i c Bulk Terminals (PBT), w i l l construct, own, and operate the terminal f a c i l i t y . The PBT j o i n t venture consists of Crowley Maritime Corporation, C. Itoh and Company, and Metropolitan Stevedore Corporation. The objectives of the LBICP i n the planning and conceptual stage are as follows: ( i ) F i n a l i z e formal organization of the LBICP j o i n t venture. ( i i ) Through a l e t t e r of understanding (LOU) 4 set f o r t h the i n i t i a l objectives and timing f o r the conceptual phase. ( i i i ) Complete formation of the subset j o i n t venture by the three p r i v a t e companies who w i l l eventually become the terminal operating group. (iv) Determine eg_uity p a r t i c i p a t i o n of each of the j o i n t venture members i n the conceptual phase of the project and a s s i s t the (106) p o t e n t i a l owners i n r e s o l v i n g d i v i s i o n of t h e i r shareholdings of the Terminal Operating Company. (v) Complete a conceptual engineering design package. This design must meet partner developed c r i t e r i a with respect to cost, environmental acceptance, operational e f f i c i e n c i e s , user acceptance, and f i n a n c i a l return. It must also demonstrate a competitiveness with other p o t e n t i a l U.S. West Coast port l o c a t i o n s . (vi) E s t a b l i s h a financing program r e s u l t i n g i n minimum c a p i t a l costs and minimum partner guarantees. ( v i i ) Complete major aspects of the environmental assessment program to the point that a determination can be made regarding the acceptance of the conceptual location/design parameters and the f l e x i b i l i t y allowed i n the f i n a l design of the terminal. ( v i i i ) Complete a marketing program aimed at providing engineering design c r i t e r i a , operational format, and general development progress to U.S. mine owners, agents, tr a d i n g companies, and P a c i f i c Rim users. These p o t e n t i a l users w i l l be encouraged to provide input during the planning stage. Maximum exposure of the terminal progress i s an important part of securing l e t t e r s of in t e n t and or other commitments f o r Terminal throughput. (107) (ix) E s t a b l i s h a range of terminal throughput rates which can be ind i c a t e d to p o t e n t i a l users as a basis f o r securing t h e i r support. Such rates to be predicated upon inputs from the marketing, engineering, and finance sub-committees. (x) Complete the above objectives within prescribed f i n a n c i a l and temporal c o n s t r a i n t s . The organization and behavioral operation of the j o i n t venture partners presents s i m i l a r i t i e s to behavioral aspects of p a r t i c i p a n t s i n d i s t r i b u t i o n channels. Louis P. Bucklin says "A channel of d i s t r i b u t i o n s h a l l be considered to comprise a set of i n s t i t u t i o n s which performs a l l the a c t i v i t i e s (functions) u t i l i z e d to move a product and i t s t i t l e from production to consumption". 5 i n the Long Beach project, the p a r t i c i p a n t organizations ( i n s t i t u t i o n s ) are performing a c t i v i t i e s necessary to move the coal terminal concept (product) from conception to operational r e a l i t y . An examination of p a r t i c i p a n t s i n a large j o i n t venture could draw on channel theory to explore a number of concepts such as r o l e s , r o l e theory, i n t e r - o r g a n i z a t i o n a l r e l a t i o n s , communications, and c o n f l i c t . B. PARTICIPANTS AND'ROLE" 1. Equity P a r t i c i p a n t s (a) The Port of Long Beach As i n d i c a t e d i n Chapter 3, the Commissioners and executive group of the Port of Long Beach have a reputation f o r aggressively pursuing new (108) projects i n areas that o f f e r long term growth p o t e n t i a l . The steam coal export trade from the U.S. West Coast has created a great deal of i n t e r e s t for the port management. The deep water access and r a i l advantages encourage the development of a San Pedro Bay l o c a t i o n as the f i r s t large West Coast export terminal. In the LBICP j o i n t venture, the port management i s acting p r i m a r i l y as a c a t a l y s t and co-ordinator i n the terminal conceptual planning phase. Their p r i n c i p l e objective i s to organize a group of companies with demonstrated operational and f i n a n c i a l strengths. I t i s hoped these p a r t i c i p a n t companies w i l l be motivated by the r e s u l t s of the conceptual and planning study to proceed with the terminal construction. The Port o f f i c i a l s would be n e f i t p o l i t i c a l l y from such a major development and would expand the Port's revenue earning c a p a b i l i t y through wharfage charges l e v i e d against the coal tonnage. I f t h i s p r o j e c t represented l e s s f i n a n c i a l r i s k , and d i d not require major marketing, marine, and operations inputs, the port has the a b i l i t y to undertake such a project on i t s own. In such an alternate development format the Port would lease the completed f a c i l i t y on a long term basis to a stevedore operator group. The Port's primary external source of funding i s through the use of tax exempt c i t y or port i n d u s t r i a l revenue bonds. These bonds are secured by the assets and earning a b i l i t y of the i s s u i n g authority. The maximum debt the Port can assume under t h i s type of financing i s regulated by the 1980 Harbour Bond Re s o l u t i o n . 6 Under t h i s r e s o l u t i o n , the Port i s presently l i m i t e d to approximately $100 m i l l i o n of a d d i t i o n a l borrowing. As they (109) have several other projects under consideration, $60-70 m i l l i o n would represent t h e i r maximum f i n a n c i a l support for the terminal. This s i t u a t i o n increases port management support for the p a r t i c i p a t i n g terminal developers. Even i f the p r o j e c t appeared extremely favourable and was supported by a number of throughput contracts, the Port would presently be unable to secure the financing independently. The Port functions on a day to day basis under the d i r e c t i o n of an executive port d i r e c t o r reporting to a Board of Harbour Commissioners. The Commissioners are appointed by the Long Beach C i t y Council. The C i t y of Long Beach i s a municipal corporation. The Executive Director i s an operational s a l a r i e d i n d i v i d u a l while the Commissioners are appointees c o n s i s t i n g p r i m a r i l y of community business leaders. As i s the case i n other major p u b l i c ports i n the United States, the success of the Port of Long Beach and the r e s u l t i n g f i n a n c i a l support for the l o c a l communities has made t h i s an important arm of the l o c a l governments. The Port may become involved i n some f i n a n c i a l support of the construction and development of the terminal. I t appears, however, that i t s f i n a n c i a l p a r t i c i p a t i o n p r i n c i p a l l y w i l l involve e f f o r t s to mediate major partner differences regarding disputed f i n a n c i a l commitments. Some of these disputed amounts may need to be assumed by the Port. Their preference i s t o have l i t t l e f i n a n c i a l or operational p a r t i c i p a t i o n i n the p r o j e c t . In a d d i t i o n to t h e i r r o l e as co-ordinator and mediator, the Port management i s also providing marketing contacts with western producers and (110) P a c i f i c Rim users. These contacts are considered valuable as a r e s u l t of h i s t o r i c a l trade associations and trade development missions. In p a r t i c u l a r the governments and p r i n c i p a l end users i n the P a c i f i c Rim countries attach great importance to the active p a r t i c i p a t i o n by the Port Executive and Commissioner groups. Their p a r t i c i p a t i o n i s regarded as an i n d i c a t i o n of serious support for the private group proposing the construction and operation of the terminal f a c i l i t y . In essence/ the Port management i s expending s i g n i f i c a n t funds on a conceptual study t o convince a p r i v a t e investor group of the Long Beach p o t e n t i a l i n r e l a t i o n to other s i t e s on the West Coast. If t h e i r program i s successful, they w i l l co-ordinate and conclude a conceptual and planning study which leads to an undertaking by the private group (PBT) to finance, construct, and operate a new f a c i l i t y . The success of the development program w i l l l a r g e l y depend on the Port's success i n securing the p a r t i c i p a t i o n of partners that have complementary business experience and i n t e r e s t s . A new coal export terminal would represent one of the more s i g n i f i c a n t p rojects undertaken by the Port of Long Beach. The Port's gross and net revenues for the f i s c a l year ending June 30, 1981 were $41.4 m i l l i o n and $26 m i l l i o n r e s p e c t i v e l y . It i s a 33-1/3% p a r t i c i p a n t i n the expenses of the conceptual phase. This phase has a. budget of four m i l l i o n d o l l a r s . I f a d e c i s i o n to continue with construction i s made by PBT (based on port agreed design and operation c r i t e r i a ) , the Port involvement w i l l l i k e l y be s u b s t a n t i a l l y reduced. The port management would function as consultants or advisors regarding t e c h n i c a l questions i n r e l a t i o n to Port operations i n t e r f a c i n g with the new terminal. (111) (b) Upland Industries Corporation Upland Industries (Union P a c i f i c Land Corporation) i s a wholly owned subsidiary of Union P a c i f i c Corporation. With annual revenues of $55 m i l l i o n i n 1981 i t represents the smallest d i v i s i o n of the U.P. group of operating companies. U.P. consolidated income f or 1981 was $6.38 b i l l i o n . Upland's i n t e r e s t i n the project r e l a t e s to t h e i r a b i l i t y to secure lease revenues from the 100 acre proposed terminal s i t e on the North side of the Ce r r i t o s Channel. This land i s presently the s i t e of a d r i l l i n g f i e l d operated by Champlin O i l (another wholly owned U.P. s u b s i d i a r y ) . The p o t e n t i a l annual lease revenues of $2-5 m i l l i o n c e r t a i n l y j u s t i f y t h e i r support of the conceptual phase. I t appears conceivable that t h e i r i n t e r e s t could also be stimulated by the p o t e n t i a l revenues f o r Union P a c i f i c Railroad. Based on 15 m i l l i o n tons per year throughput, (U.P. i s the monopoly r a i l c a r r i e r ) i t could mean 500 m i l l i o n d o l l a r s revenue per year f o r the r a i l r o a d . A f t e r the conceptual/planning phase, Upland Industries' p a r t i c i p a t i o n would p r i m a r i l y be as a l i a i s o n and consultant. They would a s s i s t i n re s o l v i n g l e g a l / t e c h n i c a l / f i n a n c i a l problems r e l a t i n g to the r e l o c a t i o n and re-organization of the Champlin d r i l l i n g f i e l d s . A d d i t i o n a l l y , Upland i s regarded by the group as a l i n k to the Union P a c i f i c Railroad. This l i n k could be important f o r seeking guidance/information on comparative rates and the r a i l r o a d ' s a t t i t u d e towards supporting the terminal p r o j e c t i n Long Beach versus other locations presently on the planning boards. The extent and a v a i l a b i l i t y of t h i s information i s presently unknown. (112) Upland have indi c a t e d that, due to fears of being charged with r e s t r a i n t of trade or d i s c r i m i n a t i o n charges, the r a i l r o a d would not l i k e l y be w i l l i n g to i n d i c a t e comparative rate l e v e l s between d i f f e r e n t ports at the present time. The s e n s i t i v i t y of the Union P a c i f i c Corporation to d i s c r i m i n a t i o n charges i s important. Although supportive of the Long Beach p r o j e c t , they have indic a t e d that they cannot i n any respect appear to favour or support the Long Beach terminal over Los Angeles or any other Port as t h i s could: (a) expose them to l e g a l action with respect to r e s t r a i n t of trade and po s s i b l e c o l l u s i o n p r a c t i c e s with the Port of Long Beach group; and (b) damage t h e i r long term business r e l a t i o n s h i p s f or other cargoes with other ports. I t i s the i n t e n t i o n of the Union P a c i f i c parent company to remain neutral to any of the terminal s i t e developments that are served by i t s r a i l r o a d trackage. The Upland group are supporting the conceptual planning phase f o r 33-1/3% of the budgeted expense. Along with the Port they can be considered c a t a l y s t s i n t r y i n g to e s t a b l i s h a conceptual planning program which leads the p r i v a t e p a r t i c i p a n t s to a decision to proceed with the construction of the terminal. Upland w i l l not p a r t i c i p a t e i n the terminal ownership or operation. (c) C. Itoh and Company C. Itoh i s Japan's t h i r d largest trading company following Mitsubishi and M i t s u i . Their 1981 turnover was $28.4 b i l l i o n . They s p e c i a l i z e i n the (113) trading of major bulk commodities i n c l u d i n g petroleum. The Japan Coal Development Corporation (JCDC), on behalf of the private e l e c t r i c u t i l i t y companies and the E l e c t r i c Power D i s t r i b u t i o n Company (EPDC), have assigned C. Itoh trading r e s p o n s i b i l i t y i n developing the United States western coal supply. They may p a r t i c i p a t e i n production and i n f r a s t r u c t u r e projects that w i l l make steam coal supplies a v a i l a b l e from the Western United States as they are required to support the forecast energy needs of Japan. C. Itoh's i n i t i a l verbal support of the project was enhanced by t h e i r acceptance of the o f f e r to j o i n the conceptual study phase and subsequently as a member of the p o t e n t i a l owner and operating group. C. Itoh are regarded by the group as the communications l i n k to the end users i n the P a c i f i c Rim countries. Their primary r o l e i s to secure long term commitments of tonnage through: (a) sales e f f o r t s i n Japan, Taiwan, and Korea; and (b) d i s t r i b u t i n g t h e i r equity share among the Japanese e l e c t r i c u t i l i t i e s and cement companies. This l a t t e r approach i s to promote the concept of p r i c e s e c u r i t y and protection from excessive e s c a l a t i o n through ownership. This concept d i d not o r i g i n a t e with C. Itoh or the group of j o i n t venture p a r t i c i p a n t s . The e l e c t r i c u t i l i t i e s i n Japan and the Japan Coal Development Corporation have indicated there i s a need on the part of the major users to p a r t i c i p a t e as owners of the terminal e n t i t y . Part of any agreement to becoming an equity p a r t i c i p a n t from the end users would be a minimum long term throughput contract ( i . e . 500,000 to 1,000,000 tons per year for a 10 year period). There are no plans to o f f e r equity p a r t i c i p a t i o n to users i n Taiwan or South Korea. (114) C. Itoh presently has a 15% i n t e r e s t i n the conceptual planning phase. They intend to own 45% of the terminal f a c i l i t y and operation. This p a r t i c i p a t i o n w i l l be d i l u t e d among major Japanese end users with C. Itoh maintaining a small p a r t i c i p a t i o n (5-10%) but remaining as the l i a i s o n f o r the group of owners and carrying the single vote for t h i s block shareholding. The r o l e of C. Itoh during the conceptual planning stage i s c r i t i c a l as they are aware of the tonnage required by the Japanese, Korean, and Taiwanese end users. Their information w i l l i n d i c a t e whether or not adequate throughput can be a n t i c i p a t e d to sustain the terminal i n the early operating years. They are the p r i n c i p a l f a r eastern marketing arm for the p r o j e c t which complements t h e i r appointment as purchasing negotiator f o r most of the Japan required steaming c o a l . C. Itoh has been appointed by JCDC and the Japanese government to a s s i s t i n the development of the U.S. West Coast/Japan steam coal export market. It i s important they involve themselves i n terminal and i n f r a s t r u c t u r e projects which o f f e r the best p o t e n t i a l for improving the l o g i s t i c s system. In t h i s context, they are s i m i l a r to the Port and Upland Industries i n that they also are acting as a c a t a l y s t . They have a s i g n i f i c a n t stake i n making the project proceed (even i f the f i n a n c i a l returns are marginal). If Los Angeles or another West Coast port were developed f i r s t , t h i s would be an extremely embarrassing s i t u a t i o n f o r C. Itoh a f t e r they have committed to the Long Beach Project. This r e l a t e s to the e a r l i e r discussion on the Port of Long Beach choice of partners. P a r t i c i p a n t s were sought that would support the terminal development and a s s i s t the Port i n t h e i r " s e l l i n g " e f f o r t s to the other p a r t i c i p a n t s . (115) (d) Crowley Maritime Corporation Crowley Maritime Corporation (CMC) i s a d i v e r s i f i e d marine operating company. They concentrate p r i m a r i l y on support of the offshore o i l and construction industry as an owner of tugs, barges, supply boats, crew boats, offshore d r i l l i n g r i g s , and re l a t e d marine assets. Annual revenue for t h i s p r i v a t e l y owned company i s i n the region of 750 m i l l i o n U.S. d o l l a r s . The r o l e of CMC i n the LBICP i s p r i m a r i l y r e l a t e d to t h e i r marine management c a p a b i l i t i e s and knowledge of the shipping market. Their involvement i n the project i s also a r e s u l t of the excellent working r e l a t i o n s h i p they have established with the Port of Long Beach over a period of many years. CMC are the p r i n c i p a l tug/barge, lighterage, ship a s s i s t , construction, shipyard, and tour boat operator i n the San Pedro basin. Crowley also have a partnership with Metropolitan Stevedore Company (another LBICP partner) i n Stockton, C a l i f o r n i a regarding the ownership and operation of a bulk coal and copper concentrate loading f a c i l i t y which i s coming on stream l a t e r i n 1982 (see Chapter 3 f o r d e t a i l s of the Stockton terminal). The construction and operating knowledge CMC has gained from being the general contractor plus 50% owner on the Stockton project, and t h e i r excellent r e l a t i o n s h i p with Metropolitan, made t h i s company a natural choice f o r one of the p a r t i c i p a n t p o s i t i o n s . Crowley's p a r t i c i p a t i o n i n the conceptual study phase i s 7-1/2% . They w i l l maintain between 35 and 45% of the terminal ownership and operation (116) (the f i n a l share w i l l be set a f t e r negotiations between CMC and Metropolitan as to s p l i t t i n g the 55% American i n t e r e s t i n the terminal ownership). Crowley have acted as the marine consultant (along with C. Itoh) i n regard to ocean shipping rates and as part of the marine survey team. These e f f o r t s involved considerable time at Long Beach evaluating the approach and berthing channels at the project s i t e . CMC has a d d i t i o n a l l y i n d i c a t e d an i n t e r e s t i n the purchase and operation of dedicated super c o l l i e r s which would service the trade established i n the long term contracts between the end users and the U.S. West Coast suppliers. Ships to service t h i s trade may require s p e c i a l design and construction because of the narrow approach channels, low power cable, and bridge overhead clearances at the Long Beach s i t e . At the present time however, Crowley's r o l e comes clo s e s t to that of a pure investor i n t h i s p r o j e c t . They are looking to the terminal ownership and operation for a reasonable f i n a n c i a l return. The complementary business l i n e s i n which they would i n i t i a l l y be involved are minimal. This r o l e has turned out to be a very important part of the project conceptual development phase. Other partners (including Metropolitan Stevedore which w i l l be discussed i n the next section) could p o s s i b l y be biased by objectives which do not n e c e s s a r i l y r e l a t e to the terminal functioning as an independent p r o f i t making e n t i t y . The other partners' motivations could stem p a r t i a l l y from business l i n e s which are complementary to or resultant from the terminal operation per se. (117) Considering the terminal i n t h i s context may enable them to cross-subsidize low p r o f i t a b i l i t y on the terminal from other p r o f i t a b l e complementary business. (e) Metropolitan Stevedore Company Metropolitan Stevedore Company i s a p r i v a t e l y owned stevedore operator located i n Wilmington, C a l i f o r n i a . Along with an associated company i n Northern C a l i f o r n i a ( C a l i f o r n i a Stevedoring Si B a l l a s t ) i t represents the l a r g e s t stevedore group on the United States West Coast. Metropolitan presently handles a l l major bulks out of Long Beach at Pier G and Pier 218 f o r soda ash and other white bulks (see Chapter 3). Their p a r t i c i p a t i o n i n the LBICP i s based on: (a) t h e i r h i s t o r y of e x c e l l e n t performance i n the stevedoring of bulk cargoes for the Port of Long Beach; (b) t h e i r operational experience i n manpower planning; and (c) the need for t h e i r support to meet the Port of Long Beach objective of t r a n s f e r r i n g a l l coal from Pier G to the new f a c i l i t y . Metropolitan presently operate under a recently signed 10 year p r e f e r e n t i a l assignment agreement with the Port. Under t h i s agreement they maintain the r i g h t to handle a l l bulk cargoes at Long Beach based on an agreed t a r i f f schedule i n c l u d i n g lease costs and e s c a l a t i o n schedules for the Port supplied terminal equipment. As the new terminal i s planned to be on stream i n 1985, Metropolitan are being asked to turn over loading r i g h t s to coal products f o r which they presently hold p r e f e r e n t i a l assignment for the s i x f i n a l years of t h e i r contract with the port. The p a r t i c i p a n t s i n LBICP and PBT have undertaken to resolve t h i s issue with Metropolitan. The l i k e l y approach w i l l be to (118) compensate Metropolitan for the loss of p r o f i t s on the Pier G a n t i c i p a t e d coal cargoes i n excess of those p r o f i t s they w i l l make as a p a r t i c i p a n t i n the new terminal e n t i t y . This i s an extremely d i f f i c u l t issue to resolve and represents a major source of disagreement between the Port, Metropolitan, and the other partners. The si z e of Metropolitan (approximately 100 m i l l i o n U.S. d o l l a r s per year revenue) prevents them from taking a major equity p a r t i c i p a t i o n i n the ownership of the terminal. Their p a r t i c i p a t i o n i n the LBICP conceptual planning phase i s 7-1/2% and t h e i r p a r t i c i p a t i o n i n the ownership and operation of the terminal w i l l be l i k e l y 10% to 20%. In addition to being an owner of the terminal e n t i t y , Metropolitan w i l l provide contract and International Longshoremans and Warehouseman Union (ILWU) labour f o r the day-to-day terminal operation. The terminal operations management w i l l be by a PBT management board. Metropolitan's p r i n c i p a l r o l e i n the conceptual stage has been to assess the engineering designs i n terms of manpower requirements and recommend trade-offs between c a p i t a l and labour costs. This involvement has been c r i t i c a l i n developing the terminal design. The objective has been to combine state of the a r t technology with the background knowledge of West Coast stevedore p r a c t i s e s as they r e l a t e to labour i n t e n s i t y f o r d i f f e r e n t design c r i t e r i a . The differences of opinion on t h i s issue became so severe at one point i n the planning stage that a second engineering company had to be retained. Bechtel and Metropolitan each had designs which claimed to be more ope r a t i o n a l l y and labour e f f i c i e n t . As operating (119) costs represent an e s c a l a t i n g component, i t i s extremely important that the project maximizes the trade-off b e n e f i t s between c a p i t a l and a n t i c i p a t e d operating costs. An i l l u s t r a t i o n of the importance of having a stevedore operator as a p a r t i c i p a n t i s the f a c t that they recommended that no approaches be made to the ILWU i n regard to t h e i r assistance on manning l e v e l s for the d i f f e r e n t design c r i t e r i a . Apparently, i f brought i n very e a r l y i n the development process, the Union w i l l make every e f f o r t to press for a design which i s unnecessarily labour-intensive. A d d i t i o n a l l y , they w i l l have drawings and other materials which could be used to b u i l d a s o l i d defense to present to various labour boards when i t comes time to negotiate the manning for the project. The project used p r i m a r i l y Metropolitan generated manning l e v e l s with some further i n v e s t i g a t i o n done by NYK Line of Japan at the request of C. Itoh. NYK's e f f o r t s were to provide support that Metropolitan were making reasonable assumptions f o r the conceptual operating a l t e r n a t i v e s . 2. Contractor'Participants (a) Engineering Bechtel C i v i l and Minerals D i v i s i o n secured a contract with the LBICP to develop a conceptual design in c l u d i n g d e t a i l e d engineering drawings and s p e c i f i c a t i o n s . This information ultimately could be released as a b i d package. There was keen competition f o r t h i s work from other major engineering contractors such as Soros and Associates, Dravo, Fluor, Ralph Parsons, and Morrison-Knudsen. The engineering consultant i s to develop a (120) "state of the a r t " terminal subject to the following major co n s t r a i n t s : ( i ) Conceptual engineering costs are not to exceed $1 . 6 m i l l i o n . ( i i ) The terminal l o c a t i o n i s on an operating o i l f i e l d which w i l l need to be r e d r i l l e d , moved to d r i l l i n g i s l a n d s , and re-piped to a d d i t i o n a l storage areas without major production i n t e r r u p t i o n s . ( i i i ) The s i t e , 100 acres l e s s 30 acres required f o r the continuing o i l operation, i s minimal and w i l l require an extremely e f f i c i e n t design to meet the minimum 700,000 metric ton storage requirement f o r Phase I. (iv) The s i t e i s characterized by a h i s t o r y of subsidence as a r e s u l t of the continued o i l removal. The subsidence has already been as much as 8-10 f e e t i n some sections. With planned coal storage of 700,0001,000,000 metric tons, water r e - i n j e c t i o n i n t o the o i l wells w i l l need to be accurately forecast and monitored to ensure that a d d i t i o n a l subsidence does not adversely a f f e c t the tunnels, reclaim systems and conveyor routes. (v) The terminal s i t e and operation must be designed to meet or exceed the environmental p o l l u t i o n regulations and requirements i n e f f e c t i n the San Pedro Basin. (vi) The conceptual design must be formulated on a negotiated basis with Metropolitan Stevedore. The f u l l b e n e f i t of (121) Metropolitan's labour knowledge and experience must be taken in t o account i n designing a l l phases of the operation. ( v i i ) C e r tain minimum throughput quantities per hour and minimum equipment requirements were set by the engineering committee i n c l u d i n g but not l i m i t e d to: (a) at l e a s t 1 dual rotary car dump with indexer; (b) 1 complete r a i l loop track capable of holding a 100-car unit t r a i n with a s i d i n g f o r an extra 50-cars; (c) stacking and reclaiming at a minimum rate of 10,000-12,000 tons per hour with at l e a s t two units and preferably more; and (d) shiploading at 10,000-12,000 tons per hour with at l e a s t 2 ship loaders and preferably more. ( v i i i ) The terminal c a p i t a l cost should not exceed $180 m i l l i o n ( i n 1982 d o l l a r s ) . During the conceptual phase engineering Bechtel w i l l be p r i m a r i l y i n v e s t i g a t i n g the following major areas of development:^ (i ) Design C r i t e r i a - Latest technology automation - Degree of standardization - Plant c l e a n l i n e s s - M a i n t a i n a b i l i t y - System s i m p l i c i t y , f l e x i b i l i t y , and a v a i l a b i l i t y ( i i ) Preliminary design ( i i i ) M a t e r ial flow diagrams (iv) Operations simulation (v) Major equipment l i s t (122) (vi) Major s i n g l e l i n e diagrams ( v i i ) General arrangement layouts, conveyor p r o f i l e s and a l t e r n a t i v e s as required to support the f i r m p l o t plan. ( v i i i ) Preparation of a report i n c l u d i n g cost estimate, schedule, and drawings. (ix) Basis f o r environmental permitting. During the course of t h e i r conceptual engineering work Bechtel recommended a number of a l t e r n a t i v e s f o r proceeding with the f i n a l construction and development phase of the pr o j e c t . Their p r i n c i p a l recommendation was that Bechtel be retained on an A & E contract basis ( a r c h i t e c t and engineering services c o n t r a c t ) . Under t h i s concept (which i s b a s i c a l l y cost plus) Bechtel would provide o v e r a l l project management. They i n d i c a t e t h i s would allow the greatest a t t e n t i o n to be focused on compliance with equipment design c r i t e r i a and s p e c i f i c a t i o n s . They would submit a b i l l i n g according to actual manpower used, subcontractor costs, and materials consumed plus an agreed l e v e l of p r o f i t according to the following r e s p o n s i b i l i t i e s : ( i ) I n i t i a l contractors studies. ( i i ) Engineering ( i i i ) Procurement - Purchasing - Inspection - Expediting - T r a f f i c and material l o g i s t i c s - Contract administration (iv) Construction (v) Construction management (vi) Pre-operational t e s t i n g (123) ( v i i ) S t a r t up ( v i i i ) Operations (ix) Financing services. With t h i s system, once the f i n a l design c r i t e r i a had been approved by the developers, Bechtel would take over the f i n a l engineering, and construction management. They would b a s i c a l l y hand over a completely up and running terminal to the terminal owners. I t can be argued that t h i s represents the most e f f i c i e n t method of maintaining exacting s p e c i f i c a t i o n s and requirements. The partners i n PBT f e l t that t h i s concept r e l a t e s more to a government sponsored contract which may not be as concerned with the l e v e l of costs as with adherence to s p e c i f i c a t i o n s . The project LBICP and PBT groups decided the A & E concept would not be used. They w i l l l i k e l y proceed on the basis of asking for lump sum quotations from major engineering companies according to a Design and Construct contract. With a Design and Construct concept, the Engineering Sub-Committee would release formal Request For Proposal (RFP) packages developed by Bechtel as p r o j e c t Engineer. These packages would include the f o l l o w i n g : 8 ( i ) Instructions to Bidders. ( i i ) Information for Bidders. ( i i i ) Agreement Form. (iv) Project General Conditions. (v) Project Special Conditions. (vi) P r i c i n g and Contract Data. (124) ( v i i ) Equipment Technical S p e c i f i c a t i o n s . ( v i i i ) Scope of Work and Drawings. The RFP would include s u f f i c i e n t d e t a i l i n a l l respects to allow i n t e r e s t e d contractors to develop a l l - i n c l u s i v e turnkey r e p l i e s . Major f i n a n c i a l l y secure construction companies such as Dravo, Fluor, Bechtel, Parsons, Morrison-Knudsen, would submit a lump sum b i d package based on equipment drawings and s p e c i f i c a t i o n s i n response to the request f o r b i d proposal. Their costs would be non-escalating to the greatest extent p o s s i b l e with some exceptions allowed on items they f e l t were beyond t h e i r c o n t r o l . With t h i s concept the majority of the construction cost e s c a l a t i o n r i s k i s s h i f t e d to the Contractor. In better economic times contractors would not b i d on t h i s b a s i s . The present worldwide economic slump, however, has most of these major engineering firms aggressively seeking new business opportunities. They have sizeable s t a f f s that are presently under u t i l i z e d . Although the cost of responding to a project of t h i s magnitude i s i n the range of $250,000 to $1,000,000, t h i s present market s i t u a t i o n allows companies to undertake the response as t h e i r labour costs are sunk and the other costs of preparation are not high. The developers expect to f i n d a number of w i l l i n g contractors to b i d on t h i s b a s i s . There w i l l l i k e l y be need f o r a small engineering group ( l i k e l y one of the partner companies) to oversee the design and construct basis (should the p r o j e c t proceed to completion). A close watch w i l l need to be kept to ensure the contractor i s meeting the equipment s p e c i f i c a t i o n requirements (125) and design c r i t e r i a . These r e l a t e very importantly to the environmental and operational aspects of the terminal development. (b) Environmental Permitting The p r o j e c t retained Enviro-sphere Ebasco as the environmental consultant and processor of the environmental a p p l i c a t i o n s . The environmental aspects of the permitting process are c r i t i c a l as the project i s introducing state of the a r t operations technology to the permitting agencies. If these new technologies and designs are not completely elucidated to the environmental consultant at the outset of the project, the environmental impact report/environmental impact statement (EIR/EIS) may be inadequate. The project may then either f a i l to achieve i n i t i a l permitting, or encounter interminable delays at a number of the permitting stages. Such delays could eventually consume a l l a v a i l a b l e development funds and time a l l o c a t e d f o r the project. Enviro-sphere has indic a t e d they envision the EIR/EIS not only as a l e g a l requirement but more generally as a planning t o o l . This can a s s i s t the proj e c t developers i n s t r u c t u r i n g the f i n a l design for maximum benefit at minimum environmental cost. If completed i n a timely manner, the documents may also provide a data base and impact analysis which could continue to provide guidance f o r mitigations that would condition coal supply agreements and subsequently proposed s i t e expansion p r o j e c t s . Enviro-sphere has brought to the attention of the project group that under the C a l i f o r n i a Environmental Quality Act (CEQA), permitting i n the South (126) Coast A i r Basin and permitting under the authority of the C a l i f o r n i a Coastal Commission i s unique from any other place i n the United States. A d d i t i o n a l l y Enviro-sphere has r a i s e d the following c r u c i a l items: ( i ) A project of t h i s magnitude has not been previously addressed i n a Southern C a l i f o r n i a EIR/EIS and s u c c e s s f u l l y permitted. ( i i ) I t i s important that the EIR/EIS demonstrate that the s i g n i f i c a n t adverse environmental impacts to the Southern C a l i f o r n i a urban public can be mitigated when these same people may receive l i t t l e of the economic benefit of the p r o j e c t . ( i i i ) R a i l transportation a n a l y s i s , r a i l t r a f f i c a n a l y s i s , r a i l c o r r i d o r noise, and associated a i r q u a l i t y elements i n the EIR/EIS w i l l d i r e c t l y a f f e c t more people i n the Los Angeles basin than the e n t i r e population of some of the supplying States. (iv) The Long Beach Coal Terminal Project cannot be considered a s i n g l e s i t e p r o ject. It i s r e a l l y a multiple EIR/EIS i n that the coal terminal project generates a large amount of l i n e a r impact. The environmental analysis must be devoted to the t o t a l l i n e a r transportation c o r r i d o r which comprises a multitude of interconnected s i t e s . (v) Interaction between the environmental consulting group and the engineering design contractor are v i t a l as the economic trade-o f f s f or t h i s project w i l l be the hinge point of any EIR/EIS. (127) The project must be j u s t i f i e d economically and the impacts mitigated p r a c t i c a l l y . Unless the project can be demonstrated to generate s u f f i c i e n t economic benefits to pay for the a n t i c i p a t e d substantial m i t i g a t i o n measures, the project w i l l u n l i k e l y be able to receive permitting or developer approval. The general r e s p o n s i b i l i t y and r o l e of the environmental consultant w i l l be as follows: ( i ) Assemble a thorough d e s c r i p t i o n of the proposed project i n c l u d i n g environmental protection systems, planning, and economic a n a l y s i s . ( i i ) I d e n t i f y , review, and assess a l l relevent environmental data i n order t o : (a) Summarize the data base, focusing on the regional areas p o t e n t i a l l y a f f e c t e d by the project, (b) I d e n t i f y and discuss s e n s i t i v e environmental features, (c) I d e n t i f y data gaps, (d) I d e n t i f y and discuss environmental features that can a f f e c t the project conduct and the design of subsequent development plans. ( i i i ) I d e n t i f y , describe, and place i n perspective a l l p o t e n t i a l environmental concerns associated with the Long Beach Coal terminal p r o j e c t . (iv) Recommend m i t i g a t i n g measures. (v) Evaluate f e a s i b l e a l t e r n a t i v e plans (vi) Discuss other planning considerations i n c l u d i n g : (128) (a) p o t e n t i a l growth-inducing impact (b) boundary of the p o t e n t i a l l y a f f e c t e d area (c) r e l a t i o n s h i p between short term uses and long term p r o d u c t i v i t y (d) i r r e v e r s i b l e and i r r e t r i e v a b l e commitments of resources (e) energy consumption (f) a esthetics. ( v i i ) F i l e f o r and monitor the completion of necessary environmental permits from the relevant agencies. (c) Geotechnical Consultant The geotechnical consultant for the project i s Ertech Western (formerly Earth Technology Corporation). Although not a major component of the conceptual study i n terms of cost, t h i s geotechnical analysis represents an important i n i t i a l element of the design and costing program. The proposed s i t e i s located on an operating o i l f i e l d characterized by considerable subsidence due to removal of large quantities of o i l . Water has been r e i n j e c t e d into the wells to support the stable surface e l e v a t i o n . A d d i t i o n a l l y , there are a considerable number of underground waste sumps used by the o i l f i e l d operation which can further act to d e s t a b i l i z e the s o i l conditions. The geotechnical analysis w i l l determine the v e r t i c a l and l a t e r a l s t a b i l i t y of the s o i l . It w i l l also complete shear t e s t s to determine how far beyond the coal storage p i l e surface l o c a t i o n s subterranean movements can be expected. (129) There are many p i p e l i n e s running through t h i s area which would be affected through l a t e r a l movements i n the s o i l . This requires a quadrant examination of the complete area to determine what e f f e c t s can be a n t i c i p a t e d and proposed solutions to these problems. The o i l well removal and r e d r i l l i n g process w i l l include a very large amount of underground water pumping/reinjection equipment which w i l l be examined i n the quadrant a n a l y s i s . A d d i t i o n a l l y along the p i e r face there i s a subterranean dike which w i l l need to be sheet p i l e d or otherwise contained to prevent the s o i l from sloughing i n t o the harbour channel. The primary r o l e of the geotechnical consultant w i l l be to provide input fo r the engineering and design contractor s p e c i f y i n g where the major d i r e c t loads should be placed i n r e l a t i o n to unstable s o i l areas and sumps. The geotechnical contractor w i l l also recommend methods of preventing the s o i l subsidence and shear movements which can be evaluated i n comparison with a l t e r n a t i v e engineering or construction costs. A l l of the geotechnical analysis w i l l be done on the basis of d r i l l i n g core samples and the l i n e a r vane shear t e s t . (d) F i n a n c i a l Advisor/Consultant The I n d u s t r i a l Bank of Japan (IBJ) has been retained as the f i n a n c i a l advisor for the p r o j e c t . The Bank was h i r e d because of i t s s i g n i f i c a n t experience i n the financing of large coal port projects throughout the world and i t s consequent close r e l a t i o n s h i p s with the major Japanese coal users. IBJ has been a c t i v e l y involved i n the promotion, development, and financing of major mine and port f a c i l i t i e s i n A u s t r a l i a , South A f r i c a , (130) Peoples Republic of China, L a t i n America, and South America. They have a large data base regarding the needs of the eventual users and have made a s i g n i f i c a n t c o n t r i b u t i o n towards the project's progress. Their r e s p o n s i b i l i t y i s to develop a d e t a i l e d f i n a n c i a l pro-forma based on the a n t i c i p a t e d construction and development costs, and timing of these expenditures. They are charged with developing a l t e r n a t i v e programs which minimize the l i a b i l i t y exposure of the p a r t i c i p a n t s while providing the p r o j e c t with the lowest possible funding costs a v a i l a b l e i n the present market. Once a f i n a n c i a l mix i s accepted by the project developers, the I n d u s t r i a l Bank of Japan w i l l a c t i v e l y p a r t i c i p a t e i n the securing of funds and negotiating of contracts with the ultimate lending i n s t i t u t i o n s . (e) O i l F i e l d Operator Champlin O i l (a Union P a c i f i c Subsidiary) presently operate a major o i l production f i e l d on the proposed project s i t e . Although committed to a s s i s t the project i t appears they have been les s than t o t a l l y cooperative. Champlin 1981 revenues were 4 b i l l i o n d o l l a r s which makes them U.P.'s most i n f l u e n t i a l d i v i s i o n . They may not f e e l the $2-5 m i l l i o n annual lease revenue i s important enough to r i s k i n t e r r u p t i o n s to t h e i r d r i l l i n g and production operations on the s i t e . There are 22 production wells, 15 water i n j e c t i o n wells, 8 water disposal wells, 4 water source wells, a waste water treatment plant, and numerous (131) p i p e l i n e s throughout the area which must be moved. The major problem i s that Champlin have demanded that these u n i t s be moved with the absolute minimum d i s r u p t i o n to production. The r e l o c a t i n g and r e d r i l l i n g process w i l l s u b s t a n t i a l l y improve the f i e l d operation and increase the production p o t e n t i a l . Champlin, however, have been reluctant to give the p r o j e c t c r e d i t f or these improvements as they represent unbudgeted expenditures f o r improvements Champlin would not otherwise make to t h i s operation. (f) Secondary Engineering Contractor Early i n the engineering conceptual design by the Bechtel group, Metropolitan Stevedore had s i g n i f i c a n t problems with the type of coal reclaiming methods Bechtel were proposing. This d i f f e r e n c e of opinion between the design engineer and operating partner became so s i g n i f i c a n t that i t was hampering the development plans and s t a l l i n g the group's a b i l i t y to proceed on schedule with the f i n a l engineering and design. Metropolitan's opinions are given considerable weight by the partners and i t was agreed that a second engineering contractor would be h i r e d to work with Metropolitan to develop an a l t e r n a t i v e to the Bechtel reclaim scheme. Comparative costs and environmental impacts between the systems could then be evaluated. The Bechtel proposal involved above ground combination stacker reclaimer units with a very large diameter high speed bucket wheel reclaimer. The Metropolitan proposal involved a completely underground reclaim fed by rotary plow feeders and gravity through the bottom of the stock p i l e . Metropolitan claimed t h e i r system s i g n i f i c a n t l y reduced: (1) manpower; and (2) p o l l u t i o n e f f e c t s . (132) To a s s i s t Metropolitan i n the development of t h e i r a l t e r n a t i v e proposal, Conveyco Engineering of Covina, C a l i f o r n i a was retained. Conveyco s p e c i a l i z e s i n conveyor and bulk handling systems, and have done considerable previous work f o r Metropolitan and the Port of Long Beach. Within very t i g h t time c o n s t r a i n t s , the Metropolitan/Conveyco proposal was quickly and expertly developed. The Engineering Sub-Committee were put i n the p o s i t i o n of deciding between c o n f l i c t i n g engineering designs. Bechtel did not want t h e i r design repudiated by the e f f o r t s of a small engineering and stevedore company. This could have serious impacts on t h e i r future marketability f o r major coal terminal p r o j e c t s . Bechtel expanded t h e i r design group to include a number of project development and marketing s t a f f to a s s i s t i n defending t h e i r design. In the f i n a l analysis the costs were d i f f i c u l t to compare. P r i o r to the Metropolitan/ Conveyco presentation Bechtel had revised t h e i r scheme and reduced t h e i r costs. At the same time Bechtel completed a study on the Metropolitan a l t e r n a t i v e which they costed s i g n i f i c a n t l y higher than Conveyco. The environmental impacts were not s u b s t a n t i a l l y d i f f e r e n t between the two schemes and i t was f i n a l l y agreed that there was enough differ e n c e i n favour of the Bechtel scheme to proceed with t h e i r program. (g) Systems Consultant To support the operational c r e d i b i l i t y of the conceptual design the developers desired a simulation model be developed. This model would generate important r e s u l t a n t v a r i a b l e s such as ship and t r a i n queues, equipment u t i l i z a t i o n , and s t o c k - p i l e size f or d i f f e r e n t design c r i t e r i a . (133) The r e s p o n s i b i l i t y f o r developing and implementing the model f e l l within the r e s p o n s i b i l i t i e s of the Engineering Sub-Committee. I t was part of the Bechtel engineering contract. Bechtel retained Reese-Chambers Consultants Inc. from Los Angeles. This company had just completed a model for the Port of Long Beach concerning the expansion of Pier G. Bechtel b a s i c a l l y transposed the Reese-Chambers model onto Bechtel hardware and changed the inputs. Despite some questions regarding Bechtel's inputs and assumptions i n the model, i t proved to be an invaluable management t o o l . Certain designs or equipment groups could be immediately eliminated from consideration as the terminal simulation could a s s i s t i n i d e n t i f y i n g areas where the p a r t i c u l a r design would not meet minimum operating c r i t e r i a . C. SUMMARY The number and complexity of the problems involved i n the terminal development r e i n f o r c e the multi-dimensional aspect of a transportation problem. The previous sections have described the subcontracts needed by the developers i n d i s c i p l i n e s such as engineering, finance, geotechnical, environmental assessment, and management science. The problems i n each of these areas were outside the c a p a b i l i t i e s of the developer group. This presents an i n t e r e s t i n g point. In r e s o l v i n g the multi-dimensional transportation problem, i t i s acceptable (and necessary) to subcontract the d e t a i l e d problems for various d i s c i p l i n e s . This does not mean the owner/developers are any l e s s responsible for the r e s u l t . The subcontractors l i k e a l l other aspects of the development, must be managed. (134) The management of a large terminal development or other large transport p r o j e c t i s a d i f f i c u l t r e s p o n s i b i l i t y . To manage the p r o j e c t s u c c c e s s f u l l y i s a function of the a b i l i t i e s of the management i n d i v i d u a l s , and t h e i r organizational structure. As the number of owners p a r t i c i p a t i n g i n a project increases the management structure becomes in c r e a s i n g l y important. Considerably more i n t e r n a l organizational issues can obstruct the progress on external issues and problems. PART II - MANAGEMENT STRUCTURE In t h e i r "International"Survey of Business Opinion and Experience", Bivins and L o v e l l recorded that " P a r t i c i p a t i o n by several partners not only allows greater resources to be amassed but also encourages a more r e a l i s t i c a l l o c a t i o n of r e s p o n s i b i l i t i e s on the basis of 'real * contributions rather than the conventional or a r t i f i c i a l one that frequently r e s u l t s from a simple 50-50 partnership or a minority-majority arrangement between two p a r t i e s . " 9 A j o i n t venture to develop a terminal the size and scope envisioned i n t h i s p r o j e c t could be operated under a number of management structures. The partners i n both the LBICP and PBT j o i n t ventures decided on committee management as the means to best accomplish the objectives of the project i n l i g h t of the d i f f e r i n g inputs from the p a r t i c i p a n t partners. Comments on how well t h i s program has functioned and other management frameworks which may work i n a s i m i l a r s i t u a t i o n w i l l be made at the end of t h i s s e c t i o n . Figure 4.1 depicts the organizational structure f o r the LBICP j o i n t venture while Figure 4.2 ind i c a t e s the j o i n t venture structure f o r PBT. In the LBICP (135) each of the committees were made up of one member and one alternate from each partner. As the Port was the project co-ordinator t h e i r member was designated as the i n i t i a l chairman on each committee. A Letter of Understanding (LOU) dated the 7th of July, 1981, formally established the J o i n t Committee for the purpose of undertaking the LBICP conceptual and design stage. A Memorandum of Agreement (MOA) dated September 25th, 1981, formally established the PBT J o i n t Venture and set f o r t h the p r i n c i p l e s by which the Terminal Operating E n t i t y (TOE) would be formed. As these two j o i n t ventures are s i g n i f i c a n t l y d i f f e r e n t they w i l l be discussed i n separate sections. A. LONG"BEACH INTERNATIONAL COAL PROJECT 1. Joint"Committee The Letter of Understanding dated July 7th, 1981 established a J o i n t Committee c o n s i s t i n g of one member from the Port of Long Beach, Upland Industries, Crowley Maritime Corporation, Metropolitan Stevedore Company, and C. Itoh. This J o i n t Committee met i n i t i a l l y to decide the organizational structure for the project management. They formed an Executive Committee which would have o v e r a l l control and authority i n the p r o j e c t . A number of f u n c t i o n a l sub-committees were also established i n the engineering, finance, marketing, environmental, government regulations, and l e g a l areas. Each of these sub-committees reported to the Executive Committee. The objective of the executive committee was to manage the conceptual design and planning program. According to the Letter of Understanding the r e s p o n s i b i l i t i e s of the Executive Committee were as follows (136) ( i ) To review from time to time the projected demand for U.S. Western c o a l . To i d e n t i f y and, to the extent p o s s i b l e , s o l i c i t commitments from the end users of t h i s coal i n Japan and other P a c i f i c Rim countries. ( i i ) To review and report on the conditions of the r e c e i v i n g terminals i n Japan and other countries. ( i i i ) To review and advise on the desirable vessel s i z e s , equipment and scheduling. (iv) To search out and obtain commitments f o r the f i n a n c i a l resources required to construct the Terminal. (v) To a s s i s t and advise i n developing and completing the various agreements to be concluded between a l l interested p a r t i e s r e l a t e d to the construction and operation of the p r o j e c t . (vi) To monitor, a i d , and a s s i s t the progress of the design of the terminal and the obtaining of government permits. ( v i i ) To ensure that each member of the executive committee makes a v a i l a b l e and shares with other members of the committee relevant information on the economic f e a s i b i l i t y of the p r o j e c t . On behalf of the p a r t i c i p a n t s , the Executive Committee i s responsible f o r developing a s t r a t e g i c plan. Included i n t h i s plan w i l l be a c r i t i c a l path. This scheduling t o o l w i l l a s s i s t i n allowing the project to (137) accomplish the objectives of determining the f e a s i b i l i t y of t h i s terminal l o c a t i o n within the time and budget c o n s t r a i n t s . The Executive Committee w i l l meet at l e a s t quarterly and on an ad hoc basis as necessary. At these meetings they w i l l resolve major c o n f l i c t s i n any of the sub-committees and make decisions regarding the development issues. Voting i n t h i s committee i s on a majority basis with the Port of Long Beach maintaining a t i e break vote. 2. J o i n t Co-ordinators o f the Executive Committee To f a c i l i t a t e the day-to-day decision making required to support the sub-committees, the Executive Committee established two j o i n t co-ordinators as an operating arm. One of the j o i n t co-ordinators i s a Commissioner of the Port of Long Beach, and the other i s a senior executive of C. Itoh & Company i n Japan. The major r e s p o n s i b i l i t i e s of the j o i n t co-ordinators are to coordinate the a c t i v i t i e s of the committees i n an manner that project goals are met on schedule. They also must f e r r e t out the problems and concerns of the committees and i n d i v i d u a l p a r t i c i p a n t s as they r e l a t e to the p r o j e c t . Problems must be resolved quickly to avoid delays to the time schedule set by the Executive Committee. A d d i t i o n a l l y , they have authority to a s s i s t i n pressure points or bottlenecks i n the development program through the following means: (i ) Applying extra resources when required. (138) ( i i ) Dealing d i r e c t l y with one or more partners on i n d i v i d u a l and c o n f i d e n t i a l matters r e l a t i n g to the project and/or the Port where items need to be negotiated outside of the committee process. ( i i i ) I n i t i a t i n g a l t e r n a t i v e i n v e s t i g a t i o n s ( p r i n c i p a l l y i n the f i n a n c i a l areas) outside of the committee purview i n an e f f o r t to improve the o v e r a l l cost of financing for the p r o j e c t . 3. Engineering Sub-Committee The Engineering Sub-Committee had i n i t i a l r e s p o n s i b i l i t y f or s e l e c t i n g the major engineering and geotechnical sub-contractors. The Committee then concentrated on managing and monitoring the conceptual design and engineering work. S i g n i f i c a n t a ttention was paid to the cost parameters. I t was important that t h i s committee draw information from the marketing, environmental, and other sub-committees to ensure the terminal design was consistent with regulatory requirements and the needs of the f i n a l users. The Engineering Sub-Committee was also assigned the task of estimating the operating costs f o r the recommended terminal design. This included an examination of the p o t e n t i a l trade-offs between labour and c a p i t a l costs. The Executive Committee expected the Engineering Sub-Committee to provide major inputs with respect to the terminal conceptual design, c a p i t a l costs, operating costs, b i d and construction process, and the construction timing schedule. A c t i v i t i e s at the time of t h i s w r i t i n g have spanned 12 months. The progress has involved s i g n i f i c a n t d ifferences between the partners which were ul t i m a t e l y a r b i t r a t e d by e i t h e r the j o i n t coordinators or the Executive Committee. (139) Finance Sub-Committee The objective of the Finance Sub-Committee i s to recommend a f i n a n c i a l package which represents the l e a s t cost to the developers with minimum partner l i a b i l i t y . The committee b a s i c a l l y i s a r e p o r t i n g mechanism through which the project f i n a n c i a l advisor ( I n d u s t r i a l Bank of Japan) presents a l t e r n a t i v e financing schemes. A base case cash flow model was developed. A s e n s i t i v i t y analysis was performed on c r i t i c a l project v a r i a b l e s such as the forecast tonnages, c a p i t a l costs, operating costs, and throughput charges. IBJ and the Committee also prepared proposals o u t l i n i n g d i f f e r e n t l e v e l s of equity p a r t i c i p a t i o n and ownership a l t e r n a t i v e s . Although the sub-committees report to the Executive Committee of the LBICP, t h e i r f i n a l recommendations also need to be approved by the PBT management committee. If the project proceeds to construction i t w i l l be the PBT partners who assume f i n a n c i a l and operating r e s p o n s i b i l i t y f o r the terminal. Marketing"Sub-Committee The Marketing Sub-Committee i s responsible for i n v e s t i g a t i n g the market for terminal services i n the United States and Japan. The Committee has been r e l a t i v e l y i n a c t i v e as PBT was a l l o c a t e d project funds to complete a major marketing study. This would give the p r i v a t e partners an opportunity to be d i r e c t l y involved i n the market assessment. The PBT study would report through the Marketing Sub-Committee. PBT and the Sub-(140) Committee also used the p a r t i c i p a n t partners as sources to secure information concerning p o t e n t i a l competing terminals with development plans on the West Coast. A l l presentations to the Executive Committee were made by PBT as an arm of the Marketing Sub-Committee. 6. Environmental~sub-Committee The primary assignment of t h i s sub-committee was to secure the services of an environmental consultant. The consultant would be responsible f o r completing the environmental, s o c i a l , and p o l i t i c a l analysis required to f i n a l i z e the Environmental Impact Report and Environmental Impact Statement (EIR/EIS). With Envirosphere-Ebasco retained to complete the permitting a c t i v i t i e s , the other functions of t h i s committee were done under the auspices of the Port Planning and Environmental Group. This group has had s i g n i f i c a n t experience i n "managing" environmental permitting processes f o r other p r o j e c t s . I t i s important that p u b l i c hearings and/or announcements and/or advertisements are made i n d i c a t i n g the l e v e l of benefits achieved by the community through the ant i c i p a t e d p r o j e c t and how any adverse environmental a f f e c t s w i l l be mitigated. This group w i l l also use t h e i r data base and considerable experience i n these matters to make recommendations to the Executive Committee on appropriate trade-offs between environment r e l a t e d c a p i t a l expenses and design change costs. Timing was important i n a l l committees due to the constraints established by the scheduling program. There were a d d i t i o n a l urgent time pressures i n the environmental group as major Federal and State changes are (141) contemplated i n the environmental permitting procedure. The major concern r e l a t e s to a New Source Review Act change i n Regulation 13. This change, as i n i t i a t e d by changes i n the Clean A i r Act, would require a terminal or stationery p o l l u t a n t source to include p o l l u t a n t s from the r a i l r o a d , ships, and other t r a n s i t sources i n t h e i r permitting process. Presently these t r a n s i t sources are not included i n measuring the terminal p o l l u t i o n . This change would put the project considerably i n excess of the allowable p o l l u t i o n l i m i t s i n the Southern C a l i f o r n i a San Pedro basin. If the permit process could be f i l e d by August 1st, 1982, there was a reasonable chance that the project could be "grandfathered" and exempted from complying with the new regulations expected to go into e f f e c t l a t e i n 1982. 7. Legal'Sub-Committee The Legal Sub-Committee was p r i m a r i l y charged with ensuring that a l l of the j o i n t venture documents and p a r t i c i p a n t agreements were duly authorized, signed, and notarized. The developers desired to avoid any charges of d i s c r i m i n a t i o n and/or other l e g a l infringements as a r e s u l t of the Port's p u b l i c status. As most of the exogenous l e g a l requirements would be determined by the Port as a public body, the Legal Sub-Committee was managed by the Long Beach C i t y Attorney's O f f i c e . This o f f i c e functions f o r the Port on a day-to-day b a s i s . The problems i n v o l v i n g the p r i v a t e partners were minimal and r e l a t e d to the avoidance of any l i a b i l i t y due to v i o l a t i o n of municipal laws r e l a t i n g to the Port functioning as a member of the group. (142) The Legal Sub-Committee also worked with the Finance Sub-Committee to determine the l e g a l impacts regarding the question of partnership versus corporation. The analysis included tax and l e g a l implications of each of these organization types. 8. Government Affairs"Sub-Committee This Committee was f a i r l y i n a c t i v e during the conceptual/planning phase. It was formed with the i n t e n t i o n of combining the resources of the p a r t i c i p a n t s i n terms of t h e i r l o b b y i s t s i n Washington and Sacramento and t h e i r p o l i t i c a l action committees. The developers recognized the need to have accurate and timely information r e l a t i n g to governmental process and/or change that could a f f e c t the terminal development. As t h i s was more a monitoring function during the conceptual phase, the Committee met f a i r l y i n f r e q u e n t l y . They were p r i n c i p a l l y concerned with the following two major items i n the Congress: ( i ) The Port User Charge Controversy — This r e l a t e s to fees f o r maintaining and dredging channels and ports. There i s a B i l l i n the House that would preserve the status quo (the Federal Government pays f o r project and maintenance dredging) by d i v e r t i n g a share of Customs fees to the dredging budget. A n a t i o n a l user charge would discriminate against Long Beach (where l i t t l e dredging i s required and w i l l be c a p i t a l i z e d as a p r o j e c t expense). Under a National User Charge system the Port would be s u b s i d i z i n g deepening/maintenance projects i n other ports through charges against coal which are estimated (143) at 50f£ per ton -' 0 (there would be d i f f e r e n t charges for d i f f e r e n t commodity groups). ( i i ) The e x p i r a t i o n and reenactment of the Clean A i r Act — Ships and t r a i n s could discontinue being considered as t r a n s i t sources and would be counted as part of the stationary terminal source. This would s i g n i f i c a n t l y impact the p r o j e c t ' s a b i l i t y . t o receive permitting approval. B. PBT"JOINT VENTURE The PBT J o i n t Venture was formed by a Memorandum of Agreement dated the 25th of September 1981. I t i s an agreement between Crowley Maritime Corporation, C. Itoh & Company, and Metropolitan Stevedore Company. The agreement formally recognizes that these companies have been selected by the Port to create a terminal operating e n t i t y and operate the proposed terminal. It i s the desire of a l l p a r t i e s i n the LBICP that the majority terminal ownership be American. The agreement s p e c i f i e s that C. Itoh would own 45% of PBT, and CMC and Metropolitan would own 55% to be divided as agreed f i n a l l y between them. The purpose of the agreement was to set f o r t h a mutually s a t i s f a c t o r y understanding of the p r i n c i p a l s by which the terminal operating e n t i t y would be formed, owned, and operated. This was i n reference to a number of sections of the Letter Of Understanding which formed the LBICP. PBT w i l l eventually own and operate the proposed terminal. The terminal a c t i v i t i e s w i l l be p r i m a r i l y storage of coal for t r a n s i t , unloading of (144) r a i l cars, unloading other modes of land transportation, and loading of ships and other forms of ocean transportation. The terminal owners w i l l also be responsible f o r furn i s h i n g q u a l i t y and quantity c o n t r o l s , tug se r v i c e s , bunkering, supply boats, and other marine services to vessels using the terminal. Environmental protections, clean up se r v i c e s , safety s e r v i c e s , and f i r e p r otection w i l l also be part of the terminal r e s p o n s i b i l i t i e s . The PBT partners at the time of the signing of the Memorandum Of Agreement were unable to decide upon a partnership or corporation so t h i s point was l e f t open. I t was agreed that voting would be on a majority basis to protect the i n t e r e s t of the American majority. This was important considering the C. Itoh ownership may be d i l u t e d i f Japanese cement and u t i l i t y companies obtain minor shareholdings. The management of PBT i s by a committee c o n s i s t i n g of two members from each of the partners. A d d i t i o n a l l y i t was agreed that as the development proceeds towards the construction and operation stage, the r e s p o n s i b i l i t i e s would be shared as follows: marketing would be principally.undertaken by C. Itoh; the marine a c t i v i t i e s managed by CMC, and the stevedoring labour a c t i v i t i e s d i r e c t e d by Metropolitan. C. EFFECTIVENESS OF MANAGEMENT STRUCTURES In the case of PBT i t appears reasonable that the Management Committee structure w i l l be one that can solve major problems. This Committee i s c e r t a i n to have senior management representation from each of the p a r t i c i p a n t s given the p o s s i b i l i t y of committing to share of a 250 m i l l i o n (145) d o l l a r expense. The requirement f o r sub-committees i n i t i a l l y i s eliminated as a l l decisions w i l l be handled by members of the Management Committee. The construction and operation w i l l be based upon c r i t e r i a already agreed by the LBICP members. The operating management i s usually l e s s d i f f i c u l t than the conceptual development management. In the case of the larger Long Beach International Coal Project J o i n t Venture, the committee management structure may not be the most e f f e c t i v e means of completing the design/planning schedule on time. The committee process i s cumbersome at best. In a large project of t h i s nature with multiple p a r t i c i p a n t s , the time required for a committee to function and make decisions can become unreasonable. With the objectives and budget fo r the study and design phase well defined, i t did not n e c e s s a r i l y require t o t a l p a r t i c i p a t i o n of each of the partners i n a l l of the committees during t h i s phase. Committee decisions are only as good as the a b i l i t i e s and authority of the committee members. Due to the s i g n i f i c a n t t r a v e l schedules of most of the senior management of the partner companies, many of the committee meetings were attended by alternates who were i n some cases not prepared to make major binding decisions. This meant that major committee decisions were often deferred u n t i l such time as the absent senior executive could be informed of the background to the problem. Late responses tended to include q u a l i f i e d decisions r e q u i r i n g e i t h e r considerably more communication or another meeting to f i n a l l y resolve the problem. A d d i t i o n a l l y , i n the case of such a large number of p a r t i c i p a n t s there (146) appears to be "psychology of meetings". Each of the p a r t i c i p a n t s has a need to make some contribution otherwise the requirement for t h e i r attendance could be questioned. Louis Stern i n h i s discussion of r o l e s f o r channel analysis i n d i c a t e s : "The concepts of p o s i t i o n s and associated r o l e s are basic to understanding the r e l a t i o n s h i p s of members i n a s o c i a l system."'''' A large j o i n t venture involves r o l e s of i n d i v i d u a l s within t h e i r respective organizations and r o l e s of organizations within the j o i n t venture system. Often the discussion topics become in c r e a s i n g l y complex and tangents representing one p a r t i c u l a r point of view are investigated to insure compliance with a l l the wishes of the p a r t i c i p a n t s . A p o s i t i v e aspect of t h i s approach i s that the p a r t i c i p a n t s have an opportunity to be d i r e c t l y involved i n the decision making process. Once decision/problem hurdles are overcome, the development program can continue, confident that progress i s being made toward an eventual conclusion. The negative aspect of t h i s approach i s the time required to deal with a l l p a r t n e r - o r i g i n a t i n g concerns. In t h i s p r o j e c t the s i g n i f i c a n t e f f o r t s of the j o i n t co-ordinators of the Executive Committee enhanced the success of the committee system. These i n d i v i d u a l s spent considerable time behind the scenes with i n d i v i d u a l partners r e s o l v i n g problems. They were successful i n motivating the sub-committees to complete t h e i r assigned tasks within the allowed time. The development program was c o n t i n u a l l y reviewed i n l i g h t of the p a r t i c i p a n t s ' desire to continue on the schedule. The p u b l i c i t y surrounding t h i s p r o j e c t meant that press releases and news conferences geared to c e r t a i n task completion dates could not be delayed. Departing from the (147) development schedule could r e s u l t i n the l o s t support from the U.S. producers and Japanese end users. This support was being aggressively pursued. A more e f f e c t i v e structure f o r the conceptual design phase of t h i s p r o j e c t may have been to assign one of the partners or an independent outside e n t i t y ( i . e . Bechtel or similar) with o v e r a l l management of the conceptual design phase. The 'contractor' would function within the guidelines of the budget and developmental framework established by the Executive Committee. The Executive Committee could be updated on a monthly or quarterly basis regarding the progress of the management contractor. This would allow t h e i r involvement i n a l l major decisions. The objective would be to minimize i n d i v i d u a l partner involvement u n t i l a proposal including the design, construction program, financing a l t e r n a t i v e s , and economic analysis was a v a i l a b l e . This structure would allow the energies of the p a r t i c i p a n t s to be focused on analyzing the major proposal. They could then undertake s p e c i f i c i n v e s t i g a t i o n s i n areas they f e l t warranted more information or support p r i o r to making t h e i r d e cisions. In the committee framework, the executives and other p a r t i c i p a n t committee members are over-involved during the development process. The f i n a l r e s u l t can be aff e c t e d by a pride of authorship i n te c h n i c a l d e t a i l . It becomes p o l i t i c a l l y d i f f i c u l t i n the f i n a l stages to question or i n s i s t on ad d i t i o n a l i n v e s t i g a t i o n of some of the areas which had previously been l a b o r i o u s l y debated i n various sub-committees. Another approach may have been f or the Port to independently fund the conceptual phase. The r e s u l t i n g report document would then be used as the (148) basis of t h e i r "marketing e f f o r t s " to secure i n t e r e s t from various organizations. This would have given the port more f l e x i b i l i t y i n completing the conceptual design study. Their preferred design and operations format could have been implemented without the compromises necessary i n the committee decision making structure. The recommendation from t h i s type of analysis would have the ports complete endorsement and would be open to further i n v e s t i g a t i o n s by the prospective partners should they question p a r t i c u l a r areas. A well defined conceptual stage, which required a s i g n i f i c a n t amount of external t e c h n i c a l d e t a i l e d engineering support, could have p o s s i b l y been better managed than through the committee structure. The need to have the eventual owners and operators involved i n t h i s phase was important; however, the committee management structure was cumbersome. It may have i n h i b i t e d the l e v e l of analysis required i n some of the areas as continual trade o f f s were being made between the objectives of the d i f f e r e n t partners. A d d i t i o n a l l y with the committee approach, the partners were committed to following through with the committee action accepting the majority d e c i s i o n s . In a management contract structure, the partners would have had more f l e x i b i l i t y to undertake i n d i v i d u a l analysis or i n v e s t i g a t i o n s i n areas they f e l t were s e n s i t i v e to t h e i r entering the p r o j e c t i n a major f i n a n c i a l way. By bringing i n the three selected owners e a r l y i n the conceptual phase, the Port also l o s t a great deal of i t s f l e x i b i l i t y . The PBT group could decide that they would not be interested i n pursuing the development and (149) construction of the terminal a f t e r the conceptual design i s completed. By t h i s time, the PBT group has s i g n i f i c a n t l y biased and changed the conceptual design to r e f l e c t t h e i r d e s i r e s . These may not have been i d e n t i c a l to the Port's desires had they been making a conceptual study fo r the purpose of a t t r a c t i n g a number of diverse investor groups. A multiple-partner j o i n t venture i s a d i f f i c u l t organization to manage e f f e c t i v e l y . If the major development objectives are well defined ( i . e . maximize p r o f i t s , minimize costs, remain on schedule, etc.) a reasonable approach may be to seek a structure which minimizes the need for p a r t i c i p a t i o n by the multiple partners. The management r e s p o n s i b i l i t y would be given to a company or group ( i n t e r n a l or external to the j o i n t venture) i n which the p a r t i c i p a n t s place a high degree of t r u s t and r e s p o n s i b i l i t y . This type of management framework i s better able to react to the dec i s i o n making environment than m u l t i - p a r t i c i p a n t committees. This business environment i s usually characterized by a s i g n i f i c a n t investment requirement and a high degree of r i s k , otherwise there would not be the mult i p l e partner j o i n t venture. C o n f l i c t i n g and diverse viewpoints could be s e t t l e d by the p a r t i c i p a n t executives a f t e r the major proposals and reports have been completed. This avoids the entanglement of d i f f e r e n t company committee members who may be applying inconsistent c r i t e r i a to t e c h n i c a l and operational problems. The major objectives of the p r o j e c t can become circumscribed. This aspect again r e l a t e s to i n d i v i d u a l and organizational r o l e s as discussed i n the l i t e r a t u r e on d i s t r i b u t i o n channels. Louis Stern f e e l s that "the greater part of the l i t e r a t u r e on r o l e theory, and most empirical studies on the subject, have (150) been r e l a t e d to the r o l e s of i n d i v i d u a l s within organizations. L i t t l e emphasis has been placed on i n t e r - o r g a n i z a t i o n a l i n t e r p r e t a t i o n s , that i s , organizational r o l e s and r e l a t i o n s h i p s among org a n i z a t i o n s . " ^ 2 The time required to f a c i l i t a t e the i n d i v i d u a l and organizational r o l e s f o r t h i s p r o j e c t could have been s i g n i f i c a n t l y reduced i n the conceptual planning phase. The management contractor structure could have off e r e d an opportunity f o r more e f f e c t i v e planning. The p a r t i c i p a n t s could always be given s e c u r i t y that major issues such as changes i n the ob j e c t i v e s , changes i n c a p i t a l i z a t i o n or shares, d i s s o l u t i o n , or declaration of dividends would be handled only through executive committee decisions. The management contractor would only operate i n c e r t a i n functional and te c h n i c a l areas i n which there e x i s t s p e c i f i c o b j e c t i v e s , i n s t r u c t i o n s , and cost/time c o n s t r a i n t s . Another problem of the m u l t i - p a r t i c i p a n t sub-committees was the d i f f i c u l t y i n c o n t r o l l i n g the major sub-contractors. This structure i n v i t e d behind the scenes lobbying d i r e c t l y to partners by the sub-contractors. This could be an e f f e c t i v e means of circumventing decisions or d i r e c t i o n s of a p a r t i c u l a r sub-committee. The opportunity f o r t h i s type of s i t u a t i o n would be l e s s under a management contractor concept. There would be les s partner-supplied s t a f f involved i n the decisions to act as support f o r the sub-contractor. There are a number of reasons why one of the p o s s i b l y more e f f i c i e n t management frameworks was not used. The f i r s t of these r e l a t e s to the (151) r o l e of C. Itoh. They were appointed by JCDC to a s s i s t i n developing the U.S. Western steam coal l o g i s t i c s system. Such a p o s i t i o n required t o t a l involvement to ensure the desires of the Japanese end users were being met. This a c t i v e p a r t i c i p a t i o n by one p a r t i c i p a n t encourages the same l e v e l of involvement from others. The diverse objectives of the p a r t i c i p a n t s were also at the root of the d e c i s i o n for committee management of a l l functions during the development stage. Each of the partners except CMC had large business opportunities complementary to the p r o j e c t . In t h i s s i t u a t i o n i t i s p o s s i b l e to speculate the p a r t i c i p a n t s would want to avoid a management contractor. The r a t i o n a l approach taken by such a contractor would preclude the p o s s i b i l i t i e s of in-committee compromises. Compromises could allow the development phase to proceed even i f s p e c i f i c information i n d i c a t e d an i n f e a s i b i l i t y i n some areas. D. OWNERSHIP ISSUES AND DIVERSITY OF OBJECTIVES The Long Beach International Coal Project j o i n t venture brings together businessmen of d i f f e r e n t backgrounds, experience, n a t i o n a l i t i e s , and a b i l i t y . Their corporations function according to a wide range of business methodologies. Bivins and L o v e l l indicate "the p r i n c i p a l drawback of a j o i n t venture, i n the opinion of many of the world's business leaders, i s the a r t i f i c i a l and uneasy atmosphere created by t r y i n g to combine the resources and management approaches of a number of separate going concerns i n the same business e n t e r p r i s e . " 1 3 They also (152) i n d i c a t e that "companies have f i r m l y established long and short range objectives and operating procedures, and i n d i v i d u a l s have set ideas and l o y a l i t i e s not e a s i l y changed or e f f e c t i v e l y compromised."^ 4 They further recorded that " i n general the purpose of a j o i n t venture i s to put together complementary resources of already e x i s t i n g firms.''^ 5 Such resources normally comprise not only ordinary ( i n the sense that they could be bought i n the market) f i n a n c i a l , t e c h n i c a l , human resources but also acquired resources of partner firms ( l i k e goodwill, knowhow, team s p i r i t , and other int a n g i b l e a s s e t s ) . "The l a t t e r are le s s easy to assemble and the d i f f i c u l t y of putting them i n common i s one of the l i m i t a t i o n s of j o i n t v e n t u r e s " . ^ T r a d i t i o n a l j o i n t ventures are formed p r i m a r i l y f or the purpose of combining resources and ta l e n t s of a company i n a developed country with those of a company (private or government owned) i n a le s s developed country. The objective w i l l u s ually be to expand or e x p l o i t a business opportunity i n the developing country. T y p i c a l l y , the host country company o f f e r s l o c a l business knowledge and an operating l i c e n s e , while the foreign investor o f f e r s c a p i t a l plus marketing and other t e c h n i c a l expertise. The LBICP group has been formed as a means to : (a) spread the f i n a n c i a l r i s k s involved i n a s i g n i f i c a n t p r o j e c t ; and (b) expand the i n -house expertise l e v e l through equity p a r t i c i p a t i o n . With the exception of CMC, a l l of the p a r t i c i p a n t s view t h e i r investment i n t h i s project as an extension of t h e i r main stream business a c t i v i t y . This i s le s s t y p i c a l of the i n t e r n a t i o n a l j o i n t ventures c h a r a c t e r i s t i c of one dominant f i r m . The Long Beach project i s further complicated by the segregation of the (153) conceptual/planning phase and the construction/operation phase. The major p a r t i c i p a n t s i n the conceptual planning stage (the port and Upland Industries with 33-1/3% each) w i l l have l i t t l e p a r t i c i p a t i o n i n the $250,000,000 terminal expense or operating costs. The minor p a r t i c i p a n t s i n the study phase w i l l be the major f i n a n c i e r s and operators of the terminal development. What has evolved i s a nesting of one j o i n t venture within another. J o i n t ventures with multiple partners are complicated enough. This project has two j o i n t ventures operating simultaneously, each with d i f f e r e n t partners. The three p r i v a t e companies i n P a c i f i c Bulk Terminals have a subset of o b j e c t i v e s . These may be d i f f e r e n t from the LBICP p r o j e c t as a whole or the i n d i v i d u a l members of e i t h e r of the j o i n t ventures. The Port of Long Beach and Upland Industries have c e r t a i n constraints regarding the construction, operation and land use. They need to see these constraints considered as part of the terminal development. However, a number of these items could represent s i g n i f i c a n t costs to be sub-group PBT. To the extent that PBT does not see any f i n a n c i a l b enefit derived from the incremental investment required to meet the desires of the non-participating investors (the Port and Upland), there i s room for major divergence of o b j e c t i v e s . The operational environment, however, has been one of cooperation and cohesion. The Port wants to ensure that the pr i v a t e investors are s a t i s f i e d with the terminal development phase to the extent they are motivated to invest i n the construction and operation phases. (154) As can be expected, items of consensus e a r l y i n the project become divergent as the development proceeds and more i d e n t i f i a b l e d e t a i l e d aspects of these general problem areas begin to surface. A number of major areas from the c r i t i c a l path i n f i g u r e 4.3 provide good examples of the diverging views of the partners over time. There are four major issues and a number of minor issues which w i l l be discussed i n the following sections. 1. O i l well' r e l o c a t i o n — t h i s represents the s i n g l e most c r i t i c a l aspect of the terminal development and one on which divergent views among the partners are most evident. The i n i t i a l Kaiser Engineering study ind i c a t e d that the o i l well r e l o c a t i o n on the terminal s i t e would cost 15 to 20 m i l l i o n d o l l a r s . This cost, although not inconsequential, was not of a magnitude that would m a t e r i a l l y a f f e c t the terminal development d e c i s i o n . The p a r t i c i p a n t s f e l t that i t would eventually be resolved i n a f a i r and equitable manner between Uplands, the Port, and the private partners. As Bechtel began to further define the o i l well r e l o c a t i o n costs, a f t e r consultation with Champlin O i l , the cost of the program escalated to 63 m i l l i o n d o l l a r s . Bechtel further indicated there could be an a d d i t i o n a l 10 m i l l i o n d o l l a r s of costs that were at that time undefined. This s u b s t a n t i a l e s c a l a t i o n i n costs could have s t a l l e d the development plans. The Port and Upland interceded to make vague assurances that the o i l well costs could be handled i n a manner that would r e l i e v e the p r i v a t e companies from bearing the f u l l cost (155) burden. As r e c e n t l y as June of 1982, however, the Upland group in d i c a t e d that neither Union P a c i f i c Corporation nor any of i t s s u b s i d i a r i e s could p a r t i c i p a t e i n any costs as part of the o i l well r e l o c a t i o n . The reasons for t h i s apparent change i n approach were the costs would not constitute a reasonable investment from the point of view of U.P. parent company. A d d i t i o n a l l y , t h i s type of support could be interpreted as U.P. discrimination i n favour of the Long Beach terminal. C. Itoh were i n d i c a t i n g that the p o t e n t i a l Japanese end users (and partners) would not be w i l l i n g to p a r t i c i p a t e i f the project had to bear the f u l l 63 m i l l i o n d o l l a r s for the o i l well r e l o c a t i o n programs. They f e l t t h i s was part of the Upland cost i n presenting the leasehold property to the project i n a l l respects ready to commence construction a c t i v i t i e s . CMC and Metropolitan indicated t h e i r f i n a n c i a l analysis demonstrated that the 63 m i l l i o n d o l l a r o i l well r e l o c a t i o n cost reduced the project f i n a n c i a l returns below t h e i r corporate cutoff rates (for throughput tonnages i n d i c a t e d ) . The Port i n t h e i r r o l e as co-ordinator advised there was a p o s s i b i l i t y they could fund the o i l well r e l o c a t i o n costs and charge the p r o j e c t only the i n t e r e s t expense on t h i s c a p i t a l f or the p r o j e c t l i f e . Although t h i s a l t e r n a t i v e has not yet been accepted, i t represents a compromise that would a t t a i n the private companies desired f i n a n c i a l returns. It also contributes to r e s o l v i n g the problems on t h i s issue for Upland and the Japanese end users. (156) 2. C a p i t a l costs" versus operating costs — t h i s i s a c r i t i c a l problem for any large p r o j e c t . However i t becomes extremely important when the labour component of the operating costs consists of members from a very strong West Coast stevedoring union. The maximum benefits from c a p i t a l to labour tradeoffs must be sought. The construction design must r e l y h e a v i l y on the input from the operating partner (Metropolitan Stevedore) to reduce the manning l e v e l s . Although t h i s o b j e c t i v e appears straight-forward there are some underlying factors i n t h i s p roject which have led to divergent views on t h i s t o p i c and made i t one of the more d i f f i c u l t to resolve. The p a r t i c i p a t i o n of C. Itoh and the I n d u s t r i a l Bank of Japan i s based on t h e i r representation of the Japanese end user (and government) views towards e s t a b l i s h i n g a r e l i a b l e U.S. West Coast steam coal supply system. These same Japanese i n t e r e s t s prefer to see the maximum amount of Japanese manufactured equipment form the major components of the terminal system. Because of t h i s desire and the close working r e l a t i o n s h i p between C. Itoh and the Bechtel Corporation, i t i s possible that Bechtel made reasonable e f f o r t s to ensure that t h e i r conceptual design was consistent with equipment that i s being manufactured i n Japan. Metropolitan Stevedore were i n d i f f e r e n t as to the o r i g i n of the equipment. They preferred that the conceptual design avoided major machinery components and recommended a le s s labour intensive underground reclaim system. The giant stacker/reclaimer combination units t y p i c a l of manufacture i n Western Europe and Japan were proposed by the Bechtel conceptual (157) design. They were strongly disputed i n concept by Metropolitan. Metropolitan demonstrated that these u n i t s : (a) required s i g n i f i c a n t inventory (no standard p a r t s ) ; (b) were much more unsightly i n terms of t h e i r s i z e and noise components; (c) were environmentally i n e f f i c i e n t because of f u g i t i v e dust r a i s e d by the large bucket wheel reclaimer; and (d) t h e i r f u nctional combination reduced the operating f l e x i b i l i t y of the terminal considerably. Metropolitan's general proposal made sense to a l l those involved. However, the short preparation time allowed Metropolitan and Conveyco di d not give them s u f f i c i e n t time to substantiate the cost of t h e i r system versus the Bechtel proposed system. The problem for the partners not d i r e c t l y involved i n t h i s dispute was that Metropolitan had never engineered a major terminal nor had Bechtel ever operated a major terminal yet each was arguing about t h e i r a b i l i t i e s i n an unproven area of experience. 3. Terminal p r i c i n g compared with other e x i s t i n g / p o t e n t i a l terminals — the Japanese partner was c o n t i n u a l l y pressing the need for the terminal to be p r i c e competitive with other e x i s t i n g and p o t e n t i a l port developments on the coast. C. Itoh were i n d i c a t i n g that p o t e n t i a l end users p a r t i c i p a t i o n i n the project would be predicated on a competitive terminal charge compared to the proposed Portland fee of $5.00 per metric ton i n 1982 d o l l a r s . The response of the other partners was that the Long Beach s i t e was being developed for i t s advantages i n r e l a t i o n to the t o t a l coal l o g i s t i c s system which would reduce the d e l i v e r e d p r i c e of the thermal coal to the Japanese (158) end users. I t was f e l t the terminal to terminal charge should be no more comparative than the r a i l to r a i l charge or ship to ship charge fo r the d i f f e r e n t o r i g i n / d e s t i n a t i o n p a i r s . D i f f e r e n t c a p i t a l and operating costs must produce d i f f e r e n t terminal throughput charges. The Japanese partner argued that although differences i n delivered p r i c e may e x i s t based on larger tonnage ships and the shorter r a i l haul, there w i l l be a large component of the Japanese thermal coal market that i s served i n conventional panamax vessels (30% i n next 10-15 y e a r s ) . 1 7 They further f e e l that the d i f f e r e n c e i n r a i l rates w i l l be reduced when a number of ports are a v a i l a b l e and there i s a c t i v e competition between the r a i l r o a d s f o r these various port d e s t i n a t i o n s . At t h i s point the American PBT partners were concerned that they would be unable to earn a reasonable rate of return on t h e i r investment or missing p r o f i t p o t e n t i a l on the terminal i f they p r i c e d the throughput charge equivalent to other terminals which could be constructed for approximately 1/3 to 1/2 of the C e r r i t o s Channel pro j e c t c o s t . 4. Diverse objectives"" o f "the " "participants regarding the" terminal  ownership"and operation — The problems ou t l i n e d e a r l i e r and some of the minor problems which w i l l follow i n t h i s paragraph r e l a t e to i n t e r n a l problems of the j o i n t ventures which must be resolved by the groups. Outside of the venture i t s e l f each of the major p a r t i c i p a n t s has p r o p r i e t a r y objectives r e l a t i n g to the terminal which may or may not r e l a t e d i r e c t l y to a f i n a n c i a l return from the throughput of (159) cargo. As speculative examples i t could be r e a l i s t i c to consider the follow i n g : ( i ) Upland Industries and Champlin O i l may be w i l l i n g to accept some portion of the o i l well r e l o c a t i o n expense and/or reduce t h e i r land lease charges. This would f a c i l i t a t e the terminal proceeding whereby the Union P a c i f i c Railroad and hence the parent corporation could earn substantial revenues from the r a i l transportation of the coal to the terminal l o c a t i o n . ( i i ) The Port of Long Beach i s extremely committed to the terminal development. They may be w i l l i n g to accept some f i n a n c i a l burden ( e s p e c i a l l y i n r e l a t i o n to the o i l well relocation) or other major project stumbling blocks to f a c i l i t a t e the development of the coal terminal. The project w i l l generate revenue to the Port of between 20£ and 50ft per ton wharfage fo r the l i f e of the p r o j e c t . There are also attendant s o c i a l and p o l i t i c a l b enefits to having the f i r s t major West Coast coal export f a c i l i t y i n the Long Beach harbour area. ( i i i ) C. Itoh & Company, as a trading house, are not large asset owners. They w i l l l i k e l y be w i l l i n g to earn t h e i r revenue on the trading income from coal sales from the Western United States. Their objective may not be to maximize t h e i r p r o f i t from p a r t i c i p a t i o n i n the terminal f a c i l i t y . It can be reasonably expected that C. Itoh and the other Japanese partners which eventually may j o i n the project would be s a t i s f i e d with a break-even or marginal p r o f i t a b i l i t y f o r the (160) q terminal. This would mean they were getting the best loading value for t h e i r thermal coal imports. A lower throughput charge also a s s i s t s i n t h e i r negotiations with other ports. A d d i t i o n a l l y , i f the p r o f i t a b i l i t y of the terminal rose too high, i t can be reasonably a n t i c i p a t e d that C. Itoh and the Japanese end users would exert pressure on the PBT partnership to reduce the r a t e s . (iv) Metropolitan Stevedore Company w i l l be responsible f o r providing the labour and supervision for the operation of the terminal e n t i t y . Although senior terminal management w i l l be a j o i n t venture matter, i t could be possible that Metropolitan have some p r o f i t already p r i c e d into the labour and supervision cost components. These labour r e l a t e d p r o f i t s could allow them to accept a lesser rate of return on the terminal investment. 5. Partnership versus corporation — the Japanese partner i n s i s t e d on a corporation as the operating e n t i t y . They could then l i m i t the l i a b i l i t y of the Japanese end users according to t h e i r p a r t i c i p a t i o n i n the p r o j e c t . This was opposite to the American p a r t i c i p a n t s who preferred a partnership i n l i g h t of the b e n e f i c i a l tax advantages i n the U.S. to the partnership e n t i t y . These tax advantages r e l a t e p r i m a r i l y to c a p i t a l structure, reporting requirements and depreciation allowances. A d d i t i o n a l l y , to form a corporation i n the United States with a foreign company requires a s i g n i f i c a n t amount of data reporting a l l f i n a n c i a l and operational aspects of the corporate (161) shareholders. This w i l l include a l l the Japanese u t i l i t i e s and cement companies that would eventually become p a r t i c i p a n t s and would l i t e r a l l y involve truckloads of information which could take years to provide. At the time of t h i s w r i t i n g the question of partnership versus corporation could be resolved through the f i n a n c i a l structure discussed i n Chapter 5. 6. Debt/Equity r a t i o s — The Port of Long Beach prefer to see an equity component of approximately 30% as an i n d i c a t i o n of the motivation of the p r i v a t e partners towards making t h i s project a success. The p r i v a t e partners were more interested i n a smaller equity component of 10%. Leases would be used to make up the a d d i t i o n a l funds that would have been equity contributions. Presently the construction costs are e s c a l a t i n g , and the Japanese throughput guarantees are not m a t e r i a l i z i n g . I t appears the Japanese financing may not be a v a i l a b l e to the l e v e l o r i g i n a l l y a n t i c i p a t e d . There a d d i t i o n a l l y may be a requirement for higher equity contributions i f the p r o j e c t i s to receive financing support from any lenders. 7. Return on "investment/Return" on equity "requirements — A previous section indicated that the p a r t i c i p a n t s could have d i f f e r e n t objectives from the terminal ownership and operation. They also measure the performance of the terminal according to d i f f e r e n t f i n a n c i a l c r i t e r i a . The Port and the Japanese partner use a return on equity which bases the return on the cash flow a v a i l a b l e to s e r v i c e the equity p o r t i o n of the investment a f t e r i n t e r e s t expense and retirement of the debt. This number, although a reasonable (162) measure of the performance of the project according to the invested equity, does not take into account the f i n a n c i a l o b l i g a t i o n of the parent companies according to the loan o b l i g a t i o n s for the p r o j e c t . Crowley and Metropolitan have chosen to use a return on investment c r i t e r i a (IRR) which looks at the t o t a l investment and i t s a b i l i t y to generate a cash flow return to support t h i s investment. Metropolitan base t h e i r return on a cash flow before i n t e r e s t whereas Crowley use an a f t e r i n t e r e s t a n a l y s i s . Crowley t y p i c a l l y have a higher hurdle rate and use a more rigorous f i n a n c i a l c r i t e r i a (namely the a f t e r i n t e r e s t component) because they have been able to earn high returns on t h e i r mobile marine equipment. Metropolitan are operating a t y p i c a l l y t h i n margin labour intensive business. Regardless of the f i n a n c i a l c r i t e r i a employed, i n the f i n a l analysis the p a r t i c i p a n t s w i l l make an independent assessment of whether they should proceed with t h e i r share of the partnership. 8. Unanimous versus majority vote in"PBT — The i n t e n t i o n of a l l p a r t i e s i s f o r the American partners to maintain the terminal ownership majority. There has been preliminary agreement that C. Itoh w i l l d i l u t e t h e i r ownership and maintain 5% to 10% of the equity themselves while carrying the proxy vote of other cement and u t i l i t y companies. The Japanese are pressing for the unanimous vote thereby g i v i n g any of the minority owners an a b i l i t y to veto a major d e c i s i o n . This system has the p o t e n t i a l of making the terminal very d i f f i c u l t to operate. The American partners have i n s i s t e d on a majority vote allowing them the a b i l i t y to operate the terminal and set rates to an established return that i s reasonable. This (163) protection has been demanded due to the lack .of i n t e r e s t i n p a r t i c i p a t i n g i n a terminal project which i s pri c e d and operated on the basis of marginal p r o f i t a b i l i t y . E. CONCLUSION The issues involved i n developing a management structure for a major terminal project are many and complex. The multi-organizational decision making units must be able to overcome problems inherent i n a j o i n t venture of t h i s magnitude. To the extent they are successful i n implementing an e f f e c t i v e management and communications framework, they w i l l be able to proceed towards r e s o l v i n g the external problems. The operation of the i n t e r n a l management structure can exhaust the personnel and time resources of the group. This w i l l s i g n i f i c a n t l y detract from t h e i r a b i l i t y to carry out t h e i r development program. (164) END NOTES 1. Wolfgang G. Friedmann and George Kalmanoff, J o i n t " I n t e r n a t i o n a l  Business Ventures, (New York: Columbia University Press, 1961), p. 5. 2. I b i d . , p. 5. 3. William M. Evan, Toward a"Theory of Interorganizational Relations, i n Louis W. Stern ed., D i s t r i b u t i o n Channels: Behavioral Dimensions, (Boston, Mass.: Houghton M i f f l i n Company, 1969), p. 74. 4. Let t e r of Understanding, signed J u l y 7, 1981 by the LBICP partners, representing formal commencement of the p r o j e c t . 5. Louis P. Bucklin, A Theory of Channel Structure, quoted i n Louis W. Stern, D i s t r i b u t i o n Channels: Behavioral Dimensions, (Boston, Mass.: Houghton M i f f l i n Company, 1969), p. 94. 6. Long Beach Harbour Department, 1980 Bond Resolution, "Resolution HD1182", s t i p u l a t e s that a new bond issue cannot be made unless the net port revenues for previous 12 months (ending at l e a s t 90 days p r i o r to d e l i v e r y of a d d i t i o n a l bonds), or the estimated net revenues for the 12-month period beginning when the improvements financed by the bonds become operational, must equal at l e a s t 1.5 times the maximum combined annual debt service on the out-standing and a d d i t i o n a l bonds. 7. Contract for Engineering Services signed between Bechtel C i v i l and Minerals Corp. and the Long Beach International Coal P r t o j e c t on November 4, 1981. 8. Bechtel C i v i l and Minerals Corp. Standard Instruction to Bidders Package. 9. Karen Kraus Bivens and Enid Baird L o v e l l , J o i n t Ventures with  Foreign Partners, Service Extension D i v i s i o n , (Montreal, Que.: The Conference Board i n Canada, 1966), p. 34. 10. Information from a Report on the User Charge Controversy presented to the Long Beach International Coal Project by the Director of the Port of Long Beach, June, 1982. 11. Louis W. Stern, D i s t r i b u t i o n Channels Behavioral Dimensions, (Boston, Mass.: Houghton M i f f l i n Company, 1969), p. 23. 12. Ibid., p. 24. 13. Karen Kraus Bivens and Enid Baird L o v e l l , op. c i t . , p. 48. 14. I b i d . , p. 48. (165) 15. Ib i d . , p. 48. 16. I b i d . , p. 48. 17. H. P. Drewry (Shipping Consultants) Limited, Research D i v i s i o n , The  Growth of Steam Coal Trade, "A Review and Forecast of International Trade i n Thermal Coal and Shipping Requirements: 1980-90", 1980, p. 130. (166) TABLES AND FIGURES (167) FIGURE 4.1 LBICP ORGANIZATIONAL STRUCTURE CROWLEY MARITIME CORP. UNION PACIFIC LAND CO. C. ITOH AND CO. LONG BEACH INTERNATIONAL COAL PROJECT METROPOLITAN STEVEDORE PORT OF LONG BEACH EXECUTIVE COMMITTEE JOINT COORDINATORS OF EXECUTIVE COMMITTEES PORT OF LONG BEACH PLANNING GROUP GOVERNMENT AFFAIRS SUBCOMMITTEE ENVIRONMENTAL SUBCOMMITTEE FINANCE SUBCOMMITTEE ENGINEERING SUBCOMMITTEE LEGAL SUBCOMMITTEE MARKETING SUBCOMMITTEE ENVIRO-SPHERE EBASCO INDUSTRIAL BANK OF JAPAN BECHTEL ENGINEERING CONVEYCO ENGINEERING REESE-CHAMBERS CONSULTANTS PACIFIC BULK TERMINALS MISC. CONTRACTORS MISC. CONTRACTORS MISC. CONTRACTORS FIGURE 4.2 PBT ORGANIZATIONAL STRUCTURE CROWLEY MARITIME CORPORATION METROPOLITAN STEVEDORE COMPANY C. ITOH AND COMPANY LBICP MARKETING SUBCOMMITTEE LBICP ENGINEERING SUBCOMMITTEE MARKETING (C. ITOH & CO.) PACIFIC BULK TERMINALS MANAGEMENT COMMITTEE OPERATIONS (METROPOLITAN STEVEDORE) SHIPPING (CROWLEY MARITIME) FIGURE 4.3 LBICP TIME SCHEDULE '82 '83 June July | Aug. Sept.| Oct. Nov. Dec. Jan. | Feb.l Mar. •83 •84 '85 Executive Committee Decision of Terminal Rates - Reduction of r e l o c a t i o n cost of o i l wells - Study of operation cost - Negotiation of transfer of Pier G operation Presentation for Customers Study & Decision of LBICT Organization structure and equity allotment thereby Approval for EIR/EA and Permits Incorporation of TOE and operator *s contract with POLB Start of Construction Work Engineering A <—*i Create private corp. to s o l i c i t bids F i n a l Decision.... p u b l i c hearing F i n a l EIR/EIS I fiechtel^assemble Prepare bi£?.*^id period" .Negotiate ar data for.bids packages . .select contractor Construction Start Source: Long Beach International Coal Project - Working paper No. 1, p. 17. CHAPTER 5 MANAGING"A"JOINT" VENTURE; THE LEGAL"AND INSTITUTIONAL"ENVIRONMENT A. INTRODUCTION Legal and i n s t i t u t i o n a l f a c t o rs have an important influence on the development of the United States West Coast coal export trade. E a r l i e r chapters have focused on the developing P a c i f i c Rim Coal Market, the p o t e n t i a l competitive port locations on the West Coast, and the organization of a j o i n t venture to manage the development of t h i s l a s t remaining l i n k of the coal l o g i s t i c s system. This chapter w i l l demonstrate that with the development of the Long Beach Port Terminal p r o j e c t , external regulatory and i n s t i t u t i o n a l factors present a number of b a r r i e r s as d i f f i c u l t to overcome as the geographic, geologic, and economic c o n s t r a i n t s . The purpose of t h i s chapter i s to discuss the external development issues and t h e i r implications f o r the Long Beach port development program. Po t e n t i a l i n s t i t u t i o n a l b a r r i e r s i n the areas of environmental permitting, finance, f o r e i g n p a r t i c i p a n t s , l e g a l / r e s t r a i n t of trade, socio-economics, and technology/market r i s k s w i l l be presented i n d e t a i l . The implications of these p o t e n t i a l b a r r i e r s and the developers' approach to r e s o l v i n g these issues w i l l form the basis of discussion. (171) B. THE UNITED STATES POLICY"AND"REGULATORY FRAMEWORK As can be expected i n any emerging export trade, the i n s t i t u t i o n a l and regulatory environment i s constantly changing. The Westpo Report i n d i c a t e s , "The i n s t i t u t i o n a l framework for western coal development i s dynamic and r e f l e c t s state, r e g i o n a l , and national changes i n economic circumstances and p o l i t i c a l d i r e c t i o n . " 1 The number and magnitude of these changes provide a good example of how deeply involved governments can become i n a l l aspects of coal production, transportation, trade, and use. The U.S. Inter-Agency Task Force describes some of the U.S. and Japanese p o l i c i e s and t h e i r p ossible e f f e c t s on the development of the coal export trade to the P a c i f i c Rim, these are:2 1. For"coal'production: ( i ) Leasing fe d e r a l lands for coal production and, i f conservative, p o s s i b l y r e s t r i c t i n g coal supply and boosting coal p r i c e s for export; ( i i ) Developing mine safety regulations for underground mines and p o s s i b l y c u t t i n g labour p r o d u c t i v i t y ; ( i i i ) Requiring land reclamation and thereby adding to the costs of coal production; (iv) Imposing state severance taxes which increase the ultimate cost of the coal product. (172) 2. For coal use: (i ) L i m i t i n g p r i c e s on competing fu e l s l i k e o i l and natural gas such that coal's f u l l p r i c e advantage does not become apparent; ( i i ) P r o h i b i t i n g the use of o i l and gas i n u t i l i t y and i n d u s t r i a l b o i l e r s thereby encouraging coal use; ( i i i ) S etting emission l i m i t s f o r a i r pol l u t a n t s such that coal costs more to use and one coal type i s preferred over another; (iv) Delaying nuclear development such that c o a l - f i r e d power plants are chosen more often; (v) Denying adequate returns on investments by e l e c t r i c u t i l i t i e s thereby blocking conversions to c o a l . 3. For coal'transportation: ( i ) Regulating r a i l rates and allowing c r o s s - s u b s i d i z a t i o n ( r a i l rates are kept higher than j u s t i f i e d by cost of s e r v i c e ) ; ( i i ) Blocking the use of coal s l u r r y p i p e l i n e s to protect r a i l r o a d s and p o s s i b l y l o s i n g an opportunity to cut delivered coal p r i c e s . The f e d e r a l government's a t t i t u d e s toward coal supply and use need c l a r i f i c a t i o n . They are, however, better elucidated than those r e l a t i n g to coal transportation and more s p e c i f i c a l l y to port development programs. (173) The Westpo Report in d i c a t e s the federal government made a p o l i c y commitment beginning i n 1966 to set new economic standards f o r the sale of fe d e r a l coal to p r i v a t e developers and u l t i m a t e l y to end users within and outside the United States. This objective has been followed through and i n 1981, competitive coal lease sales were s u c c e s s f u l l y conducted under the f i n a l i z e d program. 3 The lack of understanding of federal d i r e c t i o n i n regard to the port development programs i s i n h i b i t i n g the expansion of t h i s sector i n the face of a strong indicated demand and other economic and p o l i t i c a l pressures towards expanding the export trade. The l a r g e s t i n s t i t u t i o n a l b a r r i e r confronting expanded U.S. coal exports to the P a c i f i c Rim countries i s the United States Government. The Government has to date not yet established a firm p o l i c y on coal exports. This i s widely perceived throughout the Far East as both an error i n omission and an admission of d i s i n t e r e s t on the part of the Government. Not only i s the declaration of intent to support exports missing, but p o s s i b l e f i n a n c i a l incentives that would permit coal exports to begin on a commercially economic basis are not on the planning boards. The Government, as the f i n a l maker and a r b i t r a t e r of U.S. p o l i c y towards exports, must decide how to best support t h i s growing trade. P o s i t i v e steps should be taken at the national l e v e l to encourage investor p a r t i c i p a t i o n i n these a c t i v i t i e s . The problems just outlined are not reserved s p e c i f i c a l l y f o r the U.S. Federal Government, but are also part of the state and l o c a l governments and agencies which are presenting a cumbersome i n s t i t u t i o n a l obstacle f o r the development of West Coast terminal f a c i l i t i e s (and other components of the coal chain). (174) The Westpo Report d i f f e r s with the views as stated above and concludes that "no p o l i c y questions can be accurately characterized as impediments to achieving the desired l e v e l exports. Projected coal exports can be accommodated within the e x i s t i n g framework of fed e r a l and state environmental, safety, and other r e g u l a t i o n s . " 4 Westpo then q u a l i f y t h i s statement by i n d i c a t i n g that there i s a large and expanding i n s t i t u t i o n a l framework under which new coal projects must comply. Rigorous attention must be given to the d e t a i l of the various p o l i c i e s and regulations. If not followed to the l e t t e r , these can cause s i g n i f i c a n t delays to the pr o j e c t ' s completion. 5 The unresolved issues surrounding mining and coal conversion methods, transportation and u t i l i t y c o r r i d o r systems, port f a c i l i t i e s and marine d e l i v e r y systems pose s i g n i f i c a n t obstacles to the Western U.S. coal export trade. The U.S. Inter-Agency Task Force report on the Far East advises there are a number of impediments to the a b i l i t y of the U.S. Western coal to p a r t i c i p a t e i n the P a c i f i c Rim market. These a r e : 6 ( i ) The lack of a fi r m , pro-export p o l i c y which a r t i c u l a t e s the U.S. desire and willingness to ship coal abroad and the Federal Government's supportive function i n t h i s trade. ( i i ) The need for improved and expanded export i n f r a s t r u c t u r e which i s capable of e f f i c i e n t l y and economically transporting U.S. coal to the country of d e s t i n a t i o n . ( i i i ) The burden of government regulations which i n h i b i t mine development, r a i l system expansion, and generally r a i s e the costs of supplying coal to the export market. (175) (iv) The e x i s t i n g , i n f l e x i b l e system of federal mineral leases which has negative short-term e f f e c t s on mine development and c a p i t a l investment. C. EXTERNAL"DEVELOPMENT ISSUES External development issues are those that o r i g i n a t e outside the con t r o l of the j o i n t venture partners. There are i n s t i t u t i o n a l and operational aspects of these problems. The implications to the pro j e c t development r e s u l t i n g from these external issues are s i g n i f i c a n t . Their r e s o l u t i o n w i l l tax the a b i l i t i e s of the developers and t h e i r consultant sub-contractors . 1. Environment A large multi-faceted environmental project such as the permitting f o r the Long Beach Coal Terminal Project involves trade-offs between the human environment and p r a c t i c a l economics. To the extent the pr o j e c t i s able to support the economic costs of m i t i g a t i n g negative environmental impacts, i t w i l l l i k e l y succeed i n permitting e f f o r t s . A b r i e f o u t l i n e w i l l be made of the environmental permitting framework f or the Long Beach Coal Port Development. This w i l l be followed by a section on major environmental issues. The environmental permitting for a project of t h i s s i z e i s a major task. The following agencies are a p r e l i m i n a r i l y l i s t of those (176) having some j u r i s d i c t i o n or i n t e r e s t i n the p r o j e c t . ( i ) Local Agencies C i t y of Los Angeles C i t y of Long Beach Port of Los Angeles County of Los Angeles County of Riverside County of San Bernadino County of Orange ( i i ) State Agencies C a l i f o r n i a A i r Resources Board Department of Fi s h and Game State O f f i c e of H i s t o r i c Preservation C a l i f o r n i a Water Quality Control Board C a l i f o r n i a Coastal Commission Department of Boating and Waterways ( i i i ) Federal Agencies Fis h and W i l d l i f e Service U.S. Coast Guard U.S. Geologic Survey U.S. Army Corps of Engineers EPA Region 9 Bureau of Land Management (177) a) Federal Framework The Clean A i r Act (CAA) of 1970, along with major amendments adopted i n the Clean A i r Act Amendment of 1977, have brought s i g n i f i c a n t changes to the fe d e r a l regulatory mechanism governing p o l l u t i o n and c o n t r o l . Although the complexity of the Clean A i r Act precludes f u l l d iscussion here, c e r t a i n e s s e n t i a l features of the statutory frame-work need to be recognized to understand how the law may a f f e c t coal terminal developments. The CAA requires the Environmental Protection Agency (EPA) to develop two types of standards f o r ambient a i r q u a l i t y c a l l e d National Ambient A i r Quality Standards (NAAQS). The "primary" standards are necessary to protect public health and "secondary" standards are designed to protect public welfare. To date, the EPA has established standards for seven major classes of p o l l u t a n t s : 1. P a r t i c u l a t e s 2. Sulphur Dioxide 3. Carbon Monoxide 4. Ozone 5. Hydrocarbons 6. Nitrogen Dioxide 7. Lead The EPA has developed both short-term and long-term exposure standards for these p o l l u t a n t s . Short-term standards e s t a b l i s h (178) l i m i t s on emissions f o r periods of twenty-four hours or l e s s . Long-term standards are measured on an annual b a s i s . To coordinate the control of a i r p o l l u t i o n , the EPA divided the country i n t o 247 A i r Quality Control Regions (AQCR's). These regions can include i n t e r s t a t e or i n t r a s t a t e areas. They are formed according to meteorological, i n d u s t r i a l , and socio-economic factors and are treated as a si n g l e unit f o r the purpose of c o n t r o l l i n g a i r p o l l u t i o n . The EPA and i n d i v i d u a l states have designated areas of the country that do or do not meet NAAQS. C l a s s i f i c a t i o n of an area determines what actions the state and EPA w i l l be required to take to regulate a i r p o l l u t i o n from e x i s t i n g and new emission sources. An area i s designated a non-attainment area (NA) i f i t i s not i n compliance with these standards f o r a p a r t i c u l a r p o l l u t a n t . Prevention of S i g n i f i c a n t Deterioration (PSD) provisions are designed to protect a i r q u a l i t y i n areas now meeting a l l ambient a i r q u a l i t y standards; PSD l i m i t s the degradation of a i r q u a l i t y i n so - c a l l e d "clean a i r " areas, provides a mechanism to regulate p o l l u t a n t emission from new sources, and allow states to determine the degree of new source growth desired i n clean a i r areas. These functions are c a r r i e d out through the s p e c i f i c requirements, a l l of which are to be incorporated i n State Implementation Plans (SIPS). The regulatory e f f e c t of NA/PSD requirements i s as follows: i f NAAQS are not met i n an area, NA r u l e s must be met for each new or expanded f a c i l i t y . When NAAQS are met, PSD ru l e s apply. NA pr o v i s i o n s , i n general, (179) require that states include i n t h e i r SIPS s p e c i a l provisions designed to upgrade non-attainment areas. PSD rules require that states maintain, above EPA approved l e v e l s , the a i r q u a l i t y of t h e i r clean a i r areas. New Source Performance Standards (NSPS) are fe d e r a l standards governing emissions from new or modified stationary sources. These standards comprise the l e a s t stringent emission l i m i t a t i o n s to which appli c a b l e new sources are subject; i n d i v i d u a l s t a t e s , through implementation of new source pre-construction reviews, may e s t a b l i s h s t r i c t e r p o l l u t a n t emission r e s t r i c t i o n s . Emission standards are established by NSPS f o r categories of sources with respect to any type of a i r p o l l u t a n t emitted. State Framework State Implementation Plans (SIPS) are the mechanisms by which i n d i v i d u a l states implement, maintain, and enforce the regulations and provisions of the CAA. Each state i s required to submit t h i s plan for EPA approval. Construction of new major emitting sources i s pr o h i b i t e d i f the source emits a non-attainment p o l l u t a n t i n a non-attainment area i n a state without a f u l l or c o n d i t i o n a l l y approved SIPS. SIPS vary s u b s t a n t i a l l y within and between sta t e s . Under the Clean A i r Act SIPS must assure attainment of NAAQS by December 31, 1982; i f severe oxident and carbon monoxide problems e x i s t , the deadline may be extended to December 31, 1987. As part of (180) an e f f o r t to meet these deadlines, as well as to maintain a i r q u a l i t y i n areas needing NAAQS, many states implement New Source Review (NSR) programs. Such programs regulate new sources of a i r p o l l u t i o n . NSR programs generally require new sources to implement best a v a i l a b l e c o n t r o l technology (BACT). They also must undergo a i r q u a l i t y assessment to demonstrate that emissions from the new source w i l l not i n t e r f e r e with the maintenance or attainment of any state or National Ambient A i r Quality Standards. Most NSR programs cover more sources and have s t r i c t e r requirements than federal Preventions of S i g n i f i c a n t Deterioration (PSD) and non-attainment p r o v i s i o n s . c) Major Environmental Issues for the Long Beach Terminal Project A b r i e f i ntroduction to the s i t e - s p e c i f i c environmental permitting problems r e l a t e d to the Long Beach Terminal Project was given under the Envirosphere Ebasco section of Chapter 4. The d e t a i l s of the external permitting environment f o r the Long Beach Project w i l l be out l i n e d i n t h i s section followed by the manner i n which the Project's management decided to approach the permitting task. Implications r e l a t e d to t h i s part of the Project w i l l be discussed. The C a l i f o r n i a Health and Safety Code has designated the A i r Resources Board (ARB) as the control agency f o r the purpose of the Clean A i r Act. The duties of the ARB also include regulation of emissions from motor v e h i c l e s and establishment of standards of a i r q u a l i t y f o r each a i r basin. Permit authority to operate stationary sources r e s t s with the l o c a l a i r p o l l u t i o n c o n t r o l d i s t r i c t , with the (181) ARB a c t i n g as a review board i n case of appeals. The l o c a l d i s t r i c t s must also adopt r u l e s and regulations to achieve state and fede r a l ambient a i r q u a l i t y standards. The South Coast A i r Quality Management D i s t r i c t (SCAQMD), established by the Lewis A i r Quality Management Act, includes the counties of Los Angeles, Orange, San Bernadino, and Riverside. The SCAQMD has the r e s p o n s i b i l i t y to adopt an a i r q u a l i t y management plan to achieve the NAAQS and to issue permits i n accordance with r u l e s and regulations f o r stationary a i r p o l l u t i o n sources. A c t i v i t i e s within the Port of Long Beach which w i l l have a i r po l l u t a n t emissions must obtain permits from the SCAQMD. Emission l e v e l s must comply with EPA standards and the new o f f s e t p o l i c y , since t h i s area i s c l a s s i f i e d as a non-attainment area. Because EPA has not yet approved C a l i f o r n i a ' s implementation plan, an EPA permit i s also required for a l l new sources. Under the current EPA emission o f f s e t p o l i c y , i n a non-attainment area, a new source permit may only be granted i f the following conditions are met: ( i ) Emission l i m i t a t i o n s are defined as the lowest achievable emission rate (LAER) for that source. ( i i ) A l l other e x i s t i n g major sources owned or operated by the applicant within the state are i n compliance with applicable emission l i m i t a t i o n s and a i r q u a l i t y standards. ( i i i ) At l e a s t one-to-one emission reductions or o f f s e t s from (182) e x i s t i n g sources i n the area are achieved i n order to provide f o r reasonable further progress towards attainment of the NAAQS. (iv) The emission o f f s e t s obtained must provide a p o s i t i v e net a i r q u a l i t y b e n e f i t i n the affected area. The lowest achievable emission rate i s defined as ei t h e r the most stringent emission l i m i t f o r any source found i n any SIP or the lowest rate achieved i n pr a c t i c e or reasonably expected to be achieved for such sources. The source may demonstrate that the former condition i s not appropriate to i t s case. Nonetheless, LAER i s intended to be much more stringent than best a v a i l a b l e c o n t r o l technology (BACT) which i s required f o r new sources i n attainment areas. Although EPA requires at l e a s t one to one emission reductions, SCAQMD requires more than an equivalent o f f s e t . Depending on the distance of the trade-off source from the new source, the emission r a t i o may be as high as 2.2/1 but no less than 1.2/1. Otherwise, the SCAQMD p o l i c y i s s i m i l a r to EPA's. The f i n a l condition to demonstrate a net a i r q u a l i t y b e n e f i t i s generally based on modelling. Improvement i s not required at every l o c a t i o n but the net benefit to the region must be c l e a r l y demonstrated. (183) A i r Quality. By e a r l y June 1982, the project had f i l e d an a p p l i c a t i o n with the South Coast A i r Quality Management D i s t r i c t (SCAQMD). As indic a t e d e a r l i e r i n the paper, the SCAQMD i s presently proposing to modify Regulation 13 to include ship and t r a i n emissions within the d i s t r i c t f o r l a rger projects such as a coal terminal. If the Long Beach a p p l i c a t i o n i s accepted as complete the project w i l l l i k e l y be evaluated using the present Regulation 13 standards. The present standards do not require i n c l u s i o n of t r a n s i t emission f o r ships and t r a i n s . The agency may take exception to the a p p l i c a t i o n s , assumptions and methodologies i n the emission c a l c u l a t i o n s . This could r e s u l t i n emissions above the regulated maximum. The i n v e s t i g a t i n g agency would require o f f s e t s or other demonstrations of the Project's a b i l i t y to mitigate these matters s u c c e s s f u l l y . Some examples of pos s i b l e o f f s e t s are indicated below: ( i ) Use of shore-based e l e c t r i c a l power for the bulk "carriers c a l l i n g at the f a c i l i t y (eliminating the need f or operation of on-board generators during the loading process). ( i i ) Use of two-stroke instead of four-stroke d i e s e l engines by the r a i l r o a d s within the confines of the coal terminal. ( i i i ) On worst case days, shut down one of the two i d l i n g t r a i n engines within the terminal boundaries. (184) C a l i f o r n i a does not have an adopted v e h i c l e inspection program which i s approved by the EPA. As a r e s u l t , EPA could withhold approval of any p r o j e c t that f a l l s under t h e i r authority. Some concern has been expressed that the LBICP could be af f e c t e d by t h i s moratorium; however, present research indicates that the p r o j e c t should avoid t h i s c o n s t r a i n t . The project would be blocked only i f fe d e r a l funds were being used or i f the a i r emissions f o r the stationary source (the terminal i t s e l f ) exceeded 100 tons per year. Neither of the above i s representative f o r the Long Beach terminal. Hazardous Wastes. A f i l e search of the records of twelve governmental agencies has been undertaken by the geotechnical consultants. They attempted to determine i f any permits had been granted i n the l a s t 20 years to Champlin O i l for dumping hazardous waste i n the o i l f i e l d sumps. These sumps are subterranean to the proposed terminal s i t e . No information was located. Removal of the sumps cannot now begin u n t i l extensive ph y s i c a l sampling and t e s t i n g programs are complete. Such a program w i l l cost approximately $200,000 and i s needed promptly so that the sump r e s t o r a t i o n program can be undertaken i n the most cost e f f e c t i v e method ( t h i s program can take from 4-12 months depending on the techniques required). Dredging Disposal A bioassay was made of the proposed berth and channel dredge (185) m a t e r i a l . The proposed dredge material was found not to be contaminated. This w i l l permit the developers to dispose of the dredge s p o i l s at an ocean dumping s i t e . If contamination signs had been found, ocean dumping would have been p r o h i b i t e d . The incremental costs of loading the s p o i l s material onto trucks or other land transport and l o c a t i n g a f i l l s i t e would have been 4-5 m i l l i o n d o l l a r s more expensive than the ocean dumping a l t e r n a t i v e . Noise The issue of noise impacts at the terminal l o c a t i o n are not s i g n i f i c a n t . Problems w i l l l i k e l y r e s u l t from increased unit t r a i n frequency through populated areas i n Los Angeles and Long Beach. The extent of opposition w i l l not be known u n t i l p ublic hearings on the terminal are held. Local pressure groups can make the permitting d i f f i c u l t i f they can su c c e s s f u l l y demonstrate adverse e f f e c t s on t h e i r q u a l i t y of l i f e . Water Quality/Storm Run-Offs/Ballast Water I t has been determined that storm water run-off can be adequately handled by the proposed storm water system engineered as part of the pr o j e c t . A d d i t i o n a l l y , the Environmental Sub-Committee have met with the Los Angeles Regional Water Quality Control Board (LARWQCB) to discuss the discharge of b a l l a s t water from bulk c a r r i e r s c a l l i n g at the Port of Long Beach. LARWQCB has t e n t a t i v e l y agreed to a program whereby the Port would monitor b a l l a s t discharge through a permit (186) system. This system would require that the ship's master or agent c e r t i f y that the b a l l a s t water i s clean. Clean b a l l a s t water i s e i t h e r b a l l a s t water from segregated b a l l a s t tanks, or cargo tanks that have been flushed at sea. V i o l a t i o n of the Port's regulations would become the l i a b i l i t y of the ship's master or agent and secondarily a l i a b i l i t y of the developers and the Port i t s e l f . Railway and Highway Consultants are i n v e s t i g a t i n g the impacts of r a i l / v e h i c l e i n t e r -a c tions. Unit t r a i n s passing grade l e v e l crossings cause major problems with the road users. There are approximately 300 grade l e v e l crossings that were i n i t i a l l y evaluated by the Project according to c r i t e r i a developed by the consultants. The l i s t has since been reduced to 22 crossings and there may only be six crossings that warrant further d e t a i l e d i n v e s t i g a t i o n . The C a l i f o r n i a Public U t i l i t i e s Commission (CPUC) w i l l be contacted to determine methods of improvements to grade l e v e l crossings and which are nominated for federal or state funding. Managing the Permitting Process The key to successful environmental permitting i s an experienced management team and s t a f f . The environmental sub-committee, supported by the executive committee, f e l t t h i s work could best accomplished by r e t a i n i n g an environmental consultant and charging them with r e s p o n s i b i l i t y f o r the complete permitting process (see (187) section on Envirosphere Ebasco i n Chapter 4). The environmental consultant w i l l need to analyze and quantify the e f f e c t s on water q u a l i t y , biology, geology, a i r q u a l i t y , noise, socio-economics, a e s t h e t i c s , r e c r e a t i o n , and other c u l t u r a l resources. I t was necessary that the environmental sub-committee develop a framework which would accurately set f o r t h the performance c r i t e r i a f o r the consulting group. The following i n i t i a l general scope of work was o u t l i n e d for the consultant: ( i ) The impacts at the mine would not be included i n the EIR/EIS. ( i i ) Impacts outside the San Pedro Basin would be characterized generally and would not require s i t e - s p e c i f i c d e t a i l . For example, the a i r q u a l i t y impacts on the r a i l c o r r i d o r would be described i n terms of p o l l u t a n t emissions per mile. There need not be d e t a i l e d reference to the nature of the a f f e c t e d lands, whether r e s i d e n t i a l , a g r i c u l t u r a l , vacant, e t c . On a generalized l e v e l the c o r r i d o r could be characterized by approximate percentages of land devoted to d i f f e r e n t uses. Considerably l e s s consulting resources w i l l obviously be spent i n areas where i t i s f e l t the permitting task w i l l not be constrained. ( i i i ) The Geotechnical consultant w i l l provide a l l necessary f i e l d work. Depending on the l e v e l of d e t a i l desired i n the EIR/EIS, such items as subsidence i n v e s t i g a t i o n s , analysis l i q u i f a c t i o n p o t e n t i a l , and p e r c o l a t i o n t e s t s could be required. (188) (iv) A computer simulation model to be developed by the engineering sub-committee would demonstrate ship, r a i l , and terminal a c t i v i t y and provide the following subsets of information. - Ship l o c a t i o n — shipping lane pick-up and break-off p o i n t s , t r a f f i c patterns from the break-off point i n t o the harbour, and vessel movement patterns i n the Port. Duration of c o l l i e r modes of operation — duration of a r r i v a l , berthing, h o t e l l i n g , loading, deberthing, and departing. Number and spacing of c o l l i e r a r r i v a l s , berthings, and deberthings. C o l l i e r c h a r a c t e r i s t i c s — s i z e , number of hatches, steam or motor, whether i n b a l l a s t , type of f u e l used, f l a g flown, e t c . Numbers of tugs and support vessels and duration of s e r v i c e . Scenarios of modes of vessel operation which take into account sea conditions, simultaneous a r r i v a l of v e s s e l s , loading d i f f i c u l t i e s which might cause stacking up of vessels waiting to load e t c . Information from the model w i l l be used i n a i r emission p r o j e c t i o n s , estimates of waste water disposal needs, and assessment of navigation and safety impacts. (189) Major problems w i l l be brought to the attention of the environmental sub-committee and trade-offs necessary can be implemented during the planning and design phase. The executive committee, upon the recommendation of the environmental sub-committee, chose Envirosphere Ebasco over other consulting companies f i r s t because of t h e i r experience and knowledge i n the business, but second because t h e i r experience and knowledge was a l l in-house. Many of the environmental proposals represented teams of companies which s p e c i a l i z e d i n d i f f e r e n t areas i n the permitting process. The pro j e c t developers f e l t that a sing l e company with the t o t a l c a p a b i l i t y of carr y i n g out the permitting process when combined with the port planning s t a f f would best handle t h i s c r i t i c a l aspect of the development phase. The delegation of r e s p o n s i b i l i t i e s f o r the permitting process to outside professionals appeared to the project developers to be the p r e f e r e n t i a l course i n the permitting process. The cumbersome task of dealing with various i n s t i t u t i o n s and public agencies should only be undertaken by experienced i n d i v i d u a l s . They must possess the te c h n i c a l a b i l i t y and p o l i t i c a l wherewithal to conclude the task s u c c e s s f u l l y within time/cost c o n s t r a i n t s . The primary objective of the environmental consulting group would be to prepare complete, unbiased, and f u l l y defensible EIR/EIS documents. These must comply completely with the intent of c o n t r o l l i n g environmental l e g i s l a t i o n . Concerns of other public agencies and affected c i t i z e n r y must also be f u l l y recognized. (190) In order to s a t i s f y the objectives within the established budgetary and temporal c o n s t r a i n t s , the environmental consulting program needed to be supported and c o n t r o l l e d by a competent management system. The process w i l l be monitored according to a d e t a i l e d c r i t i c a l path schedule which w i l l be updated semi-monthly f o r sub-committee meetings. The t o t a l permitting e f f o r t w i l l take from 8-15 months. As an i n d i c a t i o n of the scope of t h i s requirement, Figure 5.1 presents an example of a d e t a i l e d preliminary table of contents for an EIR/EIS development program. The p r o j e c t planning and design phase has been organized to be responsive to the major permitting areas of concern. Technologies must be implemented which are consistent with the objectives of the regulatory framework and wishes of the developers. If m i t i g a t i n g measures cannot be accomplished due to f i n a n c i a l or operational c o n s t r a i n t s , i t may be necessary to seek assistance from the r a i l r o a d s or ocean shipping sector. They would be requested to structure t h e i r operations i n a manner which would reduce emissions at the terminal l o c a t i o n . The environmental permitting regulations are quite i n f l e x i b l e . The project w i l l succeed only on the basis of i t s a b i l i t y to mitigate the adverse environmental impacts associated with the terminal construction and operation. B. FINANCIAL ISSUES This section w i l l discuss the o v e r a l l project financing and the implications to the f i n a n c i a l a l t e r n a t i v e s of a p a r t i c i p a t i n g Japanese (191) investor. The choice of a financing package a f f e c t s the a l l o c a t i o n of r i s k to a l l p a r t i e s involved i n the pr o j e c t . Risk w i l l be analyzed f o r a number of a l t e r n a t i v e f i n a n c i a l programs. A d d i t i o n a l l y the issue of parent company guarantees versus throughput contracts w i l l be r e l a t e d to the present l e v e l of demand. 1. Project Finance I t i s important that a d i f f e r e n t i a t i o n be made between conventional financing and project financing. Project financing b a s i c a l l y i s an extension of c r e d i t i n which the lender looks s p e c i f i c a l l y at the cash flow stream from the asset being financed for the debt repayment. This i s d i f f e r e n t from conventional financing which would involve recourse on the debt extended as a general l i a b i l i t y against a l l assets of the sponsor. The pr o j e c t type of financing u s u a l l y means that a separate e n t i t y i s formed f or the purpose of financing a major development. I t i s from only t h i s e n t i t y and the project assets that the lending i n s t i t u t i o n s seek t h e i r repayment. If parent company s e c u r i t y or pledges against any other assets or revenues are required, i t cannot be regarded as project f i n a n c i n g . This i s a very important d i s t i n c t i o n as i t ind i c a t e s the strength of the project i n the eyes of the lending i n s t i t u t i o n s and gives the pr o j e c t developers an important independent opinion as to the c r e d i b i l i t y of t h e i r investment format. Lending i n s t i t u t i o n s have complained that project financing s h i f t s a great deal of the new p r o j e c t r i s k to the lender. (192) The r i s k s encountered by the developers and lending i n s t i t u t i o n s f o r a terminal p r o j e c t of t h i s type can generally be catalogued as follows: ( i ) Market r i s k s : W i l l there be adequate cargo throughput to generate the stream of earnings required to repay the debt and return a p r o f i t to the owners on t h e i r invested equity? If there are good long-term throughput contracts arranged with c r e d i b l e customers, t y p i c a l l y lending i n s t i t u t i o n s w i l l assume such a market r i s k based on these contract agreements. However, i f the developer group were to approach the lending i n s t i t u t i o n s with a n t i c i p a t e d cargo based s o l e l y on expressions of i n t e r e s t , l e t t e r s of i n t e n t , or contracts cancellable i n 90 days, i t i s highly u n l i k e l y that the transaction would be based on a project financing or l i m i t e d recourse b a s i s . The lending i n s t i t u t i o n s i n t h i s case would seek a d d i t i o n a l s e c u r i t y from the development parent companies. ( i i ) P a r t i c i p a n t r i s k : The Long Beach Project has a large number of p o t e n t i a l investors ( a f t e r C. Itoh d i l u t e s t h e i r shareholding to major Japanese coal users). It i s important the lending i n s t i t u t i o n s are s a t i s f i e d with the track record of the p a r t i c i p a n t s i n the p a r t i c u l a r j o i n t venture. This w i l l r e l a t e to independent success i n undertaking major projects and completing repayment of the financing on a timely b a s i s . A d d i t i o n a l l y the f i n a n c i a l strength, management s t y l e , (193) and business acumen of the parent company w i l l be examined according to t h e i r h i s t o r y of p a r t i c i p a t i o n i n successful j o i n t venture p r o j e c t s . ( i i i ) Completion r i s k : In project financing, there t y p i c a l l y w i l l be a clause i n the debt agreement i n d i c a t i n g that the completion of the project w i l l be at a date and for an amount not to exceed a s t i p u l a t e d aggregate value. F a i l i n g t h i s , the developers must provide necessary a d d i t i o n a l funds as contributed equity. The lending i n s t i t u t i o n , i n such a case, w i l l not be required to loan a d d i t i o n a l funds. Lenders are r a r e l y w i l l i n g to accept completion r i s k . (iv) Foreign Exchange r i s k : In a project such as the Long Beach terminal, the f i n a n c i a l program w i l l span a 20-25 year time horizon. There are s i g n i f i c a n t currency r i s k s involved. Hedging, buying forward, and other methods of reducing the r i s k of short-term currency f l u c t u a t i o n s are not applicable to a long-term project of t h i s nature. The lending i n s t i t u t i o n s w i l l u s ually propose a currency or mix of currencies which are stable and preferably undervalued against the p r i n c i p a l repayment currency. The c r i t e r i a i s to maximize the b e n e f i t of lower i n t e r e s t rates a v a i l a b l e i n foreign currency ( p r i n c i p a l l y yen). The lower i n t e r e s t r a t e s , however, must be compared to the t o t a l financing cost. This t o t a l cost w i l l include (194) s e n s i t i v i t y f o r exchange rate f l u c t u a t i o n s . For the Long Beach Project, i t has been recommended that a number of the long-term throughput contracts be denominated i n yen to ser v i c e the yen portion of the debt thereby reducing the r i s k s of the present undervalued yen increasing i n value v i s - a - v i s the d o l l a r . Any upward valuation of the yen would increase the repayment costs of the sponsors i n d o l l a r s . P o l i t i c a l Risks: In most major financing contracts there i s a FOrce Majeure clause which exempts the p a r t i e s from performance under very c l e a r l y prescribed terms of reference. These usually include Acts of God, war, acts of government, and other items beyond the reasonable control of the p a r t i e s at the time the contract was agreed. In the Long Beach Terminal case, the major lending i n s t i t u t i o n (and sponsor) concerns would be that during times of U.S. national energy shortages, the export of coal to the P a c i f i c Rim and other countries could be s i g n i f i c a n t l y reduced or halted by law. The objective would po s s i b l y be to insure the continuing supply of energy sources to serve U.S. domestic needs. In t h i s Force Majeure s i t u a t i o n , the functioning of a coal export terminal would cease and the sponsors and bankers would need to work with the government and/or other sources to see i f c r e d i t could be extended through the government-initiated c r i s i s . A major r e s t r u c t u r i n g may need to be considered. In a Force Majeure circumstance the r i s k of f i n a n c i a l loss would (195) be borne by the lending i n s t i t u t i o n s f o r an amount equal to the debt o b l i g a t i o n . The developers r i s k l o s i n g t h e i r contributed equity, or pos s i b l y the return to t h i s equity during the export i n t e r r u p t i o n . 2. F i n a n c i a l Structure The structure of pro j e c t financing can be quite complex. It involves several d i f f e r e n t types of lenders and a large number of debt service documents l e g a l l y binding the i n t e r r e l a t e d p r o j e c t developer companies. There are many possible v a r i a t i o n s of a project structure; however, there appear to be a number of features common to most p r o j e c t s . ( i ) A separate e n t i t y i s usually created to hold the project assets and to conduct external financing for the pr o j e c t . By using t h i s format, p r o j e c t assets may be separated from the normal assets of the sponsors and used as s e c u r i t y f o r the pr o j e c t debt. The cash flow from the project may also be segregated from the i n d i v i d u a l partners i n order to service such debt. ( i i ) The pro j e c t e n t i t y can take d i f f e r e n t s t r u c t u r a l forms i n c l u d i n g a corporation or partnership. The partnership form i s sometimes selected for tax reasons although i t can present problems i n meeting the l e g a l requirements of lenders. In general a partnership has les s stringent c a p i t a l structure (196) requirements than a corporation. A d d i t i o n a l l y f a s t e r depreciation schedules and expensing of c e r t a i n cost categories are more favorable for partnerships. ( i i i ) Depending on the ownership structure of the p r o j e c t , the debt associated with the project may be "off-balance-sheet" for the (iv) With pr o j e c t financing, from the borrower's point of view, the obje c t i v e i s to provide lenders with s e c u r i t y based s o l e l y on s a t i s f i e d with t h i s type of s e c u r i t y i f the technology and processes involved are well-known and the market for the p r o j e c t output i s very strong and i s committed by long-term contracts. Lenders are often concerned that t h i s form of s e c u r i t y i s i n s u f f i c i e n t because the debt i s not supported d i r e c t l y by the p a r t i c i p a n t s ' other business operations. The lenders, therefore, are exposed to a majority of the r i s k s of the p r o j e c t i t s e l f . In such circumstances the lenders may require a d d i t i o n a l c r e d i t support for the debt of the p r o j e c t e n t i t y such as a higher l e v e l of throughput agreements. A l t e r n a t i v e l y , the sponsors may provide i n d i r e c t support through guarantees or contingent o b l i g a t i o n s . This i s le s s favourable from the standpoint of the sponsors since one of the objectives of p r o j e c t financing i s to l i m i t the c r e d i t exposure and to preserve the debt capacity of the parent companies. sponsors. the revenues from the project assets. Lenders may be (197) (v) Project financing often allows higher leverage than t r a d i t i o n a l financing. Because the pro j e c t revenues are dedicated to the payment of pro j e c t debt s e r v i c e , lenders are often w i l l i n g to provide as much as 75-80% of c a p i t a l requirements providing they are s a t i s f i e d with the underlying s e c u r i t y arrangements. 3. Financing"Alternatives There are many types of f i n a n c i a l instruments a v a i l a b l e to a major terminal p r o j e c t ; several of these are discussed below: These could be i n the form of bonds placed on the open market, long term loans from major f i n a n c i a l i n s t i t u t i o n s , long term loans from major banking i n s t i t u t i o n s , tax exempt bonds sponsored by the p a r t i c i p a n t s through the auspices of a l o c a l port or municipal authority, and other sources of market fin a n c i n g and paper debt instruments. As the new j o i n t venture e n t i t y proposed for the Long Beach Terminal w i l l not have an established record the use of long term public bonds i s very u n l i k e l y . The p a r t i c i p a n t s however do wish to proceed with a long term financing package based on a f i x e d rate b a s i s . a) D i r e c t Long Term Project Loans (198) The major banking i n s t i t u t i o n s i n the United States have cash resources a v a i l a b l e to lend the p a r t i c i p a n t s . The disadvantage i s the f l o a t i n g rate nature of bank financing and the r e l a t i v e short maturity period compared to the project planning horizon. Bank instruments would be more suited to -the construction phase of the p r o j e c t . A most l i k e l y form of financing for some portion of the p r o j e c t would be the use of i n d u s t r i a l revenue bonds issued through the authority of the Port of Long Beach. This provides an excellent source of funds as many i n s t i t u t i o n s and i n d i v i d u a l s are seeking tax exempt investments to form a part of t h e i r p o r t f o l i o . The p a r t i c i p a n t s can expect to pay lower i n t e r e s t rates under the tax exempt structure. The Treasury Department, however, has announced some features of a l e g i s l a t i v e proposal i t w i l l soon pass to congress which could reduce the benefit of t h i s type of f i n a n c i n g . The proposal w i l l include:^ ( i ) Private projects financed with tax free i n d u s t r i a l revenue bonds issued a f t e r 1982 must be depreciated according to the s t r a i g h t l i n e method rather than the accelerated cost recovery system depreciation recently expanded under the 1981 tax recovery a c t . ( i i ) I n d u s t r i a l revenue bond issues must be approved by a State or l o c a l l e g i s l a t i v e body. (199) ( i i i ) A f t e r 1985, the i n d u s t r i a l revenue bond pr o j e c t must receive a f i n a n c i a l c o n t r i b u t i o n , commitment, or o b l i g a t i o n from the l o c a l government. (iv) Small issue i n d u s t r i a l revenue bonds w i l l not be a v a i l a b l e for large corporations. The main thrust of the proposal i s to prevent corporations from using both the tax exempt financing and accelerated depreciation f o r the same p r o j e c t . This form would c e r t a i n l y be one of the more appropriate financing a l t e r n a t i v e s for a terminal development scheme. Yen-Denominated Funding From Japanese F i n a n c i a l Markets F i n a n c i a l support may be possible from the Japanese market. The three p r i n c i p a l forms would be: ( i ) Export c r e d i t ; ( i i ) Overseas investment c r e d i t ; and ( i i i ) Yen syndicated loans. (See Figures 5.2, 5.3, and 5.4 f o r the structure of the funding proposal and r e s u l t i n g r e s p o n s i b i l i t i e s ) ( i ) Export Credit Export c r e d i t may be a v a i l a b l e i n the Long Beach pr o j e c t based on u t i l i z a t i o n of Japanese b u i l t equipment, par t s , accessories and other q u a l i f i e d items required i n the terminal construction. The Japanese equipment exporter must negotiate the loan with the Japanese lending i n s t i t u t i o n s . The c r e d i t (200) scheme i s i l l u s t r a t e d i n Figure 5.2. The amount of the export c r e d i t cannot exceed ei t h e r the value of the export contract or 70% of the j o i n t financing with other i n s t i t u t i o n s . The terms f o r t h i s type of c r e d i t are 5-10 years and i n t e r e s t rates are cu r r e n t l y i n the region of 8.5-9.5%. ( i i ) Overseas Investment Credit This type of financing would need to be arranged through the Japanese partner (C. Itoh). The Export-Import Bank of Japan would be approached f or the purpose of obtaining funds which the Japanese partner would use to invest i n the foreign corporation. Depending on the perceived value of the investment to Japan, (a coal terminal on the West Coast i s perceived as high value energy r e l a t e d project) the terms range from 1-10 years and i n t e r e s t rates range from 6-9%. The amount of the loan can be no greater than 70% of the required t o t a l funds. The lending scheme i s presented i n Figure 5.3. ( i i i ) Yen-Syndicated Loan Unlike the Export Credit or Overseas Investment Credit the Yen-Syndicated loan would be made d i r e c t l y to the terminal owners (PBT). These types of loans are regulated by the Japanese Mini s t r y of Finance (MOF) (201) and applications must q u a l i f y according to one of the following c r i t e r i a : 8 1) The loan must be to i n t e r n a t i o n a l i n s t i t u t i o n s such as IBRD, EIB, EURATOM, EUROFINA. 2) The loan must be for projects geared to the development of mineral and/or energy resources f o r export to Japan. 3) The loan must be used to finance the import of Japanese goods. 4) The loan must be part of a co-financing arrangement with i n t e r n a t i o n a l f i n a n c i a l i n s t i t u t i o n s . For the Long Beach Terminal the loan could be based on categories 2 or 3. The i n t e r e s t rate would be Japanese long term prime (c u r r e n t l y 8.6%) plus a premium. The term would be 10-20 years. The amount of the loan would depend on the project s i z e and c r e d i t standing of the borrowers. Yen-syndicated loans have seldom been more than $100 m i l l i o n . Any yen c r e d i t f a c i l i t y w i l l involve exchange r i s k . In the case of a coal terminal the following scheme represents a way to reduce t h i s r i s k . Figure 5.4 (202) indicates that the terminal owners would be paid the throughput charges i n yen either from the Japanese buyers, or the coal s e l l e r s . The objective i s to have yen-based throughput commitments i n an amount which supports the yen borrowing. This would a s s i s t i n reducing currency r i s k to the developers. This system requires the cooperation of the terminal owners, producers and users based on long term contracts. I t w i l l l i k e l y be d i f f i c u l t to secure t h i s support from American producers. An a d d i t i o n a l complication i s that there are several components to the terminal charge (labour, wharfage) which are d o l l a r expenses, t h i s could present an adverse e f f e c t i f the yen devalued. Yen borrowing appears to be an a t t r a c t i v e a l t e r n a t i v e to d o l l a r borrowing i n the current f i n a n c i a l markets. Table 5.5 shows the IBJ a n a l y s i s of the e f f e c t i v e i n t e r e s t burden for the p r o j e c t given d i f f e r e n t yen/dollar exchange ra t e s . Even i f the yen r i s e s s u b s t a n t i a l l y (to $ = 172Y) the r e a l i n t e r e s t cost of 11.2% i s s t i l l below the January 1982 6-month Eurodollar rate of 14.88%. Borrowing from the other P a c i f i c Rim countries has not been considered by the project developers. (203) c) "Off-Balance-Sheet" Financing This has become a popular buzz word i n f i n a n c i a l c i r c l e s . There are p r i n c i p a l l y two ways to undertake f i n a n c i a l o b l i g a t i o n s which do not r e s u l t as l i a b i l i t i e s on the balance sheet. One i s to own 50% or l e s s of a j o i n t venture. In t h i s instance the financing i s not consolidated on the parent f i n a n c i a l statements, but i s indicated only as a footnote. Only the equity investment i n the project i s shown on the parent company f i n a n c i a l statements. The other off-balance-sheet method i s l e a s i n g . There are several types of lea s i n g which can be used i n a project of t h i s type. One i s the standard form of l e a s i n g (which w i l l not be discussed due to i t s r e l a t i v e unimportance i n projects of t h i s s i z e and term). Two types of lease which are more appropriate f o r a major terminal project are the leveraged lease and safe harbour lease. ( i ) The Safe Harbour Lease The Safe Harbour Lease (under the Economic Recovery Tax Act of 1981) allows the sale of the tax c r e d i t s . Companies with a federal income tax l i a b i l i t y become nominal l e s s o r s on a f a i r l y r i s k free basis by becoming equity investors i n a leveraged lease. P o t e n t i a l nominal l e s s o r s include any company which i s subject to federal income tax. In the Long Beach p r o j e c t , p a r t i c i p a n t l e s s o r s could be Upland (204) Industries or Crowley Maritime. To the extent that the tax c r e d i t s could not be f u l l y u t i l i z e d by members of the p r o j e c t , major external companies with a large tax l i a b i l i t y such as General E l e c t r i c or International Business Machines could become le s s o r s i n the t r a n s a c t i o n . Using the safe harbour lease, a p o s s i b l e funding scheme f o r PBT i s as shown i n Figure 5.6. In such a scheme, PBT would receive an outright cash payment from the l e s s o r of approximately 30% of the t o t a l equipment cost. The l e s s o r i n turn receives the b e n e f i t of the 10% investment tax c r e d i t and depreciation deduction for the t o t a l c a p i t a l cost which exceeds the above-mentioned 30% passed to the lessee. During the period since the passage of the ERTA, the safe harbour le a s i n g provisions have been under constant examination and c r i t i c i s m . It presently appears that the safe harbour le a s i n g p r o v i s i o n w i l l be repealed and that t h i s method w i l l not be i n place at the time the major project f i n a n c i a l underwriting i s completed. The use of conventional leveraged l e a s i n g appears most probable for the p r o j e c t . ( i i ) Leveraged Lease In a leveraged lease, a l e s s o r that has taxable income from other sources i s i n a p o s i t i o n to p r o f i t from the (205) lease because, f o r tax purposes, depreciation expense on the t o t a l value of the property may be taken. The le s s o r may only put up 20% of the cost of the depreciable property to gain a tax c r e d i t equal to the t o t a l p roject value. This i s where the term leveraged i s derived. A leveraged lease scheme i s shown i n Figure 5.7. The Long Beach project has 3 d i s t i n c t c h a r a c t e r i s t i c s which make the leveraged lease an a t t r a c t i v e p o s s i b i l i t y . F i r s t , the project i s not expected to generate taxable income during the f i r s t 3-5 years of operation; second, the Japanese partner does not have subs t a n t i a l other U.S. taxable income against which to use the depreciation and investment tax c r e d i t from the p r o j e c t s ; and t h i r d , there i s pressure towards a corporate e n t i t y f o r the PBT owners which would deny them many of the partnership tax advantages (which w i l l be retained under a leveraged l e a s e ) . The Internal Revenue Service guidelines determine a number of q u a l i f y i n g standards f o r a true lease. Some of t h e i r requirements which r e l a t e to the Terminal Development are as f o l l o w s : 9 ( i ) The le s s o r at a l l times during the lease and at the time the equipment i s f i r s t placed i n (206) service must have a minimum "at r i s k " investment i n the equipment of at l e a s t 20% of the adjusted b a s i s of the property. ( i i ) The remaining useful l i f e of the equipment at the end of the lease term must be the greater of one year or 20% of i t s o r i g i n a l l y estimated u s e f u l l i f e . ( i i i ) The lessee must not have a contractual r i g h t to purchase the property at l e s s than i t s f a i r market value nor may the le s s o r have a contractual r i g h t to cause any party to purchase the asset. (iv) The lessee may not have furnished any part of the purchase p r i c e of the asset nor have loaned or guaranteed any indebtedness created i n connection with the a c q u i s i t i o n of the property by the l e s s o r . The project components that may be e l i g i b l e f o r leveraged l e a s i n g include the terminal f a c i l i t i e s , storm drains, u t i l i t i e s , and dredging. The o i l f a c i l i t i e s ' r e l o c a t i o n may not q u a l i f y f o r leveraged l e a s i n g since the lessor w i l l probably not be l e g a l l y able to "own" the improvement. (207) The e f f e c t i v e i n t e r e s t cost to the developers can be lowered through using various lease a l t e r n a t i v e s . The group must however give up the tax benefit derived from depreciation. The depreciation would ul t i m a t e l y reduce the amount of tax l i a b i l i t y when the pro j e c t becomes p r o f i t a b l e . The trade-offs between the future tax expenses and the lower e f f e c t i v e i n t e r e s t costs under the lea s i n g a l t e r n a t i v e s must be c o n t i n u a l l y reviewed. The f i n a l mix of debt and/or l e a s i n g funds w i l l depend on the pro j e c t p r o f i t a b i l i t y . Such p r o f i t a b i l i t y w i l l be measured a f t e r consideration of many var i a b l e s such as c a p i t a l cost, throughput, t a r i f f s , operating costs, e t c . Deciding on the Financing Mix In the absence of long-term throughput contracts, borrowing by PBT from outside lenders w i l l not be on the basis of pro j e c t f i n a n c i n g . The debt w i l l need to be secured by guarantees from the PBT p a r t i c i p a n t s ' parent companies. Should the pro j e c t proceed on t h i s b a s i s , PBT's parent companies have agreed to guarantee the debt repayment to outside lenders i n an amount proportionate to t h e i r shareholding. Figure 5.8 indi c a t e s the structure of t h i s type of financing s i t u a t i o n . The I n d u s t r i a l Bank of Japan was retained as the i n i t i a l f i n a n c i a l advisor. Subsequently they secured the servi c e s of (208) the Investment Banking/Project Finance D i v i s i o n of the Bank of America i n Los Angeles. Their j o i n t r e s p o n s i b i l i t y was to develop and recommend an optimum U.S. dollar/yen financing package. The primary inputs for IBJ and the f i n a n c i a l sub-committee originated as follows: c a p i t a l expenditure - source: operating cost - source: throughput - source: port charge - source: land lease costs - source: Bechtel C i v i l and Minerals Inc. Port of Long Beach. Metropolitan Stevedore Co., Marketing Committee of LBICP and C. Itoh Port of Long Beach, C. Itoh, Metropolitan Stevedore Co. Upland Industries. The a n t i c i p a t e d c a p i t a l cost of the p r o j e c t i n c l u d i n g e s c a l a t i o n and i n t e r e s t during construction w i l l be i n the region of 300 m i l l i o n U.S. 1985 d o l l a r s . The f i n a n c i a l advisors and the f i n a n c i a l sub-committee structured a d e t a i l e d cash flow a n a l y s i s . Their purpose was to determine the f i n a n c i a l attractiveness of the p r o j e c t and to t e s t the p r o j e c t ' s s e n s i t i v i t y to changes i n the following items: 1. c a p i t a l costs 2. operating costs 3. terminal charges 4. throughput tonnage. (209) Although the f i n a n c i a l return of the project was s e n s i t i v e to each of these parameters, the most s i g n i f i c a n t changes were experienced by varying the terminal charge or throughput tonnage• The return on investment, return on equity, payback period, and debt service a b i l i t y were each analyzed through the cash flow presentation. The primary concerns of the partners during the conceptual and planning phase were the return on investment and equity; a very b r i e f d e s c r i p t i o n w i l l be given of these below. ( i ) Return on Investment. The i n t e r n a l rate of return on investment (IRR) i s the discount rate which equates the present value of expected future cash flows to the i n i t i a l cash outlay or investment. In t h i s case, ROI was determined before financing and income tax. (As noted i n Chapter 4 each of the p a r t i c i p a n t s prefer d i f f e r e n t f i n a n c i a l i n d i c a t o r s based on somewhat d i f f e r i n g c r i t e r i a . ) ( i i ) Return on Equity. The return on equity i s the discount rate which equates the present value of the equity investment with the present value of the annual r e s i d u a l cash (210) flow a f t e r debt amortization, i n t e r e s t , and income taxes. A return on investment c a l c u l a t i o n i s based on the t o t a l investment while return on equity i s based on only the equity c o n t r i b u t i o n . To a s s i s t the "marketing" of the project f i n a n c i n g , a f e a s i b i l i t y study on the proposed terminal was to be prepared. The r e s u l t s of the study should demonstrate i t s competitiveness with several other proposed locatio n s on the U.S. West Coast. The c r i t e r i a supplied by the executive committee was 1) the ultimate terminal charge must be lower than $ 6 . 0 0 per ton (1982 d o l l a r s ) and 2) the return on investment must be above 15%. The f i n a n c i a l advisor developed a computer model which analyzed the circumstances i n which the above conditions could be s a t i s f i e d given d i f f e r e n t l e v e l s of c a p i t a l and operating costs. Various graphs and charts were then presented i n d i c a t i n g the ranges of financing costs, operating costs, and c a p i t a l costs that could be accommodated to keep the project within the stated c r i t e r i a . The issues involved i n the f i n a n c i a l planning of such a p r o j e c t are many and complex. Resolving these issues i s further complicated by the number of p a r t i c i p a n t s and t h e i r possible divergent i n t e r e s t s (211) with respect to the financing package. The cash flow and s e n s i t i v i t y analysis have indicated there i s only l i m i t e d f l e x i b i l i t y allowed i n making changes without departing from the boundaries of the indic a t e d f i n a n c i a l l y f e a s i b l e range. With such large sums of money involved, there are small " f i n e tuning" changes that can be made to the f i n a n c i a l scheme but these tend to only marginally a f f e c t the o v e r a l l p r o j e c t return or c a p i t a l requirements. The t h e o r e t i c a l minimum cost of financing can usually be determined. The non-capital aspect of the problem r e l a t e s to the developers' a b i l i t y to control the operating costs (an es c a l a t i n g component) and t h e i r r e l a t i o n to i n i t i a l costs. The trade-offs between c a p i t a l and operating costs are at best d i f f i c u l t to make. For example the project cost can be reduced by removing the second shiploader, i n s t a l l i n g a smaller loop track, or developing smaller amounts of ground storage. If a project i s well conceived i n i t i a l l y , these decreases i n c a p i t a l costs u s u a l l y r e s u l t i n increases i n operating costs. Manpower planning e f f i c i e n c y decreases when compromises are made to the terminal plant and equipment. A d d i t i o n a l l y , these changes s i g n i f i c a n t l y detract from the terminal's a b i l i t y to be a c o s t - e f f e c t i v e i n t e r f a c e with the (212) other components of the coal chain. How these ca p i t a l / o p e r a t i n g cost trade-offs are made represents a c r u c i a l aspect of the terminal planning program. C. FOREIGN INVESTMENT PARTNER Foreign d i r e c t investment i n the United States more than doubled i n the past 5-6 years, amounting to 53.2 b i l l i o n U.S. d o l l a r s i n 1979. 1 0 The Federal Government has proclaimed a n e u t r a l i t y to t h i s foreign investment. The State and Local Governments are making s i g n i f i c a n t e f f o r t s to increase the foreign investment base. The above factors and the large and stable United States investment market w i l l l i k e l y r e s u l t i n t h i s l e v e l of investment continuing to increase over the next decade. This section w i l l p r i m a r i l y be discussing foreign d i r e c t investment where the investor exercises some degree of control over the operation of the enterprise i n which the investment has been made. A large port (and other i n f r a s t r u c t u r e ) projects r e l a t e d to the development of the steam coal l o g i s t i c s system i n the Western United States appear to be l i k e l y candidates to a t t r a c t foreign investors for a number of reasons. As outlined i n the Westpo Report these a r e : ^ 1) the desire to gain access to United States technological developments, managerial s k i l l s , and marketing techniques; 2) the proximity to large United States c a p i t a l markets f o r future financing needs; 3) the p o s s i b i l i t y of v e r t i c a l i n t e g r a t i o n to secure raw material supplies; 4) r e l a t i v e l y low United States tax rates; 5) a future depreciation of the (213) United States d o l l a r i n foreign exchange markets; and 6) the 30% tax c e i l i n g on dividend and i n t e r e s t remittances to f o r e i g n investors (depending on t r e a t i e s a p p l i c a b l e ) . The Federal Government continues to maintain i t s n e u t r a l i t y towards the f o r e i g n i n v e s t o r s . It i s r e a l i z e d that the rate of c a p i t a l formation i s a s i g n i f i c a n t contributor to the rate of economic growth i n the country. They would l i k e l y prefer not to implement any p o l i c i e s or regulations which would decrease the amount of foreign investment to avoid the adverse e f f e c t s to t h i s rate of growth. The State and Local Governments depart s i g n i f i c a n t l y from the n e u t r a l i t y p o l i c y of the Federal Government. They a c t i v e l y encourage and s o l i c i t f o r e i g n d i r e c t and i n d i r e c t investment i n t h e i r areas. According to the Westpo Report, the State and Local Governments may u t i l i z e four types of f i s c a l p o l i c i e s to stimulate foreign investments, these a r e : 1 2 ( i ) E f f o r t s to make the o v e r a l l l e v e l and structure of state and l o c a l taxes a t t r a c t i v e to industry; ( i i ) S p e c i f i c tax incentives, such as exemptions, temporary tax abatements, and low rate assessments that lower operating c o s t s . ( i i i ) Access to i n d u s t r i a l development bonds which provide lower borrowing costs enjoyed by State or Local Governments because of t h e i r tax exempt status. (214) (iv) A p o l i c y providing new firms with public services such as roadways or u t i l i t y hook-ups at l i t t l e or no cost. Although i t i s evident that foreign investment i s welcomed i n the United States, there are some concerns that l i m i t s should be placed on the amount of d i r e c t investment i n projects that are i n key areas of national i n t e r e s t or energy. These l i m i t s could also apply i n areas that have po s s i b l e major implications on the environment or other s o c i a l phenomena fo r United States c i t i z e n s . According to the Institutional/Regulatory Task Group of the Westpo, there are number of f e d e r a l acts which give the Government authority to "monitor" the l e v e l of f o r e i g n d i r e c t and p o r t f o l i o investments i n the United States, these are: ( i ) The Foreign Investment Survey Act of 1974 (P.L. 93-479). Under t h i s Act, the Secretary of Commerce was d i r e c t e d to conduct a comprehensive, o v e r a l l study of f o r e i g n d i r e c t investments i n the United States while the Secretary of the Treasury was authorized to do the same for foreign p o r t f o l i o investments. 1 3 ( i i ) The International Investment Survey Act of 1976 (P.L. 94-472). Under t h i s Act, the President i s d i r e c t e d to set up a regular and comprehensive data c o l l e c t i o n program to conduct p e r i o d i c benchmark surveys on d i r e c t and p o r t f o l i o investment. 1 4 ( i i i ) The Domestic and Foreign Investment Improved Disclosure Act (215) (P.L. 95-213). This requires expanding disc l o s u r e to the S e c u r i t i e s Exchange Commission (SEC) of b e n e f i c i a l owners (both foreign and domestic) of more than 5% of s p e c i f i e d kinds of s e c u r i t i e s . 1 5 The above l e g i s l a t i o n does not seek to l i m i t or r e s t r i c t the amount of f o r e i g n investment. It does provide a system of monitoring these l e v e l s and would be a s t a r t i n g point should some protection be deemed necessary i n c e r t a i n areas of national s e c u r i t y , i n t e r e s t , or energy p o l i c i e s . There are, however, some exceptions to t h i s broad federal p o l i c y of non-in t e r f e r e n c e . They are r e l a t e d s p e c i f i c a l l y to areas of ownership of firms i n n a t i o n a l defence i n d u s t r i e s , c e r t a i n natural resource sectors of economy, co a s t a l and fresh-water shipping, domestic radio communications, domestic a i r transport, a c q u i s i t i o n of f e d e r a l mineral lands, and h y d r o e l e c t r i c power.^ 6 As discussed i n Chapter 2, most proposed bulk loading terminals have as p a r t i c i p a n t s e i t h e r a resource owner, a foreign trading company, a foreign coal user, or a combination of these. The C. Itoh partner of the Long Beach Project plans to d i l u t e i t s 45% d i r e c t investment through s e l l i n g parts of t h i s ownership to Japanese e l e c t r i c u t i l i t y and cement companies. These same companies w i l l become major users of the terminal. This structure i s acceptable to the United States Government. It has further been based on a minority foreign ownership by the developers to avoid future problems should changes be made that would discriminate against majority or equal foreign ownership. (216) The p o t e n t i a l owners of the terminal, through guidance by the Port, have been s e n s i t i v e to a l l f e d e r a l / s t a t e / l o c a l regulations that may p e r t a i n to the foreign ownership is s u e . This point becomes extremely important given the " p u b l i c " aspect of the terminal f a c i l i t y and the surrounding p o l i t i c a l s e n s i t i v i t i e s to the economic function of the terminal i n allowing the export steam coal trade to m a t e r i a l i z e . It must be r e a l i z e d that matters of nati o n a l s t r a t e g i c importance, r e s t r a i n t of trade, and d i s c r i m i n a t i o n , are a l l important aspects of operating a public export terminal on the West Coast. There could be a d d i t i o n a l problems i f the proposed terminal i s perceived as a monopoly i n r e l a t i o n to some mine l o c a t i o n s . D. LEGAL'AND RESTRAINT OF TRADE IMPLICATIONS There are a number of U.S. Federal laws which seek to prevent monopolistic market s i t u a t i o n s and other r e s t r a i n t s of trade. These laws attempt to promote competition i n a l l U.S. trade. The p r i n c i p a l laws i n t h i s area are the Sherman Anti-Trust Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. 1 7 In addition to these federal s t a t u t e s , most states have created a n t i - t r u s t statutes as part of t h e i r body of law. It cannot be emphasized enough that a public port f a c i l i t y , i n addition to being bound by the Acts mentioned e a r l i e r , are constrained very severely against any discrimination i n p r i c e or services through the nature of t h e i r state c o n t r o l l e d "public" authority to operate. The Port operations are further c o n t r o l l e d by the Inter-State Commerce Commission and the J u s t i c e Department. (217) Although i t may be possible that there i s adequate competition on the producing, i n l a n d , and ocean f r e i g h t markets, i t i s conceivable that the f i r s t large West Coast coal port could be i n a perceived monopoly s i t u a t i o n . This could continue for a number of years u n t i l the demand for steam coal swells to a point which would j u s t i f y a second major f a c i l i t y . The issue here i s one of ensuring that i n i t i a l operating costs and terminal throughput charges are i d e n t i f i e d very p r e c i s e l y as major increases i n p r i c e may be subsequently d i f f i c u l t to a t t a i n due to attention these p r i c e increases may receive from the various governmental/legal bodies. The developers may have some r e l i e f from the r e s t r a i n t of trade p o s i t i o n through the Webb Pomerantz Act of 1918.^8 This Act allows p r o t e c t i o n from the Sherman Anti-Trust Act i f the asso c i a t i o n has been formed s o l e l y f o r the purpose of engaging i n export t r a d e . 1 9 Obviously the function of a major export terminal i s export trade. However, there i s no s i g n i f i c a n t h i s t o r y of use of the Webb Pomerantz Act to give the partners assurances they w i l l be protected from accusations of r e s t r a i n t of trade or monopoly p r i c i n g techniques. The p r o j e c t development with a foreign partner should not be impeded by the r e g u l a t o r y / l e g a l framework of any U.S. Governments. The most d i f f i c u l t issue i n t h i s respect has been an i n t e r n a l matter of choosing a partnership or a corporation. In the case of a U.S. corporation with a for e i g n p a r t i c i p a n t , the U.S. Government requires complete and d e t a i l e d f i n a n c i a l reporting of the parent companies. This regulatory requirement (218) would apply to the U.S. owners, C. Itoh and Company and a l l p o t e n t i a l Japanese end user p a r t i c i p a n t s . These d e t a i l e d reporting requirements may be an obstacle to the formation of the corporation. E. SOCIO-ECONOMIC ASPECTS There are two areas which need to be discussed i n regard to the socio-economic impacts of a major terminal project i n the San Pedro Basin. The f i r s t i s the 3-4 years of construction a c t i v i t y during which as many as 300-400 l o c a l tradesmen and other construction personnel w i l l be involved. They w i l l be employed by the sub-contractors completing various portions of the terminal i n s t a l l a t i o n and construction work. The second i s the terminal operation. The d e t a i l e d engineering and design w i l l l i k e l y be undertaken by a construction firm located outside of the Los Angeles/Long Beach area. It w i l l not be u n t i l actual construction a c t i v i t y commences that any major impacts can be a n t i c i p a t e d . It i s reasonable to assume that, with the very large population base i n the Los Angeles/Long Beach areas, there w i l l be l i t t l e need to import any of the work force. Further, a construction p r o j e c t of t h i s nature w i l l have a r e l a t i v e l y minor impact through the construction wages and or other secondary benefits/costs that are an t i c i p a t e d to accrue given the large metropolitan area. A d d i t i o n a l l y , the high degree of unionism i n a l l the construction trades involved on the s i t e area w i l l mean that l o c a l residents w i l l r e t a i n a l l of the construction work. This i s very d i f f e r e n t from the construction of a new (219) mine project where the population of a small mining community could be increased by over 100%. There w i l l be permanent employment for approximately 85 people at the terminal l o c a t i o n . The socio-economic impacts to the l o c a l community w i l l not be great given t h i s s i z e labour force. An important con t r i b u t i o n to the community w i l l be the revenue from the port. This w i l l improve the f i n a n c i a l a b i l i t y of the C i t y of Long Beach to serve i t s l o c a l c i t i z e n s . Where large socio-economic impacts can accrue are i n regard to a new mine pr o j e c t opening because the port f a c i l i t y i s allowing a more cost e f f e c t i v e l o g i s t i c s system. This could be encouraging expansion of the trade which would have not otherwise ma t e r i a l i z e d . The Westpo Report in d i c a t e s that socio-economic problems should "rank highest i n the p r i o r i t y of those seeking to expand the development of western c o a l , because they do not lend themselves to the kind of regulatory d e f i n i t i o n s and solutions characterized p h y s i c a l environmental is s u e s , but can have consequences that are j u s t as tangible and troublesome".20 The Westpo statement h i g h l i g h t s the f a c t that the socio-economic aspects have been relegated to a lower l e v e l of importance. They are more e a s i l y compromised due to t h e i r lack of d e f i n i t i o n compared to the environmental c o n s t r a i n t s . I t must be r e a l i z e d at the present time the major socio-economic impacts from the development of western coal w i l l l i k e l y be at (220) the mine s i t e s . These are the communities which w i l l experience the most ra p i d growth and other s o c i a l and economic changes that accompany t h i s type of change. The Westpo Report does not include a very important consideration. U n t i l the end of the century the preponderance of Western steam coal w i l l be sold domestically. Estimates are that only 8.6 percent of production w i l l be exported i n 1985 and 5-8% w i l l be exported i n 1995.21 As the Port w i l l not have the socio-economic impacts of a major mine development, Westpo may be overstating the socio-economic impacts caused by the export sector of the western coal development. The terminal developer w i l l l i k e l y continue with the project on the basis of some minimum throughput guarantee l e v e l s f o r the export of western steam coal to the P a c i f i c Rim users. If these long-term throughput contracts e x i s t , i t can be assumed the developers of the mines, the r a i l r o a d s , and other l i n k s i n the l o g i s t i c s chain must have overcome or at le a s t mitigated the socio-economic (and a l l other) impacts. F. TECHNOLOGY AND ENERGY MARKET RISKS Future changes i n the a v a i l a b i l i t y of other energy sources, competition from other ports, and changes i n technologies could present major external issues i n the development of the Long Beach Terminal Project. In addition to the various s i t e l o c a t i o n s espousing proposed development plans i n Chapter 3, the r o l e of o i l and nuclear energy may change during the terminal planning horizon. Technologies and methodologies regarding a l t e r n a t i v e s to conventional port loading f a c i l i t i e s may m a t e r i a l i z e . (221) With a 20-year p r o j e c t horizon, i t i s e n t i r e l y possible that present ideas could be r e f i n e d and implemented or that t o t a l l y new energy systems could be conceived. I f these concepts become an operational r e a l i t y i t could s i g n i f i c a n t l y impact the success of the Long Beach Terminal. A number of these a l t e r n a t i v e s and t h e i r impacts on the Project w i l l be discussed i n t h i s s e c t i o n : 1. The Market For O i l The s t a b i l i t y of the petroleum market and/or a sub s t a n t i a l number of new discoveries could s e r i o u s l y impact the u t i l i z a t i o n of c o a l . O i l imports appear to dominate a l l other issues i n the world energy p o l i c y and i t i s u n l i k e l y t h i s w i l l change i n the future. New o i l d i s c o v e r i e s , or a greater willingness of the more stable supply countries to enter i n t o long-term supply contracts, could have a d r a s t i c a f f e c t on the ant i c i p a t e d P a c i f i c Rim demand for c o a l . Economists are not sure that economics of coal versus o i l have yet reached the s t a b i l i t y p o i n t . Over the next few years, the r e l a t i v e importance of coal to the P a c i f i c Rim economies could be s u b s t a n t i a l l y changed should OPEC and other o i l producing areas take steps to reduce t h e i r p r i c e to a l e v e l which made coal a l e s s competitive a l t e r n a t i v e . This s i t u a t i o n could change i n favor of coal a l s o . 2. The Nuclear Option The p r o l i f e r a t i o n of nuclear power i s another source that could (222) counter the move to massive coal u t i l i z a t i o n i n the P a c i f i c Rim countries. As i n d i c t e d i n e a r l i e r chapters, at present there are various economic, environmental, and s o c i a l problems r e l a t e d to the development of the nuclear option. I t i s p o s s i b l e these could be reduced through new technological or safety developments such that an expanded nuclear program could develop. It appears that nuclear problems are with us for the short term. There i s , however, no i n d i c a t i o n that i n the next ten to f i f t e e n years, breakthroughs cannot be taken to resolve some of the problems. The nuclear option could then be implemented as a major energy source. 3. Coal~Slurry Transport and Ship-Loading The technology of coarse and f i n e s coal s l u r r y has been investigated and tested s u f f i c i e n t l y to make t h i s a probable a l t e r n a t i v e within the next 2-5 years. Programs are cu r r e n t l y being developed by Wheelabrator-Frye and Bechtel i n t h i s research area. The concept involves a conventional on-shore coal r e c e i v i n g and storage l o c a t i o n . Coal would be reduced to a 4 inch minus s i z e and pumped through an underground/seabed p i p e l i n e to an offshore mooring buoy (approximately 2-3 miles offshore and i n 100-200 fee t of water). After the coal was loaded aboard a v e s s e l , the decanted water would return v i a a second p i p e l i n e to the Terminal f a c i l i t y f o r reuse. The c a p i t a l costs for t h i s type of f a c i l i t y would be approximately 20-30% more than a conventional coal loading f a c i l i t y . However, the operating costs would be s i g n i f i c a n t l y reduced and the opportunity of using maximum size c o l l i e r s to take f u l l advantage of the economies (223) of scale for ocean shipment would be av a i l a b l e to many location s (for both shipping and r e c e i v i n g ) . This system o f f e r s the opportunity to locate i n a non-residential port area and take advantage of remote coas t a l l o c a t i o n s thereby reducing the environmental and socio-economic impacts considerably below that of a standard f a c i l i t y . 4. Shallow"Draft C o l l i e r s Development of shallow d r a f t c o l l i e r s has been a topic of i n t e r e s t i n the United States and the P a c i f i c Rim countries f o r a number of years. There are presently several low draft/high deadweight vessels operating between the New South Wales ports i n A u s t r a l i a and P a c i f i c Rim countries. A d d i t i o n a l l y , many research and development programs are presently i n progress by the Maritime Administration i n the United States and various departments of the Japanese Government. Marad published a preliminary design i n 1982 which would enable a 45-foot d r a f t v e s s e l to be loaded to 144,000 tons deadweight ( t h i s i s an increase of 60,000 tons deadweight over a conventional 45 foot d r a f t v e s s e l ) . 2 2 There are further studies necessary regarding the construction costs of t h i s type of vessel versus standard v e s s e l s . Measures must also be made of a d d i t i o n a l operating costs r e l a t i n g to the lack of f l e x i b i l i t y i n trading patterns. It appears that t h i s technology could be developed and used for dedicated vessels to service a p a r t i c u l a r set of ports over a long term throughput contract. This development has the p o t e n t i a l of enabling ports on (224) the Columbia River and other locations on the West Coast to e f f e c t i v e l y compete with Long Beach i n ocean shipping economies of s c a l e . 5. Coal Derived Sources Technological developments are being made i n the use of coal derived energy sources such as d i f f e r e n t gases, coal o i l mixtures, and methanol. United States conversion f a c i l i t i e s could produce the coal by-products and ship the more r e f i n e d energy sources. The requirement for the export coal i t s e l f and an export terminal f a c i l i t y could be reduced. These types of changes are c e r t a i n to come as the world d i v e r s i f i e s i t s menu of energy a l t e r n a t i v e s . The developers of a major conventional port loading f a c i l i t y must be reasonably confident that these changes w i l l not occur within the planning horizon of t h e i r investment schedule. The a l t e r n a t i v e i s to secure enforceable long-term contracts which w i l l protect the investment for i t s accounting l i f e . E. CONCLUSION The essence of business i s r i s k . The a b i l i t y of management to quantify and minimize r i s k i s a major aspect of any p r o j e c t development. The external issues o u t l i n e d i n t h i s chapter contribute to the r i s k p r o f i l e which must be considered by the developers. These r i s k s are not mutually excl u s i v e . The t o t a l perceived r i s k r e s u l t i n g from the d i f f e r e n t aspects of the external development issues w i l l form the bases for the development (225) d e c i s i o n . These w i l l be augmented by technology changes and currency f l u c t u a t i o n s which are beyond present day forecasting a b i l i t y . The decision to proceed w i l l not be an easy one. (226) END NOTES 1. Western Governors P o l i c y O f f i c e , Western Coal Export Task Force, Report of the Institutional/Regulatory Task Group, Western Coal Exports to the  P a c i f i c Rim, 1982, p. 6. 2. U.S. Department of Energy, (prepared by Zinder-Neris Inc.), F i n a l Draft to the Interagency Coal Export Task Force, U.S. Coal Exports - The Far- East, November 1980, Section 2.1.18. 3. Western Governors P o l i c y O f f i c e , op. c i t . , p. 13. 4. Ib i d . , p. 16. 5. I b i d . , p. 18. 6. U.S. Department of Energy, op. c i t . , Section 1.2.15. 7. U.S. Treasury Department, Proposed Resolution to Tax Exempt  Financing Programs, Washington Week, January 16, 1982, p. 11. 8. Presentation to Long Beach Executive Committee by I n d u s t r i a l Bank of Japan, A p r i l 14, 1982. 9. I b i d . 10. Western Governors P o l i c y O f f i c e , op. c i t . , p. 158. 11. I b i d . ( P* 158. 12. Ibid., P« 159. 13. Ibid., P- 162. 14. Ibid., P* 162. 15. Ibid., P« 162 16. Ibid., - P* 168. 17. Ibid., P« 183. 18. Ibid., - P« 190. 19. I b i d . r P« 191. 20. Ib i d . r P» 32. (227) 21. I b i d . , p. 14. 22. U.S. Department of Transportation, Maritime Administration, Shallow Draft C o l l i e r Designs, Charles B. Cherrix, Project D i r e c t o r , o f f i c e of Shop Design, Report PD-267, November, 1981. (228) TABLES AND FIGURES (229) FIGURE 5.1 TABLE OF CONTENTS FOR EIR/EIS STUDY 1. Assemble a thorough d e s c r i p t i o n of the proposed project i n c l u d i n g environmental protection systems, planning and economic a n a l y s i s . 2. I d e n t i f y , review and assess a l l relevant environmental data i n order t o : • summarize the data base, focusing on the regional areas poten-t i a l l y a f f e c t e d by the project; • i d e n t i f y and discuss s e n s i t i v e environmental features; • i d e n t i f y data gaps; and • i d e n t i f y and discuss environmental features that can a f f e c t p r o j e c t conduct and the design of subsequent development plans. 3. I d e n t i f y , describe, and place i n perspective a l l p o t e n t i a l environ-mental concerns associated with the Long Beach Coal Terminal p r o j e c t ; assess s i g n i f i c a n c e . 4. Recommend m i t i g a t i n g measures. 5. Evaluate f e a s i b l e a l t e r n a t i v e plans. 6. Discuss other planning considerations i n c l u d i n g : • p o t e n t i a l growth-inducing impact; • boundary of the p o t e n t i a l l y a f f e c t e d area; • r e l a t i o n s h i p between short-term uses and long-term p r o d u c t i v i t y ; • i r r e v e r s i b l e and i r r e t r i e v a b l e commitments of resources; • energy consumption; and • a e s t h e t i c s . Source: Chambers Consultants and Planners proposal for Long Beach International Coal Project EIR/EIS. August, 1981, p. 64. (230) FIGURE 5.2 EXPORT CREDIT FORMAT JAPANESE EXPORT MANUFACTURER/TRADER PACIFIC BULK TERMINAL COMPANY Sources: An Interim Report on Funding Sources prepared f o r the members of the Executive Committee of the Long Beach International Coal Pro j e c t . I n d u s t r i a l Bank of Japan, January 14, 1982, p. 7. (231) FIGURE 5.3 OVERSEAS INVESTMENT CREDIT FORMAT EXPORT-IMPORT BANK OF JAPAN JAPAN COMMERCIAL BANKS JAPAN COMMERCIAL LEAD BANK JAPANESE INVESTOR (C. ITOH & CO.) PACIFIC BULK TERMINAL COMPANY Sources: An Interim Report on Funding Sources prepared for the members of the Executive Committee of the Long Beach International Coal Project. I n d u s t r i a l Bank of Japan, January 14, 1982, p. 6. (232) FIGURE 5.4 YEN-SYNDICATED LOAN FORMAT JAPANESE COMMERCIAL BANKS PACIFIC BULK TERMINAL COMPANY Source: Long Beach International Coal Project Economic F e a s i b i l i t y Analysis prepared by I n d u s t r i a l Bank of Japan, A p r i l 1982, p. 17. (233) TABLE 5.5 EFFECTIVE INTEREST COSTS WITH U.S. DOLLAR/YEN EXCHANGE RATE MOVEMENTS Annual Rate of Revaluation (or Devaluation) Exchange Rate at 10 Years Later Real Interest Rate % p.a. Japanese Yen per U.S. d o l l a r % p.a. Devaluation of Yen - 1.0 - 0.5 243.26 231.31 7.55 8.08 Base Case - 220 8.60 0.5 209.30 9.12 Upward Revaluation of Yen 1.0 1.5 2.0 199.16 189.57 180.48 9.64 10.16 10.68 2.5 171.86 11. 19 3.0 163.70 11.71 Assumptions 1 Interest Rate: 8.6% p.a. 2 Term: 10 years, i n c l u d i n g a 3-year grace period 3 Repayment: Semi-annual equal amortization schedule 4 Base Currency: Japanese Yen. (Borrowing i n yen and repaying i n U.S. d o l l a r s based on the revised exchange rate i n e f f e c t at the time of repayment) Source: Chambers Consultants and Planners proposal for Long Beach International Coal Project EIR/EIS. August, 1981, p. 85. (234) FIGURE 5.6 SAFE HARBOR LEASE FORMAT MANUFACTURERS sale of equipment TRADING FIRM supplier's c r e d i t r-i PBT (LESSEE) yen JAPANESE COMMERCIAL BANKS U.S. FINANCE SOURCES 1 — 1 I l _ . debt 70% Sale of equipment lease back rent THIRD PARTY (LESSOR) I I down payment 30% Source: Proposed Funding Plans and Structure of Funding for the Long Beach  International Coal Project. I n d u s t r i a l Bank of Japan, June, 1982, p. 18. (235) FIGURE 5.7 LEVERAGED LEASE FORMAT equity funds rents INDENTURE TRUSTEE Assignments )f lease and rent PBT (LESSEE) lease yen c r e d i t or d o l l a r c r e d i t JAPANESE COMMERCIAL BANKS debt funds debt service purchase p r i c e MANUFACTURER t i t l e of equipment OWNER TRUSTEE (LESSOR) e.p.| | e.p.| I e.p LENDER notes (non-recourse to equity p a r t i c i p a n t s ) *e.p.= equity p a r t i c i p a n t Source: Proposed Funding Plans and Structure of Funding for the Long Beach  International Coal Project. I n d u s t r i a l Bank of Japan, June, 1982, p. 25. (236) FIGURE 5.8 PARENT COMPANY FINANCING GUARANTEE FORMAT 1 JAPANESE USERS PBT Indication of throughput I I J loan LENDER in c l u d i n g lenders of debt portion i n the leveraged lease transaction Source: Proposed Funding Plans and Structure of Funding for the Long Beach  International Coal Project. I n d u s t r i a l Bank of Japan, June, 1982, p. 22. (237) CHAPTER 6 PROJECT/IMPLEMENTATION AND CONTRACTING INTRODUCTION The management of the implementation phase i s very d i f f e r e n t from that of the conceptual/planning phase. The r e a l i t y of managing a 250 m i l l i o n d o l l a r construction project i s equally as complex as undertaking a f e a s i b i l i t y study. The s i g n i f i c a n t l y greater d e t a i l required i n r e l a t i o n to a l l the development issues i s obvious. However, the organizational structure must adapt to changes from a study environment to an operating environment. The chapter w i l l o u t l i n e the objectives which must be accomplished i f the implementation phase i s to proceed as planned. This w i l l include discussions of (a) the major contractor requirements; (b) the marketing programme; (c) f i n a n c i a l issues; (d) organizational start-up; and (e) union negotiations. A d d i t i o n a l l y , the throughput contract w i l l be examined i n r e l a t i o n to the r i s k s accepted by the various p a r t i e s to a coal sales and transportation agreement. PARTICIPANTS The r o l e s of the p a r t i c i p a n t s change dramatically from the conceptual stage to the implementation phase. The port and Upland Industries were (238) major contributors to the cost of the conceptual phase. The implementation phase up to and i n c l u d i n g the operation of the terminal w i l l l i k e l y be funded p r i m a r i l y by the PBT partners (C. Itoh, CMC and Metropolitan) . The Long Beach port management w i l l have a major r o l e i n the continuing development given t h e i r requirement to c o n t r o l the design and operational parameters of the f a c i l i t y to ensure that i t i s as successful as p o s s i b l e . A d d i t i o n a l l y the Port and/or Upland may have a f i n a n c i a l involvement up to an amount of $66 m i l l i o n f o r the o i l well r e l o c a t i o n programme. The p r i v a t e partners are i n d i c a t i n g they w i l l not accept t h i s cost as part of the p r o j e c t . C. IMPLEMENTATION If the developers decide to proceed with the implementation and construction phase of the p r o j e c t , i t i s important that t h i s be managed, co-ordinated, and administrated competently to ensure the owners' objectives are achieved. Unlike the conceptual/planning phase which by d e f i n i t i o n allows the f l e x i b i l i t y f o r making major changes ( i n c l u d i n g c a n c e l l i n g the p r o j e c t ) , the terminal must proceed according to plan or there w i l l be major cost increases. The p r i v i l e g e of having an interim decision point w i l l pass. If a go-ahead decision i s made, reversing or changing plans w i l l be e i t h e r impossible or very expensive. This w i l l not be acceptable to the owners i n any case. There are s i x basic tasks to implementation of the Long Beach p r o j e c t : (239) 1. Resolving the issue of a corporation versus a partnership. 2. F i n a l i z i n g major engineering and construction contracts. 3. E s t a b l i s h i n g a marketing program. 4. F i n a l i z i n g the f i n a n c i a l program. 5. Setting up the i n i t i a l administrative and operations organization. 6. Commencing union negotiations. 1. Corporation vs Partnership The problem of a corporation versus a partnership i s a d i f f i c u l t one for the p a r t i c i p a n t s to resolve. The U.S. Anti-Trust provisions require a lengthy reporting process i n v o l v i n g s i g n i f i c a n t data and reports from the foreign partners. If the pro j e c t proceeds i t w i l l not be pos s i b l e to continue with the PBT unincorporated j o i n t venture status. The s t r u c t u r i n g of the financing package w i l l be dependent on the types of organization and the tax consequences of each. There are a number of ways which t h i s problem can be overcome i n i t i a l l y to allow the financing programme to continue, ( t h i s w i l l be described i n the finance s e c t i o n ) . A d d i t i o n a l l y , as part of t h i s fundamental ownership iss u e , the l e g a l d e t a i l s such as a r t i c l e s of the as s o c i a t i o n , Board members, voting r i g h t s , share holding etc., w i l l need to be completely and formally resolved. 2. Engineering Contract The developers w i l l have to decide whether to proceed with an Ar c h i t e c t and Engineering (A & E) or Engineering Procurement and (240) Construction Management (EPCM) engineering contract. The d e t a i l s of these agreements w i l l need to be worked out regarding what i s included/excluded i n the f i x e d portion of the p r i c e and what escalations would continue as a r e s p o n s i b i l i t y of the developers (these would r e l a t e p r i m a r i l y to large terminal equipment components which could not be ordered presently on a f i x e d p r i c e basis from suppliers) . The engineering procurement and management a c t i v i t y w i l l need to be divided i n t o two separate f u n c t i o n a l areas; (1) the o i l well removal programme and (2) the terminal construction. While the terminal construction costs contain a high degree of r i s k on some of the major operational components, these have been reasonably covered by contingencies i n the engineer's/estimator's p r i c i n g mechanisms. This same contingency p o l i c y has been followed under the o i l well r e l o c a t i o n programme. However, a much greater r i s k e x i s t s i n t h i s area to exceed expense and time frame schedules. There are a large number of unknowns with respect to the condition of the underground p i p i n g , the extent of sump geological decay, e t c . The engineering contractor w i l l function under the supervision of the PBT partnership and the port engineering management. The contractor w i l l need to co-ordinate these two tasks to remain on the construction schedule without a d v e r s i l y a f f e c t i n g the p r o d u c t i v i t y from Champlin's d r i l l i n g operations. (241) The engineering contract w i l l specify the construction schedule. Major target dates may involve penalties or bonuses ( i f any) for l a t e or e a r l y completion. A major aspect of t h i s document would be the i n d i c a t e d timing of the c a p i t a l expenditures as t h i s would form the basis of the draw-down from financing sources. The engineering contract document i s much more than a commitment to complete the work within f i n a n c i a l and temporal guidelines. I t involves a s p e c i f i c r e l a t i o n s h i p to a stated l e v e l of technology and design c r i t e r i a . These form the minimum acceptable l e v e l s f or the s t r u c t u r a l and operating terminal performance. One of the most d i f f i c u l t tasks during the construction phase w i l l be the engineering supervision of suppliers and sub-contractors. I t must be determined that they are meeting the requirements of the d e t a i l e d s p e c i f i c a t i o n s . Another d i f f i c u l t task i s the owner/developer supervising the engineering contractor to ensure that he i s discharging h i s r e s p o n s i b i l i t i e s i n a p r o f e s s i o n a l manner and monitoring the sub-contractors e f f e c t i v e l y . 3. Marketing Programme A minimum acceptable l e v e l of throughput guarantees are a p r e r e q u i s i t e f o r b u i l d i n g the terminal f a c i l i t y . In the present P a c i f i c Rim coal market t h i s l e v e l i s l i k e l y to be below the l e v e l of a c t i v i t y which would achieve the owner's desired return on the terminal investment. I t i s possible that the developers would (242) proceed with the p r o j e c t i f throughput contracts were a v a i l a b l e which only covered a break even cash p o s i t i o n i n the f i r s t few years. To expand the terminal business to the planned tonnages, a p r o f e s s i o n a l marketing/ information program w i l l be designed to make western coal producers and p o t e n t i a l end users aware of the f a c i l i t y completion date and operating c a p a b i l i t i e s . Part of t h i s marketing program w i l l involve developing a set of "rates" f or throughput based on the competitive environment, tonnage volumes, contract durations, storage requirements, t e c h n i c a l s p e c i f i c a t i o n s of the c o a l , and a number of other parameters. These rates must take i n t o account the rate l e v e l s used i n the f i n a n c i a l pro-formas but also must consider the r e a l i t i e s of the market i n the near and medium term and the "inducement e f f e c t " required to stimulate expansion of the trade. As a v i t a l part of the throughput contract, (discussed further i n a separate s e c t i o n ) , the operating c a p a b i l i t i e s w i l l need to be reviewed to the extent that commitments are made as to the terminal *s "performance". This w i l l involve p a r t i c i p a t i o n i n demurrage and dispatch f o r ships and t r a i n s . A d d i t i o n a l l y , t h i s type of commitment w i l l give p o t e n t i a l users confidence i n the c a p a b i l i t i e s of the terminal. I t also w i l l a s s i s t the r a i l and ship modes i n making f i n a l p r i c e refinements which previously had been based on r e s u l t s of the conceptual study. The f a c t that the developers are prepared to accept f i n a n c i a l l i a b i l i t i e s should performance f a l l short of a (243) stated c r i t e r i a w i l enhance the a b i l i t y of the project to a t t r a c t new customers. In the Long Beach example, there i s an added advantage that long term throughput contracts can be signed during the implementation stage i n v o l v i n g near term coal shipments. These early shipments would be serviced by the e x i s t i n g P ier G f a c i l i t y u n t i l the new f a c i l i t y became operati o n a l . There may be some p r i c e d i f f e r e n t i a l s involved i n the f i r s t several years to r e f l e c t the much slower operating rates of the present f a c i l i t y , but i t does provide a co n t i n u i t y of service that other planned terminals are unable to o f f e r . 4. Financing Issues The financing schemes discussed during the conceptual stage w i l l need to be f i n a l i z e d with the developers making decisions regarding financing mix, duration of debt, currencies, e t c . Although the three p r i v a t e companies i n PBT w i l l meet to make these decisions, there may be inputs from the port and/or Upland should e i t h e r decide to a s s i s t with: (a) o i l well r e l o c a t i o n costs; (b) p l a c i n g I n d u s t r i a l Revenue Bonds; or (c) e s t a b l i s h i n g lease transactions. To the extent that port revenue bonds are used, they may be e i t h e r secured s p e c i f i c a l l y against the project assets or against the general revenues of the Port. In the l a t t e r case the port would need to be involved to ensure that the covenants are not so r e s t r i c t i v e as (244) to preclude or r e s t r i c t furthur borrowing p o s s i b i l i t i e s by the port f o r other p r o j e c t s . Although the f i n a n c i a l commitments w i l l involve covenants as to minimum working c a p i t a l l e v e l s , debt service coverage, and other c r i t e r i a , the present lack of throughput agreements w i l l require parent company f i n a n c i a l guarantees f o r the majority of the financing based on t h e i r p a r t i c i p a t i n g shareholding. This w i l l not represent pure project financing as discussed e a r l i e r and indicates the high degree of r i s k the pro j e c t represents to p o t e n t i a l lenders. One of the prime o r i g i n a l objectives of the Finance Sub-Committee was to avoid partner guarantees through the use of eit h e r yensyndicated loans or yen export c r e d i t s which would be t i e d to the contractual performance of the major throughput contracts (representing u l t i m a t e l y a Japanese government guarantee). With no throughput guarantees a v a i l a b l e i n i t i a l l y to support the yen loans, t h i s type of financing w i l l also l i k e l y need to be supported by parent company guarantees. Although the f i n a l financing package i s only speculation at t h i s time, some generalizations can be made about the l i k e l y approach of the developers given the present s i t u a t i o n , (as of 3rd quarter 1982), i n both the f i n a n c i a l and coal markets. Current i n t e r e s t rates do not make long term obligations a t t r a c t i v e and i t may be a n t i c i p a t e d that some interim construction financing may be considered. The (245) placement of the long term debt would be deferred u n t i l market conditions become more favourable. There are presently yen export c r e d i t s a v a i l a b l e (given the decision i s taken to purchase major terminal components from Japanese suppliers) i n 7-8 year maturities with no penalty for prepayment. Yen-syndicated loans and Port I n d u s t r i a l Revenue Bonds would then be used i n conjunction with a leveraged lease to cover a portion of the basic financing on a long term b a s i s . This would reduce the r i s k to the developers i n the medium term should i n t e r e s t rates s t a b i l i z e at a very high rate at a time they must r o l l - o v e r the interim f i n a n c i n g . Whatever the financing scheme, i t w i l l be based on a "framework" for construction/ownership of the terminal which takes maximum exceptance from the regulations imposed on the public port sponsored work. These regulations can be avoided by delegating construction r e s p o n s i b i l i t i e s to one of the private sector owners. An example of such a framework, although not representing what w i l l be done by the group, o f f e r s an i n d i c a t i o n of the v a r i e t i e s of approaches to s o l v i n g the p u b l i c versus p r i v a t e i s s u e . Three major o v e r r i d i n g f a c t o r s are involved i n the establishment of a framework for constructing the terminal f a c i l i t y . The f i r s t i s that the port as a public f a c i l i t y must proceed with a l l contracting work on a t o t a l b i d basis (which means sealed bids and lowest bidder r e c e i v i n g the work). They are not allowed to proceed with port work on the basis of negotiated contracts. The second item i s that C. (246) Itoh and the other Japanese s t e e l and cement companies w i l l be the ultimate owners of 45% of the terminal. These companies have l i t t l e independent i n t e r e s t i n the tax cr e d i t s which w i l l flow from t h i s p r o j e c t . The t h i r d item i s the difference of opinion between the PBT partners as to t h e i r formation as a corporation or a partnership. To the extent that these issues can be resolved through the management framework i t w i l l enhance the project's t o t a l cost of funding and improve the a b i l i t y of the operators to control the construction phase. One framework which would allow some benefits i n each of the above areas would be to allow one of the larger p r i v a t e i n t e r e s t s to construct the terminal on a negotiated b i d basis ( t h i s would need to be e i t h e r Upland Industries or Crowley Maritime Corporation). The funds which they would use to construct the terminal f a c i l i t y could be provided by the Port of Long Beach based on short term tax free notes sold to the i n s t i t u t i o n a l market at 9 or 10% i n t e r e s t . Uplands could lease the land to Crowley Maritime or to another party who would agree to complete construction of the terminal f a c i l i t i e s . The completed terminal f a c i l i t y would be leased to the Port of Long Beach. The Port's master lease would guarantee the take-out financing with regard to Yen loans and/or c r e d i t s . The port i n turn would sub-lease i t s lease to the PBT partners with the p r i n c i p a l s guaranteeing f i n a n c i a l performance. The constructor and lessor of the terminal would be e n t i t l e d to receive a l l the tax c r e d i t s (247) a v a i l a b l e under a partnership. This could resolve the d i f f i c u l t i e s i n f i n a l i z i n g the proposed PBT organizational structure. This approach would allow the partners to take f u l l advantage of the tax c r e d i t s i n d i v i d u a l l y . This would permit a corporate structure f o r PBT without any loss of tax b e n e f i t s . The above example represents one of a number of ways that c r e a t i v e financing packages could be organized under a construction management framework. The objective i s to take maximum advantage of a v a i l a b l e tax benefits and minimize the d i f f i c u l t i e s involved with such a large j o i n t venture. I t should be noted, however, that the number of a l t e r n a t i v e s w i l l decrease as the f i n a n c i a l r i s k of the p r o j e c t i s perceived to increase by the p o t e n t i a l lenders. If there were throughput guarantees and s u b s t a n t i a l lender confidence, the number of frameworks could be considerable. The constraints would be the l e g a l and f i n a n c i a l requirements of the United States, C a l i f o r n i a , and the various lending i n s t i t u t i o n s . The financing package i s important to the project as both a source of funds and an i n d i c a t i o n of how others ( e s p e c i a l l y i n Japan and other P a c i f i c Rim countries) view the project's f e a s i b i l i t y . The cost of t h i s package should not be the deciding f a c t o r . If the developers make a decision to proceed, i t w i l l not n e c e s s a r i l y be based on an analysis which shows an a t t r a c t i v e project beyond the s e n s i t i v i t i e s to d i f f e r e n t i n t e r e s t rates or financing schemes. The f i n a n c i a l o bjective i n the implementation stage i s to minimize the cost of (248) funds f o r the l i f e of the pro j e c t given the construction management framework decided by the owners. 5. Organizational Start-Up This i s an important task during the implementation phase. Both an operational (overseeing the construction/engineering), and administrative organization must be set up to manage costs, disburse funds, report progress to owners, and complete a host of other a c t i v i t i e s s i m i l a r to most new organizations. The important aspects are the voting r i g h t s , r o t a t i n g chairmanship, expenditure a u t h o r i t i e s , and general operational and administrative p o l i c y formulations. There are differences of opinion at t h i s point i n respect to whether the senior management i n the operations and administrative functions should be generated i n t e r n a l l y from the partners or hi r e d from outside the group. In the Long Beach case i t had been agreed previously that should the pro j e c t proceed Metropolitan Stevedore would manage the operations and CMC would manage the administration. An engineering construction management committee with representatives from each partner would oversee the d e t a i l e d aspects of the engineering and construction. During the construction stage the involvement of the senior partner management would l i k e l y be only on an exception basis i f costs or schedules were departing s u b s t a n t i a l l y from targets. Otherwise, the engineering contractor and administrative group would manage the (249) p r o j e c t . The developer's engineering management committee would supervise d e t a i l s of the engineers and sub-contractors' performance. The administrative group would also s o l i c i t major proposals from Metropolitan and CMC as to the tasks they would perform i n t h e i r r o l e as operation and administrative managers. Charges for these services would need to r e l a t e to costs agreed to e a r l i e r i n the conceptual stage. 6. Commencement' of Negotiations with "the INternational Longshoremen &  Warehousemen's Union (ILWU) In most terminal p r o j e c t s , the union negotiations would be a very c r i t i c a l part of the implementation phase. In t h i s case, the partners have been somewhat insu l a t e d from t h i s problem because Metropolitan Stevedore previously agreed to accept the management and stevedoring operations on an established p r i c e l e v e l ( i n 1982 d o l l a r s ) . Metro had provided d e t a i l e d manning l e v e l s f o r the p r o j e c t ' s conceptual design for which they were c e r t a i n they could get the concurrence of the l o c a l union management. The d e t a i l e d cost schedules were used to derive the manpower costs. Indications of e s c a l a t i o n were t i e d to the increases i n stevedoring d i r e c t and i n d i r e c t contract b e n e f i t s . D. CONTRACTING A terminal throughput contract i s a secondary agreement predicated upon a primary export sales agreement between a mine owner/agent i n the United (250) States and a trad i n g house/agent/end user i n a P a c i f i c Rim country. The d e t a i l s of t h i s primary contract w i l l u s ually determine r e s p o n s i b i l i t y f o r the port loading function. A d d i t i o n a l l y , the terminal agreement t y p i c a l l y w i l l be the l a s t one negotiated a f t e r the higher cost l o g i s t i c s system components of r a i l and ship have been f i n a l i z e d . This allows the shipper maximum f l e x i b i l i t y i n dealing with the transportation "chain" and recognizes the port function as being the l e a s t cost component i n the system. 1. The'Terminal Contract The primary purpose of a throughput contract i s to set out the commercial/operational/legal terms which are acceptable to the shipper and terminal owners. The commercial terms r e l a t e generally to the loading charge, i n v o i c i n g , payment timing, and r e s p o n s i b i l i t i e s with respect to demurrage/dispatch. Costs w i l l be a l l o c a t e d according to the terminal guaranteed performance l e v e l s . The terminal owner w i l l accept some obli g a t i o n s as part of the throughput r a t e . These w i l l be items such as wharfage, labour costs, maintenance and operation of the f a c i l i t y , and equipment r e p a i r . A d d i t i o n a l l y , services which w i l l require a d d i t i o n a l costs are s p e c i f i e d i n d e t a i l . These w i l l be items such as opening/closing hatches, cleaning hatches, standby time waiting f o r ships or t r a i n s , handling coal that i s wet or otherwise not free flowing, and f i r e c o n t r o l . The commercial terms represent the charges f o r services by the terminal operators f o r normal loading operations. (251) The contract operational terms represent how the terminal owner and shipper agree to have the t r a i n s , terminal, and ships i n t e r f a c e with one another. The purpose of s t a t i n g and guaranteeing the operational performance l e v e l s i s to promote the maximum operational e f f i c i e n c y of each of the modes. In theory t h i s should r e s u l t i n the minimum cost of operation and best possible p r i c e to the ultimate customer. The assessment and charges f o r i n e f f i c i e n t performance are also e l u c i d a t e d . T y p i c a l l y the terminal owner w i l l agree to handle, and the shipper w i l l agree to d e l i v e r , a s p e c i f i e d number of unit t r a i n s i n each eight-hour s h i f t . Amounts/rates of coal for storage w i l l also be s p e c i f i e d . This aspect of the contract i s c r i t i c a l to the shipper as i t must be compatible with s i m i l a r clauses he w i l l have i n the r a i l and ship contracts. To the extent there are differences between the terminal operations agreement and the shipper r a i l or ocean transport contracts as they r e l a t e to the terminal i n t e r f a c e , there could be extra costs experienced by the shipper. The operational sections of the contract w i l l also specify what r e s p o n s i b i l i t i e s the terminal w i l l accept i n regard to r o t a t i n g cargo, weighing, blending, q u a l i t y sampling, e t c . The shipper w i l l agree to e s t a b l i s h planning schedules which give the terminal a set of notices at d i f f e r e n t time i n t e r v a l s regarding the a r r i v a l of t r a i n s or ships, t h e i r cargo volume and type, storage needs, and discharging/loading programs. The l e g a l " b o i l e r p l a t e " represents the d i v i s i o n of r e s p o n s i b i l i t i e s i n r e l a t i o n to damages and l i a b i l i t i e s . It sets f o r t h the relevant (252) law, and prescribes the notice and l e g a l a r b i t r a t i o n processes. This w i l l s p e c i f y when r e s p o n s i b i l i t y f o r the coal passes from one party to another and what i s the measure of the tr a n s f e r of t h i s r e s p o n s i b i l i t y . Also s p e c i f i e d are the grounds f o r f a u l t i n c e r t a i n instances such as sole negligence. A d d i t i o n a l l y , indemnifications are made to protect the respective p a r t i e s from losses which are r i g h t f u l l y the r e s p o n s i b i l i t y of others and which may i n f a c t be covered under present insurance p o l i c i e s i n e f f e c t (these p r i n c i p a l l y r e l a t e to i n j u r i e s or damage to persons or personal property of the p a r t i e s or t h e i r agents). Warranties of workmanlike procedures and operations within the relevant laws are expressly stated while other general warranties are disclaimed by a l l p a r t i e s . The l a s t major item i n any coal loading contract i s the Force Majeure clause. This allows the p a r t i e s to escape performance without penalty under c e r t a i n circumstances (usually war, acts of God, contr o l of exports, etc., or other major circumstance changes which could not have been reasonably foreseen at the time of the contract agreement). In the event of such circumstances, the party being prevented from carrying out t h e i r o b l i g a t i o n under the contract i s exempted from l i a b i l i t y due to non-performance while the force majeure condition e x i s t s . t 2. The Contract as a Solution to" Unresolved Internal/External Problems  During the Development Phase A major p r o j e c t such as the Long Beach Terminal w i l l have many (253) r e s i d u a l problems at the conclusion of the development phase. Some of these problems w i l l be generated by delayed decision making, but others w i l l a r i s e as a r e s u l t of i n e v i t a b l e oversights on the part of the developers or t h e i r consultants during the planning phases (an example would be i n c o r r e c t manufacturer s p e c i f i c a t i o n s on p o l l u t i o n emissions used i n c a l c u l a t i o n s ) . These problems must be resolved between the partners, or between the partners and outside agencies i f the p r o j e c t i s to proceed s u c c e s s f u l l y . Sometimes the only a v a i l a b l e a l t e r n a t i v e i s to formulate r e s t r i c t i v e or c o r r e c t i v e language i n the contract document which w i l l serve to correct these r e s i d u a l problem areas. In the name of expediency and usually supported by e f f e c t i v e p o l i t i c a l maneuvering by the j o i n t coordinators, a number of items were l e f t unresolved by the partners during the development phase. These items could represent differences of opinion between the Japanese and American partners regarding an operational, c o s t i n g , or service issues r e l a t i n g to the terminal. These items tend to remain suppressed while major items continue to be resolved. It i s usually not u n t i l the operations planning sessions begin that these past problems surface. In many cases i t w i l l be too c o s t l y to make design changes to respond to the majority d e s i r e s . The contract must be considered as a means of re s o l v i n g these i n t e r n a l r e s i d u a l problems. An example would be the Japanese partners i n i t i a l l y wanting 15% of the annual throughput contract guaranteed as storage f o r t h e i r (254) customers. The American partners could want a s i g n i f i c a n t l y smaller proportional guarantee. The engineering and design phase i s completed and the t o t a l storage a l l o c a t i o n has been f i n a l i z e d as p a r t of the major construction c r i t e r i a . This problem regarding the guaranteed portion for a p a r t i c u l a r customer needs to be resolved. At t h i s point, i t may be that the partners agree to 5% of throughput as free storage, 5-10% of the throughput as storage carrying a nominal charge, and 10-15% of throughput allowable but only at a s i g n i f i c a n t charge to the customer. This would allow the customers the incremental storage i f they required but compensate the owners for t h i s p r o v i s i o n . E a r l i e r i n the development process these items would have been much more d i f f i c u l t to resolve. During the implementation phase they tend to be either more e a s i l y resolved, or more e a s i l y described i n f i n a n c i a l or contract terms which a s s i s t s i n s e t t l i n g these types of issues between the partners. Many external issues are also unresolved during the course of the development process. This i s p r i m a r i l y a r e s u l t of the slow response time from a number of the regulatory and environmental agencies. If responses are handed down from these agencies which d i f f e r considerably from what had been a n t i c i p a t e d , one of the primary remedies i s the contract document. An example would be the a i r q u a l i t y management d i s t r i c t responding that the l e v e l of p a r t i c u l a t e emissions was marginally high and would need to be mitigated to allow the terminal permitting process to be concluded. If f i n a l design work had been completed, major changes at t h i s point would be (255) extremely expensive. The r e s o l u t i o n of t h i s problem could be made through s p e c i f y i n g i n the contract that unit t r a i n s would need to have minimum spacing or that coal q u a l i t y would not include " f i n e s " and would be a minimum 2-inch plus s i z e for 70% of the cargo. The contract could further i n d i c a t e that non-compliance with these conditions would require indemnification of the terminal owners from any cost r e l a t i n g to f i n e s or other penalties imposed by the regulatory a u t h o r i t i e s s p e c i f i c a l l y i n t h i s area. 3. The"Framework for Negotiations The primary coal sales contract between buyer and s e l l e r w i l l u s ually s p e c i f y which party i s responsible for the terminal function. The coal sales terms and the ultimate party negotiating the terminal contract can s i g n i f i c a n t l y a f f e c t the negotiating process for the loading operations for reasons which w i l l be covered s h o r t l y . In general whoever pays the ultimate b i l l w i l l c ontrol the cost s e n s i t i v e areas of a coal sales contract. In the case of an ocean coal terminal i t can be reasonably a n t i c i p a t e d that the P a c i f i c Rim end user w i l l control the coal loading port. The exception to t h i s (which may be quite frequent i n the United States West Coast steam coal trade) i s an FOBT sale where the producer may have the option of choosing the terminal. In t h i s case the producer must usually assume load rate guarantees, vessel demurrage/dispatch, and other (256) o b l i g a t i o n s . The four primary steam coal sales terms to be used i n the West Coast steam coal trade are as follows: ( i ) FOR — Free On R a i l . Under these terms the producer agrees to load the coal into the r a i l cars with h i s equipment and the d e l i v e r y of the coal to the f i n a l user and turnover of r e s p o n s i b i l i t y i s made once the coal i s aboard the t r a i n at the producer's r a i l c l a s s i f i c a t i o n yard. ( i i ) CIF — Cost Insurance and Frei g h t . With these terms, a l l transport and insurance expenses u n t i l the coal has been o f f -loaded at the P a c i f i c Rim port d e s t i n a t i o n , are for the producer's account. These costs form part of the t o t a l d e l i v e r e d p r i c e . In the case of P a c i f i c Rim nations where tradi n g companies play a very major r o l e i n the coal import trade, these companies w i l l l i k e l y be s e l l i n g to the f i n a l users on a CIF basis and undertaking a l l the purchase and transportation n e g o t i a t i o n s / r i s k s . ( i i i ) C S F i s i d e n t i c a l to CIF except that the insurance i s excluded. Insurance becomes the r e s p o n s i b i l i t y of the ultimate end user or trading company once the coal i s aboard the t r a i n at the producer's c l a s s i f i c a t i o n yard. (iv) FOBT — Free On Board Terminal. With these terms the purchaser w i l l take d e l i v e r y of the coal on board the ocean (257) vessel at a loading port to be named (depending on the d e t a i l s of the contract the port choice may be e i t h e r the producer' s or user's). The producer/agent i s responsible for r a i l and terminal loading charges. The r i g o r of the negotiating process appears to be a function o f : (a) the terminal p r i c e as a percentage of the t o t a l sales p r i c e under the p a r t i c u l a r terms; and (b) how much of the shipping market r i s k the coal producer must accept to f a c i l i t a t e the sale of h i s c o a l . If the coal export market was characterized by very high demand and only marginal supply, i t could be anticipated that a l l of the producers would be able to s e l l t h e i r product on the basis of free on r a i l mine s i t e . This would s h i f t the r i s k of the transportation costs and t h e i r p o s s i b l e e s c a l a t i o n over the contract period to the end user and/or trading company whichever was the purchaser. Regardless of whether i t i s the s e l l e r or purchaser that takes on the shipping r i s k s , they w i l l be attempting to negotiate the best rate and term provisions with the l o g i s t i c s components a f t e r f i n a l i z i n g the sales agreement. In some cases the producer/purchaser may prefer to accept the shipping r i s k s . Their decision would be based on a b e l i e f they could t r a n s l a t e lower shipping prices i n t o p r o f i t s for themselves. An example would be a producer p r e f e r r i n g FOBT terms basis a b e l i e f that American to American negotiations w i l l produce better r e s u l t s i n terms of transportation costs. On an FOBT p r i c e b a s i s , the terminal (258) p r i c e as a percentage of the sales p r i c e i s much higher than on an CIF or C & F b a s i s . A d d i t i o n a l l y , the producer/agent may not have so l d on the basis of a p a r t i c u l a r port. Against an FOBT background i t i s d i f f i c u l t f o r the terminal operators to argue a defence of the port charge i n r e l a t i o n to the large ocean f r e i g h t saving which i s a v a i l a b l e to the Long Beach deep water f a c i l i t y . This ocean f r e i g h t charge i s the r e s p o n s i b i l i t y of the end user and not part of the FOBT contract. (This assumes that economies of scale w i l l p r e v a i l i n the ocean shipping market.) In the FOR sales concept, the transportation r e s p o n s i b i l i t i e s l i e with the trading house or ultimate purchaser. As i n the C & F and CIF sales the terminal cost i s a smaller and l e s s conspicuous portion of the t o t a l p r i c e . In the FOR s i t u a t i o n , the Long Beach Terminal owners would be negotiating from a p o s i t i o n that the s i t e has been chosen as i t minimizes the r a i l and ship costs. This i s a s i g n i f i c a n t l y better negotiating basis for the terminal charge and conditions. In terms of American U.S. West Coast export steam coal through West Coast ports, i t can be reasonably a n t i c i p a t e d that the most d i f f i c u l t negotiations from a terminal viewpoint w i l l r e l a t e f i r s t l y to FOBT contracts. C & F and CIF contracts with the producer ca r r y i n g the transportation r e s p o n s i b i l i t y can be expected to involve l e s s onerous negotiations. The l e a s t d i f f i c u l t contracts to negotiate w i l l be FOR contracts with the Japanese end user responsible for a l l transportation and a CIF or C & F sale negotiated by a Japanese trading company that has taken possession of the coal at the mine s i t e . (259) E. SUPPLY/DEMAND VARIABILITY Chapter 2 has already discussed the p r i c i n g mechanisms that may be used i n coal sales ( i . e . world p r i c e , ROI c r i t e r i a , e t c . ) . This has been expanded to cover other issues and terms involved i n a throughput agreement binding the producers, transport components, and users on a long-term contractual b a s i s . An important concept to explore i n t h i s area i s the r e s p o n s i b i l i t y between the p a r t i e s i n the event of a s i g n i f i c a n t demand or supply v a r i a t i o n outside of the force majeure concept. The supply side v a r i a b i l i t y i s seldom considered as i t i s cu r r e n t l y evident there i s a s i g n i f i c a n t thermal coal oversupply i n the Western U.S. producing sector which would service the P a c i f i c Rim countries. There are two basic types of long term agreements used i n the coal trade. One i s the "take or pay" concept where the user agrees to purchase an annual tonnage from a producer and pay for such tonnage amount even i f i t i s not ordered. The other more popular concept i s the "evergreen" contract. In t h i s case the contract c o n t i n u i t y i s based on the producer/user's a b i l i t y to continue to negotiate acceptable p r i c i n g e s c a l a t i o n agreements at s p e c i f i e d i n t e r v a l s during the l i f e of the contract. If they are unable to come to an agreement during one of these negotiating i n t e r v a l s the contract i s cancelled with no r e s u l t i n g p e n a l t i e s . The s t r i c t take or pay contracts are rare, e s p e c i a l l y i n today's coal market. Var i a t i o n s of these may be used i f a producer i s bringing a new (260) mine on stream to s a t i s f y a p a r t i c u l a r requirement. The evergreen type contract s h i f t s the r i s k between producer and purchaser depending on the P a c i f i c Rim market supply and demand circumstance. In times of low demand and high supply the r i s k i s s h i f t e d to the producer who may need to p r i c e i n r e l a t i o n to a South A f r i c a n low cost producer during e s c a l a t i o n negotiations. When demand i s high the purchaser increases h i s r i s k of paying high p r i c e s under the evergreen concept. In r e a l i t y , the transportation components of r a i l , terminal and ship can not expect to receive any better guarantees than those of the producer. Otherwise the producer and/or trading company would be assuming a r i s k outside the scope of the sales agreement. Transportation component owners are faced with e i t h e r the evergreen concept from the producer/ agent/trading house ( i f the sales contract continues transportation w i l l continue) or some take or pay concept. This becomes burdensome i f major c a p i t a l expenditures (such as the new Long Beach f a c i l i t y ) are predicated on t h i s type of contract. Although the purchase contract may s t i p u l a t e a 5 m i l l i o n ton per year throughput for 15 years, due to a decrease i n demand over a p a r t i c u l a r period the end users may reduce tonnage to 1 m i l l i o n tons per year for 3-4 years i n the hopes of using the incremental tonnage i n l a t e r years. This s i t u a t i o n can be catastrophic to mine owners or transport f a c i l i t y owners who have undertaken major c a p i t a l expenses i n a n t i c i p a t i o n of a r e l a t i v e l y smooth income stream. The P a c i f i c Rim countries have a poor record of l i v i n g up to t h e i r contract tonnage commitments and t h i s i s l i k e l y to continue. They have (261) •a seldom taken t h e i r f u l l annual contract commitments from South A f r i c a , A u s t r a l i a , or Canada. Presently the f i n a n c i a l burden of demand v a r i a b i l i t y f a l l s p r i m a r i l y on the producers and l o g i s t i c s systems component owners who have accepted (and i t appears w i l l continue to accept) loosely worded contracts i n the area of tonnage guarantees. A d d i t i o n a l l y , with the U.S. West Coast steam coal industry i n i t s infancy, the P a c i f i c Rim purchasers know there w i l l be reluctance to r e s o r t to l e g a l remedies against a l i m i t e d number of user companies who represent the long term success of the developing export market. On t h i s basis the demand v a r i a b i l i t y f i n a n c i a l r e s p o n s i b i l i t y does not appear to be shared and the end users w i l l not maintain r e s p o n s i b i l i t y f o r s u b s t a n t i a l decreases. In the s i t u a t i o n of a supply side v a r i a t i o n , i t i s more reasonable to a n t i c i p a t e that the transportation sector would re s o r t to l e g a l remedies against the mines ( i f t h e i r contracts were of substance i n the areas of guaranteed tonnage). Presently, the r a i l r o a d and ocean shipping sectors are not i n s i s t i n g on take or pay tonnages due t o : (a) they are operating with current c a p i t a l equipment and the guaranteed tonnage i s only used by the mines to q u a l i f y for a preferred "rate"; and (b) as stated e a r l i e r the transport sector can have no better terms than the sales agreement. The terminal, as the smallest l i n k i n the l o g i s t i c s chain, w i l l be u n l i k e l y to negotiate concessions beyond those given to the r a i l or ocean sectors. Even though major c a p i t a l expenditures are required, i t i s unreasonable to expect that s o l i d take or pay contracts w i l l be a v a i l a b l e . (262) The U.S. West Coast steam coal trade w i l l not develop to i t s f u l l p o t e n t i a l i f the producers and transportation system owners require s o l i d take or pay contracts p r i o r to t h e i r committing to service t h i s industry. The coal export terminal i s i n the p o s i t i o n of being the f i r s t component to need to commit major funds towards the development of t h i s trade without a s o l i d contractual b a s i s . As the trade develops i t i s reasonable to assume that new mines w i l l open and the r a i l r o a d s w i l l also make major c a p i t a l improvements. These improvements w i l l l i k e l y be without the comfort of s o l i d guarantee contract language but at l e a s t there w i l l be an established track record of purchases from the West Coast. The present point of view of the P a c i f i c Rim users, and a number of the Western s u p p l i e r s , i s that investments i n the coal chain at t h i s time represent normal business r i s k s . They are i n d i c a t i n g that the needs of the P a c i f i c Rim countries have been o u t l i n e d i n d e t a i l basis t h e i r conversion from o i l to coal i n many of the e l e c t r i c generating power stations and other i n d u s t r i a l and u t i l i t y sectors. Furthermore, t h e i r i n t e r e s t i n d i v e r s i f y i n g t h e i r sources of coal to the extent that they need r e l y l e s s on A u s t r a l i a as t h e i r s i n g l e major producer should be regarded as a major commitment. This i s f a r from s a t i s f a c t o r y to any group of developers considering major f i n a n c i a l commitments to a sector of the coal l o g i s t i c s system. I t appears to some extent the growth and s t a b i l i t y of demand w i l l need to be accepted as as a business r i s k f or the f i r s t major terminal f a c i l i t y . ( 2 6 3 ) F. CONCLUSION The implementation of a contracting phase i s an e x c i t i n g part of a major terminal development p r o j e c t . The organization and management structures must change s i g n i f i c a n t l y from the conceptual phase. Timing and budget constraints have replaced conceptual requirements as the most important functions to be managed. This phase i s r e l a t e d p r i m a r i l y to constructing the terminal according to pre-established g u i d e l i n e s . There are many issues that surface during t h i s phase which were deferred or unanticipated during the f e a s i b i l i t y a n a l y s i s . Some of these issues can be resolved through changes i n construction design. Others w i l l need to be resolved through the contracting with terminal users. The export market to the P a c i f i c Rim countries w i l l determine the f i n a l contractual r i s k which i s accepted by the p r o j e c t . This may be s u b s t a n t i a l l y d i f f e r e n t from, the r i s k a n t i c i p a t e d during the planning stages. A high proportion of t h i s r i s k w i l l r e s u l t from the demand v a r i a b i l i t y and contractual protections from t h i s v a r i a b i l i t y . (264) CHAPTER 7 CONCLUSION A. INTRODUCTION The hypothesis of the paper i s that organizational structure has a s i g n i f i c a n t e f f e c t upon the decision making and management of a j o i n t venture. The impacts of the organizational structure upon the management of many t e c h n i c a l , s o c i a l , and i n s t i t u t i o n a l problems i n the Long Beach Coal Project are described. It i s concluded that the decision-making processes which evolve as part of a m u l t i - p a r t i c i p a n t j o i n t venture often serve the transportation issues l a s t . Technical transportation problems are the l e a s t complex aspects of t h i s terminal development program. The paper uses the Long Beach International Coal Project (LBICP) to demonstrate a number of multi-faceted aspects of problems involved i n the development of a coal terminal. This project, because of i t s f i n a n c i a l s i z e and the number of p a r t i c i p a n t s involved, o f f e r e d an opportunity to examine a wide range of issues. The important issues r e l a t e d p r i m a r i l y to the m u l t i - p a r t i c i p a n t d e c i s i o n making processes, the management structures, the i n s t i t u t i o n a l obstacles, and the r e s o l u t i o n of diverse objectives among multiple p a r t i c i p a n t s . The primary objective was to generalize about the a b i l i t y of various management structures to f a c i l i t a t e d e cision making which could resolve t e c h n i c a l and i n s t i t u t i o n a l problems. (265) To develop the generalizations, the following support objectives were included: (a) To set the scenario for the development of the United States West Coast steam coal export trade. (b) To analyze the competing port s i t e s . (c) To describe the j o i n t venture management structure of the Long Beach p r o j e c t . (d) To analyze how the d e c i s i o n making processes worked i n r e l a t i o n to a number of problems. (e) To i l l u s t r a t e the multi-dimensional aspect of a major transportation p r o j e c t . (f) To examine a number of the i n s t i t u t i o n a l problems i n d e t a i l . B. THE MARKET During 1980/81, the P a c i f i c Rim countries of Japan, Taiwan, and Korea forecasted s u b s t a n t i a l increases i n t h e i r requirements for thermal or steaming c o a l . This s t r a t e g i c energy resource would be used p r i m a r i l y to f u e l e l e c t r i c i t y generation networks. Their plans c a l l e d f o r stimulating the growth of the A u s t r a l i a n , Canadian, and United States coal supply sources. This would enhance competition and assure a d i v e r s i t y of supply. (266) C. THE U.S. SOURCE At the time of t h i s renewed i n t e r e s t i n steam coal by the P a c i f i c Rim countries, the U.S. west coast steam coal production was i n i t s infancy. Exports o r i g i n a t i n g i n Utah, Colorado, and Wyoming were l e s s than 2 m i l l i o n tons per year. With mine development and expansion programs i n place, i t appeared the U.S. western states would have the productive c a p a b i l i t y to s a t i s f y the forecast short and medium term requirements of P a c i f i c Rim buyers. The p r i n c i p a l r a i l r o a d s operating to the West Coast from the coal producing areas had been upgrading and increasing capacity f o r a number of years. They were a n t i c i p a t i n g the steam coal export expansion. There was excess capacity on most l i n e s capable of handling anticipated volumes f o r at l e a s t 2-3 years without a d d i t i o n a l c a p i t a l expenditures. The missing component i n the l o g i s t i c s system or "chain" was a modern, e f f i c i e n t , bulk handling f a c i l i t y on the U.S. west coast. Such a f a c i l i t y would need to be capable of r e c e i v i n g , handling, s t o r i n g , and loading large volumes of export c o a l . A terminal of t h i s type i s a c a p i t a l i n t e n s i v e undertaking with a financing horizon of 20-25 years. As t h i s i s the f i n a l l i n k i n the l o g i s t i c s system i t i s important that i t i n t e r f a c e s with the other already e x i s t i n g modes. With the terminal charge as the smallest component of the delivered coal p r i c e and the p r o j e c t success dependent upon incremental investment by r a i l and mining sectors within 4 (267) years, the development r i s k s were s u b s t a n t i a l . The LBICP off e r e d an excel l e n t opportunity to see major management structures developed from the project inception. The LBICP.developers had s u b s t a n t i a l l y d i f f e r e n t c r i t e r i a to view the growth of the steam coal trade than management of other l o g i s t i c s system components with c a p i t a l costs already sunk. D. MULTI-PARTICIPANT JOINT VENTURES Decision making i n a j o i n t venture i s a complicated process. The LBICP example i s an extreme case c o n s i s t i n g of two i n t e r r e l a t e d j o i n t ventures during the development phase. The two j o i n t ventures had a common ultimate objective which was to develop the Port of Long Beach coal terminal. To allow f or d i f f e r e n t decision c r i t e r i a i n the development phase, the two j o i n t venture organizations separated the investor/operators from the promoter/sponsors. I t was i n i t i a l l y a n t i c i p a t e d that d i f f e r e n t decision c r i t e r i a would cause s i g n i f i c a n t problems across these j o i n t venture l i n e s . This was the case. The magnitude of the i n s t i t u t i o n a l and organizational problems encouraged cooperation between the two j o i n t ventures. It became obvious that the f u l l and cooperative e f f o r t s of both j o i n t venture managements would be required to complete the development phase and continue with implementation. E. ORGANIZATIONAL ISSUES E s t a b l i s h i n g a management framework was the foundation of the success of the development phase. The paper has discussed the committee framework (268) u t i l i z e d by the partners and suggested a number of a l t e r n a t i v e s which may have worked more e f f i c i e n t l y . The combination of highly t e c h n i c a l transport problems, major i n s t i t u t i o n a l obstacles, and a m u l t i - p a r t i c i p a n t owner group became a major management challenge. Some tec h n i c a l and i n s t i t u t i o n a l problems were handled by consultants which eased the decision making issues within the j o i n t venture. The d i v e r s i t y of objectives within and between the two j o i n t ventures became d i f f i c u l t f o r the committee framework to overcome. As the development phase proceeded, i n d i v i d u a l s and companies assumed r o l e s which became a material part of the d e c i s i o n making process. The executive committee r o l e s would be 'negotiator' or 'agitator' or 'too much d e t a i l ' e t c . Once the r o l e s were established they were not changed. At a number of c r i t i c a l points i n the decision-making process i t was expected that r o l e playing by p a r t i c u l a r individuals/companies would be c r i t i c a l to r e s o l v i n g the issue. The diverse objectives stemmed from two major p a r t i c i p a n t p o s i t i o n s : (a) t h e i r view of the t e c h n i c a l transport process, and (b) t h e i r associate business i n t e r e s t s which could be expected to derive b e n e f i t s from the construction and operation of the terminal. Positions taken on a number of issues could have indicated the lack of requirement for the terminal to stand on i t s own f i n a n c i a l l y . Despite a number of s h o r t f a l l s , the committee structure worked reasonably well even with i t s cumbersome machinery. The composition of the various sub-committees added d i f f e r e n t personal i n t e r p r e t a t i o n s to a p a r t i c u l a r (269) company's o b j e c t i v e s . Although t h i s s i t u a t i o n could be expected, i n t h i s p r o j e c t the executive committee became embroiled i n a r b i t r a t i n g operating committee d i f f e r e n c e s . Its function should have been to make decisions based on c l e a r l y prescribed a l t e r n a t i v e s sourced at the operating committee l e v e l . Other organizational concepts discussed i n the paper may have allowed the executive committee a better opportunity to function p r i n c i p a l l y at a p o l i c y l e v e l . F. INSTITUTIONAL PROBLEMS I n s t i t u t i o n a l obstacles presented a s i g n i f i c a n t deterrent to the completion of the project development phase. The two areas highlighted i n the paper were the aspects of environmental permitting and project finance. The a b i l i t y of the project sponsors to overcome these i n s t i t u t i o n a l obstacles was p r i n c i p a l l y a function of t h e i r willingness to contract outside consultants. The issues of environmental permitting, p r o j e c t financing, and government r e l a t i o n s presented i n s t i t u t i o n a l b a r r i e r s of a magnitude that the combined resources of the sponsor companies were unprepared to ta c k l e . Some of these i n s t i t u t i o n a l problems contained many unquantifiable unknowns. They were characterized as presenting the greatest r i s k s to the proj e c t sponsors throughout the development, construction and implementation periods. Engineering costing data can be qua n t i f i e d with upside/downside s e n s i t i v i t i e s . Most of the project i n s t i t u t i o n a l issues do not lend themselves to d e f i n i t i v e c o s t / r i s k comparisons. An example (270) could be the p a r t i c u l a t e emissions from the terminal sources. The f i n a l p r a c t i c a l EPA and SCAQMD t e s t s are made a f t e r the terminal i s complete. I t i s possible the terminal emissions could exceed permissible standards, (due to inaccurate engineering or changes i n the p o l l u t i o n standards). This could cause delays i n f i n a l permitting subject to completing timely and expensive engineering/construction changes. There i s no p o s s i b i l i t y of the engineering/permitting contractor/consultant guaranteeing the permitting. This r i s k l i e s s o l e l y with the p a r t i c i p a n t s . G. BEHAVIORAL ASPECTS OF'JOINT VENTURE MANAGEMENT The a b i l i t y of the pro j e c t to proceed on schedule was not dependent on the te c h n i c a l solutions to the transportation problem. It became dependent on the organization's management structure and the evolving decision making processes. The r o l e s of the key transportation experts became somewhat subordinated to the "g e n e r a l i s t s " within the p a r t i c i p a n t group. Individuals who demonstrated an a b i l i t y to assimilate the transport and non-transport aspects of the program emerged as the motivating force i n continuing the development. Only a few of the members involved were able to t r u l y see d i r e c t i o n through the complex multiple issues. A large j o i n t venture such as the Long Beach pr o j e c t has d i s t i n c t d i f f e r e n c e s from a sing l e large corporation. In the l a t t e r case, l o y a l t i e s are usu a l l y d i r e c t e d towards objectives of the organization as indica t e d by incumbent management. With the Long Beach j o i n t venture the group was t r y i n g to agree on the organizational structure and management (271) format which could best control/manage the multiple t e c h n i c a l and i n s t i t u t i o n a l i s sues. A d d i t i o n a l l y , most organizations would have a degree of maturity by the time they would consider a 250 m i l l i o n d o l l a r investment p r o j e c t . The Long Beach project lacked such organizational maturity as i t accelerated into the development phase. The chances of success i n a new business venture are a function of the time spent pre-planning the organization structure and decision making framework. If more planning i n these areas had been undertaken at the commencement of the coal terminal project, i t i s reasonable to a n t i c i p a t e that the committee structure would not have been used for the conceptual development phase. The approach would have l i k e l y been to appoint a p r o j e c t consultant (Bechtel, Fluor, etc) assigned the r e s p o n s i b i l i t y of presenting a comprehensive plan f o r a complete terminal i n c l u d i n g permitting and fin a n c i n g . Such a consultant, i n my opinion, would be more capable of e s t a b l i s h i n g a development team with proven pr o j e c t c a p a b i l i t i e s . The focus towards a "hands-on" management s t y l e by the partner companies was implemented p r i o r to t h e i r f u l l understanding of the major d i f f i c u l t i e s involved i n completing the conceptual development phase of a major transport i n f r a s t r u c t u r e p r o j e c t . Once started i n the committee organizational format, i t i s d i f f i c u l t to change. The management process then becomes reactionary as new unanticipated problems a r i s e . Changes i n designated operating committee membership were frequent. The co n t i n u i t y of the planning e f f o r t was l e s s than may have been possible through a sin g l e consultant format. These (272) e f f e c t s were mitigated by the a d a p t a b i l i t y , f l e x i b i l i t y , and excellent business judgement of the partners' senior management. Despite the management structure, i n s t i t u t i o n a l obstacles, diverse o b j e c t i v e s , and complicated j o i n t venture i n t e r r e l a t i o n s h i p s the development phase progressed very nearly on schedule. This was p r i m a r i l y the r e s u l t of two f a c t o r s : (a) the members of the executive committee and j o i n t coordinators were powerful i n d i v i d u a l s with e x c e l l e n t p o l i t i c a l a b i l i t i e s and business acumen. Their personal energy and management s k i l l s were used to ensure that the development program was completed on time, and (b) towards the end of the development phase, the steam coal market i n the P a c i f i c Rim countries softened considerably. The main objectives of the p a r t i c i p a n t s were s h i f t e d towards f i n a l i z i n g the engineering/environmental studies, stopping further expenditures, and getti n g the pro j e c t i n a holding pattern u n t i l the market improves. H. THE PROJECT FUTURE The precipitous f a l l i n o i l p r i c e s i n l a t e 1982 combined with excess o i l supply has stemmed the t i d e of r i s i n g short-term i n t e r e s t i n steam c o a l . Many of the major e l e c t r i f i c a t i o n projects i n Japan, Korea, and Taiwan have been revised to use alternate f u e l s than c o a l . These plants w i l l burn o i l u n t i l the economics of steam coal again appear a t t r a c t i v e . It i s d i f f i c u l t to p r e d i c t when steam coal w i l l make i t s resurgence. It i s now speculated that major thermal coal exports from the U.S. west coast w i l l not begin u n t i l 1986-87. (273) The LBICP terminal project has completed the engineering design work and environmental permitting. It w i l l l i k e l y remain dormant u n t i l a number of long-term throughput contracts can be generated. Such contracts would support the base financing and renew partner i n t e r e s t . The Port i s presently handling the marketing of the p o t e n t i a l terminal f a c i l i t y . One complication i s that the environmental permits expire i n two years i f construction a c t i v i t y has not commenced. The permitting e f f o r t would need to be repeated, p o s s i b l y f a c i n g more stringent regulations or new a v a i l a b l e technology. I n s t i t u t i o n a l issues w i l l present continuing problems f o r the developers even while the project i s i n a dormant stage. (274) BIBLIOGRAPHY Bechtel C i v i l and Minerals Corp., "Standard Instruction to Bidders Package". A document prepared by Bechtel Corporation used i n d e f i n i n g construction b i d requirements. San Francisco, 1982. Bivens, Karen K., and L o v e l l , Enid B. J o i n t Ventures with Foreign Partners. Montreal: The Conference Board of Canada, 1966. Bucklin, Louis P. "A Theory of Channel Structure" quoted i n Louis W. Stern, D i s t r i b u t i o n Channels: Behavioral Dimensions. 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Port of Los Angeles. 1981 Annual F i n a n c i a l Statements. P r i c e , J o e l . " P a c i f i c Rim Market Overview". Presentation at the P a c i f i c Rim Coal Trade Conference. Honolulu, Hawaii, 1982. Stern, Louis W. D i s t r i b u t i o n Channels: Behavioral Dimensions. Boston, Massachusetts: Houghton M i f f l i n Company, 1969. Union P a c i f i c Company. "Report to the Executive Committee of the Long Beach International Coal Project." C o n f i d e n t i a l Report, 1982. 1981 Annual F i n a n c i a l Statements. U.S. Department of Commerce. "Highlights of U.S. Import and Export Trade." FT-990, U.S. Trade Digest for Calendar Year 1981. Washington, D.C: Government P r i n t i n g o f f i c e , 1981. U.S. Department of Energy. Intergagency Coal Export Task Force. Interim Report of the Interagency Coal Export Task Force, Draft for Public Comment. Washington, D.C: Government P r i n t i n g o f f i c e , 1981. . Draft to the Interagency Coal Export Task Force. U.S. Coal Exports - The Far East. Washington, D.C: Zinder-Neris Inc., 1980. (276) . Draft to the Interagency Coal Export Task Force. The Prospects f o r World Coal Trade: An Analysis and Review of the L i t e r a t u r e . Washington, D.C: ICF Inc., 1980. U.S. Department of Transportation. Maritime Administration. Shallow Draft C o l l i e r Designs. Charles B. Cherrix, Project D i r e c t o r . Report PD-267, 1981. U.S. Treasury Department. Proposed Resolution to Tax Exempt Financing Programs. Washington Week, January, 1982. Western Governors P o l i c y O f f i c e . Western Coal Exports to the P a c i f i c Basin. Western Coal Export Task Force. Denver, Colorado, 1982. . "Report of the Demand Task Group." Denver, Colorado, 1982. . "Report of the Supply Task Group." Denver, Colorado, 1982. . "Report of the Overland Transportation Task Group." Denver, Colorado, 1982. . "Report of the Port and Marine Task Group." Denver, Colorado, 1982. . "Report of the Institutional/Regulatory Task Group." Denver, Colorado, 1982. Wilson, C a r r o l l , L., Project D i r e c t o r . Coal — Bridge to the Future. Report of the World Coal Study. Cambridge, Massachusetts: B o l l i n g e r Publishing Co., 1980. Williams, J e f f r e y T. Utah and Colorado Exports to the P a c i f i c Rim. Utah Energy O f f i c e . Utah L e g i s l a t i v e P r i n t i n g o f f i c e , 1981. / (277) 

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