How Phil Tagami Learned to Stop Worrying and Love Coal

Last August, blogger and Oakland PR consultant Zennie Abraham posted a long-hidden report that helps explain why Phil Tagami embraced coal in 2014 after vociferously denying any interest in handling coal in 2013.

Abraham has a $5,000 a month contract to promote the interests of Insight Terminal Solutions, the startup company that hopes to ship millions of tons of coal each year through a prospective West Oakland coal terminal.

In 2011, the City of Oakland hired Tioga Group Inc., a transportation and logistics consulting firm, to provide an independent analysis of business prospects for the Oversized Bulk and Oversized Terminal (OBOT) and associated switching rail yard to be known as Oakland Global Railroad Enterprise (OGRE), then being proposed by Phil Tagami’s California Capital and Investment Group (CCIG).

The Tioga Report, issued in a draft dated April 19, 2012, cast grave doubt on the viability of CCIG’s vision of a bulk and oversized terminal and on the capabilities of CCIG’s team to make an economic success of it. In effect, the Tioga Group sounded an early warning that the CCIG’s development plan was likely to end badly.

“The economic prospects for the business that might be conducted using the OBOT and OGRE facilities are limited and fragile,” announced the authors.  “For the City of Oakland to expect a steady, sufficient income from tenants/users of such facilities and services is questionable.”

  • The report casts a skeptical eye on the CCIG management team’s understanding of what is required to pull off a project of this sort:  “while Tioga is not privy to all of the skill of all personnel on the CCIG Team, Tioga does see people with experience limited to only local, provincial knowledge and concerns as opposed to see the entire activity chain and just how it can offer value to the customer.”
  • Highlighting the risk of external forces ranging from international politics to financial conditions, the report concludes that the terminal “will be a business dependent on favorable terms which are completely out of the control of the principals involved.”
  • Based on a variety of geographical concerns, the report asserts that “Bay Area ports are generally at a disadvantage to other ports on the west coast of North America.”  The report emphasizes that the choice of shipping facilities is very competitive and driven by the customer’s economics, not by the facilities’ cost of operations: “This site is not ideal; the cost of operation may be excessive.”
  • In discussing potential commodities for OBOT, the report warns against assumptions that OBOT would be able to lure any customers away from other Northern California ports such as Richmond, Stockton, Sacramento, and Benicia.  The report observes that cargos related to construction projects such as steel, aggregates, cement, gypsum, or bay sand are “temporary and variable” in nature. The report mentions that OBOT has targeted for potential consideration iron ore moving via Levin Richmond terminal since 2010.
  • The report casts doubt on the potential for oversized cargo, noting that the OBOT site has no room for storing foreign-built vehicles currently imported via Benicia and Richmond.  Assuming OBOT could arrange for off-site acreage, the technology for transporting small vehicles has evolved such that “the military now looks to move them in containers, not as loose, break bulk or deck cargo.”  Meanwhile, larger vehicles and machinery “have been able to be accommodated at other local ports, primarily Richmond, Stockton, and West Sacramento. If there are natural advantages to divert these to Oakland, such advantages are not immediately apparent.”

With so many strikes against the project, how did Phil Tagami convince himself and his partners to go ahead?  Perhaps it was just the fog of opportunism. Perhaps momentum of too many moving parts – including local politicians, City bureaucrats, unions, and community groups – churning in the same direction. In any case, apparently none of the above took the experts’ red flags seriously – if they ever saw the report.

“Tioga’s experience is that ventures such as OBOT and OGRE tend to be too optimistic.  The batting average for securing business is rarely better than one in ten because competitive conditions and market conditions are too frail and commodity values too cheap.  Of the ones that actually start to move product, only one in ten results in movements as large as full unit train volumes. Such large movements tend to want/need dedicated facilities thereby negating the ability of the service provider to obtain better asset utilization across multiple customers.”

“Hence, obtaining a firm commitment of patronage is mandatory,” wrote the Tioga Report’s authors, “but nearly impossible before committing to erecting facilities.”

Tioga hit the bullseye, describing in precise terms the vicious circle that Phil Tagami faced in 2012 and 2013. Without the money to build OBOT, he couldn’t nail down any commitments by shippers to use the facility.  Financial projections submitted as part of a 1,683-page Oakland Global Trade and Industry Center Master Plan identified potential revenues from eight sources:  distillers dried grains with solubles (DDGS), corn, iron ore, lumber, cotton, oversized goods, and containers.  There is no evidence that purveyors of any of these commodities had a strong interest in shipping through Oakland.   Without firm commitments by shippers to use OBOT, no rational investor would front the money to build OBOT.

Enter coal.

As 2013 came to a close, Tagami still had no commitments from commodities shippers and no funds to build the terminal. Rumors began to circulate that Tagami planned for the proposed terminal to be used for the transport of coal. To quell them, he wrote in a December 2013 newsletter that “[OBOT] is publicly on record as having no interest or involvement in the pursuit of coal-related operations.” But in February 2014, the Port of Oakland commissioners unanimously rejected a proposal by the Utah coal company Bowie Resource Partners to turn the vacant Howard Terminal into a facility to ship over 8 million tons of coal each year.  Within a couple of months, Tagami agreed to sublet the West Gateway to Terminal Logistics Solutions (TLS), a wholly owned subsidiary of Bowie.

Most importantly, Bowie arrived with a financier, Jeffrey Holt, an investment banker working for the Bank of Montreal who would raise the money to build the private Oakland coal terminal by raiding both public coffers in Utah and pension funds which would be sold unrated debt instruments, junkier-than-junk bonds.

Acting with dubious legality, the State of Utah Legislature set aside $50 million of public funds to build the coal terminal, but the Bank of Montreal is no longer on the scene and the cost of constructing the coal terminal has been estimated at $250 million. ITS’s latest scheme is to get a Japanese bank to fund the construction of the terminal in its entirety if JERA, the mammoth Japanese energy company, commits to buy millions of tons of coal each year from Bowie (now Wolverine Fuels).

Meanwhile, lest we forget to mention it, the reason Zennie Abraham published the Tioga Report was because, he claimed, it showed that City of Oakland knew that the terminal was going to be used to ship coal in 2012, long before it signed agreements with Tagami that have formed the basis of Tagami’s legal challenges to the City’s ban on coal storage and handling.

There is nothing whatever in the document to support Mr. Abraham’s contention.

The April 2012 Tioga Report as posted by Zennie Abraham is available here,  NCIO has reposted it here. Tioga Group’s December 2011 draft consulting contract is posted here.

Featured photo:  A coal shipment underway in China.  Photo credit: Rob Loftis  CC BY 3.0