March 6, 2007 at 4:15 pm #4042
Tesoro Corp., the second-largest refiner in the Western U.S., is pursuing additional acquisitions even as it completes the $1.91 billion purchase of a Los Angeles-area refinery and 390 service stations in the Southwest U.S.
Bruce Smith, chief executive officer of the San Antonio-based company, said the deal announced Jan. 29 will prevent Tesoro from growing more in California. The Wilmington refinery, near Los Angeles, will boost Tesoro’s daily oil refining capacity by 60 percent in California to 266,000 barrels.
Tesoro, which has a Salt Lake refinery and about 40 company-owned gas stations in the Salt Lake area, is paying $1.63 billion to Royal Dutch Shell Plc for the refinery and 250 California filling stations. It’s paying another $277 million for 140 USA Petroleum gasoline stations, located mostly in California, and a fuel terminal in New Mexico.
“On the refining side we can’t acquire anything else” in California due to Federal Trade Commission concerns, Smith said in an interview Thursday afternoon in his San Antonio office. “We’ll have opportunities to grow outside of that market.”
“I’m optimistic,” Smith said. “We’re looking for smaller, high-return projects.”
California has some of the widest refining margins in the country. Lynn Westfall, Tesoro’s chief economist, said the Wilmington refinery will give Tesoro 4 percent to 5 percent of that refining market. Tesoro did not specify its refining margins.
The plant is equipped with a 43,000 barrel per-day coking unit, making it the most complex of their seven processing plants, he said. It will account for 18 percent of Tesoro’s total daily processing capacity, which is now 566,000 barrels of oil.
Tesoro will increase the Wilmington plant’s capacity by 5 percent in its first year of ownership with the facility’s existing processing units, Westfall said during an interview Thursday in his San Antonio office.
U.S. refiners are expanding their ability to process high-sulfur and heavier grades of oils that are cheaper than lighter varieties and yield higher profit margins.
Demand for the delayed coking units that process those cheaper grades has increased construction costs and delayed delivery dates, Smith said. Tesoro cancelled plans in July to build a new 25,000 barrel per day coker at its refinery in Anacortes, Wash., after the projected cost increased to $500 million from $250 million.
At that price, the construction cost was $20,000 for every barrel of daily coking capacity, Smith said.
The high price and long lead time of building the new coker, made acquiring one at the Wilmington refinery more attractive.
“The refinery that we’re buying has a 43,000 barrel-a-day coker,” Smith said. “At $20,000 a barrel that’s $860 million of value in that one unit, and it’s going to operate for me when I buy it here in two months as opposed to five years.
“So, if I look at the cost of the refinery in Los Angeles, of the $1.6 billion, half of it was equivalent value in cokers.”
Industrial development in India and China has made it costlier to find the steel and engineering talent to expand refineries in the U.S., Smith said. The slower pace of expansion will help keep fuel prices high.
“Cheap gas ain’t gonna happen,” Smith said, noting that he expects historically wide refining margins to continue.
“I used to say it was going to be over in 2010-2012,” Smith said. “I think it’s going to go on now for a long time now.”
Smith said that he expects oil prices to remain in the $60 a barrel range this year, with a $40 base during the next five years.
March 6, 2007 at 4:22 pm #7444
Consolidating its position in California, Tesoro pursues a purchase of the Shell Wilmington coking refinery (announced Jan 29) and increases its California refining capacity by 60% which could prevent future Tesoro acquisitions. The Shell refinery has a 43 MBD existing coker which allows Tesoro to take advantage of heavy crude this year instead of 5 years out.
Tesoro had canceled its 20 MBD Anacortes coking project when project cost doubled, but is still proceeding with the Tesoro Martinez replacement of the refineries fluid coker with a delayed coker.
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