NONCORE U.S. REFINING ASSETS FINDING BUYERS

Tosco Corp.'s purchase of Exxon Co.'s Bayway, N.J., refinery prompted consulting firm Kidder Peabody & Co., New York, to question current wisdom that money losing or nonstrategic refining assets must shut down. Tosco has shown with the Bayway purchase, as have Saudi Refining Inc. with its 50% interest in Star Enterprise and more recently Petroleos de Venezuela SA and Petroleos Mexicanos, that downstream assets deemed marginal by one company can be centerpiece holdings for another (OGJ,

July 26, 1993

2 min read

Tosco has shown with the Bayway purchase, as have Saudi Refining Inc. with its 50% interest in Star Enterprise and more recently Petroleos de Venezuela SA and Petroleos Mexicanos, that downstream assets deemed marginal by one company can be centerpiece holdings for another (OGJ, May 17, p. 23, Mar. 8, p. 25, and July 12, p. 29).

Kidder Peabody says the current period is unlike the 1980-85 period of U.S. refinery rationalization in two key ways:

Owners today are unwilling to shut down plants because of cradle to grave environmental liability.
Two new classes of potential buyers for refining assets have appeared in the last 10-15 years.

These classes are oil traders, who can hedge risk with new derivative trading instruments such as futures, options, and swaps, and national oil companies, which are interested in obtaining secure, steady markets for their crude oil.

Kidder Peabody lists 12 refineries for sale in the U.S., with a total crude distillation capacity of more than 1.1 million b/d. Although these are not the "best" U.S. refineries, other previously unthought of buyers could materialize to acquire one or several of the 12 plants.

The company lists several categories of possible buyers:

Entrepreneurs such as the Tisch and Pritzker families.
"Vulture" fund managers like Sam Zell.
Traders like J. Aaron and Louis Dreyfus.
Leveraged buyout firms such as Gibbons Green and Forstmann Little.
National oil firms such as Norway's Den norske stats oljeselskap AS, Colombia's Empresa Colombiana de Petroleos, and Nigeria's Nigerian National Petroleum Corp.

Once acquired, these refineries are likely to be run harder by their new owners than they were by the old ones, says Kidder Peabody.

All plants listed on the auction block probably will continue to operate under either new owners or current ones, who are reluctant to pay the environmental piper by closing down and will thus run the plants as reconfigured fuels terminals, lube plants, or other units.

Kidder Peabody is certain U.S. refining earnings eventually will increase, but it adds this is not as likely to come from shutdowns as it is from "organic" growth of product demand, combined with rising operating rates.