The eventual buyer of Tesoro Corp.’s Kapolei refinery, which the company has been trying to sell for nearly a year, will probably discontinue the facility’s refining operations and convert it to an import terminal for refined products, according to several analysts.
The change could result in the loss of about 200 jobs. The refinery, which employs 244 workers, could be operated as an import terminal with about 15 percent to 20 percent of the workforce, according to analysts.
San Antonio-based Tesoro put the refinery up for sale in January, ending several years of speculation about what the company planned to do with the underperforming facility. The Tesoro plant, which has a production capacity of 94,000 barrels a day, is the larger of Hawaii’s two oil refineries. The other refinery, operated by Chevron, has a capacity of 54,000 barrels a day.
Converting Tesoro’s plant to an import terminal would ensure a continued supply of refined petroleum products, such as gasoline and jet fuel, analysts said. The switch could potentially result in lower costs for refined products, but that isn’t guaranteed, they added.
Tesoro CEO Gregory Goff said in an August conference call with investors that it appeared "very likely" the company would complete the deal by the end of 2012. Tesoro also is selling its network of gasoline stations in Hawaii. Tesoro retained New York-based investment bank Evercore Partners to find a buyer for its Hawaii assets.
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CHANGE AT THE PUMP
San Antonio-based Tesoro Corp., which entered the Hawaii market in 1998, is selling its isle assets.
>> Refinery: Campbell Industrial Park, constructed in 1972
>> Capacity: 94,000 barrels per day
>> Competitor: Chevron, with 54,000 barrels per day
>> Retail stations: 32, with the majority company-owned and operated
>> Employees: 550
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Tesoro has owned the refinery since 1998 when it bought it from Broken Hill Proprietary Co. for $325 million.
Conversion to an import terminal is the mostly likely scenario to emerge from the sale of the Tesoro refinery, said Fereidun Fesharaki, an East-West Center senior fellow and chairman of Singaporean-based consultancy FACTS Global Energy.
The Kapolei refinery, one of seven operated by Tesoro in five western states, has had difficulty in recent years overcoming adverse market conditions and other issues related to its geographic isolation.
As a refiner that has to buy its crude oil on the world market, Tesoro often takes a hit during times when oil prices are rising, said Sam Margolin, an oil industry analyst at Dahlman Rose & Co., a New York-based investment bank.
That dynamic is amplified in Hawaii because of the large volume of fuel oil that Tesoro sells to electric utilities under contract, Margolin said. When crude oil prices are increasing, Tesoro can’t raise the price on its fuel oil fast enough to recover its costs, he said.
Tesoro’s Hawaii refinery is also hamstrung because it has fewer choices of crude to choose from than the company’s mainland facilities, Margolin added.
"There have been numerous occasions when Tesoro’s Hawaii asset has lagged the rest of the company," Margolin said. "The reason it has taken this long to find a buyer is that it doesn’t have the most advantaged operations."
This isn’t the first time there has been talk of converting Tesoro’s refinery into an import terminal. When Goff took over as Tesoro’s CEO in 2010, the company announced that it was studying the possibility of ending production at the refinery, suggesting that it could no longer bear rising crude prices. The company decided not to pursue the conversion after renegotiating its fuel contract with Hawaiian Electric Co. and obtaining a higher price.
Chevron also contemplated a refinery-to-terminal, or "RTT," conversion in 2009, enlisting Morgan Stanley’s commodities trading arm to assist in the process. Chevron ultimately decided against the conversion.
Tesoro’s decision to sell its Hawaii operations coincides with the company’s move to increase its presence on the West Coast. Tesoro in August announced it was buying BP’s refinery in Carson, Calif., along with 800 dealer-operated gas stations in California, Arizona and Nevada for $2.5 billion.
David Isaak, a Huntington Beach, Calif.-based oil industry analyst specializing in the Asia-Pacific region, said a major factor supporting the conversion of Tesoro’s Kapolei refinery is the Hawai‘i Clean Energy Initiative, which will cut the demand for petroleum products in the future.
He said RTT conversions have become commonplace on the East Coast over the past decade due to excess refining capacity in the U.S.
"I’m not saying that someone can’t come up with a clever solution to keep Kapolei as a refinery. But I think the value in Tesoro’s Hawaii operation is mostly as a terminal and in its retail operations," Isaak said.
During a presentation at a Honolulu energy forum in August, the East-West Center’s Fesharaki said if the Tesoro refinery is not converted to an import terminal, a sale to Chevron was the second most likely option, followed by a sale to a third-party refiner and a complete closure.
There is at least one group of mainland investors that has approached Tesoro about buying the facility and keeping it going as a refinery, according to a person familiar with the discussions.
A group of private-equity investors was trying to raise $160 million to acquire the refinery and gas stations, as well as an additional $360 million to finance crude oil inventory, according to the source, who requested anonymity. The investors, who hired retired Conoco Inc. executive Thomas O’Dell as part of their team, did not return calls or respond to emails seeking comment. O’Dell said by telephone that he could not comment.
State officials have been in periodic contact with Tesoro about the sale but have not taken a position on what option would be in the best interest of Hawaii, said Lt. Gov. Brian Schatz.
"This is a private transaction with major implications for the public. The state’s role at this stage is simply to monitor the progress of any potential sale. At the point where we have a transaction to consider, the state will be looking at it from the standpoint of energy security, and any regulatory considerations, including environmental and antitrust," Schatz said.
Some in Hawaii’s energy community have suggested that Tesoro’s and Chevron’s Hawaii operations could be combined and jointly owned by a consortium of energy companies and other stakeholders, similar to a structure used in New Zealand. New Zealand Refining Co., which operates the country’s lone refinery, has five major shareholders including BP, Exxon Mobile and Chevron. The company also has about 3,600 private and institutional investors.
