Tesoro Corp. said it hopes to dramatically improve the profitability of its underperforming Hawaii refinery next year through a combination of measures, including a plan to charge Hawaiian Electric Co. more for fuel oil.

In addition to revising the HECO contract, Tesoro also is looking to tap cheaper sources of crude oil "feedstocks" in the Pacific Basin and increase production of higher-value refined products in an effort to boost its net refining margins in Hawaii by an estimated 220 to 225 percent, CEO Greg Goff said in a recent presentation to investors. San Antonio-based Tesoro operates Hawaii’s largest refinery and a network of gasoline stations in the state.

The expected gains in Hawaii far outpace what Tesoro hopes to accomplish in other markets. Tesoro is targeting refining margin increases of 5 to 25 percent at its six other U.S. refineries.

The size of the projected increase in Hawaii is partly due to the fact that net refining margins at the local plant have been unusually low in recent years. Refining margins, which are a measure of a refinery’s ability to earn a profit from each barrel of crude it processes, totaled $11 million in 2009 and $5 million through the first nine months of this year at the Hawaii plant.

Goff said about half of the anticipated improvement in the refining margins in Hawaii will come from an expected revision in Tesoro’s contract to supply low-sulfur fuel oil to HECO and independent power producer Kalaeloa Partners LP, which sells electricity to HECO.

Under the current contract, Tesoro is locked into selling fuel oil to HECO at a loss, causing a financial hardship for the company, a Tesoro spokesman said. Both HECO and the state consumer advocate have agreed to the proposed "price structure revision," the details of which were not made public for competitive reasons. The Public Utilities Commission is expected to make a final ruling on the proposal this month.

"The substantial losses suffered by Tesoro Hawaii since 2009 as a result of the existing fuel oil contract is the major justification for Tesoro to obtain a retroactive adjustment on the low-sulfur fuel oil pricing," said Tesoro spokesman Mike Marcy.

He said Tesoro competitor Chevron, which operates the only other major refinery in the state, obtained a similar agreement with HECO in February.

A HECO spokesman said it is the long-term interest of the utility to have two viable suppliers to choose from as it shifts to greater use of alternative fuel sources.

"Hawaiian Electric’s priority remains to significantly reduce Hawaii’s use of imported oil by increasing renewable energy as well as energy efficiency and conservation," said HECO spokesman Peter Rosegg. "As we work toward this goal, it is still important to have more than one financially sound fuel supplier in the market to ensure price competition so we can get the best possible price for our customers."

Rosegg also said Tesoro is committed to transporting biofuels to HECO power plants, which adds renewables to its energy mix.

Tesoro’s Hawaii refinery also is at a disadvantage compared with the company’s mainland operations because of the high cost of importing crude oil from Asian countries, Goff said in his presentation. However, the Hawaii plant has the flexibility to process a wide variety of crude products, which would allow Tesoro to tap new, cheaper sources of crude that are in less demand in the world market. One new source Tesoro is researching is crude from eastern Russia.

Goff said Tesoro also is planning to improve yields at its Hawaii plant by producing more products with higher value, such as jet fuel.

The low profitability had prompted Tesoro at one point recently to consider ceasing refining operations at its Hawaii facility and using the site as a terminal from which to distribute fuel. That option was one of several considered earlier this year as part of a review of the company’s assets in Hawaii.