Bloomberg News

Tesoro California Plant Swap Proposed as Antitrust Antidote

October 11, 2012

Intensifying regulatory scrutiny of record gasoline prices in California may force Tesoro Corp. (TSO:US) to sell its Los Angeles-area refinery to complete a $1.18 billion purchase of a larger BP Plc (BP/) plant in the state.

Tesoro proposed selling its 97,000 barrel-a-day Wilmington refinery to overcome any government antitrust opposition to the acquisition, according to a company filing. Adding BP’s 266,000 barrel-a-day Carson refinery would double Tesoro’s California market share, making it the state’s largest crude processor with control of 25 percent of refining capacity, according to data compiled by Bloomberg.

As gasoline prices in the state soared amid refinery and pipeline outages, both of California’s U.S. senators requested federal investigations yesterday, a state senator called for hearings and a consumer watchdog group asked state Attorney General Kamala Harris to block Tesoro’s deal with BP. Harris is reviewing the acquisition for its potential market impact.

“Adequate competition is crucial to keep gasoline prices as low as possible,” Harris said in an e-mail message yesterday.

“Tesoro remains confident that once all the facts are in, the data will support regulatory approval of the transaction,” Tina Barbee, a spokeswoman for Tesoro, said in an e-mail yesterday.

“We believe the transaction is pro-competitive,” said Scott Dean, a BP spokesman. The deal is expected to close by the middle of 2013, according to the companies.

Tesoro, based in San Antonio, is buying BP’s Carson refinery along with an import-export terminal and 800 retail stations across the Southwest. The purchase would put 63 percent of the state’s refinery capacity under the control of Tesoro, Chevron Corp. (CVX:US) and Valero Energy Corp. (VLO:US), according to data compiled by Bloomberg.

Antitrust Solution

In anticipation of antitrust concerns around its Carson purchase, Tesoro agreed to sell or otherwise dispose of the Wilmington refinery if regulators tried to block the deal, according to the purchase and sale agreement between BP and Tesoro filed with the U.S. Securities and Exchange Commission on Aug. 13.

If Tesoro sold the Wilmington plant to keep Carson, the company would sacrifice its plans to integrate the two refineries. Combining the plants’ operations would cut costs and reduce carbon emissions at Wilmington by at least 30 percent, Chief Executive Officer Gregory Goff said Aug. 18 when the deal was announced.

California has forced a refinery divestiture in the past as a condition of approving an acquisition. In 1999, Exxon Corp. agreed to sell its Benicia refinery to Valero in order to win approval from then-California Attorney General Bill Lockyer of its $79.9 billion merger with Mobil Corp.

Price Trigger

“There was a concern that the new entity would have too much market influence by having a refinery in San Francisco and Benicia, so they had to divest of Benicia and sell several hundred service stations,” Harold York, principal analyst for oil research at Wood Mackenzie Ltd. in Houston, said in a telephone interview yesterday. “The recent rise in gasoline prices illustrates why the attorney general looks at these sorts of issues.”

The Federal Trade Commission will have the final say on whether Tesoro’s Carson purchase is approved. The agency will look “very seriously” at the California attorney general’s concerns, York said.

Peter Kaplan, a spokesman for the FTC, declined to comment.

Tesoro, which rose to the highest level in more than four years on the day the purchase was announced, may have to pay London-based BP a $150 million penalty if the transaction doesn’t close, according to the purchase agreement. Tesoro fell 0.3 percent to $38.59 at the close in New York.

Consumer Opposition

Consumer Watchdog, a California advocacy group that calls for lower gasoline prices, asked Harris to reject the transaction.

“California’s drivers and the state economy will pay the price for this merger at the pump,” Consumer Watchdog wrote Harris in a letter yesterday. “We ask you to halt it on antitrust grounds.”

California gasoline prices leaped to an all-time high of $4.671 a gallon Oct. 9, according to data from AAA, the nation’s largest motoring organization. Prices rose 50 cents last week after an Exxon Mobil Los-Angeles area refinery reduced production Oct. 1 because of a power failure.

That followed the September shutdown of a Chevron pipeline and an August fire at Chevron’s Richmond, California refinery. Chevron fell 4.2 percent, the most in almost a year, to $112.45 at the close in New York yesterday after announcing that a crude unit in the 240,000 barrel-a-day refinery will remain offline until the end of the year.

Investigations Multiply

U.S. Senator Dianne Feinstein asked the Federal Trade Commission to investigate the price spikes and U.S. Senator Barbara Boxer asked the Department of Justice to do the same. Both senators are California Democrats. State Senator Mark Leno said he intended to hold a legislative hearing on the matter.

The state’s “price squeeze” will lead regulators to scrutinize the deal more thoroughly, David Hackett, president of Stillwater Associates LLC, an Irvine, California-based energy consulting firm, said in a telephone interview yesterday.

Tesoro would probably struggle to find a buyer for its Wilmington plant, which shares a fenceline with BP’s larger Carson refinery, in the event regulators block the deal, Hackett said.

“I don’t know anybody who would buy Tesoro Wilmington,” Hackett said.

Cutting Emissions

California is aiming to cut the state’s greenhouse-gas emissions by implementing a cap-and-trade system and requiring a 10 percent reduction of the carbon intensity of transportation fuels sold by 2020.

The latter law, dubbed a “low-carbon fuel standard,” would raise costs for refiners and could force four to six refineries in the state to close, erasing as much as 30 percent of the state’s refining capacity and triggering gasoline shortages as early as 2015, according to a June industry-funded study by the Boston Consulting Group.

“This market is not for everyone,” Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis, said yesterday in a telephone interview. “Californians are going to have to choose between the ideal environmental regulations and prices.”

To contact the reporters on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net; Dan Murtaugh in Houston at dmurtaugh@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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Companies Mentioned

  • TSO
    (Tesoro Corp)
    • $74.6 USD
    • 1.08
    • 1.45%
  • CVX
    (Chevron Corp)
    • $113.47 USD
    • -0.48
    • -0.42%
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