UPDATE 2-Alon's Bakersfield hydrocracker will get VGO by rail

Mon Feb 14, 2011 12:21pm EST

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* Gasoline and distillates will be sold in Bakersfield

* First phase of possible multiphase project

(Adds details)

NEW YORK, Feb 14 (Reuters) - Alon USA Energy Inc (ALJ.N) has begun to reconfigure its 68,000 barrel-per-day Bakersfield, California, refinery as a stand-alone vacuum gas oil hydrocracker with startup expected in June, a company spokesman said on Monday.

The Bakersfield hydrocracker will run VGO produced at the company's 85,000-bpd Paramount refinery in Long Beach, California, and produce gasoline and distillates for the Bakersfield market.

The reconfiguration will result in a 55 percent yield in distillates at the refinery.

This is the first phase of a potential multiphase reconfiguration at Bakersfield as Alon seeks to find other ways to maximize returns on the Bakersfield refinery it bought out of bankruptcy in 2010.

The combined Paramount-Bakersfield refinery will will produce 35 percent distillates, 35 percent asphalt and 30 percent gasoline when the work is completed in June, a spokesman said.

"The future growth of gasoline demand is negative," said the spokesman, in explaining why Alon was increasing its distillate yields at the expense of gasoline.

Alon bought the Paramount refinery in late 2006 to support its growing asphalt business in Southern California, knowing that at the time the plant was a simple hydroskimming refinery. Paramount produced intermediate (unfinished) products, finished distillates (diesel and kerosene) and asphalt.

Throughout 2007-2009, Alon worked with engineering companies to come up with a way to upgrade those unfinished products into higher-valued finished gasoline and diesel, but the price tag of $600 million was too steep to build a new unit at the refinery, so plans were shelved.

Then, Alon bought the Bakersfield refinery from Flying J Corp in 2010 and the company began looking at ways to integrate it into its West Coast refining system, said the spokesman.

In the new configuration, Alon will ship the unfinished intermediates, primarily VGO, by rail and/or truck to Bakersfield to run through the hydrocracker. Alon is currently hiring 100 employees to work at the refinery site in Bakersfield.

The finished gasoline and distillate will be sold in the Bakersfield region, rather than being shipped back to Los Angeles, since Bakersfield products sell at a premium to Los Angeles refined products. Alon will garner "slightly less than 50 percent of the Bakersfield market share" once the unit comes online, said the spokesman.

Alon decided that continuing to run the crude unit at Bakersfield was not viable, since it was configured to run locally-produced San Joaquin Valley crude, production of which is subject to a 15 percent annual decline rate.

Alon is also looking at pipeline options for moving the VGO to Bakersfield, and may move in that direction in the future, but for now, the use of rail cars and/or trucks looks like the best option for the company.

Beside the Paramount-Bakersfield refining complex, Alon also owns refineries in Big Spring, Texas, and Krotz Springs, Louisiana.

(Reporting by Jeffrey Kerr; editing by Jim Marshall and Lisa Shumaker)

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