Sunoco, Carlyle in talks for Philadelphia refinery

NEW YORK Mon Apr 23, 2012 6:27pm EDT

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NEW YORK (Reuters) - Sunoco Inc SUN.N said on Monday it was in exclusive talks with private equity firm Carlyle Group LP (CG.O) for a potential joint venture to run the biggest refinery on the U.S. East Coast.

The two plan to revive the fortunes of the 335,000 barrel per day refinery in Philadelphia by running about half of it on crude from North Dakota and Canada, a source familiar with the plan said on Monday.

The talks with Carlyle, first reported by Reuters last week, could save the longest continuously operating U.S. oil refinery from permanent closure, easing fear of a potential fuel shortage on the East Coast this summer after several major plants were shuttered.

Under the deal being considered, Sunoco would put the refinery assets into the joint venture in exchange for a non-operating minority interest in the venture, it said in a statement.

Carlyle would contribute cash to the joint venture, hold the majority interest and oversee day-to-day operations of the joint venture and the plant.

Sunoco, which was poised to shut the plant in July if it did not find a buyer, said it would now extend that timeline until August. If a deal cannot be reached by then, it will idle the main processing units.

Sunoco did not disclose any financial terms, and officials suggested they were still counting on support from national, state and local levels before sealing a deal.

"The facility has been operating at a significant loss for some time, and we are exploring every avenue to create a viable plan. It is a heavy lift and we are not sure a solution is possible, but we are doing the work," Carlyle Group managing director Rodney S. Cohen said in the statement.

Sunoco`s president and chief executive officer Brian P. MacDonald said: "A concerted effort by all stakeholders is necessary to ensure the successful completion of this joint venture. We have been encouraged by the offers of support by federal, state, local and labor officials."

Oil markets are closely watching the fate of the refinery, one of three on the East Coast threatened with closure due to weak profits. Sunoco first put it up for sale in late 2011, but traditional energy companies have not shown much interest.

Most Northeastern refineries are designed to run only light, sweet crude oil imported from Europe and Africa. That oil now is priced at a steep premium to other crude oils, cutting profit margins.

Sunoco and Carlyle would initially run about 150,000 barrels per day of Bakken crude from North Dakota and syncrude from Canada, the source said. Earlier test runs with Bakken crude have been successful.

The source called Bakken crude "the closest to Brent" -- the North Sea benchmark which has been run at the refinery for many years. Bakken crude trades at about a $20 discount to Brent, trade sources said.

While the plan to ship cheaper, inland crude to the East Coast's biggest refinery still faces some logistical hurdles, it provides further hope that the plant may be spared closure now that Sunoco has found a willing buyer.

The crude will be shipped by rail to Albany, New York, then sent by barge and truck to Sunoco Logistics' Eagle Point terminal in West Deptford Township, New Jersey.

However, one local sticking point involves the number of trucks on a main road leading to the Eagle Point facility which would be needed to supplement rail cars of the crude.

The site of a former refinery, the Eagle Point facility is connected by pipelines running under the Delaware River to the Philadelphia plant.

On a federal level, the impact of tightening sulfur content rules for gasoline and diesel are under discussion with the U.S. Environmental Protection Agency, the source said. In the past, small refiners have had more time to meet tighter environmental regulations.

Eventually, the group is planning to use Utica shale oil from Ohio, about 200 miles to the west. A pipeline is contemplated to carry the crude to Philadelphia.

(The story has been corrected to delete final paragraph relating to refinery experience. Carlyle was not an investor in the Coffeyville refinery.)

(Additional reporting by Michael Erman in New York; Editing by David Gregorio)

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