Carlyle saves big Sunoco refinery with shale boom, JPMorgan

A general view of the lobby outside of the Carlyle Group offices in Washington, May 3, 2012.

NEW YORK (Reuters) - Sunoco Inc SUN.N and private equity firm Carlyle Group LP (CG.O) reached a deal on Monday to save and expand the largest U.S. East Coast refinery, capitalizing on the nation's shale boom to reinvent the economics of refining in the region.

Sunoco will retain a minority stake in the 330,000 barrel per day Philadelphia, Pennsylvania refinery and Carlyle will be in charge of daily operations under the terms of the deal. Traders for Wall Street titan JPMorgan Chase & Co (JPM.N) will handle crude supplies and fuel sales.

Carlyle and Sunoco plan to construct a high-speed unloading rail facility to feed the plant with cheap domestic crude, reducing the huge costs associated with importing oil that wrecked margins and forced the U.S. refiner to decide to look for buyers or shutdown the longest running refinery on the East Coast this summer. The private equity firm had been in exclusive talks since April, and a deal had been generally expected.

In addition to saving the region from a potential shortfall of fuel and heralding a stronger connection between East Coast refiners and the dramatic growth in Midwest shale oil production, the venture plans to exploit the low cost and abundant supply of natural gas from the nearby Marcellus Shale deposit to reduce the costs of powering the plant.

"We believe the changing nature of the energy paradigm in the U.S., coupled with a redefined operating model, could truly benefit this refinery," said Rodney Cohen, managing director of the Carlyle Group told reporters during a conference call.

"The refinery's exceptional location and infrastructure will enable the joint venture to create new business opportunities related to Marcellus Shale natural gas fields."

The joint venture, to be called the Philadelphia Energy Solutions, was expected to close in the third quarter, saving 850 existing jobs and creating 100 to 200 permanent new ones.

Terms of the deal were not disclosed, but some $25 million in state and local support spoke volumes to the political importance of saving jobs in a teetering economy and securing domestic fuel supply to prevent a potential spike in prices this summer.

SHALE RESCUE

Carlyle becomes the second white knight to rescue an imperiled refinery on the U.S. East Coast. Last month, Delta Air Lines Inc (DAL.N) bought the 185,000-bpd Trainer refinery, located several miles away, from Phillips 66 (PSX.N).

It is an abrupt reversal for a regional industry that a year ago appeared to be in terminal decline, beset by foreign competition, costly imported crude and weak demand. Now, only one of three plants in the Philadelphia area that had been threatened with closure is shuttered and is unlikely to reopen as a refinery.

The surge in U.S. oil and gas production from non-conventional sources such as shale has redefined energy markets and refining in the world's biggest economy, providing a cheap source of crude for domestic plants. The natural gas boom has also provided an inexpensive fuel for refineries to power their plants.

The refinery, which imported just over 300,000 barrels per day (bpd) of crude from countries like Norway and Nigeria in the first four months of this year, plans to run 50 percent domestic Midwest crudes within two years, operators said.

While some analysts warn that the rescue of the two East Coast refineries - plus plants in Europe and the Caribbean - could tilt the region back into the doldrums, others say the U.S. sector is now better able to withstand a downturn.

"The US East Coast plants certainly have better prospects than their European competitors and the growth in US domestic production of crude and natural gas is improving those prospects further," said John Auers, a refinery expert with Turner Mason in Houston.

With the deal, JPMorgan Chase's commodities division - which has expanded over the past four years with the purchase of RBS Sempra's trading desk - will take up supplying the refinery with crude and non-crude feedstocks and purchasing fuel produced by the plant for offtake, an increasingly common arrangement.

PASSING THE BATON

The deal effectively marks Sunoco's exit from the refining sector, ending the company's over century-long tradition in the region. Sunoco has already closed the 178,000-bpd plant in Marcus Hook, several miles away.

Meanwhile new buyers are snapping up assets with a view beyond the immediate margins. In Europe, trading companies have purchased plants from failed refiner Petroplus in order to gain valuable leverage in the market.

"We have seen non-traditional companies enter into the downstream space as traditional refiners exit because they have better access to low-cost capital," said Mark Routt, Senior advisor at KBC Advanced Technologies in Houston.

UPGRADES IN STORE

Philadelphia Energy Solutions plans to construct and upgrade units at the plant, moves that could help the refinery meet new lower sulfur fuel requirements for home heating oil in the region.

The joint venture plans to convert a middle distillate hydrotreater into a mild hydrocracker and construct a natural gas-based hydrogen plant to produce greener fuels. In addition, they plan to upgrade the plant's catalytic cracker to improve performance and reliability.

Phil Rinaldi, an industry veteran who helped turn the floundering Coffeyville, Kansas, refinery to a profit a decade ago, will be the chief executive officer of the new venture.

(Reporting by Janet McGurty; Writing by Matthew Robinson; Editing by Marguerita Choy, Jeffrey Benkoe and Tim Dobbyn)