HOUSTON (Reuters) - Tesoro Corp (TSO.N) has agreed to buy BP's Carson plant for $2.5 billion, creating the biggest U.S. oil-refining empire in the Pacific Basin with about a quarter of California's processing capacity, but the deal could trigger regulatory alarms.
Tesoro, the largest independent refiner on the U.S. West Coast, will pay $1.18 billion plus the cost of inventory. London-based BP (BP.L) is seeking to focus more on northern U.S. refineries with better access to cheap Canadian oil supply.
Shares in Tesoro closed up more than 9 percent on Monday at $38.87 apiece, their highest price in more than four years.
The purchase of the 266,000-barrels-per-day (bpd) plant could garner close scrutiny from regulators aiming to prevent any one company from gaining too much control over how much gasoline, diesel fuel and other products are made in a state.
California is the country's largest gasoline market, and its drivers routinely pay some of the highest pump prices due to boutique blending requirements that prevent the state from importing large quantities of fuel.
"We're going to look seriously at it," said Lynda Gledhill, spokeswoman for California Attorney General Kamala Harris, whose agency will comb through the deal alongside the U.S. Federal Trade Commission. An FTC spokesman declined to comment.
Greg Goff, Tesoro's president and chief executive officer, expressed no regulatory concerns in a conference call with analysts on Monday.
"We will work our way through the regulatory approval process," Goff said.
Tesoro's grip in a U.S.-defined petroleum supply zone that includes five western states, Alaska and Hawaii would rise to 25.35 percent from 17.66 percent of the region's 3.12 million bpd of refining capacity with the purchase of BP's Carson refinery.
That amount would fall to 20.1 percent if Tesoro sells its Hawaii refinery as planned.
If regulators approve the purchase, Tesoro will have three plants in California alone in addition to three refineries elsewhere in the Pacific region -- in Washington, Alaska, and Hawaii.
"Integrating the BP assets, specifically the logistics, is expected to drive significant value throughout our West Coast system," Goff said.
Texas-based Tesoro plans to merge Carson with its 97,000-bpd Wilmington plant, located next door, to form a 370,000-bpd refinery, company officials said. It would be the largest refinery west of Texas.
The deal would give Tesoro nearly 700,000 bpd of refining capacity in the Pacific Basin, surpassing that of Chevron Corp (CVX.N), which currently has 575,000 bpd of capacity as the top U.S. refiner in the region.
West Coast refinery ownership is already concentrated and further consolidation could sharpen regulatory concern, said Severin Borenstein, co-director of the Energy Institute at the University of California-Berkeley.
"Further concentration will get greater scrutiny," Borenstein said. "We've not seen a lot of deals of this scale done for some time."
Chevron would remain the largest refiner in California, but adding BP's plant to Tesoro's lineup would make Tesoro a close second, said John Auers, senior vice president with refinery consulting firm Turner, Mason & Co.
However, Tesoro will surpass Chevron as the largest refiner for the entire West Coast, Alaska and Hawaii, Auers said.
If the FTC looks at Tesoro's share of the Los Angeles gasoline market, concentration levels could be higher, he said.
The FTC has blocked such deals based on market concerns before. In 2001, the FTC scuppered Valero Energy Corp's (VLO.N) purchase of a third California refinery as part of that company's merger with Ultramar Diamond Shamrock.
Since then, would-be buyers have assumed they could acquire no more than two refineries in California. In 2002, Tesoro purchased the 166,000-bpd Martinez refinery that Valero was forced to sell to win FTC approval of the Ultramar purchase.
Tesoro also is buying storage and distribution assets from BP, including more than 100 miles of pipeline, three marine terminals, four land storage terminals and four product marketing terminals.
It plans to sell those assets to its master limited partnership, Tesoro Logistics LP (TLLP.N), for around $1 billion within a year of closing.
WEST COAST GIANT
The merger of the Carson plant with Tesoro's Wilmington refinery -- which are separated by a fence -- should be finished by 2015, with the completion of $225 million in spending for pipeline interconnections and improved hydrotreating capacity used to make greener fuels.
Tesoro will shift about 25 percent of the combined refining capacity to produce diesel to "meet the growing demand for distillates on the West Coast," Goff said, and operations at some redundant units will be reduced.
BP said in late July that it was in advanced talks on the sale of the Carson plant, as well as its Texas City, Texas refinery. The oil major announced in February 2011 that it would sell the refineries by the end of 2012 as it reorients its U.S. operations to focus on its three Northern Tier plants.
BP's North American products division, which oversees its U.S. refineries, finished a three-year probation term in March that stemmed from a 2005 explosion that killed 15 people and injured many more at the Texas City refinery.