Valero may sell U.S. plants in hard refinery times

SAN DIEGO (Reuters) - Top U.S. refining company Valero Energy Corp (VLO.N) said on Tuesday it is considering selling nearly a third of its North American refineries amid a U.S. economic slowdown that is crimping fuel demand, and that it is exploring new projects in the Middle East and Asia.

The outlook marks a major shift in Valero's strategy after a decade of sterling profits, acquisitions and expansions transformed the San Antonio-based company from small independent refiner into a behemoth.

Valero Chief Executive Bill Klesse, speaking at the National Petrochemical and Refiners Association meeting, said the company is close to selling refineries in Aruba, Memphis, Tennessee, and Krotz Springs, Louisiana, and has received interest from potential buyers for two other plants.

Klesse did not say what companies were vying for the plants, which account for 840,000 barrels per day of the company's 3.1 million bpd capacity.

But Zurich-listed Petroplus PPHH.VX announced in late February it partnered with two private equity firms to buy U.S. refineries, raising some speculation in the oil industry that it could be one of the bidders.

Brazilian state oil company Petrobras (PETR4.SA)(PBR.N) has also said it is eyeing opportunities to buy refineries.

Klesse said that at the same time, Valero is exploring potential growth in the Middle East and Asia, where demand for fuel has been robust.

"We have looked in the last six months at opportunities in the Middle East and we looked at a situation in Asia," said Klesse. "Nothing is imminent."

Subsidized prices and a weakening U.S. dollar have helped keep fuel demand high in many consuming nations, he said.

U.S. 'GOLDEN AGE' OVER

After a stretch of soaring profits that Valero once dubbed "the golden age" of refining, the sector in the United States has faced a sharp downturn.

Surging crude oil prices, softening demand growth, tough environmental regulations and rising costs for materials and labor have cut into margins and led U.S. refiners to slow fuel production and scrap more than a half a million barrels per day in expansion plans in recent months.

Klesse said he expects prices of crude oil, the primary feedstock in fuel production, to continue to hold strong despite weaker U.S. demand growth for gasoline. Crude oil hit a new peak near $110 a barrel on Tuesday. <O/R>

He added that poor margins, particularly in the Midwest, had led the company to slow some gasoline production even as pump prices hit new peaks.

"Oil prices are going to stay high," Klesse said. "I'd like to think not $110. The world economy has shown it can handle these high prices."

Klesse said the United States may need to raise tariffs on imported gasoline to protect domestic refiners against "dumping" from foreign suppliers.

Average regular gasoline prices hit an all-time high of $3.227 per gallon Tuesday, according to travel group AAA.

OFF THE BOOKS

When Valero began a buying spree in 1997, it had only one refinery. That number ballooned to 18 until the middle of last year when it sold off a plant in Ohio. If it sells the five plants Klesse indicated were on the block, it will have cut the number of its plants by nearly a third.

Klesse said it would likely sell its plants in Aruba, Memphis and Krotz Springs by the end of 2008.

"There is no question that I know the values are good for these (three) refineries for our shareholders," Klesse said. "It's more driven by the fact that Valero is not going to invest in these plants and take them to the next level."

He added Valero was also entertaining interest in two other plants in Ardmore, Oklahoma and Paulsboro, New Jersey.

"Paulsboro is not on the market, but I have said it is on the bubble," he told reporters. "In other words, it is a plant we are looking at and trying to decide is it in fact worth more to another company than it is to Valero."

Klesse, 61, has been CEO since January 2006. He said Valero is still interested in buying plants, but added it is in an "enviable" selective position.

"We are still interested in acquisitions," he said. "But we do not need to make any and they have to be extremely strategic because of the (high) price of them."

Klesse reiterated that Valero will spend about $4 billion to $5 billon on capital expenditures this year and about $5 billon in 2009.

Valero two weeks ago announced it will spend $2.4 billion to expand its Port Arthur, Texas refinery by the mid-2011. The expansion of the refinery will boost throughput to 415,000 bpd from the current capacity of 325,000 bpd.

(Editing by Marguerita Choy and David Gregorio)