* Philadelphia plant to take more Midwest shale oil via rail
* JPMorgan in crude supply, fuel offtake deal with JV
* Joint venture plans upgrades, expansion
By Janet McGurty
NEW YORK, July 2 Sunoco Inc and private
equity firm Carlyle Group LP 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 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
Carlyle becomes the second white knight to rescue an
imperiled refinery on the U.S. East Coast. Last month, Delta Air
Lines Inc bought the 185,000-bpd Trainer refinery,
located several miles away, from Phillips 66.
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
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
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
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.