US senators question ChevronTexaco-Unocal merger

The proposed acquisition represents the largest union of US oil and gas companies since Conoco Corp. merged with Phillips Petroleum Co. in a $15 billion transaction (OGJ Online, Aug. 30, 2002).
'The bottom line is, the price of gas is going way up, and competition is going way down,' Schumer said. 'Without regulating the mergers of these behemoth oil companies, gas prices will continue to skyrocket�lining the pockets of Big Oil and bilking American consumers.'
In the FTC letter, the senators said they were concerned about what they called a 'dangerous level of concentration in the oil industry.' They said, 'This consolidation has already drastically undermined competition, leaving American consumers vulnerable to repeated and sustained spikes in the price of oil.'
Prudential Equity Group LLC analyst Andrew F. Rosenfeld of New York said, 'We don't believe that concerted efforts by any one senator or group of senators is likely to successfully influence the FTC in these cases.'
Individually, Schumer called on President George W. Bush to initiate a crude oil swap with companies from the Strategic Petroleum Reserve similar to former President Bill Clinton's release of 30 million bbl.
The latest proposal is for the release of 60 million bbl. Schumer believes that the release of stored crude would lower gasoline prices.
Referring to gasoline prices, Schumer called on Bush to help avert 'what will be a very hot, very expensive summer for all Americans.'"

Refinery Viability

The Energy Information Administration estimates that demand for petroleum products will increase 25% over the next 20 years. Domestic refinery expansion will be necessary to meet this demand growth as well as offset the production loss resulting from more stringent product quality requirements and possible refinery shutdowns. The U.S. petroleum refining industry has averaged about 4% rate of return throughout the 1990�s. There is every expectation that refiners will continue to be challenged to finance the very high level of investment required over the next several years. This capacity expansion will require increased investment and operating costs in refineries that must ultimately be recovered in the marketplace if they are to be financially viable and provide reliable product supplies.

In the past, refinery efficiency increases have offset the loss in capacity from regulatory-driven changes. However, with all the product specification changes to be implemented over a short period of time, there is concern that near-term efficiency increases will be insufficient to maintain adequate refinery capacity, let alone allow for the expansion required to keep up with growing product demand. Also, in recent history, most refining capital has been devoted to complying with environmental regulatory requirements leaving payout projects such as refinery expansion, a secondary priority. In addition, refinery expansion has been reduced by a regulatory climate which fostered increased uncertainty, delay and increased cost.

Refinery capacity utilization and reliance on product imports may need to increase to unsustainable or unacceptable levels to meet the growing petroleum product demand. The challenge to refiners to supply the marketplace is exacerbated by the increase in the regulatory burden (stationary and mobile source regulations).

Due to increased utilization rates and more stringent product specifications, the overall strain on the refining and distribution systems will increase and flexibility decrease. This will, in turn, increase the risk of market instability.
Without changes in the current regulatory and permitting processes, petroleum product market instability is likely.
The Administration could investigate developing a unified and comprehensive approach looking more broadly at the product supply, national security and economic implications associated with policies and regulations (stationary and mobile sources) affecting the refining industry. These policies and regulations could be progressed after careful consideration and agreement by an Interagency Work Group that any adverse impacts are justified by other greater benefits.

The Administration could consider developing a regulatory policy that ensures that regulations impacting the refining industry are based on sound science and the application of full cost-benefit and risk analyses and should be performance-based. Such a policy could ensure there is certainty in the scope, timing, requirements and interpretation of regulations. This will enable capital improvements to be made with the knowledge that further regulatory changes will not result in wasted investment and will ensure there is not retroactive reinterpretation of regulations that would result in punitive, selective and unpredictable enforcement policies that discourage and unfairly penalize sound compliance efforts (e.g., EPA New Source Review enforcement initiative).

In June 2000, the National Petroleum Council published a study entitled “U.S. Petroleum Refining – Assuring the Adequacy and Affordability of Cleaner Fuels.” This study looked at the current state and competitiveness of the U.S. refining industry and the potential impacts that the current and new regulatory initiatives are expected to have on the long-term viability of the industry. The Administration could recommend that the DOE, in consultation with governmental departments and federal agencies, review the findings and recommendations of the study and recommend adjustments that can be made to federal policies to implement those findings and recommendations.

The issue of refinery viability and capacity expansion should be addressed before new regulations are issued or existing regulations take effect.

Valero deal has hurdles

Nothing much stands in the way of Valero Energy Corp.'s plans to acquire Connecticut-based Premcor, a major independent refiner, in an $8 billion deal. Except for federal regulators. They're likely to give Valero's merger plan close scrutiny, and that could slow its completion, analysts said.
San Antonio-based Valero, sharing details of its merger plans Monday in New York, said it hopes to complete its purchase of Premcor by Dec. 31.
The news buoyed Wall Street, sending the Dow higher and giving a major boost to Premcor's stock, which soared $10.70 a share to close at $69.70. Valero's shares rose 83 cents to close at $75.87.
Valero wants Premcor for its four powerhouse refineries in Port Arthur; Lima, Ohio; Delaware City, Del.; and Memphis, Tenn.
The acquisition will make Valero the largest refiner in North America, with expected annual revenue of $70 billion and 19 refineries. Just four years ago, Valero had six plants. Valero, whose first-quarter earnings more than doubled from a year ago, said the deal would be good for itself and also would help consumers because the company would increase the capacity of the Premcor refineries.
However, Cal Hodge, an energy consultant in Houston who used to work at Valero, said the deal wouldn't make much difference to motorists for a long time.
"Both of these refinery systems are running pretty much all-out," he said. "You're not going to change the amount of gasoline that's getting out there."
Hodge and industry officials said supplies will remain tight until the easing of environmental regulations, which they blame for the lack of new refineries.
The Valero deal is the latest in a long run of mergers and takeovers in the industry and reflects growing optimism that refiners, once considered a low-profit business, will be helped for several years by strong energy demand.
Analysts, while heaping praise on the deal, also closely queried Valero chief Bill Greehey about what he expects from antitrust regulators.
Greehey said Valero isn't likely to face a significant challenge from regulators, including the Federal Trade Commission. The FTC hasn't blocked any proposed refinery takeovers under President Bush.
Jeff Dietert, an analyst at Simmons & Company International in Houston, said there's a high probability that the FTC would approve this, but they'll give it tough scrutiny. Regulators take a close look anytime there's a reasonably high market share in a region of the country. Evan Smith, portfolio manager at U.S. Global Investors in San Antonio, agreed, saying: "I wouldn't say it'll get smooth sailing. With high gasoline prices at the pump and in this political climate this deal is going to draw some attention. That could draw this out."
Valero may have given itself until year's end to close the deal, Smith said, anticipating that it will take time to deal with regulators' concerns. Ten U.S. senators, led by Charles Schumer, D-N.Y., recently asked the FTC to tell Congress how Chevron Texaco's proposed $18.4 billion purchase of Unocal Corp. would affect competition. Should Valero acquire Premcor, analysts said the Delaware refinery could be the biggest concern, because Valero has an existing refinery in Paulsboro, N.J.
If things get too sticky and antitrust regulators insist Valero sell its Delaware refinery in a Premcor merger to get final approval of the deal, Greehey hinted that could be a deal killer.
Delaware City and Port Arthur are really key in this acquisition, he said.
If not, Valero could walk away, Greehey suggested.
"We would not sell any major assets at Valero," he said.
Greehey said Valero would be the third-largest refiner on the East Coast after the merger, and that's not likely to raise the ire of regulators.
On the East Coast, Sunoco is by far the largest, followed by ConocoPhillips, he said.
And regulators last year let Sunoco, the region's biggest refiner, buy a New Jersey plant from Houston-based El Paso Corp., Greehey said.
Likewise, the Gulf Coast isn't likely to present a problem. Even after acquiring Premcor's other big refinery, the Port Arthur plant, Valero would rank substantially behind Exxon Mobil, which is No. 1 in that region, Greehey said.

Valero to buy Premcor in refinery Megamerger

Valero Energy Corp. plans to acquire Premcor Inc. for $6.9 billion in cash and stock as part of a deal that would create the largest refiner of crude oil in North America, company officials announced today.
In the merger agreement, Valero will issue $3.5 billion in stock and pay $3.4 billion in cash. Valero also will assume about $1.8 billion in Premcor debt and will add four refineries and 790,000 barrels per day to its system.
"This transaction is one of the largest and most strategic acquisitions in Valero's history," said Bill Greehey, Valero chairman and chief executive officer. "This acquisition is also good news for consumers because we have a track record of investing in and expanding our refineries."
With the proposed acquisition, Valero will have total assets of $25 billion and annual revenues of nearly $70 billion, which would rank it No. 15 on the current listing of the Fortune 500.
Adding Premcor's refineries in Port Arthur; Memphis, Tenn.,; Delaware City, Del.; and Lima, Ohio; will give San Antonio-based Valero 19 refineries with a total throughput capacity of 3.3 million barrels per day.
The boards of directors of both companies unanimously approved the acquisition, which is subject to the approval of Premcor's shareholders and customary regulatory approvals. The transaction is expected to close Dec. 31.
"This transaction provides Premcor's shareholders with a meaningful increase in the value of their investment, as the terms of the agreement represent a 24.6 percent increase over the closing price of our stock on April 22," said Jefferson F. Allen, Premcor's chief executive officer.
Premcor, of Old Greenwich, Conn., is one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum coke and other petroleum products in the United States. The company's refineries have a combined crude oil throughput capacity of approximately 790,000 barrels per day.
In recent months, U.S. refiners have seen rising demand spur gains in fuel prices and higher profits. Gas prices were expected to dominate talks Monday between President Bush and Saudi Arabia's Crown Prince Abdullah in Texas.
"This acquisition couldn't come at a better time," Greehey said. "2005 is off to a great start and we are right on track to have another record year. Our first quarter earnings were 111 percent higher than the same period last year, and of course, we had a record first quarter in 2004."