California Refinery Sale Under Fire (BP, TSO, CVX, MPC)

In August BP plc (NYSE: BP) announced that it would sell its Carson, California, refinery to Tesoro Corp. (NYSE: TSO) for $2.5 billion. The sale was part of BP's effort to shed $38 billion in assets. Included in the sale were marketing agreements for about 800 Arco-branded retail outlets. BP also recently announced the sale of its Texas City, Texas, refinery to Marathon Petroleum Co. (NYSE: MPC).

Following the recent rapid run-up in California's gasoline prices, however, the refinery sale is coming under fire from consumer advocates who claim that the sale to Tesoro will reduce competition and may raise prices for consumers. If Tesoro gets approval for the purchase from state and federal regulators, the company and Chevron Corp. (NYSE: CVX) will own 51% of California's refining capacity to go with a 38% share of the gasoline fuel market currently owned by Chevron and Arco.

In a letter to California's attorney general, a consumer group opposed to the sale said:

It is in refiners' self-interest to restrict production and supply, taking higher profits from selling less but more expensive gasoline. Tesoro's purchase of the BP refinery will intensify the ability of one or two companies to control output and supply.

According to a report in the Los Angeles Times, about half the state gas stations selling fuel at the lowest prices are Arco stations. Tesoro's USA and Shell branded stations sell gasoline at prices from $0.05 to $0.20 a gallon higher. With gasoline prices at eye-popping levels in California, consumers are understandably cautious.

That said, however, finding a company willing to buy and operate a refinery leaves only a small handful of choices. And even though Chevron and Tesoro would control more than half the refining capacity in the state, it would not be in either's best interest deliberately to run their refineries at less than a capacity that would keep the market well-supplied. Idle capacity drives up costs and cuts into margins -- there's no profit in that scenario.

At the marketing end of the chain, though, the retail operations are subject to the kind of pricing that the consumers' groups are worried about. The refinery sale should be approved, but the state or the federal government could require that the retail part of the deal be cancelled or in some way altered to offer some assurance of competition.

Paul Ausick


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