Tesoro California Deal Under Regulatory Microscope

May have to sell one refinery to clear way to acquire another

Published in CSP Daily News

LOS ANGELES -- Intensifying regulatory scrutiny of record gasoline prices in California may force Tesoro Corp. to sell its Los Angeles-area refinery to complete a $1.18 billion purchase of a larger BP Plc plant in the state, a Bloomberg report said.

Tesoro proposed selling its 97,000-barrel-per-day Wilmington, Calif., refinery to overcome any government antitrust opposition to the acquisition, according to a company filing cited by the news service. Adding BP's 266,000-bpd Carson, Calif., refinery would double Tesoro's California market share, making it the state's largest crude processor with control of 25% of refining capacity, according to data compiled by Bloomberg.

As gasoline prices in the state soared amid refinery and pipeline outages, both of California's U.S. senators requested federal investigations, a state senator called for hearings and a consumer watchdog group asked state Attorney General Kamala Harris to block Tesoro's deal with BP. Harris is reviewing the acquisition for its potential market impact (see Related Content below for previous CSP Daily News coverage).

"Adequate competition is crucial to keep gasoline prices as low as possible," Harris told the news agency.

"Tesoro remains confident that once all the facts are in, the data will support regulatory approval of the transaction," Tina Barbee, a spokesperson for Tesoro, told Bloomberg.

"We believe the transaction is pro-competitive," BP spokesperson Scott Dean told the news agency. The deal is expected to close by the middle of 2013, according to the companies.

Tesoro, based in San Antonio, is buying BP's Carson refinery along with an import-export terminal and 800 retail stations across the Southwest (see Related Content below for previous CSP Daily News coverage).

The purchase would put 63% of the state's refinery capacity under the control of Tesoro, Chevron Corp. and Valero Energy Corp., according to data compiled by Bloomberg.

In anticipation of antitrust concerns around its Carson purchase, Tesoro agreed to sell or otherwise dispose of the Wilmington refinery if regulators tried to block the deal, according to the purchase and sale agreement between BP and Tesoro filed with the U.S. Securities & Exchange Commission (SEC) on August 13.

If Tesoro sold the Wilmington plant to keep Carson, the company would sacrifice its plans to integrate the two refineries.

"There was a concern that the new entity would have too much market influence by having a refinery in San Francisco and Benicia, so they had to divest of Benicia and sell several hundred service stations," Harold York, principal analyst for oil research at Wood Mackenzie Ltd., Houston, told Bloomberg. "The recent rise in gasoline prices illustrates why the [AG] looks at these sorts of issues."

The Federal Trade Commission (FTC) will have the final say on whether Tesoro's Carson purchase is approved. The agency will look "very seriously" at the California AGl's concerns, York said.

Tesoro, which rose to the highest level in more than four years on the day the purchase was announced, may have to pay London-based BP a $150 million penalty if the transaction does not close, according to the purchase agreement.

Consumer Watchdog, a California advocacy group that calls for lower gasoline prices, asked Harris to reject the transaction.

"If the purchase goes through, Tesoro and Chevron will between them own more than half of California's fuel refining capacity, including the three largest refineries in the state," the letter said. "California's drivers and the state economy will pay the price for this merger at the pump. We ask you to halt it on antitrust grounds."

In a statement, the group added that the purchase of the ARCO gas stations would tip Tesoro into the top slot for control of retail gas locations. Tesoro already controls Shell-branded southern California stations, plus Tesoro, USA and Thrifty-branded stations statewide. "Goodbye ARCO stations as the state's lowest priced sellers of gas," said Tucker. "As long as California doesn't have control over refinery output or supply, mergers like these should be blocked. Period."

Click here to view the full letter.