Tesoro's ARCO Deal Draws Scrutiny

State's high gas prices raise concerns over sale, prompt AG investigation

Published in CSP Daily News

LOS ANGELES -- Consumer advocates are gearing up to fight the sale of the ARCO brand and its Carson refinery to Tesoro Corp, according to a report by The Los Angeles Times.

The transaction is drawing fire now--with California's average gasoline price at a record $4.671 a gallon Tuesday, according to AAA--because it would leave 51% of the state's refining capacity in the hands of two companies: Tesoro and Chevron Corp., San Ramon, Calif.

Currently, 38% of the fuel sold in California is made by Chevron and ARCO, which is owned by BP.

Some experts are calling the proposed $2.5 billion sale to San Antonio, Texas-based Tesoro the biggest shift in California's petroleum business in decades. Activists say the deal, announced in August, would reduce competition and possibly raise prices for motorists, and they will ask state and federal regulators to reject it.

(See Related Content below for previous CSP Daily News coverage of the deal, as well as coverage of the current gasoline-price situation in California.)

"We need more competition in California, not less," Charles Langley of the Utility Consumers' Action Network, San Diego, told the newspaper. "We need to see if there are any other suitable buyers."

Jamie Court, president of Consumer Watchdog, told the Times that the latest price jump "is proof positive that we have too few refiners controlling too much gasoline" and that the proposed acquisition "is a recipe for huge sticker shock for consumers at the pump."

The group has sent a letter to state attorney general Kamala D. Harris urging her to block the sale on antitrust grounds.

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

Harris said Monday that she was opening an investigation into the transaction "to ensure competition in the marketplace is maintained and consumers are protected."

More than half of California's lowest-cost gas stations carry the ARCO name, according to the report, citing GasBuddy.com. More than 800 stations sell the ARCO brand.

In the middle of the price pack usually are stations supplied by Tesoro under the USA and Shell brands, averaging nearly a nickel to almost 20 cents a gallon higher than ARCO's average price, said GasBuddy. Tesoro owns two California refineries and supplies more than 650 stations in the state.

In an analysis of prices for regular gasoline from May through August, ARCO stations averaged $3.891 a gallon, according to GasBuddy. Tesoro's USA stations averaged $3.935, and Shell stations were at $4.068.

Tesoro executives have expressed confidence that the deal will get the green light from regulators. The Federal Trade Commission (FTC) has declined to discuss the review, which is expected to last into next year.

Tesoro "is committed to maintaining the well-established ARCO brand model of providing low-cost fuel for consumers," spokesperson Tina Barbee told the paper.

The consistent price disparity between ARCO and the Tesoro-supplied stations has left consumer advocates worried that ARCO's low-priced strategy might be in danger when there are fewer companies selling to California's drivers, said the report. That perception, exacerbated by the recent price surge, could cause problems with the deal, analysts said.

"That fuel spike could very much hurt Tesoro's chances even though they had no real involvement in last week's problems," John Kilduff, founder of Again Capital in New York, told the paper. "Any further consolidation of the refinery industry in California will be looked at quite hard, if not made impossible, because of this episode."

Fuel experts are wondering whether Tesoro will continue ARCO's low-price legacy.

"This is a very big question," independent fuel price specialist Bob van der Valk told the paper. "In 2000, one of the ways that BP earned the approval of regulators for acquiring ARCO was by promising that the ARCO brand would remain and continue to be a low-price leader. And BP kept its promise."

Tesoro executives said they can't discuss their plans before the transaction's completion because of regulatory rules, but said that they were mindful of consumer advocate concerns. CEO Gregory J. Goff told analysts when the proposed transaction was announced that "the combination of our business with BP's is good for California, good for consumers."

Consumers would benefit, he said, because linking the nearby Tesoro and ARCO refineries would decrease costs, increase production and reduce pollution.

Some analysts said that Tesoro would be foolish to boost ARCO prices. "Tesoro will choose a strategy that will benefit the company," Fadel Gheit, an oil analyst with Oppenheimer & Co., told the Times. "There is no sense in losing market share to a competitor by raising prices when part of the point of the deal was to increase market share."

Keywords: 
fuel prices