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    Refinery Shakeup Expected

    Report says as many as 20 refineries could be sold over the next six months.

    HOUSTON -- As many as 20 of the nation's 150 or so refineries could either change hands or close within the next six months, as the industry copes with low profits and new regulations, The Houston Chronicle reported.

    Tom Kloza of the Oil Price Information Service (OPIS) told The Chronicle that a "sales spree" will cause about 10 percent of the nation's refining capacity to be sold or shut down if buyers can't be found.

    The current number for sale is roughly twice what is typically on the market, the report said. Kloza had identified 15 refineries for sale, including eight that are widely publicized and are being packaged for potential buyers. Seven more are considered likely candidates for sale or closure. Since Kloza published his refinery report, tipsters have told him that at least five more are up for sale.

    The 20 are located across the nation, but not in California, where there already has been a shakeout of less-efficient refineries. Would-be sellers include a mix of companies wanting to shore up dangerously ill balance sheets or trying to avoid spending millions on equipment to remove sulfur from gasoline before new regulations go into effect in January 2004.

    The industry already has experienced low profitability for three quarters, said John Felmy, chief economist for the American Petroleum Institute (API). The second quarter wasn't any better than the first, he said. "It reaches a certain point, you kind of throw in the towel."

    One sign of the pressure on the business is the sharp drop in price tags in a relatively short period, said Tom O'Malley, chairman and CEO of Premcor, another independent that is acquisition-minded. A refinery that would have cost $400 million on Jan. 1 is worth about $300 million today, O'Malley said.

    Even the biggest players, such as Exxon Mobil Corp., reported poor results from refining, but there are several more reasons for wanting to sell refineries.

    Some are on the market for ulterior motives, as in the case of Conoco Inc. and Phillips Petroleum Co., which want to grease the Federal Trade Commission's wheels for merger approval by pulling back in markets where their combined capacity raises competitive questions, the report said.

    Conoco is offering up a 60,000-barrel-per-day plant in Commerce City, Colo., on the edge of Denver, while Phillips has its 25,000-barrel-per-day plant near Salt Lake City on the block. These are the smallest refineries owned by both companies.

    Farmland Industries, a farmer-owned cooperative, has slipped into bankruptcy and is trying to sell its 115,000-barrel-per-day refinery in Coffeyville, Kan. There is some speculation about whether the refinery will be sold, because it faces at least $100 million in upgrades in order to make clean fuels.

    Houston's El Paso Corp., seeking to improve its balance sheet, in December started trying to sell its Eagle Point refinery in New Jersey, which it got with the Coastal acquisition. There are no active negotiations at the moment, with the company waiting for a better market, a spokeswoman said.

    At the same time the number of sellers is growing, the number of potential buyers is shrinking. A buyer's market like this comes along about once every 25 years, said James Gibbs, chairman, president and CEO of Frontier Oil, a two-refinery business with headquarters in Houston, which would like to grow through acquisitions.

    The number of independent refiners, which are the most likely buyers, is down to a handful. Some, like San Antonio-based Valero Energy, are seen as less likely to buy. It spent more than $5 billion for Ultramar Diamond Shamrock last year. The majors, such as Exxon Mobil and Royal Dutch/Shell, are for the most part not interested, the report said.

    To meet the new EPA regulations on sulfur content, companies need to make spending commitments now. The costs of meeting the gasoline requirement in 2004 and the diesel requirement in 2006 cover a wide range, from $50 million to $150 million, depending on plant size. The outlook isn't all that gloomy, however, for those that own refineries.

    O'Malley is already predicting a big improvement in refinery margins in 2003 as the industry converts to low-sulfur gasoline. As the new equipment is tied in, he said, turnaround times will double, and the nation's refining capacity will be reduced.

    Even the drive to get rid of the additive MTBE could work to the long-term advantage of at least some refiners by boosting margins, the report said. It would do this by reducing the amount of gasoline produced -- in the case of California, a significant 10 percent.

    ABOVE: A report suggests 20 of the nation's 150 or so refineries could either change hands or close within the next six months.

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