Arco To Sell Its Operations to BP Amoco for $26 Billion
California Prices Soar As Gasoline Supply Falls
New West To Acquire Berry Hinckley Industries
Anti-Trust Suit Filed In Hawaii Against Major Oils
MTBE Banned In California Fuel By 2002 Companies

ARCO TO SELL ITS OPERATIONS TO BP AMOCO FOR $26 BILLION

LONDON — BP Amoco has come to an agreement to purchase the Atlantic Richfield Company (Arco) of Los Angeles in exchange for stock in a $26.8 billion deal.

Included in the transaction are Arco’s 1,760 retail sites in California, Arizona, Nevada, Oregon and Washington, selling approximately 600,000 b/d of oil products. Also included are Arco’s two refineries, located in Carson, CA., and Cherry Point, WA., with throughput of 450,000 barrels of crude oil daily.

The merger will make BP Amoco the biggest non-state oil producer in the world and a significant presence in the United States marketplace. BP Amoco already had a large market share in the East but had virtually no assets in the 13 Western states. With the addition of Arco’s huge West Coast network, BP Amoco will be a major player across the nation.

BP Amoco chief executive Sir John Browne described the deal as "a compelling strategic and geographic fit of quality assets," claiming it would yield annual pre-tax savings of around $1 billion by the year 2001.

Some of these savings will come from cuts in staff and streamlining operations. According to the companies, $110 million are targeted to be cut from refining and marketing and $180 million from corporate costs.

In addition, approximately 2,000 jobs are expected to be lost as a consequence of merging the operations of the two companies. The majority of these jobs will be cut from the United States — not BP Amoco’s headquarters in London — and from existing Arco staff. Arco currently has approximately 18,400 employees on staff worldwide.

As Arco is being purchased outright by BP Amoco, Arco’s top management and board of directors will fully relinquish control of the oil company. If any of the top staff are employed by BP Amoco, it will be their own hiring decision. It is expected that very few — if any — of Arco’s top managers will be rehired by BP Amoco but instead the company will bring in their own existing staff to run Arco’s former assets.

The deal also will substantially boost BP Amoco’s reserves and production, giving it the largest oil output of any non-state company, and will consolidate its position in Alaska where both companies already have substantial holdings. Among the first priorities following the merger of the two companies will be the construction of a new $70 million pilot plant on the North Slope to try and increase output and transportation of gas from the area.

The combined company of BP Amoco/Arco would also own approximately 75% of the trans-Alaska pipeline.

Internationally, the deal will add major reserves from Arco’s fields in Southeast Asia, Algeria, Venezuela, the Caspian Sea, the United Kingdom and Russia.

CALIFORNIA PRICES SOAR AS GASOLINE SUPPLY FALLS

SAN FRANCISCO, CA. — A combination of refinery turnarounds, accidents, and the beginning of spring fuel demand combined to shoot up the price of gasoline in California.

The state already operates as a fuel "island" because of its environmental requirements, causing a special "California" reformulated gasoline to be marketed in the state, keeping its street prices second only to another island — Hawaii — in the United States.

But California’s fuel became the most expensive in the nation during the month of March when a wide variety of factors combined to increase the wholesale price dramatically.

One Southern California jobber reported his wholesale prices of fuel jumped 76 cents from March 1 to April 1 — and Northern California sources reported jumps even higher.

As a consequence, gasoline prices on the street jumped an average of 42 percent in a month. Average prices throughout the state rose by 48 cents to $1.58 a gallon for regular unleaded as of April 5, according to the California Energy Commission. Some areas of Northern California reported street prices of well over $2.00 per gallon.

The massive jumps in price were launched by a number of refinery accidents (see related stories). Tosco’s refinery in Martinez, CA., a major supplier for much of Northern and Central California, was shut down because of an accident — and remains closed.

Chevron’s refinery in Richmond, CA., suffered an explosion at its hydrocracker, shutting down its gasoline and jet fuel production unit. On the same day, Chevron also had damage to its refinery in El Segundo, CA., affecting its hydrocracker as well.

Exxon’s Benecia refinery in Northern California had already announced it would be idle for weeks as the facility undergoes repairs for its regularly scheduled turnaround. The shortage of Exxon fuel was reportedly so acute that jobbers were given permission to fill their tanks with unbranded fuel.

The combination of accidents and refinery closures essentially shut down the bulk of gasoline production in Northern California’s Bay Area. Basic economics took hold and the price of gasoline rose dramatically as Bay Area suppliers, brokers, and jobbers bought the limited amounts of fuel available to try and keep their customers and stations supplied.

Despite the jump in the wholesale cost of fuel to over $1.00 per gallon, virtually every rack in Northern California had some suppliers indicating they were out of gasoline. This drove up prices across the state as suppliers moved their fuel to Northern California, limiting supply in virtually every rack in the state.

At the same time the Northern California supply was impacted, Arco’s Southern California refinery in Los Angeles had some of its gasoline production units shut down. In addition, Texaco has scheduled a turnaround for its Wilmington refinery and the units are expected to be closed in mid-April. This has further impacted supply in Southern California.

The problem was compounded because of California’s status as a fuel "island." If a similar problem occurred in other states, fuel could come in from its neighbors, helping to meet the supply problems and keep prices moderate. But no other state requires California’s RFG formulation, so no gasoline was available to help solve California’s fuel supply problem.

Independent suppliers and stations were hit the hardest by the supply problems as they said most of the "loose" gallons had been purchased by major oil companies looking to cover their demand.

As the price differential grows between California and the rest of the country, some refiners began manufacturing California RFG and shipping it to California ports, helping with the supply problem.

According to OPIS, the St. Croix-based Hess refinery, the Texas-based Valero refinery, and the Finland-based Neste refinery have all shifted some production to California RFG.

Although this will help take care of some of the supply problems, industry observers say that the supertanker cargoes cannot physically meet the demand for California RFG that the state’s refiners had been producing.

The refinery problems and tightness in supply levels also impacted diesel fuel and jet fuel supplies and prices. Chevron’s Richmond refinery was the top supplier of diesel to Northern and Central California, followed by Tosco’s Martinez refinery — both of which shut down their diesel production. Consequently, some jobbers reported limited supply or outages of diesel fuel around the state at the end of March.

Like gasoline, California also requires its own unique diesel formulation, CARB diesel, and there are basically no out-of-state producers of this fuel. Industry observers predict that this could cause a major problem in the state if the refineries are not brought up to their regular production levels soon.

NEW WEST TO ACQUIRE BERRY HINCKLEY INDUSTRIES

SACRAMENTO, CA. — New West Petroleum, headquartered here, has agreed to purchase Berry Hinckley Industries of Reno, NV.

Among the assets involved in the sale are Berry Hinckley’s 35 service stations in Nevada (branded Chevron, 76 and Exxon), two terminals (one Chevron-branded), 11 bulk plants (two located in California in South Tahoe and Truckee and the remaining 9 in Nevada), and 61 cardlock sites located across Nevada. Also included are several undeveloped sites that are owned by the company.

Both companies signed a letter of intent on Friday, April 2 for the sale and the deal is expected to close on or before June 30.

The key management of Berry Hinckley Industries — Owners Mike Berry, Ward Hinckley, Art Hinckley and President Steve Johnson — will all stay on with the company following the sale, as will the Berry Hinckley employees.

Pete Downing of New West Petroleum noted that Berry Hinckley "has over 400 employees and we have approximately 395, so it will double the number of employees with our company. Berry Hinckley has done a wonderful job running their company. We can’t really improve on their operation. They just do it all so well.

"This addition adds a whole new dimension to New West Petroleum" added Downing. "You’re got to step up to the next level."

ANTI-TRUST SUIT FILED IN HAWAII AGAINST MAJOR OIL COMPANIES

HONOLULU, HI. — The state of Hawaii has filed a $500 million anti-trust lawsuit against major oil companies, claiming they have conspired to keep gasoline prices high on the Hawaiian islands.

The suit was filed against Shell, Texaco, Tosco, Unocal, Tesoro Hawaii, Chevron, and BHP Hawaii, the major oil companies operating stations and providing fuel in the Hawaiian islands.

In the suit, the state accuses Hawaii’s refiners and wholesalers of conspiring to overcharge Hawaiians by up to 40 cents a gallon, keeping the street price of gasoline far above the prices in the remaining 49 states.

The lawsuit, filed by the San Francisco law firm of Hosie, Wes, Sacks, & Brelsford on behalf of the state of Hawaii, is asking for over $150 million in compensatory damages, civil penalties of over $70 million, and a permanent injunction against any future illegal conduct. The value of the suit is estimated at $500 million because the attorneys are asking for triple damages.

Attorneys for the major oil companies have filed a motion to dismiss the charges, claiming that the suit "fails to suggest a conspiracy by anyone." It also claims that the parties will have to prove their innocence — violating the "innocent until proven guilty" doctrine — because they are being charged of a crime without any evidence of a crime being committed.

MTBE BANNED IN CALIFORNIA FUEL BY 2002

SACRAMENTO, CA. — California Governor Gray Davis has issued an executive order, banning MTBE (Methyl Tertiary Butyl Ether) as a gasoline additive.

"I hereby certify that there is, on balance, a significant risk to California’s environment associated with the continued use of MTBE," Davis declared. "I am directing the appropriate state regulatory agencies to devise and carry out a plan to begin immediate phase-out of MTBE from California gasoline, with 100 percent removal achieved no later than December 31, 2002."

The California Air Resources Board was directed to develop regulations "that would require prominent identification at the pump of gasoline containing MTBE" in an attempt to encourage marketers and refiners to phase out the additive prior to the deadline date.

MTBE is used as an oxygenated additive in the California RFG; approximately 70% of the gasoline in the state uses an average of 11% MTBE in its volume.

California’s Lake Tahoe area, which has been a focus of concern regarding MTBE contamination, was singled out for special consideration in getting rid of MTBE. Davis ordered that "The Air Resources Board and the California Energy Commission shall work with the petroleum industry to supply MTBE-free California compliant gasoline year-round to Lake Tahoe region at the earliest possible date."

Following the order, Tosco Chief Executive Officer Thomas D. O’Malley said, "We applaud the Governor’s bold action to order an aggressive MTBE phase-out to safeguard California’s water resources while preserving the benefits of the California Cleaner Burning Gasoline Program." He continued, "The Governor placed particular emphasis on the immediate need to provide non-MTBE gasoline to sensitive areas such as Lake Tahoe. In response to the Governor’s request, effective April 15, 1999, Tosco will voluntarily supply non-MTBE gasoline to our Union 76 retail outlets in Lake Tahoe, and to our wholesale customers who currently supply the Lake Tahoe region."

Although the Lake Tahoe area was singled out as a first priority for the MTBE phaseout, South Tahoe officials said that the Governor should have taken stronger action. "The Governor didn’t go far enough," said Chris Strohm, vice president of the South Tahoe Public Utility District. "I just think it’s frustrating the Governor has batted the ball back to the oil industry and state agencies that got us into this mess in the first place."

Strohm said that local area officials will join together and impose their own ban on MTBE in the South Lake Tahoe and El Dorado County area.

Davis also ordered the California Air Resources Board and the State Water Resources Control Board to conduct "an environmental fate and transport analysis of ethanol in air, surface water, and groundwater" to make sure that ethanol, the most likely oxygenate additive to replace MTBE in fuel, will not behave in a similar way and enter the state’s water sources.

These reports will be peer-reviewed and presented to the Environmental Policy Council by December 31.

It is believed that ethanol, ETBE, and TBA are the most likely alternative oxygenates to MTBE. CARB officials say that ETBA, TBA, and TAME have comparable air quality benefits to MTBE and would be acceptable replacements to the additive. However, CARB determined, based on recent emissions tests, that increased use of ethanol would result in major increases in hydrocarbon emissions, ozone formation, and benzene emissions due to evaporative emissions from ethanol-based fuel, making ethanol a problematic replacement for the additive.

Originally published in the April 1999 issue of O&A Marketing News.
Copyright 1999 by KAL Publications Inc.