Valero Buys ExxonMobil Refinery, Stations — Will Enter N. California Market
Costco to Begin Marketing Gasoline in Hawaii
CARB Decertifies All Existing Vapor Recovery Systems in California
Utah Mandates Stage I Vapor Recovery Equipment
Arco Fleet Testing Reformulated Diesel
Electric Vehicles Banned From Oregon State Roads

VALERO BUYS EXXONMOBIL REFINERY, STATIONS AND WILL ENTER NORTHERN CALIFORNIA MARKET

SAN ANTONIO, TX. — Valero Energy Corporation his signed a deal to acquire ExxonMobil’s 160,000-barrel-per-day refinery in Benicia, CA., as well as 340 Exxon-branded stations. Valero will purchase the assets from ExxonMobil for $895 million plus an additional amount for inventories and working capital.

The purchase marks Valero’s entry into both the West Coast market and into retail operations.

“The retail business is a natural growth area for Valero because retail margins tend to be counter-cyclical to those in refining,” said Bill Greehey, Valero’s CEO, announcing the purchase. “And, our strategic plan has been to enter the retail business through a major acquisition where we could also acquire an experienced management team in place.”

The service stations involved are all Exxon-branded stations in California. Under the conditions set by the FTC and State of California, the Exxon brand will be withdrawn from Exxon’s Oakland, San Francisco, San Jose and Santa Rosa metropolitan areas. Outside of these areas, Valero Energy Corporation has the right to continue to use the existing Exxon brand for at least 10 years or longer, as well as products and services associated with the brand. Of the stations included in the deal, 80 are company-owned with 75 located in the San Francisco Bay area. Ten of these sites will be operated by Valero and the remaining 70 will be dealer-operated.

For all the 75 locations in the Bay area, the Federal Trade Commission and the State of California are requiring that the Exxon brand name be withdrawn from the market by mid-June, at which time a new Valero brand will be introduced.

“We are excited about launching a Valero retail brand and have been working with a nationally recognized branding and marketing firm for the past several months to prepare for our market entry,” said Greehey. “We have completed site audits and conducted extensive market research — so we are well on our way to establishing all of the necessary marketing plans and materials for a successful rollout of our new brand.

“Our research shows that California consumers are eager to have an alternative to traditional retailers and we plan to mount an aggressive advertising and promotional campaign to introduce the Valero brand,” he added. The other 260 sites included in the deal are independently owned, Exxon-branded distribution outlets located throughout California. Valero will have exclusive rights to the Exxon brand name throughout California (excluding the Bay Area) for at least ten years and will have the flexibility to offer either the Exxon or Valero brand name to new distributors.

Eugene A. Renna, senior vice president of Exxon Mobil Corporation, noted that “Valero has a strong record as a refiner, will offer comparable pay, benefits, and employment opportunities to our employees, and will be an effective retail marketer.”

“We plan to meet or exceed the level of brand support that Exxon distributors received in the past,” said Greehey. “We view this as a great platform from which to grow our new retail business and plan to offer competitive packages and eventually offer existing Exxon distributors the option to brand with Valero.”

On the refining side of the deal, the Benicia refinery, located just north of San Francisco, primarily produces gasoline for the California marketplace. About 16 percent of the refinery’s production is low- sulfur diesel and jet fuel.

It is estimated that approximately 75 percent of the refinery’s gasoline production and 90 percent of the distillate will be sold on the unbranded market. The remaining 25% will be sold to Exxon and Valero-branded stations. As part of the purchase, Valero signed a long-term crude supply agreement with ExxonMobil to buy up to 100,000 barrels per day of Alaskan North Slope crude to run the refinery.

Greehey commented that the Benicia refinery will be a tremendous asset because it is one of the best-maintained and most complex refineries in the U.S. “The refinery has a replacement value of $2 billion and yet — it still has upgrade potential,” said Greehey. “It also has great supply and distribution logistics with waterborne and pipeline access.”

Greehey predicted that the acquisition would be a smooth one as Benicia’s business activities are identical to Valero’s existing refining and marketing business.

The divestiture of the Benicia refinery and the branded stations was mandated by the Consent Decrees executed last year between ExxonMobil and the FTC and the State of California in an attempt to keep the fuel supply market open in the state.

COSTCO TO BEGIN MARKETING GASOLINE IN HAWAII

WAIPIO, HI. — Costco has announced plans to open a gasoline station at the Costco Waipio Gentry store, currently scheduled to open in the Summer on Ka Uka Boulevard.

The plans call for three rows of gasoline pumps and 12 dispensing sites, making Costco’s station one of the largest gasoline operations on the island of Oahu and in the state of Hawaii.

Like all Costco gasoline stations, only Costco members will be able to purchase fuel from the site.

It is expected that Costco will enter gasoline marketing in Hawaii with the same strategy it has used in the rest of the United States: lower margins and the lowest price available in the area. Costco officials declined to comment specifically on the Hawaii station.

In supply-sensitive Hawaii, where prices are usually higher than the Mainland, dealers are planning their strategy to compete with the new player planning to enter the market.

“The trickle effect could kill us,” Chevron dealer Frank Young told local reporters. Young, who operates a station in Kakaako, predicted that a station that marketed solely on price would teach customers to look at price as the number one concern when choosing where to fill up. Young noted that when he passed along a three cent price increase charged to him by Chevron in November, his weekend business dropped by 20%. “Customers are learning to price the cheapest gas,” Young said.

George Williamson, general manager of a Shell station less than a mile from where the new Costco will be built, says that he expects to lose the price-shoppers from his customer base but says he will be able to compete effectively because of the “superior service” offered by his station. The Costco will be “just one more competitor as far as I’m concerned,” Williamson said.

Costco currently operates several other warehouse stores in Hawaii but says there are no plans to open other gasoline stations because the sites are too small.

CARB DECERTIFIES ALL EXISTING VAPOR RECOVERY SYSTEMS IN CALIFORNIA

SACRAMENTO, CA. — In an action that will cost service station owners individually thousands of dollars over the next few years — and may drive even more small dealers out of business — the California Air Resources Board had decided to de-certify all existing vapor recovery systems operating in California.

Under the new regulations, adopted by CARB at the end of March, all existing vapor recovery systems will be decertified within the next year.

It is estimated that the decertification will require stations to change or install new “enhanced” vapor recovery systems including new nozzles, station self-diagnostics, swivel connectors, and vapor lines. It is estimated the costs of this newly redesigned equipment will be approximately 50% higher than current equipment costs.

“In an era where everyone is concerned about gasoline prices, where the FTC is looking at the consolidation of the fuel market in California, I can’t believe CARB has passed this regulation,” said a marketer. “Now even more independents will be forced out of business. No one except a major oil company can afford to go in and dig up their station every few years and put in new equipment every time a regulator changes their mind about what they want. And if you think those costs aren’t going to be passed along to the public, you don’t understand business.”

CARB officials said they decided to decertify the vapor recovery systems operating in the state because they were not meeting the state’s current standard of 95% efficiency — although it was CARB who certified the equipment in the first place.

California marketers will have four years to completely replace their vapor recovery systems with newly certified systems. Equipment manufacturers say they are glad they have a four-year window to try and develop new equipment to meet CARB’s tougher standards.

New stations will also be unable to use multi-nozzle dispensers but must instead install single nozzles at each filling position. CARB’s belief is the fewer number of nozzles will lead to less pollution. Existing stations will be required to install single nozzles when they remodel.

The Petroleum Marketers Association of America formally protested this requirement noting that nozzles are “an oil company marketing decision. Some motorists simply do not trust single hose multi-grade dispensers.”

The PMAA also noted that “nozzle makers are required to spend millions of dollars developing enhanced vapor recovery dripless nozzles with all of the other new CARB enhanced requirements for vapor nozzles. Then, in the same breath, CARB proposes to cut the size of the nozzle market by more than half by requiring only single hoses and nozzles for multi-grade dispensers. As a result of CARB’s proposal, several of the small nozzle companies may decide to leave the vapor recovery nozzle business, which could result in higher prices for all.”

Adding insult to injury, in addition to the decertification, service stations may also have to add In-Station Diagnostic (ISD) equipment. These systems — which exist only theoretically at this time — would sound an alarm and shut down a station’s operations if they found the vapor recovery was operating at less than 98%.

The ISD provision would be voted on by individual air districts who would also have the ability to keep a station closed until their inspectors visited the station to make sure the vapor recovery systems were working at a 98% vapor recovery rate.

“This is just insane,” said one station owner, commenting on the ISD requirement. “Air district inspectors work weekdays, during normal business hours. If my station was shut down on a Friday afternoon, I would lose all my weekend business — plus who knows how much longer — waiting for an inspector to come and see everything was working.

“This could completely destroy my business,” he added.

The new regulations will hit small retailers — many of whom are still paying for 1998 UST upgrades — the hardest as they will be required to install new equipment at their stations. Like the 1998 UST requirements, these latest regulations will undoubtedly force smaller marketers with lower gallonage levels out of business. This will hit rural areas the hardest, including some areas where it is already difficult to find a service station.

In a modest effort to help the smaller stations, CARB is allowing stations until 2007 to install new hanging hardware. In addition, very small retail stations (which pump less than 160,000 gallons per year) will be exempt from the ISD requirements.

“Collectively, the system change-out is conservatively expected to cost gasoline marketers $31 million,” stated Evelyn Gibson of the California Independent Oil Marketers Association. “Marketers are expected to have a very difficult time obtaining funding to purchase, install, and maintain these systems.”

UTAH MANDATES STAGE I VAPOR RECOVERY EQUIPMENT

SALT LAKE CITY, UT. — Marketers and service stations in Utah are busy upgrading their stations to come into compliance with a new regulation requiring Stage I vapor recovery.

According to the regulation passed by the Air Quality Board, all bulk plants, transport, and service stations in Utah County and Weber County must have Stage I vapor recovery installed by May 2000.

Utah officials claim the requirement will lead to greatly improved air quality across the state.

ARCO FLEET TESTING REFORMULATED DIESEL

LOS ANGELES, CA. — Arco has launched a fleet demonstration program of its new EC Diesel fuel in the greater Los Angeles area. The major oil company is looking to show that its reformulated diesel “can make dramatic reductions in soot emissions from trucks, buses and cars in Southern California.”

Arco will test the new fuel in seven California fleets over the next year. Over 160 vehicles will participate in the program that will evaluate EC Diesel fuel and new exhaust treatment devices.

Included in the demonstration program will be Los Angeles City refuse and street maintenance trucks, Santa Monica City Big Blue Buses, Ralphs Grocery tractor trailer trucks, Hertz Equipment pickup trucks, San Diego School District school buses, and Arco gasoline tanker trucks.

“We are confident that our demonstration program will show an immediate and significant reduction in particulates and NOx emissions from diesel engines,” said Roger Truitt, president of Arco Products, Los Angeles. “We believe this new fuel will do for diesel what EC-1 and EC-Premium did for gasoline.”

Arco’s in-house testing of the EC Diesel resulted in up to a 15 percent reduction in particulates and a five percent reduction in Nitrogen Oxide (NOx) emissions, with no apparent loss in fuel economy. These reductions resulted from comparing EC Diesel against California-formulated diesel, already considered one of the cleanest diesel fuels in the world.

The EC Diesel also has a higher cetane rating, with a lower sulfur and aromatics content than traditional diesel.

In addition to testing the new fuel, Arco’s demonstration fleet will also test new exhaust emission control devices that can reduce particulates from diesel exhaust. Emission control manufactures Engelhard and Johnson-Matthey are participating in the program by supplying passive regenerating particulate filters to the program. These technologies work more effectively with lower sulfur fuel.

Arco officials say they “hope” to make EC Diesel available in California once the demonstration program confirms its initial testing.

“We see EC Diesel as the next step in our effort to help attain even greater air quality improvements,” said Arco’s Truitt.

ELECTRIC VEHICLES BANNED FROM OREGON STATE ROADS

SALEM, OR. — A number of small electric vehicles have been ordered off the state roads by the Oregon Driver and Motor Vehicle Services Department.

The DMV is enforcing a new Federal regulation that requires the state to revoke the licenses of cars that don’t meet minimum speed requirements. It is estimated that 40 vehicles in Oregon will have their license plates pulled by the state and will be unable to drive on traditional roads.

The Federal government enacted the new regulations because of safety concerns. They claim that many of the new electric cars and electric hybrids do not meet speed or safety requirements for use on public roads.

Oregon is recalling the plates because they never should have issued them in the first place, stated Lana Tribbey of the DMV. “For us to give them passenger plates, they’d have to meet safety and equipment requirements,” Tribbey explained.

Rick Barnes, who lives in Aloha, OR., was one of the drivers who had his vehicle’s license revoked by the state. Barnes has been driving his Cushman flatbed electric to work for two years. The truck has a top speed of 20 miles per hour but Barnes says that he stays on streets with a 25 mph speed limit.

“I can do just about everything,” Barnes told local reporters. “I can go to the hardware store, the pizza place, all the grocery stores and bars and the post office. I can get to everything. I drive it all the time.”

“These four-wheeled vehicles can evolve quickly,” said Mark Murphy, a product designer for the Neighborhood Electric Vehicle Company, based in Eugene, OR., defending the alternative vehicles. “Where does a Geo Metro stop and a golf cart start?”

Originally published in the April 2000 issue of O&A Marketing News.
Copyright 2000 by KAL Publications Inc.