Unocal Wins RFG Patent Lawsuit and Royalties Must Be Paid
Veeder-Root Acquires USTman Technologies
New Mexico Pipeline Planned by Equilon
Valero CEO Greehey Outlines Plans to Enter the California Marketplace

UNOCAL WINS RFG PATENT LAWSUIT AND ROYALTIES MUST BE PAID ON ALL CALIFORNIA GASOLINE

EL SEGUNDO, CA. — In an action that may drive up gasoline prices in California and across the United States, the Federal Circuit Court in Washington, D.C., has upheld Unocal’s patent on reformulated gasoline.

By declining to hear an appeal, the Federal Court upheld the validity of Unocal’s RFG patent and confirmed the earlier jury award of 5-3/4-cents per gallon in damages for infringing motor gasoline production by the six major oil refiners.

The situation began in the early 1990’s after the California Air Resources Board announced stringent new requirements for California Reformulated Gasoline, which was to be introduced in 1996. All of the major oil companies immediately began working on ways to meet CARB’s requirements.

Some scientists for the major oil companies claim that the research into finding a solution to CARB’s requirements was a joint effort, with information exchanged freely among all parties.

Unknown to the other oil companies, however, Unocal applied for a patent for their solution to the RFG problem. This patent was granted by the U.S. Patent and Trademark Office on Feb. 22, 1994.

As the patent covered virtually all possible formulations for California RFG, Unocal then demanded royalties from all companies manufacturing motor fuel in the state.

The other major oil companies claimed this action was unfair and unjust and countersued Unocal, saying Unocal patented information that was being freely exchanged by many companies.

In 1997, a jury in the Federal District Court in Los Angeles found the Unocal patent was valid and that the six defendant companies — all refiners manufacturing California RFG — had infringed on the patent. They ordered that Unocal be paid 5 3/4 cents royalty for every gallon of RFG sold in the state of California.

The other major oil companies appealed this decision — which has now been upheld, which may leave the oil companies liable for 5 3/4 cents per gallon for all the gallons of RFG sold in California since 1996 — and for every gallon of this formulation sold in the future.

It is estimated that for the period of the original trial — March 1 to July 31, 1996, the jury award would total $95 million to Unocal, including interest and attorney’s fees. If the royalties were applied to all RFG sold in the state between March 1, 1996 and the present, the royalties paid to Unocal would be closing on $1 billion.

If the formulation for California RFG becomes mandated in other states — as is being considered — all gasoline marketed in these states also would be subject to paying Unocal royalties.

VEEDER-ROOT ACQUIRES USTMAN TECHNOLOGIES

SIMSBURY, CT. — Veeder-Root announced on June 6 that it will acquire USTman Technologies for $17.35 million.

The deal, which must be approved by USTman’s shareholders as well as USTman’s and Danaher’s (the parent company of Veeder-Root) Boards, will allow Veeder-Root "to acquire substantially all the business assets of USTman Technologies, Inc."

It is expected that the merger will go through within the next 60 days with full approval from all parties.

"USTman will become a service-oriented company for Veeder-Root, which is something they have not had in the past," said Hugh Hatton-Ward of USTman. "We need to stress that this will enhance all the services available through USTman and through Veeder-Root and our customers will receive a better performance with the merger of both companies.

"USTman has always been on the constant lookout for a new product, a new service to give our customers. This is an opportunity to perfect SIR for our customers."

He noted that the Veeder-Root sales staff will be fully trained and authorized to sell USTman services "and vice-versa. Everyone is keeping their jobs." Because of some overlap, it is expected that some territories will be changed, but for the most part customers will continue to work with their current sales representatives.

He also added that "We will maintain the USTman name for a short period of time, for the first year. After that, we’re not sure what the name will be.

"It’s very exciting," added Hatton-Ward. "I think it’s going to be very beneficial for the customers we have and I think we’ll be able to complete an automation service for our customers."

"Combining our portfolio with USTman’s will create a complete range of fuel management services for all sites," said Scott Clawson, Veeder-Root’s president, announcing the deal.

"One of our company goals is to provide performance analysis tools and Internet-based services to help UST owners manage data flow with standardized, streamlined processes for all their sites. We anticipate that USTman’s expertise will help us achieve this goal."

"We’re all pretty excited," said an USTman staffer. "The customers of ours that I’ve called are all very receptive. They feel it’s cool, it’s great. We haven’t gotten any negative response yet, and I hope that’s the way that it stays."

Veeder-Root, headquartered in Simsbury, CT., is a leading supplier of equipment and services for environmental compliance and fuel management.

USTman Technologies, Inc., headquartered in Lakewood, CO., provides monitoring for more than 76,000 tanks, and was the first SIR company to receive third-party certification from the Environmental Protection Agency.

NEW MEXICO PIPELINE PLANNED BY EQUILON

HOUSTON, TX. — Equilon Pipeline Company has announced that it will develop a refined products pipeline system from West Texas to central and northwest New Mexico.

Equilon’s planned New Mexico Products Pipeline System will connect the Odessa area with Bloomfield, NM., a distance of almost 500 miles.

In an important development in the area, the New Mexico system will have access to products manufactured at Gulf Coast refineries. These refineries are capable of providing cleaner-burning fuels should federal and state regulations for air quality become more stringent in the Southwest.

The new pipeline system will have an initial capacity of 40,000 barrels a day of gasoline, diesel and jet fuel. The 16-inch-diameter pipeline will consist of 406 miles of existing pipe and 94 miles of new construction.

Startup of the new pipeline is scheduled for 2001; construction of a storage terminal in Moriarty, NM., is planned for later this year.

"We are confident that the New Mexico Products Pipeline System will stand on its own as a reliable supplier of quality and competitively priced products," said George Rootes, president of Equilon Pipeline Company. "The demand for refined products along this route is steadily growing and we will be in an excellent position to help meet this demand."

Equilon officials say they are working with federal, state and local agencies to determine the details of the required permits for the New Mexico Products Pipeline System. Environmental, archaeological and cultural reviews also are under way.

VALERO CEO GREEHEY OUTLINES THE COMPANY'S PLANS TO ENTER THE CALIFORNIA MARKETPLACE

PALM SPRINGS, CA. — "Entering into California is the most important thing Valero has done in the last 20 years." This was the message of Valero Chairman and CEO Bill Greehey, speaking to the California Independent Oil Marketers Association at their recent Spring Meeting.

Greehey reflected on the history of Valero as well as the plans of the refining company which is entering the California and western marketplace.

"We’re a real young company," began Greehey. "We spun off from Coastal Corporation on January 1, 1980. We had no pipeline operations — we had natural gas liquids. Our largest customer was the city of San Antonio, so we moved our corporate headquarters to San Antonio."

Greehey recalled that the company was named "Valero" after Mission de Valero, the historic structure that became the Alamo. He explained, "We wanted an historic name."

Valero became a refiner in 1981 when it purchased a small refinery in Corpus Christi, Texas. After successfully operating the refinery, Valero chose to spin off their refining and marketing business into a new company in 1997, leaving behind their natural gas liquids operations.

"We said we were going to be very aggressive and grow the refining side of the business," said Greehey. "We said ’strictly refining.’"

Valero completed their first acquisition soon after, in May 1997, buying three Gulf Coast refineries from Basin Petroleum for $485 million.

"That number represented about 10% of its replacement costs," recalled Greehey. "The reason we got it so low, I think, is they were refineries trying to be run by investment bankers."

The next acquisition came in October 1998, when Valero acquired Mobil’s refinery in Paulsboro, New Jersey. "With that acquisition and upgrades we became the nation’s second largest independent refining company," said Greehey.

Soon after, the company was bidding on Exxon’s refinery in Benecia, CA., which the company was ordered to divest as part of the Exxon Mobil merger. In addition to the refinery, 335 retail service stations were included in the deal which had to be sold by Exxon Mobil to prevent further consolidation of the California marketplace.

Earlier this year, it was announced that Valero was the successful bidder and would be taking control of the refinery and the retail stations on June 15.

"Now we have purchased Exxon Benecia and Exxon’s retail outlets," said Greehey. "Nice guys really do finish first because we were the low bidder of the three companies. This is because Exxon Mobil considered both financial and non-financial criteria.

"Our company works hard at building a good working relationship with our business, our employees, and with our community. I’m most proud of the fact that Fortune said Valero was one of the 100 best companies to work for. We have less than 2% turnover."

Prior to the purchase of Benecia, Valero had revenues in 1999 of $8 billion, ranking them 229th in the Fortune 500. The company marketed product to major retailers, offering supply through 190 terminals in 31 states, and supplied refined product to U.S. and Mexico. All of these operations were outside the West, however, until now.

"With Benecia, we will have a throughput of 950,000 barrels per day," he continued. "With that, we tied Tosco as the largest independent refiner in the country. Those of you who know O’Malley know he couldn’t stand it, so he had to go out and buy Wood Ridge refinery."

Greehey continued, "We strengthened our U.S. marketing position. Benecia is one of the best maintained, best refineries in the U.S. but we still think there is upgrade capability. Our goal: increase gasoline production at the refinery and increase reliability. The utilization is at 91%. We think we can get it to 98%

"70% of what they make is gasoline. 16% is low sulfur diesel and jet. They do not make CARB diesel. One of our top priorities is to make CARB diesel.

"Our marketing plan is 75% of gasoline and 90% of distillate sold on an unbranded basis to commercial customers. The remaining product will be sold to customer’s stores."

Looking at Valero’s plans with its newly acquired retail outlets was a major topic of discussion for Greehey.

"We are going into retail for the first time," he explained. "The strategy we followed was to get an experienced management in place with the acquisition. And that’s exactly what happened."

Of the branded stations acquired by Valero in the Bay Area, 75 were company-operated by Exxon and will be rebranded to Valero’s own brand by June 15. "The other 260 stores are independently owned," he said. "We have the right to use the Exxon brand. However, we plan to offer Exxon distributors the opportunity to brand with Valero."

Greehey said that the Valero staff is working closely with marketing experts and is developing a brand image that they feel will be successful in the West Coast markets and will be attractive to consumers.

The stations will feature teal, golden yellow and white graphics and colors. The Valero "V" will be used as a logo, incorporating the company’s colors and style. The company has also decided on a marketing slogan for the Valero stations: "Valero: a turn for the better."

"We are working on the Valero brand," said Greehey. "We’re talking about rebranding, reimaging, upgrading station sites. We have met with dealers and discussed our market plans.

"We plan on investing $50,000 per store to give them a clean, unique look. We have a $2.5 million budget this year to spend June to December to introduce the brand."

Valero has also spent time examining the unique supply situation in California with the special CARB RFG gasoline requirement for the state. Greehey believes Valero is in a position to help keep supply stable in California and the West.

He noted that Valero owns the only U.S. refinery outside of California which manufactures CARB RFG: the Corpus Christi refinery. When Valero plans a turnaround of the Benecia refinery, he said the company will make sure that their Texas refinery is ready to supply California and lessen the chance of price spikes. Greehey pledged, "If we go down in Benecia, we’ll make sure we have plenty of CARB gasoline in the market before we go down."

If there is an unexpected problem with supply, Greehey noted that the Corpus Christi refinery would be able to step in and help by sending CARB RFG to California. The action would be on a slightly longer time frame as it would take one week to begin producing the fuel in Texas and 14 days to get it to California.

As the California Air Resources Board looks to make gasoline formulation even more stringent in the state, he believes Valero will be able to continue to supply the market, although supply will tighten when the new regulations are enacted.

"We believe for a relatively small investment, we can make CARB III by 2002," Greehey predicted. "We believe we’re going to have a 9,000 barrel per day reduction in production to do this, primarily because of the use of ethanol. We think we can make up this incremental loss by 2003, however.

"Like us, other refiners will be looking to increase their production but, despite this, I do think there will be a tightness to the market."

As government regulations on gasoline and its formulation increase, Greehey predicted market fluctuations and supply problems coming in the future — and not just in California.

"Everything we’ve done regulatory-wise with RFG in the past has added supply by adding oxygenates," he explained. "Everything we’re doing now reduces supply. Taking out sulfur reduces supply. CARB III reduces supply. And the EPA is scared to death. They don’t have a handle on this. They don’t know what’s going to happen with this."

In addition to supply problems, Greehey expressed his concerns about the pending ban on MTBE and its replacement with ethanol. He believes there are both health problems with this choice as well as concerns for the future of the petroleum industry.

"MTBE is not a carcinogen," Greehey stated. "Ethanol is a carcinogen. There haven’t been any studies on ethanol the way there have on MTBE.

He added, "You ought to be scared to death. If they ban MTBE, what’s next?"

Despite his concerns about government regulations, Greehey said that he and his company were looking forward to becoming an active part of the California and western marketplace. He added that he hoped to instill his company’s philosophy in their operations in the West: "First we become friends, then we do business."

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