Phillips to Acquire Tosco for $7 Billion
EPA Issues Tough New Diesel Regulations
G.P. Resources Buys Pennzoil-Quaker State Carson Plant
Earthcab Taxi Fleet Runs on CNG
BP Amoco Accused of Price Fixing In the West

PHILLIPS TO ACQUIRE TOSCO FOR $7 BILLION

OLD GREENWICH, CT. — Phillips Petroleum Company announced on Feb. 5 that it has agreed to purchase Tosco Corporation for $7 billion in stock, making it the second largest refiner in the United States and the third largest marketer in the country with the Phillips 66, Union 76, and Circle K brands.

According to Tosco CEO Tom O’Malley, the deal came about after Tosco was looking to expand its own holdings and entered into talks to buy some of Phillips’ assets. Although that scenario did not take place, the acquisition of Tosco emerged from those talks.

Phillips will acquire all of Tosco’s operations, including its eight U.S. refineries with a total capacity of 1.35 million barrels per day and as well as Tosco’s 6,400 retail outlets in 32 states.

Phillips currently operates three U.S. refineries with a capacity of 360 thousand barrels per day, over 6,000 retail and aviation outlets in 28 states, and 6,000 miles of pipeline.

Under the terms of the agreement, Phillips will issue 0.8 Phillips shares for each Tosco share. It will also assume approximately $2 billion of Tosco’s debt.

Tom O’Malley, 59, the chairman and CEO of Tosco, will lead the transition effort. Following the acquisition, O’Malley will become a member of Phillips’ board of directors and serve as vice chairman of Phillips’ board and CEO of the company’s Refining, Marketing, and Transportation (RM&T) operations.

Jim Mulva, Phillips chairman and CEO will remain as head of the expanded company.

With this deal, "We truly become a major integrated petroleum company," said Mulva. The total assets of Phillips are valued at $36 billion following the acquisition.

The combined companies’ RM&T offices will be based in Tempe, AZ., in Tosco’s current marketing headquarters. Exploration & Production, Research & Development and other upstream operations will be based in Bartlesville, OK., in Phillips’ headquarters.

"We see a great opportunity in the RM&T business to really make a lot of money and grow this part of the business," said Mulva. "I think returns in the RM&T business will continue to be strong because of the supply and demand situation. The demand continues to go up and the available supply and manufacture through the refineries is rather limited. So I see a tight supply and demand situation and continued tight crack spreads — so a good return."

In the area of Tosco’s convenience store holdings, "We are and have been the nation’s largest operator of company controlled convenience stores and we have the addition of the 390 or 400 Phillips stores to this system," recalled O’Malley. "This is a terrific advantage for us. We now have 12,000 branded outlets across the United States. In terms of gallonage sold, it puts us in the number three position. When you talk about profitability, it’s the gallonage sold that matters."

O’Malley added, "We’ve got a terrific retail organization. There is absolutely no rush and, indeed, perhaps, no need, to jump into other markets in terms of refining and marketing."

Phillips says they expect the deal to save the combined companies $250 million annually as well as substantially increase net cash flow.

Part of these savings will come from staff reductions from both companies. O’Malley explained, "We only need one corporation. Those elements are there and they’re real. When you put two companies together, there are more employees we need. We are going to fairly look for the best and the brightest, the people that really want to do the job. Many of those folks will, perhaps, come out of the Phillips organization into the Tosco refining and marketing organization. Certainly many of our employees are very talented ones and have further opportunities to grow into Phillips. But there will be synergies from that side of the equation and we’re not being overly optimistic when we say that’s $90 million." He added, "We’re going to get these synergies and we’re going to get them very fast."

Both companies state, however, that the acquisition will not impact the current 2001 capital spending plans of either Phillips or Tosco.

"The addition of the assets that Phillips owns to the Tosco assets really gives us critical mass," said O’Malley. "There is complementary skill use here. We do run really good refineries and we have c-store expertise. But Phillips has a great wholesale system. And in terms of R& D, I think our R&D staff will learn a great deal from Phillips. They’ve developed tremendous new processes…to really develop the clean fuels that are demanded here in America."

"This really is the final step with respect to really putting in place what is a new Phillips and what Phillips is going to look like going forward in the future," said Jim Mulva, Phillips chairman and CEO. "We are acquiring the assets and expertise of the country’s largest independent refiner and marketer and combining the complementary skills of the two companies, including Tosco’s refining capabilities and convenience store expertise along with Phillips’ branded wholesale skills and expertise in refining and fuel technologies."

"We see the great opportunity to transform the company in a rather quick period of time to transform the company into a truly major integrated petroleum company," Mulva explained. "And if you’re going to be a truly major integrated oil company, you’ve got to have a strong upstream and a strong downstream."

He noted that prior to the acquisition, 70% of Phillips’ assets were in exploration and production. The company has expanded in that area following their purchase of Arco’s holdings in Alaska last year.

"With the acquisition of Tosco, we start to move a little more of our portfolio into the RM&T part of the business," Mulva continued. "RM&T is going to be domestic-oriented and the bulk of our capital is going to be going to the dramatic growth of our E&P." He predicted, "By 2005, you can see there’s a balance 50-50 upstream and downstream.

"We’re excited about Tosco," he continued, "when we look at Tosco, premier independent refining & marketing company. We have just positioned ourselves to be a leader domestically in the RM&T business. And you really want to be a leader.

"If you’re going to do it you want to be right at the top because there’s a lot of opportunity to make money and value creation in this business. In terms of supply and demand and infrastructure, there is not a lot of new capacity that is going to be built, so we see a great opportunity to make a lot of money in value creation.

"You see the scope and size of Tosco, how they grew through acquisitions, run a great operation. What we really have is one of the very best competitive domestic RM&T companies in the business."

Mulva added, "We now have positioned our business to fully compete in the domestic RM&T marketplace, which, when combined with our strong E&P operations, puts us among the leaders in the integrated oil industry."

"I am delighted that Tosco is joining the Phillips family," said Tom O’Malley. In a vote of confidence he added, "As Tosco’s largest individual shareholder, I fully intend to convert and hold my shares on a long-term basis, and am so confident about the potential of the new Phillips that I expect to increase my holdings."

O’Malley noted that "Tosco has built a great domestic system. We looked at growth possibilities out in the future. And here in the United States, we really were limited. The good assets have been taken. There is some stuff out there but you really don’t want to go after it.

"Tosco’s old expansion mode was to expand into Europe. It was going to be very tough because the kind of assets we were acquiring weren’t really available over there."

He continued, "My recommendation to Jim has been to not go forward with an expansion program outside the United States at this time in refining and marketing but, rather, use some of the capital we’re generating to improve the refining system that we currently have — which is truly world scale, to improve the retail system that we have, to further concentrate it, to, perhaps, take some money out of it. I think we probably own too much dirt in that business."

The transaction has already been approved by the Boards of both Phillips and Tosco and is expected to close by the end of the third quarter, subject to regulatory approval.

EPA ISSUES TOUGH NEW DIESEL REGULATIONS

WASHINGTON, DC. — At the end of December the Environmental Protection Agency unveiled its new regulations mandating a new ultra low sulfur on-road diesel fuel.

The change in diesel requirement has been debated by the EPA for the last several years. The strict regulations released by the EPA at the end of the year were seen by many as a "parting shot" by the Clinton-appointed administrators before they were to be replaced by officials in the Bush administration.

The controversial regulations would require refiners to reduce the sulfur content of on-road diesel fuel from the current requirement of 500 parts per million (ppm) cap to 15 ppm by June 1, 2006.

Refiners had testified before the EPA that the diesel fuel supply might be disrupted if the cap was set lower than 50 ppm.

The EPA estimates that the cost to manufacture this very low sulfur diesel fuel will be approximately 4.4 cents per gallon higher than current production costs.

The American Petroleum Institute has estimated that the costs of making the new fuel will be 10 to 15 cents more per gallon — and the market costs may be substantially higher if shortages occur.

The new diesel regulations extend beyond the traditional mandates for fuel formulation, impacting the marketing of diesel as well. The EPA has said that they may require petroleum marketers to install new dispenser nozzles to cut back on emissions, label ultra low sulfur fuel dispensers with consumer warnings, and implement new cargo tank loading and unloading procedures to prevent mis-blending of low and high sulfur diesel fuels.

As part of the new tank loading procedures, marketers at every step of the distribution process would be required to compile and maintain product transfer documents "to establish a defense against fuel misblending." If any misblending was found in any stage of the testing process, all the parties in the distribution network would be liable.

Marketers may also be required to conduct sulfur content tests at the terminal rack to ensure fuel meets government specifications. They may also be required to test the fuel for lubrication characteristics and blend lubricating additives where necessary to prevent wear in older diesel engines.

The EPA officials said they were aware that these policies could create shortages of diesel fuel. In order to try and prevent this from occurring, the Agency said it was considering a phase-in of the ultra low sulfur diesel.

Under the phase-in plan, the largest retailers of diesel fuel would be the first ones required to market the ultra low sulfur formulation. Among those targeted would be truck stops and retail facilities selling over 200,000 gallons per month.

The petroleum industry is taking action against the standards that it feels are unreasonable and will destroy diesel marketing in the United States while bringing an unfair financial burden on diesel customers.

On Feb. 1, the Society of Independent Gasoline Marketers of America’s Board of Directors voted to sue the EPA over the diesel rule. "SIGMA will be asking the U.S. Court of Appeals for the DC Circuit to enjoin EPA from enforcing the rule, and to either overturn the rule or remand it to EPA for further consideration," noted Tom Osborne of SIGMA.

"In both cases — the implementation date and the phase-in — EPA’s decisions were not supported by the public record during the regulatory process," stated SIGMA President Tom Robinson of Robinson Oil Corporation, San Jose, CA. "Those points will be raised in our litigation. EPA chose to ignore the evidence, and adopted a flawed rule."

The National Petrochemical and Refiners Association (NPRA) has also filed suit against diesel sulfur rule on behalf of diesel refiners to try and block implementation.

Petroleum marketers and retailers are not the only ones who will be hit by the new regulations. The EPA is requiring strict emission standards for all on-road diesel vehicles — cars, vans, and heavy-duty trucks) beginning with model year 2007. These vehicles will be required to have engines that are designed to run on the ultra low sulfur diesel — and it will be illegal to fill their tanks with any other diesel formulation.

The regulations are scheduled take effect on February 21.

To read a copy of the final rule, visit the EPA’s website at http://www.epa.gov/otaq/diesel.htm.

G.P. RESOURCES BUYS PENNZOIL-QUAKER STATE PACKAGING PLANT

CARSON, CA. — Pennzoil-Quaker State Company announced that it has sold its packaging plant, based here, to G.P. Resources, Inc.

G.P. Resources, Inc., which also markets under the name of General Petroleum, is a large West Coast marine, commercial fuels and lubricants distributor based in Long Beach, CA.

Announcing the deal, G.P. President John Zar, commented, "The Pennzoil-Quaker State Carson facility will allow General Petroleum to consolidate its offices, transportation group and lubricants storage facilities under one roof. Strategically situated near three main freeways, this operation will allow G.P. to improve its petroleum distribution economics and allow for future expansion."

The Carson plant has operated as a blending and packaging facility since the formation of Pennzoil-Quaker State Company in late 1998. The plant formulates and supplies lubricants to the West Coast market.

EARTHCAB TAXI FLEET RUNS ON CNG

BROOMFIELD, CO. — EarthCab’s six car fleet of taxis is now fueled by compressed natural gas and will pick up and drop off customers within a six-mile radius of their home base in Broomfield.

The area includes Superior, Louisville, Lafayette, Westminster, and Arvada. The company plans to expand its fleet to 12 cars by the end of the year.

Global positioning technology is used to track the cabs and improve efficiency.

BP AMOCO ACCUSED OF PRICE FIXING IN THE WEST

PORTLAND, OR. — BP Amoco has been accused of shipping Alaskan crude oil overseas in an attempt to keep prices high on the West Coast.

According to the Jan. 7 issue of The Oregonian, BP Amoco artificially raised oil prices in the West by exporting Alaska North Slope (ANS) crude to Asian customers — for less than U.S. refiners were willing to pay for the same crude.

The Oregoniancited documents that it says were kept secret by the company but offer proof that BP Amoco planned to keep supply short in the West to shore up prices in the marketplace. The documents were made public as part of the Federal Trade Commission’s lawsuit filed last year to block BP’s buyout of Atlantic Richfield Co.

Among the damaging evidence that surfaced was a report by Dallas engineer and consultant Steanson Parks who wrote that "BP regularly exports ANS crude to foreign markets at a lower price, net of transportation costs, to tighten West Coast crude oil supplies and raise ANS crude oil prices."

Parks also wrote that BP charges "significantly higher prices to West Coast refiners that do not have an economically viable alternative to ANS crude oil," a situation that is well-known in the tight supply of the Western marketplace.

BP Amoco officials deny the accusations made by the newspaper.

"What we did in terms of sales to the Far East was well within the bounds of the law," said BP spokeswoman Jennifer Ruys. "We were absolutely not able to affect West Coast prices."

Following the reports, a coalition of lawmakers requested a ban on Alaskan crude exports be renewed by the U.S. Government. The export ban was in place but was lifted in 1996.

Led by Senators Barbara Boxer (D-CA.) and Patty Murray (D-WA.), the lawmakers claimed that since the ban on Alaskan exports has been lifted, retail gasoline prices have been steadily increasing for consumers.

At the same time, Oregon’s Senators Ron Wyden and Gordon Smith are calling for a Federal investigation of BP and its actions with the Alaskan crude.

Originally published in the February 2001 issue of O&A Marketing News.
Copyright 2001 by KAL Publications Inc.