Independent refiner PBF Energy on June 11 announced its plan to acquire Shell Oil’s Martinez, CA, refinery for about $1 billion; the deal is expected to close by the end of 2019. The purchase will give PBF its sixth U.S. refinery and add 157 Mb/d to the company’s existing 865-Mb/d refining portfolio, pushing its total capacity past 1 MMb/d. Post-acquisition, PBF will retain overall fourth place in the U.S. market, behind leaders Marathon Petroleum, with 3 MMb/d; Valero, with 2.6 MMb/d; and Phillips 66, with 1.9 MMb/d. With the exception of its 173-Mb/d Toledo, OH, plant, PBF’s refineries are equipped with cokers that extract value from the heaviest sour crudes. As such, the Martinez acquisition extends the company’s long-term bet that heavy crude refining margins will exceed those of simpler refineries processing light sweet grades, even as U.S. production of the latter soars. Today, we examine prospects for the Martinez refinery and the sweet/sour spread.
This blog is based on analysis originally published by Morningstar Commodities and Energy Research. You can download a copy here.
The U.S. refinery market has seen significant merger and acquisition (M&A) activity in the past two years, topped by Marathon Petroleum’s 2018 acquisition of rival Andeavor (formerly Tesoro) to create the U.S. largest independent refiner. In November of last year, smaller independent Par Petroleum snapped up U.S. Oil & Refining’s 41-Mb/d Tacoma, WA, plant from private equity-backed TrailStone, and in January (2019), Chevron purchased the 110-Mb/d Pasadena, TX, refinery from Brazil’s Petrobras (see Big Time). Just last month, Midwest independent CVR Refining announced that its132-Mb/d Coffeyville, KS, refinery and 74-Mb/d refinery in Wynnewood, OK, could be sold under an asset review. These plants are changing hands despite strong margins experienced in 2018 (see Run Run Run) and continued discounts for U.S.-sourced crude during the Shale Era as production exceeds refinery demand for light sweet grades.
Canadian crude output is rising, requiring new export routes. As traditional pathways face constraints, the U.S. Rockies—especially the Guernsey, WY hub—are emerging as key corridors for moving Canadian heavy crude to downstream markets, including the Gulf Coast.
Doubling Down
Despite U.S. crude oil production climbing from 5.5 MMb/d in 2010 to 11 MMb/d in 2018, according to the Energy Information Administration (EIA), refining capacity only increased by 1 MMb/d to 18.6 MMb/d in that period. In part, the lack of refinery expansion reflects difficulty permitting new construction for anything but small refineries, as well as existing refiners’ reluctance to invest in new capacity to process abundant light crude — with the notable exception of ExxonMobil’s planned 300-Mb/d Beaumont plant expansion. The bulk of U.S. refining capacity that came online in the past 40 years was designed to process heavy crude in the belief that it would be easier and cheaper to acquire than lighter crudes, which were expected to become scarcer (see Heavy Fuel). Instead, this year — in the midst of OPEC, Russian and Canadian production cuts as well as sanctions on Iran and Venezuela — it’s heavy sour crudes that have become less available (see Just Can’t Get Enough) and light sweet shale crude is flooding the international market. Given that, PBF Energy’s $1 billion investment in a San Francisco-area refinery running heavy sour crude represents a doubling down on the company’s belief that technically superior U.S. refineries can extract better value from heavy crude than less complex rivals can from shale grades.
The coker and other sophisticated equipment at the Shell Martinez refinery (pink marker in Figure 1) make PBF’s California fleet — which also includes the 155-Mb/d Torrance refinery near Los Angeles that PBF acquired from ExxonMobil in 2016 — the most complex in the Golden State. PBF also has two refineries on the East Coast in Delaware City, DE, and Paulsboro, NJ, as well as the Toledo plant in Ohio and the 190-Mb/d Chalmette, LA, refinery (also purchased in 2016). California has 11 transport fuel refineries that we described in an August 2017 blog (see Beast of Burden) with a total of 1.8 MMb/d of capacity. The Martinez acquisition will put PBF in third place in the state, with 317 Mb/d total — only Chevron (with 514 Mb/d) and Marathon (with 508 Mb/d) have more. Marathon’s 120-Mb/d Anacortes, WA, refinery makes it the biggest refinery player in the Petroleum Administration for Defense District (PADD) 5, followed by Chevron and Phillips 66, then PBF.
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About the song
"Going to California" was written by Jimmy Page and Robert Plant, and appears as the third song on side two of Led Zeppelin's fourth studio album, Led Zeppelin IV. The song features Page on acoustic guitar and John Paul Jones on mandolin, accompanied by Plant's vocals. Page and Plant say the song (originally titled "Guide to California") was inspired by Joni Mitchell, of whom both were fans. The acoustic folk music feel of the song contrasts nicely with the heavy blues rock grooves of the rest of the album. It was recorded, along with most of the album, at Headley Grange, a country house located in Hampshire, England. The Rolling Stones Mobile Studio was used for recording, with Andy Johns engineering and Jimmy Page producing.
Led Zeppelin IV was recorded between December 1970 and February 1971. It was released in November 1971, where it went to #2 on the U.S. Billboard Top 200 Albums chart. Personnel on the LP were: Robert Plant (vocals, harmonica), Jimmy Page (guitars, production), John Paul Jones (bass, keyboards, mandolin, recorder, synthesizer) and John Bonham (drums). The album won a Grammy Hall of Fame Award, and has been on many lists of the greatest rock albums ever recorded.
Led Zeppelin was an English rock band formed in London in 1968. It was made up of Jimmy Page, Robert Plant, John Paul Jones and John Bonham. They are one of the best-selling rock bands in history, with record sales estimated to be 300 million worldwide. Led Zeppelin released eight studio albums from 1969 to 1979 before drummer John Bonham's untimely death in 1979 led to the dissolution of the group. They have won one American Music Award, five Grammy Awards and two Ivor Novello Awards. They also have received Kennedy Center Honors and are members of the Rock and Roll Hall of Fame. Page, Plant and Jones still record individually and tour with various solo and side projects to this day.
