This Wednesday (September 30, 2015) PBF Energy announced their acquisition of the 155 Mb/d ExxonMobil Torrance, CA refinery that has been out of commission since February 2015 and will not likely return to service until February 2016. This PBF purchase is their second refinery buy this year and their fifth since 2010. The sophisticated Torrance refinery has a lot of upside potential for PBF but may be constrained by California transport fuel regulations. Today we take a closer look at the deal.
Back in February (2015) we looked at California regulation of transport fuels (see I’ll Be Back) in particular the impact of State environmental legislation known as the Low Carbon Fuel Standard (LCFS) that calls for continuous reductions in Greenhouse Gas (GHG) emissions from transport fuels – effectively reducing the use of gasoline and diesel in the State – with a not too hidden agenda to remove them from the mix altogether. California is something of an “island” state when it comes to refining with unique regulations mandated by the California Air Resources Board (CARB) that make gasoline and diesel more expensive to produce than in other states. But PBF is certainly not risk averse as we discussed back in 2012 (see Masterpiece Refining) when they launched an initial public offering for one of the first Master Limited Partnerships (MLP’s – see Masters of the Midstream for an explanation of these company structures) to operate refineries (rather than the more typical pipeline/midstream infrastructure that MLP’s are used for). Prior to this year PBF operated three refineries in Paulsboro, NJ (160 Mb/d), Delaware City, DE (190 Mb/d) and Toledo, OH (170 Mb/d) with the two East Coast refineries operating largely on a diet of heavy crude and Toledo running on light sweet domestic or Canadian syncrude. All three of these refineries have benefited from lower priced domestic crude in the shale era that have meant fat margins for refiners over the past four years (see Living With A Material Surge). So far though – although the California refineries have enjoyed lower crude prices during the shale era and (as we shall see) refiners there have been very profitable this year – shale crude has not made any inroads into the Golden State. The “local” Monterey shale prospect has proven a hard nut for producers to crack (see Do You Know The Way to Monterey?) and supplies of shale crude have not been delivered from out of State because of a lack of pipeline infrastructure – with the only such scheme on the drawing board being the Questar Inland California Express Pipeline (see The Crude Is Back In Town) that would potentially connect crude from the Rockies or the Permian basin to Los Angeles refineries. The Kinder Morgan Freedom pipeline project that would deliver crude from the Permian to the West Coast (see Price of Freedom) was put in mothballs last year (2014) although the company is still soliciting shipper interest apparently.
The PBF acquisition target is what realtors call a fixer-upper – hit by an accident on February 18, 2015 that damaged the electrostatic precipitator (ESP) – a unit that reduces emissions from the fluid cat cracker or FCC – a secondary processor that produces gasoline (see Complex Refining 101 for more on FCCs). The accident put the refinery out of commission and it has been down ever since – playing a major part in a spike in West Coast gasoline prices this summer as regional supplies fell short. PBF says that the purchase deal will not close until current owner ExxonMobil has repaired the ESP and that is now expected to be February of next year. The important point is that although the refinery is wounded now – PBF will have no liability for fixing the problem. Apart from that injury the Torrance refinery is a state of the art highly sophisticated refinery – designed to run a slate of heavy sweet and sour crude – mostly sourced locally from California production (more on supply in a minute). The refinery produces about 10% of California’s supply in a market that is the nation’s largest for gasoline consumption - in spite of the best efforts of legislators to eliminate petroleum fuels with regulations.