Decision not to rely on Alaska crude pays off for refiner

Posted: Friday, August 18, 2006

DALLAS - While most major refiners have suffered from the partial shutdown of a major Alaska oil field, at least one is feeling good about its decision to avoid relying solely on the Alaskan North Slope for crude oil.

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Independent refiner Tesoro Corp.'s decision two years ago to seek suppliers elsewhere paid off last week as the San Antonio-based company watched more than 200,000 barrels go offline when BP scaled back Prudhoe Bay operations because of pipeline leaks and corrosion.

Tesoro would have been strapped to supply its Pacific Coast refineries, which represent nearly 80 percent of the company's assets. Instead, it's among the refiners with the least exposure to production that could ultimately curtailed by as much as 300,000 barrels a day.

"A couple of years ago this would have been significant for us; it could have been real bad," Lynn Westfall, chief economist for Tesoro. "Now, the situation is more of a timing and logistics issue in getting the crude."

Analysts don't expect a meaningful impact on refiners that can get oil from other sources, such as the Middle East, West Africa and Asia, but prices at the pump along the West Coast should still go up.

"What's going to happen is that if there is an extended period of down time, refiners will have to find alternative sources," said Jacques Rousseau, analyst with Friedman, Billings Ramsey. "It may not be the optimal oil, and they may not get it an optimal price, but it's something they will be able to do."

Prudhoe Bay accounts for just under half the Alaskan crude production of 850,000 barrels a day. Of that sum, about 280,000 are used by Alaskan refineries with the rest used in Washington and California.

Tesoro is among eight refineries with at least one facility along the West Coast or Alaska that draws from the Alaskan North Slope. The others are BP, Shell Oil Co., ConocoPhillips, Valero Energy Corp., Chevron Corp., Flint Hills Resources and Exxon Mobil Corp.

Chevron is the least dependent on Alaskan crude, according to a research report by Fadel Gheit, analyst with Oppenheimer & Co. BP is the largest refiner of Alaskan crude.

"Overall, I expect there will be some glitches and inconveniences, but nothing major," he said. "We will reach our destination, but the ride is going to be a bit rougher and it could be less comfortable."

A BP spokesman said the company is working to offset any shortages created from the Prudhoe Bay production decline. The British company has so far purchased 4.5 million barrels of crude to serve the West Coast, spokesman Neil Chapman said.

"We are making sure the West Coast market is whole," Chapman said. "Obviously, we are going to be buying additional supplies as necessary."

Analysts expect fallout at the pumps, particularly along the West Coast, which is dependent on local refiners. It could come as early as next month.

While refiners can import additional crude, Standard & Poor's analyst John Thieroff points out California's strict environmental restrictions could leave some refiners hamstrung. It's a market that operates in a "precarious balance," he said.

"Anything that takes gasoline off the market is likely to result in really, really sharp spikes in prices in parts of the country that already pays the highest prices," he said.

Refiners are typically able to handle different crude grades, and they are constantly tweaking equipment to accommodate additional grades.

Tesoro's Martinez, Calif., facility was primarily dependent on Alaskan's lighter crude but began to diversify with North Slope production in a slow, steady decline.

"We set out to expand our crude diet," said Westfall, the Tesoro economist. "We started by hiring people with international crude experience who had the contacts and the knowledge. Now we can handle a crude diet of 50 grades."

Gheit, the Oppenheimer analyst, said it was a savvy move.

"Everybody saw the writing on the wall," he said. "There was just not enough Alaskan North Slope crude to go around."

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