SAN FRANCISCO -- As political maneuvering continues over the fate of the controversial proposed Keystone XL pipeline, one of the world's largest energy companies -- BP -- is already signaling the direction it plans to take: it's positioning itself to tap the burgeoning supply of Canadian tar sands oil.
BP announced it will divest from its oil refineries on the Southern West Coast -- in Carson, Calif. -- and Texas City, TX, and expand its operations in the Pacific Northwest and the Midwest -- a move that would halve the company's U.S. refining capacity.
David Hackett of Stillwater Associates, an energy consulting firm based in Irvine, Calif., called the energy giant’s exit from California “a big deal.”
“There hasn’t been a major refinery sale in California since the late nineties,” he said, adding that the divestment appears to be “an investment decision that BP has made,” rather than being driven by refinery consolidation or government action. Hackett says BP is cutting back on its oil refining business, because of the “thin profit margin.” Oil companies make significantly more profit from producing crude oil, he says, than from refining and marketing it.
“They don’t want to be in refining and marketing in the Pacific Southwest -- Southern California, Southern Nevada, and Arizona,” he said.
The company has significant market share in these states, Hackett says, through the ARCO brand, which BP bought in the ‘90s. The company will continue to operate and supply fuel to ARCO stations in Northern California and the Pacific Northwest.
A company spokesman said in an emailed statement that the divestment decision, announced last February, is “part of a strategic plan to restructure BP's U.S. refining portfolio.” The company is looking for buyers for its Carson and Texas City refineries, and hopes to complete the sales by the end of the year.
In the meantime, BP is repositioning itself in the Pacific Northwest and Midwest by upgrading its refineries there to tap a burgeoning crude supply from the U.S.’ northern neighbor. Increasing the flow of Canadian tar sands is the focal point of the proposed Keystone XL pipeline that would connect Alberta’s tar sands to refineries on the Gulf Coast, and transport up to 830,000 barrels of crude oil per day.
Extracting and processing Canadian tar sands releases more greenhouse gases than conventional oils, and the pipeline has faced fierce opposition from environmentalists globally. The pipeline’s supporters, including some Republican politicians, have said that derailing the pipeline would cost Americans jobs.
In January, Pres. Obama denied TransCanada, the company that wants to build the pipeline, a permit, saying a rushed timeline did not allow for adequate review. Since then, Congressional Republicans have tried to override his decision by attaching the pipeline’s approval to other bills and by trying to give a quasi-independent federal agency authority to make the final decision.
The BP spokesman wouldn’t comment on how the delay of Keystone XL might affect BP’s plans. Canadian crude is already flowing into the Midwest through another pipeline, simply called the Keystone, but Keystone XL would dramatically increase capacity.
BP’s Texas City refinery can process 460,000 barrels of crude oil each day, enough to supply 3 percent of the nation’s gasoline demand. But it’s also an older refinery with a history of safety problems. In 2005 it was the site of a fire and explosion that killed 15 workers and injured hundreds. The company was slapped with then record fines for safety violations.
“Texas City they got when they bought Amoco, and they have never been able to run it very well,” Hackett said.
Hackett says he’s not surprised BP wants out of its Texas City refinery, but “It’s a mystery to me why they are making this decision [to sell Carson].”
BP’s Carson refinery, which has a capacity of 266,000 barrels per day, turns crude oil into “low emission gasoline” and other fuels and products, and supplies about a quarter of the fuel demand in Southern California.
According to analyst and investor documents on BP’s website, “the refinery has limited feedstock flexibility, is gasoline biased and will require investment in logistics and/or configuration to improve this.”
Terms like feedstock flexibility are “code words” that refer to a refinery’s ability to process a spectrum of crude oils, said Greg Mooney, general counsel for the South Bay Center for Community Development, an organization that trains residents who live around the refineries – called “fenceline communities” -- for jobs in the industry. Mooney once worked in human resources at the ConocoPhillips refinery, not far from BP’s Carson facility.
Crude oil varies in terms of quality and physical traits. It can come out of the ground looking like kerosene, according to one industry analyst, or it can look like tar that needs to be heated to turn into a liquid. The most coveted crude is referred to as “light” and “sweet,” and the stuff that is harder to refine is labeled “heavy” and “sour.” There’s also a price difference.
“You pay a whole lot more for lighter crude,” said Mooney. “It’s easier to refine. The really heavy, nasty stuff… you can get it at a discount.
“The refineries that can process the heavier higher sulfur crude -- more bottom of the barrel stuff, as we used to call it -- are the refineries that are going to be able to survive in market, because they can process just about any kind of crude.”
Hackett of Stillwater says the Carson refinery was equipped to process crude oil from Alaska -- Alaskan North Slope (ANS) -- but supplies of crude from Alaska, as well as California, are dwindling.
“Now that ANS has mostly dried up, they have to go looking for alternatives,” said Hackett, adding that the alternatives have been heavier and higher in sulfur, and more costly to process. Going from a steady feedstock diet to a variable one requires investment in technology, and he said BP evidently decided the cost of upgrading the refinery was not worth it.
BP has boosted investment in three of its U.S. refineries – Cherry Point in Washington state, Whiting in Indiana and Toledo (refinery) in Ohio. Expansion projects were recently completed or near completion at these sites, positioning them to process a greater variety of crude oils, mainly from Canada.
Speaking about the Cherry Point refinery, now the hub of BP’s Northern fuel business, Iain Conn, the company’s chief executive for refining and marketing, said, “The refinery is better-located and more feedstock flexible, being both pipeline connected to Canada and also closer to ANS supplies,” according to analyst and investor documents on the company’s website.
The Whiting refinery is in the midst of a major “modernization project,” that will transform it from a facility that runs mainly light, sweet crude to a facility that processes heavy sour, boosting the company’s bottom line.
“This comes from an improved ability to run heavy crudes, improved product yields and location advantage relative to the Gulf Coast for Canadian crudes,” Conn said.
Conn also pointed to a trend that is further influencing the direction the industry takes.
“The backdrop to our strategic choices is one of flat to declining demand for fuel in the U.S. and Europe,” he said.
Mooney, the lawyer for the South Bay Center for Community Development, says BP’s strategic moves will have ripple effects in the Los Angeles area.
His organization has trained and placed at least 500 local residents in jobs in the refining industry, through partnerships with the area’s major refineries, including ConocoPhillips, Exxon Mobil, and Valero.
He says they hope to continue the training program with BP’s successor.
“I would think they would be interested in… talking to us about what this collaboration is like, and what we can do to help make their business a better business and continue to recruit and train workers who live on that fenceline,” he said.
A worst-case scenario, said Hackett, the Stillwater analyst, would be “if the refinery doesn’t run, and 1,000 people are out of work,” although he said he didn’t think that would/will happen.
“That refinery [BP Carson] will indeed continue to operate,” he said. “ I just don’t know whose flag will be on it.”
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