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Carlyle, Sunoco Agree to Joint Venture for Refinery

Carlyle Group, the Washington-based private-equity firm that went public this year, is taking over operations of a Sunoco Inc. plant on a bet that revived U.S. oil and natural-gas output can restore the oldest continually operating refinery on the East Coast to profitability.

Carlyle will invest an undisclosed amount in Sunoco’s 330,000-barrel-a-day Philadelphia facility as part of a joint venture, the companies said today in a statement. Sunoco will contribute the refinery to the joint venture and retain a minority stake.

Carlyle plans to process oil delivered by rail from North Dakota’s Bakken formation where production has risen fourfold in the last three years. It will also use gas from the Marcellus Shale in Pennsylvania, where output doubled last year, to run the refinery.

“This refinery could be profitable if it were running on Bakken crude instead of Nigerian crude,” said Bradley Olsen, a Houston-based analyst at Tudor Pickering Holt & Co. who rates Sunoco a buy and doesn’t rate Carlyle. “The rest of it is just trying to make it a sufficiently efficient operation.”

Oil from the Bakken and the Eagle Ford deposit in Texas will displace almost half the more costly imported oil used by the refinery by early next year, Phil Rinaldi, chief executive officer of the venture, Philadelphia Energy Solutions, said today on a conference call.

Bakken crude, constrained by limited pipeline capacity, has sold for an average $88.51 a barrel this year, compared with $113.47 a barrel for Brent, the global benchmark that sets the price for oil Sunoco has been refining, according to data complied by Bloomberg.

State’s Aid Package

The agreement means that two of three Pennsylvania refineries that faced shutdown will keep operating. The Carlyle joint venture follows Delta Air Lines Inc.’s decision to buy a ConocoPhillips refinery south of Philadelphia in April for $150 million. Pennsylvania lawmakers have opposed plans to close the three refineries, saying the shutdowns would reduce jobs and raise gasoline prices.

The state will contribute $10 million toward the rail terminal, capable of unloading 140,000 barrels per day by early 2013. That’s part of a $25 million package that includes $15 million to overhaul the plant. The refinery will also be eligible for tax abatements and tax-free bond sales, Governor Tom Corbett, a Republican, said on the conference call.

“Pennsylvania is going to be the energy capital of the country,” Corbett said in an interview outside the United Steelworkers Local 10-1 union hall in Trainer, Pennsylvania. “I saw the steel mills go away because there wasn’t that kind of cooperation between business and labor and government.”

Low-Sulfur Diesel

Carlyle will add jobs and invest at least $140 million in plant improvements, Steve Kratz, a spokesman for Pennsylvania’s Department of Community and Economic Development, said in an interview. Carlyle declined to comment on how much it would spend.

“This was a no-brainer for us,” Kratz said. “It saves jobs directly and indirectly, because with the plant construction and improvements there will be construction jobs.”

After the overhaul, the plant will produce more and higher quality low-sulfur diesel, for which demand is growing, and less high-sulfur heating oil, Carlyle Managing Director David Marchick said on the call.

“Demand in the Northeast for heating oil continues to decline,” Andy Lipow, president of Lipow Oil Associates LLC, said today in a telephone interview. “New York state is going to require an ultra-low-sulfur heating oil.”

Within two years, Carlyle hopes to be fueling the plant with abundant natural gas from Pennsylvania’s Marcellus Shale formation instead of imported oil, Marchick said.

Marcus Hook

Sunoco rose 0.3 percent to $47.65 at the close in New York. Carlyle, which began trading publicly on May 3, rose 2.1 percent to $22.90.

Carlyle joins private-equity firms Blackstone Group LP and TPG Capital, which made refinery deals in the past two years to expand natural resources investments. Unlike public companies, which have to answer to shareholders every quarter, private-equity funds can make longer-term bets on a business or an industry because their capital is usually locked up for 10 years.

Sunoco, based in Philadelphia, had said it would close the refinery this month unless it found a buyer. Sunoco shut another refinery in the state, Marcus Hook, after it got no bids for it. The company, which is being purchased by Energy Transfer Partners LP for $5.3 billion, has sold or closed all its other refineries.

‘Christmas’ for Union

Keeping the Philadelphia refinery running will save 850 jobs and “secure the region’s fuel supply,” according to the statement.

“If Sunoco’s Philadelphia refinery, which alone accounted for nearly a quarter of refinery capacity on the East Coast in 2011, were to shut down in July 2012, petroleum product markets in the Northeast could be significantly impacted,” the Energy Information Administration said in a February report.

Delta announced plans to buy the 185,000 barrel-a-day Trainer refinery and spend $100 million to make it capable of supplying 80 percent of the airline’s U.S. jet fuel needs.

Workers are voting today on a tentative contract with Carlyle, Jim Savage, president of Steelworkers Union Local 10-1, said in an interview. The agreement will be approved overwhelmingly, United Steel Workers President Leo Gerard said on today’s call.

“The young guys will have a chance to retire,” said John Read, a retired United Steelworker union member who worked in the Philadelphia refinery for 40 years. “It’s a load off everyone’s shoulders. It’s like Christmas.”

Carlyle Group got legal advice from Vinson & Elkins and Buchanan Ingersoll & Rooney. Sunoco received financial advice from Credit Suisse AG and legal advice from Kirkland & Ellis LLP.

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