Sunoco Raises Chance Of Refinery Closure As Oil Demand Wanes
Sunoco Chief Executive Lynn Elsenhans said the company's Tulsa, Okla., refinery - which has been on the block for more than a year - would be converted to a terminal if a buyer isn't found by the end of 2009.
The move comes as Elsenhans seeks to reinvent the Philadelphia-based refinery as it grapples with a downswing in the sector.
While some refiners may be in a "cut-and-cope" mode, trying to reduce costs, but function normally, "we are trying to make meaningful cuts," said Elsenhans, who was appointed to lead Sunoco in August. She previously worked at Royal Dutch Shell PLC (RDSA), where she oversaw the major oil company's refining business.
Sunoco shares recently traded 3.2% lower at $34.80.
That Sunoco even raised the possibility of a refinery closure underscores how quickly the business environment has deteriorated amid weak global demand for refined products. Refinery valuations skyrocketed in the middle of the decade as demand ran up against capacity constraints, lifting profits.
Refiners, in the past, shied away from closing plants for fear of political backlash. With the average gasoline price less than half of the $4-a-gallon mark, Sunoco may be betting that the sale of its Tulsa, Okla., plant, which has a processing capacity of 85,000 barrels a day, wouldn't reverberate as widely. Such a move could also lead the way for other refiners looking to cut costs.
The U.S. hasn't seen a refinery of this size shut in at least a decade.
Elsenhans also said she planned to run cheaper grades of crude oil and produce a more flexible slate of products, while cutting Sunoco's overall costs.
Such changes are a radical shift for Philadelphia-based Sunoco, which in the past held to a more conservative strategy. Some of the changes Elsenhans advocates - such as investing in large, waterfront refineries and processing low-quality crude blends - are already at work at rivals.
Scaling Back In Tulsa, environmental regulations are forcing Sunoco's hand. The company would need to make a major investment in the plant in order to continue operating it.
This wouldn't gel with Sunoco's new strategy, which focuses on operating a narrow set of assets with a great deal of control over the crude they process and products they make.
Sunoco is likely to cut costs by more than 10%, Elsenhans said in an interview following the meeting.
To reduce spending, Sunoco will cut energy costs, services and "people costs," Elsenhans said. She didn't specify how many employees might potentially be laid off. She stressed that some "lifestyle" items would also be cut.
"The corporate jets are going to go," she said.
Refining is a cyclical business, subject to price shifts in the oil it must buy and changing demand for the products it produces. Even if profit margins were to improve dramatically, Elsenhans said she expects her cuts to remain.
Sunoco previously announced it had retained consultancy McKinsey & Co. to analyze its operations and create a plan for operating more efficiently.
Looking To Canada While most independent refiners are currently cutting capital spending, Sunoco's plans are notable because they're redirecting some funding to particular areas of business that Elsenhans says could be most profitable in the future.
Elsenhans' plans for Sunoco focus upon cutting costs and changing the type of crude it processes at its refineries.
"There's room for diversification away from light, sweet crude," Elsenhans said. Light, sweet crude yields a higher proportion of refined products per barrel than other kinds of oil.
To gain greater flexibility in the crude it processes, Elsenhans said Sunoco would look for joint-venture partners.
Sunoco is already in talks with Canadian crude oil producers about potential long-range plans for a joint venture. Such a project could give Sunoco capital needed for improving its Toledo, Ohio, refinery to run cheap, heavy grades of crude oil produced in Canada. Falling crude prices have made Canadian crude unprofitable to produce, calling into question whether adequate volumes will be available to refine in the U.S.
However, Elsenhans said she expects that it will be profitable in the long run. Such a project could be about five years out, she said.
Sunoco also will seek a joint venture to upgrade its Northeast refineries to process more high-sulfur crude blends and produce more diesel. The market for diesel fuel, which has been a bright spot in gloomy refining markets this year, is expected to weaken next year as industrial demand wanes, Elsenhans said.
"I see diesel demand very closely tied to economic activity," she said.
-By Jessica Resnick-Ault, Dow Jones Newswires; 201-938-4435; jessica.resnick-ault@dowjones.com
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Publié le 15 Décembre 2008 Copyright © 2008 Dowjones
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