US independent refiner PBF Energy is looking to expand in a place where other competitors fear to tread: California.
With a car culture boasting more than 32mn vehicles and 16,600 miles of highways, the state offers a robust market. But California's lagging economic recovery and notoriously tough environmental regulationshave many refiners looking for the exit.
Where others see roadblocks, PBF Energy sees potential.
"We say 'particularly in California' because that's where most of the opportunities have been," PBF Energy chairman Thomas O'Malley said during an earnings call earlier this month.
California refiners lack infrastructure to access both discounted heavy Canadian crudes and light North American barrels for their systems. Regulatory hurdles have largely helped to keep them that way, blocking new pipelines and slowing new crude-by-rail terminal proposals. State environmental laws and wary environmental groups can tie up refinery upgrade projects for years. Chevron will return to court after spending roughly a decade to win local approval for a refinery modernization project at its 250,000 b/d refinery project in Richmond, California.
PBF had $318mn in cash on hand and $735mn in debt at the end of the second quarter as it considers acquisitions. The refiner recently increased its line of credit by more than 50pc, to up to $2.75bn, following recent expansions at its rail facility in Delaware City, Delaware.
O'Malley and his team have roots in California's downstream sector reaching back to prior positions at Ultramar and Tosco, companies that once had significant footprints there before vanishing into mergers.
PBF declined to comment on what it might seek in a California refinery.
Valero has two refineries in California, in Wilmington and Benicia, but has shown little interest in expanding on the west coast. Former chief executive Bill Klesse bemoaned operations in the state last year, and early this year described west coast refineries as the company's weakest group of assets, financially. California has lagged other states for recovery from the recession that began in 2008. Valero recently extended pessimism on major capital at the refineries, citing ongoing struggles to gain permits.
But Klesse has also praised the California refineries' operations and the huge, nearby Los Angeles refined product market, calling the business an "option value." Valero has sought permits to build rail offloading facilities at both refineries to cut operating costs with cheaper North American crudes for its west coast slate.
"The market's there," Klesse said. "We just need to show a little growth back to where it was before."
Valero's west coast refineries tilt toward sour crudes and higher gasoline production. While the US independent refiner has elsewhere moved its system to produce mostly distillates, gasoline made up 59pc of the 2013 output from Wilmington and Benicia. Wilmington in particular runs local heavy, high sulfur crude. Imports make up roughly half of the refiner's stated capacity, according to Energy Information Administration data, and those barrels have trended toward intermediate sours through the first five months of this year. The refinery supplies Carbob to the Los Angeles market and finished products to southern California, Arizona and Nevada through Kinder Morgan's CalNev pipeline.
PBF has already proved its affinity for Valero properties. The US independent refiner previously operated both of PBF's current east coast facilities, which were the smaller refiner's first and second purchases. Valero acquired Wilmington from Ultramar, veterans of which make up a portion of PBF's executive staff.
Phillips 66 has shown a similar reluctance for major investment in its California operations.
The company's 120,000 b/d San Francisco complex, a combination of two refineries connected by a 200-mile pipeline, includes heavy, high-acid crude capability in the Santa Maria end of the facility.
Phillips 66's Los Angeles complex, another pair of facilities separated by just 15 miles, has heavy crude capability and supplies Los Angeles International Airport in addition to the broader southern California and Arizona and Nevada markets. The refinery can also take railed crude through a pipeline-connected Plains All American offloading facility in Bakersfield, California. Both facilities produce petroleum coke, with a combined capacity of 110,000 b/d.
Both of Phillips 66's California plants are also former Tosco refineries, a former US downstream company for which O'Malley served as chief executive.
Phillips 66 has viewed refining with increasing detachment. Chief executive Greg Garland earlier this year said Phillips 66 will become a "midstream logistics chemicals company with a great refining business in it." But the company invested in improving California refining access to cheaper North American crudes and has sought permitting for a liquid petroleum gas recovery project at the San Francisco complex.
The company is not actively marketing any of its west coast refineries, a representative said last week. Garland earlier this year did say all options were open for refineries in the state, including a spinoff or joint venture.
"Those assets, in the future, will probably be worth more than what people think they are worth today," Garland said.
A refinery sale could also provide a quick exit for majors impatient with the large but lumbering California market, including Shell and ExxonMobil.
Shell this year moved more than halfway through a $15bn global divestment program that includes downstream assets in four countries. The company does not break out plans by state, let alone continent, but has not ruled out US facilities. Chief financial officer Simon Henry has given few comments on US downstream, but more of the company's interest appears to be in the US Gulf of Mexico and areas near shale plays. Neither describe the company's 165,000 b/d refinery in Martinez.
ExxonMobil said the company regularly considers all its assets for restructuring or divestment, but had no comment on its California downstream outlook. The firm operates a 155,000 b/d refinery in Torrance, near Los Angeles.
"ExxonMobil remains committed to conducting business in California, as it has for more than 80 years, including our role as a major producer and supplier of oil and natural gas," the company said.
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