Tesoro to pump funds into refinery

By Elizabeth Douglass

June 4, 2007 12 AM PT

Times Staff Writer

The refinery looms above a hardscrabble Wilmington neighborhood, a tangle of hundreds of miles of dingy pipes and industrial structures clustered into 308 fuel-making acres.

But to Tesoro Corp., the complex looks like gold.

Late last month, Tesoro -- “treasure” in Spanish -- closed its purchase of Shell Oil Co.’s Wilmington refinery with a round of celebratory barbecues for the plant’s 500 employees. And the San Antonio company laid out plans to spend $1 billion over five years to reduce breakdowns and boost gasoline production at the refinery.

“We are going to invest money here that will increase clean fuels for California,” Tesoro Chief Executive Bruce Smith said in an interview. “Shell hadn’t invested in that type of opportunity because they had other priorities.”

Tesoro has been on a $2-billion buying spree lately that has reshaped the business of making and selling fuel in California. Tesoro executives say that investment plans and operational changes will boost the Wilmington refinery’s fuel-making capabilities by 20%, giving market watchers hope that the state’s drivers will benefit.

“We need more gas on the market,” said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, whose Santa Monica-based group is a frequent critic of the oil industry. “Putting refineries into the hands of a Tesoro or a Flying J is a good thing, because they are much more likely to expand refining than the majors.”

Ogden, Utah-based Flying J Inc., best known for its truck stops, bought Shell’s Bakersfield refinery and has outlined plans to expand fuel production at the plant. Houston-based Shell, the U.S. arm of oil giant Royal Dutch Shell, had planned to shutter the facility.

Tesoro’s purchase of the Wilmington refinery came as part of a $1.76-billion deal that also included a Shell distribution terminal, petroleum inventories and 278 Shell-branded gas stations in Southern California. In a separate transaction that became final May 1, Tesoro paid USA Petroleum Corp. $273 million for 130 USA-branded gas stations in California, plus inventory and seven other stations in New Mexico and the Pacific Northwest.

With its fresh acquisitions, Tesoro has edged past BP’s Arco brand to rank second among the state’s fuel refiners, well behind giant Chevron Corp.

Tesoro said it would increase production of California-grade gasoline almost immediately by halting Shell’s practice of making fuel for Arizona and Nevada at the Wilmington plant. The company would not quantify the gain for California, but production manager Jerry Forstell said about 25% of the refinery’s gasoline output was earmarked for out-of-state consumption.

The company said fuel production would also get a boost from a series of electrical and other upgrades aimed at reducing downtime. Those projects are expected to cost as much as $350 million, and Tesoro plans to spend an additional $80 million a year on maintenance.

“Reliability’s a huge issue,” CEO Smith said. “If the refinery goes down, that does take product out of the market. You have to invest some money to make some changes and fix those bad actors that cause the refinery to go down.”

Those improvements, together with the shift away from making out-of-state gasoline, could increase the refinery’s production of California gasoline and diesel by 20%, Smith said. The Wilmington plant makes about 65,000 barrels a day of gasoline and 10,000 barrels a day of diesel.

Tesoro’s plans include spending as much as $400 million on regulatory projects that would improve wastewater treatment and reduce emissions and burn-off, according to the company.

All of the projects, however, will have to pass muster with air quality regulators and community leaders who are trying to improve conditions for residents in the Wilmington region. The community borders the busy Port of Los Angeles and is dotted with refineries and other industrial plants.

Jesse Marquez, executive director of the Wilmington-based Coalition for a Safe Environment, wants to know more about the projects Tesoro is considering.

“The first concern is that Tesoro has not invited any of the community leaders or environmental organization leaders to discuss their plans and the possible priorities for our communities,” Marquez said. “We hope that they will extend an opportunity to meet with us to show us the plan.”

The Wilmington facility can process 100,000 barrels a day of crude oil and represents 15% of Tesoro’s total refining capacity. The company, which focuses only on producing and selling fuels, owns a refinery in the Bay Area city of Martinez, as well as plants in Alaska, Hawaii, North Dakota, Utah and Washington state.

Smith said he promised workers at the newly acquired plant that their efforts would be better appreciated by Tesoro because it’s a smaller company that is committed to refining.

“They are an important part of our company,” Smith said. “At Royal Dutch Shell, they were a rounding error.”

elizabeth.douglass@latimes.com

(BEGIN TEXT OF INFOBOX)

Boosting its output

Tesoro Corp.

Headquarters: San Antonio

Employees: More than 6,000

Refineries: Wilmington and Martinez, Calif.; Anacortes, Wash.; Salt Lake City; Mandan, N.D.; Kapolei, Hawaii; and Kenai, Alaska

Total processing capacity: 660,000 barrels a day of crude oil

Retail: 881 Tesoro, Mirastar, Shell and USA gas stations

Wilmington refinery

Address: 2101 E. Pacific Coast Highway