China Enters California Oil Market With 50% Purchase of Coastal Corp. Refinery

China agreed Wednesday to buy half of a Hercules, Calif., oil refinery in a move that will put Chinese crude oil into competition with Alaska and California oil. The investment is the first of its kind by China’s state-owned oil industry and mimics recent actions by several OPEC nations.

The joint venture with Coastal Corp. of Houston, owner of the small refinery in the San Francisco Bay Area, also signals a move by Coastal into California’s huge gasoline and convenience-store market, the U.S. company said.

The venture with China National Chemicals Import/Export Corp., known as Sinochem, also includes fuel oil terminals in Los Angeles and Coos Bay, Ore., and fuel marketing operations in San Pedro, Long Beach and Portland, Ore.

Sinochem is the refining and marketing arm of the oil industry owned by the People’s Republic of China.

Coastal wouldn’t disclose the cash price paid by the Chinese or other terms of the deal.

The Hercules refinery operated by Pacific Refining, a Coastal subsidiary, can refine 55,000 barrels of crude per day and store 2.2 million barrels. A “substantial” part of the plant’s feedstock will be Chinese crude, Coastal said. It now burns mostly Alaskan crude.

The joint venture plans to modernize the refinery to produce more high-octane gasoline as “part of a company objective to move into the gasoline market in California and operate its own convenience stores,” a Coastal spokesman said.

The company hopes to buy small or medium-sized retail gasoline-convenience store chains in the state and operate them under the Coastal Mart brand that it recently introduced in Texas, Florida, Kansas and some East Coast areas.

Coastal doesn’t have retail gasoline operations in the state. Most of the output of its Hercules refinery is heavy fuel oil and diesel and aviation fuel.

Aware of Risks

Scott T. Jones, president of AUS Consultants in Philadelphia, was dubious about Coastal’s plans to enter California’s highly competitive retail gasoline and convenience-store market. Arco’s combined discount gasoline and AM-PM stores are the biggest force.

“To come in this late in the game with all those players seems like a highly risky business,” commented Jones, a former Atlantic Richfield Co. planning executive.

He described China’s investment as an overdue move into Pacific Rim markets. Sinochem refines its own crude or sends it to Singapore for refining.

China has made a string of offshore oil discoveries--in the Pearl River Basin in southern China and the Bo Hai Gulf in northern China--and exports about 400,000 barrels of crude per day. Jones said it is cheaper and quicker for the Chinese to buy refineries than to expand their own to handle the increasing flow of crude.

In addition to its need for hard currency, the current oil glut gives China the same interest in cornering assured markets for crude as Saudi Arabia and other OPEC countries that have recently bought into foreign refineries, Jones said.

“This agreement is also another step forward in Sinochem’s continuing efforts to diversify and strengthen its oil markets and to expand its worldwide operations,” said Zheng Dunxun, chief executive and president of Sinochem.

It is the first such deal by Coastal since announcing last year that it was seeking joint-venture partners at its six U.S. refineries. The Coastal spokesman said it is holding talks with potential buyers from the Middle East, Africa, Central America and South America.

Among OPEC nations known to be looking for U.S. refineries are Saudi Arabia, Nigeria, the United Arab Emirates and Venezuela. The other countries weren’t interested in the West Coast refinery because of shipping logistics, Coastal said.

Saudi Arabia recently agreed to buy a half-interest in three Texaco refineries and Texaco’s marketing operations in 23 states. Venezuela owns half of two refineries in Texas and Louisiana. Other transactions are apparently in the works.

Oscar S. Wyatt Jr., Coastal’s chairman and chief executive, said the deal strengthens a relationship that began in 1978 when Coastal became the first U.S. company to purchase and import crude from the People’s Republic of China.

The Hercules refinery, which will sign a supply agreement with Sinochem, has processed Chinese crude from time to time.