Oxy Mulls Over a Move Into Refining

Seeing opportunity in a former banana plantation near the Panama Canal, Occidental Petroleum Corp. may do something it has never done in its storied, 86-year history: build a refinery.

The $6-billion potential project, which Panamanian officials unveiled Wednesday, would represent a departure for Occidental, an oil and natural gas driller that has found most of its revenue below the ground.

For eager officials in Panama, the project would encourage foreign investment, create thousands of jobs and boost the economy in Puerto Armuelles, a deep-water port near the Costa Rican border on the Pacific side of the isthmus.

On both ends of the transaction, location represents opportunity.

The refining business in general has become more profitable now that production can’t keep up with worldwide fuel demand. The plant could prove especially advantageous for Occidental because it would convert cheap, heavy-grade crude oil from elsewhere in Latin America into valuable gasoline, diesel and jet fuel. The location makes it a simple matter to export those fuels to California and other lucrative markets.

Analyst Jacques Rousseau, who follows Occidental for Friedman Billings Ramsey, said the project could provide a guaranteed market for the hard-to-process crude that Oxy produces in Ecuador, Colombia and Peru. Because few refineries can handle it, that oil typically sells for $10 to $20 a barrel less than the so-called light, sweet variety that’s in greater demand.

“They’re not going to get into refining for refining’s sake,” Rousseau said. Given its fields in South America, he said, “they’re thinking maybe instead of selling that oil at a big discount, they should make it into gasoline or diesel, and then that sells at better prices.”

Still, a day after the announcement, Occidental cautioned that it hadn’t committed itself to proceed with the project.

“It’s potentially a strategic business opportunity that we are investigating further,” spokeswoman Jan Sieving said, adding that “it’s purely conceptual at this point.”

In Panama, officials are already counting on the refinery moving well beyond concept.

“This project will be for Puerto Armuelles what the canal has become for Panama City, creating thousands of jobs and generating substantial commercial and industrial activity in a zone largely depressed,” Alejandro Ferrer, Panama’s commerce and industry minister, said Thursday.

The government of President Martin Torrijos plans to introduce a law Monday that sets aside the proposed site -- a former Chiquita plantation 3,000 acres in size -- for construction of the Occidental plant.

Ferrer anticipates that a project of the refinery’s magnitude would transform the economy of an area now dedicated to cattle and farming.

The government estimates that the project would employ 15,000 people to build the refinery and supporting infrastructure. The completed facility would create 6,000 direct and indirect jobs.

In the project’s favor are the isolation of the site, which is 30 miles from the nearest sizable town, and its proximity to both the port at Armuelles and a pipeline through which crude oil could be transported.

The pipeline currently pumps Occidental’s Ecuadorean crude from the Pacific side to tankers on the Caribbean, but its direction could easily be reversed, Panamanian officials say.

The United States is particularly thirsty for fresh sources of fuel because the nation’s last new refinery opened in 1976 and expansions at existing plants have not kept pace with growing demand. The West Coast, in particular, is short of capacity. California accounts for 12% of the nation’s gasoline consumption, and supplies in the state are so tight that any glitch in production triggers sharp price increases at the pump.

For Occidental, the decision to move ahead with the project depends on the outcomes of studies by oil industry consultant Purvin & Gertz of Houston and Jacobs Engineering Group and Fluor Corp., both California-based engineering firms. A determination is expected by the end of the year.

Oxy said the project would require at least one partner. Panamanian officials said the project could be operational as early as 2011.

“It all comes down to economics,” analyst Rousseau said. “But the strategy makes sense.”

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Kraul reported from Mexico City and Douglass from Los Angeles.