update feb 04

Refinery Updates

February 2004

INDUSTRY ANALYSIS

1. AMERICAS

U.S.

Rosemount: Flint Hills to expand

With tighter pollution standards for diesel fuel a little more than two years away, Flint Hills Resources is proposing a $325 million to $400 million upgrade at its Rosemount refinery.

The project, expected to last 18 months and produce 500 construction jobs, will enable the refinery to produce cleaner-burning low-sulfur fuel demanded by the federal government in 2006.

To meet the requirement, Flint Hills has proposed building two new processing units that remove sulfur from petroleum products, three large storage tanks and expanded cooling tower capacity.

The construction project is not expected to increase crude-oil processing capacity at the large Pine Bend refinery southeast of St. Paul. But the new processing equipment will need up to 600 gallons more water a minute, raising the possibility of one or more new wells.

Before any are drilled, how-ever, Flint Hills will pursue several other options to reduce groundwater demand, according to spokesman John Hofland. Among them, he said, is tapping into treated water that Empire Township plans to pipe from its wastewater treatment plant near Farmington to the Mississippi River.

The company said a new well would have minimal impact on local groundwater levels but promised to work with any neighbors whose wells might be affected.

"We already use water four or five times before discharging it," Hofland said. "We're trying to use it as efficiently as we can."

He said construction upgrades like the Flint Hills proposal are or will be occurring at many of the more than 100 refineries nationally that produce diesel, a fuel that emits harmful pollutants such as soot and nitrogen oxides when burned in engines.

"Everyone will have to do this,'' Hofland said. "They may choose different ways to get there or else not sell diesel. But everyone will have to meet these standards.''

Beginning June 1, 2006, diesel producers must produce diesel fuels with a maximum sulfur content of 15 parts per million instead of the 500 parts per million allowed today. The rule requires all new diesel-powered highway vehicles produced in 2007 or later to use the cleaner diesel fuel.

The Environmental Protection Agency said the new fuel and engine standards would reduce particulate and nitrogen oxide emissions by 90 percent.

Hofland said the project is not expected to affect a company pledge in 1999 to cut chemical emissions at the plant by half in five years. The plant, he said, is on track to meet that objective later this year.

He said the new units will cause a slight increase in air emissions but that will largely be offset by reductions in other areas of the plant.

Hofland said the company hopes to have permits in place in time to begin construction this summer and be operating in early 2006.

It is seeking various federal, state and local air-emission, stormwater and storage permits.

Flint Hills, formerly Koch Petroleum Group, processes and refines crude oil for Minnesota and Upper Midwestern states.

N.P. Refinery Contract Heads to Legislature

Kansas-based company Flint Hills Resources cleared another hurdle in its plan to take over the North Pole oil refinery when the Alaska Royalty Oil and Gas Development Board unanimously approved a contract for the company to buy state oil.

The 10-year contract--a five-year deal with five one-year extensions--between Flint Hills and the state now heads to the Legislature, which will consider giving final approval to the deal.

If lawmakers approve the $265-million sale, the contract would allow Flint Hills to use between 56,000 and 77,000 barrels of state royalty oil a day. The oil would be converted for commercial use at the North Pole refinery, which Flint Hills plans to buy from the current owner, Williams Alaska Petroleum.

Whether Flint Hills takes over the refinery from Williams is contingent upon the Legislature approving the contract for Flint Hills to buy royalty oil.

Senate President Gene Therriault, R-North Pole, introduced a bill this week that would approve the contract. Therriault's bill has been forwarded to the Senate Finance Committee.

Both Flint Hills representatives and Gov. Frank Murkowski, a supporter of the transfer, hope to have the deal secured by the end of March.

Oil and gas development board members had almost all positive comments in approving the contract. The deal includes a provision for Flint Hills to spend $100 million to add new processing equipment that will produce the cleaner-burning, low-sulfur fuel mandated by the federal government starting in June 2006.

The contract also contains terms that could help Fairbanks International Airport attract more business from cargo carriers. For example, Flint Hills agreed to charge a jet fuel customer in Fairbanks the same or lower price than they would charge a customer in Anchorage and study the possibility of reviving the currently defunct underground hydrant fuel system that was originally built to transport jet fuel straight from the refinery to the airport.

Flint Hills is anxious for the Legislature to approve the contract, Allen Lasater, who plans to take over as president of Flint Hills' Alaska operations, said. Changing the refinery so it could produce low-sulfur fuel will require the company to double the number of processing units at the facility. With Alaska's short construction season, making the changes and still meeting the federal government's deadlines for producing low-sulfur fuel could be a difficult prospect.

Refineries must start producing low-sulfur diesel by June 2006 and low-sulfur gas by January 2007, he said. Flint Hills still has not developed definitive plans for installing the new processing units because it does not have access to the refinery.

The new processing units will require more workers, he said, but Flint Hills has not determined how many of the roughly 155 people who work at the refinery or the 370 others who work at Williams operations elsewhere in the state would be retained.

Jeff Cook, Williams vice president for external affairs, said the company is also ready for Flint Hills to take over the refinery. The debt-saddled company has been looking to sell its assets since June 2002.

Koch Alaska Pipeline Co., which like Flint Hills is a subsidiary of Koch Industries Inc. in Kansas, would receive Williams' interest in the trans-Alaska oil pipeline if the contract is approved.

Motiva Selects AspenTech Operator Training Solution for Major Refinery Project

Aspen Technology, Inc. (Nasdaq: AZPN) announced February 18 that Motiva, a joint venture between Shell Oil Company and Saudi Refining Inc., has selected AspenTech to supply operator training simulators for its Norco refinery in Louisiana. The simulators will help to ensure the safe and efficient operation of the refinery during the transition to a new distributed control system (DCS), which is being installed in all of the plant's main process units.

The Norco refinery has a capacity of 240,000 barrels per day, and produces a range of oil products including gasoline, jet fuel and diesel fuels. The refinery is undergoing a major re-instrumentation project, installing an Emerson DeltaV(TM) DCS system in seven key process units including the catalytic reformers, coker, hydrocrackers, hydrogen plant and hydrotreaters. As each unit changes to the new control system, AspenTech's simulators will be used to provide rigorous training in advance of the cutover.

Motiva Enterprises LLC is a joint venture between Saudi Refining Inc. and Shell Oil Company. Motiva operates primarily in the Eastern and Southern US and includes Shell-branded and Texaco-branded gasoline stations, four refineries with a capacity of 860,000 barrels per day and a network of oil products terminals. Motiva was formed in 1998.

Challenge to Sale of Farmland Refinery Rejected

A bankruptcy judge on February 11 turned away a challenge of the sale of Farmland Industries' petroleum refinery to an East Coast investment firm.

The sale of the refinery to Coffeyville Resources, a subsidiary of Pegasus Capital Advisors of Greenwich, Conn., is expected to be completed next week.

With that sale, Farmland will be in a position to release payments to its unsecured creditors. That is expected to happen this spring.

Judge Jerry Venters ruled that GAF Holdings Group, which had bid against Coffeyville Resources for the refinery in November, did not prove there was any impropriety in considering its bid.

Farmland rejected GAF's bid, saying it did not meet minimum requirements, including a deposit.

GAF, led by Coleman Ferguson, the former general manager at the refinery, contended that Farmland did not treat it fairly during its bid preparations.

Farmland, which filed for bankruptcy protection May 31, 2002, owes about 60,000 unsecured creditors more than $1 billion.

Farmland, once the largest farmer-owned cooperative in North America, has estimated that those creditors will receive 60 to 82 cents on the dollar under the plan.

The deal with Pegasus is for about $22 million in cash, $85 million in working capital and $174 million in assumed liabilities.

After the sale is completed with Coffeyville Resources, it will take two to four months to complete the legal and administrative work necessary to get checks to creditors, Farmland officials have said.

Environmentalists Sue ExxonMobil's Chalmette Refinery
Environmentalists have filed a lawsuit against ExxonMobil's refinery, alleging that the plant endangers the health of nearby residents and has repeatedly violated limits on emissions.

"This lawsuit is being filed because we want clean air and a healthy community," said Kenneth Ford, president of St. Bernard Citizens for Environmental Quality. His group and the Louisiana Bucket Brigade filed the suit.

The suit alleges that the plant's frequent equipment breakdowns have led to violations of its permitted hourly emissions limits and that its storage tanks release too much benzene.

The suit also charges that the refinery has failed to document discharges and operate and monitor the plant's flares properly.

"When you drive by you can see the problems and smell the problems, and this is what the lawsuit is about," said Anne Rolfes, director of the Louisiana Bucket Brigade. "They need to start investing in the refinery and in people's health."

The suit notes that within three miles of the refinery there are 20 schools, two hospitals and six retirement communities.

Between March 12, 2001, and October 24, 2003, the refinery had over 100 unauthorized discharges due to equipment failures, the suit says.

In 2003, equipment failures caused unlawful emissions of 882,298 pounds of sulfur dioxide, 13,746 pounds of nitrogen oxide, 17,011 pounds of volatile organic compounds and 21,262 pounds of benzene, and 1,321 pounds of hydrocarbons, the suit contends.

The suit charges that three storage tanks of benzene each emit 51 pounds a day above the refinery's 68 pound per day limit.

The suit, filed in federal court in New Orleans, asks the court to issue injunctions forcing the refinery to fix its problems and get into compliance or close down.

The refinery insists that it is in regulation with state and federal laws and standards.

Refinery officials said there are plans to install over $100 million in "environmentally driven projects," including a new unit to produce low sulfur motor gasoline, equipment to reduce flaring emissions and improve the sulfur plant. The refinery also plans to build a new wastewater treatment facility.

The suit the environmentalists filed is a citizens’ enforcement suit, which is a measure under the Clean Air Act that allows people to bypass government agencies to get alleged polluters to clean up their operations.

The Louisiana Bucket Brigade and the Tulane Environmental Law Clinic, which has worked on the case, have been active up and down the Mississippi River to get plants to upgrade their facilities.

El Paso to Sell Aruba Refinery to Valero
El Paso Corp., in the process of divesting assets to pare debt, said that Valero Energy Corp. had agreed to buy its Aruba refinery and related operations for $465 million.

San Antonio-based Valero, which already owns and operates 14 refineries, will also pay El Paso an estimated $175 million to cover the cost of crude oil and other products in inventory.

With the money, Houston-based El Paso will pay off a $370 million lease obligation related to the refinery. After closing costs of $5 million, El Paso will use the estimated $265 million in net proceeds to reduce debt.

"The sale of the Aruba refinery is another major step in the execution of our long-range plan," Doug Foshee, El Paso's president and CEO, said in a prepared statement.

The company's main businesses are natural gas pipelines, natural gas and oil exploration and production, and a marketing operation to sell its gas and oil production.

With the net proceeds from the Aruba refinery sale, the company said it will have announced or sold about $636 million worth of petroleum assets since Dec. 1, exceeding a target of $500 million to $600 million.

In the second quarter of last year, El Paso took an $836 million charge to write down the value of its petroleum assets. A large part of that was related to the Aruba refinery.

In a prepared statement, Bill Greehey, Valero's chairman and chief executive office, called the deal a great value for Valero and its shareholders.

He said that more than $640 million had been invested in the refinery in the last five years to improve its safety, reliability and profitability.

The deal is expected to close at month's end.

Valero Starts $120 Million Expansion

Valero St. Charles Refinery broke ground during the first week of February on a $120 million expansion at its Norco refinery, the largest industrial project in St. Charles Parish planned for this year. Valero, bought the bankrupt Orion Refining Corp. refinery last summer.

The project involves building a gasoline desulfurization unit that will produce more than 1.5 million gallons, or about 45,000 barrels, of gasoline daily. The unit takes sulfur out of high-sulfur gasoline, said Ron Guillory, Valero's director of human resources, public affairs and security.

"It's a unit that produces cleaner gasoline," he said.

The project will take about 18 months and provide 500 construction jobs and five permanent jobs, he said.

In 2003, Valero spent about $20 million on capital improvements at the Norco plant, and in the next few years, it plans to spend more than $150 million on capital improvements, Guillory said.

"We have a number of different, smaller projects going," Guillory said. For example, a planned $20 million expansion will increase the company's output from 155,000 barrels of oil per day to about 175,000, he said.

A $3 million upgrade will add more closed circuit television monitors and improve the refinery's fence line and dock barricades, he said.

St. Charles Parish Economic Development and Tourism Director Corey Faucheux said Valero's expansion is the biggest such project announced or begun in 2004. Companies often announce expansions in advance because it is a requirement for getting state tax breaks. Industrial expansions, which were somewhat flat after the record-breaking pace of the mid- to late 1990s, are taking off.

Valero employs 550 full-time employees and 350 contractors. Primary commodities include gasoline, diesel, jet fuel and other petroleum products.

Ashland Inc. Quiet on Possible Refinery Sale

Whether the Catlettsburg, Ky., refinery will have new ownership this time next year remains uncertain.

The refinery is owned by Marathon Ashland Petroleum, a joint venture of Ashland Inc. and Marathon Oil Co. Ashland owns 38 percent of the joint venture, with Marathon owning the remaining 62 percent.

Ashland owned and operated the refinery until the two companies formed the joint venture in 1997.

The refinery has about 1,000 employees, according to Marathon Ashland spokesman Chuck Rice. That makes it one of the largest industrial employers in the region.

According to the contract the two companies signed in 1997, on Dec. 31 of this year, Marathon Oil Co. may buy out Ashland’s share of Marathon Ashland Petroleum if it so chooses. Marathon must pay Ashland 115 percent of the appraised value of Ashland’s interest.

Jim O’Brien, Ashland’s chief executive officer, spoke about the subject briefly during his company’s annual stockholder meeting. O’Brien told a stockholder that he has no control over what Marathon does in regard to the buyout option.

Ashland’s investment in Marathon Ashland Petroleum was valued at $2.335 billion on the company’s balance sheet as of Dec. 31. Multiplying that by 115 percent would require Marathon to pay nearly $2.7 billion for Ashland’s share.

Meanwhile, work continues on what the company calls the Catlettsburg repositioning project. The $300 million project includes the decommissioning of the fluid catalytic cracker unit and the expansion of the reduced crude cracker. The expansion will double the reduced crude cracker unit’s capacity, which in turn will allow the refinery to increase its gasoline production and double its asphalt production, said Chuck Rice, Marathon Ashland spokesman.

In addition, the project will make the Catlettsburg refinery the first of the company’s seven refineries to produce low-sulfur gasoline, Rice said.

Based in Findlay, Ohio, Marathon Ashland Petroleum is the nation's sixth largest refiner. The company’s retail marketing system has about 6,000 locations in 15 states.

CANADA

Pacific Energy Partners, L.P. Announces Agreements to Purchase Canadian Pipelines

Pacific Energy Partners, L.P. (NYSE:PPX) announced on February 24 that indirect, wholly-owned subsidiaries of the Partnership have entered into a definitive share purchase and sale agreement to acquire the Rangeland Pipeline System from BP Canada Energy Company. The Rangeland Pipeline System, which is located in the province of Alberta, Canada, consists of Rangeland Pipeline Company, Rangeland Marketing Company and Aurora Pipeline Company Ltd.

The acquisition price for the Rangeland Pipeline System is $130 million (Canadian) plus approximately $26 million (Canadian) for line fill, working capital, transaction costs and transition capital expenditures. Closing of the transaction is expected within 45 to 90 days, following receipt of regulatory approvals and fulfillment of other standard closing conditions.

Concurrently, the Partnership announced that a wholly-owned subsidiary has entered into a letter of intent to purchase the Mid Alberta Pipeline ("MAPL") assets, also in Alberta, from Imperial Oil Resources. This transaction is subject to completion of a definitive purchase and sale agreement, receipt of regulatory approvals and fulfillment of other standard closing conditions.

"These acquisitions are a continuation of our regional development plans in the Rocky Mountains and provide a unique and strategic opportunity for Pacific Energy Partners to participate in the expected increase in production of synthetic crude from the Alberta oil sands by providing to Canadian producers and U.S. Rocky Mountain refiners an integrated pipeline delivery system from Edmonton, Alberta to U.S. PADD IV markets," said Irv Toole, President and Chief Executive Officer. "The acquisitions are expected to have significant synergies with the Partnership's U.S. pipeline systems and will enable us to provide expanded services to our Rocky Mountain customers."

Mr. Toole commented, "The combined acquisitions are expected to be slightly accretive in the initial year of operation, the period during which additional pipeline facilities are to be constructed in Edmonton. Once the integration of these facilities is complete we expect the acquisitions to be approximately five percent accretive to net income and cash distributions to unitholders."

The 138-mile, 12-inch and 16-inch diameter MAPL pipeline is a proprietary system, with an estimated capacity in light crude service of approximately 50,000 barrels per day ("bpd"). The line originates at the Edmonton, Alberta oil hub and extends south to a connection with the Rangeland Pipeline System at Sundre Station.

The Rangeland Pipeline System, located in southern Alberta, is a proprietary system consisting of approximately 800 miles of gathering and trunk pipelines. It is a bi-directional system capable of gathering and moving crude oil, condensate and butane either north to Edmonton, Alberta via third-party pipeline connections or south to the U.S. border near Cutbank, Montana, where it connects to the Western Corridor system, in which the Partnership owns an undivided interest. The trunk system from Sundre Station to the U.S. border consists of 12-inch and dual 12-inch and 8-inch pipelines, and has a current capacity of approximately 85,000 bpd in light crude service.

The Western Corridor system runs south to serve the Billings, Montana and Casper, Wyoming refineries and terminates at Guernsey, Wyoming. At Casper and Guernsey, the Western Corridor system connects with other pipelines owned by the Partnership serving refineries in Salt Lake City, Utah and to third-party pipelines that deliver to the Cheyenne, Wyoming and Denver, Colorado markets.

Following completion of pipeline connections that the Partnership plans to make in Edmonton, the combined systems will provide a new integrated pipeline outlet for movement of growing Alberta synthetic oil production to the U.S. PADD IV Rocky Mountain refineries currently served by the Partnership. Supplies of synthetic crude production, blends derived from synthetic crude oil, and displaced conventional Canadian crude oil are increasing as a result of the ongoing expansion of oil sands processing in northern Alberta. It was reported by the Oil & Gas Journal in 2003 that Alberta's oil sands have reserves of approximately 175 billion barrels of synthetic crude oil. These supplies are important to the Rocky Mountain refineries served by the Partnership, as domestic U.S. production in the Rocky Mountain region is declining and new supplies are needed to meet increasing demand for refined products.

RBC Capital Markets has acted as the exclusive financial advisor to the Partnership for these transactions and Royal Bank of Canada, an affiliate of RBC Capital Markets, has been engaged as the lead bank for a new $100 million (Canadian) revolving credit facility. The Partnership intends to finance the acquisitions through a combination of borrowings under its new credit facility and the issuance of additional common units, but the final structure of the acquisition financing will depend on market conditions existing prior to the completion of the acquisitions.

Pacific Energy Partners, L.P. is a Delaware limited partnership headquartered in Long Beach, California. Pacific Energy Partners is engaged principally in the business of gathering, transporting, storing, and distributing crude oil and other related products in California and the Rocky Mountain region. Pacific Energy Partners generates revenue primarily by charging tariff rates for transporting crude oil on its pipelines and by leasing capacity in its storage facilities. Pacific Energy Partners also buys, blends and sells crude oil, activities that are complementary to its pipeline transportation business.

PERU

Peru to Sell Stake in Biggest Oil Refinery

Peru will auction a packet of shares it owns in the country's largest oil refinery on March 1-3 and could sell off its full 32 percent stake if demand were high enough, state investment agency ProInversion said on Tuesday.

ProInversion said in a statement the government will offer a minimum of 3.7 million common shares but could sell its total stake of 11.2 million shares in the La Pampilla refinery, which is majority-owned by Spain's Repsol-YPF <REP.MC>.

"It depends on demand," said a spokesman of Banco Wiese Sudameris, the bank structuring the auction. U.S. investment bank J.P Morgan is the government's financial adviser on the auction, ProInversion said.

Shares will be auctioned at a starting price of $7.25 each, putting the minimum asking price for the total stake at $81 million. The minimum bid has been set at 20,000 soles ($6,000).

Repsol-YPF paid $180 million for La Pampilla in 1996. The refinery has a capacity of 107,000 barrels a day.

2. ASIA

AUSTRALIA

Caltex Australia Plans Upgrades at Its Two Refineries

Caltex Australia Ltd. (CTX.AU) said February 25, that it plans to spend a total of A$295 million upgrading its two refineries to meet fuel standards that take effect from 2006.

The refineries are Kurnell, in Sydney, and Brisbane's Lytton operation.

Caltex said it has already spent about A$43 million, with the remainder to be outlaid over the next two years.

"The cost of the project will be met from operating cash flows," it said.

Analysts have speculated that at least one petrol refiner and marketer might withdraw from Australia due to the expenditure required to meet the new fuel standards.

Kurnell has crude oil capacity of 124,500 barrels per day while Lytton has 105,500 bbl/d capacity.

Caltex said the upgrades are designed to meet further changes in fuel emission levels expected to take effect later this decade. The changes from January 2006 are designed to cut sulfur and benzene levels.

A spokesman for Exxon Mobil Corp. (XOM) said the company still hasn't made a commitment to meeting the new standards. "That is still the case," he told Dow Jones Newswires.

Media reports in mid-2003 said Exxon Mobil might shut its Altona oil refinery near Melbourne, its only refinery in Australia after closing its Adelaide plant earlier last year. The company said it plans to keep Altona open but is looking at ways to boost profitability.

BP PLC (BP) and Royal Dutch/Shell Group (RD) also have refineries in Australia. Caltex Australia is 50%-owned by ChevronTexaco Corp. (CVX). The sector has long been tipped as ripe for consolidation, with the prospect of tighter environmental standards a likely catalyst.

CHINA

Record Chinese Oil Demand Growth Outweighs OECD

Global oil demand estimates for 2004 were increased, on signs that surging Chinese demand would outweigh stumbling growth in the industrialized countries of the Organization of Economic Cooperation and Development.

The International Energy Agency's monthly oil market report lifted its demand growth forecast for 2004 by 220,000 barrels a day to 1.4m b/d. Total demand is now seen at 79.9m b/d.

While OECD demand growth is forecast to slow to 340,000 b/d this year, against 700,000 b/d in 2003, non-OECD demand is expected to accelerate to 1.1m b/d or 3.7 per cent. That is the fast test growth rate since 1997, said the OECD's energy watchdog.

The decision by the Organization of Petroleum Exporting Countries to schedule in a 1m b/d cut in its production ceiling from April came too late for the IEA report. Nonetheless, the report provided circumstantial support for Opec concerns that seasonal second-quarter falls in demand could trigger a price collapse.

The IEA raised its estimate of how much Opec oil the market would need in 2004 but said it would still be 500,000 b/d below the 26m b/d figure for 2003.

The "call" for the second quarter drops sharply to 23.7m b/d from 26.2m b/d for the first quarter. At 25.8m b/d excluding Iraq's near 2m b/d, Opec in January was producing some 1.3m b /d over its current ceiling.

Fast-growing Chinese demand was a strong factor in the oil markets last year but what is becoming increasingly clear is that it has been underestimated and that Chinese economic growth is spurring increased oil demand in other non-OECD Asian economies.

Demand in China is currently at a plateau around the record 5.8m b/d reached in August. Short-term growth is hampered by capacity constraints. Stocks have been replenished since shortages in the second half of last year but not by enough to bring refinery run cuts or increased exports. There is evidence that refineries continued to work through the New Year holiday period.

The report notes that Chinese oil companies appear to be scrambling to add new refining capacity. These expansions and the construction of new storage facilities will provide another short-term demand boost. There are problems assessing the full level of demand in China as there are a number of small, independent refineries along the east coast that escape official statistics.

The IEA has also raised by 100,000 b/d its estimate of demand growth in other non-OECD Asian countries, particularly India, Thailand and Vietnam. Recovering agricultural demand is a major factor in India but "China's economic expansion is pulling regional economies along, in turn stimulating product demand".

In the Middle East, higher oil prices have helped to stimulate a lesser uptick in regional demand growth for oil.

INDIA

IDE Wins $11.5m. Indian Contract

Israel Desalination Engineering (IDE) Technologies, a subsidiary of Israel Chemicals and Delek Investment & Properties, won an international tender to construct a desalination facility for one of the world's largest oil refineries in India's Gujarat state, the company said Tuesday.

Under the $11.5 million contract IDE will build a thermal desalination plant capable of treating 15,000 cubic meters of water per day.

Company executives said the new facility, expected to be completed in one year, will join another five IDE-built desalination plants at the oil refinery. Four of the facilities can treat up to 12,000 cubic meters per day of water.

Orissa Signs MoU with IOC for Paradip Refinery

Clearing the uncertainties over the future of Paradip oil refinery, Orissa government and the Indian Oil Corporation signed an MoU for establishment of this nine million ton refinery project by 2009-10.

“All issues concerning the project have been settled. We will be starting work very soon,” said MS Ramachandran, chairman, IOC soon after the signing of MoU.

He informed that the cost of the project, which was originally estimated at Rs 8,270 crore has been brought down to Rs 7,500 crore through redesigning. Redesigning relates to changing the product mix from more of diesel to more of petrol.

He said, the company has already spent about Rs 500 crore on preliminary work at the project site and it intends to invest another Rs 620 crore soon for construction of crude terminal and Single Point Mooring (SPM) system to be located about 20 km offshore near Paradip.

Refuting suggestions that the signing of MoU was a pre-poll stunt as the project was hanging fire for a long time, Ramachandran said there was no political reason behind it.

The project was in a limbo following withdrawal of tax concession by the state government. Now with the government restoring the tax sops we have decided to go ahead with the venture, he said.

In its new avtaar, the project is scheduled to be completed by 2009-10. However, depending on favorable market conditions of petroleum products, Indian Oil will make efforts for early completion of the project by 2008-09, he said.

It may be noted that though the foundation stone of the project was laid by the Prime Minister, A B Vajpayee in May 2000, and its was originally slated to go on stream in 2004.

However, the venture ran into rough weather following withdrawal of certain tax concessions to it by the state government, in protest against which IOC stopped work at the site after some preliminary investment.

The issue was resolved after the state cabinet approved tax concession to the tune of Rs 6666 crore to the proposed oil refinery, thus paving the way for signing of MoU.

Bowing to the demands of IOC, the cabinet decided to grant sales tax deferment facility to IOC for a period of 11 years. The sales tax dues will be treated as an interest free loan repayable from the 12th year of the commencement of production.

Similarly the project has been exempted from payment of Central sales tax, octroi, entry tax levied on machineries and other equipment procured for the venture, electricity duty, royalty on sands and other duties whose combined worth is about Rs 2254 crore. The deferment of sales tax for the refinery alone will amount to Rs 4412 crore.

The refinery is expected to provide direct employment to nearly 4000 persons while the downstream industries will employ 5000 people more, the chairman claimed.

J Rath, general manager of the project, said that a mega downstream petrochemical plant would be set up at the sight after the completion of the refinery. But he did not give details of the proposed petrochemical plant.

Essar to Build Refinery, Grow Retail Chain

India's Essar Oil Ltd said it will commission the first phase of a 210,000 barrel per day (bpd) refinery in 18 months and plans to import at least 25,000 tons of diesel per month while it is built.

Essar, which set up India's first private gas station last year, said it had been importing between 25,000 and 30,000 tons of diesel per month for the past four months to feed its retail chain, which will grow to 500 outlets by March next year.

Managing Director A.N. Sinha said the retail outlets would target the rural market, and Essar would need to continue importing a similar level of diesel until its refinery was ready.

Most Indian refiners are reluctant to sell fuel to Essar as this would help it get a foothold in a retail market dominated by refining giant Indian Oil Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd.

The government recently allowed new retailers including Essar, Royal Dutch/Shell and the country's only private refiner, Reliance Industries, to set up gas stations, ending a decade-old monopoly of the state firms.

India, once Asia's largest diesel buyer, became an exporter after Reliance set up a 540,000-bpd refinery in western India five years ago. Reliance now processes 660,000 bpd and is likely to export 5.5 million tons of diesel in 2003/04.

Sinha said on top of what it imported, Essar was also buying 25,000 tons of diesel per month from India's Mangalore Refinery and Petrochemicals Ltd.

Essar hopes to have a retail network in place by the time it commissions its refinery, a project started five years ago that stalled due to financial problems and environmental issues.

Sinha said the company would resume construction in April, with an expected capacity of 80,000-100,000 bpd in 18 months and 210,000 bpd in 24 months.

Indian Oil Mathura Refinery to Close for Maintenance

State-run Indian Oil Corp plans to shut its 150,000 barrels a day Mathura refinery for maintenance in May, an industry official said on February 13.

"All units of the refinery, including the crude distillation units and the secondary processing units, will be shut for about 40 days in May," the official told Reuters.

IOC is India's largest refiner and controls more than 40 percent of India's refining capacity of 2.4 million bpd.

PAKISTAN

Indian Company Targets Pakistan Oil Market

Indian Oil Corp, or IOC, India’s largest refiner and oil retailing firm, is looking to export up to 3 million metric tons of petroleum products a year to Pakistan, a company official.

“We are awaiting the clearance of the Pakistan government. Pakistan has a deficit of up to 8 million tons a year for petroleum products, mainly diesel, and we are eyeing this market for exports,” the official told Dow Jones Newswires.

Analysts say the recent thaw in relations between the nuclear neighbors after the tense two-year standoff augurs well for more trade between India and Pakistan.

IOC and its units have a refining capacity of 48.15 million metric tons a year. The combined installed refining capacity of India’s 18 refineries currently stands at 116.97 million tons a year.

3. EUROPE / AFRICA / MIDDLE EAST

CZECH REPUBLIC

Oil Players See Unipetrol as Shield

Central Europe's refineries are looking at Unipetrol to help them oil the wheels of regional consolidation. The Czech oil and petrochemical conglomerate, 63 percent of which is scheduled for privatization by the end of April, is a key target for Polish and Hungarian oil groups hoping to ward off potential hostile bids from Western concerns.

"None of us as individual oil companies will have a chance to hold our own. Against all the other oil players in Europe and the world, we are like boxes of matches compared to Mount Everest," said Zbigniew Wrobel, president and CEO of PKN Orlen, the Polish oil group emerging as a front-runner in Unipetrol's privatization.

"[By acquiring Unipetrol] we won't be a Mount Everest, but at least we will be closer to that mountain chain and that will save us against hostile takeover bids."

The Polish group's management believes Orlen in its current form is undervalued and would present an attractive target for companies looking to buy it on the cheap, said Marcin Krysiak, adviser to Orlen's president.

What's more, hostile takeovers are now back in vogue worldwide, with the $145 billion (3,625 billion Kc) in global mergers and acquisitions in January the highest for any month since October 2000, according to The Economist magazine.

Orlen, in which the Polish state holds 27 percent, is partly traded on the London and Warsaw stock exchanges and has a market capitalization of 2.2 billion euros ($2.8 billion/72.6 billion Kc), which management regards as undervalued by 1.3 billion euros, Krysiak said.

The acquisition of Unipetrol and an eventual merger with Mol, the Hungarian oil group that already controls Slovak oil and petrochemical group Slovnaft, would give the group a market capitalization of about 10 billion euros, Krysiak figures.

Crucially, winning Unipetrol could also help the Polish group emerge as a leader in talks with Mol, with which it is seeking a merger of equals.

"Whoever ends up with Unipetrol would be in a stronger position," one insider said.

In fact, Orlen faces a rival bid for Unipetrol from its potential future partner, Mol. The Poles also face strong competition for Unipetrol from Royal Dutch/Shell, the Anglo-Dutch oil and chemicals giant. Questions remain, however, over the seriousness of Shell's and Mol's participation. Shell declined to comment on rumors that it has not appointed any external advisers for Unipetrol's privatization.

Shell is also rumored to have started the process of legal and financial checks at Unipetrol known as due diligence Feb. 13 -- two weeks late, according to Tomas Gatek, analyst at Prague brokerage Atlantik FT. In addition, Mol remains undecided about whether it will actually submit a binding bid for Unipetrol and, if so, whether it will go alone or with a partner. "We have to consider whether Unipetrol can bring some value to the company," Mol spokeswoman Bea Lukacs said.

The fear is that Mol may already have overstretched itself with the costly acquisition of Croatian oil group INA, for which it paid $505 million last November. The company denies the speculation. Meantime, Unipetrol gave potential buyers precious little to cheer about Feb. 20 when it released its 2003 results.

Although the group's refinery unit, Ceska rafinerska, posted a 416 million Kc net profit on turnover of 32.8 billion Kc, the market had expected considerably better figures.

Chemopetrol, Unipetrol's petrochemical unit, posted a net profit of 109 million Kc thanks to a new polyethylene unit, and Unipetrol's plastics division, Kaucuk, reported a 128 million Kc net profit.

Unipetrol's filling station chain, Benzina, had a 272 million Kc loss, while Spolana, its troubled PVC unit, recorded a 2.66 billion Kc loss, mainly because of a 1.9 billion Kc write-off from a discontinued product line.

"These results are worse than expected, but what currently drives the share price is the privatization," said Atlantik FT's Gatek.

Binding bids, expected to reach 15 billion Kc, must be submitted in late April, with bidders looking to form consortia with other investors by then.

Orlen has already teamed up with U.S. oil group ConocoPhillips, a 16.33 percent shareholder in Ceska rafinerska, and with Czech agrochemical group Agrofert. Ironically, Agrofert, in partnership with Conoco, won the first attempt to privatize Unipetrol in December 2001, before Agrofert pulled out over the price nine months later.

Industry experts expect Shell, which says it is in talks with unspecified third parties for Unipetrol, to enter negotiations with several companies. They point to Dow Chemical's Leuna petrochemical plant in eastern Germany, linked by pipeline to Unipetrol's Litvinov petrochemical complex, as making particular strategic sense.

POLAND

Lotos Group Takes over Three Oil Refineries and Oil-Drilling Firm

Polish Treasury Ministry has merged three minor oil refineries and a Baltic Sea oil-drilling firm into the structures of Lotos Group, the ministry said on February 4. The new companies will be entirely melted into the Lotos Group by the means of a capital, product and technology consolidation. According to the Treasury, the merger will lead to increased production and storage capacities of the Lotos Group and will allow the group to grow its share of the fuel market, particularly in southern Poland. State-owned fuel sector holding Nafta Polska, which owns 75% of Lotos, will receive 10% stakes in Rafineria Czechowice, Rafineria Glimar, and Rafineria Jaslo, all located in southern Poland, and 75% of offshore drilling firm Petrobaltic. The group's value is estimated to grow to EUR 519 mln from EUR 373 mln after the consolidation.

SLOVAKIA

Slovnaft to Invest over Sk8 Billion

The Slovnaft oil refinery plans to invest between Sk8 - 8.5 billion (€197.7 - 210.05 million) in 2004. According to Slovnaft director general Vratko Kassovic and MOL (the majority owner of Slovnaft) director general György Mosonyi, the most important investments are the construction of new polypropylene and desulphurization units for the production of diesel.

The refiner also plans to spend more than Sk2 billion (€49.42 million) to enlarge its filling station network. Half this investment would be used in Slovakia and the rest in the Czech Republic and Poland.

The polypropylene 3 unit should begin operations in the third quarter of 2004. The desulphurization unit will begin to keep the volume of sulfur in diesel fuel below 10 parts per million in May 2005, in line with European standards.

In another step towards entering the Austrian market, the company will build a transport terminal in Bratislava's river port with an annual capacity of several million tons.

Slovakia Interested in Druzhba Oil Transportation- Ukrainian Fuel Minister

Slovakia is interested in development of projects for transportation of oil via the Druzhba oil pipeline, which passes across Ukraine and Slovakia.

Ukrainian Minister of Fuel and Energy Serhiy Yermylov said this on February 24, following his meeting with Slovakian Ambassador to Ukraine Vasil Grivna. The Druzhba oil pipeline involves two projects - its integration into the Adria oil pipeline and test pumping of different oil brands to Czech oil refineries.

The agency reported earlier that Ukrainian President Leonid Kuchma had signed a bill into law on ratification of an agreement on cooperation in a project for integrating the Druzhba and Adria pipelines to transport additional volumes of oil (up to 15m tons a year) to the world market via pipelines of Russia, Ukraine, Belarus, Hungary, Slovakia and Croatia, with reloading through the Croatian port of Omisalj.

Yermylov said earlier that the test shipment of oil would start in February.

TURKEY

O.I.B. Invites Tupras Auction Winning Company to Sign Contract

The Privatization Administration Board (OIB) has invited the auction winning company to sign contract after the Higher Board of Privatization's (OYK) decision on privatization of the Turkish Oil Refineries Corp (Tupras) was published in the Official Gazette.

Sources said that the company was given a sixty-day period to sign contract, beginning on February 11, 2004.

The auction for privatization of Tupras's 65.76 percent share was conducted on January 13, 2004 and Efremov Kautschuk GmbH made the highest bid of 1 billion 302 million U.S. dollars.

Tupras Sale Cleared

Tatneft's $1.3 billion bid for Turkey's state-controlled Tupras oil refinery was cleared by the country's Competition Board.

The sale to Tatneft and Turkey's Zorlu group doesn't threaten competition in the refining, petrochemicals or shipping markets that Tupras is involved in, the board said in a statement to the Istanbul Stock Exchange. Any expansion would need to be monitored and the purchase by an oil company will lead to integration that may hinder others from entering the refining market, the board said.

SOUTH AFRICA

Engen Deal Set to Fuel Sasol's Rise
Runaway economic growth in China was responsible for a third of the world's growth in oil demand last year.

To meet soaring Chinese demand, oil imports shot up 30 percent, about half from the Middle East and the rest from all over the globe, including Africa, Southeast Asia, Russia, Kazakhstan and South America.

In Gabon, meanwhile, recent declines in oil production have led the government, headed by Bongo since 1967, to encourage further exploration, and concern over a long-term decline in proven oil reserves has fueled development of the non-oil sector.

The successful conclusion of talks between Sasol and Malaysian national oil company Petronas could see Sasol take up to 60% of SA's refinery industry and up to 30% of its fuel retail market.

There is no indication at this stage whether the discussions relate to a joint venture or to a full sale by Petronas of its 80% stake in Engen, which in turn has a 56.5% stake in oil exploration company Energy Africa. Petronas also has an 8.7% direct stake in Energy Africa. Nevertheless, it is widely thought that Petronas is keen to disinvest, although it may want to retain a foothold in South Africa.

Sasol issued a cautionary, saying it was in discussion with Petroliam Nasional Berhad (Petronas) involving the liquid fuel interests of both companies in Southern Africa.

Engen is by far the largest oil company in South Africa, with about 27% share of the market compared with about 17% held by Shell and Caltex and 16% by BP. It has about 1 200 filling stations.

Speculation, however, is that other oil companies might make a counter-bid for Engen. A spokesman for BP says "we are analyzing the deal, but we do not feel threatened". Shell says that it is not considering a counter-bid and that the possible deal came as no surprise. "The Petronas-Sasol move was anticipated well in advance and catered for in our business plans for the year."

Caltex had not been expecting the possible deal, but will not be making a counter-bid.

Petronas acquired its stake in Engen between 1996 and 1999 at a price of about R4-billion to R5-billion, and at the current exchange rate could expect a price of between R6.5-billion and R7-billion for its 80% share.

Engen has perhaps the oldest refinery in South Africa, in Durban, but if the deal should be approved by the Competition Commission, Sasol would end up with about 30% of the retail market and 60% of the refining industry.

Petronas is a small player in the oil industry by world standards.

In terms of a long-standing agreement, Sasol supplied petrol and diesel to all the fuel companies, including Shell, BP and Caltex, in Gauteng, northern Free State and Mpumalanga. They then added their own additives and sold the fuel under their own brands.

This agreement ended last year and Sasol is now able to enter the retail sector. It has bought about 100 filling stations, which were operated under other brand names and are now being converted to Sasol stations. Exel, a black economic empowerment group, recently agreed to merge its operations with Sasol Oil. Exel has 189 petrol stations.

It is understood that Petronas, since having its offer to buy out minorities of Energy Africa refused, has wanted to lessen its participation in South Africa, partly because of the high cost of upgrading the Engen refinery. But if Sasol wanted to buy the whole of Engen, it would take considerable firepower. One analyst said that Engen's retail business could fetch R4.2-billion, so even a joint venture would require in excess of R2-billion.

In refining, Sasol has about 36% of the market through Secunda and Natref, and Engen has 18%. Engen's future funding requirements to modify its refinery would run into billions of rand.

Petronas, Sasol to Merge Liquid Fuels Businesses

SASOL, the South African fuels firm, has agreed in principle on a merger with Petroliam Nasional Bhd (Petronas) of their liquid fuels businesses.The proposed merger will create a business with substantial scale in the manufacturing of liquid fuels in South Africa as well as a petrol-, kerosene- and diesel-refining capacity of about 14 billion liters a year.

Sasol and Petronas are still in discussion concerning the merger of their respective interests in Sasol’s liquid fuels business and Engen, Sasol said in a statement dated February 19 from Johannesburg.

Together with their Black Economic Empowerment (BEE) partners, the former Exel shareholders and Worldwide African Investment Holdings and other interested parties, the companies aim to reach definitive agreements in the third quarter of this year.

Prior to this, there was a report saying that Petronas and Sasol were in talks on forming a motor fuel partnership but the talks were abandoned four years ago and revived recently.

According to the statement, it is envisaged that the merger will be affected by way of a joint venture in which Petronas and Sasol will each have an equal 37.5 per cent interest and BEE partners (both existing and new) will hold a combined 25 per cent interest.

The envisaged combination of Engen and Sasol’s liquid fuels business will create a leading South African liquid fuels business, which will comprise Sasol and Engen’s liquid fuels marketing and distribution businesses in the retail, commercial and wholesale markets.

Sasol’s liquid fuels business, which will be contributed to the joint venture, includes volumes produced at Secunda.

The joint venture will include the Enref refinery in Durban, Sasol’s interest in the Natref refinery in Sasolburg and about 1,500 service stations in South Africa. The joint venture will have operations in 14 countries and its geographic scope will include the whole of sub-Saharan Africa.

Commenting on the proposed merger, Sasol deputy chairman and chief executive officer Pieter Cox said the transaction will create a South African national champion in the liquid fuels business.

“Together with Petronas and our respective BEE partners, we look forward to the joint venture,” he was quoted as saying in the statement.

Petronas president and chief executive officer Tan Sri Mohd Hassan Marican, who was also quoted in the statement, described the merger of Engen and Sasol’s liquid fuels business as an exciting development in the next stage of Petronas’ investment in South Africa.

Together, these two businesses will have an enhanced platform on which to build and expand,” he said.

Sasol is an integrated oil and gas group with substantial chemical interests, and operates in 15 countries. It has a market capitalization of US$10 billion (US$1 = RM3.80).

Its liquid fuels business includes all of Sasol’s assets in the liquid fuels business, encapsulating the entire value chain from crude oil procurement for Sasol’s 64 per cent stake in the Natref refinery to receiving blending components from the Synfuels refinery in Secunda.

Engen owns and manages a 125,000-barrels-per-day crude oil refinery, which produces a wide range of petroleum products including base oils for lubricant manufacture. It is 80 per cent owned by Petronas and 20 per cent by Worldwide African Investment Holdings, a black economic empowerment company created to promote the economic interest of those disadvantaged by South Africa’s former apartheid system.

Polluting Oil Refineries to Face Scrutiny

Oil refineries polluting the environment have been earmarked for priority attention in coming months by the environmental affairs and tourism department, which will be reviewing emission licenses.

Environmental and tourism director-general Crispian Olver confirmed that a new environmental tax was in the offing, but did not provide details.

Chief director of the environmental affairs department, Peter Lukey, told Parliament's portfolio committee on environmental affairs and tourism that the oil- refining industry had been identified as a "hot spot" industry in terms of its pollution emissions into the sea and the air.

It had become clear from the department's discussions with the KwaZulu-Natal government that oil spills and air pollution appeared to be on the increase.

Lukey stressed the importance of the department taking action to manage air quality even before the Air Quality Bill, which would tighten air quality management, comes into being .

According to Lukey, the bill could not be regarded as a panacea for all air pollution problems and would take time to be implemented and enforced.

"Over the next couple of months the department together with provincial departments will be prioritizing air quality issues, particularly hot spot ones and we will be reviewing the emission licenses for these facilities."

Petronas, Sasol to Merge Liquid Fuels Businesses

SASOL, the South African fuels firm, has agreed in principle on a merger with Petroliam Nasional Bhd (Petronas) of their liquid fuels businesses.

The proposed merger will create a business with substantial scale in the manufacturing of liquid fuels in South Africa as well as a petrol-, kerosene- and diesel-refining capacity of about 14 billion liters a year.

Prior to this, there was a report saying that Petronas and Sasol were in talks on forming a motor fuel partnership but the talks were abandoned four years ago and revived recently.

Sasol’s liquid fuels business, which will be contributed to the joint venture, includes volumes produced at Secunda. The joint venture will include the Enref refinery in Durban, Sasol’s interest in the Natref refinery in Sasolburg and about 1,500 service stations in South Africa. The joint venture will have operations in 14 countries and its geographic scope will include the whole of sub-Saharan Africa.

Commenting on the proposed merger, Sasol deputy chairman and chief executive officer Pieter Cox said the transaction will create a South African national champion in the liquid fuels business.

“Together with Petronas and our respective BEE partners, we look forward to the joint venture,” he was quoted as saying in the statement.

Together, these two businesses will have an enhanced platform on which to build and expand,” he said.

Sasol is an integrated oil and gas group with substantial chemical interests, and operates in 15 countries. It has a market capitalization of US$10 billion (US$1 = RM3.80). Its liquid fuels business includes all of Sasol’s assets in the liquid fuels business, encapsulating the entire value chain from crude oil procurement for Sasol’s 64 per cent stake in the Natref refinery to receiving blending components from the Synfuels refinery in Secunda.

El Paso to Sell Aruba Refinery to Valero El Paso Corp., in the process of divesting assets to pare debt, said that Valero Energy Corp. had agreed to buy its Aruba refinery and related operations for $465 million.

El Paso to Sell Aruba Refinery to Valero
El Paso Corp., in the process of divesting assets to pare debt, said that Valero Energy Corp. had agreed to buy its Aruba refinery and related operations for $465 million.