What's next for Big West refinery?
| Sunday, Feb 21 2010 12:00 PM
Last Updated Thursday, Feb 25 2010 04:31 PM
A little more than a year after Big West refinery was shut down, a company has stepped forward offering to buy the plant on Rosedale Highway. Here are some details about the bid and the key players involved:
The bidder
Alon Israel Oil Co. Ltd. owns the Dallas-based company that has offered to buy Big West. It owns four U.S. refineries that together process 250,000 barrels of oil per day. Alon USA Energy Inc. also operates more than 300 convenience stores in Texas and New Mexico, and markets motor fuel under the FINA brand at about 640 locations.
The owner
Ogden, Utah-based Flying J Inc. bought Big West from Shell in March 2005 for a reported price of $130 million. In 2008 the company succeeded in securing approval for a $700 million upgrade to the plant, but before it could complete the job, it filed for Chapter 11 bankruptcy protection in December 2008. Parts of the company are being sold off; other parts are being merged with Pilot Travel Centers LLC.
The property
Big West is actually a combination of what had been three separate refineries. At full capacity the 942-acre property can process about 70,000 barrels of oil a day, producing about 2 percent of the state's gasoline supply and 6 percent of its diesel. About 175 employees -- some temporary and some part-timers -- were laid off when the plant was shut down early last year as an indirect result of Flying J's bankruptcy. Big West has a product loading facility, crude oil truck terminal and 2.6 million barrels of storage capacity.
The offer
As the lead, or "stalking horse" bidder, Alon has offered $40 million for the refinery, including some of the upgrade equipment Flying J has already purchased but not including a 250-acre buffer zone. The offer does not take into account the price of oil on the site, which is to be decided later. Alon has agreed to assume some of the site's environmental mitigation costs, though Shell also will have to pay for the site's cleanup. Anyone hoping to beat out Alon must turn in a better offer by the end of the day March 16; the auction is to take place March 19, and a winner is to be decided March 23.
Images:
The Big West of California refinery on Rosedale Highway.
Twelve long months and a $40 million bid later, Bakersfield is still no closer to learning what the future holds for the mothballed refinery on Rosedale Highway known as Big West.
The opening bid in an auction scheduled for next month says next to nothing about the intentions of the Israeli company that made the offer, and business people with a stake in what happens to Big West say the same is true of the brief public statement sent out by the lead bidder early this month.
Will the property reopen as a refinery that could add more than 100 local jobs, as well as resume oil purchases from nearby sources and even provide some relief from Bakersfield gas prices? Or will the plant be shut down for good and turn into something else entirely?
Information available publicly can be interpreted either way. And neither the bidder nor the refinery's current owner would comment.
Local oil producer and former Big West supplier Ken Hunter has studied the situation, and his take is this: "I'm confused."
So are a number of others who hope to do business with the refinery if it reopens.
"We don't have any indications," said Bakersfield petroleum executive Henry Medina. "The industry is taking a wait-and-see to what's going to happen."
A reasonable price
The $40 million offer by the lead bidder, Alon Israel Oil Co. Ltd.'s U.S. subsidiary, raised some eyebrows at first, especially considering that it reportedly went for $130 million when last it changed hands in 2005. Some have speculated that the bid by itself suggests Alon will scrap out the plant and either redevelop most of the property or keep part of it as a fuel depot distributing gasoline and diesel piped in from the Bay Area.
But two factors may account for the small dollar figure: Tough conditions in the refining industry, and the fact that Big West hasn't processed fuel for a little more than a year.
Firing up an idled refinery is much more expensive than taking over one that's already running. Although routine maintenance has been kept up over the past year, substantial preparatory work would have to be done prior to a resumption of operations.
Also, a good deal of inventory -- perhaps 1 million barrels of oil -- would have to be purchased to replace what was sold off for cash by the current owner, Utah-based Flying J Inc., whose Chapter 11 bankruptcy filing in December 2008 led to the refinery being put up for auction. Alon's offer does not include the price of whatever crude remains at the plant; that dollar amount would be determined at the close of sale.
Dave Hackett, president of an Irvine energy consultancy that has examined Big West's finances and operations, estimated the cost of reopening the refinery at about $200 million. He said the $40 million offer accounts only for what exists at the site, regardless of how it is used.
By contrast, if Big West were still processing oil and if the refining industry were not as battered as it is now by high oil prices and generally low profit margins, the plant might have fetched as much as $500 million as recently as two years ago, Hackett said.
"I think (Alon's bid) is an illustration of how volatile the oil business gets," he said. "And it could go from boom to bust. And we're seeing the bust phase now."
Mixed signals?
Although Alon's Feb. 2 news release about the Big West bid neglects to say whether the company would resume refining operations there, it does mention some specifics that people in the industry say could be telling.
Alon stated that it would take some equipment now located at Big West and move it to its other refineries. It also indicated that it would connect the Bakersfield plant, by pipeline, to a refinery complex it owns and operates in southeast Los Angeles County.
Hackett and others have speculated that the equipment Alon plans to ship out would include some of the material bought by Flying J as part of its efforts to upgrade the facility at a cost of some $700 million. If true, that would mean Alon would abandon one of Bakersfield's most costly and controversial construction projects in recent years.
But that theory raises questions about the pipeline, an idea that has its own problems.
Without Flying J's proposed expansion, Big West cannot process certain refining byproducts, such as gas oil. And it is that substance -- gas oil -- that Alon said it hopes to ship from L.A. County to Bakersfield for further refining.
The very idea of a pipeline linking the two refineries leads some to question how serious Alon is about its stated intentions. People in Kern's oil industry said there are no pipelines carrying petroleum products from Bakersfield to L.A. County, though at least one running the other direction does exist.
Installing a new pipeline would likely take many years and be cost-prohibitive.
"If it's a new pipeline, I'm going to be in a wooden box by the time that comes," said Medina, president of Bakersfield-based petroleum supplier Fleet Card Fuels.
Local potential
Even so, he and others have expressed optimism that Alon will reopen the refinery in a form that produces fuel for the immediate area while also providing many well-paying jobs.
"It would put a lot of people back to work," he said.
It would also be a good customer for local oil producers, said Hunter, president of Bakersfield's Vaquero Energy Inc.
But so far, he said, there's no evidence that Alon is looking to set up contracts with local crude suppliers, as people in Kern's oil industry have said would be in the best interest of any would-be Big West operator.
"At this point," Hunter said, "they don't seem to be making any attempts to buy local crude."
