Warren refinery thrives while importing threatens others in Pennsylvania

| Sunday, April 15, 2012

WARREN — A small Northwest Pennsylvania refinery located near the birthplace of the oil industry is benefiting from a quirk of oil economics that threatens to shutter three refineries in the Philadelphia region.

And after this summer, 110-year-old United Refining Co. in Warren County could be the only major gasoline producer left in the state.

"It appears at the moment that we're in a good position," said Robert Kaemmerer, vice president of finance for the operation that sprawls across 107 acres along the Allegheny River in the small city of Warren, at the northern edge of the pristine Allegheny National Forest.

Warren is about 300 miles from Philadelphia, but it might as well be a world away. While Sunoco Inc. and ConocoPhillips have been losing hundreds of millions of dollars a year on their East Coast refineries, United has remained relatively healthy. It's had some up-and-down years recently, but in its September-November quarter, it earned a profit of $62 million. The company reports financial results for the December-February quarter on Monday.

East Coast refineries, mainly concentrated in the Philadelphia area and New Jersey, import their oil from overseas, for which they pay a premium. United, by contrast, taps into a crude oil pipeline out of Canada and has been paying about $20 less per barrel for the last year. And it can process heavier crude oil than its eastern counterparts -- another cost advantage.

"They've been in a pretty good position to benefit from the trends in terms of where the prices have moved," said Marc Bromberg, an analyst with Standard & Poor's, which last year revised its outlook on United from negative to stable.

East Coast refineries are stuck with imported oil because they're set up to process light crude oil, which they must import because it's not cost-effective to ship cheaper crude from the Midwest. Imported "Brent" crude, as it's known, is priced in London and for about the last year has been $10- to $20-a-barrel more expensive than domestic oil, known as West Texas Intermediate, or WTI, and priced on the New York Mercantile Exchange.

"There's no way really to get that oil to the east coast, at least not cost effectively," said Aaron Brady, director of global oil research for IHS Cambridge Energy Research Associates, Cambridge, Mass. "They're configured to run light sweet, and they're the most expensive oils in the world."

Brent crude prices reflect "the world reality," said Kevin Lindemer, a Boston oil analyst. WTI is discounted relative to Brent because of a North American supply glut caused by increasing production in Canada and northern plain states such as North Dakota.

"The industry has not yet reacted to deal with this surplus," he said.

Geopolitical problems, such as in the Middle East, are more likely to push Brent prices higher than WTI, said Kent Moors, a Duquesne University professor and oil industry expert.

"Brent is benchmark of preference for (pricing) international trades," Moors said. "So when you have upward pressure on oil prices, it's going to hit Brent first."

The price difference has driven Sunoco and ConocoPhillips to put up for sale three refineries that account for about half the capacity on the East Coast.

Sunoco, which has said it lost $1 billion on refineries in the last three years, idled its Marcus Hook operation in December. Sunoco's Philadelphia refinery, the largest on the East Coast, is still running but will close by July 1 if a buyer doesn't step in and keep it running. ConocoPhillips idled its Trainer refinery in September.

The refinery closures are a concern for the Pittsburgh region because they are major suppliers of gasoline and diesel fuel here. The Energy Information Administration has warned that shortages and price spikes could result from their closure.

Several buyers have submitted bids for the Philadelphia refinery, according to Reuters news service, including John Catsimatidis, the billionaire owner of United Refining and a chain of New York grocery stores.

United distributes about 70 percent of its gasoline to the 366 Kwik Fill, Red Apple and Country Fair retail gasoline and convenience stores it owns in Western New York and Northwest Pennsylvania. And with a capacity to process about 70,000 barrels of crude oil a day, it's one-fifth the size of Sunoco's Philadelphia refinery, meaning it's unlikely to make up for lost supply in Pittsburgh.

Catsimatidis declined to discuss the Philadelphia refinery. But he is bullish on United's prospects.

"I bought the company 27 years ago when it was in bankruptcy," Catsimatidis said. "The company has been doing great since then."

The company employs more than 360 refinery workers and another 3,880 full- and part-time workers at its gas stations. It's become one of the largest employers in Warren after the loss of several manufacturing operations, Kaemmerer said.

Catsimatidis said he would like to expand United's capacity, but he's unsure that the political and economic climate in the United States would support large investments.

But the refinery has purchased several adjacent industrial properties recently, Kaemmerer said. He said no specific plans have been developed to use the new land.

"Whenever you talk about a refinery, it's a $100 million for this and a $100 million for that," Catsimatidis said.

Additional Information:

About United Refining Co.

What : Operates a 70,000-barrel-a-day crude oil refinery that produces gasoline, diesel fuel, asphalt and other petroleum products. It owns an 78-mile long crude pipeline and 360 gas stations and convenience stores.

Where : Warren, Warren County

Founded : 1902

Employees : 4,400

Executives :

• John Catsimatidis, CEO and owner

• Myron Turfitt, president and chief operating officer

• Ashton Ditka, senior vice president of marketing

• Thomas Skarada, vice president of refining

• James Murphy, chief financial officer

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