By George Gill
 
Holly Corp. will enter the lubricants market by buying Sunoco’s Tulsa, Okla., refinery, including its 9,500 barrel per day API Group I base oil plant, for $65 million. Last December, Sunoco told analysts it might convert the 85,000 barrel per day refinery into a terminal in late 2009 if it couldn’t find a buyer for it.
 
The transaction announced Thursday is expected to close by June 1, subject to necessary approvals and conditions.
 
Neale Hickerson, Holly’s vice president of investor relations, said that aside from plans to build a new diesel desulfurizer, there should be no change in the refinery operations. “With regards to the remainder of the refinery, and product units, we would expect to operate them as Sunoco has up until now – no changes, or units shut down, or anything of that order,” Hickerson told Lube Report.
 
The acquisition will include inventory which will be valued at market prices at closing. Holly will also receive an assignment of the Sunoco specialty lubricant product trademarks in North America and a license to use the same in Central and South America.
 
“Sunoco has done a great job over the last 10 or more years in developing a strong specialty lubricants trademark and following,” Holly Chairman and CEO Matt Clifton told analysts in a conference call Thursday. “The thing that drives the profitability of the Tulsa facility is the substantial growth margins that have been achieved on specialty lubricant products – these are basically specialty lube oils, waxes and modifiers in a business that Sunoco has developed.”
 
He emphasized that Holly will basically continue to do what Sunoco has done as a wholesaler of the specialty lubricant products. “The senior management team that managed this end of the business will be joining us, and the sales force that is in the field throughout the country will also be joining us,” Clifton stated. “We envision a pretty seamless transition. We’ll continue to do what Sunoco has a done good job doing – leveraging the expertise in their management group to continue wholesale marketing of these specialty products.”
 
Clifton told analysts not to expect a lot of change on the crude slate or product mix at the Tulsa refinery. “I think the value of the lubricants is a big driver in the profitability of this refinery,” Clifton said. “It’s very dependent on getting a quality sweet crude to yield the formulations that drive that growth margin.”
 
Incorporating specialty products will expand Holly’s product line and provide new business opportunities, according to Clifton. The company produces high-value light products such as gasoline, diesel fuel and jet fuel. Holly has a 100,000 b/d refinery in Artesia, N.M., that can process as much as 100 percent sour crude oil; and a 31,000 b/d refinery in Woods Cross, Utah, that is a high-conversion refinery that processes regional sweet and Canadian sour crude oils.
 
“We’re looking to develop synergistic opportunities between the three facilities for possible intra-refinery feedstock movements that could be exploited,” Clifton explained. “There may be opportunities to upgrade some of Holly’s other refinery products into the specialty products market. This is a great acquisition to tag on – it gives us the scale, geography and product diversity we’ve longed to have.”
 
Holly plans to build a new diesel desulfurizer and associated equipment at the Tulsa refinery by the end of 2011. The addition, at an estimated $150 million cost, will enable the facility to produce all of its diesel fuel as ultra-low-sulfur diesel. “We’ll be required to become compliant with ultra-low-sulfur diesel requirements in the latter part of 2011 under the expected waiver we should receive,” he added.
 
The company will also assume some of Sunoco’s remediation activities at the Tulsa refinery under a permit. “We haven’t done our own estimates yet,” Clifton said. “Sunoco’s was somewhere in the $3 million range to perform that.” He said the cost of those activities will be spread out over a number of years.
 
Sunoco Chairman and CEO Lynn Elsenhans said the sale represents another step towards improving Sunoco’s performance and competitiveness. “It also keeps the refinery operating, provides for necessary upgrades to ensure the long-term viability of the facility, and protects approximately 400 jobs,” Elsenhans added.
 
Tulsa is the last of three base oil refineries Sunoco once operated. In 1992, it closed its base oil plant at Marcus Hook, Pa., which had capacity to make 10,000 b/d but required major capital investment for upgrades. A second refinery, in Yabucoa, Puerto Rico, had 9,200 b/d of base oil capacity and was one of the first to produce Group II quality stocks. But Yabucoa stopped processing crude in 2000, and the next year Sunoco ended lube operations there for good and sold the refinery to Shell Chemical.
 
Sunoco also has dwindling internal need for base oils. In the mid-1990s, its lubricants division was not profitable, and it acquired the Amalie and Kendall motor oil brands from Witco in an attempt to build volume and create operating efficiencies. The Amalie name was resold, but keeping Kendall allowed Sunoco to lay claim to nearly 5 percent of the U.S. finished lubes market.
 
In 2000 though, the same corporate streamlining that prompted the divestment of the Yabucoa refinery also led Sunoco to put its lube marketing assets, including the Kendall name, on the block. In 2001, Kendall was sold to Tosco (now owned by ConocoPhillips). The company then closed its three blending plants, at Tulsa, Marcus Hook, and Richmond, Calif., further loosening its ties to lubes.