PBF Energy to acquire Shell Martinez refinery: Update

Adds detail from PBF.

PBF Energy has agreed to acquire Shell's 156,000 b/d refinery in Martinez, California, giving the merchant refiner a more balanced northern and southern California business while continuing the oil major's targeted $5bn/yr divestment program.

The $1bn transaction, not including the value of on-site petroleum and supply and offtake agreements, should close this year, Shell said. The purchase will include associated logistics assets. The upfront cost will fall if the closing is delayed.

PBF Energy has worked for years to acquire a second California refinery, but previously described the costs as too high. PBF chief executive Tom Nimbley was not optimistic about new acquisitions in early May.

"Right now there is nothing we see that would get nailed down, so we are focused on trying to figure out how we come out of the first quarter and move forward for the rest of the year," Nimbley said at the time.

But conversations with Shell began in December, he said today. The combination of Shell's divestment interest and PBF's strong desire specifically for Martinez drove the transaction and abrupt announcement, Nimbley said.

"This was something we really felt we could not pass up because of the assets of the facility," Nimbley said.

Gasoline makes up about 60pc of its refined fuel production, followed by about 27pc jet fuel and 13pc diesel. The refinery includes coking units, an 80MW cogeneration facility, waterborne dock facilities and third-party pipeline connections to northern California and San Francisco International Airport.

The refinery runs a crude slate of an average 20°API with very high sulfur and acid. Discounts for this difficult feedstock to light, sweet crude have narrowed over the past year, as a combination of sanctions and producer curtailments have slashed US availability of heavy crude.

This was not a long-term risk, Nimbley said.

"The fact is that those crudes are not going to be kept in the ground or the sand forever," Nimbley said.

Terms of the acquisition include Shell spending $70mn on a first quarter 2020 turnaround, regardless of who owns the refinery at that point. Shell will also pay $40mn to compensate for downtime if PBF owns the facility at that point. Neither company identified the planned units involved in that work.

An earn-out agreement also means that Shell may receive up to $400mn more, depending on refinery revenue. Up to $100mn a year of initial earnings would be split evenly with Shell, unless PBF is able to pay $400mn in the first two years.

"If we are in a position to pay an earn out, Martinez is performing as we expect it will," Nimbley said.

Shell expects to hold a "smaller, core set of refineries" focused around Shell trading hubs and integration with chemicals and other products not specifically tied to conventional fuels, the company said today. Shell did not answer a direct question about its future interest in its 145,000 b/d Puget Sound refinery in Anacortes, Washington.

"Our focus is value rather than volume," the company said. "We will invest in our core refineries to enable them to deliver resilient returns."

The acquisition will mean all companies operating California refineries with at least 100,000 b/d of crude processing capacity will control facilities in both northern and southern California. The state's unique gasoline blendstock, CARBOB, and position on the Pacific coast makes it more difficult to quickly replace supplies to its ravenous fuel market when refineries malfunction. Chevron, Marathon Petroleum, Phillips 66 and Valero all operate northern and southern facilities.

PBF began operating the 155,000 b/d Torrance refinery in southern California in July 2016, guiding that facility out of a devastating 2015 explosion and fire that shut the facility for more than a year.

PBF was critical of the condition of that repaired refinery following its purchase from ExxonMobil. Martinez had a stronger reputation for care, Nimbley said.

"We are not buying a Torrance and we are not buying a Chalmette," Nimbley said, referring to both refineries PBF purchased from ExxonMobil. "We are buying a facility that is basically a world-class facility that we can go in and hit the ground running on."