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Marcellus, Bakken Open New Doors for Old Philly Refinery

The Carlyle Group LP and Sunoco Inc. last week stepped up with an ambitious plan to keep the doors open at the oldest continuously operating refinery on the East Coast by using the gassy Marcellus Shale that surrounds the refinery and the oily Bakken Shale, which could provide up to 140,000 b/d of low-cost fuel supplies.

Philadelphia Energy Solutions, a joint venture (JV) between Carlyle and Sunoco, would give the Sunoco Philadelphia refinery new life beyond its August closing date. The refinery now employs 850 people and processes 330,000 b/d, but it had been on life support until the refinery owners, outside equity, federal and state government leaders, and labor unions got involved.

"This partnership is a great example of what can happen when motivated people think creatively to solve pressing problems," said Sunoco CEO Brian P. MacDonald. "The private sector, government and labor all played important roles in getting this done. This is the best possible outcome for everyone involved: existing jobs will be saved, new jobs will be created and new business opportunities will be given the chance to develop."

The Philadelphia refinery has struggled to make money as the price of imported crude oil rose, according to officials. Federal energy officials had warned that closing the refinery could lead to oil price spikes in parts of the Northeast. Labor unions also were pushing to keep the facility open, citing the number of jobs that would be lost.

State and federal officials then jumped in, with White House economic adviser Gene Sperling joining Philadelphia Mayor Michael Nutter. Sunoco officials in April began "exclusive discussions" with Carlyle about a JV involving the facility.

What Carlyle gives the facility is money and a long-term plan. The investment, which is undisclosed, in part will be to fund a high-speed rail system that would import lower-cost oil from North Dakota's Bakken Shale straight to the facility's doorstep. The refining would shift to a higher proportion of ultra-low-sulfur diesel and use natural gas for processing from the Marcellus Shale.

Carlyle's Phil Rinaldi, who has led other refining and chemical business turnarounds, would serve as the JV's CEO. Capital would be provided by the Carlyle Equity Opportunity Fund and the Carlyle Energy Mezzanine Opportunities Fund. JPMorgan Chase agreed to provide working capital financing for intermediate products owned by the refinery through an asset-backed loan. Subsidiary J.P. Morgan Ventures Energy Corp. also agreed to supply the refinery with crude and feedstocks on a just-in-time basis and then would purchase refined products from the facility for offtake.

"Together we've re-imagined the Philadelphia refinery and its role as a critical energy hub in the Northeast," said Carlyle Managing Director Rodney Cohen. "This joint venture will keep one of the region's most important economic engines up and running. The refinery will be a reliable and critical supplier of fuels to the regional market through its new business structure and improved crude oil sourcing. In addition, the refinery's exceptional location and infrastructure will enable the joint venture to create new business opportunities related to Marcellus Shale natural gas fields."

Carlyle plans $200 million of capital improvements alone. "We are going to explore a range of new energy and chemical businesses," Cohen said during a conference call.

One challenge to be addressed is expanding the refinery's connection to U.S. oil and natural gas pipelines, said Cohen. Carlyle also wants to expand the use of Marcellus gas as a lower cost fuel for processing for their refinery, while looking at other ways of producing natural gas liquids or gas byproducts. Several parties also are looking at ways to get involved with transporting gas to the refinery.

Under the JV agreement, which is scheduled to close by the end of September, Sunoco would contribute its Philadelphia assets in exchange for a nonoperating minority interest. Carlyle would hold the majority stakes and oversee day-to-day operations. Its investments would flow directly to the refinery's balance sheet to fund capital projects, facility upgrades and working capital.

The announcement "will preserve 850 direct jobs and thousands of jobs that rely on this refinery's active operation in the Philadelphia region," noted Pennsylvania Gov. Tom Corbett. A tax-free zone is possible for the refinery site; Pennsylvania also is offering up to $25 million in grants. In addition, the state may issue tax-exempt bonds.

Philadelphia Energy Solutions plans to invest in several "capital intensive projects" considered critical to the long-term economic viability of the facility: planned improvements to reduce waste and emission, and to reduce reliance on foreign oil supplies. Also planned is an upgrade of the catalytic cracker and the partners want to build a "mild hydrocracker" and hydrogen plant.

"By converting the existing middle distillate hydrotreater into a mild hydrocracker and constructing a natural gas-based hydrogen plant, the refinery will produce a more environmentally friendly mix of refined products," the partners noted. "The project will create several hundred construction jobs."

Also being explored are "other significant capital projects, including the creation of new businesses based on the availability and abundant levels of natural gas from the Marcellus Shale."

"This is a big fill-in-the-blank deal," said U.S. Rep. Bob Brady (D-PA).

The Sunoco refinery would have been the company's second in the Philadelphia area to shut its doors in less than a year. Last December the company shuttered the 110-year-old Sunoco Marcus Hook Industrial Complex, which is on the banks of the Delaware River south of Philadelphia. However, last month IHS Inc. researchers said the Marcellus Shale also could spark life into that refinery complex, which once employed 500 people.

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