U.S. Downstream Independents

U.S. Downstream Independents Acquire National Prominence in the 1990's

United States Energy Information Administration
http://www.eia.doe.gov

U.S. Refining Assets Undergo Significant Redistribution

Due to a long period of low profitability in the refining/marketing line of business, U.S. integrated major energy companies began a process during the 1990's of selective refining/marketing divestiture. During the same period, 42 refineries (constituting 20 percent of those in operation in the United States during 1990) were shut down.

The availability of the majors' downstream assets created an opportunity for smaller, independent U.S. refiner/marketers to acquire domestic refineries and petroleum marketing outlets and move into market areas formerly dominated by the majors. (For the purposes of this report, an independent refiner/marketer is defined as one that has no significant crude oil production.) As a result, a large amount of FRS refining and marketing assets changed hands in the 1990's.

Initially, one independent refiner/marketer (Tosco Corporation) was willing to absorb the risk inherent in acquiring these assets. A small number of other independents subsequently pursued a similar acquisition and growth strategy. However, despite the significant shutdown of U.S. refineries and the substantial restructuring of the U.S. refining/marketing industry, overall crude oil distillation capacity in the United States only declined from 16.4 million barrels per day to 16.1 million barrels per day between 1990 and 1997.

Clearly, some refiners have been expanding the capacity of their refineries. An examination of the data indicate that the majors have added some capacity at the refineries which they retained, and other capacity gains have been made by the same independent refiner/marketers who undertook a growth strategy in the 1990's. Among independent refiners, growth has been largely concentrated in the following group of companies: Citgo/PDV America, Clark Refining and Marketing, Diamond Shamrock (merged with Ultramar during 1996, creating Ultramar Diamond Shamrock), Koch Industries, Tesoro Petroleum, Tosco Corporation, Ultramar, and Valero Energy (Figure 21).^a As a group, they owned 12 refineries with a combined refining capacity of slightly more than 1.3 million barrels per day in 1990, about 8 percent of total U.S. refining capacity.^b By October 1998, the companies owned a total of 29 refineries with a combined refining capacity of approximately 3.7 million barrels per day, about 23 percent of total U.S. refining capacity (Figure 22).^c

The near-tripling of the refining capacity of this group was largely accomplished through acquisition of refining capacity (88 percent), 66 percent of which was acquired from the integrated major energy companies reporting to the Financial Reporting System (FRS) (Table 20). Recent acquisitions by Tosco (since April 1993) include six refineries from these companies (Exxon-1, BP-2, and Unocal-3) with a total refinery capacity of 747,000 barrels per day (b/d). Also, near the end of 1996, Diamond Shamrock (which had a refining capacity of 223,000 b/d) merged with Ultramar (which had a U.S. crude distillation capacity of 68,000 b/d).^d Since then, the resulting company (Ultramar Diamond Shamrock) has acquired Total Petroleum's distillation capacity of 141,600 b/d,^e as well as control of Phillips Petroleum's 345,000 capacity through the formation of a new Ultramar-Phillips joint venture, Diamond 66.^f Overall, the rate of refining capacity acquisition in the United States has been especially high during 1998. Thirty-three percent of the capacity acquired between 1991 and October 1998 was acquired during 1998.

The large amount of downstream acquisition activity during the 1990's noticeably redistributed U.S. refining industry capacity. In 1990, the FRS companies (including their joint ventures) held 72 percent of U.S. refining capacity. The independent refiner/marketers who pursued acquisition growth strategies in the 1990's (the "fast-growing independent refiners") then held only 8 percent of domestic capacity, with 20 percent being held by all other refiners. By October 1998, the FRS share of domestic crude distillation capacity had fallen to 54 percent (60 percent including their joint ventures), and the fast-growing independent refiners had earned their name by increasing their share to 23 percent, an almost threefold increase. The remaining capacity (18 percent) is still held by all other refiners (Figure 22).

Gasoline Marketing Operations Also Expand

Gasoline marketing in the United States has undergone dramatic changes over the past 15 years. Not only has the crude distillation capacity of the fast-growing independent refiners grown markedly since 1990, so too has their presence in gasoline retailing, as measured by number of motor gasoline retail outlets.

The major U.S. oil companies have refocused their marketing operations, concentrating operations in those regions in which they have had the most success, i.e., where they have achieved the greatest profitability or the greatest market share. The average number of states in which the FRS companies have operations declined from 28 states in 1990 to 25 states in 1997 (Table 21). However, this decline is only part of the consolidation story, as the FRS companies also have substantially fewer branded outlets.

Total domestic FRS branded outlets (lessee and open dealers) declined from 51 thousand in 1990 to 34 thousand in 1997, a 34-percent decline over the period.^g This decline is notable when compared to the 10-percent decline in the number of all U.S. gasoline stations (regardless of ownership) between 1991 and 1997.^h The FRS companies' consolidation and refocusing of their marketing operations have resulted in their branded outlets declining at more than twice the national rate over the same period.

In contrast to the FRS companies, the fast-growing independent refiners have expanded their scope of operations, both through acquiring and opening new outlets. The number of branded outlets of the fast-growing independent refiners nearly doubled from 1990 to 1997, to 25 thousand. Rather than consolidating the geographic scope of their gasoline marketing networks (the concentration strategy pursued by the majors), the fast-growing independent refiners have expanded. For those independent refiners owning gasoline outlets in 1997, the average number of states in which they retail gasoline increased from 14 states in 1990 to 24 states in 1997.

Recent gasoline marketing acquisitions by independents include Tosco, which has added approximately 2,000 outlets (632 from BP and 1,317 from Unocal) since April 1993. Additionally, in 1996 Tosco acquired the Circle K convenience store chain and its 1,900 gasoline outlets. Prior to this acquisition, Tosco had owned relatively few convenience store operations. Also in 1996 (as previously mentioned), Diamond Shamrock (which had 1,324 retail outlets in eight different Midwestern states) merged with Ultramar (which had 420 outlets in California in late 1996) creating Ultramar Diamond Shamrock (UDS). Since then, UDS has acquired Total Petroleum, failed in an attempt to create a joint venture with Petro-Canada in the northeastern United States and Canada, and succeeded in creating a joint venture with Phillips Petroleum in 1998.

The UDS acquisition of Total Petroleum included a total of 560 outlets and 3 refineries with a distillation capacity of 141,600 b/d.ⁱ The UDS-Phillips joint venture, Diamond 66, includes all of Phillips' domestic downstream petroleum operations and will be controlled by UDS, which has a 55-percent share of the joint venture. UDS' participation in the Diamond 66 joint venture adds 6,530 outlets in 32 states to those already controlled by UDS. In addition, the joint venture is expected to generate annual cost savings of at least $50 million and a one-time saving of $250 million.^j Thus, the significance of UDS and, more generally, the group of fast-growing independent refiner/marketers in the U.S downstream petroleum industry have become even greater.

The rate of growth of the independent refiner/marketers discussed here may be described as ferocious. In particular, the downstream joint venture of one of the fast-growing independents (UDS) with one of FRS major energy companies (Phillips Petroleum) represented a new variation in the independent refiners' merger and acquisition trend. Such a substantial rate of growth suggests an obvious question, "How similar to the FRS companies do these independent refiner/marketers intend to become?" We look to the next year to provide additional insight into this question.

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^aDuring 1996 Ultramar and Diamond Shamrock merged, forming Ultramar Diamond Shamrock.
^bEnergy Information Administration, Petroleum Supply Annual 1990, Volume 1, DOE/EIA-0340(90)/1 (May 1991, Washington, DC), Tables 36 and 39.
^c Energy Information Administration, Petroleum Supply Annual 1996, Volume 1, DOE/EIA-0340(96)/1 (June 1997, Washington, DC), Tables 36 and 40 and Energy Information Administration, Petroleum Supply Annual 1997, Volume 1, DOE/EIA-0340(97)/1 (June 1998, Washington, DC), Table 38.
^d Ultramar also had substantial Canadian operations that became part of Ultramar Diamond Shamrock after the merger. Ultramar owned a 150,000 b/d refinery in Quebec, and a total of 1,341 retail outlets in Canada. Energy Information Administration, Petroleum Supply Annual 1996, Volume 1, DOE/EIA-0340(96)/1 (Washington, DC, June 1997), Table 40; and National Petroleum News, Market Facts '96, Volume 88, Number 8 (Mid-July 1996), p. 80.
^e Alan Kovski, "BP quitting Northwest with sale of refinery, outlets to Tosco," The Oil Daily, Volume 43, Number 187 (September 29, 1993), p. 3; Robin Sidel, "Tosco to Stay on Growth Track," Reuters Financial Service (February 16, 1996); and "Ultramar to Announce Purchase of Total U.S. Assets," Reuters Financial Service (April 15, 1997); Energy Information Administration, Petroleum Supply Annual 1996, Volume 1, DOE/EIA-0340(96)/1 (Washington, DC, June 1997), Table 49; and Energy Information Administration, Petroleum Supply Annual 1997, Volume 1, DOE/EIA-0340(97)/1 (Washington, DC, June 1998), Table 38.
^f "Ultramar Diamond Shamrock and Phillips Petroleum to Form Joint Venture Creating Largest Independent Refining and Marketing Company in North America," Business Wire (October 9, 1998).
^g Energy Information Administration, Form EIA-28, "Financial Reporting System."
^h A national estimate of the total number of motor gasoline retail outlets was not available for 1990.
ⁱ Alan Kovski, "BP quitting Northwest with sale of refinery, outlets to Tosco," The Oil Daily, Volume 43, Number 187 (September 29, 1993), p. 3; Robin Sidel, "Tosco to Stay on Growth Track," Reuters Financial Service (February 16, 1996); and "Ultramar to Announce Purchase of Total U.S. Assets," Reuters Financial Service (April 15, 1997); Energy Information Administration, Petroleum Supply Annual 1996, Volume 1, DOE/EIA-0340(96)/1 (Washington, DC, June 1997), Table 49; and Energy Information Administration, Petroleum Supply Annual 1997, Volume 1, DOE/EIA-0340(97)/1 (Washington, DC, June 1998), Table 38.
^j "Ultramar Diamond Shamrock and Phillips Petroleum to Form Joint Venture Creating Largest Independent Refining and Marketing Company in North America," Business Wire (October 9, 1998).

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