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How a U.S. Oil Refinery Got Saved — and a Supply Shut-Down Averted

These guys got it done.

In a few short months, they saved hundreds of jobs, increased industry profits, created some energy security for the US east coast, and set the stage to improve the environment through reduced air emissions.

They are the epitomy, the poster child, of how business, labour and government can and should work together to create solutions in the North American oil patch.

Who are “these guys?” They are the United Steelworkers of America, Pennsylvania Governor Tom Corbett’s team, Sunoco senior management, and management from the Carlyle Group, a large private equity firm.

What they did was save 850 direct, high-paying jobs at the Sunoco refinery in Philadelphia. But even more important, if this 330,000-barrel-a-day refinery closed, there was a serious supply issue for drivers on the east coast—and the industry.

They are a textbook lesson that certainly the polarized Canadian stakeholders should be reviewing in issues like the Northern Gateway oil pipeline from Alberta to the Canadian west coast.

And if the American stakeholders around the Keystone pipeline could work together like this, there would be environmental and economic security—and commerce would flow.

What’s surprising to me is that this monumental feat of consensus got only one day of media attention in the US. I interviewed several people involved in the negotiations to get a sense of the attitudes, the friction points, and the lessons that this issue brought to the oil patch. Here’s how it got done:

Last September when Sunoco and ConocoPhillips announced they would each be closing their Pennsylvania refineries, it seemed like a dark day for energy in the Northeast.

The facilities — Philadelphia and Marcus Hook for Sunoco, Trainer for ConocoPhillips — not only kept the region supplied with the fuel it needed… but they accounted for hundreds of direct jobs. The closure of these three refineries would have led to increased unemployment figures and rising fuel prices.

September 2011 to July 2012

When the United Steelworkers (USW) heard of Sunoco’s announcement to shutter the refineries if buyers couldn’t be found, they sprang into action. Letters were written to politicians and officials to call attention to the situation. After all, it could cause a huge negative impact on the region.

By October, Democratic House Leader Nancy Pelosi had mentioned the closure of the refineries at a White House briefing. But the USW didn’t let the issue fade away and kept up its tireless campaign to raise awareness among the country’s top decision makers. In January, Gene Sperling, President Obama’s top economic advisor, was involved in the process.

The end of February saw a report from the U.S. Energy Information Administration come out that confirmed many people’s fears:

The Northeast’s fuel situation would be in dire straights if the refineries were to be shuttered.

In March, Sperling organized a conference call with newly promoted Sunoco chief executive officer Brian P. MacDonald, who had previously been the company’s chief financial officer.

As it turns out, that call was a major turning point in keeping the Philadelphia refinery—with its 330,000-barrel-a-day output and its 850 direct jobs—open, according to The Philadelphia Inquirer. During that call The Carlyle Group was identified as a possible buyer for the facility. In addition, the government gave assurances to MacDonald it would do whatever possible to allow a deal to get done.

David M. Marchick, Carlyle’s managing director for external affairs, touched on a point that would be echoed by all sides in the matter when he told The Inquirer, “This is a rare example of federal, state and local officials, business and labor, Republicans and Democrats, all coming together for one common purpose.”

In April, Sunoco announced that it had established an exclusive sales negotiation agreement with Carlyle, and by July the two companies said they would form a joint venture called Philadelphia Energy Solutions, which would keep the plant open. Just days after, USW ratified their contract with a near unanimous vote.

And so, the Philadelphia refinery was saved.

How the Labor Union Saved a Shut-Down

The news of the refineries closing last fall went largely unnoticed by the national media, but it was obviously big news to the USW. And they worked hard to get it on the political agenda—including a candlelight vigil at Pennsylvania Governor Tom Corbett’s mansion.

Lynn Hancock, a USW spokesperson, says that if not for the union, the plant would have been shut down.

“If these facilities had been non-union you wouldn’t have seen this kind of campaign. They probably would’ve been shut down by now,” she said.

Bringing together the stakeholders and the government was an important step, but that didn’t guarantee that a deal would get done.

Hancock said that she knew Carlyle was serious about its offer when they wanted to talk to the union.

“When I heard that they were going to meet with the local union, 10-1, leaders I knew that this was moving and there’s a good chance it was going to result in a sale,” she said.

And when Carlyle and the union did meet to talk about the workers’ contract, both sides worked together to get something done. Ultimately, a three-year contract was negotiated that gave the union a 2.5% raise the first year and a 3% raise in years two and three.

In exchange, the union would give up its defined-benefit pension plan for a 401(k) and allow some union jobs to be performed by contractors.

These negotiations are another example of the cooperative theme that permeated the whole campaign and talks about keeping the facilities open. Hancock emphasized what can be done when business and labor get together:

“It shows that a lot can be accomplished when business works together with its unions. Instead of seeing them as adversaries they should see them as helpmates in improving things and in making businesses stronger,” Hancock’s spokesperson reported.

Private Industry’s Part

When Brian MacDonald became the CEO of Sunoco in March of this year, it marked a turning point in the process. Hancock said that MacDonald’s involvement was vital in getting a deal done.

After his meeting with Sperling, MacDonald left a message for Carlyle Managing Director Rodney S. Cohen, who had previously helped save a refinery in Kansas. Having someone with previous experience was likely a big plus in the deal.

After several weeks of negotiations a deal was struck to create a joint venture that would see Sunoco get a one-third, non-controlling stake in the venture, and Carlyle would get control of the 1,400-acre facility. In addition, Carlyle will receive $25 million in state funds to match its $200 million investment in upgrades to the plant.

MacDonald said that the joint partnership was an example of across-the-board cooperation.

“This partnership is a great example of what can happen when motivated people think creatively to solve pressing problems,” he said. “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.”

Still, some key technical concerns remained in order for the partnership to succeed. One of the key questions was:

Where would oil come from for the refinery?

Typically refineries in the area have relied on expensive, imported Brent crude.  But Carlyle’s investment will open the door for the light shale oil from North Dakota—the Bakken formation—to be shipped in.

Carlyle officials said that plans are in place to connect the facility to the west through a high-speed train unloading facility, which could reportedly handle 140,000 barrels a day.

The Pennsylvania Department of Transportation will reportedly be contributing about $10 million to the effort to extend the rail lines. Dennis Buterbaugh, a spokesman with the Pennsylvania DOT, said that more details will emerge in the coming weeks once Carlyle’s application comes through.

The Bakken won’t be the only play that will be a part of this venture, as the Marcellus shale will also be involved. Carlyle said that it plans to use natural gas from the formation to power the refinery, and also said it would explore the possibility of liquid natural gas at the plant.

Government’s Part

Many prominent politicians including Governor Corbett, U.S. Representative Bob Brady and Philadelphia Mayor Michael Nutter were involved. What was impressive about their efforts is that no one took the opportunity to try to get a political “win.”

Corbett, a Republican, decided that even if this project would be good for the Democratic White House in the upcoming election, he would not let so many of his constituents lose their jobs.

“Obviously, if you take it from a political perspective, this is important to the White House. They’re going to be able to count this in an election year… Working together and getting this done was a lot better than seeing this facility shut down,” he said.

Support from these high-level lawmakers was an important factor in the refinery being saved but there was also a great deal of behind-the-scenes effort from local officials and government employees—like Mike Krancer.

Krancer is the secretary of Pennsylvania’s Department of Environmental Protection (DEP), part of a team put together by the governor in December to evaluate what could be done to save the refinery.

Krancer said his job was to make sure all the stakeholders knew the government was here to solve problems, not create barriers.

Once Carlyle was identified as a potential buyer, he said it was important they had confidence in the government to help them through any air permitting issues.

Krancer and key members of his team had spent a large part of their career in the private sector. He said that he knew what it is like to work with stubborn government officials who have no interest in solving problems. By bringing a “can-do” attitude to the table, Krancer helped give Carlyle the confidence it needed to make the investment.

One of the technical keys that made this deal viable for Carlyle, Krancer said, was bringing in Bakken crude, which is lower in sulfur than many other crudes. This light oil leads to lower emissions, so it was a win-win for both the environment and economics.

Another state agency that was on Governor Corbett’s task force was the Department of Community & Economic Development.

Steven Kratz, the department’s press secretary, said that one of the keys for the government’s success in this situation was that it was extremely active, but not visible. This allowed strong bipartisan cooperation within the government.

Kratz said that the project was a “terrific example of … coordination within state government” and a “great example of all levels of government working together.”

While the deal is not yet finalized (that is expected to happen in the third quarter), the example of the Philadelphia refinery should be held up as what can happen when the private sector, labor and government put their heads together to solve energy problems.

by +Keith Schaefer


 



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