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The Kansas City Star
Jun 26, 2005

by Steve Everly

Coffeyville plant brews oil, profits;

Refinery once viewed as industry joke
HENDERSON, Nev. -- On the map, Coffeyville, Kan., and the Ritz-Carlton hotel near Las Vegas, Nev., are 1,279 miles apart.

In other ways, they're worlds apart.

The Ritz is a place to take afternoon "Florentine" tea or to spend a few hours at its spa, where "truth, beauty and freedom meet mind, body and soul." In Coffeyville, you can grab a steak at the Sirloin Stockade and relax in the Bricktown Lodge's hot tub.

But last fall the two places briefly shared the spotlight.

Phil Rinaldi was at the Ritz to speak at an oil industry conference about the Coffeyville oil refinery that his company, an East Coast investment firm named Pegasus Capital, had purchased from the bankruptcy estate of Kansas City-based Farmland Industries Inc.

Rinaldi was in a jocular mood, even cracking a joke about Judith Leiber handbags, which can cost $5,000, manufactured by another business owned by Pegasus.

But Rinaldi was at the conference to talk about making some real money. The Coffeyville refinery once was widely viewed as a joke within the industry, a surefire money loser. But Rinaldi set those in attendance straight: The refinery's first-year operating income for Pegasus would exceed $100 million.

"We are extremely pleased," he said.

New management played a role in the quick turnaround in Coffeyville. But Rinaldi also saw the refinery as a rare opportunity to reap big profits in an industry where demand will continue to exceed supply. In essence, Pegasus wriggled through a crack in an industry where refineries are more likely to be closed than sold, and in recent years are never built.

In the Midwest, the opportunity is even greater.

In a recent filing with the Securities and Exchange Commission, Pegasus noted the Midwest refining industry was so depleted over the years that it now has to depend on Gulf Coast refineries for 40 percent of its supply. But Gulf Coast fuel has to be shipped by pipeline and at least one major line, Explorer, was running at capacity.

If there is a demand spike, refinery outage or pipeline interruption, then refineries remaining in the Midwest would reap the benefits because it "drives up the price of the scarce barrel," according to the Pegasus regulatory filing.

Industry critics say the financial benefits of keeping supplies tight are so tempting it has become a driving force in restraining capacity. But Big Oil doesn't always get its way in closing refineries.

Royal Dutch/Shell announced in late 2003 that it was closing its Bakersfield refinery, which supplies 2 percent of California's gasoline and 6 percent of its diesel. The company said the refinery's future source of crude oil was tenuous and the unit no longer made economic sense.

In a letter to Sen. Barbara Boxer, the head of Shell Oil Products U.S. called the closing "inevitable," adding that the company didn't expect any "credible" offers to buy it.

But Court, president of The Foundation for Taxpayer and Consumer Rights, began getting calls and documents that raised questions about Shell's motives. Supplying crude oil to the refinery wouldn't be a problem, Court was told. The refinery was profitable, according to one document.

Some of the refinery's employees told Court about a meeting in which they were told that the refinery wouldn't be sold because Shell didn't want it in the hands of competition.

Shell denied the allegations and continued to make plans to close the refinery.

But under mounting pressure from California's attorney general, Shell said it would postpone closing the refinery to give more time to try to sell it. In January 2005, it closed a deal with a unit of Flying J, a chain of truck stops. Flying J announced plans to expand production.

While there is growing interest among independent investors in buying refineries and preventing their closure, Big Oil has shown little interest in building a new refinery in the United States.

"In terms of our own case, we have no plans to invest in a grass-roots refinery," said Lee Raymond, chairman and CEO of Exxon Mobil, after the company's annual meeting in May. "We do have plans to continue to expand the refineries that we have, both in terms of size as well as intensity of operation."

But a group of independent investors has been working for years to build one from the ground up.

The Arizona Clean Fuels refinery, which would be built 100 miles southwest of Phoenix in Yuma County, is considered the only serious effort to build a U.S. refinery. Backers recently reached a milestone by receiving an air permit that will allow it to operate the 150,000-barrel-a-day refinery. The refinery, say its backers, is desperately needed in the state in part because of the demand for fuel.

"If it can't happen here it won't happen anywhere," said Ian Calkins, a spokesman for the Arizona Clean Fuels.

The independent investors so far have spent $20 million on the proposed refinery and are looking for investors to help finance the $2.5 billion cost of the facility. Oil companies showed little interest until the air permit was obtained. Pemex, Mexico's oil company, has been in talks about selling oil to the refinery at a discount.

Even if the refinery is opened, possibly in 2009 or 2010, the state will still be challenged to meet gasoline demand. In fact, Calkins said, the new refinery will only be able to meet the projected increase in demand that occurs from now until the refinery opens.

"Arizona is going to need more refineries," he said.
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To reach the author Steve Everly, call (816) 234-4455 or send e-mail to severly@kcstar.com


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