PhillyInc: With Sunoco move, a setting sun for refining in Phila. region

Sunoco is part of the South Philadelphia landscape (Michael Bryant / Staff Photographer)
Sunoco is part of the South Philadelphia landscape (Michael Bryant / Staff Photographer)
Posted: September 07, 2011

A year ago, I took a boat ride up the Schuylkill to the Fairmount Water Works.

To reach that elegant, neoclassical structure below the Philadelphia Museum of Art, you must first pass a sprawling South Philadelphia complex that was designed to quench a different thirst for a once rapidly industrializing nation.

On that summer day, the sounds, smells, and flashes emanating from the metal city that is Sunoco Inc.'s refinery overwhelmed the quietude of the trees and greenery that line much of the river's western bank. Puttering along at 5 to 10 m.p.h., the boat took nearly 10 minutes to pass what is no mere monument to Philadelphia ingenuity, but the living embodiment of its role in the global oil business.

Since the 1860s, oil has been refined along the Schuylkill by various companies. Today, Sunoco Philadelphia is the biggest of the 10 refineries that operate on the East Coast, with a capacity to handle 335,000 barrels of crude daily. That's more than 100,000 barrels per day more than the second-largest, ConocoPhillips Bayway in Linden, N.J.

With Sunoco's announcement Tuesday that it will exit the refining business as of July 2012, however, we are staring at the sunset of refining, not only in the city but the region as a whole.

Sure, Sunoco may find a buyer for the 1,400-acre complex, where about 850 full-time employees and 175 contractors work, as well as its refinery on the Delaware River in Marcus Hook, which Sun Oil Co. founder Joseph N. Pew started in 1902. (Marcus Hook employs more than 600 full-timers and 250 contractors.)

Still, the company has not had

a nibble for the 178,000-barrel- per-day Eagle Point refinery in West Deptford that it shut down in November 2009, costing 400 employees their jobs.

There are real drawbacks to running a $37.49 billion business with refineries that have so much history. Over the last two decades, Sunoco has tried to upgrade its area refineries to keep pace with the growing complexity of petroleum refining, spending nearly $1 billion in South Philadelphia alone.

It hasn't been enough to improve the Sunoco refineries' operational reliability or profitability.

First, the kind of crude oil processed by Sunoco's two refineries is priced off costly European Brent crude rather than the cheaper West Texas Intermediate crude. The spread between the two has been as wide as $26 per barrel this year, and Sunoco refineries cannot process lower-quality crudes.

And fires and unplanned outages can happen at any refinery, but Sunoco had a particularly bad stretch in early 2011. According to Sunoco's quarterly financial report, its crude-unit capacity utilization rate - a measure of operational reliability - was just 74 percent for the first quarter, 84 percent for the second.

What happened? A power outage in late March led to a "total refinery shutdown" at Marcus Hook, which didn't return to full service until the second week of April. In addition, following reports of several fires at the Philadelphia refinery in March and April, Sunoco had to perform maintenance work on several units that extended into the third week of April.

During a conference call with financial analysts in early August, Sunoco chief financial officer Brian P. MacDonald called April "our worst month in the history of refining."

Jim Savage, president of United Steelworkers Local 10-1, which represents about 600 refinery workers in South Philadelphia, said there was simply "no margin for error" at Sunoco's operations now. When a minor breakdown occurs, an entire crude unit goes down, he said.

Anyone hoping for a deep-pocketed buyer who will spend billions of dollars modernizing Marcus Hook and Philadelphia is bound to be disappointed. Fadel Gheit, an oil analyst at Oppenheimer & Co., said the upkeep alone on the two refineries was between $150 million to $200 million a year, and any new buyer was "unlikely to spend much more than that."

In addition, it could be a bad time to try sell these refineries - with supply exceeding demand. Energy-consulting firm Solomon Associates noted that there had been an enormous amount of consolidation in the refining business over the last decade, with one to three refineries sold per year on average. Over the last 12 months, nine to 10 refineries have either been put up for sale or sold.

"The refining business has always been a difficult, volatile business, and today we see companies that realize that this business will be more of the same in the future," said Dale Emanuel, the president of Dallas-based Solomon Associates.

That's a future that Sunoco under CEO Lynn L. Elsenhans doesn't want any part of.

Should I make the same boat trip up the Schuylkill next summer, everything will probably look the same. But for hundreds of workers, everything will be different. And the refinery complex? That will be just another remnant of Philadelphia's industrial past.


Contact columnist Mike Armstrong

at 215-854-2980 or marmstrong@phillynews.com, or @PhillyInc on Twitter. Read his blog, "PhillyInc," at www.phillyinc.biz.

 

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