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The Globe & Mail: Shell’s move away from gas refining gains pace with sale

Reuters News Agency

LONDON — Royal Dutch Shell PLC says it is selling its Los Angeles refinery and related assets to Tesoro Corp. for $1.63-billion (U.S.) as the Anglo American oil giant further reduces its exposure to the refining industry.

Tesoro chief executive officer Bruce Smith said the purchase will give the company profit growth even as it faces flatter gasoline margins.

The deal also includes 250 California service stations in and around Los Angeles and San Diego as well as supply agreements. Tesoro, which is based in San Antonio, Tex., expects to complete the deal in the second quarter of 2007.

The sale follows Shell’s decision to put its three French refineries and a refinery in the Dominican Republic up for sale.

Tesoro has been acquiring refineries on the West Coast since 1998. The purchase basically completes the company’s long-running strategy of building up its refining presence in the region, Mr. Smith said in an interview.

“We think it’s probably [going to be] a flatter margin environment, but this positions our shareholders to benefit from something besides pure commodity upside. What’s really attractive from this is we get immediate earnings growth from the synergies and then we get future earnings growth from a couple of projects” at the refinery, he said.

Tesoro expects to generate $100-million in earnings before interest, taxes, depreciation and amortization (EBITDA) in the first year from the refinery.

It plans to spend between $325-million and $350-million over the next five years to improve reliability at Wilmington, a process projected to boost annual EBITDA by between $125-million and $150-million, Mr. Smith said.

Lehman Brothers served as Tesoro’s financial adviser for the transaction.

Tesoro also said yesterday that it will buy 140 retail sites located mainly in California, a terminal located in New Mexico and select sites in other states from independent marketer USA Petroleum Corp. of Thousand Oaks, Calif., for $277-million, plus the value of inventory.

The market for refineries has been strong in the past two years — after two tough decades for the industry — as refining margins firmed.

Other oil majors, including Britain’s BP PLC and Chevron Corp. of San Ramon, Calif., are also shedding refineries, a move analysts interpret as a sign they think the “golden age of refining” of the past two years is coming to an end.

Even with the recent refining resurgence, oil companies make much more money from extracting oil than processing it.

Shell’s Wilmington refinery, located south of Los Angeles, is a 100,000-barrel-a-day heavy, sour crude refinery. Heavy, sour crude is denser and has more sulphur than benchmark light, sweet crude oil.

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