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Bloomberg: Li Ka-shing, Barrack Outwit Shell, Marathon, Buy Oil Refineries

By Nesa Subrahmaniyan

June 25 (Bloomberg) — Li Ka-shing and Thomas Barrack have found a way to make more money from record gasoline prices than Marathon Oil Corp. and Royal Dutch Shell Plc.

The billionaires are buying refineries in Europe and the U.S. for about $12,000 per barrel of processing capacity, 33 percent less than the oil companies pay to build them along the Gulf of Mexico. Charges for contractors, labor, cement and steel have doubled and the new plants are years away from completion.

“It’s easier for private equity to make decisions faster,” said Fereidun Fesharaki, chief executive officer at FACTS Global Energy Inc. in Honolulu, an industry consultant. Oil companies must decide whether they “can justify their decisions to shareholders,” he said.

Refineries are generating record profits of $17 to $24 per barrel, seven times higher than the 1990s average. Investors such as Fidelity Investments, the world’s biggest mutual-fund company, are loading up on shares of refiners Valero Energy Corp. and Tesoro Corp., whose price-to-earnings ratios are about 50 percent below the levels of benchmark stock indexes.

Valero sells for eight times next year’s earnings, and Tesoro 9.2 times. They’re even cheaper than Countrywide Financial Corp. and IndyMac Bancorp Inc., mortgage lenders who are reeling from the worst housing slump since the Great Depression.

“In the financial industry, people are getting more optimistic than in the oil and energy industry itself,” Klaus Hagedorn, who manages about $850 million at Metzler Investment GmbH in Frankfurt, said in a telephone interview. “And the financial companies put their money where their mouth is.”

Buy, Don’t Build

Colony Capital, Barrack’s buyout firm in Los Angeles, is paying $5.4 billion for three plants in Europe after beating more than 10 bidders, including Washington-based Carlyle Group. Husky Energy Inc., the Canadian oil company controlled by Li, agreed in May to buy Valero’s 165,000 barrels-a-day refinery in Lima, Ohio, for about $1.9 billion.

Li paid $11,515 for each barrel of refining capacity; Barrack’s deal equaled about $12,100. Marathon is spending $17,778 on each barrel of capacity to be added in Louisiana.

“For financial players, it’s the right time to get into the industry,” said John Vautrain, vice president at refinery consultants Purvin & Gertz Inc. in Singapore. “Refiners will be making a lot of money in the next few years because I don’t see new construction coming in to destroy the market.”

Spokesmen for Li and Barrack declined to comment.

European, Asian Winners

Exxon Mobil Corp., Shell and BP Plc in the past year sold European refineries on the expectation that profit margins will fall. Record prices have failed to slow demand for fuel as the global economy grows for a sixth straight year.

The U.S. needs to add the equivalent of 2 1/2 new refineries each year to keep pace with gasoline use, according to Lynn Westfall, chief economist at Tesoro, the largest refiner in the U.S. West. The nation hasn’t built a new plant in three decades.

The lack of global refining capacity has boosted profit and shares of Zug, Switzerland-based Petroplus Holdings AG, Neste Oil Oyj of Helsinki, Greece’s Hellenic Petroleum SA and ERG SpA and Saras SpA of Italy. In Asia, Singapore Petroleum Co. has benefited.

Petroplus shares have gained 96 percent since listing on Nov. 29. In the past five years, Hellenic’s profit has more than tripled, while the shares have doubled. Singapore Petroleum’s earnings increased fivefold while the stock rose ninefold.

Marathon Expands

Marathon, the fourth-largest U.S. energy company, will spend $3.2 billion in Garyville, Louisiana, to add 180,000 barrels a day of capacity.

Garyville is a “unique opportunity” because it’s the newest and among the most efficient refineries in the country, close to the production facilities in the Gulf and to transportation systems, said Chris Fox, a spokeswoman for Marathon in Findlay, Ohio.

“Garyville is our flagship refinery,” Fox said. “It’s a refinery that is well connected logistically speaking and for all these reasons it made it a very good decision” to expand the plant.

Shell, Europe’s largest oil company, plans to double the 300,000 barrel-a-day Port Arthur, Texas, plant. Shell Chief Executive Jeroen van der Veer this month said he’s proceeding with the plans. Shell has no estimate on the cost of expanding Port Arthur, spokeswoman Sarah Smallhorn said.

Engineering Costs

A near doubling in engineering costs since 2005 has ended at least 10 new refining projects worldwide, said Fesharaki at FACTS Global.

“For five to six years, you’re pouring billions of dollars into a project and getting nothing in return,” said Lynn Westfall, chief economist at Tesoro. “Even at today’s margins, it’s going to take 10 to 15 years to repay that investment.”

Carlyle Group, the manager of the biggest U.S. buyout fund, in November sold a 63 percent stake in Petroplus for 2.9 billion Swiss francs ($2.3 billion) in an initial public offering, more than six times the 278 million euros paid for the business 19 months earlier.

A Goldman Sachs Group Inc. unit and the buyout firm Kelso & Co. said on June 7 they expect to sell a 19 percent stake in CVR Energy Inc., a Coffeyville, Kansas, refinery and fertilizer mill, for as much as $375 million in an initial public offering. That equals a market value of $1.72 billion, more than double the buyout firms’ original investment.

Tom O’Malley

In Europe, Petroplus Chief Executive Officer Thomas O’Malley for the third time is building a refining empire by acquiring plants from oil companies.

As CEO of Premcor Inc. from 2002 to 2004, O’Malley bought and built 790,000 barrels of daily processing capacity before selling the Greenwich, Connecticut-based company to Valero last year for $6.9 billion. Earlier, he sold Tosco Corp. in 2001 for about $9 billion to Phillips Petroleum Co., now ConocoPhillips. Tosco’s 1.35 million barrels a day of refining capacity were sold for less than $6,700 each.

In February, Petroplus bought BP’s Coryton, U.K., refinery for $1.4 billion, its second purchase in six months, equal to about $8,100 for each barrel of capacity. In July 2006, the company agreed to buy the Ingolstadt, Germany, plant from Exxon Mobil.

Li, Asia’s richest man, along with his family owns a 71 percent stake in Husky. His biggest company, Hutchison Whampoa Ltd., holds interests in industries from telecommunications to ports. He also owns a 39.63 percent interest in Cheung Kong Holdings Ltd., Hong Kong’s biggest builder by market value. He was ranked ninth on Forbes magazine’s annual survey of billionaires, with a net worth of $23 billion.

`Abandoned, Delayed’

Colony, which received more than 3,000 filling stations in Europe as part of the Tamoil SA acquisition, has invested approximately $28 billion in over 8,400 ventures focused primarily on real estate-related securities and operating companies, according to the June 6 statement announcing the refinery purchase. On March 7, Colony and French billionaire Bernard Arnault said they’d amassed 9.8 percent of Carrefour SA, Europe’s biggest retailer.

Demand for the output from existing plants is increasing as refiners this year canceled 28 percent of the 12.5 million barrels a day of processing capacity they planned to add worldwide by 2012, FACTS’s Fesharaki said. The ventures could have provided 50 percent of China’s energy needs.

“A majority of the projects have either been abandoned or are progressing slowly because costs have risen,” said P.M.S. Prasad, president of oil and gas at Reliance Industries Ltd., India’s biggest company.

Reliance Refinery

Reliance is among the few energy providers ready to complete a new refinery. The 580,000 barrel-a-day plant in Jamnagar, western India, built at a cost of $6.1 billion, in June, 2008 will start making diesel for Europe and gasoline for the U.S.

Each barrel of daily processing capacity will cost Reliance $10,500. Reliance gave final approval for the project in December 2005 and locked in most costs within three months, before they spiraled out of control. The stock has gained more than eightfold in four years.

Kuwait Petroleum Corp., the Middle East’s biggest exporter of refined products, June 17 invited new bids to design and build a 615,000 barrel a day refinery. A first round of bids at $12 billion, or $19,512 for each barrel of daily capacity, was rejected in February. Kuwait Petroleum originally estimated the construction costs at $6.4 billion.

“Asking anyone to build a brand-new refinery today is asking them to take a 20-year bet that refining margins are going to remain where they are,” said Tesoro’s Westfall.

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at [email protected] .

Last Updated: June 24, 2007 19:18 EDT and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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