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Vol. 23, No.18 Week of May 06, 2018
Providing coverage of Alaska and northern Canada's oil and gas industry

Marathon-Andeavor merge

Once again Marathon Petroleum becomes big player in Cook Inlet basin

Kay Cashman

Petroleum News

Whether you refer to it as Kenai, North Kenai or Nikiski, two of Alaska’s key refiners and export facilities are located there - the LNG facility and the state’s largest oil refinery. Currently owned by Andeavor (formerly known as Tesoro Corp.), if the recently announced merger of Andeavor and the larger Marathon Petroleum Corp. goes through in the second half of 2018 as planned, they will be officially owned by the combined company, which will carry Marathon’s name.

In the last 10 years Marathon exited the Cook Inlet basin as an upstream and midstream player.

The merged company’s headquarters will be in Findlay, Ohio, where Marathon currently resides, along with a secondary office in San Antonio, Texas, Andeavor’s current headquarters.

The Alaska office for both, headed by Andeavor vice president of refining, Cameron Hunt, will presumably remain the same, although any changes in Alaska likely won’t be announced until after the merger closes.

In the April 30 deal, Marathon agreed to buy rival Andeavor for $23.3 billion, creating the largest independent fuel maker in the United States, with an initial enterprise value greater than $90 billion.

The only news from the Alaska Andeavor office was Casey Sullivan’s move from Caelus Energy to Andeavor as of May 7. Sullivan replaces Kate Blair as government and public affairs manager.

Although Alaska is a minor player in the new entity’s portfolio of refining assets, both the LNG facility and the oil refinery have something deemed important in the Marathon-Andeavor merger presentation - export port access.

Marathon, Phillips build LNG facility

The LNG facility, which includes a dock and loading facility, was originally opened by Phillips Petroleum and Marathon Oil in 1969 to provide a means of monetizing excess natural gas coming from the Cook Inlet basin. Over the years the plant produced LNG, or liquefied natural gas, for delivery by tanker to Japan, primarily to two utilities, Tokyo Gas and Tokyo Electric. Cargo sizes ranged from 588,764 barrels to 855,100 barrels.

However, as gas production from Cook Inlet tightened and the price of Cook Inlet gas increased while global LNG prices fell, the export of LNG from Nikiski slowed to a halt. There were just five cargoes exported in 2014, six in 2015. Exports stopped entirely in 2016.

Plant operator ConocoPhillips put it up for sale in November 2016 and in the fall of 2017 mothballed the facility in preparation for a long-term warm shutdown, a company spokeswoman in Alaska, Amy Burnett, told Petroleum News July 12, 2017.

“The reduced operations will focus on continued preservation of the facilities for future LNG exports,” Burnett said.

The Nikiski facility continued to produce some LNG, during the second half of 2016 transferring eight tanker truckloads of LNG from the Kenai LNG facility to Fairbanks Natural Gas LLC facilities.

On Jan. 31 of this year ConocoPhillips closed on its sale to Andeavor for the unconfirmed price of $10 million versus its Kenai Peninsula Borough assessed value of $55 million.

“We can confirm that Andeavor has acquired the Kenai Liquefied Natural Gas (LNG) facility,” Andeavor spokesman Scott LaBelle told Petroleum News in an email. “This acquisition further strengthens our integrated value chain by optimizing our operations in Kenai and providing low-cost fuel for our (oil) refinery to produce the fuels that consumers in Alaska need to keep their lives moving.”

It was the last of ConocoPhillips’ Cook Inlet assets to be sold - the company had been departing the Cook Inlet gas industry and had already sold its gas fields in the region to focus on its North Slope oil fields and exploration.

Exporting LNG was not resumed under ConocoPhillips or Andeavor, although ConocoPhillips applied for and received a two-year extension from the Department of Energy that expired on Feb. 18 of this year, allowing it to export up to 40 billion cubic feet of natural gas in the form of LNG during that period.

“The export license for the facility expired in February of 2018. As such no export activity has taken place. We are still in the process of determining our plans for the facility,” LaBelle told Petroleum News May 3.

Tesoro refinery starts 1969

Andeavor, changing its name from Tesoro in 2017, was founded in 1968, and in 1969 began operating its first refinery, the Kenai Refinery, at Nikiski.

On Cook Inlet, 60 miles southwest of Anchorage, Andeavor’s refinery can process up to 72,000 barrels per day.

The refinery produces gasoline and gasoline blend-stocks, jet fuel, diesel fuel and heavy fuel oils, propane and asphalt.

Crude oil is delivered by truck, by double-hulled tankers through Cook Inlet and by pipeline from the Kenai Peninsula and Cook Inlet. A 69-mile, 48,000 bpd common-carrier products pipeline transports jet fuel, gasoline and diesel fuel to the Port of Anchorage and the Anchorage International Airport.

Wholesale delivery occurs through terminals in Kenai, Anchorage, the Nikiski dock and the Port of Anchorage.

The refinery also supplies Andeavor’s network of Tesoro and USA Gasoline stations throughout Alaska.

The Marathon/Andeavor deal

Increasing fuel demand, both in the U.S. and Latin America, and a tight oil boom (so-called shale or unconventional), which has expanded access to domestic oil supplies, have given North America refiners an advantage over foreign competitors.

“Why wouldn’t you do this deal?” Greg Goff, Andeavor’s chairman and chief executive officer, said in a conference call April 30. “The time is right now, because for this industry, the wind is behind our backs.”

Whereas Marathon’s refineries and pipelines are in the Midwest and Gulf Coast, Andeavor focuses on the western U.S. and Alaska. Thanks to acquisitions from 2017’s merger with Western Refining Inc., Marathon surpassed its number one competitor, Valero Energy., as the largest U.S.-based oil refiner, per Bloomberg calculations.

The combined entity expects to be well-positioned to capitalize from upcoming regulations to reduce pollution from ships. Andeavor’s port assets in California and Alaska, together with Marathon’s on the U.S. Gulf Coast, will give the combined company the ability to sell lower-sulfur ship fuel.

“Ports are the lifeblood to refining out in those markets,” Gary R. Heminger, Marathon chairman and chief executive officer said April 30.

At closing, Goff will join Marathon as executive vice chairman. He, along with three other Andeavor directors, will also join the board of directors of Marathon.

Heminger will remain Marathon top executive.

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