By: Steve Crower, Greg Haas, and Emily Haggstrom Issue: Rebuilding Our Infrastructure Section: Business
Creative Infrastructure Transactions Turn Inoperable Refineries into Growth Centers For Communities
OVERVIEW
Several announced or completed RTT projects are repurposing operating and shuttered refineries in an industry that has been plagued by decades of excess refining capacity. An over supply of transportation fuels in developed economies is lowering refining margins and forcing owners and governmental agencies to consider repurposing refinery sites that are often considered an eyesore.
Although these refining sites may have considerable environmental issues; they benefit from an installed base of infrastructure with multi-modal access, and have permits that can be transferred or re-instated. By using private funds and bringing in well capitalized energy companies as owners, ex-refining sites can be converted into useful sites that generate tax revenues for local governments and provide communities with well-paid, highly skilled jobs from a business model that can generate consistent cash flow.
HISTORY
Currently in the United States there are 326 refinery sites of which 60 percent, or 196, are ex-refineries, they are obsolete, shut down and inoperable. Most of these ex-refineries were shut down as a result of the unintended consequences of generous U.S. government subsidies from the 1950s to the 1970s that led to the construction of hundreds of small, unsustainable refineries. In general, energy feedstocks and refined fuel products are transported to and from an operating refinery using rail, highway, water and/or pipelines. Refineries that had access to all of these forms of transportation were able to compete and are most likely operating today. However, refiners without access to a pipeline or water transportation logistics were forced to refine only feedstock resources that could be transported short distances by costly rail or over-the-road tanking options which left them at a competitive disadvantage.
After crude prices collapsed in 1982, refining margins decreased as well. Low prices for distillates and other refined products drove refiners to consolidate into ever-larger, more-complex, better-capitalized companies with greater economies of scale. Refiners located on deep-water ports were able to import various grades of less expensive crude as they leveraged their tremendous processing volume advantage to produce a wide range of low-cost distillate products. In 1984, the Resource Conservation and Recovery Act (RCRA) passed more stringent laws governing waste disposal and emissions. Many of the smaller refineries that were already struggling were unable to afford the equipment required to meet the new federal guidelines. When guidelines were not met, penalties and fines were imposed putting small refiners at an even greater disadvantage.
For the next several decades, volatile and depressed commodity prices limited investments in the U.S. energy infrastructure. Demand for energy was increasingly met using imports from countries with excess natural resources. Now, environmental regulations have restricted the number of available terminal locations to store and distribute hydrocarbons while the U.S. struggles to meet its own resource needs and export its excess resources to the rest of the world. The confluence of these factors and the presence of 196 available ex-refinery sites ready for potential RTT projects provide an opportunity to both energy companies and local governments looking to clean up the properties and produce jobs for the community.
RTT TRANSACTION PROCESS
Enter Dahlman Rose & Co., an investment bank positioned to advise governments and energy companies on transactions for these environmentally contaminated ex-refining sites in an effort to convert them into productive storage and distribution facilities. After performing several refining asset transactions, bankers discovered a trend among buyers of small refineries: even with the most well-intentioned business plan, buyers were unable to restart the small shuttered refinery.
Typically, Dahlman Rose evaluates ex-refining sites and works with the buyer and seller to ensure the valuation makes sense for each party involved. Most sites have a tank farm used to store inventory while the refinery was operational. Therefore, these tanks require little additional capital and can produce consistent cash flow by storing distillates, asphalt or other products used in the energy value chain. Permits once used by the refinery can be applied to the trans-loading coal located in remote locations in the U.S. and can now be distributed to world markets.
THE TERMINALLING INDUSTRY
The U.S. business has few competitors, high barriers to entry and strong profit margins (profit margins can be five times more than refining). companies are compensated to store physical commodities such as coal, oil, natural gas, asphalt and distillate fuels to assist refiners in their operations. Recently, financial institutions have invested in the terminalling business, allowing their traders to use the physical product as collateral for trading.
Even if the majority of ex-refining sites were used for storage, the supply/demand dynamics have pushed storage rates to their current increased value. In fact, terminals on the West Coast command high storage rates because the permits to build new terminalling sites have been significantly restricted.
CASE STUDY – Western Colorado
One recent RTT conversion example lies in western Colorado where there is an abundance of natural gas, uranium, coal and oil shale reserves. However, western Colorado is served by only one rail line, has few pipelines and is 200 miles away from the nearest refinery. Therefore, the region needs to import distillates and products to develop its natural resources and needs a location to store and export its energy resources to world markets.
Through a series of transactions, an ex-refining site located in Fruita, Colorado is currently coordinating several large industrial annexations on its path to becoming an RTT conversion project. The 536-acre ex-refining site used to be the home of an old Gilsonite refinery and was eventually sold in 1973 to Gary-Williams Energy Corporation and other oil refiners processing crude oil until all operations ceased in 1993.Typical of most ex-refineries, the site benefits from rail access along the entire northern side of the property and overland roadway access to interstate 70 and the Colorado River on the southern side.
The first transaction, a $10.1 million deal with a private equity-backed environmental remediation firm, is removing the asbestos and dismantling the refining equipment for scrap steel. The soil is being remediated and the groundwater is being cleaned using private funds augmented with cash flow from long-term contracts to store asphalt in 50-year-old storage tanks that are still on the site from the previous refining operations.
The second transaction resulted in a $6 million deal with a publicly traded oilfield service company that purchased 40 acres of environmentally clean land to import, store, and distribute hydraulic fracturing sand to develop the significant gas fields in Wyoming and western Colorado.
The third transaction was a $4.5 million deal with a publicly-traded coal company that purchased 213 acres of land and will invest additional $15 million to build a two-mile rail spur to export the vast Colorado coal reserves. This transaction became necessary after Colorado passed legislation that forced the conversion of coal power plants to natural gas, forcing coal companies to find a way to move the product to more receptive markets.
Finally, a large road construction company owns 100 acres of land that will serve as a gravel mine with an expected resource life of 15 years. As traffic in the area increases, road construction will require the import of asphalt and gravel located on the site.
ECONOMIC VIABILITY OF THE CONVERTED SITE
In 2001, when the City of Fruita realized the implications of the run-down site and the potential the rail-line served, it forged partnerships to ensure the parcel was remediated using private equity with no expense to taxpayers and releasing the city from the environmental liability and tax repercussions that the site posed. The city also saw the monetary and fiscal benefits that could spur growth within the small town from businesses that could be served by improving the entire site. As a result, the city laid out a development plan entitled Greenway Business Park, a document that outlined the city’s intentions to, “capitalize on the assets of the three major areas in the Fruita/Mesa County Greenway Business Park,” a large parcel of land that would cover an area marked by remnants of the ex-refinery site. Through its forged partnerships, the city was able to obtain a grant from the U.S. Economic Development Administration to fund the clean-up, redevelopment and restoration of the larger 1,336-acre industrial park and the 39 acres of the ex-refinery terminal conversion. The project is in line with the city’s 2011 Economic Development plan, which strives to protect and enhance existing assets while creating the infrastructure for new growth.
After the site met Resource Conservation and Recovery Act (RCRA) compliance orders with the Environmental Protection Agency, the city of Fruita was able to secure a strong viable company to acquire a portion of the ex-refinery site. Once the land remediation is completed, and pending annexation, the city of Fruita is poised to generate significant economic impacts from taxes, infrastructure and business development.
Additionally, the site permits allow supplementary storage terminals and distribution infrastructure to be built that will provide the local community with jobs. Once the RTT process is complete, the site will allow refined products to be imported via truck and rail, and its energy resources to be exported to world markets. Once the infrastructure is in place, the city will boast increased tax revenue from businesses establishing or relocating to the area; increased energy and property tax revenues for the city, the county and the school district; and is set to include a new wastewater and sewage treatment plant that has long been needed in the area.
Without the impending conversion of the ex-refinery into a terminalling facility, the city of Fruita would have never been able to realize the benefits to help improve the quality of life for local residents. It was important to the city to grow and build energy related businesses. And with the terminal conversion, it brought hope for attracting new businesses and individuals into the area. Through the coordination of several large industrial annexations due to be completed by the end of the year, the city of Fruita may once again see a spur in investment, property ownership and increased business relationships through financial incentives and tax credits from the larger industrial site—Greenway Business Park.
Portions of this article originally appeared in Fuel Magazine, a publication of Hart Energy LLP.
Steve Crower is vice president of energy investment banking at Dahlman Rose & Co. in New York, NY. Mr. Crower graduated with a B.S. Civil Engineering from the University of Michigan and an M.B.A. in Finance from Rice University. He can be reached at [email protected].
Greg Haas covers the energy industry for Houston-based Hart Energy LLP from the dual perspective of a former Wall Street energy equity analyst and a former engineer with Exxon. Mr. Haas graduated with an M.S. and B.S. in Mechanical Engineering from the University of Illinois in Urbana Champaign and an M.B.A. in Finance from Rice University. He can be reached at [email protected].