By Geoffrey Cann
Canada’s largest private oil company, and operator of the largest oil refinery, is carrying out a strategic review, which includes the possible sale of the company. Why would they do this?
I grew up in Saint John, and had the privilege to work at this company for a few years. My extended family members who still live and work in the area, have reached out to me for a perspective. They are naturally concerned about what the sale of the largest business in town means for their future.
My advice: keep calm and carry on refining.
The political class has seized upon this announcement to shout some hysterics to the gallery. Some points have a grain of truth, but most are profoundly ill-informed, willfully ignorant, or just plain devious.
This is driven by Canadian tax policies.
That’s not my read. Tax has little if anything to do with it. Yes, there is a carbon tax but that is being imposed across all of society in equal measure. No one company is being singled out for special tax attention.
The company will relocate.
No, it won’t. The refinery isn’t going anywhere. You just can’t dismantle an asset of this scale and move it. A huge and significant workforce toils away daily at the plant and distribution system. The ecosystem of suppliers is locally based, highly skilled, reliable and experienced. That is all hard to replace.
The head office will move.
Perhaps, it depends on the buyer. Sometimes in a transaction like this, a couple of senior managers will leave and new managers move in. Sometimes the new owner leaves the existing management team in place. In almost all cases, the direct refinery managers are likely staying on as their roles are site specific, they possess unique knowledge, and they’re clearly competent.
The jobs most likely at risk are in marketing. These jobs lend themselves to scale effects—if the buyer already has an extensive downstream footprint, then the marketing jobs can be readily absorbed into the buyer’s organization. When Royal Dutch Shell purchased out the minority share holders in Shell Canada, the country marketing team was folded into the North American marketing team. Only the oil sands assets stayed under uniquely Canadian management, until they were sold.
Setting aside any private reasons that the family might want to sell out (from the complexities of intergenerational wealth transfer to family taxation strategies), the most important reasons involve upcoming market changes.
Market Changes
Oil refineries produce a lot of products, from fuels to lubricants to waxes to petrochemical feedstocks. But their main products by volume are fuels, in the form of gasoline, diesel, marine fuel, and jet fuel. It’s perhaps 25% of the refinery production, and for some plants, up to 50%. The market demand for fuel is clearly changing as auto makers shift to battery electric vehicles, heavy truckers go electric, and aviation adopts sustainable fuels.
As an example of market shifts, the share of zero emissions vehicles as a proportion of all vehicle sales in California was 25% last quarter. It will be a few years still before gasoline sales start to materially decline, but the direction of travel is now clear. Cars have become a consumer technology like the smart phone before it, and the uptake will be swift and relentless.
Oil refineries are marvelously configurable to suit different market situations, but they are not infinitely malleable. At some point, refining capacity for fuels will need to be permanently removed from the market. This is tricky because you can’t just shut down gasoline production in favor of some other product mix.
It’s bound to get more competitive. A refinery must be truly exceptional to be able to survive in the long run, which is fast approaching. A refining winter is coming.
Opportunity Calling
It’s also completely feasible that someone had contacted the company about selling out. Like selling your house, if you are approached by a buyer with an offer to purchase, it’s to your advantage to create an auction by inviting other possible buyers.
Why would a company want to purchase an oil refinery business, particularly a big one?
Greater Optionality
One of the secrets to the refining business is to create optionality. Companies that own more than one refinery have greater market optionality, and more prospects to capture margin. That optionality permits a company with a refining portfolio to move production to the most advantageous location.
As an example, the intense hurricane activity in the US Gulf area often causes much damage to communities, which in turn unlocks new construction. That pushes up diesel demand for a spell. Refiners with more than one plant in their portfolio can ramp up diesel production closer to the Gulf, while not jeopardising their retail fuel operations.
A suitable buyer might be one that owns more than one refinery today and seeks to round out its refinery portfolio.
Great Location
In this instance, the refinery is excellently located, with year round market access and an ice free port. It can supply both the European market as well as the US east coast market (which is enormous). Gulf refiners have a few more days sailing to get to Europe, and are constrained by the Jones Act to move product from the Gulf to the coast.
A buyer interested in the US east coast or perhaps supply into Europe would value a refinery in this location.
A Class Asset
The refinery itself is a world class asset. It is highly complex (which means it can ingest the lowest quality crude and produce the highest quality refined products). An upstream producer with tidal access and exposure to a wide crude slate might find a captive oil refinery a suitable asset to help it capture refining margin from its equity crude. Oil companies in the Middle East could be candidate buyers.
Excellent Distribution
Getting access to more markets, particularly in the New England area, is dependent on securing tidal access to tank farms and depots. These are in short supply, and they change hands only slowly. A buyer with access to distribution but no supply along the US east coast might find it advantageous to lock in supply for its distribution needs.
Long Life
Gasoline, diesel and jet fuel demand will be with us for years to come. To reduce supply in the petroleum sector, the industry tends to shut down refineries starting with the smallest and least efficient, and there are hundreds of petroleum refineries in the world. Large complex refineries like this one, able to process a wide range of crude oils, will be the last ones standing. An overzealous response to the electrification of transportation by shutting down refineries too aggressively will mean exceptional profits for those still in the business.
Ignore the politicians. They’re spinning a story of outrage and alarm that has no basis in fact. The refinery is not going anywhere, and there are plenty of reasons to think that it has a solid future, even under new ownership.
Artwork is by Geoffrey Cann, and cranked out on an iPad using Procreate.
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