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Tesoro plan to buy Arco gets more scrutiny amid gas-price surge

Ronald D. White
AL GRILLO

LOS ANGELES -- As California gasoline prices set fresh records daily, consumer advocates are gearing up to fight the sale of the low-cost Arco brand and its Carson refinery to a Texas company not known for its cheap fuel.

Some experts are calling the proposed $2.5 billion sale to Tesoro Corp. of San Antonio the biggest shift in California's petroleum business in decades. Activists say the deal, announced in August, would reduce competition and possibly raise prices for motorists, and they will ask state and federal regulators to reject it.

The transaction is drawing fire now -- with California's average gasoline price at a record $4.671 a gallon Tuesday, according to AAA -- because it would leave 51 percent of the state's refining capacity in the hands of just two companies: Tesoro and Chevron Corp. of San Ramon, Calif. At the moment, 38 percent of the fuel sold in California is made by Chevron and Arco, which is owned by British oil giant BP.

"We need more competition in California, not less," said Charles Langley of the Utility Consumers' Action Network in San Diego. "We need to see if there are any other suitable buyers."

Jamie Court, president of the advocacy group Consumer Watchdog, said the latest price jump "is proof positive that we have too few refiners controlling too much gasoline" and that the proposed acquisition "is a recipe for huge sticker shock for consumers at the pump."

The Santa Monica, Calif., group has sent a letter to California Attorney General Kamala D. Harris urging her to block the sale on antitrust grounds.

"It is in refiners' self-interest to restrict production and supply, taking higher profits from selling less but more expensive gasoline," the letter said. "Tesoro's purchase of the BP refinery will intensify the ability of one or two companies to control output and supply."

Harris said Monday that she was opening an investigation into the transaction "to ensure competition in the marketplace is maintained and consumers are protected."

On a typical day, more than half of California's lowest-cost service stations carry the Arco name, according to GasBuddy.com, which tracks fuel prices supplied by a network of registered volunteers. More than 800 stations sell the Arco brand, which is made at the sprawling refinery in Carson, Calif.

In the middle of the price pack usually are stations supplied by Tesoro under the USA and Shell brands, averaging nearly a nickel to almost 20 cents a gallon higher than Arco's average price, according to GasBuddy. Tesoro owns two California refineries and supplies more than 650 gas stations in the state.

In an analysis of prices for regular gasoline from May through August, Arco stations averaged $3.891 a gallon, according to GasBuddy. Tesoro's USA stations averaged $3.935, and Shell stations were at $4.068.

Tesoro executives have expressed confidence that the deal will get the green light from regulators. The Federal Trade Commission has declined to discuss the review, which is expected to last into next year.

Service-station dealers, largely independent business owners, say they're in the dark about what lies ahead.

Tesoro spokeswoman Tina Barbee said the refiner "is committed to maintaining the well-established Arco brand model of providing low-cost fuel for consumers."

Still, the consistent price disparity between Arco and the Tesoro-supplied stations has left consumer advocates worried that Arco's low-priced ways might be in danger when there are fewer companies selling to California's drivers.

That perception, exacerbated by the recent price surge, could cause problems with the deal, analysts said.

"That fuel spike could very much hurt Tesoro's chances even though they had no real involvement in last week's problems," said John Kilduff, founder of Again Capital in New York. "Any further consolidation of the refinery industry in California will be looked at quite hard, if not made impossible, because of this episode."

The blue, white and red Arco stations have their quirks: They don't take credit cards, and some mechanics gripe about the gas quality, a longtime complaint that the company has vehemently rejected.

But the chain has plenty of loyalists, and some are worried about the proposed deal. Among them is Cynda Holmes, who searches for the cheapest gasoline using her smartphone.

"There's almost always an Arco on my list when I'm checking my phone apps for fuel prices," said Holmes, a pharmaceutical company representative whose preference for Arco was challenged just once, after BP's Deepwater Horizon oil spill in the Gulf of Mexico in 2010. "It's troubling to think we might lose that low-price option."

The proposed sale is the biggest thing to hit the California fuel business since Atlantic Richfield Co., which eventually became known as Arco, helped discover the vast Prudhoe Bay oil field in Alaska in 1968, said Joe Hahn, a professor at Pepperdine University's Graziadio School of Business and Management. The company was purchased in 2000 by British Petroleum, later shortened to BP.

Alaskan oil helped set up Arco as the low-price leader among the nation's oil company brands, Hahn said. The Prudhoe Bay find allowed Arco to supply its own West Coast refineries with its own tankers shuttling back and forth with its own supply of then-cheap Alaskan crude, said Hahn, who worked for Arco after graduating from engineering school in 1991.

"It gave Arco one of the most efficient and dependable operations in the industry," said Hahn, whose specialties include energy price modeling. "It was a big cash machine for them, and it let them sell the cheapest gasoline you could find on the market."

Later, even as Alaskan crude production began to decline, the brand maintained its low-price ways by keeping costs down. For instance, the company accepts only cash or debit cards to avoid the expense of merchant credit-card fees.

In addition, revenue was bolstered by sales at Arco's AM/PM convenience stores, which BP isn't selling. They will be franchised to Tesoro.

Fuel experts are wondering whether Tesoro will continue Arco's low-price legacy.

"This is a very big question," said independent fuel price specialist Bob van der Valk. "In 2000, one of the ways that BP earned the approval of regulators for acquiring Arco was by promising that the Arco brand would remain and continue to be a low-price leader. And BP kept its promise."

Tesoro executives said they can't discuss their plans before the transaction's completion because of regulatory rules but said that they were mindful of consumer advocate concerns.

Tesoro Chief Executive Gregory J. Goff told Wall Street analysts on the day the proposed transaction was announced that "the combination of our business with BP's is good for California, good for consumers."

Consumers would benefit, he said, because linking the nearby Tesoro and Arco refineries would decrease costs, increase production and reduce pollution.

Some analysts said that Tesoro would be foolish to boost Arco prices.

"Tesoro will choose a strategy that will benefit the company," said Fadel Gheit, an oil analyst with Oppenheimer & Co. "There is no sense in losing market share to a competitor by raising prices when part of the point of the deal was to increase market share."

 


By Ronald D. White
Los Angeles Times