Marathon-Andeavor Deal Shows Old Refiners Get Disruption
(Bloomberg) -- For all its painful ubiquity, “disruption” is not a word usually thrown around when discussing oil refining. The business of taking toxic raw materials and turning them into useful fuels inside a mess of pipes and tanks is as old-school as it gets.
Even so, Marathon Petroleum Corp.’s $36 billion acquisition of Andeavor, sprung Monday morning, is at least partly an attempt to capitalize on, and get ahead of, some big disruptions both happening now and about to hit the oil market.
The existing disruption is, of course, what shale hath wrought. The resurgence in U.S. production in onshore basins, combined with the tilt in demand toward emerging markets overseas, has made “location, location, location” as pertinent for refiners as it is for real estate. Proximity to lower-cost crude oil, the ability to shift between different sources, and control of or access to critical pipeline and export capacity are defining competitive advantages now.
And what better way to address this than to be in every location at once. The east-meets-west map (reproduced below) showing how Marathon’s largely eastern U.S. assets will marry up with Andeavor’s along the Pacific Coast and other western markets did much of the work on Monday morning’s call.
Besides warding off the threat of antitrust regulators, that limited overlap represents Marathon’s bid to go from regional player to truly national giant. For Andeavor, it would fulfill at one stroke an ongoing process to diversify away from the West Coast’s idiosyncratic fuels market (and get taken out at an all-time high, which helps).
The underlying logic is that of the commodity trader: optionality. For example, the logistical constraints in the Permian shale basin that are currently depressing local prices for crude oil are great for any local refiner able to take advantage of it – such as Andeavor. An integrated network spanning most of the U.S. has more of an opportunity to take advantage of these dislocations as they arise.
One dislocation that is exercising oil-watchers but largely flying under the radar is the fast-approaching change in pollution regulations for the world’s shipping industry. On January 1, 2020, the International Maritime Organization’s new rules demanding much lower sulfur emissions from ships will kick in. The high-sulfur fuel oil currently used by ships that will soon be non-compliant accounts for around 4 million barrels a day of global oil demand, according to a recent report by Doug Terreson, an analyst at Evercore ISI.
There are various ways to meet the requirements, such as installing equipment to filter out the nasties or just switching to running on liquefied natural gas rather than fuel oil. But those are expensive. Most of the work will actually fall to refiners having to produce a lot more low-sulfur fuel.
That isn’t as easy as you might think; refineries need more sophisticated (and expensive) equipment such as coking units to upgrade sour, heavier oil into compliant fuels. At a macro level, that has the potential to cause a spike in crude-oil prices as refiners scramble to secure lower-sulfur (or “sweeter”) grades (see this recent column by energy economist Phil Verleger, published by Bloomberg View, for an explanation).
Refiners with access to a broader slate of crude-oil grades and plants sophisticated enough to produce compliant fuel economically are the likely winners. That’s especially so if they have a large presence on America’s coasts, where they can blend the fuel and either supply it to shippers or export it. Marathon and Andeavor, combining a large presence on both the West Coast and the Gulf Coast, fit that bill. They even took the time on Monday morning to point out that, combined, they’ll have almost 800,000 barrels per day of capacity for upgrading fuels – the largest of any U.S. refiner.
Similar to recent moves to consolidate the U.S. exploration and production sector, Marathon’s gambit feels like a milestone in the remaking of the country’s place in the global oil market. It would cement a distinct gap between a “big three” and a set of smaller, more regional independent refiners:
Just being bigger isn’t necessarily better, obviously. Marathon will have to prove its optionality has actual value, and it was notable how much detail the two companies went into on Monday morning with regards to synergies. Still, the seismic shifts in America’s position in the global market provide a sound logic for trying.
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