Carlyle teams with government to save refinery

The firm is investing in the largest refinery on the eastern seaboard with help from Pennsylvania to upgrade the facility and shift the source of crude oil from northern Africa to domestic sites around North America.

While many in the US debate whether private equity plays a legitimate role in the US economy, The Carlyle Group has stepped up, announcing a public-private deal that is expected to save an historic Philadelphia-area oil refinery and at least 850 jobs.

Carlyle announced Monday it had reached a deal with Sunoco to form a joint venture called Philadelphia Energy Solutions that will keep open the refinery, the oldest continuously operating facility on the east coast, the firm said in a statement Monday. The site was scheduled to close in August.

“The refinery will be a reliable and critical supplier of fuels to the regional market through its new business structure and improved crude oil sourcing,” according to Carlyle managing director Rodney Cohen.

The refinery processes 330,000 barrels of oil per day into a range of products, and the deal is expected to “secure the region’s fuel supply by continuing the daily flow of 10 million gallons of various fuels, and create 100 to 200 new, permanent jobs, as well as thousands of construction jobs”, the firm said.

Carlyle is investing in the joint venture through its Carlyle Equity Opportunity Fund and the Carlyle Energy Mezzanine Opportunities Fund. JPMorgan will provide working capital through an asset-backed loan.

Domestic access

Carlyle’s investment will lead to various improvements at the site, including the creation of a high speed unloading

Today we're making a declaration of energy independence.

Michael Nutter

facility that will give the site access to trains that transport crude oil from various sites in the US, including the Bakken shale region in North Dakota. The high-speed unloading facility will be built with assistance from Pennsylvania, the firm said. This access to domestic crude oil will help the firm gradually shift its sourcing from northern and western Africa, officials said Monday during a media call.

“Today, we’re making a declaration of energy independence,” Philadelphia Mayor Michael Nutter said on the call. Nutter spoke along with Pennsylvania Governor Tom Corbett and Carlyle managing directors Rodney Cohen and David Marchick.

Pennsylvania will kick in $25 million to help finance the effort, including a $10 million grant from the state transportation department for updated equipment at the site, according to Corbett. State workers actually will be contributing more to the deal: the state’s public school employees’ retirement system committed $200 million to Carlyle’s energy mezzanine fund earlier this year, while the state workers’ retirement system pledged $50 million to the fund.

Industrial revolution

The joint venture also will explore creating new businesses around the availability of natural gas from the Marcellus Shale, which runs through large portions of Pennsylvania. While Carlyle spoke only in broad terms about the deal, the exposure to shale gas opportunities may have been one of the big keys for the firm. While there is no direct exposure to shale gas immediately, the site will work to bring in natural gas to help run the plant, officials said on the call.

Eventually, through the creation of businesses around the shale opportunity, Carlyle would be able to get its exposure to the burgeoning natural resources opportunity that several other firms have seized upon in the last few years, including Kohlberg Kravis Roberts and The Blackstone Group.

It’s not clear if Carlyle has exposure to shale gas sites through other investments, but Cohen said on the call that the abundance of natural gas in shale formations like the Marcellus region represents what could be an “industrial revolution”.

Bakken shale region in North Dakota
Source: Hess Corporation

“We’ve been spending a considerable amount of time looking for a variety of investment opportunities in and around that area,” Cohen said.

The deal is an example of an ideal public-private partnership, Nutter said during the media call. All parties worked together, including the Steelworkers union, to make sure the facility stayed open and workers kept their jobs. Officials in the administration of US President Barack Obama also played a part in getting the deal sealed, including Gene Sperling, director of the National Economic Council.

The participation of Obama officials along with private equity professionals in the transaction might seem a bit ironic considering that the president has been attacking rival Mitt Romney’s past as head of Bain Capital. However, Obama’s campaign has gone out of its way to make a distinction between Bain Capital under Romney’s tenure, and the industry in general.