Carlyle saves Sunoco refinery with shale boom, JP Morgan

NEW YORK (Reuters) - Sunoco Inc and private equity firm Carlyle Group LP reached a deal on Monday to save and expand the largest U.S. East Coast refinery, capitalizing on the nation's shale boom to reinvent the economics of refining in the region and on the trading savvy of Wall Street titan JP Morgan Chase & Co .

Sunoco, which announced last year it would close the 330,000 barrel per day Philadelphia, Pennsylvania, refinery this summer due to poor margins unless a buyer was found, will retain a minority stake while Carlyle will oversee daily operations, the companies said in a statement. The private equity firm had been in exclusive talks since April, and the deal had been generally expected to go through.

Backed by JP Morgan to supply feedstock and buy the plant's fuel, Carlyle and Sunoco will construct a high-speed train to feed the refinery with cheap domestic crude, reducing that huge costs associated with importing oil that pushed the plant to the brink of closure over the past year.

In addition to saving the region from a potential shortfall of fuel and heralding a stronger connection between East Coast refiners and the dramatic growth in Midwest shale oil production, the venture plans to exploit the low cost and abundant supply of natural gas from the nearby Marcellus Shale deposit to reduce the costs of powering the plant.

"Together, we've re-imagined the Philadelphia refinery and its role as a critical energy hub in the Northeast," said Carlyle Managing Director Rodney Cohen in a release.

"The refinery's exceptional location and infrastructure will enable the joint venture to create new business opportunities related to Marcellus Shale natural gas fields."

The joint venture, to be called the Philadelphia Energy Solutions, was expected to close in the third quarter, saving 850 existing jobs and creating 100 to 200 permanent new ones. Term of the deal were not disclosed.

SHALE RESCUE

The surge in U.S. oil and gas production from non-conventional sources such as shale has redefined energy markets and refining in the world's biggest economy, providing a cheap source of crude for domestic plants. The natural gas boom have also provided an inexpensive fuel for refineries to power their plants.

For the East Coast, where last year three refineries were slated to be shut as the high cost of buying crude from the North Sea and West Africa, foreign competition and weak demand battered margins, the plans for saving the Philadelphia plant could mark a turning point.

Carlyle became the second white knight to rescue an imperiled refinery on the U.S. East Coast. Last month, Delta Air Lines Inc bought the 185,000-bpd Trainer refinery, located several miles away, from Phillips 66 .

It would also effectively mark Sunoco's exit from the refining sector, ending the company's over century-long tradition in the region. Sunoco has already closed the 178,000-bpd plant in Marcus Hook, several miles away, while Trainer has been saved.

EAST COAST FILL UP

Concerns the loss of refineries on the East Coast as additional capacity in Europe and the Caribbean was shuttered or imperiled by rising crude costs and struggling demand, caused a rise in fuel costs due to fears of a shortfall during the summer driving season.

But the reprieves offered by Carlyle and Delta have eased those worries, and brought in new, non-traditional companies into the refining space which experts say could be better suited to weather the difficult downstream climate.

"This is very important for product supply since the Philadelphia refinery is the top supplier of products," said Mark Routt, Senior advisor at KBC Advanced Technologies in Houston.

"We have seen non-traditional companies enter into the downstream space as traditional refiners exit because they have better access to low-cost capital."

Philadelphia Energy Solutions also plans to construct and upgrade units at the plant, moves that could help the refinery meet new lower sulfur fuel requirements for home heating oil in the region.

The joint venture plans to construct a convert a middle distillate hydrotreater into a mild hydrocracker and construct a natural gas-based hydrogen plant to produce greener fuels. In addition, they plan to upgrade the plant's catalytic cracker to improve performance and reliability.

JP MORGAN

With the deal, JPMorgan Chase's commodities division -- which has expanded over the past four years with the purchase of RBS Sempra's trading desk -- will take up supplying the refinery with crude and non-crude feedstocks and purchasing fuel produced by the plant for offtake.

"(The deal) leverages our physical commodities capabilities and substantially reduces the working capital requirements at the Philadelphia refinery beyond the assistance provided by traditional financing paths," said Blythe Masters, head of Global Commodities at J.P. Morgan.

"(It also) demonstrates how financial institutions with physical capabilities can prudently, yet more effectively, meet our clients' capital needs."

(Reporting By Janet McGurty; writing by Matthew Robinson; editing by Marguerita Choy, John Wallace and Jeffrey Benkoe)