Koch Subsidiary Buys Into Paralubes

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Shell Oil Co. andFlint Hills Resourcesannounced April 23 that they have entered a definitive agreement for Shell to sell its 50-percent stake in Excel Paralubes to a Flint Hills Resources LLC subsidiary. Flint Hills Resources is a wholly-owned subsidiary of oil and chemical conglomerate Koch Industries Inc.

Koch, a privately-held company headquartered in Wichita, Kan., is engaged in production and trading of oil and gas products and chemicals, as well as minerals, securities and finance. It has no previous involvement in the lubricants industry. But it called the acquisition a logical extension of existing activities and an attractive entrance to the base oil market. Also based inWichita, Koch’s Flint Hills Resources subsidiary produces and markets fuels and other petrochemical products. It has refineries in Corpus Christi, Tex., and Pine Bend, Minn., and its Canadian businesses include an oil sands development project.

“This growth opportunity is a great fit for us,” said Dave Robertson, president and chief executive officer of Flint Hills Resources. “Excel is well positioned in the base oil market. We look forward to entering into this new product line and the opportunity to serve this customer base.”

The announcement tentatively culminates Shell’s six-month search for a buyer after it acquired the stake during last year’s purchase of Pennzoil-Quaker State Co. The U.S. Federal Trade Commission asked Shell to sell the Excel Paralubes interest as a condition for agreeing not to contest the merger. Under terms of that agreement, the commission must approve Flint Hills’ purchase before the deal can be completed.

A Shell spokesman said the companies expect thecommission to bless the deal.The spokesmansaid he did not knowof a schedule for the commission to render a decision, but added that Shell plans to close the deal during the third quarter.

“Webelieve this deal fulfills the termsset by the FTC and fully expect to close on the sale,” Tim O’Leary said Monday.

Excel Paralubes was built in the mid-1990s as a 50-50 joint venture between Pennzoil and Conoco. The Westlake, La., plant is the second-largest base oil refinery in the Western Hemisphere, with capacity to produce 21,500 barrels per day of Group II base stocks.

The FTC asked Shell to sell its stake because– given that it already owned 50 percent of the Motiva base oil refinery and had a long-term contract to purchase from ExxonMobil– the commissioners believed Shell would control too much of the domestic supply of Group II, an increasingly important ingredient in motor oils.

ConocoPhillips still owns half of Excel Paralubes and manages the plant, but was precluded from acquiring Shell’s stake as part of Shell’s agreement with the FTC.

Terms of Flint Hills’ acquisition were not disclosed. The company had been one three bidders left when Shell developed a short list of potential buyers. Houston-based Lithcon Petroleum USA, which distributes Group III base oils imported by South Korea’s SK Corp., confirmed Friday that it had also been on the short list.

Flint Hills officials declined to comment beyond the joint announcement with Shell, stating they will wait to discuss the deal until after the FTC renders its decision. Market observers said they are interested to hear about the extent to which Flint Hills plans to supply Shell, and how it will go about selling product that does not go to Shell.

The FTC settlement required Shell’s stake in Excel Paralubes to be put under the management of a hold-separate trustee, which nevertheless expected to continue selling most of its product stream to Shell. Observers noted, however, that Shell’s half of the business, even before the Pennzoil-Quaker State acquisition, has always sold some of its product on the open market, sometimes for export.

The FTC settlement also said that Shell could enter an agreement for up to one year to buy base oil from the purchaser of its stake. The Independent Lubricant Manufacturers Association is attempting to learn how much base oil Shell plans to purchase from Flint Hills Resources and will then consider whether to submit comments to the FTC.

“We are looking at it to see what happens both in the first year and after the first year,” the association’s counsel Jeffery Leiter said Monday. “Generally speaking, our members are interested in supply not being tied down.”

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