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Refining rivalry.

Refining Rivalry

Emblazoned on gasoline stations, the corporate colors of Tesoro and Mapco are the flags of a heated battle for market share.

The recent announcement by North Pole's Petro Star Refinery that it was going to build a second plant was greeted by some with skepticism. Petro Star is teaming up with MarkAir to build a Valdez facility that will supply MarkAir with jet fuel for its own fleet and also produce other fuels for sale in the Prince William Sound regional market.

Locked in their highly visible, two-way contest for Alaska's retail gasoline market, officials at Tesoro Alaska Petroleum Co. and Mapco Alaska Petroleum took time out from their rivalry just long enough to declare that Petro Star's plans are poorly conceived and not likely to prove viable.

There is no indication that Petro Star intends to compete directly with the big guys in the lucrative jet fuel market. Nor does Petro Star manufacture gasoline. But, acknowledges a Tesoro official, the Prince William Sound market is important to the company. "Every barrel is important," the spokesman notes.

For the average Alaskan, the competition between Mapco and Tesoro at the gas pumps has become emblematic of the state's crude oil refining industry as it comes of age. The duel will continue to dominate the refining picture for the foreseeable future, although less visible developments also will influence positioning, long-term planning and profitability of major players.

One of these developments is the announcement by Chevron that its venerable refinery at Nikiski will close in early summer because of eroding profit margins and increasing liability risks. Chevron launched the state's crude oil manufacturing industry in 1963.

Strictly speaking, the Chevron announcement leaves Alaska with eight crude oil refineries. But two of these on the North Slope and three topping plants along the trans-Alaska pipeline are not considered commercial producers. Counting Chevron's production, all refineries in the state were recently estimated to provide 600 employees with a $21 million annual payroll.

Ambitious plans floated several years ago by a California company, called Alaska Pacific Refining Inc., to build a 120,000 barrel-per-day refinery in Valdez also seem highly speculative. The state's current refining capacity is ample for the needs of the Alaskan market, according to experts.

Chevron's departure leaves Tesoro, Mapco and Petro Star competing for market share in home heating fuels and diesel, while the two largest refiners square off in the gasoline market. One of the things that makes the state's two biggest refiners interesting to watch is the marked difference in their strategic approach to selling gasoline, the area in which their competition is most intense.

Tesoro has opted to sell through 127 independently owned stations, supporting them with a $500,000 annual advertising budget. Thirty-four of the Tesoro stations operate in conjunction with 7-Eleven convenience stores. Tesoro recently acquired the 7-Eleven Alaska license. Competitor Mapco retails through only 17 combination convenience stores and gas stations, but owns them outright.

According to Bill Cromey, senior vice president for marketing at Tesoro, the company had a good 1990, following a period of difficulties. The mid-1980s were "just not a very profitable time to be in the business," Cromey recalls. Adding to the industrywide woes, Tesoro's fate is linked to the shifting fortunes of the Anchorage International Airport.

"We're a big supplier of the airport. People just stopped coming through here for awhile," Cromey says. He notes the arrival of Federal Express, now one of Tesoro's biggest customers in terms of volume of product purchased, helped turn things around last year. "We had a profit in every quarter. It was consistent and healthy."

The Alaska subsidiary of Tesoro Petroleum Corp. of San Antonio, Tex., began doing business in the 49th state in 1969. "This has always been a good performer for the corporation up here ... a crown jewel. It's pivotal to the corporation. It's been fairly consistent," says Cromey.

There's also been consistent misunderstanding about Tesoro's relationship with its stations. Cromey notes that customers sometimes slam the company for prices being charged on the street, not realizing the stations are not company-owned.

Of the entrepreneur who sells Tesoro's products, Cromey says: "He is literally independent. He can set prices where he wants and take the consequences of overpricing." Cromey adds that he advises motorists to "drive on by, vote with your steering wheel" when gasoline is not competitively priced.

Pricing has been a particularly sensitive issue in the Interior, Mapco's home turf. Cromey spoke to the Fairbanks Chamber of Commerce during a recent string of statewide speaking engagements orchestrated to extract the maximum public relations benefit from Tesoro's selection as Manufacturer of the Year by Made in Alaska Inc. While there, he learned of a local petition drive advocating a class-action lawsuit against Alaskan refineries concerning pricing.

Cromey says he supports the petition because it might result in the opportunity to address the public's concerns. "I'd like to get this thing out in the light of day," he told a Fairbanks reporter.

It's unfair to compare Tesoro and Mapco, Cromey says. He cites higher production costs for Tesoro, necessitated by shipping the crude oil by tanker from Valdez to its refinery in Kenai. Mapco and Petro Star take crude directly from the trans-Alaska pipeline in North Pole and can also put residual crude back in the line, while Tesoro has to process its residuals. According to Cromey, Tesoro invests about 13 cents more per gallon of gasoline sold in Fairbanks than Mapco does.

Confusion about the identities of the two big refiners can be traced to Mapco's 1987 purchase of the Toppers chain of family-owned gas stations in Anchorage. Local residents had long associated Toppers with Tesoro.

The purchase marked Mapco's entry into the Anchorage market in a big way. A.L. "Buki" Wright, Mapco's vice president for Alaskan operations, says many of the Topper's sites were run-down, but with good locations, "good corners or traffic patterns."

In addition to the stations it bought, Mapco built five more from scratch in Anchorage, Fairbanks and Eagle River. According to Wright, careful selection of sites, as well as a distinctive logo and color scheme, gives the impression that there are more of the well-lit green and yellow stations than there actually are.

"We're fairly selective about what we'll build and where we'll build it," Wright says. "Our satisfaction with it three and a half years later is high."

He acknowledges that Mapco doesn't sell the same amount of retail gasoline that Tesoro does, but claims Mapco stores generally are selling more per outlet than rival stations of all brands. "On average, we probably have the highest per-unit volume in Anchorage and Fairbanks," Wright says.

Although the lion's share of Mapco sales are wholesale, its aggressiveness in challenging Tesoro in the gasoline retail area stems from a crucial strategic decision. "From a market strategy point of view, we felt we'd have a more secure position if we more vertically integrated and had a closer relationship with the end-user. I'd say that it's paying off," says Wright.

Wright also feels the fervor of the Mapco-Tesoro contest may be overstated. He explains, "We work at what we do well and at doing it consistently. We feel we have a very good offering. Our strategy is to be at the low end of the prices in whatever area we have a store in. We don't market against Tesoro."

Tesoro's Cromey sees it a little differently. He points out that Mapco has more control over prices charged for its product, allowing it greater flexibility. "If they choose to make a price change, they can take it right to the street. The competition is heated, there's no doubt about it. We see them as the major competition at the street level right now. I don't see that lessening," Cromey says.

He admits Mapco's aggressive entry into the retail gasoline market was a spur to Tesoro, prompting Tesoro to undertake facelifts of its branded outlets. "It was quite frankly something of a wake-up call for us," Cromey says.

Another sign of the company's determination: six new Fairbanks outlets on the drawing boards for the next two years, including a discount truck stop. Tesoro is also looking at ways of dealing with the competitive disadvantage of shipping crude by tanker, including the option of building a pipeline directly from Fairbanks to Nikiski. Cromey stresses that this $250 million investment remains a possibility.

Valdez Venture. According to its February announcement, Petro Star, a wholly owned subsidiary of Arctic Slope Regional Corp., will build a $15 million to $20 million refinery in Valdez in a 50-50 joint venture with MarkAir. Plans call for a plant capacity of 20,000 barrels per day, with production of jet fuel, home heating fuel and products for marine operators to begin in 1992.

Company officials are reticent about financing and other details but say progress is being made. Petro Star's vice president for refining, Jim Boltz, discounts the skeptics. He says the company, formed by two former Mapco employees in 1985, is used to a lot of flak. He contends the new venture has a good chance to capture market share in the Prince William Sound region.

"The key word is small," says Boltz. He explains that building the refinery in Valdez will afford the company a closer relationship with customers in the region. "We feel being there should give us a competitive advantage."

Chevron's Nikiski refinery manager, Bob Williams, says competitors have to assume Petro Star means business: "I think you have to be concerned that you're going to lose part of your (market). Whether you consider them viable or not, you have to take them seriously."

Boltz says the small size of the refinery should also mitigate one of the issues raised by the skeptics, the potential for air pollution in the Valdez basin. One of the other misconceptions about Petro Star is the impression that it's going to compete in the jet fuel market. But Boltz says that's only true to the extent that MarkAir won't be purchasing from other sources. "We don't intend moving any appreciable amount, if any, jet fuel into market other than to our partner," he explains.

For its part, MarkAir cites fuel costs that have increased more than 100 percent since last fall as the company's primary motive for participating in the deal. The carrier will use about half the plant's capacity to fuel its fleet of 79 aircraft.

Tesoro's Cromey remains unconvinced. He says the proposal's marketing analysis should have been better developed: "It requires a lot more thought. I have a feeling it was premature." Cromey speculates the February announcement might have been timed to generate interest among possible capital sources.

Nixing Nikiski. Finding a buyer for the Chevron facility at Nikiski is unlikely, says Bob Williams, the plant's manager. He says the granddaddy of Alaskan refineries is slated to close early in the summer due to declining profit margins. The plant will probably be dismantled. Some equipment may be sold to other refiners.

Williams says the rising costs of complying with environmental regulations has burdened the plant. He says Chevron has continuously evaluated the profitability of the refinery for the last nine years and decided to keep producing; the margins were small but acceptable. The last time around, things didn't look so good.

New state oil-spill legislation requires Chevron to spend about $1.4 million per year as its share of oil-spill preparedness in Cook Inlet. "The profit has been eroded. We do make a profit, but it just doesn't stand up to the liability," says Williams.

The Nikiski refinery employes 20 people full time. It is responsible for only 2 to 3 percent of the petroleum products consumed in Alaska, according to a company press release. Chevron also notes the firm has always obtained motor gasoline and aviation gasoline for its Alaskan customers from its California refineries and other sources. These arrangements will be continued as needed.

Chevron expects to continue to supply fuels and lubricants to 100 branded retail outlets, six airport fuel dealers, the Anchorage airport and a number of Alaskan resellers. The company also says its announcement about the Nikiski refinery is unrelated to exploration and production activities. "Each arm of the company looks at its own viability," says Williams.

Because Chevron's refining capacity has been so small, closure of the Nikiski plant shouldn't strongly affect Alaska's refining industry. But the company's prolonged examination of Nikiski's profitability left an impression of mystery and uncertainty in the minds of industry experts.

"We're not quite sure what Chevron is doing," says Tesoro's Cromey. "They're not the most aggressive marketer. They haven't lowered their profile, but they haven't grown either."

As the industry takes a wait-and-see attitude regarding the prospect of a new refinery in Valdez and the closure of another on the Kenai Peninsula, the most visible refining game in town will be the street-corner slugfest between the Mapco team, wearing the green, yellow and red uniform, and Tesoro's Gold Star Energy team, sporting blue, yellow and orange.

And beyond the reach for gasoline market share, jockeying will continue for dominance in the home heating, aviation fuel and marine fuel markets.

PHOTO : In several locations, Mapco and Tesoro stations compete in view of one another.

PHOTO : Tesoro's Bill Cromey says Mapco's aggressive entry into the retail market spurred his company to spruce up its stations.

PHOTO : Mapco's Buki Wright says the company's decision to add retail gasoline stations as part of a vertical integration strategy is paying off.
COPYRIGHT 1991 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Tesoro Alaska Petroleum Co. and Mapco Alaska Petroleum Inc. compete for market share in Alaska's gasoline retail market; Petro Star Inc. plans to build second plant
Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Date:Jun 1, 1991
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