FAQ: What Kind of Name is PES? Part II

Philadelphia Energy Solutions is a strange name for an oil refinery. It’s vague, eerie, and frustratingly suggests that oil is a solution to something. But, to me, what is strangest about the name ‘PES’ is that it doesn’t correspond with any well-known oil company. One would expect such a historic, eminent refinery to bear the name of an equally historic and eminent corporation like Exxon or Gulf. But it doesn’t. Why? 

The short answer is that the refinery hasn’t been owned by a well-known oil company (most recently Sunoco Inc.) since 2012.  

The slightly-longer-but-still-short answer is that, in September 2011, Sunoco was losing a million dollars a day producing fuel, resulting in a decision to sell or close its Marcus Hook and South Philadelphia refineries. Then, in July 2012, just before Sunoco closed its refineries for good, a private-equity firm called the Carlyle Group agreed to operate Sunoco’s South Philly refinery with Sunoco in a joint venture called ‘Philadelphia Energy Solutions.’ (Sunoco’s Marcus Hook refinery never recovered. I explain why a little further down.)

(Interesting note: by the time the Carlyle Group entered into the joint venture with Sunoco in July 2012, Sunoco wasn’t even really Sunoco anymore. Three months earlier, in April 2012, a Texas-based company by the name of Energy Transfer Partners (ETP) bought Sunoco Inc. for $5.3 billion in a definitive merger agreement.

It gets weirder.

Right now, if you visited www.sunocologistics.com, the webpage for Sunoco’s pipeline division, you would enter a site whose header reads ‘Energy Transfer Partners.’ Apparently, Sunoco Logistics bought Energy Transfer Partners in 2017, despite the fact that Energy Transfer Partners seems to have bought Sunoco in 2012.)

So, why is the refinery called PES? 

The longer answer is that, seven years ago, Sunoco was buying the wrong type of oil. All of Sunoco’s refineries imported a specific type of petroleum called ‘West African crude,’ a type of oil within a broader class of low-sulfur petroleum called ‘sweet crude.’ One unmovable fact of the refining industry is that refiners pay for every barrel of oil they refine. In 2012, sweet crude prices were very high, and West African crude was significantly more expensive ($16 more per-barrel) than cheaper, domestic petroleums like West Texas Crude. Since Sunoco was paying a higher premium than companies paying the West-Texas price, Sunoco was hemorrhaging money. Between 2009 and 2011, the company lost nearly a billion dollars. How? 

Well let’s break it down: 

In January 2012, gasoline - a refined petroleum product - was selling at $115.50 to $117.50 per barrel. The type of petroleum Sunoco’s refineries processed cost $115. Now, you might say. Hey well that’s a $.50 to $2.00 profit margin per barrel. Not too shabby! 

It actually was quite shabby. 

Sunoco would only have made that much money per barrel if it didn’t have any other costs, which, as an owner of two massive refineries, it did. Sunoco had to compensate its workers, operate its facilities, and - most importantly - constantly meet demand. At full capacity, Point Breeze can refine 335,000 barrels (or 1.407 million gallons) of oil a day - a quantity of oil requiring the equivalent of one “supertanker” of crude every three days (see next exhibit for “supertanker” overview). In 2012, assuming the refinery was at full capacity, Sunoco was basically losing money on every one of the 335,000 barrels it refined every day. Hence, the $1-billion-loss, the deal with Energy Transfer Partners, and the joint venture with The Carlyle Group.

And - voila - that’s why it’s called ‘Philadelphia Energy Solutions.’