Somerset Refinery: Marathon Oil a threat

By KEN SHMIDHEISER, Editor

Somerset — The new owners of Somerset Refinery are taking to the public arena a David-versus-Goliath challenge pitting them against Marathon Oil.

At the peak of the holiday season, Lawrence Barker, COO of Somerset Energy Refining (SER), issued an open letter to Marathon Oil imploring the $72 billion oil-processing giant to “quit crude procurement practices that are putting [SER] out of business.”

Copies of the letter were forwarded to Kentucky’s U.S. Congressional delegation, Gov. Steve Beshear, Judge-Executive Barty Bullock and Mayor Eddie Girdler, and the Commonwealth Journal just prior to the holidays.

In his letter, Barker contends that crude from regional oil wells—some of which was once processed at Somerset Refinery—is now being loaded onto tanker trucks and hauled “right by the SER gate” as much as 300 miles further to Marathon’s Catlettsburg refinery. Truckers are willing to haul the extra distance due to incentives paid them by Marathon, according to Barker.

“...Marathon successfully gets a fraction of one percent more crude whilst putting this refinery out of business,” Barker wrote in his letter dated Dec. 15.

“We have asked Marathon Oil many times to ‘play fair’ with us, as well as the local oil producers and transporters, but they have not answered us,” Barker told the Commonwealth Journal.

“We have taken a bankrupt company with a pile of rusted pipe and have turned it into a little efficiently rung and reliable refinery with a solid cash flow... Even though we have been offering the highest regional prices to producers and suppliers, it has been for naught...

“We are presently running at less than 40 percent capacity and will cease to operate without the minimal crude we are presently refining,” Baker asserted.

While SER employs 100, Marathon employs in excess of 32,000. SER claims the 3,000 barrels of crude it is losing per day to Marathon “represents about 10 minutes of daily production for Marathon’s refinery in Ashland.”

“At 3,000 barrels SER can increase the present workforce by about 40 percent in this economically depressed area...” Barker noted.

On behalf of SER, Barker asked Marathon to refuse future purchase of regional crude reserves, and to cease the trucker’s incentives, instead giving local producers a higher price for their crude.

In return, SER said it will provide Marathon’s Ashland refinery a supply of high-quality of “atmospheric black oil crack feed.” It also proposes to co-sponsor a local joint advertising campaign celebrating Marathon’s role in saving “the 100 families that did not have to go on unemployment.”

“... so the 10 minutes of Marathon’s ‘lost production’ time may be worth millions in intangibles of positive publicity and/or political ‘good will,’” Barker said.

Following is the text of Barker’s letter to Marathon:



Marathon Oil Corporation Attention

Mr. Gary Heminger

5555 San Felipe Road

Houston, TX 77056-2723



Mr. Heminger,

My name is Lawrence Barker and I am the Chief Operating Officer of Somerset Energy Refining (SER) in Somerset, Kentucky. It was suggested by some of our Senators, Congressmen, and their staffs, federal, state and local politicians that a direct appeal to your good offices might be acted upon prior to their further involvement as prior attempts to communicate with Marathon were unsuccessful.

SER purchased the former Somerset Oil Company, Somerset, Kentucky out of bankruptcy in November 2008, effectively retiring close to $20,000,000 in debt. Since the purchase SER invested an additional $12,000,000 to renovate and modernize the refinery and in June 2009 resumed production. SER also purchases $100,000+ in Marathon product monthly from the Knoxville rack for blending and direct sale purposes.

Today I write to save the jobs and the company that SER has resurrected because Marathon Ashland Petroleum’s regional crude procurement practices are putting it out of business. Marathon’s Findlay procurement group is not only matching my already high local crude prices but also offering additional incentives that SER simply cannot match. These incentives are unfortunately being offered to Southern and Southwestern Kentucky trucker/brokers who bring their crude right by the SER gate on their way to the to the Catlettsburg refinery. Unbeknownst to the individual producer, these truckers are transporting crude as much as 300 miles further than necessary and probably paying for the privilege whilst Marathon successfully gets a fraction of one percent more crude whilst putting this refinery out of business.

SER, its affiliates and local vendors employ in excess of 100 people. We have taken a bankrupt company with a pile of rusted pipe and have turned it into a little efficiently run and reliable refinery with a solid cash flow. We were even able to turn a small profit in October. While we have (mostly) overcome the negative effects created by Somerset Oil’s unpaid debt/bankruptcy (though completely unaffiliated), the Achilles Heel remains Marathon Ashland Petroleum’s regional crude procurement practices and the resultant lack of crude for us to process.

Even though we have been offering the highest regional prices to producers and suppliers, it has been for naught. On January 1st Barrett Oil/Trucking has threatened to divert to Marathon all it’s 1,500 barrels daily (average) that Barrett has brought to SER since our start up. This refinery will close without the Barrett deliveries.

Barrett, like the other broker/truckers like Coomer, Regal and Kentucky Oil Gathering have a place in filling the niche between refiner and producer, assuming either has its own transportation (which SER has). The broker/truckers only care about the money they put into their pocket versus the money saved for the producers (that don’t know) by bringing the crude half the distance to SER. The problem is that Marathon is an unwitting accomplice in this by turning a blind eye to such practices for a meager fraction of a percent in volume of crude.

All that Marathon need do is accept crude produced within a reasonable geographic distance from its refinery, say 75 miles in a South and Southwest arc. Ideally, Marathon could leave the local crude market and take Marathon’s rude exclusively from the pipeline which SER is foreclosed from buying from due to storage, facilities and volume issues favoring Marathon.

To put our problems into perspective, 3,000 barrels of crude represents about 10 minutes of daily production for Marathon’s refinery in Ashland. At 3,000 barrels SER can increase the present workforce by about 40 percent in this economically depressed area and still provide an acceptable return to our shareholders.

Marathon’s own crude procurement people admit the only reason regional oil is used at all is to maximize the throughput or their equipment. That means bring it up towards the 90-100 percent capacity.

We are presently running at less than 40 percent capacity and will cease to operate without the minimal crude we are presently refining. Is Marathon’s running at a fraction of 1 percent more efficient a good enough reason to stamp out the minuscule competition and loose those 100 gainfully employed workers and loose further refining capacity in this country as well . . . all for less than 1 percent of Marathon’s capacity?

The essence of the arrangement is that these broker/truckers are claiming they are losing money because they have to transport their crude too far and require extra payment for the shipping distance. Marathon is paying this via a “gathering fee” to make up the distance. The brokers are then neglecting to tell the producers of the gathering fees they collect from Marathon and instead inform them that, because of the distances, they too will have to reduce their payments to the producers to compensate for the extra shipping cost.

All that SER respectfully is asking of you is that:

a) Marathon refuse to purchase Southern and Southwestern Kentucky regional crude inclusive of the Barrett crude (Coomer, Regal, Ohio Kentucky Gathering etc.) by shutting down those meters or simply restricting crude from less than 75 miles to their meter. This will allow SER to increase our local procurement and pay the local producers a fair and higher price without the unnecessary trucking fees; and,

b) Rescind any and all incentives to such truckers/gatherers/brokers thereby sparing the 100+ local jobs at SER.

In return we are open to any creative quid pro quo arrangement which would ultimately benefit the local Somerset, Kentucky economy. We would like to again provide Marathon Ashland with #4/#6 “atmospheric” black oil crack feed of a desirable gravity rarely available.

SER is ready willing and able to participate in joint advertising as the “small business Marathon saved and the 100 families that did not have to go on unemployment,” etc. As an aside, Marathon has not been receiving the Barrett Crude since May, so the 10 minutes of Marathon’s “lost production” time may be worth millions in the intangibles of positive publicity and/or political “good will.”

It would be my team’s pleasure to meet with any one from Marathon as soon as practical to discuss this matter further but being that Barrett Trucking will be diverting our crude to Marathon starting January 1st, time is of the essence. Marathon, at no expense, has the ability to spare this SER’s 100 jobs and see that the people actually producing the crude receive the fair compensation that the market provides. Your consideration is deeply appreciated.



Sincerely,

Lawrence Barker

COO Somerset Energy Refining, LLC

600 Monticello Street

Somerset, KY 42501

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