EXHIBIT 10.3
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE
CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY [***]. THE
CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
[TESORO LETTERHEAD]
May 5, 2002
VIA FACSIMILE
Natalie S. Manzo, Esq.
Deputy Attorney General
State of California Department of Justice
Office of the Attorney General
300 South Spring Street, Suite 1702
Los Angeles, CA 90013
Dear Ms. Manzo:
In consideration of the California Attorney General office's approval
of Tesoro as the acquirer of the Golden Eagle CARB Refining and Marketing
Assets, and pursuant to the requirements set forth by California, Tesoro makes
the following commitments:
Condition 1:
In the event that Tesoro chooses to sell the Golden Eagle refinery
during the five-year period following closing, Tesoro agrees that such
transaction would be subject to prior approval by the California Attorney
General's Office. Tesoro will notify the Attorney General's office of any letter
of intent or definitive agreement providing for such a sale. Such notice shall
be provided in writing to: Natalie S. Manzo, Deputy Attorney General, Office of
the Attorney General, 300 South Spring St., Suite 5000N, Los Angeles, CA 90013.
Within ten (10) days after receipt of the notice, the Attorney General's office
may request additional information concerning the proposed sale. Within twenty
(20) days after receipt of the notice or within twenty-five (25) days after
receipt of the additional information, whichever is later, the Attorney
General's office will notify Tesoro in writing if it objects to the proposed
divestiture and set forth the reasons for the objection. If the Attorney
General's office does not object, then the sale may be consummated.
Natalie S. Manzo, Esq.
May 5, 2002
Page 2
Condition 2:
Tesoro commits that until the CARB Phase III gasoline specifications go
into effect, or until [***], whichever comes first, the following percentages of
gasoline produced at the Golden Eagle refinery will be CARB/CARBOB gasoline
meeting the requirements of the applicable CARB II specifications:
(a) Until the ninetieth day following completion of the
fractionation tower and gasoline hydrotreating unit referenced
below, at least [***] percent of the first [***] barrels per
day (bpd) of gasoline produced at the Golden Eagle refinery
during the period between [***] through [***];
(b) After the ninetieth day following completion of the
fractionation tower and gasoline hydrotreating unit referenced
below, [***] percent of all gasoline produced at the Golden
Eagle refinery during the period between [***] through [***];
and
(c) At least [***] percent of the first [***] bpd of gasoline
produced at the refinery during the period between [***]
through [***] of each year.
Tesoro commits that it will complete the upgrades and enhancements
begun by UDS and Valero that will be necessary to produce CARB III at the Golden
Eagle refinery. The additions (hereinafter, Upgrades and Enhancements) to be
completed by Tesoro, if not already completed by UDS or Valero, include:
o A new [***] bpd Selective Hydrogenation Unit ("SHU").
This process will desulfurize the light FCC and light
Coker gasoline streams, as well as saturate the
diolefins.
o A new [***] bpd fractionation tower to separate
product from the above SHU Unit into three cuts. The
overhead butane stream will be routed to the existing
Coker gas plant for further processing. The sidecut,
a light naptha stream, will go directly to gasoline
blending. The bottoms stream will be further
desulfurized as described below.
o A new [***] bpd gasoline hydrotreating unit. This
unit will receive the bottoms stream from the above
fractionator and desulfurize to a design outlet
specification of [***] ppm. It will also be designed
to saturate from [***]% to [***]% of the olefins in
the feed, as necessary to meet CARB Phase III
specifications.
o A $[***] upgrade to the Alkylation unit to optimize
operation without the upstream MTBE Unit.
o Two flare gas recovery compressors, each having a
[***] standard cubic
Natalie S. Manzo, Esq.
May 5, 2002
Page 3
feet per day ("scfd") capacity. These will reduce
flaring and provide an emissions offset for
permitting new units.
o Logistic upgrades for handling the excess light
streams resulting from Phase III blending. The Liquid
Petroleum Gas ("LPG") rail car rack will be expanded
to increase loading\unloading capacity from [***]
cars per day to [***] cars per day.
o Other logistic upgrades for Phase III blending. These
include modifications of piping and pumps to allow
segregation of light and heavy hydrocrackate streams,
and software upgrades to the Foxboro blending system
to handle Phase III formulations.
o An upgrade to the FCC Unit feed system to allow
operation of the unit on [***]% cold feed during
outages of the FCC Feed Hydrotreater. An alternative
to this upgrade may be adding flexibility to the
above gasoline hydrotreater; both options are
currently under study.
These Upgrades and Enhancements have been designed to increase the total
production capacity of CARB gasoline and CARBOB by [***] bpd to [***] bpd, which
takes into account the projected volumetric losses from the Phase III
specifications and the ban on MTBE blending. As of March 2002, the above-listed
Upgrades and Enhancements are estimated to cost approximately $122 million to
complete. Tesoro commits to completion of these Upgrades and Enhancements by the
date the CARB Phase III gasoline specifications take effect. In the event that
Tesoro discovers a better or less expensive means of accomplishing this same
increase in production of the same refined products, Tesoro may substitute the
alternate means.
For a period of one year, following the implementation of CARB Phase
III gasoline specifications, but in no event later than [***], Tesoro commits
that at least [***]% of the first [***] bpd of gasoline produced at the Golden
Eagle refinery during the period between [***] through [***], and at least [***]
percent of the first [***] bpd of gasoline produced at the refinery during the
period between [***] through [***], will be CARB\CARBOB gasoline meeting the
requirements of the applicable CARB III specifications.
While Tesoro is committed to maximizing CARB gasoline production at the
Golden Eagle refinery, it is important to recognize that extenuating factors
beyond Tesoro's reasonable control could significantly impact plant economics in
the future. Tesoro commits to the production volumes herein unless such factors
make it economically infeasible to do so.
Natalie S. Manzo, Esq.
May 5, 2002
Page 4
These factors include but are not limited to:
o Future alterations in CARB specifications that would
necessitate substantial additional capital
expenditures.
o Unavailability of ethanol or other suitable
oxygenates or gasoline blending components.
o Limited supplies of ethanol or other suitable
oxygenates, feedstocks or gasoline blending
components which create a limited supply situation
that place Tesoro at an economic disadvantage to its
competitors by virtue of abiding by this commitment.
o Failure of a refinery unit to operate in the manner
in which it was designed or intended and which
significantly impacts the ability of the Golden Eagle
refinery to produce CARB/CARBOB gasoline meeting the
requirements of the state of California as set forth
herein, provided such failure of a refinery unit is
not due to Tesoro's failure to maintain the refinery
in accordance with customary industry practices.
The following factors will either excuse or extend the time for
performance of the production volume commitments and the Upgrades and
Enchancements as indicated below:
o An increase of 25 percent or more in the total
$122 million projected capital cost required to
produce the committed amounts of CARB/CARBOB gasoline
meeting the requirements of CARB Phase III
specifications will excuse performance.
o Failure to obtain all necessary permits to complete
the CARB III project or to meet the production
commitments set forth herein, will excuse
performance, provided such failure is not due to the
substantial or negligent failure of Tesoro to pursue
obtaining such permits. Any delay in obtaining
permits shall excuse performance for the period of
delay, provided such failure is not due to the
substantial or negligent failure of Tesoro to pursue
obtaining such permits. A good faith disagreement
with a permitting authority is not a failure to
pursue such permits, provided Tesoro diligently
pursues resolution of such disputes through
appropriate appellate process.
o Events of force majeure, having an effect on Tesoro's
ability to meet the commitments set forth herein,
including war (whether or not declared);
Natalie S. Manzo, Esq.
May 5, 2002
Page 5
embargo; civil insurrection; riots; sabotage;
strikes; labor difficulties; compliance with acts,
regulations or orders of any national, federal, state
or local civilian or military authority or persons
purporting to act therefor; actions of the elements;
earthquakes; floods; natural disasters; fire;
explosion; mechanical breakdowns; logistical,
environmental, delivery, or storage constraints; or
any other causes reasonably beyond the control of
Tesoro shall excuse performance of Tesoro's
obligations for so long as Tesoro is unable to meet
its commitments due to the force majeure, provided
Tesoro makes a good faith and reasonable effort to
cure the effects of such event(s) of force majeure.
If the effect of the force majeure is to make it
economically infeasible to cure the effects of such
event(s) of force majeure in a manner that will allow
it to meet these commitments, then Tesoro shall be
excused from further performance.
Tesoro will provide to the Attorney General's office copies of the same monthly
and annual production reports submitted to the California Energy Commission. It
is understood that the sole and exclusive remedy for violation of the
commitments made in this letter will be specific enforcement of its terms in the
California Superior Court.
Both Tesoro and the California Attorney General's office recognize that
Tesoro does not own the Golden Eagle refinery and has had limited access to
information about it. If, after closing, Tesoro learns of any unforeseen
circumstance or new information that might affect Tesoro's ability to meet the
commitments made in this letter, then Tesoro and the Attorney General's office
will renegotiate in good faith its terms and conditions.
Sincerely,
/s/ Bruce A. Smith
Bruce A. Smith
Chairman of the Board, President and
Chief Executive Officer
cc: James C. Reed, Jr., Esq.
David M. Foster, Esq.