Published: February 08, 2010 08:18 pm      

Somerset Refinery shuts down

Somerset — Two years and $22 million-plus later, the owners of Somerset Refinery are calling it quits and putting a sale sign on the Monticello Street plant.

"We simply weren't able to buy enough crude oil to process to keep our doors open," said Ed Phelps, IT director and spokesman for the refinery's owners, Somerset Energy Refining (SER), LLC.

At its peak last November, the refinery employed 66 persons. And only a month earlier it had enjoyed its first profitable month since it was purchased out of a nasty bankruptcy in November 2008.

As of presstime the refinery's labor force had been cut to 36 and after layoffs this week only a skeleton crew will remain to keep the plant in "idle mode" while it goes on the public market.

Just prior to the holidays, the first public evidence that the refinery was struggling came to light in the form of a letter of desperation from Lawrence Barker, COO of Somerset Energy Refining, to Marathon Oil Corp-oration. In his letter, Barker contended that Marathon's purchasing of crude oil from regional suppliers was strangling SER. In a skillfully crafted reply, Marathon indicated that to comply with SER's request to ease up on purchasing crude from the SER market region would be tantamount to con-spiring to circumvent antitrust laws and that it would have no part of such a scheme. Barker sub-sequently conceded to Marathon’s contention.

Phelps said SER’s largest supplier of crude stopped selling to the company last month, and instead began shipping its products to Marathon. That decision sounded the death knell for SER.

In retrospect, according to Phelps, Michael Grunberg, the inter-national financier behind SER, has acknowledged that his inexperience in the oil processing bus-iness, coupled with early strategic errors, con-tributed to the company's plight.

"From the beginning, Mr. Grunberg said one of his goals was to restore the stature of the Somerset Refinery name due the company's prominent pos-ition in the history of our community," Phelps — a native Pulaski Countian — explained.

Grunberg’s sentiments — today they seem naive — are evident in this statement he released when he purchased the refinery:

“For 80 years the Somerset Refinery has been a part of the community in Somerset, Ky., providing jobs and opportunity to many. It is our goal to restore this institution to the position it once held. As pater-nalistic as it once was under the steady hand of Cy Waddle and W.T. Walker we want it to be an economic engine to this community. With more than ample capitalization over the next several years and everyone’s dedication to hard work this can again be accomplished.”

However, regional crude oil suppliers who had been left holding the bag following the failure of Grunberg’s predecessors, didn’t share the entre-preneur’s vision.

"Sadly, under prior ownerships, the refinery's reputation had suffered. Much of the company's debt had gone into insolvency during bank-ruptcy proceedings, and many local suppliers to the former owners were never paid. That left a really bad taste in their mouths," Phelps admitted.

Following a headline front page article in last Dec. 26th’s Common-wealth Journal concerning SER COO Barker’s plea to Marathon, we received this letter which typified the feelings of many former Somerset Refinery crude oil suppliers:

“I really liked your article about the goings on and mentality currently at Somerset Refinery.

“A liberal dose of history would alert anyone to the problems of the past and the reluctance of pro-ducers to even deal with Somerset Refinery. Cash in hand and a deal on lost funds to producers would be a great place to start, Mr. Barker. If they don't have to deal with Somerset, they won't, and since there may well still be some management which carried over from years gone by, they see no difference from previous owners to current owners. Someone needs to wake up and realize people lost real money dealing with Somerset Refinery, and it's only real money that will make them sell oil to them again, including reim-bursement for all moneys lost.

“Somerset Refinery can bring in all the new people they want, it's all for nothing if there (are) bad dealings that haven't been cleared up from the past, and what was done in court isn't going to count with the ‘mom & pop’ producers. Money talks.”

Phelps said he and company officials under-stood those negative sentiments, and in hind-sight would have handled things differently:

"If we had to do it all over again, we should have had a complete name change and would have distanced ourselves from 'Somerset Refinery,' thus letting our suppliers know they were dealing with a completely new company. Instead, we continued to be viewed as 'Somerset Refinery,’ but it was impossible for us to assume the debts of the earlier companies and our suppliers went elsewhere."

One thing is certain: If and when the refinery changes hands in the future, the new owners will inherit a physical plant quite different than that purchased by Grunberg for $2.2 million in the November 2008 bankruptcy settlement.

When SER took ownership, the refinery was teetering on obsolescence — if not outright failure. It had been years since serious investment had been made to maintain its infra-structure yet alone up-grade and modernize the plant. The refinery also faced potentially fatal environmental issues.

SER invested $20 million addressing those issues and modernizing the plant. That investment transformed and stream-lined the operation.

"Several years ago Somerset Refinery had to process a minimum of 3,500 barrels of crude oil a day to break even. With our upgrades to the plant and improved efficiency today we only need to refine 1,800 barrels to break even," Phelps said.

While it is under-standable why regional crude oil suppliers swit-ched allegiance from Somerset Refinery to Marathon, Phelps pre-dicted the decision may, in the long run, come back to haunt them.

"Before we again began buying local crude oil, suppliers were paying $10 to $12 a barrel shipping costs to get their oil delivered to Marathon. When we entered the market, that cost was cut in half."

Phelps predicted that those same suppliers will may well again see their shipping costs escalate...and their profits plummet, now that Somerset Refinery is closing its doors.

"It could be a case of cutting off their nose to spite their face."

Phelps laughed when it asked if he thought Marathon would be interested in purchasing the refinery.

"I guess they could use it as a playground for their kids," he joked concerning the giant corporate conglomerate. (Some 3,000 barrels daily production at Somerset Refinery would represent about 10 minute’s production at Marathon's Ashland refin-ery.)

So who would be a potential buyer?

"I think this refinery would be a perfect choice as a cooperative for regional crude oil pro-ducers. They could buy the plant, process their own oil and enjoy the profits," Phelps said. Among the assets also on the market are about a dozen former Somerset Oil service stations still owned by SER — a few of which are in the process of excha-nging hands.

"I know our closing is certainly not what the Pulaski County economy needs," Phelps said. "I just read about Sumerset Houseboats going back to the bank, and before that we lost Crane and before that Tecumseh and other plants.

"What is so sad for us is that if we could have purchased crude oil, we were in a position to be profitable and a responsible employer — even adding employees. We just couldn't obtain enough raw product to keep going.

"You don't need an IT director at the newspaper, do you?"