Sunoco CEO’s cost-cutting agenda

Sunoco Inc.'s new chief executive officer, Lynn Elsenhans, has big plans for the Philadelphia oil refiner, which is contending with a painful industry downturn.

First up is a major cost-cutting push that likely will lead to an unspecified number of job losses next year in the Philadelphia area, where Sunoco employs 4,900, including 700 in convenience stores.

Longer term - at least five years out - Elsenhans told analysts today in Center City that Sunoco has big projects on the drawing board for its refineries in the Philadelphia area and Toledo, Ohio, where she envisions a joint venture with a Canadian tar-sands producer.

Elsenhans, who started as CEO in August, said the cost- reduction program "actually is not in response to the downturn," but rather an effort to get the company's costs out of the average range into the top quartile.

The company must do a better job buying supplies, utilities and services. "This is not cut and cope," she said, citing potential for savings in corporate overhead and in the operation and maintenance of refineries and chemical plants.

Jim Savage, president of United Auto Workers Local 10-1, which represents more than 700 workers at the Philadelphia refinery, said the cost-cutting effort had given people the "McKinsey sweats," referring to the consulting firm Elsenhans hired to assist with the comparison of Sunoco's operations with benchmarks.

"There's eight million rumors flying around," Savage said. "My biggest concern is, they can't run the refinery with less workers. They just can't," he said.

Contracts with unions in Philadelphia, Marcus Hook and Toledo expire in February and March, setting the stage for tough negotiations.

Elsenhans said talks were ongoing with potential partners in an upgrade of the Toledo refinery to increase its use of synthetic oil from Western Canada's tar sands, which are an abundant, but expensive resource.

It is a long-term project. "Even in the best of cases, you're talking five years from today," Elsenhans said.

Sunoco has a history with oil sands. In 1995, it sold its interest in the Canadian subsidiary Suncor Energy Inc. as part of its exit from energy exploration and production. Suncor, based in Calgary, Alberta, kept developing oil sands and is valued at $19 billion, compared with $4 billion for its former parent.

Sunoco is in even earlier-stage discussions with potential partners in an upgrade of its Northeast refining complex, which comprises refineries in Philadelphia, Marcus Hook and West Deptford Township.

Elsenhans said one possibility would be the installation of a hydrocracker, equipment costing about $1 billion that would allow Sunoco to process a wider variety of crude oils and produce valuable jet fuel and diesel from difficult-to-process components of crude. A project of that size would be done with a national or private oil producer, she said.

"In the United States, a lot of investment is going to be required by the refining industry to be able to change the type of crudes that we currently run because the industry has been built largely on crudes that are in significant decline," Elsenhans said.

On other fronts, Sunoco is continuing its efforts to sell its chemicals business and may convert its Tulsa, Okla., refinery into a terminal.

In response to questions about the incoming Obama administration, Elsenhans said she would not be surprised to a see a higher federal gasoline tax, even though President-elect Barack Obama said he opposed it.

"As I see it, it's not necessarily a bad thing," she said, because it would encourage conservation and energy efficiency.

Sunoco's shares closed at $34.75, down $1.20, or 3.34 percent.