72 Cummings Road
Stamford, Connecticut 06902
Fax: (203) 964-3187
Incorporated: 1955 as Oil Shale Corporation
Sales: $2 billion
Stock Exchanges: New York Pacific
SICs: 2911 Petroleum Refining; 2819 Industrial Inorganic Chemicals Nee
Tosco Corporation is one of the largest independent refiners of petroleum products in the United States. Once a major player in American efforts to develop alternative energy sources, Tosco refocused on its refining operations after enthusiasm over synthetic fuels waned in the early 1980s. The company also manufactures phosphate-based fertilizers through its Seminóle Fertilizer subsidiary.
Tosco was founded in 1955 under the name Oil Shale Corporation by a group of investors headed by Hein Koolsbergen. The company was incorporated under the laws of the state of Nevada, but made its headquarters in the Los Angeles area. As its name might suggest, Oil Shale Corporation was in its beginnings a highly entrepreneurial company convinced that the practice of extracting oil out of oil-bearing shale could be a financially rewarding venture. One of its early projects was an attempt to help Brazil wean itself off of imported oil by developing its substantial oil shale deposits. The project won some early support from the U.S. government, but interest from other sources was meager and the initiative soon died out.
Oil Shale entered into a somewhat more durable alliance in 1965 when it joined West Coast oil giant Atlantic Richfield in forming the Colony Shale Oil Project. The joint venture was formed in hopes of mining a 7,000-plus acre property in a section of Colorado containing the nation’s richest and most extensive known oil shale reserves. Progress on the Colony project came slowly, however, in part because of Colorado’s stringent environmental laws, but also because the process of extracting oil from shale was still too expensive to make it competitive with other sources.
In the meantime, Oil Shale began to develop refining as a profitable sideline until its vision of the future of the oil industry came to fruition. It sold part of its interest in Colony Shale Oil to Atlantic Richfield for $8 million, staggered some observers in the investment community by leveraging itself to the hilt, and then went on a buying spree. In 1970 it acquired the Signal Oil & Gas refinery in Bakersfield, California, for $22.5 million. In 1976 it acquired $222 million of Phillips Petroleum’s West Coast property, including the giant Avon Refinery in Concord, California. These moves gave the company a refining capacity of more than 200,000 barrels per day, making it the third-largest independent refiner in the United States and the largest supplier of gasoline to independent marketers on the West Coast. Tosco—the company changed its name to an acronym of its previous name in 1976—also drew attention for processing California crude, a thick, high-sulfur, crude oil that most refiners refused to touch. But Tosco’s history of technical experimentation enabled it to find a process that could extract a broad range of gasoline products from California crude at a reasonable cost.
As Tosco underwent a major shift in operational emphasis during the 1970s, its top management changed as well. Hein Koolsbergen had served as chief executive officer virtually since the founding of the company, but critics charged that he found it difficult to adapt to the growth and maturation of his brainchild. Morton Winston, a lawyer who became a full-time executive with the company in 1964, was named president in 1971 and he and Koolsbergen quickly ran afoul of each other. In the power struggle that ensued, Winston won, becoming chief executive officer in 1976, and Koolsbergen was forced out.
Morton Winston was an anomaly in an industry in which most top managers had backgrounds in geology, engineering, or finance. As a graduate student in the early 1950s, he aspired to become a literary scholar and chairman of a college English department. Later, after a stint in the Coast Guard, he entered Harvard Law School. After graduating from Harvard in 1958, Winston spent a year clerking for Supreme Court Justice Felix Frankfurter, then joined a New York law firm that specialized in advising small, entrepreneurial companies. He made his first contacts with Oil Shale Corporation in 1961 and joined the company shortly thereafter.
As chief executive officer of Tosco, Winston made no effort to hide his unusual background in the humanities. He composed poetry in his spare time and encouraged his executives to memorize Bartlett’s Quotations. Associates said that he conducted meetings not unlike a soft-spoken college professor conducting a class. But all the points that Winston earned on style would have gone for naught if the company had not fared well during his tenure. Despite his admission that Tosco had moved into the refining business rather later than it should have, the company nonetheless showed a tenfold increase in earnings between 1975 and 1980. The oil price shocks of the 1970s that drove the price of imported crude to dizzying heights supported Tosco’s long-standing conviction that oil shale production could prove a financially viable option. As the decade drew to a close, Winston told the Los Angeles Times that “this company was born out of the insight that the United States would shortly be in deficit in oil. We have always been able to see what was coming. Where we have been wrong is in estimating how long it would take to get there. We have been too early.” Tosco appeared to be in good position to collect on its shale oil bet, having patented its own process for extracting oil from shale.
The company’s advancement in this area, however, was not smooth. Tosco flinched in allowing the Colony project to proceed, fearing that it would require an initial investment of $1 billion. The company also worried that future changes in Colorado’s environmental regulations could drive operating costs to unacceptable levels.
In 1980 the Atlantic Richfield Company sold its 60 percent share in Colony to Exxon Corporation for $300 million. Construction began at last on a processing plant that was scheduled to be completed in 1986 or 1987. Questions about the plant, however, soon presented themselves. Rising capital costs (from 1980 to 1982, Exxon and Tosco spent $400 million between them on Colony) and a levelling off in the price of crude oil raised doubts about the economic feasibility of the project. In addition, the Reagan Administration was not sympathetic to calls for continued funding of the Synthetic Fuels Corporation, the federal agency set up by the Carter Administration to subsidize the development of synfuels. In 1982 Exxon announced that it was withdrawing from the Colony project, effectively dooming it. Without a partner of Exxon’s size and prestige, Tosco could not keep the venture afloat.
The Colony project was of such size and importance that its demise seemed to signal the collapse of the entire effort to develop synthetic sources of crude oil. “It’s the end of a pretty brief era,” prominent oil analyst Daniel Yergin said at the time in the New York Times. After Colony’s demise, only Union Oil, among major American oil companies, continued to sink money into oil shale development.
For its part, Tosco received $380 million worth of compensation from Exxon for its share of Colony. The initial agreement between the two companies had stipulated that Exxon would have to buy out its stake in the venture if it ever pulled out, and Tosco exercised that clause in the contract. Most of the money went to relieve debt and recover Tosco’s own capital expenditures, while some of it went to shareholders in a special onetime dividend. Exxon’s payment, however, did not obscure the fact that Tosco’s gamble on oil shale—the entire reason behind the company’s birth—had come to a profitless end. It now had to rely on its refinery business for direction and revenues.
During this period, Morton Winston’s position at the top of the company began to look shaky. In the wake of the collapse of the Colony project, Kenneth Good, a Colorado land developer who owned nine percent of the company’s outstanding shares, accused Tosco of concealing Colony’s long-term risks from shareholders and pressed for Winston’s removal. Tosco attempted to cope with the reality of a shale-less future by courting AZL Resources, a Phoenix-based oil and gas exploration firm. Late in 1982 it agreed to acquire Credit Immobilier, a Swiss investment concern that owned a 30 percent stake in AZL Resources. In January 1983 it acquired all remaining outstanding common shares of AZL Resources.
This attempt to recover from the Colony disaster was insufficient to forestall a major reorganization. With Tosco reeling from a first quarter loss of nearly $77 million and still saddled with more than $700 million in bank debt, Morton Winston stepped down as CEO in June 1983 and was replaced by Matthew Talbot. One of Talbot’s first acts was to announce the layoffs of 15 top executives and the consolidation of Tosco’s seven divisions into two.
The reorganization did little to ease Tosco’s difficulties. Sagging crude oil and gasoline prices made things difficult for a company that suddenly found refining to be its sole source of support. Tosco lost over $677 million between 1983 and 1986, and, after buying out dissident shareholders inspired by Good, found itself so deeply in debt that its creditors decreed that it should hire investment banker Bear Stearns to help arrange a takeover. There were, however, no takers. The company’s stock fell to $2.75 per share, down from its high of $45 in 1980. Feeling that a change of leadership was necessary, Tosco’s directors forced Talbot to resign in June of 1986 and replaced him two months later with company chairman Clarence Frame. In the meantime, Tosco sold its Bakersfield refinery to Texaco for $22 million.
Although the company returned to profitability under Frame, its heavy debt load and depressed stock price forced Tosco to spend the remainder of the decade under the pall of takeover speculation. Michael Tennenbaum, a Los Angeles-based director of Bear Stearns, purchased a seven-percent stake in the company in 1987. The next year, Argus Energy, a Connecticut-based investment partnership, announced that it had acquired a 40-percent interest in Tosco. In 1989 the company acquired Seminole Fertilizer, but this did not stop the widespread takeover speculation and uncertainty over Tosco’s status. Later that year, Argus Energy head man Thomas O’Malley, by now a Tosco director, succeeded Clarence Frame as chief executive officer.
One of the company’s first actions under O’Malley was to announce that it was entertaining takeover bids. Tosco claimed that at least three multinational corporations made offers, but refused to announce the identity of the suitors. Informed speculation had it that one suitor was British Petroleum, which was said to be interested in establishing a presence on the West Coast through Tosco’s Avon refinery. Neither party ever confirmed that this was so, however.
Tosco declared in 1991 that none of the offers it had received were satisfactory, and that it would remain independent. The company then declared that it would consolidate operations and cut administrative costs by closing down its headquarters in Santa Monica, California. Initially, Tosco declared that it would find a headquarters site in northern California, closer to the Avon refinery. But it ultimately wound up moving to Stamford, Connecticut, the home of Argus Energy.
Indeed, the move may have signalled that Tosco intended to shift geographical direction and develop a presence on the East Coast as significant as its presence on the West Coast. In December 1992 the company acquired Exxon’s Bay way refinery, located in Linden, New Jersey, for $175 million. The acquisition made it the second-largest independent refiner in the United States.
Exxon’s withdrawal from the Colony Shale Oil Project in 1982 and Colony’s consequent collapse marked a decisive turning point for Tosco, as the company has since struggled to stabilize its fiscal health and corporate identity. What had once been a small, entrepreneurial company with a futuristic vision of how to use new technology to find alternative fuel sources has had to content itself with more traditional ways of making money in the oil business. With the acquisition of the Bayway refinery, it appears that Tosco is determined to establish itself as a major independent oil refiner.
AZL Resources, Inc.; Diablo Service Corp.; Seminole Fertilizer Corp.; The Lion Group, Ltd.; The Oil Shale Corp.; Tosco Corp.; Tosco International Finance; Toscopetro Corp.; Tosco Trading, Transportation & Supply, Inc.; Western Hemisphere Corp.
Grant, Linda, “Events Catching up With Tosco’s Plans,” Los Angeles Times, December 24, 1978; Chavez, Lydia, “Tosco’s Winston Is an Anomaly Among Oil Industry Executives,” Los Angeles Times, July 22, 1980; Martin, Douglas, “Exxon Abandons Shale Oil Project,” New York Times, May 3, 1982.