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The Navajo Refinery has a crude oil capacity of 75,000 BPSD and has the ability to process sour crude oils into high value light products (such as gasoline, diesel fuel and jet fuel). The Navajo Refinery converts approximately 90% of its raw materials throughput into high value light products. For 2004, gasoline, diesel fuel and jet fuel (excluding volumes purchased for resale) represented 59%, 26% and 5%, respectively, of the Navajo Refinery’s sales volumes.
Navajo Refining’s Artesia, New Mexico facility is located on a 410 acre site and is a fully integrated refinery with
crude distillation, vacuum distillation, fluid catalytic cracking ("FCC"), HF alkylation, catalytic reforming,
hydrodesulfurization, isomerization, sulfur recovery, and product blending units. Other supporting infrastructure
includes approximately 1.8 million barrels of feedstock and product tankage at the site, maintenance shops, warehouses
and office buildings. The operating units at the Artesia facility include newly constructed units, older units that
have been relocated from other facilities, upgraded and re-erected in Artesia, and units that have been operating as
part of the Artesia facility (with periodic major maintenance) for many years, in some very limited cases since before
1970. The Artesia facilities are operated in conjunction with integrated refining facilities located in Lovington,
New Mexico, approximately 65 miles east of Artesia. The principal equipment at Lovington refinery consists of a
crude distillation and associated vacuum distillation units which were originally constructed after 1970.
The facility also has an additional 1.0 million barrels of feedstock and product tankage. The Lovington facility
processes crude oil into intermediate products, which are transported to Artesia by means of two of our owned pipelines,
and which are then upgraded into finished products at the Artesia facility. The combined crude oil capacity of the
Artesia / Lovington facilities is 75,000 BPSD and typically processes or blends an additional 10,000 BPSD of
natural gasoline, butane, and gas oil.
We have approximately 800 miles of crude gathering pipelines transporting crude oil to the Artesia and Lovington
facilities from various
points in southeastern New Mexico and West Texas, 67 crude oil trucks and 70 trailers,
and over 600,000 barrels of related tankage.
We distribute refined products from the Navajo Refinery to markets in Arizona, Albuquerque and
West Texas primarily through two of HEP’s owned pipelines that extend from Artesia to El Paso.
In addition, we use a pipeline leased by HEP to transport petroleum products to markets in central
and northwest New Mexico. We have refined product storage through our pipelines and terminals
agreement with HEP at terminals in El Paso, Texas; Tucson, Arizona; and Albuquerque, Artesia,
Moriarty and Bloomfield, New Mexico.
In 2000, we formed a joint venture, NK Asphalt Partners, with a subsidiary of Koch Materials
Company (“Koch”) to manufacture and market asphalt and asphalt products in Arizona and
New Mexico under the name “Koch Asphalt Solutions – Southwest.” We contributed our asphalt
terminal and asphalt blending and modification assets in Arizona to NK Asphalt Partners and
Koch contributed its New Mexico and Arizona asphalt manufacturing and marketing assets to NK
Asphalt Partners. In February 2005, we purchased the 51% interest owned by Koch in NK Asphalt
Partners for $16.9 million plus working capital of approximately $5 million. This purchase
increased our ownership in NK Asphalt Partners from 49% to 100%. All asphalt produced at the
Navajo Refinery is sold at market prices to NK Asphalt Partners under a supply agreement.
Following the purchase of the 51% interest from Koch, NK Asphalt Partners now does business
under the name of “Holly Asphalt Company.”
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The Navajo Refinery primarily serves the growing southwestern United States market, including
El Paso, Texas; Albuquerque, Moriarty and Bloomfield, New Mexico; Phoenix and Tucson, Arizona; and
the northern Mexico market. Our products are shipped through HEP’s pipelines from Artesia,
New Mexico to El Paso, Texas and from El Paso to Albuquerque and from El Paso to Mexico via
products pipeline systems owned by Chevron Pipeline Company and from El Paso to Tucson and Phoenix
via a products pipeline system owned by Kinder Morgan’s SFPP, L.P. (“SFPP”). In addition, the
Navajo Refinery began transporting petroleum products in late 1999 to markets in northwest New Mexico
and to Moriarty, New Mexico, near Albuquerque, via a leased pipeline from Chaves County to San Juan County,
New Mexico.
The petroleum refining business is highly competitive. Among our competitors are some of the
world's largest integrated petroleum companies, which have their own crude oil supplies and
distribution and marketing systems. We compete with independent refiners as well. Competition
in particular geographic areas is affected primarily by the amounts of refined products produced
by refineries located in such areas and by the availability of refined products and the cost of
transportation to such areas from refineries located outside those areas.
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The Navajo Refinery is situated near the Permian Basin in an area which historically has had abundant
supplies of crude oil available both for regional users, such as us, and for export to other areas.
We purchase crude oil from producers in nearby southeastern New Mexico and West Texas and from major
oil companies. Crude oil is gathered both through our pipelines and tank trucks and through third party
crude oil pipeline systems. In March 2003, we sold our Iatan crude oil gathering system located in West
Texas to Plains All-American Pipeline, L.P. (“Plains”) for a purchase price of $24.0 million in cash.
In connection with the transaction, we have entered into a six and a half year agreement with Plains that
commits us to transport on that gathering system at an agreed upon tariff any crude oil we purchase in the
relevant area of the Iatan system. The sale resulted in a pre-tax gain of $16.2 million. Crude oil acquired
in locations distant from the refinery is exchanged for crude oil that is transportable to the refinery.
We also purchase crude oil from producers and other petroleum companies in excess of the needs of our
refineries for resale to other purchasers or users of crude oil.
We also purchase isobutane, natural gasoline, and other feedstocks to supply the Navajo Refinery.
In 2004, approximately 4,000 BPD of isobutane and 4,000 to 4,500 BPD of natural gasoline used in the
Navajo Refinery’s operations were purchased from other oil companies in the region and shipped to the
Artesia refining facilities on our 65-mile pipeline running from Lovington to Artesia. We also purchase
vacuum gas oil from other oil companies for use as feedstock.
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Our principal customers for gasoline include other refiners, convenience store chains, independent marketers,
an affiliate of Pemex and retailers. Our gasoline is marketed in the southwestern United States, including the
metropolitan areas of El Paso, Phoenix, Albuquerque, Bloomfield, and Tucson, and in portions of northern Mexico.
The composition of gasoline differs, because of local regulatory requirements, depending on the area in
which gasoline is to be sold. Diesel fuel is sold to other refiners, truck stop chains, wholesalers,
and railroads. Jet fuel is sold primarily for military use to the Defense Energy Support Center, a part
of the United States Department of Defense, under a series of one-year contracts that can vary significantly
from year to year. Since the formation of NK Asphalt Partners in July 2000, all asphalt from the Navajo
Refinery has been sold to NK Asphalt Partners (now doing business as Holly Asphalt Company). Carbon black
oil is sold for further processing, and LPG’s are sold to LPG wholesalers and LPG retailers.
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We have invested significant amounts in capital expenditures in recent years to expand and enhance
the Navajo Refinery and expand our supply and distribution network. In December 2003, we completed a
major expansion project at the Navajo Refinery that included the construction of a new gas oil hydrotreater
unit and the expansion of the crude refining capacity from 60,000 BPSD to 75,000 BPSD. The total cost of
the project was approximately $85 million, excluding capitalized interest.
The hydrotreater enhances higher value light product yields and expands our ability to produce additional
quantities of gasolines meeting the present California Air Resources Board ("CARB") standards, which were
adopted in our Phoenix market for winter months beginning in late 2000, and enables us to meet the recently
adopted Environmental Protection Agency (“EPA”) nationwide low-sulfur gasoline requirements that became
effective in 2004 for all our gasolines. Additionally, in fiscal 2001 we completed the construction of a
new additional sulfur recovery unit, which is currently utilized to enhance sour crude processing capabilities
and provide sufficient capacity to recover the additional extracted sulfur resulting from operations of the
hydrotreater.
Contemporaneous with the hydrotreater project, we completed necessary modifications to several of the Artesia and
Lovington processing units for the Navajo Refinery expansion, which increased crude oil refining capacity from
60,000 BPSD to 75,000 BPSD.
For the 2005 year, our capital budget for the Navajo Refinery totals $60.3 million for various refining
improvement projects. Additionally, $6.5 million was approved in the 2005 capital budget for pipeline and
other transportation related projects.
Our combined clean fuels/expansion strategy for the Navajo Refinery calls for the expansion/conversion
of the distillate hydrotreater to gas oil service, the conversion of the gas oil hydrotreater to ultra
low sulfur diesel (“ULSD”) service, the expansion of the continuous catalytic reformer and the conversion
of the kerosene hydrotreater to naphtha service, which will allow us to produce ULSD by June 2006.
Additionally, we plan to revamp our crude and vacuum units at Artesia and Lovington for improved energy
conservation and cutpoints which will also permit us to increase our processing up to 85,000 BPSD of crude.
We estimate the total cost to complete the ULSD project and expansion of our crude oil refining capacity
to 85,000 BPSD at $52 million and plan for completion in 2006. It is currently anticipated that these
projects will also permit the Navajo Refinery without substantial additional investment to comply with
low-sulfur gasoline (“LSG”) requirements that will become applicable in 2010.
We have purchased and plan to relocate and refurbish an existing 4,500 BPSD ROSE asphalt unit for
the Navajo Refinery at a total estimated cost of $16.4 million. This project will upgrade asphalt to
higher valued gasoline and diesel and is expected to be operational in the first quarter of 2006.
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