Tulsa Refinery

On June 1, 2009 Holly Corporation acquired the 85,000 bpd Tulsa Refinery and 3.2 million barrels of storage and related logistics assets (on-site truck and rail loading facilities) from Sunoco for $65 million. Holly later sold in October 2009 associated logistics assets to Holly Energy Partners and Plains All American Pipeline for a combined amount of $57.5 million. In December 2009 Holly acquired the 75,000 bpd Sinclair Tulsa refinery for $128.5 million with plans on integrating the two Tulsa refineries. The combined facility is planned to be operated at a capacity of 125,000 bpd. These two refineries are located approximately 2 miles apart and will be connected via pipeline. This refinery complex sits in the Midwest region (PADD II), approximately 45 miles from the supply and storage hub at Cushing, Oklahoma, in a region that is well served by crude pipelines that deliver crude oil from Canada, U.S. onshore and the Gulf Coast. This provides the Refinery the flexibility to optimize its crude slate and maintain lower crude inventories than a typical refinery.

This refinery complex produces a combination of high value lubricants and specialty products in addition to distillates (diesel and jet fuel) and gasoline fuels. Refined distillates and gasolines are primarily delivered from the refinery to market by two pipelines owned or operated by Magellan Pipelines. The Magellan pipeline terminal is located across from the refinery and these Magellan pipelines connect the refinery to distribution channels throughout Texas, Oklahoma, Kansas, Missouri, Illinois, Iowa, Minnesota and Wisconsin. Additionally, on-site rail and truck rack capability facilitates access to local refined product markets.

The Tulsa Refinery primarily processes sweet crude oils into high value light products such as gasoline, diesel fuel, jet fuel and lubricants, however has the capability to process sour crude oils when economics dictate. For 2009, gasoline, diesel fuel, jet fuel and lubricants (excluding volumes purchased for resale) represented 26%, 29%, 10% and 16%, respectively, of the Tulsa Refinery's sales volumes.

The Tulsa Refinery west facility is located on a 750-acre site in Tulsa, Oklahoma situated along the Arkansas River. The principal process units at the Tulsa Refinery west facility consist of crude distillation (with light ends recovery), naphtha hydrodesulfurization, catalytic reforming, propane de-asphalting, lube extraction unit, MEK dewaxing, delayed coker and butane splitter units. The refinery's supporting infrastructure includes approximately 3.2 million barrels of feedstock and product tankage, of which 0.4 million barrels of tankage is owned by Plains, and an additional 1.2 million barrels of tank capacity that are currently out of service and could be made available for future use.

The Tulsa Refinery east facility is located on a 466-acre site also in Tulsa, Oklahoma situated along the Arkansas River. The principal process units at the Tulsa Refinery east facility consist of crude distillation, naphtha hydrodesulfurization, FCC, isomerization, catalytic reforming, alkylation, scanfiner, diesel hydrodesulfurization and sulfur units. Additions and improvements to the facility since late 2004 include a scanfining unit to meet 2006 gasoline sulfur content requirements, a new naphtha hydro desulphurizer unit in 2005, a new sulfur plant, modifications to the distillate hydro desulphurizer unit, a new tail gas unit installed on the new sulfur plant and the conversion of the reformer from a 17,000 BPD semi-regenerative reformer to a 22,000 BPD continuous catalyst regeneration reformer (thereby increasing its capacity, octane capability and yield of gasoline). The refinery's supporting infrastructure includes approximately 3.75 million barrels of tankage capacity on the refinery's premises, approximately 1.4 million barrels of which is owned by HEP.

We are integrating the Tulsa Refinery west and east facilities that will result in a single, highly complex refinery having an integrated crude processing rate of approximately 125,000 BPSD, primarily by sending intermediate streams from one facility to the other for further processing. Pursuant to this plan, high sulfur diesel and various gas oil streams will be sent from the Tulsa Refinery west facility to be processed in the diesel hydrotreater and FCC units, respectively, at the Tulsa Refinery east facility. Various heavy oil streams will be sent from the Tulsa Refinery east facility to be processed in our coker unit at our Tulsa Refinery west facility. Various other streams such as naphtha, hydrogen and fuel gas will be shared between the two refinery facilities.

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Refined Products

The Tulsa Refinery produces fuel products including gasoline, diesel fuel, jet fuel, #1 fuel oil, asphalt, heavy fuels and LPGs and serves markets in the Mid-Continent region of the United States and also produces specialty lubricant products that are marketed throughout North America and are distributed in Central and South America.

Crude Oil and Feedstock Supplies

The Tulsa Refinery is located approximately 50 miles from Cushing, Oklahoma, a significant crude oil pipeline crossroad and storage hub. Local pipelines provide access to regional crude production as well as many United States onshore, Gulf of Mexico, Canadian and other foreign crudes. The proximity of the refinery to this pipeline and storage hub provides the refinery with the flexibility to optimize its crude slate and maintain lower crude inventories than a typical refinery.

The refinery also purchases other feedstocks on an opportunistic basis. From time to time, the refinery purchases naphtha, gasoline components, transmix, light cycle oil, lube blend stocks or residuals from other refineries. These feedstocks are delivered by truck, rail car or pipeline, depending on product and logistical requirements.

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Markets and Competition

The Tulsa Refinery primarily serves the Mid-Continent region of the United States. Distillates and gasolines are primarily delivered from the Tulsa Refinery to market via two pipelines owned and operated by Magellan. These pipelines connect the refinery to distribution channels throughout Oklahoma, Kansas, Missouri, Illinois, Iowa, Minnesota, Nebraska and Arkansas. Additionally, the Tulsa Refinery has a proprietary diesel transfer line to the local Burlington Northern Santa Fe Railroad depot, and the refinery's truck and rail rack capability facilitates access to local refined product markets.

In conjunction with our acquisition of the Tulsa Refinery east facility, we entered a five-year offtake agreement with an affiliate of Sinclair whereby Sinclair has agreed to purchase 45,000 to 50,000 BPD of gasoline and distillate products at market prices from us to supply its branded and unbranded marketing network throughout the Midwest. The offtake agreement can be renewed by Sinclair for an additional five-year term.

Our Tulsa Refinery also produces specialty lubricant products including agricultural oils, base oils, process oils and waxes that are sold throughout the United States and to customers with operations in Central America and South America. Our refinery's production represents 6% of paraffinic oil capacity and 12% of wax production capacity in the United States market and is one of four refineries of specialty aromatic oils in North America.

The refinery's asphalt and roofing flux products are sold via truck or railcar directly from the refinery or from a leased terminal in Phillipsburg, Kansas to customers throughout the Mid-Continent region.

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Principal Products and Customers

Light products are shipped by product pipelines and are also made available to customers through truck and rail loading facilities. The Tulsa Refinery's principal customers for conventional gasoline include Sinclair, other refiners, convenience store chains, independent marketers and retailers. The composition of gasoline differs, because of regulatory requirements, depending on the area in which gasoline is to be sold. Sinclair and railroads are the primary diesel customers. Jet fuel is sold primarily for commercial use. LPGs are sold to LPG wholesalers and retailers.

The specialty lubricant products produced at the Tulsa Refinery are high value products that provide a disproportionately high margin contribution to the refinery. Specialty lubricant products are sold in both commercial and specialty markets. Base oil customers include blender-compounders who prepare the various finished lubricant and grease products sold to end users. Agricultural oils, primarily formulated as supplemental carriers for herbicides, are sold to product formulators. Process oil customers include rubber and chemical industry customers. Specialty waxes are sold primarily to packaging customers as coating material for paper and cardboard, and to non-packaging customers in the adhesive or candle-making businesses.

Asphalt and roofing flux are sold primarily to paving contractors and manufacturers of roofing products.

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Specialty Products:
Approximately 10% of the plants production consists of lubricants and specialty products which are categorized and explained below. Each of these products can be custom blended in tank car-size quantities in order to satisfy customer requirements.

Lubricating Oils (Base, Blended & Process oils):
These solvent neutral ("SN") paraffinic products are specifically manufactured as base stocks or blending components in the manufacture of finished lube products. Typically these products are shipped to blender-compounders who prepare the finished product sold to end-users. Applications include passenger and commercial vehicle engine oils, specialty products for metalworking or heat transfer applications and other industrial applications.

Some of the Process oils produced at the Tulsa plant are designed for the rubber and chemical industry and are extracted from the Refinery's Lube Extraction Unit (LEU) where increased aromaticity and low volatility is desirable. Beyond rubber applications, these highly refined oils are used in: adhesives, coatings, and defoamers.

Waxes:
Soft and semi finished waxes that are produced aid in manufacturing more flexible packaging, waterproofing corrugated board, emulsions, extrusion processing, candles, rubber, adhesives, gaskets and fire logs. The waxes are removed from oil by solvent crystallization and filtration and are de-oiled to produce a range of products differentiated by melting points.

Horticultural Oils:
These highly refined process oils are used in Horticultural sprays that can be applied as either a Pesticide or Herbicide. The pesticide spray oils are paraffinic oils specifically designed to meet growers' requirements for an extremely effective pesticide with low toxicity. The Herbicidal Oils are used in conjunction with other herbicides as an adjuvant. As carriers, they form a better spray pattern than herbicides used alone, and improve penetration, wetability, spreadability and anti-evaporative action for improved post-emergent weed control.

Asphalt Modifiers:
The plant produces numerous Hydrolene Asphalt Modifiers to accommodate the complete spectrum of asphalt applications and performance requirements. Hydrolene is available in both aromatic and paraffinic formulations, offering various viscosity and volatility characteristics for specific customer applications. Product applications include improving compatibility with polymer modified asphalts in paving and roofing industry.

Light Refined Products:
The light petroleum products manufactured consists of distillates and gasoline which is estimated to account for 39% and 44% of the plants production respectively once the integration of the two refineries is completed. Additionally, the previously produced gas oil production (approximately 12,000 bpd) from Holly's legacy Sunoco refinery will now be upgraded to higher grade refined products (distillates and gasoline) by further processing the gas oil at the newly acquired legacy Sinclair refinery. The refined gasoline and distillates are delivered to market by two pipelines owned or operated by Magellan Pipelines. These two processing locations have on site storage and logistic assets consisting of over 3 million barrels of storage, truck loading racks and rail loading and unloading facilities.

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Capital Improvement Projects

Our total approved capital budget for the Tulsa Refinery for 2010 is $101.6 million. Additionally, capital costs of $24 million have been approved for refinery turnarounds and tank work. We expect to spend approximately $63.2 million in capital costs in 2010, including capital projects approved in prior years. The following summarizes our key capital projects.

We are proceeding with the integration project of our Tulsa Refinery west and east facilities. Upon completion, the Tulsa Refinery will have an integrated crude processing rate of 125,000 BPSD. The integration project involves the installation of interconnect pipelines that will permit us to transfer various intermediate streams between the two facilities. We have also signed a 10-year agreement with a third party for the use of an additional line for the transfer of gasoline blend stocks which is currently in service. These interconnect lines will allow us to eliminate the sale of gas oil at a discount to WTI under our 5-year gas oil off take agreement with a third party, optimize gasoline blending, increase our utilization of better process technology, and reduce operating costs. Also, as part of the integration, we are planning to expand the diesel hydrotreater unit at the east facility to permit the processing of all high sulfur diesel produced to ULSD, eliminating the need to construct a new diesel hydrotreater at our west facility as previously planned. This expansion is expected to cost approximately $20 million and will use the reactor that we acquired as part of the Tulsa Refinery west facility acquisition. We are currently planning to complete the integration projects by the end of the 2010.

The combined Tulsa Refinery facilities also will be required to comply with MSAT2 regulations in order to meet new benzene reduction requirements for gasoline. We have elected to largely use existing equipment at the Tulsa Refinery east facility to split reformate from reformers at both west and east facilities and install a new benzene saturation unit to achieve the required benzene reduction at an estimated cost of approximately $15 million. Our Tulsa Refinery is required to meet MSAT2 1.3% benzene levels in gasoline beginning in July 2012 and we expect complete this project well before then. We will be required to buy credits until this project is complete, as required by law, beginning in 2011.

Our consent decree with the EPA requires recovery of sulfur from the refinery fuel gas system at the Tulsa Refinery west facility by the end of 2013. We estimate our investment to comply with the requirements will be approximately $20 million. The consent decree also requires shutdown, replacement, or installation of low NOx burners in three low pressure boilers by the end of 2013. We are still evaluating the best solution to this issue.

We believe that the synergy of the Tulsa Refinery west and east facilities operated as a single integrated facility will result in savings of approximately $110 million of expected capital expenditures related to ULSD compliance. Also as a result of the integrated facility, we expect to be able to reduce capital expenditures for the forthcoming benzene in gasoline requirements from approximately $30 million for the Tulsa Refinery west facility alone to approximately $15 million for the integrated complex. Even if we are able to realize the operating synergies of the integrated facility, our Tulsa Refinery will still require sulfur recovery investment, but we estimate combining the two refineries will reduce our net near-term capital expenditure requirements by approximately $125 million, excluding the cost to construct the pipelines that will integrate the west and east facilities.

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