California's fragile gasoline market will be strengthened by the addition of almost one million barrels of crude oil storage capacity, California Attorney General Bill Lockyer announced. It's part of an enforcement settlement that resolves antitrust objections to Valero's $2.8 billion acquisition of Kaneb.

"Lack of storage has been a significant contributing factor to the dysfunction that afflicts California's gasoline market and the exorbitant prices suffered by this state's drivers," said Lockyer.

"By increasing storage capacity, this settlement will help stabilize the market in Northern California and benefit motorists by providing a buffer against supply shortages and price hikes."

Under the agreement, Valero must construct at its Benicia refinery crude oil storage tanks with a total capacity of 900,000 barrels. To further address concerns the merger would have anti-competitive effects and harm consumers, the settlement also requires Valero to sell gasoline and petroleum terminal facilities in Martinez and Richmond currently owned by Kaneb.

Additionally, the settlement requires Valero to agree to terminate its lease of crude oil storage tanks at the Martinez terminal, and remove the oil held in those tanks. The tanks have a combined capacity of 1 million barrels. Valero will transfer the oil now stored at Martinez to the new Benicia tanks.

Valero must complete construction of the Benicia tanks no later than three years following its sale of the Martinez terminal and the new owner's decision to terminate the current tank lease, or May 31, 2011, whichever comes first.

The effect of the settlement's storage provisions will be to add 900,000 barrels of capacity to the system and free up for use by third parties 1 million barrels of capacity now controlled by Valero.

The settlement's terms are contained in a consent decree Lockyer will file today in U.S. District Court for the Northern District of California. The settlement resolves a lawsuit, also to be filed today by Lockyer, that alleges the merger would lessen competition and restrain trade in violation of federal antitrust laws known as the Clayton Act and Sherman Act.

The Federal Trade Commission (FTC), to remove its objection to the acquisition, today announced its approval of a settlement similar to California's, but which requires only the sale of the Martinez and Richmond terminals. The court must approve the California agreement.

Lockyer said the increased storage capacity provided by the settlement should facilitate more gasoline production, increase supply and, as a result, help control prices. As the consent decree states, "The purpose of the provisions ... is to maximize motor fuel production and to create incentives for further investment in Northern California's infrastructure for crude oil and petroleum products ..."

The sale formally called divestiture of the Martinez and Richmond terminals must be completed within six months following the merger's effective date. If Valero fails to meet that deadline, the settlement allows Lockyer to appoint a trustee to complete the divestiture.

Terminals receive and store gasoline and other light petroleum products, and provide facilities to redistribute the products via pipelines, sea vessels or trucks. They also receive, store and redeliver bulk quantities of crude oil.

Additionally, they provide facilities for handling and injecting gasoline additives including ethanol. Valero and Kaneb directly compete in the Northern California terminal services market. Kaneb owns the Martinez and Richmond terminals, as well as two more in Selby and Stockton. Valero, meanwhile, operates its own terminal at its Benicia refinery.

Importantly, Kaneb's terminals are the only non-refiner-owned terminals accessible to both marine imports and the Kinder Morgan (KM) pipeline system. The KM pipeline is the only common carrier system that serves the interior of Northern California, making it the sole means of economically shipping gasoline to Northern California terminals outside the Bay Area.