(Reuters) - Tesoro Corp TSO.N moved on Monday to create the biggest U.S. refining empire in the Pacific Basin with a $2.5 billion deal to buy BP's (BP.L) Carson plant in the isolated California market.
Shares in Tesoro shot up more than 9 percent, trading at $38.75.
If regulators approve the purchase, the independent refiner will have three plants in California alone as well as three refineries elsewhere in the Pacific region -- in Washington, Alaska, and Hawaii.
The Texas-based company plans to merge the 266,000-barrels-per-day Carson plant with its 97,000-bpd Wilmington plant, located next door, to form a 370,000-bpd refinery, company officials said. It would be the largest refinery west of Texas.
"Integrating the BP assets, specifically the logistics, is expected to drive significant value throughout our West Coast system," said Gregory Goff, Tesoro president and chief executive officer.
The deal would give Tesoro nearly 700,000 bpd of refining capacity in the Pacific Basin, putting it ahead of Chevron Corp (CVX.N), which has 575,000 bpd of capacity as the top U.S. refiner in the region.
Tesoro is also buying storage and distribution assets from BP, including more than 100 miles of pipeline, three marine terminals, four land storage terminals and four product marketing terminals.
It plans to sell those assets to its master limited partnership, Tesoro Logistics LP TLLP.N, for around $1 billion within a year of closing.
Tesoro will acquire the Carson plant's inventories at the time of the deal's closing, expected before mid-2013. The company said it plans to pay for the purchase with cash on hand, inventory financing and debt that will be repaid after the sale of assets to Tesoro Logistics.
The deal with BP includes a retail marketing network of about 800 dealer-operated gasoline stations, ownership of BP's Arco brand, 51 percent-ownership in a company-operated 400-megawatt cogeneration facility, and other assets.
Cut off from the rest of the country by a lack of connecting infrastructure, California has traditionally been an isolated market with strict fuel standards that limit import possibilities. Plants there have not benefited from the shale oil revolution in North Dakota and Texas that has driven down costs for refineries operating in the Midwest and Gulf Coast.
The merger of the Carson plant with Tesoro's Wilmington refinery -- which are separated by a fence -- should be finished by 2015, with the completion of $225 million in spending for pipeline interconnections and improved hydrotreating capacity used to make greener fuels.
Tesoro will shift about 25 percent of the combined refining capacity to produce diesel to "meet the growing demand for distillates on the West Coast," Goff said, and operations at some redundant units will be reduced.
Overall annual cost savings were estimated at $250 million.
The acquisition will bring Tesoro's total refining capacity to just under 1 million bpd, Goff said. Tesoro also owns refineries in North Dakota and Utah.
However, the company plans to sell its 94,000-bpd Hawaii refinery no sooner than the second half of 2012.
BP said in late July that it was in advanced talks on the sale of the Carson plant, as well as its Texas City, Texas refinery. The oil major announced in February 2011 that it would sell the refineries by the end of 2012 as it reorients its U.S. operations to take advantage of growing Canadian crude supplies.
BP's North American products division, which oversees its U.S. refineries, finished a three-year probation term in March that stemmed from a 2005 explosion that killed 15 people and injured many more at a refinery in Texas City.
BP also said on Monday that it would sell two processing plants and an associated gathering system in the Texas panhandle to Eagle Rock Energy Partners EROC.O for $227.5 million.
Reporting by Michael Erman, Matt Daily and Selam Gebrekidan in New York; Editing by Dale Hudson, Lisa Von Ahn and John Wallace