SOMERSET — A New York real estate magnate has bought the historic Somerset Refinery for $2.2 million and said he wants to have it up and running by early next year.
That would begin a new chapter for the refinery. It had been turning crude oil into gasoline for generations before it ran into financial trouble and shut down in late 2006. A bitter fight over the company ensued.
Michael Grunberg, managing principal of Grunberg Realty, will pay a total of $2.42 million, with sales costs, for the parent company of the refinery, which is on 105 acres off U.S. 27 in Somerset.
The property includes offices, dozens of tanker trucks and other vehicles, a pipeline easement across six counties and 12 Somerset Oil service stations in Southern and Eastern Kentucky. At one time it employed 150 workers.
The refinery can refine an average of 5,500 barrels of oil a day. Buyers from all over the world expressed interest in buying it.
Grunberg's company owns and manages commercial and residential buildings, most notably in New York City; Hartford, Conn.; and Scottsdale, Ariz. The refinery is its first foray into Kentucky and the oil business.
"In times like these, we wish to diversify," he said.
The Somerset refinery was one of only two in the state. Since it closed, oil producers in Southern Kentucky have faced higher costs to take their product elsewhere, according to John Gabbard, executive director of the Kentucky Oil and Gas Association, which represents producers.
Grunberg said he is committed to putting the refinery back into operation. He estimated it would take four or five months to do that.
"The good news is that means jobs," said Edward Durnil, CEO of Tranzon Asset Advisors, which handled the sale of the refinery.
There is a lot of work to do before it can start turning out gas, however, including hiring and training workers, making sure equipment is in good order and re-establishing crude-oil supplies and a market for finished products, said Jan Acrea, vice president of the refinery.
Grunberg acknowledged a refinery is a very different kind of property than his company has owned before, but said the business principles are the same. "My interest is to keep things going and to make them profitable," he said.
A skeleton crew of about 20 people has kept up environmental obligations and other work at the refinery since late 2006.
A bitter court battle
Cy Waddle, a longtime officer of the refinery, said it opened in the early 1930s. It provided an important market for small oil producers in Southern and Eastern Kentucky and nearby areas of Tennessee; Somerset Oil service stations made the name familiar in the region for decades.
A group of employees bought the refinery in the early 1960s and operated it for more than 40 years, Waddle said.
In the early 1990s, the U.S. Environmental Protection Agency cited the company for improper handling and disposal of hazardous wastes. The company agreed to pay a $200,000 penalty and make improvements that EPA estimated would cost $4 million.
In 1999, Waddle and others sold the refinery. The principal new owners, former military men Frank Lynch and Roy Shirley, said in court depositions that the refinery ran into financial trouble in 2006 after their costs to buy crude oil went up significantly.
In 2007, William Spears, of Lexington, who had a background in the coal industry, offered to buy the parent company of the refinery, PHS Group, with stock in his company called USA Energy, according to Lynch and Shirley.
Spears said their stock would be worth $10 million each, the two testified.
Soon after striking the deal, however, Spears filed for bankruptcy protection for PHS in May 2007.
Spears said in court documents that Lynch and Shirley lied to him about the value of the refinery and siphoned off large sums of money.
Things were so bad he had to declare bankruptcy almost as soon as he walked in the door, Spears said.
Lynch and Shirley, however, said Spears misled them about having adequate money for the purchase.
"Why in the hell would you represent this damn crook?" Lynch asked an attorney for Spears.
Ultimately, the bankruptcy court decided the company should be put up for auction.
Lynch, Shirley and Spears are still fighting over money in Pulaski County Circuit Court.
Widespread buyer interest
Durnil, the auctioneer, said business interests from the Mideast, Asia, Europe and more than 30 states had expressed interest in the refinery. It's not often that a refinery goes on the auction block, he noted.
Many potential bidders only wanted pieces of the company, however. After a decision to sell it as a whole, only two bidders showed up.
A Texas business submitted a pre-auction bid of $1 million. Grunberg's pre-bid was $2.1 million.
When Durnil opened the bidding, Grunberg upped that by $100,000 and the Texas group didn't answer.
Grunberg said the prior owners were undercapitalized and couldn't afford to buy enough crude oil to operate the refinery at full capacity.
Grunberg said he has adequate capital and no other investors to please, so he can take a longer view.
"I'm happy to break even for awhile," he said. "That's the problem with America these days. Everybody has to make a buck right away."