U.S. refiner Sunoco Inc (SUN.N: Quote, Profile, Research) will probably convert its refinery in Tulsa, Oklahoma, into an oil terminal as the necessary investment needed to make the refinery environmentally compliant is too great, analysts said on Tuesday.

"We believe terminal conversion is the most likely outcome," Michael LaMotte, oil analyst at J.P. Morgan, said after Sunoco's analyst meeting on Monday, where the options for the refinery were discussed, including a sale or upgrading.

Sunoco, like other refiners, has seen its margins suffer as the U.S. economic recession has crimped demand for gasoline and other products, making it uneconomical for many refiners to upgrade facilities.

The 85,000 barrel per day refinery is currently operating under waivers as it is unable to make products that meet current environmental standards, such as low sulfur fuels, market sources said.

Last December, Sunoco said it had received unsolicited bids from parties interested in buying the refinery and said it would make a decision by the third quarter of 2008.

A Sunoco spokesman said Tuesday the company was pursuing a number of different alternatives, including a sale.

"We continue to pursue a sale," said Thomas Golembeski, a spokesman for the company. Citing confidentiality, he said he was unable to divulge names but there were interested parties.

Based on the $333 million price that Alon paid for Valero's 80,000 bpd refinery in Krotz Springs, Louisiana, in May 2008, J.P. Morgan's LaMotte put a $500 million price tag on Sunoco's Tulsa plant.

However, a possible sale of the refinery would face competition as Valero's Midwestern refineries are also on the block and the current economic uncertainty could prevent Sunoco from getting a good price, analysts said.

"This is an extremely bad business environment to sell anything. It's a buyer's market," said Fadel Gheit, analyst with Oppenheimer.

"Sunoco will look at ways of possibly reconfiguring the units at Tulsa into something more sensibly matched to the expected weak refining market in 2009," said Mark Flannery, an analyst with Credit Suisse.

"But, if this cannot be made to work, the plant will be converted into a terminal and the refining units permanently mothballed," he added.

Flannery said the company's cancellation of its capital program in the third quarter had forced the issue. (Reporting by Janet McGurty; Editing by Walter Bagley).

Source: Reuters India