Bombshell: Propel Fuels sues Phillips 66 over “Year-long extraction of trade secrets”

May 18, 2022 |

In California, Judge Evelio Grillo of the Superior Court of Alameda County has unsealed a Propel Fuels-Phillips 66 lawsuit, ordered that Propel Fuels file an unredacted copy of the suit. According to Propel, the suit alleges hat “the Texas-based oil company misappropriated Propel’s trade secrets and engaged in unlawful business practices in violation of California’s Uniform Trade Secrets Act and Unfair Competition Law.” Propel Fuels is a leading distributor and retailer of renewable fuels, and Phillips 66 is a major oil refiner and marketers which has in recent years made a major shift towards renewables.

The bombshell lawsuit uncovers a proposed acquisition of Propel Fuels by Phillips 66 that dates back to 2017-18, according to Judge Grillo. The unredacted complaint has not yet been filed — Propel has provided some detail as background.

According to Propel: “the complaint alleges Propel’s trade secrets showed Phillips 66 that there was an opportunity not just to help Phillips 66 mitigate its LCFS compliance costs, but to pour the foundation of an entirely new business opportunity that could drive the profitability for Phillips 66 while burnishing its environmental, social and governance (ESG) credibility – a significant factor in driving the low-carbon business investments for fossil-based Big Oil companies.”

Propel’s take? “Propel founder and CEO Rob Elam said, “What started as standard due diligence transformed into a year-long extraction of trade secrets.”

All-cash acquisition offer

“Unsurprisingly,” Propel states, “Phillips 66 expressed enthusiasm for pushing ahead with the transaction.” On Dec. 20, 2017, it submitted an all-cash acquisition bid and began what it initially described as confirmatory due diligence. Propel alleges that “Phillips 66 demanded detailed information about all aspects of Propel’s business and strategic insights from Propel’s management. Propel also lent Phillips 66 its experience and reputation, meeting with California regulators and guiding Phillips 66 through the complex regulatory process necessary to secure approval to sell E85 and renewable diesel on the Phillips 66 network.” Financial terms of the abandoned Propel Fuels acquisition have not yet been disclosed.

Use of proprietary algorithms

Propel further alleged that “Phillips 66 demanded Propel use its proprietary location algorithms to choose the top 250 locations for new Phillips 66 / 76-branded low-carbon fueling sites across California, later built by Phillips 66 without Propel, and designed to lure away Propel customers.” Also, Propel alleges that “Phillips 66 repeatedly assured Propel’s senior management of its intention to consummate the deal and that it would not enter the California renewables market without Propel.”

The breakdown in Propel-Phillips negotiations

Propel adds, “When final documentation for Phillip 66’s acquisition of Propel was mere hours from final signatures, Phillips terminated the transaction without any explanation on a Friday morning. The following Monday, Phillips 66 notified California regulators that it intended to apply for permits to distribute and sell the same kind of low-carbon fuels Propel Fuels was selling. Walking away after Propel had effectively designed an entire low-carbon business for it, the complaint asserts, Phillips 66 is now in the process of building a copycat business using the highly proprietary financial models, customer research data, and trade secrets it learned during the confidential due diligence process.”

Phillips 66 moving forward on Rodeo

The news comes a week after Phillips 66  made a final investment decision to move forward with Rodeo Renewed, the project to convert its San Francisco Refinery in Rodeo, California, into one of the world’s largest renewable fuels facilities. The project, which recently received approval from Contra Costa County, is expected to cost approximately $850 million and begin commercial operations in the first quarter of 2024.

Upon completion of Rodeo Renewed, the converted facility will no longer process crude oil and instead use waste oils, fats, greases and vegetable oils to produce an initial 800 million gallons per year (over 50,000 barrels per day) of renewable transportation fuels, including renewable diesel, renewable gasoline and sustainable aviation fuel. Production of these fuels is projected to reduce lifecycle carbon emissions by approximately 65% — the equivalent of taking 1.4 million cars off California roads each year. Rodeo Renewed is also expected to cut criteria pollutant emissions at the site by 55% and water use by 160 million gallons per year.

Philips 66 rolling out renewable diesel and E85

Since pulling out of the deal, Propel said, “Phillips 66 rolled out renewable diesel and E85 (85 percent ethanol, 15 percent gasoline) fuel sales at some 450 of its California retail 76 stations, [and]Propel Fuels was left with “no choice” but to seek legal remedy for the alleged theft of its proprietary business data and methods. Propel alleged that “Phillips could and would not have made those investments without the business strategies, data, and relationships with customers and regulators that Propel spent more than a decade developing. Propel was supported by California agencies (and tax dollars), employed Californians in the new-energy economy, and engaged a wide range of stakeholders in those efforts.”

“We believe all of this was simply stolen by Phillips 66,” said Propel CEO Rob Elam.

The Rodeo backstory and a foray into Washington state

We reported in April 2021 that Phillips 66 is securing feedstock for the company’s growing portfolio of renewable fuels projects by investing in a new soybean-processing plant in Iowa.  The company’s investment gives it a minority ownership stake in Shell Rock Soy Processing, named after the nearby town in northeast Iowa, where it will be built. The plant, which is pending state and local approvals, will yield approximately 4,000 barrels per day of soybean oil. Phillips 66 has an agreement to purchase 100% of the plant’s soybean oil production that will be used to make renewable fuels.  

We reported in August 2020 that Phillips 66 would build what would be the world’s largest renewable diesel and sustainable aviation fuel plant. The 800 million gallon monster is slated for 2024 opening as P66 says it will convert Rodeo Refinery to renewables.

That news came just seven months after Phillips 66 and Renewable Energy Group discontinued their joint effort to construct a large-scale renewable diesel plant in Ferndale, Washington in January 2020. The project was canceled due to permitting delays and uncertainties. Originally announced in fall 2018, the 250 million gallon per year project would have resulted in the largest renewable diesel refinery on the West Coast.

The Bottom Line

We’re awaiting the filing of the unredacted amended complaint, which may contain important details in this lawsuit. Also, we will be looking forward to the Phillips 66 view as expressed in its responses in court and in public statements that may be made. Lots of hard data is as yet uncovered.

At first glance, we have some questions with respect to the timeline, that will need to be answered. For example, Phillips and REG announced a project to build a refinery in Washington state in November 2018. And P66 formed a development partnership with Sapphire Energy as far back as 2013 ro explore a renewable fuels business based on renewable diesel and SAF from algae — back when Sapphire eimed to be at commercial scale by 2018.

It’s not entirely clear to us, at this stage, how Phillips 66 could have been substantially ignorant of how to formulate a renewable fuels strategy to address ESG concerns, as late as 2017 when the negotiations with Propel appear to have commenced. We’re bound to learn more on this score as information reaches us.

Also, we have questions about the timeline relating to the Rodeo project itself, which was not announced until the summer of 2020, some years after the negotiations broke down between Propel and Phillips 66, and how Propel could have “effectively designed an entire low-carbon business for it, and that Phillips 66 is now in the process of building a copycat business,” given that Rodeo is engaging in production as well as distribution, which is different than the Propel model.

Further, we expect to learn more about the evolution of Propel’s business, recalling that in 2019, a year after the breakdown of negotiations, Propel announced a major expansion of the company’s business model with the adding of an electric vehicle charging network — which has not yet been built, we believe, based on a review of the Propel website.

We’d be curious to learn how much Phillips 66 learned during its failed acquisition of Propel Fuels and, potentially, the failure of its project with REG to deploy renewable diesel via a Washington state project — and any other negotiations or discussions that may have taken place under NDA over the past decade or so, and how, if at all, Phillips 66 benefited from that knowledge.

We’ll also learn more about how the provision of data for a Top 250 locations in California analysis for renewable diesel and E85 relates to the eventual deployment at 450 locations, as Propel noted in its complaint.

So, there’s reason for some skepticism while we await more information, but the allegations are serious. Propel Fuels is a company of long and established standing in the industry that has done much to advance not only the volume of renewable fuels sales but also established a positive consumer culture receptive to sustainable fuels. And, we have been briefed by FBI, not in relation to the Propel case but in relation to the bioeconomy in general, that the United States sees substantial harm from past acts on theft of trade secrets. As many as one dozen FBI agents have made appearances at single ABLC events in order to provide protection, raise awareness and distribute information on making trade secrets more secure. 

So, let’s take these allegations with the highest seriousness while noting that material information is yet to come to light, allegations are neither judgments nor proof, and we have reason to give Phillips 66 benefit of the doubt until we know more. 

 

 

Print Friendly, PDF & Email

Category: Top Stories

Thank you for visting the Digest.