ANALYSIS-Tesoro's California refinery deal probed by regulators

* Tesoro's bid for BP's Carson plant investigated by FTC

* Tesoro hopes to tie Carson and Wilmington refineries together

* Tesoro is second biggest California gasoline producer

WASHINGTON, Feb 14 (Reuters) - Tesoro Corp., one of California's biggest gasoline producers, has made an aggressive play to buy a BP refinery in southern California but winning antitrust approval will be no slam dunk.

Tesoro announced in August that it had agreed to buy BP's Carson plant for $2.5 billion, creating the biggest oil-refining empire in the Pacific Basin with about a quarter of California's processing capacity.

The deal is being probed by the U.S. Federal Trade Commission and the California attorney general's office. FTC staff has depositions under way as part of the antitrust investigation, according to a source knowledgeable about the probe.

Tesoro has called the planned purchase a "transformational growth opportunity."

It plans to tie together the Carson refinery with one it owns in the neighboring Los Angeles suburb of Wilmington, California. The front gates of the two refineries are three miles (4.8 kilometers) apart but the north end of the Tesoro refinery is a little more than a half mile (0.9 km) from the south end of BP's Carson plant.

The deal has raised eyebrows, particularly in California, where consumers are frustrated by consistently high and frequently spiking gas prices.

Chevron Corp produces 27 percent of the specialized gasoline required by California state environmental laws. Tesoro is in second place with 14 percent while ConocoPhillips is just behind at 11 percent. With the deal, Tesoro would remain in second place but its market share would rise to 26 percent.

Tesoro's preference is to integrate the two refineries, causing the shuttering of some units at the older, smaller and less efficient Wilmington refinery, according to sources familiar with Tesoro's plan.

They could also shut the entire Wilmington refinery if needed to satisfy the FTC or sell it entirely, the sources said.

The number of Tesoro-owned gas stations, which carry the brands Tesoro, Shell and USA Gasoline, would rise from about 650 to 1,450 out of more than 9,000 in the state. The 800 acquired stations are in southern California, Nevada and Arizona.

In a conference call on Feb. 7, an executive with the San Antonio-based refiner said the company was working with the agency to win approval to buy the 240,000 bpd Carson refinery, affiliated plants and retail outlets.

Tesoro expects the sale to be completed in the second half of this year, said Greg Goff, chief executive officer.

"We ... continue to work with the FTC to complete the transaction," Goff said. "We don't see anything that would change the schedule we've laid out (for completion of the sale)," he said.

Tesoro did not agree to an interview for this story.

If approved, Tesoro would own four refineries on the West Coast with a combined capacity of 629,500 bpd.

The company would control 24 percent of the crude oil refining capacity on the West Coast, whose physical isolation and lack of pipeline connects to the nation's Gulf Coast and Midwest refining centers make it a virtual fuel island.

And in southern California, Tesoro would have about 33 percent of the market while Chevron would have 26 percent, raising the possibility of higher gas prices, said Diana Moss, who teaches economics at the University of Colorado at Boulder and is an antitrust law expert.

"That kind of scenario would introduce the possibility of higher prices. ... I can see where they (the FTC) might not like this deal," she said. "I don't think it's a slam dunk pass. Clearly it's not a rubber stamp."

FEELING THE POLITICAL HEAT IN DC

While many big, controversial mergers have a political component underneath layers of economic analysis and theory, in this case the politics are out in the open.

Just last October, California gas prices spiked to nearly $5 a gallon when Tesoro ran short of supply and was unable to buy any because of what traders said looked like a squeeze by other companies.

The price spike sparked uproar among the California delegation on Capitol Hill, and put pressure on the FTC, which monitors antitrust violations in the gasoline industry.

"Anything involving oil in California gets a close look," said William Kovacic, a former acting chairman of the FTC who now teaches law school at George Washington University, citing "relentless political pressure."

Kovacic warned, however, that depositions did not necessarily mean that the FTC planned to challenge the deal.

"That by itself does not foreshadow a case. If you believe that some day you might be in this courtroom, this is what you do," said Kovacic.

Tesoro already owns two refineries in California, and one in Washington State. There has long been an unwritten rule that no refiner could own three major refineries in California.

The last refiner to try was Valero several years ago, but its plan was rejected by the FTC. It was required to sell the refinery that Tesoro now owns in the San Francisco Bay-area town of Martinez, California.

The FTC tried to block Western Refining's purchase of Giant Industries but lost in a court fight.

And Tesoro's bid to buy the BP refinery could well face an antitrust challenge, said one antitrust expert.

"I can't imagine anything worse. This is the most fragile gasoline market in the United States. The FTC should be very aggressive in challenging the deal," said David Balto, a veteran of the FTC now in private practice.

(Reporting By Diane Bartz and Erwin Seba; editing by Ros Krasny)