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North America's Source for Oil and Gas News
April 2004

Vol. 9, No. 16 Week of April 18, 2004

Shell faces protests over decision to close refinery

Californians, already angry over high pump prices, question Bakersfield shutdown

Allen Baker

Petroleum News Contributing Writer

Shell Oil Products US is facing growing protests over its decision to shut a small refinery in Bakersfield, Calif., next to the Kern River oil field. Shell’s credibility already was damaged by the wholesale reserve revisions the company made in January, and California’s high, and rising, pump prices aren’t helping matters either.

Shell says it’s willing to sell the Bakersfield refinery, which processes about 70,000 barrels a day. But another owner would face the same supply problems, company officials say.

“This is a land-locked refinery, which because of a decline in its crude source — San Joaquin Valley heavy crude from the Kern River field — makes its continued operation no longer economically viable,” said Lynn Elsenhans, president of the Shell entity. Shell announced last November it was closing the refinery this coming October, and taking an after-tax charge on earnings of about $200 million. The company has promised to keep supplying branded stations in the area.

The Shell refinery produces just 2 percent of California’s gasoline and perhaps 6 percent of its diesel, but supplies are tight in the region and gasoline prices have soared well beyond $2 a gallon in many places.

Internal documents aired

California has problems not with supply, but with refinery capacity, the Los Angeles Times noted in an editorial, and in early April a consumer watchdog group raised the stakes when it released internal company documents showing the facility’s refining margin in March hit a very impressive $23.01 a barrel, making it the most profitable of Shell’s three plants in the state.

Well, yes, March was profitable, the company replied, but those same documents show the facility lost money in 2001 and 2002 — as did many other refineries that now show booming profits.

Still, says Elsenhans, “the profit that we project for the refinery in 2004 does not justify maintaining our investment in the facility. Furthermore, the declining utilization rates illustrate that it will not be economically viable to operate the facility going forward.” San Joaquin Valley heavy crude output averaged about 450,000 barrels a day in 2000, but that figure is expected to drop by a third by 2010.

Government inquiries

Politicians and others are suspicious, and it’s an election year. So the state attorney general is investigating, along with the Federal Trade Commission.

The federal agency was prodded into the fray by Sen. Ron Wyden, D-Ore., who fears his state’s gasoline prices will suffer if regional supplies are cut.

Wyden advances the interesting notion that the shutdown was perhaps propelled by an FTC condition when it approved the merger of Chevron and Texaco. At that time, the agency mandated the dissolution of Equilon, a joint refining venture between Texaco and Shell, due to antitrust concerns. That meant ChevronTexaco no longer had a vested interest in supplying Bakersfield.

ChevronTexaco is heavily exploiting its holdings in the area. Indeed, the company is planning to drill more than 800 new wells in the San Joaquin Valley in 2004, according to a report by the Bakersfield Californian newspaper that Wyden quoted in his letter to FTC Chairman Timothy J. Muris. The field is expected to continue producing for 20 to 25 years, and technological advances could add to that figure.

The Bakersfield facility, which went into operation nearly 70 years ago, produces about 20,000 barrels of gasoline daily, and about 15,000 barrels of diesel. Shell isn’t planning to boost capacity at its other California refineries when Bakersfield is brought to a halt.

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