Sunday, January 24, 2010

Chevron Mulls Closing Refineries

As I wrote earlier (see this link), Chevron has troubles in California, specifically with their two refineries. Chevron has other refineries, both in the USA and overseas. Chevron announced that they are evaluating their downstream (refining and marketing) business and will have a plan in place by third quarter 2010. There will likely be some job losses. My view is that there will also be one or more refineries sold, shut down, or scaled back. Should the Richmond, California, refinery be shut down, the environmentalists will celebrate. They likely have the champagne on ice already (probably just apple juice, since champagne contains CO2 to create the tiny bubbles).

The Richmond refinery is old and has antiquated technology in several areas. Chevron has a capital program that would upgrade the refinery to more modern technology, which will also reduce emissions of various pollutants. This upgrade project was halted by environmental groups.

Meanwhile, the US economy sputters, and California does no better. Gasoline and diesel demand are reduced, so that refineries are operating at historically low rates. The official number from EIA this past week had refineries operating at just above 78 percent of their capacity. The utilization normally is low in the heart of winter, as now, however this is abnormally low. The usual swing from summer to winter utilization is around 10 to 12 percent. The utilization will likely fall to 76 percent by mid-February, perhaps lower as more people lose their jobs. In such a market, Chevron must decide how to most profitably revise their refining business.

Having been through this before in the 1980's, I have some insight as to how a refining company reaches such decisions. The company projects the future demand for products, as best they can, in each marketing region. California is almost completely isolated as a marketing region, meaning what is consumed in California is also refined in California. The product specifications for gasoline are much tougher in California due to clean air issues. Then, the company assesses all the other refineries in that marketing region, and ranks them from best to worst as to profitability and long-term viability. In the current business environment, the refineries with the least likelihood of profitability are candidates for closure. Future regulations such as AB 32 (implementation in 2012) also play a big role. AB 32's cap and trade provision will require each refinery to pay hundreds of millions dollars each year for their CO2 emissions. Under that scenario, it could very well be that foreign refineries will produce gasoline to California specifications, and companies such as Chevron will import those products rather than run a refinery in California.

It will be quite interesting to watch the California refining industry over the next several months. When refineries shut down, jobs are lost, tax receipts are reduced, government deficits increase, and lives are disrupted, among many other consequences.

Roger E. Sowell, Esq.

1 comment:

Anonymous said...

I understand that more and more gas is being made overseas where there are few environmental or safety requirements. Making gas overseas is markedly cheaper than making it in California. The solution is not to deregulate or allow the oil companies to reduce their environmental or safety watch guards, but to tax gas made overseas so that it is so much more expensive than U.S. gas.