Plan to Shut Refinery Draws More Questions

LA Times

April 6, 2004

Critics say Shell Oil's decision to close its Bakersfield facility is an attempt to boost profit. By Elizabeth Douglass, Times Staff Writer

As frustration over California's high gasoline prices has mounted, so have questions about Shell Oil Co.'s plan to shutter its refinery in Bakersfield.

The company's announcement late last year that it would close the aging refinery Oct. 1 sent tremors through a state already in the grips of a chronic shortage of gasoline supplies.

Since then, the situation has only gotten worse. The cost of regular gasoline in California rocketed more than 44 cents a gallon and has stayed above $2 for seven weeks.

The statewide average pump price for self-serve regular rose 4.2 cents in the last week to $2.126, the highest weekly average since March 2003, the U.S. Energy Information Administration reported Monday.

Shell executives say they have to close the refinery because it's running out of the molasses-like San Joaquin heavy crude that comes from nearby oil fields and feeds the plant at a rate of as much as 70,000 barrels a day.

Critics contend that there is plenty of crude in Kern County, home to some of the most prolific oil fields in the country. They believe the planned shutdown has more to do with boosting profit at Shell's two other refineries in California, located in Los Angeles and Martinez in the Bay Area.

"I think this deal smells," said Sen. Ron Wyden (D-Ore.), who has commandeered the Senate floor four times in two weeks to rail against high fuel prices and the Bakersfield shutdown. "Up and down the West Coast, people are getting clobbered by gas prices, and they deserve to get some answers."

Shell spokesman Cameron Smyth rejected the criticism. "To assert that we're closing to somehow tighten supplies or somehow drive up margins is false," Smyth said.

Many refineries, especially in California, are enjoying record profits. Competitors and industry experts are hailing the dawn of a "golden era" for U.S. refining because demand has begun to outstrip supply nationwide, increasing profit margins.

The Bakersfield refinery, though less efficient than other Shell plants, was profitable in 2003 and has the highest margins of Shell's eight U.S. refineries, according to internal documents obtained by The Times.

Shell has said it would entertain offers for the facility but has made a sale less likely by declining to include the nearby oil fields in the deal.

California Atty. Gen. Bill Lockyer is investigating whether the shutdown would have antitrust implications, said spokesman Tom Dresslar, who declined to elaborate on the probe.

Sources said Lockyer's staff had visited the refinery and interviewed employees there.

State Sen. Joe Dunn (D-Santa Ana) recently suggested that idling Bakersfield could be part of a "deliberate strategy" to dictate gasoline pricing in California. Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica, has said the organization will sue to block the closure if Lockyer doesn't.

Wyden has twice asked the Federal Trade Commission to review Shell's plan to ensure that closing the refinery won't violate antitrust laws.

There has been no response from the commission, Wyden said.

His home state of Oregon gets about a third of its gasoline from California refineries and suffers along with Golden State motorists when fuel production falters.

The same is true for Arizona and Nevada, which get more than 60% and 90% of their fuel from California, respectively.

California's 13 gasoline-making refineries run nearly full-tilt around the clock but can't keep up with rising demand. Imports from Washington state and as far away as Finland have traditionally filled the gap, though just barely.

Shell's Bakersfield plant, a relatively small refinery, supplies California with 2% of its gasoline and 6% of its diesel.

Losing the seemingly minor production would put the fuel-thirsty state in a "very vulnerable situation," said Claudia Chandler, assistant executive director of the California Energy Commission.

The 72-year-old refinery sits in Kern County's San Joaquin Valley. The county's combined output accounts for most of California's crude production and outranks that of every state except for Texas and Alaska.

Although production is declining by as much as 5% a year in the valley, the region's 75 active fields still hold 20 to 35 years' worth of crude at today's production rates, said Randy Adams, district deputy in the state's Division of Oil, Gas and Geothermal Resources.

Said David Hackett, an Irvine consultant who has done gasoline studies for the state: "I was just kind of mystified that they picked crude as their reason" for closing Bakersfield. "Some of the reason they're in trouble on this is that they picked a reason that a lot of people have doubts about."

Shell, however, hasn't wavered.

"The overall production of the San Joaquin heavy crude has been declining, and Shell's access to those San Joaquin Valley heavy-crude barrels has been declining as well," said Aamir Farid, general manager of Shell's Bakersfield and Martinez refineries.

Shell sends some of its Bakersfield crude to Martinez, Farid said, and nearby fields can't keep supporting both facilities.

"Chevron or other people may be producing lots of barrels of this stuff," Farid said, referring to Bay Area giant ChevronTexaco Corp., "but there are lots of people who want it, and it's not available to us at the kind of level that would keep Bakersfield viable."

Among those hardest hit by the closure would be fuel users in the Bakersfield area, where Shell is the major supplier of gasoline and diesel.

Shell has promised to continue to deliver fuel to its branded gasoline stations and others with supply contracts, but it hasn't said how.

In November, Shell said it would boost diesel production at the Martinez plant and increase gasoline production at its refinery near Seattle, delivering both to customers in the Bakersfield area by reversing a pipeline that currently sends fuel the other way.

Kinder Morgan Energy Partners, which owns the pipeline, is reviewing the possibility. But the firm hasn't committed to reversing its pipeline and would need one or two years to complete the process, state officials say.

That would leave Shell's Bakersfield customers dependent on trucked-in supplies from Los Angeles or from the Bay Area 200 miles north.

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(BEGIN TEXT OF INFOBOX)

Bakersfield refinery

Daily processing capacity at opening in 1932: 1,500 barrels of crude oil

Daily processing capacity now: 70,000 barrels

Gasoline production: 20,000 barrels a day, 2% of statewide supply

Diesel production: 15,000 barrels a day, 6% of statewide supply

Employees: 250, plus 150 contractors

Source: Shell Oil

Los Angeles Times