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Sacramento Bee: Shell denies greed spurs the closure

Sacramento Bee: Shell denies greed spurs the closure

By Dale Kasler — Bee Staff Writer

Wednesday, May 19, 2004

BAKERSFIELD – In the furious debate over California’s gasoline prices, the Shell Oil refinery in Bakersfield – a forlorn mess of pipes and boilers on a state road choking on truck fumes – usually got overlooked. Until Shell decided to close it.

Set for an Oct. 1 shutdown, the refinery produces just a sliver of the state’s motor fuel but has been embraced as a cherished resource by economists, elected officials and consumer advocates. They say losing the refinery could be devastating in a market where the balance between supply and demand is extraordinarily delicate.

With the statewide average price of gas at a record $2.31 a gallon Tuesday, one energy economist said prices could jump another 10 percent or more if the refinery closes. 

Some consumer advocates say that’s no accident. The Foundation for Taxpayer & Consumer Rights, which has unearthed internal company memos showing the refinery has been profitable recently, says Shell is trying to manipulate the market. “They don’t have a good reason for shutting it (except) to drive up the price of gasoline,” said Jamie Court, president of the Santa Monica-based foundation. “Shell knows that … the price will go through the roof.”

Shell officials deny that the company is out to do harm. They say the 72-year-old refinery is inefficient and needs $1 billion in new equipment. Discarding it is “best for the consumer,” said David Harrington, a spokesman for Shell Oil Products US.

But Shell won’t rule out the possibility that prices could go higher as a result. While the company expects to compensate partially by increasing production at other West Coast refineries, Harrington acknowledged Shell’s total output of fuel for California will fall. “I don’t know what the market’s going to look like,” he said when asked about the price impact. “Maybe others will bring in cargoes from somewhere” or increase production.

Facing biting criticism from elected officials – and informal inquiries about price impact by the Federal Trade Commission and state Attorney General Bill Lockyer – Shell agreed to try to sell the refinery. So far it’s had 14 inquiries but no “credible offers,” said spokesman Cameron Smyth.

The refinery’s fate is important beyond the immediate impact on prices. Shell’s decision raises unsettling questions about Kern County’s oil-based economy and California’s long-term energy future.

The refinery is surrounded by some of the nation’s most fertile oil fields. Kern produces more crude oil than Oklahoma and Wyoming combined, and trails only Louisiana, Texas and Alaska. It’s responsible for about one-fourth of all the oil used in California.

But it’s slowly running dry.

Kern’s oil production is falling roughly 1 to 3 percent a year and has dropped more than 20 percent since 1988 – mirroring what’s happening in the rest of California’s oil fields.

Twenty years ago, California produced 60 percent of its oil; now it’s 48 percent and falling.

Shell officials say declines in Kern’s oil make it increasingly difficult – and expensive – to feed the Bakersfield refinery. Although Shell is a partner with ExxonMobil Corp. in a major oil-producing venture in Kern County, that business is run separately and the refinery has to scrounge for supplies like anyone else, Harringon said.

“The crude here is declining. That doesn’t mean it’s going away tomorrow, but it’s a finite resource,” he said. “There’s a point where the cost to acquire (oil) does not make it efficient to run … an old, cobbled-together, inefficient refinery.”

But at a time of record gas prices, the refinery has become a battleground issue for suspicious consumer advocates and elected officials.

U.S. Sen. Barbara Boxer, D-Calif., who has criticized Shell repeatedly, accused the company Tuesday of speeding up the shutdown by two months. Shell denied it, saying it will begin scaling back production after the peak summer driving season ends on Labor Day. Production would come to a complete halt Oct. 1, as scheduled.

According to documents uncovered by Court’s group, the refinery earned $4.7 million last year and has made money in four of the past six years. A separate memo from early last month said the Bakersfield site was enjoying the highest profit margin of any Shell refinery in the nation.

Harrington said the memos only provide a “snapshot” of what’s going on. The larger story is that the refinery is increasingly uneconomic, and closing it will improve the efficiency of Shell’s West Coast operations, he said.

That’s because the Bakersfield site has acted as a kind of drain on a much larger, more efficient Shell refinery in Martinez, which runs partly on Kern oil. With Bakersfield out of the picture, more oil will flow to Martinez, Harrington said. “We can squeeze more … out of Martinez than Bakersfield,” he said.

The company also expects to bring more supplies in from its refinery in Anacortes, Wash. But it won’t be enough to make up completely for the loss of Bakersfield.

“Will we be making less gasoline? The answer’s yes,” Harrington said.

Many experts say California needs every drop it can refine.

While high global crude-oil prices are contributing to the latest increases at the pump, California also is suffering from a long-term, fundamental shortage of production capacity at its refineries. That problem is compounded by the state’s unique clean-air fuel specifications: Only a handful of refineries outside California can meet those recipes, and that’s a key reason why prices spike when in-state production falters.

As a result, even a small refinery like Shell’s in Bakersfield – producer of only 2 percent of the state’s gasoline and 6 percent of its diesel fuel – can matter. Even though Shell said it will make up part of the shortfall, the effect on prices still could be significant.

“If you’re at a peak time (in demand) and you don’t have any other place to get supply, it could mean a 10 to 15 percent increase in the price,” said Severin Borenstein, director of the University of California Energy Institute.

The Kern facility opened in 1932 as the Mohawk Refinery. It’s gone through a succession of owners, including a joint venture between Shell and Chevron. When Chevron merged with Texaco in 2001 and was forced by antitrust regulators to sell its share, Shell became sole owner.

The plant is actually three separate facilities, pulled together by acquisitions over the years. One of the sites is actually three miles away, connected to the main plant by pipelines.

The combined facility processes under 70,000 barrels of oil a day – a minuscule amount in a state that runs through roughly 2 million barrels daily. It’s the second smallest of the 13 California refineries that make gasoline (another 11 refineries make other products).

Bakersfield also needs expensive upgrades, like a machine known as a fluid catalytic cracking unit.

“But it was a $1 billion investment and it never got built,” said Gregory Cervantes, the refinery’s operations manager.

Cervantes, who’s worked at the refinery for 25 years, said he’s heard rumors of a shutdown for more than 10 years.

“We gave it a hell of a run,” he said. “Nobody expected us to be here this long.

“We tried to work out as many of the inefficiencies as we could. You can’t do ’em all.”

Some experts agree.

“It’s a pretty old, inferior piece of equipment,” said Phil Verleger Jr., an independent energy consultant from Newport Beach.

By spotlighting the gradual decline in Kern’s oil production, Shell created something of an unpleasant buzz in Bakersfield.

No one denies that oil gradually is running out in Kern. Still, most people say the barrel is half full, not half empty.

Kern has at least 20 to 30 years of oil left, said Randall Adams of the state Department of Conservation’s oil and gas division. New oil-extraction methods could extend that even further, he said.

Questions about disappearing oil bring a chuckle from folks like Fred Holmes, a genial oilman who runs drilling rigs in the sandy hills of western Kern.

“Why don’t we seem more nervous? We’ve heard this all our lives,” the 60-year-old said in a soft twang. “It’s not going to decline overnight.”

Locals take heart from ChevronTexaco Corp.’s decision to increase capital spending by $100 million in the area this year. “There’s still a lot of value in these fields,” said spokesman Greg Hardy.

Oil was first discovered in Kern County in 1899 and has been part of the landscape ever since. Oil rigs methodically bob up and down next to subdivisions, golf courses and everywhere else. The sports teams at Bakersfield High School are the Drillers. The city’s elite dine at the downtown Petroleum Club.

The oil business here isn’t easy street, though, even when crude prices are sky high. Most of Kern’s oil, known as “San Joaquin Valley heavy,” is thick and sludgy and expensive to extract, while its high sulfur content makes it less desirable to refiners.

So when west Texas crude, the benchmark for U.S. oil, topped $41 on Tuesday, Kern crude was selling for about $35.

The difficult economics seem to have made Kern oil people that much tougher.

“There’s still a lot of wildcatters out there, looking, exploring,” said Les Clark, who runs an association of independent oil producers in Kern.

“Most folks know oil won’t be there forever. But to shut the door today and walk away? That’s not the position we’re in.”

The Bee’s Dale Kasler can be reached at (916) 321-1066 or [email protected].

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