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MarketWatch: Shell Argentina declares service station force majeure

By Drew Benson
Last Update: 6:04 AM ET Sep 7, 2007

8:58am 09/07/2007

RDSA80.51, +1.14, +1.4%) plans to send letters Thursday to its service stations declaring a force majeure, citing a government order to shut down its refinery, Shell Argentina President Juan Jose Aranguren said.

Shell Argentina began shutting down its Doc Sud refinery in Buenos Aires after receiving an order from the government’s Environmental Ministry on Wednesday night. “We have a situation of force majeure, and we consider it out of our control,” Aranguren told reporters during a meeting at Shell Argentina headquarters.

The shutdown order is the latest in a string of clashes since 2005 between Shell and government officials, and it comes amid reports that Exxon Mobil Corp.

(XOM) wants to sell its Argentine unit, Esso, whose refinery provides about 12% of the nation’s gasoline and diesel. Asked if Shell wants out, too, Aranguren said the company will continue to operate in Argentina.

The refinery shutdown will take five days, with another five days needed to bring the refinery back up to full production if the order were to be reversed or legally blocked, he said.

By Thursday, the inflow of oil to Doc Sud had dropped from the normal 15,000 cubic meters a day, or roughly 95,000 barrels a day, to 10,000 cubic meters a day, Aranguren said.

Company executives were to meet with government officials Thursday night and planned to file an administrative appeal Friday. If that fails to reopen the refinery, the company plans to seek a court injunction, Aranguren said.

Environmental authorities said in a statement that 13 days of inspections at the Doc Sud refinery found soil contamination. They also alleged that the refinery was using river water without the necessary permits and that environmental impact studies were lacking. The order called for a refinery shutdown until Shell corrected the problems.

Aranguren rejected the claims one by one. Regarding the use of river water usage, he said the company has been trying to apply for a permit for years, showing reporters copies of several requests along with government responses that there are no requirements for water not drawn from underground.

Regarding the amount of fuel remaining, Aranguren said service stations usually have about three days worth in storage, while the refinery has about 15 days of gasoline, and seven to eight days of diesel. Meanwhile, the refinery will continue to produce in progressively smaller amounts over the five-day shutdown period.

The shutdown will also require Shell to cancel incoming crude shipments from Argentine producers. “If it isn’t processed at Shell’s refinery that doesn’t mean that it can be refined in another one, because they are all operating at maximum capacity,” Aranguren noted.

Aranguren said Shell won’t import fuel to meet domestic service station needs, even if the government were to make an exception to the shutdown order that currently prohibits the company from operating its fuel import docks and storage tanks at the Doc Sud site.

“If you want to know if we are going to assume the loss of importing all of the product that (the government) won’t let us produce, we aren’t going to do it,” he said.

Fuel retailers operating in Argentina, which also include Repsol YPF SA (REP) and Petroleo Brasileiro SA (PBR), complain that de-facto government price controls make selling imported diesel a money losing business.

Nonetheless, companies have had to periodically import diesel in recent years to meet demand during peak harvest or planting periods.

Farmers began the year’s corn planting last week, and demand is expected to jump next month when farmers begin to plant soy.

President Nestor Kirchner called on Argentines to boycott Shell stations in March 2005, after the company raised pump prices on a jump in world oil prices. After government-aligned protesters marched on Shell stations, the company quickly dropped prices, and they have remained more or less under government control since.

Last September, the government forced Shell to pull a new premium diesel from stations and sent investigators to review company records.

The government activated a 1974 “Supply Law” a month later, and government price controllers have since fined Shell for allegedly failing to supply the market and sought arrest warrants for Aranguren and other Shell Argentina executives.

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