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Michael Hiltzik / GOLDEN STATE

Shell's Refinery Shutdown: Standard Business Practice

May 20, 2004|Michael Hiltzik

Every so often a major corporation, following its natural instinct to root out another few pennies of profit per share, drives blindly into a political quagmire. It leaves a community without employment by closing a factory, bulldozes a landmark to put up another drive-through restaurant, dumps wastewater in a bucolic swimming hole -- you know the sort of thing.

These are salutary events in their way, because they remind people that as much as big businesses love to drape themselves in patriotism and good works, they're not charities.

This brings us to Shell Oil Co., which has made a perfectly sound business decision (in its own terms) to close its Bakersfield refinery on Oct. 1. Because the shutdown will deprive California of at least 2% of its gasoline and 6% of its diesel supply at a time when there is no slack whatsoever in the state's supply-demand equation, the move is almost certain to keep pump prices high and cause more frequent price spikes for motorists. In turn, it will probably enhance the company's bottom line.

The Bakersfield facility's importance to a competitive gas market is well understood. The refinery only ended up in Shell's hands in 2001, when the Federal Trade Commission forced Texaco Inc. to sell its interest in the plant. Given that the FTC feared that merging Texaco's ownership with Chevron Corp.'s own local refinery assets would be detrimental to gasoline competition in California, presumably it can't be happy about the competitive implications of taking the refinery out of the picture completely.

Accordingly, the shutdown has generated announcements of legislative investigations at the state and federal levels, another "probe" by Atty. Gen. Bill Lockyer and hints of FTC action. All of these are healthy developments, and someone might even unearth hard evidence that Shell is conspiring to squeeze the car-driving public because it knows that crimping overall supply will force up prices on the gasoline it does sell.

"Should they have the right to reduce a treasured and valuable refining capacity simply to make more money?" asks Jamie Court, a consumer advocate challenging the shutdown.

Unfortunately, the short answer is that companies often do have the right to make more money, even if it comes at the expense of a greater public good.

In this case, Shell has done itself no favors by failing to own up to this harsh reality. Rather than being candid about its rationale for shutting down the Bakersfield facility, it has trotted out a series of transparent half-truths.

Initially, the company claimed that the Kern County oil fields serving the refinery were declining so rapidly that "there is simply no longer an adequate supply of crude oil" for the plant. After state officials said their surveys showed that the fields would remain productive for several decades, Shell amended its position to hint that the issue is not whether there's enough oil in the ground, but whether it can buy the crude it needs at a price it considers suitable.

Recently the company's story has become, so to speak, more refined. It now acknowledges that broader economic concerns have factored into its decision, although it still seems to be going out of its way to be vague.

What's curious about Shell's murky explanations is that oil industry consultants and other experts say the company's desire to shut the facility down is fully understandable in financial terms.

Although the Bakersfield plant has been operating with sterling profit margins of late, it is by almost any measure less efficient than Shell's other facilities, including the big Northern California refinery in Martinez that will be inheriting its supply of Kern County crude.

It's small -- roughly half Martinez's rated capacity (although not much smaller than Shell's Wilmington refinery). It's 100 miles inland, so it can't easily draw on flexible supplies that can be landed at the coast. If it were operated through 2006, it would need a major overhaul and environmental upgrade costing more than $50 million.

"Part of Shell's problem is that they'll have to spend some serious money" to get the refinery up to standards, David Hackett, an Irvine-based oil industry consultant, told me. "They have to ask whether they should spend the money there, or shut it down and spend the capital elsewhere."

Shell doesn't deny that the closure will strain fuel supplies in California generally and the Bakersfield region in particular; it merely says that it will continue to provide its branded gas and diesel dealers -- though not independent dealers -- with fuel, and that it prefers not to predict whether or how other refiners will fill the gap. It acknowledges that Martinez will be able to replace only half of Bakersfield's diesel output and none of its gasoline.

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