The media chatter on the future of Chevron and Richmond ramped up this past week with new threats by Chevron to downsize its workforce and eliminate “positions” (Chevronspeak for refineries).
Take a look at any of the reader feedback and comments that typically follow stores in the Chronicle and Contra Costa Times for a lively discussion about how dumb the Richmond City Council is to have treated Chevron so poorly and driven them out of Richmond.
I continue to maintain, however, that whatever decisions Chevron makes or doesn’t make about the future of the Chevron refinery will be driven not by the Richmond City Council or Bay Area environmentalists but instead by Chevron’s own internal strategic and economic plans. The impact of the magnitude of taxation controlled by the Richmond City Council, or the votes of Richmond residents for that matter, is less than the compensation of Chevron’s CEO. To think that Richmond holds the fate of the Chevron refinery in its hands is patently absurd.
Chevron’s latest Annual Report (2008) says nothing about the precarious economics of downstream operations or the impacts of predatory cities on its refining operations. Instead, it cites the price of crude oil as the “biggest factor,” something the Richmond City Council or Communities for a Better Environment have no control over.
Earnings of the company depend largely on the profitability of its upstream (exploration and production) and downstream (refining, marketing and transportation) business segments. The single biggest factor that affects the results of operations for both segments is movement in the price of crude oil. In the downstream business, crude oil is the largest cost component of refined products.
Chevron’s Annual report also listed a number factors affecting the profitability of its downstream operations. I looked carefully, but I was disappointed to not see Richmond, CBE or my name anywhere:
Earnings for the downstream segment are closely tied to margins on the refining and marketing of products that include gasoline, diesel, jet fuel, lubricants, fuel oil and feedstocks for chemical manufacturing. Industry margins are sometimes volatile and can be affected by the global and regional supply-and-demand balance for refined products and by changes in the price of crude oil used for refinery feedstock. Industry margins can also be influenced by refined-product inventory levels, geopolitical events, refinery maintenance programs and disruptions at refineries resulting from unplanned outages that may be due to severe weather or other operational events.
Other factors affecting profitability for downstream operations include the reliability and efficiency of the company's refining and marketing network, the effectiveness of the crude-oil and product-supply functions and the economic returns on invested capital. Profitability can also be affected by the volatility of tanker-charter rates for the company's shipping operations, which are driven by the industry's demand for crude oil and product tankers. Other factors beyond the company's control include the general level of inflation and energy costs to operate the company's refinery and distribution network.
Similarly questionable is the reality of the current whining by Chevron about the low profit margins of its “downstream operations.” I have to believe that a 100-year old oil company is in it for the long haul. Chevron is no day trader. Less than 15 months ago, Chevron reported the largest quarterly profit in its 129-year corporate history, joining other oil companies reporting stunning third-quarter earnings gains. Chevron also reported a $1 billion at its U.S. refining and marketing arm, benefited from significantly higher margins on the sale or refined products—largely because of the dramatic drop in crude prices.
Reportedly, Chevron’s California refineries are its most profitable, and without Richmond, Chevron would lose its substantial northern California market share.
Oil market analyst Allen Good of Morningstar market research firm noted that Chevron’s West Coast properties are among its most profitable. In addition, California refineries typically make more money because of the state requirements on blending gasoline. Also, if Chevron were to close its Richmond refinery, it would no longer have a presence in the Northern California market, thereby forcing the oil giant to ship gasoline blended at its Southern California refinery and adding to its costs. “Those refineries may be safe,” Good said of Chevron’s California plants, including Richmond. “It could be some of the smaller ones that they have in the U.S. that could take a hit.”
However, critics are correct that Richmond depends on Chevron for a substantial portion of its general fund, primarily from property taxes and utility user taxes. Richmond is not anywhere near as precarious or as joined at the hip with its major revenue source as San Pablo, which depends on gamblers at Casino San Pablo for 2/3 of its general fund, but we would be wise to have a contingency plan for that day when Chevron might do something to drastically change the revenue stream from the Richmond refinery.
To that end, the City Council will conduct a study session on February 23 to consider “Life After Chevron,” including the various scenarios for the future of the Richmond Refinery and how the City might mitigate the impact. Some scenarios might have lesser impacts than others. Sale of the refinery to an independent refiner may have no effect at all. Changing its nature to a terminal or chopping it up and shipping it to China would certainly affect the utility user tax. Even if it is shut down, the refinery occupies 3,000 acres of prime waterfront property on which property tax would still be due. Chevron has said nothing about the prospects for the Richmond research facility, which employees as many people as the refinery itself.
One trend that seems to be for sure is a reduction in automobile and gasoline use in America. See 4 Million Fewer Cars on the Road: America's Love Affair with the Automobile May Be Coming to an End. There probably are going to be fewer refineries and reduced demand. Those that survive are likely to be larger, more efficient and strategically located.
Contrary to popular opinion, the Richmond City Council does not have its head in the sand. The City Council continues to make overtures to Chevron to craft a “global” resolution of the many conflicts between the two parties, including the utility tax, business license tax, the Bay Trail and Point Molate, all of which are or have been the subject of litigation or threatened litigation. That doesn’t include the halted Energy and Hydrogen Renewal project that was stopped, not by the City Council, but by a so far successful lawsuit from environmental organizations that maintained the City Council erred in approving a flawed EIR.
Despite Chevron’s poor mouthing and reduced earnings, its stock has continues to climb throughout 2009 and market analysts are optimistic for 2010.
Following is a digest of this week’s media coverage of Richmond and Chevron:
Richmond hurt
It's clear Gayle McLaughlin, Richmond's green mayor, and her supporters have wasted great amounts of human and financial resources to find ways to attack Chevron.
These so-called leaders have done little to encourage economic development or to address Richmond's continual rise in crime.
They introduced Measure T, a tax measure focused on Chevron's operations, which the courts found to be illegal. Next, they challenged Chevron's reporting of its utility user's tax, hoping to pressure Chevron into paying more than the 8 percent every other business owes.
Finally, they moved to stop Chevron's retrofit project, designed to upgrade the old plant and reduce emissions. This resulted in putting 1,100 people out of work.
Now, Councilmen Tom Butt and Jeff Ritterman, McLaughlin's primary supporters, are attacking the Point Molate resort project — a major economic development project.
The waterfront project site is presently inaccessible. The comprehensive resort promises good employment opportunities for residents — in its construction and future operations.
It's time these elected officials start focusing on positive ways to help Richmond grow, while reducing unemployment and crime.
Their past efforts have done much to hurt and nothing to help, Richmond residents have more employment opportunities and a better quality of life.
Bob
Dabney
Will Chevron Close Its Richmond Refinery?
Wednesday, January 20, 2010
There’s been a lot of speculation in the past couple of days that Chevron may decide to close its 100-year-old Richmond refinery because of declining revenues. Drew Voros, business editor for the Oakland Tribune and Contra Costa Times, is already blaming environmentalists and liberal members of the Richmond City Council who have fought to stem pollution at the refinery for years, claiming that they’re the causing Chevron to close the refinery. However, an industry expert quoted in today’s San Francisco Chronicle says it’s unlikely that Chevron will pull up stakes in Richmond, because there's too much money to be made in the California market.
Oil market analyst Allen Good of Morningstar market research firm noted that Chevron’s West Coast properties are among its most profitable. In addition, California refineries typically make more money because of the state requirements on blending gasoline. Also, if Chevron were to close its Richmond refinery, it would no longer have a presence in the Northern California market, thereby forcing the oil giant to ship gasoline blended at its Southern California refinery and adding to its costs. “Those refineries may be safe,” Good said of Chevron’s California plants, including Richmond. “It could be some of the smaller ones that they have in the U.S. that could take a hit.”
Chevron has said that it plans to cut jobs and that its domestic refineries are losing up to $600,000 a day, but has not disclosed whether those losses apply to its California plants. The rumored Richmond closure also could be nothing more than saber-rattling in an effort to convince environmentalists to drop their lawsuit which blocked a massive expansion of the Richmond plant last year because of concerns over increased pollution. Chevron also is likely apprehensive by a renewed city council effort to increase taxes on the Richmond refinery to make up for the impacts it causes on the city.
Chevron Corp. to cut jobs worldwide
David R. Baker, Chronicle Staff Writer
Wednesday, January 20, 2010
Oil giant Chevron Corp. will cut jobs from its worldwide refining, marketing and retail operations as the recession drags down gasoline sales, a spokesman for the San Ramon company said Tuesday.
Chevron won't decide until March the exact number of employees who will lose their jobs, said spokesman Lloyd Avram. The impact on Chevron's extensive California operations, which include headquarters and two refineries, is unclear.
But the shakeup could lead the oil company, America's second largest, to sell some of its refineries and pull out of unprofitable markets.
"The organization is going to be leaner and less complex, in order to be more profitable in the global market," Avram said. "It's going to have fewer positions and therefore fewer employees."
The company owns two of the state's largest gasoline refineries, in Richmond and El Segundo (Los Angeles County). Chevron has had a stormy relationship with Richmond officials and community groups, sparring with them over taxes and a proposed refinery expansion project that was blocked by a judge last year. Avram on Tuesday wouldn't discuss the fate of the Richmond refinery except to say that it would be reviewed along with all the company's other "downstream" operations, which include refining, marketing and retail sales. Chevron has about 18,000 downstream employees worldwide, 4,400 of them in California.
Oil market analyst Allen Good said Chevron's West Coast refineries are among the company's most profitable in the United States and probably won't be sold or closed.
"Those refineries may be safe," said Good, with the Morningstar market research firm. "It could be some of the smaller ones they have in the U.S. that could take the hit."
California refineries typically enjoy better profit margins than their counterparts elsewhere because the state uses its own gasoline blends made by a limited number of refineries.
Chevron's downstream employees learned of the cutbacks Monday in a video message from Executive Vice President Mike Wirth. The reorganization should be complete by the third quarter of this year, Avram said.
Like all oil companies, Chevron has seen profit margins at its refineries shrink with the recession, which has hurt sales of gasoline and diesel. Earlier this month, Shell Canada announced it would convert its Montreal refinery into a fuel storage center. And last year, the Big West refinery in Bakersfield closed after its owner, Flying J, tumbled into bankruptcy.
E-mail David R. Baker at dbaker@sfchronicle.com.
Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/01/19/BUQH1BKEHM.DTL&type=business#ixzz0dCp3NZmq
UPDATE 1-Chevron's Richmond refinery likely to close -paper
Wed Jan 20, 2010 2:10pm EST
Related News
Tue, Jan 19 2010
Mon, Jan 11 2010
Stocks
Chevron Corporation
CVX.N
$78.06
-1.62-2.03%
10:13am PST
* $1 bln upgrade of S.F. area refinery halted last July * Columnist says Chevron looked at refinery sale last year
* Chevron hopes to continue Richmond operations –spokesman
* Refinery has 240,000 bpd capacity, ranked 21st in U.S. (Adds Chevron spokesman's comments, industry background, details on Richmond refinery)
SAN FRANCISCO, Jan 20 (Reuters) - Chevron Corp (CVX.N) is likely to close its oldest refinery, in Richmond, California, in a wider restructuring of downstream operations, the local newspaper's business editor wrote in a column on Wednesday.
The second-largest U.S. oil company halted work on a $1 billion upgrade of Richmond last July after a state judge ordered it, agreeing with environmentalists who brought a lawsuit that the refinery's environmental impact report was incomplete. The company later filed an appeal. [ID:nN20122859]
Chevron said on Tuesday it planned to cut refinery jobs and exit some markets, and the Contra Costa Times business editor, Drew Voros, expects details to be unveiled in March to include the closure of the 108-year-old refinery.
"If Chevron had been allowed to complete the retrofit in Richmond, there would be a strong fiscal argument to keep it open. Instead, there is a strong fiscal argument to close it," Voros concluded in his column for the paper, serving the county that is home to Richmond and Chevron's San Ramon headquarters.
Chevron spokesman Lloyd Avram said the company had not yet made any announcements on assets, jobs or markets. "We've operated in Richmond for more than 100 years, and we would hope to continue operating," he said of the San Francisco Bay refinery, which has capacity to refine more than 240,000 barrels of crude a day, ranking it 21st in the United States.
A Richmond closure would be only the latest response by refiners to a devastating squeeze on margins due to demand weakened by the economy, coupled with high crude oil prices. Leading U.S. refiner Valero Energy Corp (VLO.N) said in November it would close its plant in Delaware City, Delaware, three months after indefinitely shutting its Aruba refinery. Sunoco Inc (SUN.N) has idled its plant in Eagle Point, New Jersey.
Chevron said last week it expected to report sharply lower refining earnings for the fourth quarter, and highlighted a $4 drop in U.S. West Coast refining margins. Stricter regulations in California, in particular, historically have contributed to relatively fatter margins for refined products in the state, but the West Coast premium over the U.S. Gulf Coast disappeared last quarter.
Chevron's largest U.S. refinery is on the Gulf Coast, in Pascagoula, Mississippi, while its second-largest is about 400 miles down the coast from Richmond, in El Segundo, California. Voros cited sources at Chevron who said last year that the company had talks with Chinese buyers who would have dismantled and shipped the Richmond refinery to China, while the land would be kept as an offloading facility for refined products.
Just this month, larger rival Royal Dutch Shell Plc (RDSa.L) said it would transform its Montreal East refinery into a fuel terminal.
Richmond sits at the southern end of a water artery that gives tankers direct access from the Pacific Ocean to smaller refineries in Rodeo, owned by ConocoPhillips (COP.N); Benicia, owned by Valero; and Martinez, where one is owned by Shell and the other by Tesoro Corp (TSO.N). (Reporting by Braden Reddall, editing by Gerald E. McCormick)
Chevron plans to cut jobs
By George Avalos
Contra Costa Times
Posted: 01/19/2010 05:04:23 PM PST
Updated: 01/19/2010 07:19:29 PM PST
Related
Chevron Corp. plans job cuts in its fuel production and retail operations, a potentially wrenching downsizing that clouds the outlook for its century-old refinery in Richmond.
San Ramon-based Chevron has been forced into a far-ranging review of its downstream units — composed of refinery, retail and marketing operations — because the economy has toppled into recession, drying up profits for the downstream business.
"It is very difficult to make money in the downstream business," said Lloyd Avram, a Chevron spokesman. "The downstream market has been out of balance for some time."
Chevron notified retail, refining, marketing and transportation employees through a video message that a downsizing was in the works.
More details were due in March, which could include the number of jobs that will be lost. An assessment of how downstream units should be restructured may be complete by September.
The energy giant could sell or close some refineries, or scale back the retail markets in which it competes, as a result of the assessment.
"It is possible that at some point we could make a decision to dispose of assets such as refineries," Avram said. "It is possible and likely that we will exit some markets."
Might a shutdown or asset sale include the Richmond refinery?
Chevron emphasized it hasn't made any decisions on what to do with any refinery, including the two in California and one in Hawaii.
Still, some Richmond officials have begun preparing for a possible oil refinery shutdown in their city.
The City Council is due to meet in February "regarding the preparation of a contingency plan should Chevron abandon, sell or downsize operations," Richmond Mayor Gayle McLaughlin said.
A government assessment about the Richmond refinery's future might also be lengthy.
"This needs to be discussed with the City Council and the community broadly and we will be doing that," the mayor said.
The Richmond refinery employs 1,250. The refinery also provides about $26 million in annual property tax revenue for an array of public agencies.
It accounts for at least 25 percent of the city's general fund revenue, which would equate to roughly $36 million in the current fiscal year.
Chevron has 18,000 downstream employees worldwide, including 4,400 in California.
Analysts weren't surprised by the move to restructure and cut refinery and retail operations and jobs.
"Chevron is not making much money in refineries. Everybody involved in refining is having a hard time making money over the last year," said Jason Gammel, an analyst with Macquarie Research, an investment firm in New York.
During the final three months of 2009, Chevron's refineries lost more than $600,000 a day, according to a Deutsche Bank analyst.
As a result of the thin margins, Chevron could be reluctant to continue operating refineries that are outmoded. That's a problem that all refinery operators, not just Chevron, must confront, said Tina Vital, an oil and gas equity analyst with rating firm Standard & Poor's.
"Companies want refineries that are larger, more nimble, and more flexible, with the ability to handle a wider range of crude-oil feedstocks," Vital said.
"With the recession, a lot of refineries worldwide will have to permanently shut down."
Chevron is seeking approval to upgrade and modernize the Richmond refinery. Environmental and legal foes have stymied the efforts.
The upgrade was designed to achieve improvements on a wide range of fronts.
Among the benefits cited by Chevron: "This project will increase the refinery's flexibility to process a larger variety of crudes."
Union officials said the prospect of downsizing for the refinery operations was "unsettling," as Jeff Clark, secretary-treasurer of the United Steel Workers Local 5, put it. Local 5 represents numerous union workers at the Richmond refinery.
"We support having clean and safe refineries for our workers and for our communities. That's a great idea," Clark said.
"But at some point, you have to look at whether all of these environmental regulations in the Bay Area make these facilities less competitive."
Yet even if the Richmond refinery isn't upgraded to fit in with the new world of crude oil, that is not a death knell by any means.
"The Richmond refinery is in California, which has some of the highest refining margins in the world," Vital said.
Plus, the factory is near other key Chevron markets such as Asia and the Pacific.
"Just because you have an older, less nimble, less complex refinery, that doesn't mean the refinery is automatically a target to be sold or closed," Vital said.
Contact George Avalos at 925-977-8477.
RETURN