Documents suggest company already planned summer refinery slowdown

The Orange County Register (California)

Shell Oil Co. documents released by a Santa Monica consumer group on Monday show that California’s second-largest oil refiner plans to throttle back production at its Martinez and Bakersfield refineries in July — a time of peak demand.

Experts said the cutbacks could amount to 200,000 gallons per day – enough of a shortfall to boost gasoline prices under some circumstances.

A spokesman for Shell Oil said the documents appear to be authentic but stressed that they were revised in early June. “Those are not necessarily the current plans,” spokesman Stan Mays said.

Mays didn’t disagree that the documents portray a production slowdown in July and August at both refineries in order to rehabilitate refinery units at Martinez – and he said some maintenance is still scheduled.

“There is routine summertime maintenance that is going on. Whatever would be normal for the refinery would be undertaken,” Mays said.

Jamie Court, president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights, contends that the documents are very recent because they contain numbers marked “5/25/04 Actual.”

“Why are they cutting back in a peak period?” he asked. “Cutting back operations in July and August is a recipe for higher prices.”

The documents describe refinery units that would be taken down for cleaning and repairs, cutting production from 96 percent of capacity in June to 87 percent in July. August production would recover somewhat, to 91 percent.

Experts say maintenance on refineries is normally done in the winter, when demand is slack. Unanticipated reductions in the summer might leave an oil company struggling to supply its own stations.

David J. Hackett, president of Stillwater Associates and a former oil company executive, reviewed the Santa Monica group’s documents for the Register and said they appear to be a 90-day plan drafted sometime in May.

“They were planning to do some maintenance in July and August,” Hackett said. “Refiners don’t like to do maintenance in the summer. But it’s not unusual.”

Hackett said the documents show Shell planning on a slippage in spot gasoline prices –from $1.36 per gallon in June to $1.21 in August.

“They might have thought that they would pump up the price,” Hackett said. “Or they might already have plenty of gas in the tank, and they’ve got it covered. … 150,000 barrels over a three-week period is not a lot of gas.”

Economists consider California’s gasoline market a tight oligopoly. Four companies – Chevron/Texaco, Shell, BP/Arco and Valero control 71 percent of the market.

In an interview last week about the economics of oil refining, Severin Borenstein, director of the University of California Energy Institute at Berkeley, said California’s largest refiners have “market power” — meaning a single company’s business decisions can have a dramatic effect on gasoline prices.

“If you take product off the market that no one else can replace, it can have a big effect,” Borenstein said. “In general, there is a 5 percent increase in price for every 1 percent decrease in quantity.”

The controversy over Shell‘s maintenance plans comes on top of a months-long dispute over Shell‘s plans to cease operations at the Bakersfield refinery in October.

Shell has said the 1932 refinery, which processes San Joaquin Valley heavy crude, is only marginally profitable in good years and is projected to lose $5.7 million this year.

However, the documents obtained by the consumer group show the refinery earning a projected profit of $11.4 million in May alone. Shell‘s projected margin at Bakersfield was $11.76 per barrel in May, compared with $16.09 at Martinez.

Court sent the documents to the Federal Trade Commission and the California attorney general, saying a regulatory response is needed to keep gasoline from hitting $3 a gallon before August.
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