Shell Documents Show Need For National Moratorium On Refinery Closures

April 6, 2004

President George Bush
The White House
The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

United States Senator John Kerry
304 Russell Senate Office Building
Washington DC 20510

Dear President Bush and Senator Kerry,

In recent days, both of you have weighed in on the high price of gasoline in the United States. Unfortunately, the debate has not yet turned to the main cause of the recent gasoline price spikes. That has little to do with OPEC but is a result of the deliberate restriction of supply by the highly consolidated domestic refining industry.

We write you with new internal Shell documents showing manipulation of supply at domestic refineries and ask that both of you call for an immediate moratorium on refinery closures in the United States. The documents available at http://www.consumerwatchdog.org/utilities/rp/ show Shell is shuttering its highly profitable Bakersfield refinery — artificially restricting the supply of California gasoline to drive up the price and lying to the public about it.

The April 5th “Alliance Refining Update” document shows that Bakersfield, which supplies 2% of California’s reformulated gasoline, has the biggest margins of any Shell refinery in the nation– or $23.01 per barrel, about 55 cents profit per gallon. That means, for example, that margins are 36 cents per gallon higher in Bakersfield than in Port Arthur Texas. The internal document comments under the category of refinery margins “Wow.” Yet Shell has publicly stated it is closing the Bakersfield facility, and not selling the refinery, because it is not profitable.

The case of Shell‘s Bakersfield closure, discussed further below, shows how refiners have consciously closed refineries and maintained low inventories because they know that in a speculative commodities market the scarcer the commodity, the higher the price. When there’s a shock to the system, the market anticipates a shortage and spikes the price of the commodity. Since it doesn’t cost refiners any more to make the gasoline when the price is high, their profits soar too.

In the wake of soaring gasoline prices in the Midwest two years ago, for example, the Federal Trade Commission found low inventories to blame for price spikes following a pipeline break. One refiner, Marathon, even acknowledged to the FTC that it had no incentive to bring gasoline in quickly since that would lower the price. Days ago Saudi Arabia similarly pointed to limited refining capacity as an explanation of higher US gas prices.

As you may know, Californians are paying the highest prices for gasoline the nation, up to 50 cents per gallon more than most other areas in the nation. The culprit is low inventories and restricted refining capacity maintained by the five oil refiners that control 90% of California’s special CARB fuel.

Given this restriction of supply, it’s shocking that Shell would announce the closure of yet another refinery responsible for 2% of the state’s gasoline supply. That would bring the number of refineries in California making CARB fuel to 12, from 37 in 1983, despite a burgeoning population. Everyone seems to be aware that local refineries can barely meet our needs for CARB gasoline and the lack of refining capacity is recognized as a major factor in the higher pump prices. Closing yet another refinery would undoubtedly cause prices to rise even further.

This market obviously functions like no other. If there were a computer shortage, would any computer maker close computer factories?

When Shell announced its intentions to close its refinery in Bakersfield by October of 2004, the company blamed poor profitability and a declining crude supply in the San Juaquin Valley. Shell stated in its press release that the refinery’s continued operation is “no longer economically viable” because “there is simply no longer an adequate supply of crude oil to justify the continued operation of this facility.” The Seattle Times also reported on March 6th: “Shell will close the plant because it was unprofitable and didn’t receive enough oil from the area to keep operating, said James Frazier, a company spokesman.”

The new evidence obtained by the Foundation for Taxpayer and Consumer Rights (FTCR) shows Shell has deceived the public with these statements and that it intends to demolish the refinery to keep gasoline off the market, and the price of gasoline high, rather than sell the refinery. Your united call to keep this refinery and others open can stop such anti-competitive behavior.

Shell has admitted to the media and its own employees that it has not sought to sell the refinery. That’s confirmed by internal documents showing a timetable to decommission and demolish the Bakersfield refinery right after shut down in mid-September. The company implied no other oil company would want the refinery as it is unprofitable and any buyer would face the crude shortage.

Since Shell‘s announcement, industry observers, local crude producers, and analysts at the California Department of Conservation, Division of Oil, Gas and Geothermal Resources have questioned the notion that the Bakersfield refinery could run out of crude. They have pointed out how California is ranked 3rd behind Alaska and Texas for size of crude oil reserves and ranks 4th amongst the states in crude production. FTCR is now convinced a 20 year supply of local crude is available for processing in Bakersfield.

In addition to the April 5th update, an internal Shell Power Point Presentation titled “People, Planet, Results February 2004 Shell Bakersfield Refinery” disproves the claim Bakersfield is not profitable as the company displays positive net earnings for 5 out of the last 7 years.

Moreover, an end-of-2003 memo from Shell manager Jeff Krafve to fellow refinery employees says it all: “[W]e turned in excellent operational performance this year. We are the most reliable US Shell refinery in 2003, and achieved world-class performance two years in row now. We have made quantum step improvements in our environmental compliance, finishing well under target again for the second straight year. We have reduced the expense we control 15+% year over year, and have been one of the few Shell U.S. refineries to turn a profit’.We’ve done this with the lowest personnel index in Shell refining in the country, making us comparatively the most productive and effective workforce in the system.”

Owning a refinery with this type of profitability located in the largest gasoline market of the in the world, why wouldn’t Shell offer to sell the refinery rather than close it? Interviews of workers at the refinery provide the answers.

Refinery workers in Bakersfield told FTCR that Aamir Farid, General Manager of the Shell‘s refinery, stated to hundreds of employees at an employee meeting that the company would never sell the refinery because it did not want the competition. This suggests the real motivation for the company to close the refinery is to ensure its production does not stay on line and further decrease competition for the company’s remaining two refineries in California.

If the Bakersfield refinery is closed, Californians will undoubtedly suffer even greater economic harm at the pump due to the loss of treasured refining capacity for our unique blend of CARB gasoline and diesel fuel. Both the loss of CARB fuel refining capacity and the damage to competition will be nearly impossible for the state of California to reverse in the future.

Together you have an opportunity to stop Shell from closing this refinery and to maintain the nation’s refining capacity by calling for a moratorium on all refinery closures in the United States. It’s the right thing to do not only for Americans’ bank accounts, but also for our national security. As the bulldozers are apparently on the way to Bakersfield, time is of the essence.

Sincerely,

Jamie Court Tim Hamilton
President Petroleum Consultant