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California: Shell to Reduce Summer Fuel Output at Bakersfield Refinery

Shell Oil Co. plans to put the brakes on production at its Bakersfield refinery in July and August, potentially shorting California's fuel supplies during the summertime driving season, according to internal Shell documents.

The planned cutback is the latest development in the controversy over the refinery, which can process up to 70,000 barrels a day of crude oil and makes about 2% of California's gasoline supply and 6% of its diesel. Shell has said it will close the facility Oct. 1 in a move that experts predict will boost pump prices by worsening the chronic imbalance between supply and demand in the state.

The internal documents obtained by The Times, including a refinery output forecast, indicate that Bakersfield will soon be producing far less than its capacity. After relatively high output rates in May and early June, Shell plans to cut crude oil processing about 6% in July and another 6% in August, according to the forecast.

Those two months are when California's fuel demand reaches annual peak levels.

Aamir Farid, general manager of Shell's refineries in Bakersfield and Martinez, said he couldn't confirm that there was a production slowdown in the works. "If that's the case, there is a good reason for it," he said.

There could be maintenance planned or projections for a shortfall of crude, he added, but "off the top of my head, I don't know what that good reason is.

"We're not playing any games. We're not shutting down early," Farid continued. "We're going to run as we normally run everything. We're not doing anything different through Labor Day, for sure, because we don't want to impact anything during driving season."

Refining industry experts said production at a facility slated for a shutdown wouldn't need to be curtailed until shortly before the closing date, when the owner would begin emptying and cleaning the equipment.

The Shell forecast says the Martinez refinery, in the Bay Area, will also cut crude processing in July, by nearly 10%, a reduction attributed to planned heavy maintenance called "turnarounds" as well as other work.

Farid said it wasn't unusual for maintenance work to occur during the peak driving season instead of the traditional spring maintenance season. Rob Schlichting, a spokesman for the California Energy Commission, agreed with that assessment.

But Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica, said he believed Shell was up to no good.

"They are cutting back production coming into the busiest driving holiday of the year," Court said. "That's incontrovertible proof that Shell is artificially limiting supply in order to drive up prices."

Court contended that motive explained why Shell didn't search out potential buyers for the refinery once it decided to shutter it.

Interest in the refinery grew after Sen. Barbara Boxer (D-Calif.), state Atty. Gen. Bill Lockyer and others complained publicly that Shell wasn't actively putting it on the market. A Shell spokesman said the company had so far received 23 inquiries — up from 18 a month ago — and that five parties had signed confidentiality agreements to delve into the Bakersfield books.

They'll find that the refinery has recently been a moneymaker: The Shell documents show that Bakersfield's profit of $11 million in May was 57 times what the company projected and more than double what it made in all of 2003.

Farid said that shouldn't be interpreted to suggest that Shell was wrong to plan to close the plant.

"You still have to assess whether you're going to generate a return on investment that you think is adequate," he said. Despite the big profit in May, "our view hasn't changed."

Last month, Lockyer's office hired an industry consultant to study the financial viability of the Bakersfield refinery and report back before the end of July.

Meanwhile, the Federal Trade Commission continues to investigate Shell's plan to close the refinery, which became a wholly owned Shell asset in 2001 as part of the commission's approval of the merger that created ChevronTexaco Corp.

"The FTC is digging into the details of this closure," said Boxer, who met recently with commission officials. But she added that the agency wouldn't complete its probe until after Labor Day.

"I'm not happy with that.... They need to move more quickly," she said, especially in light of Shell's move to taper off production. "The investigation's meaningless if everything is shut down, dismantled and all the rest."

The Bakersfield refinery is surrounded by prolific oil fields that produce San Joaquin Valley heavy crude. The company, a part owner of several of those fields, has said it wants to close the facility so it can divert more of the heavy crude to its refinery in Martinez, which Shell has said is more efficient than Bakersfield and is suffering from "underutilization" because of dwindling supplies of the San Joaquin crude it is set up to process.

The internal documents show that most of the Martinez refinery is set to run at or near maximum capacity and that it booked net profit of $34 million in May, which is just shy of Shell's profit expectations at Martinez for all of 2004.

Editorial Notes: Its good to remember that some consumer-end prices are due to industry manipulation rather than fundamental supply shortages. -AF

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