Chevron to scale back refining

By Monica Hatcher and Brett Clanton
Thursday, January 21, 2010


A lingering recession and a sharp downturn in demand for gasoline and diesel fuel are forcing U.S. oil giant Chevron Corp. to overhaul its global refining business in a sweeping plan that includes laying off workers and possibly closing or selling some refineries around the world.

In a video message to employees, Mike Wirth, executive vice president for Chevron's global downstream business, announced a restructuring of the company's refining business that will include trimming its work force by a yet-to-be-determined number.

Wirth did not discuss the fate of assets or markets. Further details about the reorganization will come in March and the plan will be fully in place by the third quarter, company spokesman Lloyd Avram said Tuesday.

“There is excess capacity and shrinking demand, so to make our downstream operations more profitable long-term we are reducing the size and complexity of our downstream operation. That means fewer positions and fewer employees,” Avram said.

The company's downstream business employs 18,000 worldwide. That includes 8,200 in the U.S., 900 in Texas and 700 in Houston's supply and trading group.

Downstream typically refers to operations after oil and natural gas is extracted, such as transmission, refining and retail marketing.

Chevron, the second-largest U.S. oil company after Exxon Mobil Corp., employs more than 60,000 in all its operations worldwide and does business in more than 100 countries.

The announcement of the restructuring comes on the heels of an earnings update last week in which Chevron warned that income from its downstream operations would be sharply lower. The company said refining margins — the difference between the cost of crude oil refiners use and the price they get for the products they make from it — were down in some markets by as much as 59 percent. Chevron, based in San Ramon, Calif., releases its fourth-quarter earnings Jan. 29.

Houston's ConocoPhillips said in an interim earnings report Tuesday that it expects a drop in refining margins from the third to the fourth quarter, and that fourth-quarter refining margins in most regions will drop year-over-year as well.

That report and the Chevron downsizing represent the latest blows to the embattled U.S. refining sector, which has seen refining margins shrivel amid excess inventories of fuel, greater global production capacity and falling demand at the pump.

Market is changing

Changing market fundamentals underlie the shift: U.S. motorists are turning to more fuel-efficient vehicles and driving less. At the same time, governments are requiring greater use of renewable fuel sources, such as ethanol.

The new dynamics are forcing refiners to scuttle expansion plans, idle units and close plants.

Meanwhile, major oil companies are having to spend more to develop new oil and natural gas resources as they push into more complicated geological formations, deeper waters and emerging regions around the globe.

Fadel Gheit, a managing director and senior analyst with Oppenheimer & Co. in New York, said Chevron's plans were not surprising and that other refiners likely will follow. Five U.S. refineries closed last year as the recession stunted demand.

“Chevron is looking at the longer term,” Gheit said. “It's not knee-jerk. It's a well-thought-out strategic shift, because these decisions are not made lightly. If they decide to trim head count, shut down plants, these things are permanent.”

Has left some areas

Most analysts agree that refining's profitability may never return to acceptable levels for certain companies. In recent years, Chevron has pulled out of unprofitable markets, selling downstream holdings in Brazil, Kenya and Uganda.

“Chevron is recognizing the reality of that situation and is choosing to withdraw somewhat from its refining portfolios and concentrate on other assets that are further upstream in their portfolio,” said Ken Stern, managing director for the petroleum and chemical practice at LECG, a New York based economic and financial consulting firm.

“Chevron is recognizing the reality of that situation and is choosing to withdraw somewhat from its refining portfolios and concentrate on other assets that are further upstream in their portfolio,” said Ken Stern, managing director for the petroleum and chemical practice at LECG, a New York based economic and financial consulting firm.

In the U.S., Chevron owns refineries in Pascagoula, Miss; Salt Lake City; Honolulu; and El Segundo and Richmond, Calif. Internationally, it has 100 percent interest in plants in Pembroke, Wales and Burnaby, British Columbia; a 75 percent interest in a plant in Cape Town, South Africa; and smaller stakes in 10 other refineries across the world..

Other major oil companies have said they are considering their options for some of their refineries.

ConocoPhillips has said it may consider selling less- sophisticated and less- competitive operations. Royal Dutch Shell is also reviewing the possible sale of some of its plants in Europe.

Meanwhile, Valero Energy, Sunoco and other independent refiners, which only operate refineries and do not have exploration and production units, have announced plans to close or sell U.S. refineries.

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