Chevron executives told a gathering of Wall Street analysts Tuesday that the oil company, America's second-largest, will lay off 2,000 employees this year from its global "downstream" division, which makes and sells gasoline. Oil companies have seen their downstream profits gutted by the recession, as drivers buy less gas.
"Downstream market conditions are likely to be difficult for the next several years," warned Mike Wirth, the company's executive vice president for worldwide refining and marketing operations.
In response, Chevron plans to sell its refinery in Pembroke, Wales, and will seek bids for some of its downstream operations in Europe, the Caribbean and Central America.
But the company made no mention of its refinery in Richmond. City officials there are trying to raise the refinery's taxes, and environmentalists have blocked a project to upgrade the plant's aging equipment.
Chevron executives, including Wirth, had previously hinted that they might pull out of Richmond if the company didn't get its way. Critics considered that a bluff.
"That's what we were saying all along - that the likelihood of them closing the Richmond refinery was very small," said Richmond Mayor Gayle McLaughlin, who often rails against the company.
Chevron representatives would not say how many jobs could be lost at the company's San Ramon headquarters or its offices in Houston. Severance packages will cost an estimated $150 million to $200 million in the year's first quarter.
Just a few years ago, refineries were enjoying record profits, and analysts declared that the industry had entered a "golden age." Now those same businesses are struggling.
Demand for gasoline and diesel plunged with the recession, as consumers stopped spending and shipping companies idled trucks. Today, refiners must pay top dollar for oil, with crude oil futures trading above $80 on the New York Mercantile Exchange. But weak gasoline sales prevent the companies from passing the full cost on to consumers. As difficult as it is for drivers to believe, refiners have been losing money.
"It's something most of the general public doesn't get," said Ken Medlock, an energy research fellow at Rice University's James A. Baker III Institute for Public Policy. "They look at the price of gasoline, and they think the oil companies are doing great, but that's not necessarily the case."
Chevron makes most of its money by pumping and selling crude oil, so the company as a whole remains profitable even when its refining and marketing operations aren't. In the fourth quarter of 2009, for example, the company made $3.1 billion in profit, while its downstream operations lost $613 million.
Refining has always been a cyclical business, and Medlock predicts that gasoline demand will eventually pick up. But even as the economy recovers, high gas prices will force many drivers to cling to the thrifty ways they learned during the recession, he said. Regular gas costs an average of $2.76 per gallon nationwide, according to the AAA automotive club. In California, the average is $3.07.
"We certainly won't see demand grow the way it was when gas was $1.50," Medlock said.
Richmond city officials said they hope Chevron's planned layoffs would largely spare the refinery, the city's largest private employer. But they gave no indication that they would back down in their disputes with the oil company.
City Councilman Jim Rogers said he will continue to oppose the refinery's upgrade project until Chevron guarantees that the changes will not lead to more air pollution. Critics say the project, which has been frozen by a lawsuit, would allow the refinery to refine heavier grades of crude oil and create more pollution.
The company says the grades of crude oil used at the refinery would stay the same, although the changes would allow the plant to process larger amounts of the heaviest grades already in use there.
"I don't think it's Chevron-bashing to insist - absolutely insist - that they don't make the air dirtier," Rogers said.
"I certainly don't want the refinery to close," he added. "I'm certainly gratified that it doesn't look like that's happening at this point."
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