Posted on January 30, 2010

Chevron's Fight with Richmond Intensifies

David R. Baker, Chronicle Staff Writer

Greg Karras has heard the talk about Chevron Corp. possibly pulling out of Richmond. He isn't buying it.

Karras is a senior scientist of an environmental group fighting Chevron's plan to upgrade its Richmond refinery, which has occupied a spot on the city's western edge for more than a century.

To him, recent hints from Chevron executives that they might leave Richmond unless they get their way ring hollow. Although they're low right now, refinery profit margins tend to be higher in California than they are elsewhere in the country, he said. Chevron isn't likely to sell or close the third-largest producer of gasoline in the state.

"It's not going to happen - not to this refinery," said Karras, with Communities for a Better Environment. "Here you've got the California market, a gold mine for any refinery, and a new refinery is very unlikely to be built. If it's profitable to sell gasoline, diesel and jet fuel in California, Chevron's not going to close the Richmond refinery."

Negotiating tactic

Many of the people sparring with Chevron in Richmond - over the refinery expansion as well as a $20.5 million tax dispute - don't believe the company will leave. Some consider the executives' hints of departure a negotiating tactic. Chevron's announcement this month that it needs to cut jobs throughout its worldwide refining operations and possibly sell some facilities didn't change their minds.

"It seems like they've got something that's working and making money," said Richmond Mayor Gayle McLaughlin, a frequent Chevron critic.

The City Council, she said, will discuss the possibility that the refinery could change hands or close. But she doubts either will happen.

"We're basically going to look at all the potentialities," McLaughlin said. "But I do think that because it is a profitable refinery, this probably won't result in a closure." [emphasis added]

Chevron, based 35 miles away in San Ramon, won't say which of its refineries around the globe will close or be sold. Those details will be revealed in March.

Chevron spokesman Sean Comey said the company wants better relations with Richmond, but the city's business environment leaves something to be desired.

"The refinery was there before the town was incorporated, and historically it had been a good place to do business," he said. "Right now, there's some opportunity for improvement."

Oil companies rarely disclose profits for specific refineries, lest they give competitors too much information. But in a New York Times article last fall, the head of Chevron's global refining operations said Richmond ranked in the "lowest tier of earnings" among the company's refineries. "Refineries that don't make money don't stay open," he warned.

And yet, California refineries typically enjoy some of the nation's highest profit margins. The state uses unique gasoline blends designed to fight air pollution, and only a small number of refineries make those blends. Limited competition has, for most of the past decade, made California the place to be for refiners.

Refining industry profits can be tracked, roughly, by looking at the difference between the price of the oil that refineries use as raw material and the price of the products that they make, a measure known as the "crack spread." Last year, the crack spread for West Coast refineries averaged $14.83 per barrel of oil. For refineries on the Gulf Coast, it averaged $8.18.

Demand down

These days, all refineries are hurting, in California and throughout the country. The recession has driven down the demand for gasoline, as Americans try to save money by driving less. Even with high gas prices, averaging more than $3 per gallon in California, refineries are losing money. In such a bleak environment, Chevron might contemplate closing or selling its Richmond site, said Brian Youngberg, senior energy analyst with investment company Edward Jones.

"I doubt that they would close it, but I don't think it's necessarily out of the realm of possibility," he said. "I really think they're re-looking at their entire portfolio. If they feel they need to make significant improvements in Richmond, and they're getting pushback, they might consider it."

Chevron is Richmond's largest employer, with 1,250 people at the refinery and 1,350 at a research and technology center. The company's relationship with the community has been turbulent.

In 2008, Richmond voters approved a new tax on the refinery, based on the value of the crude oil it refines. A judge ruled the tax unconstitutional in December, saving Chevron $20.5 million.

Another courtroom fight has gone badly for the company. Last summer several organizations, including Communities for a Better Environment, persuaded a judge to block the refinery's upgrade and expansion. The company had not answered key questions about the project in its environmental impact report, the judge ruled. Settlement talks between Chevron and the plaintiffs have, so far, produced no results.

Chevron executives have not explicitly said that the company would leave Richmond. Instead, in comments to the New York Times and National Public Radio, they have suggested that if they can't upgrade the refinery, their relationship with the city might end in "divorce."

To Karras, those comments sound familiar.

Nearly 10 years ago, owners of another Bay Area refinery embroiled in an environmental dispute threatened to close their facility. The Tosco refinery (now owned by Tesoro Corp.) had been ordered by the San Francisco Bay Regional Water Quality Control Board to cut the amount of dioxin it released into the environment. Company executives said the changes would cost too much, and they threatened to shutter the facility, located near Martinez.

The board backed down. Two weeks later, Tosco announced that another company, Ultramar, had agreed to buy the refinery. The sale had to be in the works before the showdown with the water board, Karras said.

"Lo and behold, the water board granted their request," Karras said. "It was clearly and obviously an empty threat. It clearly and obviously put pressure on the environmental agencies."

And yet, California refineries face significant uncertainties about the future.

State rules

As part of the fight against global warming, California is developing a cap-and-trade system that would put a price on carbon dioxide emissions. The state also has adopted a "low-carbon fuel standard" that will force refiners to reduce the carbon intensity of the fuels they sell. Both will probably prove expensive for refiners.

If the entire country adopts those measures, refineries throughout the country would face similar costs. But if the federal stalemate over climate-change legislation continues and California goes it alone, refineries in the state would be at a disadvantage, said Catherine Reheis-Boyd, president of the Western States Petroleum Association, an oil industry lobbying group.

"We've got companies that are looking at every investment dollar, every investment and where they're going to make it," she said. "And I can tell you, California is not at the top of the list."

E-mail David R. Baker at dbaker@sfchronicle.com. This article appeared on page DC - 1 of the San Francisco Chronicle