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Californian exclusive: State investigating Shell over refinery trouble

The Bakersfield Californian

 | Tuesday, Jan 27 2009 11:00 PM

Last Updated: Tuesday, Jan 27 2009 5:40 PM

The state Attorney General’s antitrust unit is investigating whether Shell Oil Co. is “illegally refusing to sell crude oil … or shutting off pipeline access” to Big West refinery on Rosedale Highway. The inquiry was confirmed in a letter dated Friday from Chief Deputy Attorney General James M. Humes to Sen. Barbara Boxer, D-Calif., who earlier this month forwarded to the office allegations that Shell was “deliberately manipulating the supply (of oil) in order to force the refinery to shut down.”

The investigation appears to be the first government action addressing recent trouble that threatens to close the refinery.

Big West has had trouble securing an adequate supply of oil following the Dec. 22 Chapter 11 bankruptcy filing of its parent company, Ogden, Utah-based Flying J Inc. Some oil producers have said they worry the company will be unable to pay for past or future oil shipments.

Bakersfield union officials have accused Shell of trying to shut down the refinery by refusing to sell it oil and closing a pipeline that carries about 20 percent of the refinery’s normal oil supply.

Shell denies the charges, saying it has been trying to work out an agreement with Flying J by which it would continue to provide oil to the refinery.

A company spokeswoman said Tuesday that Shell’s pipeline into Big West, which carries crude produced by it and other companies, is available for use as soon as Flying J works out an oil supply contract.

“We are already in communication with the AG’s office,” spokeswoman Alison Chassin said. “We are confident they will come to the conclusion that Shell is working cooperatively with Flying J to find a solution during their bankruptcy status.”

Big West employs more than 100 workers. When operating normally, it produces 6 percent of the state’s diesel and 2 percent of its gasoline. Industry experts have predicted that Kern gas prices could rise by as much as 20 cents a gallon if the refinery shuts down.

It was unclear whether Big West was operating Tuesday. Union officials and a Flying J spokesman could not be reached for comment. Earlier this month a union official said the plant was operating at a minimum capacity.

With the attorney general’s office stepping in, the situation at Big West closely resembles an earlier conflict that pitted Shell against former Attorney General Bill Lockyer.

Shell, Big West’s previous owner, attempted to close the refinery in 2004. But under pressure from Lockyer, it sold to Flying J in January 2005.

Now as before the sale, Shell is accused of trying to shut Big West in order to free up California’s supply of crude oil. Some industry observers say that if Big West closes, Shell could find lower prices on the oil it buys to supply a refinery it owns in the Bay Area.

Refinery at a glance

1932: Refinery opens as Mohawk Oil Refinery.

1975: It’s purchased by Reserve Oil & Gas.

1980: Getty Oil takes over.

1984: Texaco buys it.

1998: Texaco and Shell agree to operate it as Equilon Enterprises LLC.

2001: The Federal Trade Commission requires Texaco to divest its interest following its merger with Chevron. Shell continues to operate it.

2003: Shell announces plans to shut it down.

2004: California attorney general urges Shell to sell, not close, it.

2005: It’s purchased by Flying J Inc. and operates under subsidiary Big West of California.

April 2007: Controversy breaks out over plans to expand the refinery and use a dangerous chemical. Big West later says it will use a safer form of the chemical. The county fines the facility for venting gases into the air that made people sick.

May 2007: County cancels public hearings on the expansion until the environmental report is reviewed by refinery experts.

October 2008: County approves the expansion, allowing work to begin as soon as January 2009.

December 2008: Flying J runs into financial trouble and files for Chapter 11 bankruptcy protection. Some oil producers, upset that they won’t be paid immediately for past deliveries to Big West, withhold their oil.

January 2009: Flying J says refining activity at Big West has been put on hold pending 10 days of maintenance work. Industry executives say the temporary halt to refining was forced by the plant’s inability to purchase enough oil to operate normally. Sen. Barbara Boxer, D-Calif., sends a letter to state Attorney General Edmund Brown Jr. airing allegations that Shell Oil Co. has withheld in order to shut the plant.

Sources: Big West of California, news archives

Unresolved issues

The latest drama at Big West resembles the one there in 2004-05 largely because some of the issues that were problematic back then were never really resolved, industry observers say.

They say the move that ended the earlier controversy — Shell Oil Co. selling the refinery to Flying J Inc. — may have created new problems that contributed to the more recent trouble.

Under the sale, the plant was essentially separated from the oil production that sustains it. Shell pumps oil in Kern County; Flying J does not.

Oil industry consultant Bob van der Valk said that separation spelled trouble from the start.

“They (Flying J) didn’t get the crude,” van der Valk said. “The refinery and the crude go together.”

But there are other reasons the arrangement hasn’t worked out as planned, said industry consultant Malcolm Turner, who was hired at the time to look into the refinery’s operations under Shell.

Former state Attorney General Bill Lockyer’s success in getting Shell to sell the refinery did not take the company out of the picture. It still operates a refinery in the Bay Area, which Turner said makes it a competitor of Flying J.

As a refiner, Shell could benefit if the Bakersfield plant closes, Turner said, though he stopped well short of accusing the company of trying to run Big West out of business. Shell denies any such intentions.

But with 65,000 or so barrels of oil a day not being converted to fuel in Bakersfield, Shell could see lower prices for crude up north, where it needs them.

“If I’m Shell in (the Bay Area), it does not hurt me if you fail, (Big West) — it helps me,” he said.

In addition, Turner suggested that Flying J might not have been the best of all possible buyers for the refinery. He said Flying J is not known for being especially friendly with others in the industry.

“Why would you bend over backward to help somebody who’s not necessarily your trusted friend and not done any favors for you?” he asked. “You wouldn’t.”

For its part, Shell does not appreciate the comparison of what’s happening now to what took place four years ago.

“It’s very different now,” company spokeswoman Alison Chassin said, “because we’re not now the owner and operator of the refinery.”

A question of profits

In 2004, when Shell tried to close the plant, it said the operation was unprofitable.

But amid a campaign by union leaders and consumer advocates to pressure Shell to keep the plant open, Lockyer, who is now the state treasurer, ordered an investigation into the claim that the plant was losing money.

The investigation concluded that the refinery could make money, and Lockyer successfully persuaded Shell to sell to Flying J.

— John Cox, The Californian


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