Valero to Shutter Some Refinery Operations, Cut Hundreds of Jobs

(MoneyWatch)  Valero Energy has continued its let's-hunker-down-til-the-smoke-clears cost-cutting strategy with plans to cut back operations at a Delaware facility and extend its Aruba refinery shutdown.

The reduced operations will mean at least 250 workers -- both contract and Valero employees -- will lose their jobs at the Delaware facility. More than 700 contract workers at the Aruba refinery will be released this month.

Valero will close the coker and gasifier complex at the Delaware facility, which is part of its Premcor Refining Group subsidiary . The coker unit could eventually reopen, but the gasifier complex, which converts petroleum products to gas, will be closed indefinitely.

Refiners have struggled in the wake of a recession that has sapped demand and squeezed its refining margins. And Valero, the largest U.S. refiner, is no exception.

Valero's heavy, sour crude refining operations --its specialty -- were hit especially hard in the second quarter and the company has already delayed projects and idled refinery operations in Corpus Christi, Texas and Aruba.

Refining heavy, sour crude is a more difficult process. But it's been lucrative for Valero because until recently the refiner was able to buy these heavy, sour crude oils at a discount and then sell the refined products at a well-padded margin.

Valero's profitability problems stem, in large part, from poor coking margins due to an ever-shrinking price differential between heavy sour and light sweet crude oils. Cokers take oil left over from the distillation of crude and turns it into other products including petroleum coke and naphtha.

Valero's announcement today is not a complete surprise. The company outlined plans to reduce costs and preserve cash during its second-quarter conference call with investors several months ago. Valero had already put two hydrocracker projects on hold, shut down a coker and fluid catalytic cracking unit at its Corpus Christi, Texas refinery and idled its Aruba refinery.

Valero's continued cost reductions and refinery closures signal that an improved economic outlook may be further off than executives originally thought.

Back in July, Valero execs decided to retain all of its Aruba refinery employees and planned to review whether it would bring the facility back on line later this year.

Clearly, margins have not improved. At least not enough to bring the Aruba facility back on line or keep the Delaware facility's coker and gasifier units open.