Sour Market: With No Buyer in Sight, Valero Closes Delaware Refinery

(MoneyWatch)  Valero Energy will permanently close its Delaware City refinery as shrinking margins and weak demand continue to punish the largest U.S. refiner. About 550 employees will lose their jobs as a result of the plant closure.

"The decision to permanently close the Delaware City refinery was a very difficult one," Valero Chairman and CEO Bill Klesse said in a statement Friday. Valero tried unsuccessfully to sell the refinery and "at this point, we have exhausted all viable options, Klesse said.

The San Antonio-based company in September closed the coker and gasifier complexat the Delaware City facility, which is part of its Premcor Refining Group. The U.S. oil refiner had said at the time of the announcement, the coker could eventually reopen. In recent months, Valero has extended its Aruba refinery shutdown; put two hydrocracker projects on hold; and closed a coker and fluid catalytic cracking unit at its Corpus Christi, Texas refinery.

Valero's problems stem from its core business: heavy, sour crude refining, which has been lucrative for the company. The process is difficult, but Valero has made a bundle off of this approach in the past because until earlier this year the company was able to buy these heavy, sour crude oils at discount and then sell the refined products at a well-padded margin.

Unfortunately for Valero and the refining industry, relief from weak margins doesn't appear within reach. At least not any time soon. And if you're Tony Hayward, CEO of energy giant BP, demand for gasoline in the U.S. will never return to 2007's peak. In an interview Thursday with the WSJ, Hayward said greater use of biofuels and increased engine efficiency will cut consumption of gas.

Consumption of motor gasoline dropped 3.2 percent in 2008, from a peak average of 9.3 million barrels a day in 2007, according to the U.S. Department of Energy.

Oil producers such as Marathon Oil have announced plans to shift money out of their refining and marketing segment put more capital into their upstream business. Others, including Chevron have focused their downstream business in targeted growth areas like the Pacific.

But Valero and other refiners like Sunoco, which closed its Eagle Point refinery earlier this year, have few options.

A few more details on the Delaware City refinery closure.

• Valero expects to report in the fourth-quarter a pre-tax charge up to $1.8 billion related to asset impairment, employee severance and other shutdown costs.
• The cash portion of the pre-tax charge will be between $125 million and $150 million.
• The shutdown is expected to cut pre-tax operating expenses by about $450 million, including $125 million of non-cash costs, in 2010. Capital spending and turnaround costs will be reduced by about $200 million through 2010.
• Valero expects to received after-tax cash flows in 2010 between $600 million and $700 million from inventor sales.

For additional BNET Energy coverage on Valero:

• Valero to Shutter Some Refinery Operations, Cut Hundreds of Jobs
• Valero Hunkers Down in Challenging Sour Crude Refining Market