July 27, 2012:

There was probably never any realistic prospect that Caltex’s review of its Kurnell refinery in Sydney would come to a different conclusion to the one Shell reached a year ago after a similar review of its Clyde refinery in NSW. Despite the apparent surprise of some union leaders, the inexorable logic that ended in the closure of Clyde was inevitably going to lead to a similar outcome for Kurnell, whose closure Caltex announced yesterday.  If there is a surprise, it is that the Australian refineries have survived for as long as they have and, in the context of Caltex, that it decided to retain its Lytton refinery in Brisbane and, indeed, invest in it. Caltex revealed Lytton had been spared at its annual meeting in May. Part of the explanation for why the refineries have kept operating long after it became clear they were sub-scale and uncompetitive with the giant new facilities that have been built, and are still being built, in Asia and the Middle East showed up in the Caltex announcement. It is going to cost Caltex $430 million to dismantle Kurnell and remediate the site — refineries are “dirty” facilities — and another $250 million to convert the site to an import terminal. The value of the refineries had already been written down by $1.5 billion in February. The cost of exiting the sector prolonged the lives of Clyde and Kurnell for quite some years.

The new refineries in the region, apart from the fact that several of them have as much capacity as the entire Australian industry used to have, produce petrol as a byproduct to their primary product, diesel. Despite the transport costs, they can supply this market on very competitive terms. The position of the local refiners has, like much of our trade-exposed industry, also been exacerbated by the strength of the Australian dollar. If the assumption is that the strength of the dollar is likely to persist for some time, that will add to the lack of competitiveness of the local sector. Certainly Kurnell has been losing significant amounts. Caltex’s Julian Segal said earlier this year that he expects Asia-Pacific refining capacity to grow roughly in line with demand in 2012 and 2013 before new capacity coming on stream created significant over-capacity in the region. That would exacerbate the position of the domestic refiners — but would also create an opportunity to import product even more cheaply, particularly if the dollar does hold up.

For Caltex, unlike Shell — which as an integrated oil major has refineries within the region but outside Australia that it owns and operates — there was another complicating factor in determining the fate of the refinery. Caltex is 50%-owned by Chevron of the US but isn’t an integrated part of its operations and therefore couldn’t take it for granted that it would have secure access to a competitive source of supply. It has, however, now negotiated a commercial agreement with Chevron to ensure long-term supply of petrol, diesel and jet fuel at market-based prices. Today Caltex sources about 55% of its transport fuels from its own refineries. After Kurnell closes, Lytton will supply only about a quarter of Caltex’s requirements. Caltex supplies about 30% of all transport fuels in this market so the withdrawal of refining capacity will make clearer the nature of the modern Caltex, which is fundamentally an attractive and high-margin fuel marketing and distribution business. There will, unfortunately, be significant job losses associated with the closure of the refinery and its conversion to an import terminal, with the Kurnell workforce likely to be reduced from 430 employees to less than 100 and the prospective eventual loss of a further 300 contractors.

While Caltex expects that the cash outflows related to the redundancies, the closure and dismantling of the refinery, the remediation of the site and its conversion to an import terminal will broadly match the cash inflows from expected tax benefits and working capital releases, it isn’t taking any chance of a liquidity mismatch. It said yesterday that in the short term it would change its dividend policy, reducing the range of its payout ratio from the current 40% to 60% to between 20% and 40% but intending to revert to the existing policy once the refinery has been closed in the second half of 2014.  As further insurance and protection for its investment grade credit rating and its ability to continue to support and invest in its core operations, the group is also considering capital management options, including an issue of hybrid securities. Before the Clyde closure there were seven refineries in this country. Once Kurnell closes there will be five. At least for a while.

By Business Spectator

July 27, 2012:

India's Mangalore Refinery & Petrochemicals Ltd. (500109.BY) Friday plunged to a quarterly net loss due to a fall in product prices and lower production as it had to temporarily shut its refinery. The state-run company posted a net loss of 15.21 billion rupees during the April-June quarter, compared with a net profit of 1.73 billion rupees a year earlier. Gross revenue fell 7.3% to 134.65 billion rupees. "This loss was mainly triggered with a sharp reduction in crude and product prices in April and May, steep devaluation of the rupee against the dollar and lower throughout due to force majeure arising out of stoppage of water supply for about ten days (at its plant)," the company said. The company, a unit of Oil & Natural Gas Corp. (500312.BY), said it posted a negative $4.15 per barrel gross refining margin in the past quarter, compared with a positive margin of $3.72 a year earlier.

By Dow Jones Newswires

July 27, 2012:

Taiwan's Formosa Petrochemical Corp has shut one of two residue desulphurizer (RDS) units at its 540,000 barrels per day (bpd) refinery in Mailiao due to a leak, and it may restart in about a week's time, a company spokesman said on Friday. Its other RDS unit is running at full capacity, he said. Both RDS units have a capacity of about 80,000 bpd each. An RDS is a unit that removes sulphur from crude. "The No. 1 RDS was shut on Thursday and likely we would need about a week or so to restart the unit," he said. Formosa has three crude distillation units in the plant with a capacity of 180,000 bpd each. It also owns two residue fluid catalytic crackers (RFCC), or gasoline-making units, with each having a capacity of 84,000 bpd. Formosa's no.1 RFCC was shut on July 24 following a steam leakage and is expected to resume operations in about two weeks.

By Reuters

July 27, 2012:

WOOLWORTHS says the appropriation of its logo and slogans for a union campaign against the supermarket over imported petrol is unlawful and must be stopped. But the Australian Workers Union will continue its campaign linking the supermarket chain to the decision by Caltex to close a Sydney oil refinery this week. The supermarket has 601 co-branded Woolworths-Caltex petrol stations across Australia. Caltex announced on Thursday that it would shut Sydney's 57-year-old Kurnell oil refinery in mid-2014 and import fuel from Asia.  It means 630 jobs will go, and Caltex will refine 25 per cent of its oil in Australia, down from 55 per cent. Before the announcement, the AWU had been targeting Woolworths by holding public rallies outside supermarkets and distributing flyers and T-shirts depicting the store's logo as a petrol bowser hose. The union argued Woolworths should pressure Caltex to maintain Australian jobs and refining, using the slogan ''Woolworths is only pretending to be Aussie through and through'', mocking a slogan launched by the supermarket recently.

Woolworths chief Grant O'Brien wrote to AWU national secretary Paul Howes earlier this month, saying the union was infringing Woolworths' copyright and intellectual property. On Thursday, after the job cuts were announced, Woolworths' lawyers Corrs Chambers Westgarth again wrote to the union, saying it was engaged in ''misleading and deceptive conduct''. Woolworths has demanded a campaign website be removed, and that Mr Howes stop making statements implying the supermarket could force Caltex to sell only Australian-refined fuel. Mr Howes said the AWU's campaign would continue, as the refinery was not due to close for two years: ''We're not giving up.'' And he said the supermarket's threats would not intimidate his union. ''They seem to be saying that we should not be allowed to say the word 'Woolworths','' Mr Howes said.

By theage.com.au

Chevron Corporation (NYSE:CVX), the second largest American oil company, posted a 7 percent dip in quarterly profit in its earnings release today, amid widespread weakening of oil prices on a year-over-year basis. During the second-quarter, its income fell to $7.2 billion. Nonetheless, the otherwise bearish situation was salvaged by remarkable refining margins (downstream). While Chevron Corporation (NYSE:CVX)’s earnings are not all that dependent on natural gas prices, they were affected by the sapless nature of the natural gas price during the second quarter. Notwithstanding, Exxon Mobil- its bigger rival- took a bigger blow during the quarter as it has a more profound inclination towards natural gas. Despite the many pitfalls, Chevron Corporation (NYSE:CVX)’s earnings topped Wall Street analysts’ forecasts. Brian Youngberg, an analyst with Edward Jones, shared a notably positive insight on the matter. On a personal level, Youngberg believed that the quarter was outstanding. “The downstream was the main reason for the beat,” he says.

According to Thomson Reuters, analysts’ general outlook came in at $3.24 per share. However, actual reports now show that Chevron was underestimated, as it has managed to post earnings of $3.66 per share. Although this was lower than last year’s $3.85, it still managed to beat estimates, and as such, plants a seed of hope. In an interesting twist, Chevron’s upstream business recorded an 18 percent drop, as profits dipped to $5.6 billion, while its downstream refining business- which was the real game changer- posted a profit of $1.88 billion, representing an 80 percent leap. In general, U.S refinery operations performed exceptionally well. Profits swelled notably, presenting a 42 percent gain. The global picture was also equally appealing, as collective profits from diverse markets around the globe more than doubled to come in at $1.1 billion.  Apparently, the strong global performance is traceable to a major asset sale in South Korea.

On the other end of the table, Exxon (which arguably happens to be Chevron’s biggest competitor) failed to meet expectations. Its oil and gas output was not impressive and its chemical unit exhibited weak margins.  The cumulative oil and gas production this quarter came in at 2.62 million barrels per day, down from a slightly higher 2.89 million barrels per day in last year’s second quarter. As if to mark the tough conditions facing the oil industry, Chevron commented on the reasonable rise in bench mark margins earlier this month. At the time of giving its insight, Chevron noted that the margins on the Gulf Coast had risen to $24.89, an additional $4 plus of the initial price. In today’s early trading, Chevron’s share price closely revolved around $108.50.

By ValueWalk.com