Giant oil refiners will brave cost of clean air, plan to stay in L.A.

Giant oil refiners will brave cost of clean air, plan to stay in L.A.

Though working amid the nation's toughest environmental rules, Southland oil refiners have no immediate plans to follow Shell Oil Co.'s lead in putting local facilities on the auction block.

However, while the major oil players like Atlantic Richfield Co. and Unocal Corp. say they have hunkered down in Southern California for the long haul, the independent refiners face a hazier future which may eventually require them to either undertake joint ventures or sell their plants.

To the surprise of some industry experts, Shell announced in late June that it would sell its 68-year-old Wilmington refinery, which employs nearly 700 workers. Analysts expect the facility to fetch $500 million for Shell's London-based parent, Royal Dutch Shell.

Among other reasons for the move, Shell spokesman Gene Munger said costs associated with clean-air laws and upgrades necessary to produce reformulated gasoline were too high, making the facility inefficient to operate. Estimates to bring the 650-acre facility up to code range from $250 million to $500 million.

But Douglas Henderson, executive director of the Western States Petroleum Association, was more blunt in his assessment of Shell's move. "The unpredictability and difficulty of the environmental regulations have led them to this decision," he said.

Fact is, Southern California's oil landscape remains a place of extremes. Local refineries produce more than 1.2 million barrels of fuel every day in what is considered the nation's leading gasoline guzzling region with 8-10 million cars and trucks. At the same time, those same companies face America's most stringent and complex anti-smog regulations in both what they spew from their refineries and the pollutant-content of their gasoline.

The reason is clear.

Despite thousands of environmental controls, Southern California has the country's smoggiest air. In its ambitious quest to bring the region up to federal health standards by the year 2010, the South Coast Air Quality Management District says current emissions on industry must be slashed by a whopping 80 percent to 90 percent.

Have the oil firms cried regulatory foul? Not as much as they used to, according to some. Instead of fighting AQMD tooth and nail, petroleum makers have taken a more cooperative path, working increasingly with the agency on the technicalities of compliance rather than attacking it politically.

"You are finding a new level of communication between refiners and the AQMD. That's just the nature of the beast," said Tom Soto, president of the Coalition for Clean Air, an environmental group. "Besides, the big companies can afford making the changes. It's the small refiners that may fall beside the wayside."

Also unlike their smaller rivals, the large oil refiners have become much more sophisticated in their public relations and marketing campaigns. Arco reportedly is spending $15 million to promote its yet-to-be-released EC-X, a reformulated gasoline. Unocal, similarly, forked out $10 million to advertise its offer to buy back high-polluting, older cars.

"Refiners don't wear as black a hat as they used to, just dirty brown," Soto added.

Doug Elmets, spokesman for downtown Los Angeles-based Arco, reiterated the company's status-quo position. "We have no intention of moving," he said. "Southern California is our headquarters and the vast majority of our retail business is based here."

Downtown Los Angeles-based Unocal Corp. is likewise "committed" to keeping its refinery here, and plans to invest more than $500 million during the next three years to upgrade its Wilmington facility, said Unocal spokesman Jeff Callendar.

Last year, Arco disclosed revenues of $19.9 billion while Unocal reported $11.8 billion in sales.

Further, Mobil Oil Corp.'s Torrance refinery is "entrenching itself" in the Southland, according to a newsletter published by North Hollywood-based Lundberg Survey Inc., another tracker of gasoline prices.

Perhaps one reason the oil companies, large and small, are staying put involves a pollution-credit trading system AQMD is working on -- a radical departure from the rigid "command-and-control" regulations of today. By allowing polluters to buy and sell emission credits, refiners could conceivably hike emissions at their plants by selling cleaner gasolines.

Other, less publicized reasons Shell is moving out include an imbalance between its refining capacity and retailing and the less-than-ideal proximity of its L.A. refinery for the delivery of crude, according to William Sanderson, principal with Purvin & Gertz, a Dallas-based energy consultant.

Still, Shell's announcement caught some experts off guard. Why, analysts asked, would capital-rich Shell not use its vast resources and comply with the new clean air standards? Shell, after all, is the nation's No. 1 gasoline retailer, and the third largest marketer in Los Angeles.

"It surprised me, frankly, that a refiner like Shell would do this," said Sanderson.

That may not bode well for the smaller refiners.

"If it's too expensive for Shell Oil, how expensive is it for the other guys?" said McDonald J. Beavers, president of Whitney Leigh Corp., a Tulsa, Okla., company that tracks gasoline prices.

Added June Christman, manager of environmental engineering for Santa Fe Springs-based Powerine Oil Co., "I think just about every small refinery in the area is looking for a joint venture or sale, but they all (also) have plans to deal with the environmental regulations."

Like other petroleum producers, Powerine was the target of AQMD's "Operation Blue Sky," a surprise inspection regimen aimed at determining whether refiners were complying with district rules. Inspectors cited Powerine 12 times, mainly for bookkeeping violations, and fined it $300,000.

While industry denizens debate why Shell decided to call it quits at its Wilmington facility, there is a broad consensus among regulators that the Southland refineries will soon face a bevy of new rules.

Though long viewed as the most heavily regulated industry in Southern California, oil refiners continue to top the polluters list. In emissions of hydrocarbons and nitrogen oxide -- the two chief components of urban smog -- refineries operated by Texaco, Chevron, Arco, Shell, Unocal are the largest "legal" polluters. More than 250 permits are required by AQMD to run each refinery, compared to only a handful of authorizations needed for non-oil plants.

What's more, the refiners may soon need additional permits.

AQMD is crafting a rule to reduce the amount of sulphur belched by refineries by requiring the installation of pollution-cutting equipment.

AQMD also plans to make refineries slash nitrogen oxide from process heaters and boilers and has slapped on new rules governing storage tanks.

Ben Shaw, AQMD's senior enforcement officer for refineries, predicts it will cost regional oil companies well over $1 billion to comply with the rules. That estimate doesn't take into consideration the thousands or millions of dollars the region's biggest oil refiners must shell out to comply with AQMD-ordered phase-out of hydrofluoric acid, a hazardous chemical used as a catalyst in gasoline production.

At the same tiem, AQMD rules may pale in comparison to clean-fuel standards imposed by the California Air Resources Board.

In a move to reduce the smog-cutting and toxic chemicals in conventional fuel, the ARB last September ordered California oil refiners to lower the vapor pressure in gasoline by 13 percent, increase the use of detergents and cut the amount of sulphur and manganese.

The ARB, in pursuit of even more cleanburning, reformulated gasoline, is expected to unveil six more changes to gasoline later this year. Last fall it also took action on tailpipe standards by requiring that all cars sold in California between the years 1994 and 2003 be 50-85 percent less smog-producing than today's models.

Said ARB spokesman Bill Sessa, "It (the reformulated gas standards) is certainly the most dramatic change to their product they've faced for a long time."

PHOTO : Shell Oil refinery: Signs at the front gate

PHOTO : Shell Oil refinery in Carson: The 650 acre facility is up for sale