Chevron and its Burnaby refinery, a major supplier of gasoline and jet fuel to the Lower Mainland, are likely to stay as is – at least for the near term.
The company has had to push a large boulder up a big hill of late to do business in Canada. It’s failed in attempts with the National Energy Board (NEB) to guarantee feed access to the pipeline that serves as the Burnaby refinery’s primary lifeline. It’s been unable to compete on even terms with Puget Sound refineries south of the border. And the longtime West Coast employer faces an uncertain future if Kinder Morgan’s (NYSE:KMI) proposed Trans Mountain pipeline expansion goes through.
All this headache for what is really just a small producing asset in the company’s downstream portfolio.
As a result, some have speculated Chevron (NYSE:CVX) would sell, close or convert the refinery to an import terminal. However, Chevron has showed commitment to Burnaby in the way only a company truly can: by investing its dollars in a significant capital project.
Chevron completed the rebuild this year of its fluid catalytic cracking (FCC) unit, an integral part of refining operations. In its community newsletter, the company said the upgrade would “improve reliability for many years to come.”
Russ Day, Unifor Local 601 president and longtime Chevron employee, says the company could have deferred the investment and generally committed to required maintenance only.
Day described the investment in what was a significant FCC upgrade as an expensive bow to tie around an asset if Chevron were looking to potentially divest Burnaby.
The Burnaby refinery’s capacity of 55,000 barrels per day (bpd) is unique for Chevron. By comparison, the company’s two other refineries along the West Coast – El Segundo and Richmond in California – have capacities of 269,000 bpd and 257,00 bpd, respectively.
Because of its physical footprint, the Burnaby refinery can’t expand production capacity or supply expansion through rail or shipping routes. It has to fight for the supply it gets. And Day isn’t comforted by a 2015 NEB decision that would have the larger Puget Sound refineries ensure they aren’t stockpiling extra crude from the pipeline to starve smaller competitors like Chevron.
Size, or lack thereof, does matter for Chevron.
Until recently, the company had a 50% stake in Caltex (ASX:CTX), an Australia energy company that operated two refineries with similar capacity to that of Burnaby. However, Caltex converted one of the two – Kurnell – late last year to a major import terminal and contracted Chevron to provide future gasoline and jet fuel supply to the storage location.
Of the many refineries Chevron wholly owns, Burnaby is one of only three with production capacity under 100,000 bpd. Chevron recently announced its intention to sell the second, a refinery in Hawaii. The third, located in Salt Lake City, has received not only upgrades, but overt promotion in company presentations that Burnaby has not.
In an email from the company’s Bay Area headquarters, Chevron spokesman Braden Reddall wrote that Burnaby “is a part of our West Coast refining operations, and following a recent NEB ruling on pipeline allocation, we are optimistic that we can work effectively within the new framework. Also, as we have told investors before, Burnaby and Salt Lake are refineries that are well placed to run advantaged [discounted] North American crudes.”
Although small, Chevron’s Burnaby refinery is a sweet plum in the company’s portfolio because it enjoys high profit margins, said Robyn Allan, an economist and former expert intervener in the NEB Trans Mountain review.
According to Refining Margins in British Columbia, a study released by Vancouver-based Navius Research, “since 2010, refinery margins in British Columbia have risen well above the Canadian average and are well above margins in other global markets.”
Chevron’s Burnaby refinery, which can refine only light crude, was not part of the group of 13 refineries to commit to lengthy 15- to 20-year contracts for Kinder Morgan’s Trans Mountain pipeline expansion.
Critics have contended the expansion plans provide for an export pipeline focused on heavy bitumen from the Alberta oilsands with little supply certainty for Chevron’s light crude needs. Chevron’s refusal to commit to a lengthy contract could be seen as a death knell.
But Allan said it could instead be a smart decision for a company betting on a different long-term view. If Trans Mountain’s future scenario for heavy bitumen production doesn’t pan out, toll-tethered companies would be left looking to sell to the secondary market – refineries like Chevron – at discounted rates.
“Chevron could just be that kind of outlier that says, ‘We’ve read the signals, and we think we’re going to be in good position here with a very profitable refinery selling gas to the Lower Mainland,’” said Allan. “It doesn’t necessarily mean Chevron saying, ‘We’re leaving.’ It could just mean Chevron saying, ‘We don’t buy the scenario the others are buying, and we’re going to sit back and see what happens.’ If [expansion] does in fact crowd them out, they’re in a position to leave.” •
