Oil Watchdog

Flat gasoline prices and record-high costs for refinery crude oil
jolted Chevron Corp.’s earnings, causing the East Bay energy giant to
report on Friday its first slump in third-quarter profits in five
years.

Some analysts suggested San Ramon-based Chevron is not
efficient enough in how it operates its U.S. refineries, including the
company’s factory in Richmond. The analysts said frequent outages and
other malfunctions sometimes hobble Chevron refineries and may have
contributed to the company’s third-quarter struggles.

Chevron earned $3.72 billion, or $1.75 a share, during the
July-September quarter. That was down 26 percent from the $5.02 billion
that Chevron earned in its third quarter of 2006.

Chevron’s shares fell 56 cents, or 0.6 percent, to finish at $88.48.

Why the slump? Chevron had to pay more for sharply rising prices
for crude oil it uses to make refined products such as gasoline. At the
same time, prices for gasoline didn’t rise nearly as briskly.

"Earnings declined due mainly to weak refining and marketing
conditions in the United States," David O’Reilly, Chevron’s chairman
and chief executive, said in a prepared release.

Earlier this year, Chevron harvested a bumper crop of profits
from its refinery and marketing operations. Until August, for every
dollar rise in the per-barrel price of crude oil, gasoline prices went
up about 3 cents, said David James, senior vice president with James
Investment Research. After August, the pattern was broken, he said.

"A big disconnect has occurred," James said. "There has been a
huge rise in the price of oil, but not a corresponding rise in the
price of gasoline."

This supply-cost problem was particularly acute on the West Coast, Chevron officials said.

"The cost of bringing crude from long distances to our
California refineries was expensive," said Donald Campbell, a Chevron
spokesman. "Gasoline prices didn’t move enough in the quarter to help
us make enough money to overcome what we paid for crude oil."

In the third quarter of 2007, Chevron’s domestic refinery
operations lost $110 million. But for the same quarter the year before,
the refineries powered to a profit of $831 million. That means the U.S.
refineries went from a profit of $9.2 million a day a year ago to a
loss of $1.2 million a day this summer.

"It was a tough quarter," Campbell said. "But we’re working through this."

Despite the profit erosion, a consumer group claimed Chevron
remains a remarkable profit machine. The Foundation for Taxpayers &
Consumer Rights said Chevron is still on pace to vault to a record
annual profit.

"No one outside Wall Street can weep for Chevron or any of the
other major oil companies," said Judy Dugan, the consumer group’s
research director.

Some analysts say Chevron has inflicted wounds on itself
because its refineries are plagued by breakdowns.
"Chevron has experienced weak reliability on a chronic basis," said
Mark Gilman, an oil and gas analyst with Benchmark Co. LLC. "Chevron’s
operating reliability for their U.S. refineries has been
unsatisfactory."

"Chevron does have some problems with operating its refineries,
but I would not say that is management’s fault," James said. "We have
not built a new refinery in the United States in quite some time. Oil
companies have to run some refineries full out until they can’t go any
more."

Executives at Chevron countered that it has curbed breakdowns.

"Incidents per quarter to our largest operated refineries have
fallen more than 50 percent since 2005," Mike Wirth, a Chevron
executive vice president, said during a conference call Friday with
analysts. The company suffered 27 such incidents per quarter in 2005,
16 a quarter in 2006 and 11 per quarter in 2007.

Chevron is launching upgrades at all its U.S. refineries,
including Richmond. At the West Contra Costa refinery, Chevron will
replace a hydrogen plant, install a new gasoline reformer unit and add
a co-generation plant.

"Richmond will operate more reliably, we will be more
energy-efficient, and we will be able to produce more California-grade
gasoline," said Camille Priselac, a Chevron spokeswoman.
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George Avalos covers jobs, economic development, commercial real
estate, finance and petroleum. Reach him at 925-977-8477 or
[email protected]