This previous post from last summer told the story about a bizarre Federal Trade Commission investigation that had been launched into the planned closing of an unprofitable Royal Dutch/Shell Group refinery in California.
Shell had been unable for years to find a sucker, er, I mean, a buyer for the Bakersfield facility. Shell had lost more than $50 million over the past three years on the refinery and was facing between $30 million and $50 million in turnaround and environmental costs on the old facility. However, given that the closure would crimp gasoline supplies further in California — where supplies are already tight and prices the highest in the nation — both the federal government and the California state government pressured Shell to find a buyer rather than close the facility. Not surprisingly, buyers were not exactly lining up to bid on an obsolescent refinery, so last month the federal government agreed to let Shell exceed pollution standards in operating the facility in return for Shell keeping it open for another three months to find a buyer.
Well, Shell announced yesterday that it had finally found a buyer for the facility — Flying J Inc., a closely held Utah-based oil company that specializes in distributing diesal fuel to truckers. The purchase price was not announced publicly, but is estimated to be around $130 million by sources close to the deal.
So, let’s take stock here. Shell lost $50-$75 million to sell an asset for $130 million — not bad, but not the type of risk that Shell normally indulges to make a return on its investments. Rather than adopting policies necessary to induce major companies such as Shell to invest the capital necessary to build new refineries that would address the tight supplies in the Western part of the United States, the federal government and State of California took legal actions and then even compromised their sacrosanct environmental standards to prod Shell to sell an obsolescent facility to a tire kicker. Flying J is a good little company who will continue to operate the refinery, but it does not have the capital necessary to turnaround the declining production at the facility or build new refineries that are really needed to increase gasoline supplies. In the meantime, average gasoline prices in California have risen almost 27 cents a gallon to $1.93 from last year when the feds and the State of California started strong-arming Shell over its plans to sell the refinery.
My sense is that the postscript on this story is that the federal government and State of California’s actions in this matter have, in the long run, made California’s chronic gasoline supply problems worse. So it usually goes with governmental intervention into problems that markets should be resolving.