Chevron Restructuring to Trim Downstream Business

Due to a markedly more difficult business environment than just a few years ago, U.S.-based supermajor Chevron has asked its employees to expect redundancies in the coming months as it goes through a period of adjustment, Dow Jones reports. Most of the job losses are expected in the company's downstream business, principally in refining, where, due to ongoing economic weakness and low margins on refined products, performance continues to be below par. While Chevron has not yet detailed how many job losses might result, the move has been characterised as a general restructuring that will also affect other, as yet unnamed, parts of the company. More specifics are expected in March, though some information on future plans may filter out of analyst questions at the end of this month, when the company releases its fourth-quarter and full-year 2009 operational and financial reports. Lloyd Avram, a spokesman for the firm, told the Wall Street Journal that a restructuring of its downstream business segment was expected to leave Chevron in a better position to compete on a long-term basis.

After experiencing solid downstream returns between 2004 and mid-2008, as crude oil and refined product prices inflated to record levels, the credit crunch and subsequent global economic downturn of the latter half of 2008 and early 2009 resulted in dramatic margin deterioration. Since then, a number of notable downstream players in the United States have announced plans to cut their refining capacity, in some cases permanently, in a bid to better weather the new business environment. Shell in Canada, for example, recently announced plans to convert its 130,000-b/d Montreal East refinery in Quebec into a fuel terminal. Elsewhere, Valero, the United States' largest independent refiner, announced plans to temporarily close its 235,000-b/d refinery in Aruba until business conditions improved. The big news, however, was its later announcement that it would immediately and permanently shut down its 182,200-b/d Delaware City refinery. As a pure downstream player, Valero's situation is admittedly different to that of the integrated majors, who are themselves able to rely on upstream oil and gas revenues to offset downstream losses. For Valero, this is not an option, hence its drastic response. While the situation is not as dire for the integrated players, there is nevertheless little desire on the part of management to continue to absorb downstream losses if these can be avoided.

Outlook and Implications

Despite fourth-quarter and full-year 2009 results still being a few weeks away, there is already widespread expectation that downstream performance figures will be particularly disappointing. ConocoPhillips has already given warning that it anticipates its downstream business segment to have been loss-making in the final quarter of 2008. Chevron, for its part, has also given warning against high expectations concerning its quarterly earnings. The latest news from the company on its downstream reassessment plans could be a watershed moment for the wider industry as integrated players across the board commit more firmly to dealing with the problem of refining overcapacity. The presiding hope will of course be that as the economy eventually improves, demand should come up against tighter capacity to boost refined product prices, and, with a little luck, margins as well. Chevron has booked some time in March to explain its restructuring plans and is targeting the third quarter of this year to have implemented them.

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