Engineering News

Investors Raise Concerns About Yorktown's Future
May 17, 2010

For the last six months the Yorktown refinery has struggled to turn a profit. Now investors of the parent company Western Refining are wondering about the future of the refinery.

The discussion took place during a conference call last week to discuss Western's first quarter results. Although the news was better than the previous quarter, the financials were still bleak.

Western reported a first quarter loss of $30.7 million, an improvement from a $51.1 million loss in the fourth quarter of 2009.

The Yorktown refinery's profit margins also improved in the first quarter, but not enough to cover costs. The refinery made $2.80 per barrel against operating expenses of $4.54.

By contrast, Western's refineries in Texas and New Mexico posted first quarter profit margins of $6.91 and $15.27 versus direct operating expenses of $3.77 and $7.54 respectively.

Jeff Stevens, president of Western Refining, said demand for crude oil and petroleum products dropped, effectively squeezing profit margins.

"If the heavy to light [crude oil] differentials continues to trend the way we think they should, we believe it will be profitable," he said of the Yorktown refinery.

Stevens said Yorktown was in a good position based on its location and its ability to make "unique crudes."

"We're trying to do things at that facility to ensure it is one of the survivors," he said. "We have to watch and monitor to see how everything plays out."

Refineries are considered sacrosanct for their sophisticated cracking of crude oil into gasoline and diesel, but they are still vulnerable to closing. Last November, Western announced it would be closing its refinery in Bloomfield, N.M., to save $25 million a year, in part by eliminating 100 jobs. To compensate, Western increased production at its nearby Gallup refinery.

Meanwhile, Western is deferring upgrades to Yorktown to save money. The company canceled plans to overhaul a crude oil unit, saving around $20 million. Plans to upgrade a coker unit were shifted to early 2011. That project will cost around $10 million.

Investors questioned whether putting off the upgrades was safe. The Yorktown refinery was the site of four fires between 2001 and 2006 from ignition in various processing units.

Stevens said maintenance work has been done on the crude unit three times in the last three years. "We're confident in where the unit's at," he said.

Talk of savings at the refinery didn't ease investors' minds as they continued to ask questions about the future of Yorktown.

"It's going to be demand-driven, and how the economy comes back on the East Coast," Stevens replied. "We're cautiously optimistic."

The Yorktown refinery has been in operation since 1956 and is one of the county's largest taxpayers. The refinery has around 260 employees.

"They provide excellent wages and benefits for their employees," said Jim Noel, director of economic development for York County. "They've been a pillar of our industrial community since 1956. There are generations of families who have worked at the refinery."

Noel described the refinery as a good corporate citizen, noting that the refinery donated about 500 acres that included wetlands for conservation.

"Through the years they have worked very closely with the community to make sure they're good neighbors," he said.

The Yorktown refinery has changed hands several times in recent years beginning in 2002 when BP sold the refinery to Giant Industries. Then in 2007 Giant Merged with Western.

In 2008, Western announced it was putting the Yorktown refinery up for sale but later decided to take it off the market.

Noel acknowledged that the refining industry has been struggling in recent years.

"They've been put in a very difficult economic paradigm now," he said. "It's been challenging. They have to invest a lot just to maintain the facility. It's a very capital intensive industry."

Noel said that between 2008 and 2009 Western invested $175 million at the Yorktown refinery to expand some of the processes there.

He said that the state as well as Dominion Virginia Power and Virginia Natural gas have had meetings with the refinery to discuss possible assistance.

"When it gets to the order of magnitude of losses sometimes there's not a lot we can do," Noel said. "We want to do everything we can to keep them in place."

Source: The Virginia Gazette, Williamsburg / Knight Ridder Tribune Business News

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