Not All Flows Smoothly at Bakersfield Refinery

With the cotton harvest in full swing, farmers around Bakersfield are watching the sky for signs of rain and the fuel gauge for signs of drought.

The diesel fuel they need for their trucks and farm equipment has been in tight supply lately because the local Flying J Inc. refinery, which makes 6% of California’s diesel and 2% of its gasoline, has been hobbled by a series of snafus.

Coming at a time of record diesel prices around the country, the additional squeeze is “eating our profit,” said farmer Mario Buoni, who is spending about $435 per day on fuel -- more than double last year’s tab -- for the three picking machines that roam his 1,600 acres of cotton. “We try to get fuel from L.A. because you can haul it here a lot cheaper than you can get it in Bakersfield.”

For Flying J, the Bakersfield plant represents a shot at big-time refining: a chance to crack California, the nation’s most lucrative fuel market.

In March, the Utah truck-stop operator paid $130 million for the refinery, which previous owner Shell Oil Co. had said lacked cheap crude oil and was too decrepit to continue operation. Furious protests by politicians and consumer advocates persuaded the energy giant to look for a buyer.

Under the new management, the refinery is still pumping out fuel and making money but it has fallen short of the success story that state energy officials had hoped for.

“You always have issues ... we didn’t think it would be smooth,” said Fred Greener, executive vice president of Big West Oil, the Flying J subsidiary that runs the Bakersfield plant. Even so, he said, “we’ve been very pleased with our investment.”

One of the nation’s largest truck-stop operators, Flying J sells more diesel fuel than any other retailer, but had limited experience making it. The Ogden-based company already owned a tiny refinery in Salt Lake City, and the purchase of the Bakersfield plant nearly quadrupled its ability to refine oil.

But getting enough oil to turn into diesel and gasoline has been at the top of Flying J’s list of woes in Bakersfield. Other difficulties have cropped up too, including a dispute with the refinery’s union and the death of a key executive.

Since taking over operations, Flying J has been unable to run the refinery anywhere near its maximum processing rate of 70,000 barrels of oil per day. The plant’s production peaked at about 83% of capacity in July, and plummeted to about 55% this month, according to a source at the refinery who didn’t want to be identified for fear of retribution.

Supplies have been thin at the refinery’s distribution “rack,” where wholesalers buy tanker loads of fuel, according to refinery customers. That has added to a slew of other factors -- high oil prices, hurricanes and refinery outages -- that have kept California diesel prices well above $3 a gallon for much of the year.

This year, Bakersfield’s rack price typically has been about a nickel a gallon higher than in Los Angeles, but at times that difference swelled to as much as a quarter, according to the Oil Price Information Service, an energy research company.

“The suppliers were lining up to get what they could and then trying to prioritize with customers,” said potato farmer Pete Belluomini. He said his supplier, Jeffries Bros., was no exception. “They were asking me, ‘How much can you get by with?’ ”

Don Jeffries, the owner of Jeffries Bros., said his customers have received whatever fuel they needed. But, he added, in recent months “there were a few days where we were scrambling for diesel ... you might go in to Big West and they were out.”

The situation may soon get worse, because the refinery last week shut down some equipment until early November for repairs. The work will cut off diesel production entirely.

“I’m concerned,” said Mark Del Papa of Fleet Card Fuels, a Bakersfield wholesaler. “The Bakersfield supply won’t meet the South San Joaquin Valley demand, so you’re going to have to supplement from somewhere else.”

Part of the problem stems from Shell’s insistence on keeping the crude oil that had been allocated to the plant for decades. The oil company, a unit of Royal Dutch Shell, has rerouted the petroleum north to its Bay Area refinery in Martinez. Although there is no shortage of oil in the southern San Joaquin Valley, much of it is already spoken for by other refiners.

Buying a refinery without a guaranteed supply of crude oil is a risk rarely taken in the industry, but Flying J went ahead anyway, betting that it could wrest away enough local oil from others to fill the refinery. Shortly before the company took over the plant, Greener said that Flying J had been “acquiring oil all over” and that he had no doubt that the company would secure what it needed.

It hasn’t worked out that way. At least not yet.

“We don’t like not running full, that’s for sure,” Greener said last week.

But “we weren’t kidding ourselves,” he said. “We realized that to even get a chance to get some of this oil, it has to get out of contracts. We’re waiting for our opportunity to bid on it.”

Flying J’s quest for crude has been further complicated by Shell, which agreed to provide the refinery with pipeline access to important oil fields west of Bakersfield for one year -- and then cut off that access after just six months, Greener said.

Shell, which still owns the major pipelines that run in and out of the refinery, helped fund alterations to substitute pipelines owned by another company to restore the plant’s access to the fields, according to a Shell spokesman.

Greener said Shell has been “quite honorable” in its post-sale dealings with Flying J. But he added, “we’re still working through some transition issues with those guys ... we’re looking for solutions to some logistical issues.”

The snags in Bakersfield caught the attention of the state attorney general’s office, which reportedly sent a representative to meet with Flying J during the summer. Neither Greener nor Atty. Gen. Bill Lockyer would confirm the meeting, but Greener said, “they touch base with us pretty often to see how we’re doing ... there were several items of concern.”

Lockyer was instrumental in derailing Shell’s plan to close the refinery. It was hailed as an important victory for price-shocked motorists, and Lockyer clearly doesn’t want to give up any ground.

“There is no investigative or regulatory work that we’re doing on it other than just to keep an eye on it,” Lockyer said. “When people buy a refinery without a guaranteed supply of crude, there’s always reason to be a bit anxious.”

Adding to its troubles, Flying J recently lost the corporation’s top refining executive and a pivotal figure in the company’s purchase of the Bakersfield plant. Jeffrey K. Utley, the company’s 48-year-old senior vice president for refining, died Aug. 5 in a motorcycle accident.

In addition, Flying J’s relationship with its new Bakersfield employees has deteriorated in recent months.

In June, Flying J refused to sign a national three-year contract extension worked out between major refiners and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers. That angered the union, which represents about two-thirds of the refinery’s 175 to 200 employees.

The Bakersfield local then declined to extend an agreement that allowed Flying J to use outside contractors in union jobs at the refinery. When Flying J kept the contractors anyway, the union filed a complaint with the National Labor Relations Board. The matter is pending, and both sides say they’re hoping for a quick resolution.

“Our employees have put up with a lot of uncertainty and change, and they’ve been able to run the refinery and train people and maintain safety,” Greener said. “That takes a lot of work.”

Despite the bumpy road so far, Flying J is sticking to its plan to expand the refinery substantially by late 2007.

“We haven’t convinced everybody yet, but we’re committed to that plant,” Greener said. “We would like to provide a little cheaper barrel of fuel [for Californians], but we’re working on that.”

In the meantime, the state’s near-record fuel prices have more than made up for the troubles at Flying J, a privately held company that reported $7.3 billion in sales last year but doesn’t release profits. As Greener put it: “You’ve got to be brain dead not to be making money in this market.”