Questions about Chevron's Richmond Refinery and its Relationship to Richmond
Questions about Chevron's Richmond Refinery and its Relationship to Richmond
RPA has asked Jeff Kilbreth to research answers to some of the questions people are asking about Chevron - from the current status of the regulatory agency reports on the August fire to their property tax appeals. If you have questions that are not covered, please send them to Jeff at Jeffrey.firstname.lastname@example.org and he’ll try to research the answer and add it to the list. If you have disagreements with the facts presented or opinions expressed in an existing answer, please send your reactions to both Jeff and to RPAActivist@gmail.com as we may want to organize a discussion about the question.
Click on the link to go to a specific question.
Refining oil is a dirty, dangerous business. Can our safety and health really be improved?
YES! Large refineries are the most dangerous and polluting industries in the US. Accidents like the August fire produce as much pollution in a day as a whole year of regular operations. Reducing the number of catastrophic accidents can improve our health and stabilize our environment. A FOCUS on safety can reduce accidents and flaring to near zero. A FOCUS on emissions reduction can improve our health and help the environment.
Improvements in the regulatory framework are critical. Three big problems standout:
- Lack of stretch goals. There should be improvement goals, not just penalties for major violations. For example, Chevron currently has over 100 clamps in use in the heart of its high-risk-hydro-carbon processing operations, and 2,000 throughout the refinery. An improvement goal could be that clamps used as temporary repairs to leaking pipes never exceed 20 in number, and that no clamp is left in place for more than 24 months. Many clamps in the Richmond refinery have been in place for 5 to 10 years. The UC Chemical Safety Board recommends stretch goals for safety. The draft Bay Area Air Quality Management District rule on emissions tracking does not, but should.
- Inadequate fines and penalties. Penalties for violations should be meaningful. Last January Cal/OSHA fined Chevron $1mil for 25 significant violations, half of which were categorized as “willful and negligent”. This was the steepest fine Cal/OSHA has ever levied. But it is an insignificant amount for Chevron, and still they are appealing. Stiffer penalties and limits on the time and public money wasted on appeals are critical.
- Insufficient inspectors on the ground. Cal/OSHA currently has only 7 inspectors for 1600 refineries and petro-chemical plants in CA. They have the legal right to levy fees on these companies to fund an adequate staff. They need the support of the legislature and the governor to levy fees of less than 10 cents per barrel to enable them to hire the staff they need. The US CSB report suggested that they needed 20-30 times more hours going into on-sight inspections.
What’s the difference between what Chevron is saying they will do and what the US Chemical Safety Board (CSB) is recommending?
Chevron has admitted to mistakes, but as far as we know they haven’t disciplined anyone in refinery management for ignoring the safety recommendations of their own inspectors, operators and maintenance personnel. And they haven’t acknowledged the main problem - cutting corners on safety & maintenance to maximize short term production & profits. Chevron has committed to improvements including more comprehensive inspections and the creation of a better safety culture - but these things have always been part of their policies on paper. After all, their #1 Operational Excellence principle for many years has been that “There is always time to do it right.” But they have not committed to any stretch improvement goals for safety and maintenance or to public reporting of inspection results and the scheduling of repairs and replacements. While we can hope Chevron management’s behavior will improve, we cannot trust them to do the right things without a better regulatory framework and greater transparency.
Fortunately, the US CSB is focused on recommendations for systemic change – a complete package of changes that should give us the safety we need and provide a model for similar improvements on emissions reduction. What are the main safety improvements CSB is recommending?
- Company accountability for a comprehensive hazard prevention planning process with a complete plan available for public & regulatory review. This plan must include:
- A comprehensive inspection schedule
- A schedule for repairs and replacements based on inspection data, component age and process characteristics
- The use of “inherently safer technology” and “industry best practices” to eliminate hazards before they can cause harm
- A standardized system of safety performance data collection including the tracking of actual repairs & replacements against plan, use of clamps, etc. Any scheduled action that is deferred must be explained and justified by management. This system will allow a refinery’s safety performance to be trended over time and compared to other refineries
- More frequent and more in-depth independent inspections by better trained inspectors from Cal/OSHA (this requires funding, easily covered by fees on the order of 10 cents per barrel of oil processed)
- Established procedures for greater workforce and public participation in safety performance reviews
Is there anything important that the CSB Report didn’t address?
The main thing missing in the CSB Report is any position on the refining of high-sulfur crude oil. They document quite clearly how Chevron’s move to higher sulfur oil over the last 15 years resulted in a significant increase in corrosion. And they say that Chevron violated industry standards by failing to adequately plan for the likely impacts of this switch. Finally, they include the choices of crude oil as within the scope of their rules on the use of “inherently safer technology.” But they do not discuss actually limiting the use of high-sulfur oil, nor do they comment on the reasons the industry wants to use higher sulfur oil. They may believe that this is not a safety issue in that higher corrosion can be safely dealt with by aggressive inspections, the use of higher quality materials in the pipes (stainless steel, Chrome-9) and more frequent replacement of system components. Even if this is correct, we are still left with the increase in emissions caused by refining higher sulfur crude. But this is not a US CSB responsibility – it is more appropriately under the jurisdiction of the regional air quality districts under the California Air Resources Board. For us, this would be the BAAQMD.
What is the Bay Area Air Quality Management District (BAAQMD) doing?
Like the US CSB, the BAAQMD is using the August 2012 fire as the catalyst for recommending a major change to the regulatory framework governing refineries here in the Bay Area. They’ve issued a preliminary draft of a new rule for refinery emissions tracking. In fact, the scope of the draft rule is far bigger than the term “emissions tracking” might imply. It requires a serious plan for emissions reductions if any increase over the baseline is greater than a set triggering amount. The most important thing about the draft rule is that it is currently comprehensive in its scope – it covers all emissions – from the toxic particulates that cause local health problems to the green house gases that affect the ozone layer and climate change. Examples of weaknesses in the current draft rule are the following, but we can hope that with broad public review and input, these problems will be fixed by the end of 2013.
- The rule focuses exclusively on preventing increases in emissions over current levels. To the degree that we would like to push for a 30, 40 or 50% reduction in emissions from current levels, the rule is silent. It would, however, establish the better baseline emissions data needed to measure progress against any emission reduction “stretch goals” we might establish.
- The rule says companies can pick any year in the last ten years to serve as their baseline. This makes no sense. We want to take the lowest of their last three years.
- The rule says emissions will be tracked on an annual basis. Given the importance of good data and causal analysis, it would be better if we got monthly data with the number of operational days so that all figures could be easily translated into “emissions per operational day by month.”
Have Chevron’s personnel policies been part of the safety problem?
Yes, to at least some degree. There are two different issues. One is the management culture at the refinery. Simply put, management has not given the workers a meaningful vote in the areas of greatest importance – from the details of the refinery “modernization” project plan to the annual preventive maintenance schedule to whether to shut down operations when a leak is detected. It is a very hierarchical management culture. Secondly, Chevron management has steadily replaced full-time, union employees with contractors on the maintenance side of refinery operations. So the maintenance side of the workforce is now less experienced, less stable, less committed to their colleagues, and more willing to go along with management decisions. This is why it is important to us that Chevron maximizes full-time union maintenance positions.
Do a lot of Richmond residents hold jobs at the refinery and Technology Center?
No, only 5-10 percent of the employees at the refinery and Technology Center are Richmond residents.
Aren’t the costs associated with “extreme” safety precautions and environmental standards so high that Chevron might become uncompetitive?
There are two answers to this question
- The cost of cutting corners is far greater than the cost of doing things safely. The fire last August has probably cost Chevron between $500 and $700 mil when you include the extra costs associated with sourcing finished goods from other refineries, reduced sales, engineering & repair costs, regulatory compliance costs, health care costs, legal costs, lobbying costs, etc. They had another significant “incident” in 2007 that cost them less but was still very expensive. So the first point is that good preventive maintenance and the use of safer systems & technology is actually free – because the costs associated with accidents are far greater than the costs of being shut down three or four more weeks every other year and using the best possible materials, technology and operating practices. Their shareholders as well as the community would be better off if they quit cutting corners. It is management’s focus on quarterly profit maximization that makes Chevron short-sighted.
- Chevron makes $26-27 bil/yr in profits and can certainly afford to spend more on safer operations. For example, if they spent $65 mil/yr in Richmond on better preventive maintenance, better monitoring & information systems, and lowering emissions, it would represent only a quarter of 1% of corporate profits. If all of their US refineries got the investments they deserve, it would mean only a 1% reduction in corporate profits. Maybe as little as 2% for all of their refineries worldwide.
Do we want the Refinery “Renewal” Project to happen?
Yes, as long as the community's concerns about health, safety and clean air are fully addressed. Like everyone else, we would welcome the construction jobs. We would also like to see the over 100 year old refinery brought up to date with state of the art equipment, but that is not what the revised hydrogen renewal project proposes to do. Chevron's current application is to complete construction and make operational the Hydrogen Plant Replacement and Hydrogen Purity (sulfur removal) Improvement of the original 2008 project. The revised project would not include the Catalytic Reformer Replacement, Power Plant Replacement, and Other New and Replacement Facilities (storage tanks, control building and central maintenance building) that were part of the original 2008 project.
Chevron's 2008 renewal project was halted by the State Court in 2009 (and this action was upheld on appeal) because the Environmental Impact Report (EIR) failed to evaluate the impact of refining heavier, dirtier, more corrosive crude oil, and also because no specific plan was given for mitigating projected increase in greenhouse gas (GHG) emissions from the project to net zero. These two issues must be addressed in the current revised application for the hydrogen renewal project.
Furthermore, we'd like to see the possibility of powering the refinery with renewable energy, maximizing energy efficiency and minimizing process intensity fully evaluated in the EIR. The rationale for expanding the refinery's capacity for producing hydrogen both for its own uses and for export to other refineries needs to be carefully reviewed and evaluated in the EIR. Since hydrogen is needed to remove sulfur and other impurities from crude oil, increased hydrogen production is likely to enable Chevron and other area refineries to process heavier and dirtier crude, which would have negative impacts and cumulative impacts that need to be fully studied. In addition, GHG mitigations will need to be specified in the EIR, both to offset GHG increases from the renewal project and because of the AB32 mandates. We would like to see a plan for mitigating GHG at the refinery and in Richmond, which would create local jobs."
At this point, the EIR for the revised renewal project is being prepared by a specialized consulting firm hired and supervised by the City of Richmond and paid for by Chevron, the applicant. After the Draft EIR (DEIR) is issued (estimated to be sometime later this year or next year), there will be a 45-day public comment period, after which a Final EIR (FEIR) will be prepared and presented to the City's Design Review Board (DRB) and Planning Commission for a decision on whether to approve a Conditional Use Permit. The decision of the DRB or Planning Commission can be appealed to the City Council. The city’s permitting power is our most powerful means of protecting the community, and now is the time to use it.
Can we legally stop Chevron from making contributions to favored City Council candidates via political action committees?
Richmond has a $2500 limit on donations to individual candidate committees, but there is no limit on donations to Political Action Committees (PACs) - it is through these PACs that Chevron funnels its millions of dollars. This is what the Citizens United case decided by the Supreme Court permits. So we can only do two things: beat their candidates at the polls (as we did in 2010) and shame them, making their attempts to buy our elections a public relations disaster for them. A typical Richmond City Council candidate might raise & spend $30,000 to $40,000 to win a seat on the City Council. How does this person compete with a candidate backed by $300,000 to $400,000 from Chevron? It is a 10 X advantage – not a level playing field. (Chevron gave $1.2 mil to a PAC in 2012 which supported 3 City Council candidates – in 2010, they gave over $1 mil, so it wasn’t actually a new thing in 2012)
Does Chevron pay its fair share of property taxes in Richmond?
No. Based on reviewing the situation with Gus Kramer the Contra Costa County Assessor, we can summarize the situation as follows:
- Chevron is the largest property tax payer in Contra Costa County. They paid $71.6 mil for the 2011-2012 fiscal year – 3.64% of the total property taxes received by the county
- In 2012, Chevron’s Richmond properties were assessed at $3.8 bil. This includes the Technology Center and the various office buildings as well as the refinery, wharf and storage tanks. These Richmond properties generated around $47.5 mil in property taxes. The City of Richmond gets 28.5% of this amount – around $13.5 mil – the rest goes to the WCCUSD, CCC, etc.
- This is at least $4 bil less than any rational system of assessment. The result of this is that the citizens of Contra Costa County are losing around $50 mil/year in taxes due to under-assessment. For the City of Richmond, this is worth $14 mil/yr.
What are the causes of this massive “under-assessment?”
The combination of Prop 13 and corporate tax breaks are the problem. The problem isn’t a “Chevron” problem – it is a “California property tax policy” problem.
- In 1968, 40% of Contra Costa County property taxes were paid by industry. By 2012, it had fallen 77% to 9% of the total. The share of taxes paid by the combination of commercial and industrial properties in the county fell 54% from 1978 to 2009. The pattern across all of the large counties in the state was that the residential share of our property taxes went up from around 50% to around 75%. Commercial and industrial properties collectively dropped from 50% to 25%
- Over the 35 years of Prop 13, overall inflation in the cost of land and improvements has been at least 4 times the Prop 13 limit of 2% per year increases.
- Government in California is now vastly more dependent on residential property taxes, sales tax and personal income tax than before Prop 13. Sales and income tax rates have gone up around 50% since 1978.
Prop 13 passed in 1978. It altered the way property values in California were assessed in five ways:
- It rolled back assessed property values to 1975 values
- Property values cannot increase more than 2% per year.
- The property tax rate is capped at 1%.
- Property is only reassessed upon change of ownership or new construction. Change of ownership is defined as a new 51% owner so corporations and their lawyers spend a lot of time engineering shell corporations, trusts & partnerships to avoid having a single new 51% owner – this is what Assemblyman Amiano is trying to change currently.
- It mandated that any future local or state tax legislation or referenda require a two-thirds majority vote
The biggest Prop 13 winners have been large commercial & industrial property owners who have been able to keep assessed property values based on 1975 assessments.
- Similar benefits have also accrued to individuals and small businesses that have retained property ownership for a long time, but the benefits these people receive are a) on far smaller pieces of property, and b) were the true purpose of Prop 13. The original idea was that a retired homeowner shouldn’t ever experience a 50% increase in their tax bill in one year just because the county got around to doing a reassessment and had no restrictions on either the assessment increase or the tax rates they could apply. Of course, we could have just limited property tax increases for people over 65 with houses worth less than $1 or $2 mil.
Multiple industry lobbying campaigns over the years have made many types of plant and equipment exempt from property taxes – examples include equipment with “embedded software” or various types of environmental benefits. As a result, a significant percentage of Chevron’s improvements and expansions are exempt from property taxes..
- We can see the magnitude of this because Chevron counts all of their capital investments when calculating their depreciation deductions for income tax purposes. Chevron reported their total investment in their US Downstream property, plant & equipment as $21.8 bil at cost as of 12/31/12. Given that the Richmond refinery accounts for 27% of Chevron’s total US refining capacity (and 46% of their advanced refining process capacity) and that the World Technology Center is a major investment as well (36 buildings on 31 acres with lots of equipment), it is hard to understand how the Richmond properties together wouldn’t be 33% of this total US investment. If this was accurate, the Richmond investments at cost would be $7.2 bil, $3.4 bil more than their current assessment. A big part of the explanation for this difference is exemptions.
How are commercial and industrial properties assessed?
When assessing a commercial or industrial property, assessors are supposed to look at three valuation methodologies and go with either the lowest number or some weighted average. As is easily seen, there is a lot of room for subjectivity and the use of lawyers when all three methodologies can be considered:
- Current market comparables (recent sales of similar properties). This is an almost impossible method to use for a large industrial property like the Richmond refinery
- Income generated (determining the value of the asset by the annual income generated – like rents on an apartment building). Again, this is a deeply flawed and impractical method.
- Chevron doesn’t disclose the revenue or profitability of the Richmond refinery but we estimate it to be a $25-30 bil/yr business making $700 mil/year in net income under normal operations). If you use $700 mil/yr as their income, this method yields an assessment of between $4 and $5 bil for the refinery alone.
- But how do you associate income with the Worldwide R&D Center?
- It simply doesn’t make sense to assess industrial property based on the ups and downs of net income. Homeowners don’t pay more or less in property tax because they made more or less income in a year. Why should commercial & industrial property be any different?
- Replacement cost less depreciation – this is the one that makes the most sense. The only alternative to it would be if you could increase cost-based assessed values for commercial & industrial properties by the true rate of inflation.
- We can roughly estimate the replacement cost for all of Chevron’s Richmond plant & equipment at $10 bil. We know that their big refinery in Pascagoula, Mississippi is almost finished with a $1.4 bil lubricant refining addition – such a unit probably isn’t more than 20% of a complete refinery with all of the advanced processes. And costs in California are 20% higher than costs in Mississippi for just about everything. So this suggests that the Richmond refinery has a replacement cost of $8.4 bil. The R&D Center and office buildings are probably worth another $1 bil.
- If we allowed for 40% accumulated depreciation, we would have $5.6 bil for the refinery, Technology Center and office buildings. For the land, you have to ask what 13% of the City of Richmond’s land and best views is worth. If we used $2.4 bil, the total assessment would be $8 bil. This $4.2 bil difference ($8 bil vs $3.8 bil) is the impact of Prop 13 and the special exemptions for certain types of plant and equipment,
Why do we say Chevron should stop their appeals?
- They are already huge beneficiaries of Prop 13 and numerous special tax breaks. They should be ashamed to ask for more tax relief
- Chevron has fought paying their fair share for decades and it costs us a lot of money to fight back. Back in the days when they controlled things better, they managed to have their Richmond properties assessed at the absurdly low figure of $1.9 bil. In 2004, the County Assessor raised it 84% to $3.5 bil which triggered 8 years of continuous litigation. Chevron has appealed their property tax bill 3 times, each time for a 3 year period, so 9 years have now been contested. Fighting these appeals has cost the County between $2 and $3 mil/year.
- The first appeal resulted in a $23 mil rebate for 2004-2006
- The second appeal for 2007-2009 was for a similar reduction of $24.3 mil/yr based on a refinery valuation of $1.2 bil. In April 2012, this appeal was not only rejected by the County Appeals Board, but they increased the assessed value to $3.8 mil for 2007 and 2009 and $4.5 bil for 2008 resulting in a supplemental tax assessment of $27 mil ($9 mil/yr)
- The third appeal for 2010-2012 has just begun and Chevron has initiated the process by trying to get 3 of the Appeals Board members disqualified.
- The County is spending $2-3 mil/year that it can’t easily afford to defend its assessments. Chevron is probably spending three times this much to appeal them. But for Chevron, it is worth spending $5-10 mil/yr to wear the county down and keep them on the defensive. For the County, the cost is not just the $2-3 mil/yr on outside lawyers and consultants, it is the opportunity cost of not having the resources to chase down ownership changes and unassessed investments in improvements (like a medical clinic buying a new $500,000 MRI machine). We are leaving a lot of money on the table.
- We need a new, simpler way of calculating a fair assessment that will not force the County to spend millions to figure it out and then more millions to argue about it with Chevron’s lawyers.
- Ultimately this means pulling commercial and industrial property out from the jurisdiction of Prop 13 and having new laws govern the way these assessments are done. It would also mean ending equipment exemptions. Why not use the cost basis that companies use for calculating their depreciation deductions? It is easy to understand and is reported to the Securities & Exchange Commission as part of their financial statements every year. No lawyers needed! The only adjustments that would be needed would be for inflation.
Doesn’t Chevron provide a large amount of Richmond’s total tax base?
It has been stated that Chevron pays 30% of the City’s taxes, but that does not mean Chevron pays for 30% of the City’s total budget. When we look at the entire City budget including the Housing Authority budget, the Capital Improvements budget, the Port and many other important budgeted enterprises of the City, Chevron pays about 11% of the total.
What are the extra costs of having the Chevron refinery in our backyard?
Everyone should understand that there are very real costs to having a large refinery in our town. Just as Cal/OSHA and the Bay Area Air Quality Management District can establish fees to cover the costs of the inspections they need to do, the City of Richmond and Contra Costa County should be able to recover their extra costs as well – whether through special fees or from higher property taxes.
- City and County government costs associated with protecting the community from actual and potential refinery accidents:
- Fire department training, preparation and overtime
- Warning systems
- Emission monitoring systems
- Healthcare preparedness, training & tracking systems
- General community costs that affect us all to one degree or another
- Health problems, especially asthma
- Depressed property values (and lower property tax revenues) due to the shadow of pollution and catastrophic risk hanging over the community
If you demand too much, won’t they just close the refinery & take-off?
This is extremely unlikely for at least four reasons:
- It would cost well in excess of ten billion dollars and probably take 15 years to replace the refinery. These “replacement costs” greatly exceed the costs associated with making the existing Richmond Refinery state-of-the-art. Richmond is one of their 3 major US refineries and in a normal year produces $25-30 bil in sales. It is not easy to replace such a large operation – getting a permit to build such a large refinery with a co-located Marine Terminal isn’t easy anywhere, and especially not in California!
- The co-location of Chevron’s Worldwide Technology Center and the Richmond Refinery is extremely valuable to Chevron – it would not be easy to recreate this synergy somewhere else
- Chevron supplies more than 20% of the gasoline & jet fuel and the majority of the lubricants consumed in California. They need their existing California production & distribution network to maintain market share in California
- Closing the Richmond Refinery would likely trigger EPA site review & oversight. The accumulation of toxic waste at the site would mean a lengthy and very expensive clean-up project for Chevron
Don’t you have anything nice to say about Chevron?
Yes, we do. Chevron provides over 4,000 jobs in Contra Costa County and has a lot of talented and dedicated employees. The Technology Center is a center of innovation in fuel efficiency and Chevron has significantly improved the way it handles waste products, water consumption and emissions over the past 30 years. But none of this compensates for the problems it has caused or suggests that we should not be critical of some of their management practices. When it comes to our health, safety and the future of our planet, it pays to have the highest possible standards!
Don’t they contribute a lot to non-profit organizations in Richmond and Contra Costa County?
Not really. In fact, given that they are the 8th largest corporation in the world and that their Worldwide Headquarters is in San Ramon and their Technology Center and oldest refinery are in Richmond, you would think they would be far more generous. In 2011, when they had revenue of $245 bil & profits of $27 bil, they made $3.5 mil in donations to organizations in West Contra Costa County. In 2012, they increased these donations to $5 mil – probably in large part because of the amount of community anger about their property tax appeals and the August fire. It should be noted that the more our community speaks out and voices criticism of Chevron, the more money Chevron donates to local organizations, in an effort to improve its image. While giving grants to numerous non-profits certainly helps people, how should we really think about $5 mil per year?
- This is less than 1% of the profits generated by the Richmond refinery in a normal year
- This is a very, very small fraction of what they spend every year on their “We Agree” advertising campaign that never mentions the health or safety of communities near their refineries or makes any commitments to emissions reduction
- This was 1/10th of 1% of the amount they spent in 2012 on stock buy backs that helped them increase earnings and dividends per share
- This is 10% of what they are currently paying in property taxes for their Richmond property – and it’s only 5% of the property taxes they would be paying if Prop 13 and a number of special exemptions weren’t in force.
In fact, most big companies are far more generous to the communities in which they operate.