My Trip to Chevron’s Cape Town Refinery…

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A little over a week ago I was 8,300 miles away from home.

I was traveling in South Africa with Agora Financial colleagues Chris Mayer and Matt Insley. I'm home now, with a notebook full of ideas and takeaway points, plus a camera full of imagery.

There's plenty to discuss about South Africa. There's also plenty to say about what the world looks like from the vantage point of the Cape of Good Hope.

My travel partners and I spent a few days in Cape Town, the bottom-left tip of light on the satellite image above. Cape Town is one of the most important strategic locales in the world — as well as stunningly beautiful. Really, there aren't too many towns quite like this one. You've got to see it to believe it.

Cape Town is nestled on the slopes of the massive Table Mountain, a tough, quartzite sandstone that today forms an erosional remnant of the extensive Cape Range, further inland.

From sea level, the Cape Town topography rapidly ascends to a height of over 3,500 feet. If every foot of elevation were worth, say, $1 million, Table Mountain would represent a mere one day of deficit spending by the U.S. federal government. So think of Table Mountain as a stark image of the U.S. government's daily deficit. Scary. Depressing.

OK, back to Cape Town. One of our goals was to visit the oil refinery north of the city, operated by Chevron South Africa (formerly Caltex), a division of Chevron (CVX: NYSE). The Caltex brand dates back to 1936. It was a partnership between Chevron — the old Standard Oil Co. of California — and the former Texaco company. In fact, Caltex was one of the original joint ventures between large oil companies.

Chevron and Texaco merged in 2001. Thus, the Caltex joint venture is, more or less, a classic old logo. Plus, this kind of business and energy combination is quite common today.

Back in the 1930s, however — during the depths of the Great Depression — the Caltex joint venture was novel. In a tough economic era, forming Caltex was an unprecedented means of sharing the risk of exploration and development in distant places like the Middle East, the Far East and, of course, Africa.

Construction started on the Caltex-Chevron Cape Town refinery back in 1966. Over the years, it has expanded and added capacity and new technology. Today, the refinery is entirely up-to-date. It meets a global level of best practices for safety, efficiency and environmental management. It's fair to say that Chevron has one — very high — standard by which it operates everywhere, in the U.S. and abroad.

The Cape Town refinery sits on about four square miles and processes up to 110,000 barrels of crude oil per day. That's relatively small by world standards. Still, this facility is a key national energy asset for South Africa, as well as strategically sited at a critical juncture for world trade

The Chevron facility is the only refinery in the western Cape region. It's the main source of refined petroleum products for many thousands of miles north along the western littoral of the African continent.

The "local" market for this Chevron refinery is, in fact, quite global. The refinery meets the energy needs of tens of millions of people, for a wide variety of energy products. It moves product from Cape Town toward the interior of South Africa, and well north and east into many other nations of both West and East Africa.

The Cape Town refinery serves a large African-based fishing fleet that trawls the waters from South America to West Africa and far into the Indian Ocean. In that respect, the energy products from this refinery are critical to supplying high-quality protein that helps feed entire nations.

Closer to Cape Town, all of the jet fuel at the Cape Town International Airport comes from this Chevron refinery. This includes fuel for flights to the rest of Africa, as well as to North and South America, Europe, the Middle East and Asia.

Down at the Cape Town waterfront, where cargo ships moor and dock while sailing across the Atlantic Ocean, the Chevron refinery is the first gas station at which to refuel after a long southeasterly haul. Likewise, for ships sailing west out of the Indian Ocean, Cape Town is the last gas station before a long crossing toward South or North America, as well as up along West Africa and northward to Europe.

So of course, the Chevron refinery keeps the rubber rolling on the roads of Cape Town. Over and above that, the refinery is a vital global energy hub that powers aircraft and ships on long treks to other continents.

While visiting the Chevron refinery, we learned that its crude oil supply comes down a 65-mile buried pipeline from a massive storage site up the coast at Saldanha Bay.

How big is the Saldanha storage site? It's 42 million barrels of capacity, the equivalent of over 20 ultra-large crude carriers! Wow — big number; but in perspective, 42 million barrels is all of two days' consumption for the U.S.

The Saldanha storage site is a relic of the former apartheid days of South Africa, when the country was under international sanctions. Back under the apartheid regime, the oil supply was spotty. So the South African government built a gigantic strategic petroleum reserve at Saldanha. Then the government filled it up with oil from any exporting nation with which it could cut a deal.

What kind of deal? Well for example, pre-revolutionary Iran (back under the shah) was a big seller of oil to apartheid-era South Africa in the 1960s and 1970s. In return, the South African government sold large quantities of uranium to Iran for its nuclear power program.

Now, decades later, the revolutionary government of Iran is using that "old" South African uranium as a key ingredient of its robust nuclear weapons program. And instead of South Africa being under international oil sanctions, it's Iran that's under nuclear sanctions. What a world we live in, eh?

Today, the sanctions on South Africa are long past. The Chevron refinery processes oil from the Middle East, West Africa and offshore fields in South African waters. Chevron buys a variety of crude blends, most of which come from non-Chevron wells. In that sense, the Chevron refinery pays the world price for oil — whatever is posted on the date of sale.

The refinery managers plan production three months ahead of time. Chevron's global oil trading operations encompass a vast array of factors, but basically revolve around price per barrel and refinery yield. The idea is to set up a series of tanker deliveries that can mix the optimum chemistry for this particular refinery up at the Saldanha storage site. In other words, the huge Saldanha facility is an oil "pharmacy."

Then the crude oil moves down the underground pipeline from Saldanha to the refinery. There, it gets processed into gasoline, diesel, jet fuel, liquefied petroleum gas and much else. The refinery works 24 hours per day and has on-site loading facilities as well as other underground lines that transfer both crude and refined product to other locales.

Think about the financial exposure — the risk — involved here. Chevron is contracting for oil as long as three months ahead of delivery date. Then after the tanker unloads at Saldanha, the oil is in storage, pending the trip down the pipeline. Then it takes time to refine the oil, at 100,000 or so barrels per day. Then the refined product is in storage until the refinery ships it out for sale.

All this time, oil prices might go up or down. Over the past five months or so, we've seen international posted oil prices range from $80 to over $120 per barrel — a 50% swing. If the average oil price is, say, $100 per barrel, times, say, 100,000 barrels per day of refinery capacity? Then the Chevron refinery has a potential exposure of $10 million per day, on which Chevron could make money or lose money.

Another big risk issue for the Chevron refinery is that it's subject to unplanned power interruptions from the South African electrical utility, Eskom. Eskom has problems with both power generation and transmission down the grid.

On occasion, the Eskom lines go cold and the juice stops flowing to the refinery. As you can imagine, this interrupts production. So Chevron has devoted extensive resources to help Eskom upgrade its electric reliability, which also serves to benefit the overall energy supply of the entire Cape region.

I want to be sure to note something about the Cape Town site that I've seen at other Chevron facilities. There's a truly superb Chevron "culture of safety." Really, this isn't some smoke-and-mirrors corporate publicity stunt. It's the real deal. I've experienced it. The culture of safety crosses all Chevron operations.

For example, just to schedule the Cape Town refinery visit, my colleagues and I had to review an in-depth online refinery safety presentation. When we arrived on site, they asked us to certify that we had watched the presentation. Then we had more safety briefings.

In fact, just to walk through the front gate of the Cape Town refinery, we had to go through a metal detector and blow into a Breathalyzer. This was just to visit the refinery offices and tour the grounds in a chauffeured van. We didn't get close to any refinery hot sections, let alone turn any valves.

This level of safety awareness fits into what I've experienced at other Chevron sites. Two months ago, when Matt Insley and I visited Chevron oil operations outside Midland, Texas, we first received an extensive safety briefing at the Andrews field office. Then we suited up in appropriate safety gear and went out into the oil patch to see the big drilling rigs and fracking operations up close — with Chevron.

On an even larger scale, last year, Chevron required that I go through two entire days of safety training before I could fly out and visit a deep-water drill ship operating about 200 miles south of New Orleans in the Gulf of Mexico. Only after passing the training (and some people in the same class flunked, by the way) did Chevron allow me to visit the 110,000-ton vessel Discoverer Inspiration.

Here's another takeaway…

Frankly, I'd expect a company like Chevron to do a great job at refining petroleum and back it up with a strong culture of safety. Chevron is big. It's technically sophisticated. It's under the spotlight wherever it operates. Chevron has to do things right, while earning a fair return for its shareholders. Being safe is very good business.

But beyond the basics of oil operations at Cape Town, Chevron has gone to another entire level of involvement worth discussing. Chevron South Africa has a strong program for community engagement. Chevron supports extensive public and university-level programs for education and training, as well as environmental protection.

Furthermore, Chevron has made pioneering strides in dealing with issues of hard-core poverty, HIV/AIDS awareness and community development — far beyond what you expect when you hear the words "oil company."

Chevron's laboratory for engagement is Dunoon Township, a poor enclave that has grown up on formerly vacant land almost adjacent to the Cape Town refinery. Dunoon houses over 100,000 people (likely many more) on about three square miles.

The residents of Dunoon are among the poorest of South Africa's poor. The HIV/AIDS rate may be in the 50% range. To a set of North American eyeballs, it's just a jaw-dropping level of poverty and social pathology.

To address some of the problems, Chevron has committed significant funding and personnel to improve the educational opportunities within the government-run Dunoon school system. This included devoting full-time Chevron staff to community outreach, first building a level of communication and trust. Then Chevron set up programs that literally touch the lives of thousands of children from hundreds of families.

One tangible success has been rebuilding the library at the main secondary school in Dunoon. Chevron has stocked the library with useful and age-appropriate books, wired the place for Internet access and funded librarians and other staff. There are clear metrics, from independent observers, that this kind of focused investment in the school has yielded positive results in terms of academic performance.

The bottom line is that Chevron has created what may be a workable, scalable model to address at least some aspects of the grinding poverty and social problems of South Africa's many townships. The South African ministry of education has taken an interest, and this Chevron program at Dunoon may see duplicate efforts in the months and years to come.

The Chevron program may have further impact beyond South Africa. Indeed, it's a pleasure to note that one Chevron manager who was instrumental in designing the Dunoon project has been invited to present the concept to an international panel at The Hague, in the Netherlands.

I could continue to tell you more about Chevron and its oil operations and community engagement. There's also plenty more to discuss about South Africa. But I'll end here and save some things for future updates and issues.

Before I sign off. Many thanks to Chevron Corp., and Chevron South Africa, for allowing Chris Mayer, Matt Insley and me to visit the Cape Town refinery. The Chevron staff were all gracious, hospitable, patient and open with their time and knowledge. As I hope I conveyed in this alert, we had an informative and inspiring day.

There's always more to discuss about the energy and mining plays — it's a busy, exciting world out there. Stay tuned.

Thanks for reading, and best wishes…

Byron W. King

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Byron King

Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Byron King's Military-Tech Alert, Outstanding Investments and Real Wealth Trader.  Byron has made frequent appearances in mainstream media such as The Washington Post, MSN Money, Marketwatch.com, Fox Business News, CNBC's Squawk Box, Larry Kudlow, Glenn Beck and PBS Newshour. He also had a feature article written in the Financial Times, and has appeared on both CNN and Marketplace radio broadcasts. Byron has also been quoted in various international publications such as The Guardian and De Volkskrant, and has been a guest on Canada's CBC television broadcast.

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