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Comparison: In November 1996, the
per-gallon profit was 166 times greater
than total for entire West region

Expert opinion: 'That level of profit
is absolutely astronomical,' says mainland
consultant Tim Hamilton

---

By Rob Perez
Star-Bulletin

Shell Oil Co.'s profit margins from Hawaii gasoline sales for most of 1996 were nearly triple the levels it earned on gas sales throughout the Western region, confidential company documents show.

In just one month, November 1996, Shell's profit on a per-gallon basis in Hawaii was 166 times greater than the total for the entire region, according to the records.

The documents, part of the voluminous filings in the state's antitrust lawsuit against several major oil companies, are significant because they show for the first time publicly how much one of the companies was earning in the Hawaii market.

It also marks the first time that gasoline profits for a company other than Chevron Corp., the market leader here, have been portrayed in the antitrust case.

"That level of profit is absolutely astronomical," said Tim Hamilton, a mainland petroleum consultant who has studied the local market. "It's confirmation once again that the high pump prices in Hawaii were almost entirely due to pure profits (for the companies), not the cost of doing business."

Kitty Borah, a Shell spokeswoman in Texas, and Dale Lee, a local attorney representing the company, did not respond to requests for comment yesterday and today.

San Francisco attorney Spencer Hosie, who is overseeing the state's case, declined comment.

Until now, Chevron has been the only company whose profit levels specifically have been cited in the public court filings -- and only indirectly through allegations by the state.

In its lawsuit, filed in federal court in October 1998 but amended twice since, the state alleged that Chevron's net profits on local gas sales in 1998 were five times greater than its gas profits on the West Coast. The state last year made the allegation - not disputed by Chevron at the time - after reviewing internal Chevron documents obtained in the evidence-gathering process. Those records have not been made public.

Like most internal company documents in the case, the Chevron records have been kept secret under a strict protective order imposed by the court, a common practice in complex antitrust litigation.

But the Shell documents were placed in the court file that is accessible to the public -- despite being marked highly confidential and subject to the protective order. The documents were part of a Shell filing dated June 29 in which the company was opposing a state request seeking more records.

Shell noted that it already had spent more than 12,000 "person hours" at a cost of more than $500,000 searching for documents the state sought - and those totals did not include the time and cost of private lawyers helping in the effort. In all, more than 750,000 pages were turned over to the state, according to Shell.

The profitability documents detail Shell's net income for its marketing arm in Hawaii for the first 11 months of 1996 and for November 1996. It also shows comparable totals for the overall Western region, which includes Hawaii and California, and also for six individual markets in California. In addition, the records list such data as fixed costs and gross margins (essentially profits before expenses) for each market and the region.

$3.9 million in 11 months

On a per-gallon basis, Shell recorded a profit of 7.7 cents in Hawaii for the first 11 months of 1996, or nearly three times greater than the 2.7 cents the company earned throughout the region, according to the documents.

Based on volume of more than 51 million gallons, Shell posted a profit of $3.9 million locally in those 11 months, the documents show. Regionally, the company's net income totaled $46 million.

The comparisons were made in a year in which West Coast prices- typically among the highest in the nation -- spiked to then-record highs, largely coinciding with California's switch in the spring of 1996 to a cleaner-burning but more costly fuel. The price hikes triggered allegations of price fixing and sparked a government investigation.

Boosted by the higher prices, oil companies on the West Coast posted extraordinarily high profit margins in 1996, according to Hamilton.

Consequently, any comparison between Hawaii and West Coast gas margins in 1996 would have fallen short of the more typical, larger spreads that were common in the 1990s, Hamilton said.

"Even given that, even when profits were reaching record levels in the West, they were doubling and tripling those levels in Honolulu," he said.

Numbers likely understated

In November 1996, the spread went well beyond that, Shell's data shows. That month the company's net income hit 16.6 cents a gallon in Hawaii, or 166 times greater than the 0.1 cent it posted regionally, according to the documents.

By the latter part of 1996, West Coast prices had settled back down from their spring highs, while Hawaii's were on the rise, likely accounting for the higher gap between the two markets, according to industry analysts.

Honolulu pump prices in 1996 on average ranged from roughly $1.50 to $1.63 a gallon for regular unleaded, while prices in the major California markets fell to as low as $1.15. In May of that year, however, San Francisco's average jumped to $1.64 a gallon, marking the first time in the 1990s that a mainland market topped Honolulu's average price.

Hamilton said Shell's internal documents likely understate the Hawaii profit picture for another reason: when doing their books, oil companies tend to shift profits made from selling gasoline to their refinery side for tax purposes.

"They were making more money in Hawaii than these numbers suggest,'' he said.

The state's $2 billion lawsuit accused Shell, Chevron, Texaco Inc., Tosco Corp. and Unocal Corp. of conspiring to keep Hawaii gas prices artificially high - a charge the companies deny. Tesoro Petroleum Corp. and BHP Hawaii Inc. originally were defendants as well, but the companies settled the case for a total of $15 million while continuing to deny any wrongdoing.

A trial has been set for September 2001.