Nov. 20 (Bloomberg) -- Valero Energy Corp., the largest U.S. refiner, said it will permanently close its Delaware City, Delaware, plant because of mounting losses after the recession eroded demand for gasoline and diesel.

The shutdown will affect 550 employees and will result in a fourth-quarter charge of $1.7 billion to $1.8 billion, Valero said today in a statement. Company spokesman Bill Day said the plant has lost $1 million a day this year.

The Delaware plant is the third and largest U.S. refinery to be shuttered this year because of evaporating profit margins. San Antonio-based Valero acquired the plant through its 2005 purchase of Premcor Inc., a deal that gave the company the largest U.S. capacity to process heavy, cheap grades of crude. Discounts on such crudes relative to lighter grades have narrowed this year amid increasing heavy-oil capacity.

“I think it’s a testament to Valero’s view of what the 2010, 2011, maybe even 2012 outlook is,” said Jeff Dietert, an analyst at Simmons & Co. International in Houston. “If they were optimistic that we were going to go back to 2004 to 2007- type margins, they clearly would not have shut the plant down permanently.”

Valero said the shutdown will cut operating costs by about $450 million next year and will reduce capital spending by about $200 million.

Valero rose 11 cents to $16.47 in New York Stock Exchange composite trading. The stock had dropped 24 percent this year before today.

Sunoco, Western Closings

Philadelphia-based Sunoco Inc. idled its Eagle Point refinery in Westville, New Jersey, this month. Western Refining Inc. announced plans to close its Bloomfield, New Mexico, plant on Nov. 9. Valero’s Delaware refinery can process 190,200 barrels of crude a day, according to the U.S. Energy Department.

Valero said it considered strategic alternatives for the plant, including shutdowns of certain processing units or a sale, before deciding to close it.

The refining industry hasn’t seen the recovery in diesel demand that some predicted earlier this year, Dietert said. “Perhaps buyers are moving away from the table, saying ‘Let’s watch this,’” he said.

The Delaware plant also has a history of environmental and safety incidents, as well as breakdowns. A 2001 tank explosion at the refinery, then owned by Motiva Enterprises LLC, killed a worker and spilled 99,000 gallons of sulfuric acid into the Delaware River. Last year, Valero was delayed in restarting a processing unit called a coker that was idled for maintenance.

More Closings Predicted

“It has had a history of environmental challenges,” in terms of both emissions and impact on water quality, said Colin O’Mara, secretary of the Delaware Natural Resources and Environmental Control Department.

Valero’s position as a refiner without oil wells leaves it vulnerable to narrowing profit margins when fuel prices don’t keep pace with crude costs, said Ryan Cournoyer, director of equities at Lighthouse Financial Group LLC in New York. In the short term, shutting the Delaware plant marks “one small step in the right direction for Valero,” he said.

The shutdown will boost the profitability of Valero’s Paulsboro, New Jersey, plant and other refineries in the region as they fill the supply void, said Ann Kohler, an analyst at investment bank Caris & Co. in New York. She said there will be more U.S. refinery closings because of slumping demand.

“This is the early innings, and there certainly is significant additional capacity that will need to come out of the system,” Kohler said.

To contact the reporter on this story: Jessica Resnick-Ault in New York at jresnickault@bloomberg.net.

Last Updated: November 20, 2009 16:09 EST