UPDATE 5-Valero shuts Delaware refinery, takes big charge

* Sees charge of $1.7 bln-$1.8 bln, cuts of 550 jobs

* Expects reduced operating expenses

* Shares firm 1.1 pct in early trade

* Refinery lost more than $1 million per day in 2009 (Recasts to add timing of shutdown, adds comment from Delaware natural resources agency)

By Matt Daily and Rebekah Kebede

NEW YORK, Nov 20 (Reuters) - Valero Energy Corp (VLO.N), the top U.S. independent oil refiner, said on Friday that it has begun permanently shutting down its plant in Delaware City, Delaware, as the weak economy batters the refining sector.

The San Antonio-based company said it would take a pretax charge in the fourth quarter of $1.7 billion to $1.8 billion, or $2 to $2.15 per share after taxes, related to the shutdown, including severance for cutting 550 jobs at the plant.

Slumping fuel demand due to the economic recession and higher crude oil costs have squeezed margins for U.S. refiners this year, forcing companies to idle plants and scale back production of refined fuels, such as gasoline and diesel.

Valero said the shutdown of the 210,000-barrel-per-day plant, which began earlier this week, would reduce 2010 pretax operating expenses by about $450 million, including $125 million of non-cash costs, and trim capital spending and turnaround costs by about $200 million through 2010. [ID:nN20238744]

"The refinery itself has, so far in 2009, lost more than $1 million per day," Valero spokesman Bill Day said, adding that the company has no plans to announce further closures.

"We have said previously, several times, that we are taking a good hard look at all of our refineries throughout our system and working to identify ways that we can cut costs," Day said.

Valero has been aggressive in shuttering units this year, closing its 235,000 bpd Aruba refinery indefinitely in August.

The company had failed to find buyers for both refineries.

Valero's 16 refineries have a refining capacity of 3.1 million bpd; Aruba and Delaware City refineries make up about 14 percent of the refiner's total capacity.

U.S. refiners operated at 79.4 percent of their total capacity as of last week, the lowest rate since September 2008, according to U.S. Energy Information Administration data.

With fuel demand weak, refined product inventory levels have continued to build, creating a glut that has eaten into refining margins. [EIA/S]

For a factbox on other actions taken by refiners this year due to weak profits, click [ID:nN20226769]

"If there's ever been a time to mothball a refinery, it's probably now, with utilization rates below 80 percent. I wouldn't be surprised to see additional closures," said Peter Beutel, president of consultancy Cameron Hanover in New Canaan, Connecticut.

To see a compilation of analyst views on the shutdown, click [ID:nN20226645]

Valero said it would begin severance negotiations with the United Steel Workers and International Brotherhood of Electrical Workers employees' unions.

"With the closure of Sunoco's Eagle Point refinery operations, it looks like this is becoming a systemic problem in the independent refining sector," the United Steelworkers Union said in a statement.

Delaware Governor Jack Markell and Delaware's Department of Natural Resources and Environmental Control (DNREC) said on Friday the state will oversee the shutdown of the refinery and ensure environmental safety during the process.

"We haven't coordinated any schedule for the shutdown. We need to know if they are decommissioning or mothballing ... it was a bit of a surprise," David Small, DNREC spokesman, said.

The Delaware refinery processed heavy and sour crude oil grades, which typically trade at a discount to the light, sweet crude oil that is known as the benchmark in the United States.

The cost advantage of those sour crudes has declined this year, hurting profits for refiners like Valero that have invested in units to process those cheaper crude grades.

Venezuela, Saudi Arabia, and Russia were among the foreign suppliers of crude to Delaware City, according to EIA data. (Additional reporting by Erwin Seba, Matthew Robinson, Eileen Moustakis, Robert Gibbons, Joshua Schneyer, and Janet McGurty; Editing by Walter Bagley)