Governor calls on HOVENSA to reopen or sell oil refinery
Published: August 7, 2012
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ST. CROIX - Gov. John deJongh Jr. said Monday night that he has rejected HOVENSA's proposal to operate as an oil storage facility under a proposed modification to the current agreement between the company and the government.
In a strongly worded televised speech, deJongh said that the HOVENSA proposal offered few benefits to the territory and gave strong advantages to HOVENSA.
The governor said that on Monday - the deadline for his response to the HOVENSA pitch - he instead offered two compromise counterproposals, both of which involve the facility on St. Croix's south shore operating as a refinery, not a petroleum storage facility.
The governor also raised the threat of litigation if HOVENSA refuses to accept the counterproposals and does not abide by the terms of the current agreement.
In a presentation that at times grew accusatory, the governor also offered his perspective on the negotiations to this point.
"That, after so many years, and notwithstanding the existence of a contract, HOVENSA would think that its best way forward was simply to announce what it wished to do without considering the impacts of its actions on the territory was regrettable," deJongh said. "Perhaps the thinking was that they had us over their not-quite proverbial barrel and that we had no choice but to do what they said, to agree to what they demanded."
DeJongh also pointed out that if HOVENSA continues to maintain its current position, electricity costs for V.I. consumers are likely to soar by 20 percent to 25 percent as soon as next year, when HOVENSA would no longer be providing discounted fuel for the V.I. Water and Power Authority.
"What I do want to be forthright about is that given HOVENSA's present positions, the approximately $50 million of relief that we have felt in the LEAC and the cost of electricity will be one more burden shifted onto the residents of the territory by reason of the abrupt corporate decision of HOVENSA to close the refinery," he said. "And, as things now stand, that consequence may be placed upon us all as soon as the first of next year."
HOVENSA did not respond publicly to the governor's speech on Monday night.
"At this time, HOVENSA will not be making a statement in response to the governor's address made earlier this evening," HOVENSA spokesman Richard Layton said in an emailed response to Daily News phone inquiries.
DeJongh harkened back to Jan. 17 - the day before HOVENSA made its public announcement on Jan. 18 that it would be ceasing refining operations - in his speech.
He said that on Jan. 17, John Hess, the chairman of the board and chief executive of Hess Corp., called to tell him that the next morning, HOVENSA would be issuing a statement announcing the closure of the oil refinery. HOVENSA is a joint venture between Hess Corporation and Petróleos de Venezuela S.A., or PDVSA, the state-owned oil company of Venezuela.
"Mr. Hess was not calling to ask us to do anything or to ask me for our thoughts on the matter," deJongh said. "He was simply calling to inform the government and the people of the Virgin Islands of a decision that had already been made - a done deal, with no input from us. A decision, we have now come to know, was actually made in December of 2011."
DeJongh spoke of a partnership through the years between Hess - and later HOVENSA - and the government, and of the good faith negotiations that resulted in the original agreement and numerous modifications through the years.
"But when the end came, it was because the two owners of HOVENSA, no doubt for their own separate reasons, that we are not likely to ever fully know, each decided that we no longer served their purposes," he said, adding that the decision was made "knowing full well that they were and remain bound by the terms of a legal contract between HOVENSA and the United States Virgin Islands through its government."
DeJongh outlined the effects of the HOVENSA decision, including the loss of 2,000 direct jobs, the impact to St. Croix's economy and the threat that the company would yank long-standing price discounts WAPA has received in the form of subsidized fuel supplies.
The governor also said that because HOVENSA operates the only docking, storage and distribution facility for fuel on St. Croix, the action has "caused many to fear a threat to the availability of gasoline and other fuels on St. Croix."
The end of refining operations also meant a loss of almost $100 million in tax revenues to the government's General Fund, he said.
A week after the announcement, HOVENSA put forward its proposal to create an oil storage business to operate under a modification of the concession agreement, deJongh said.
"Do not misunderstand what HOVENSA is now asking us for: They are asking that an existing contract be modified to relieve them of the obligations they have under the existing contract and that they be provided even more tax exemptions and reductions than they previously enjoyed," he said.
DeJongh contended that the proposal involved continued environmental risk to the territory, with HOVENSA bringing oil shipments in and out of the port - but without the benefits that would balance out the risks.
Specifically, the governor said that the HOVENSA proposal would provide 100 jobs "at most" and require a reduction in HOVENSA property tax payments from $14 million to $4 million per year. He also said that HOVENSA sought a "lengthy extension of the submerged lands permit at a rent of $1 per year."
"And the entire package was initially presented to us as somehow non-negotiable, as somehow not requiring justification or factual support," he said.
The storage facility also would allow HOVENSA to "maintain the fiction" that they might reopen the refinery, without any commitment to do so, "and therefore avoid triggering expensive closure obligations set forth in federal environmental protection laws," deJongh said.
The governor asserted that operating a storage facility also would provide HOVENSA with a "free option" to hold the refinery until sale conditions and prices improve and that a modification to the agreement as HOVENSA had proposed would allow it to tout to potential buyers benefits that could enhance the price of the refinery down the road at the territory's expense.
DeJongh contended that after making the offer, HOVENSA then "stirred up fears across an already shaken community."
DeJongh spoke of comments made by HOVENSA CEO Brian Lever at a public meeting on St. Croix, suggesting that the comments were a means for HOVENSA to play on community anxiety to get what HOVENSA officials wanted by "threatening further devastation."
DeJongh said the government hired Duff & Phelps to provide it with industry advice for the negotiations with HOVENSA.
The company, he said, has done a comprehensive analysis of the situation.
"Duff & Phelps' conclusion was clear: The best outcome, the most logical outcome and the highest and best use for the HOVENSA refinery site and facility was and is as an oil refinery," deJongh said.
Duff & Phelps suggested that the refinery has been handicapped by two problems that can be remedied: a cost advantage favoring some Midwest refineries that have access to lower-cost West Texas Intermediate crude at a favorable price because of delivery contracts that are expiring soon and the high cost of the energy that HOVENSA used to make its products, deJongh said.
He noted that HOVENSA operated the refinery by burning oil, while trying to compete with refineries that operated using much cheaper electricity.
DeJongh said that the "overarchingly important factor" is that Duff & Phelps concluded that beyond those two problems, the HOVENSA refinery can be competitive for the right owner.
"Noting my belief that government must be prepared to assist WAPA in finding a way to finance a conversion to a lower cost fuel supply such as Liquefied Natural Gas, they suggest that this might well be accomplished quicker and cheaper if it was done in coordination with the investments needed to make the refinery more efficient," deJongh said.
The governor said that if infrastructure changes that would benefit the refinery would also benefit WAPA and its ratepayers, the government would be willing to "participate fully and cooperatively" in the conversion.
DeJongh said he rejected the HOVENSA proposal on Monday and has countered with "a choice of compromise proposals" aimed at reopening "a more efficient and profitable oil refinery on St. Croix."
- For Hess and PDVSA to make plans with the territory to reopen a more efficient refinery, jointly working to get the benefits of a lower cost fuel supply for the refinery that can also provide a cheaper fuel supply for WAPA.
- If the owners do not agree, the territory asked for HOVENSA to work with the territory to "find new owners who will work with us to achieve the result we see: an operating and efficient oil refinery on St. Croix providing jobs and revenues and using a fuel that will also allow us to produce more affordable electricity for our residents," deJongh said.
- If HOVENSA rejects both counteroffers, deJongh said he expects the company to "fully and completely comply with all of the requirements" of the contract that is in place, and indicated he is willing to sue to enforce the terms of the contract.
The governor also noted that if HOVENSA continues to maintain its position that it is not bound by an obligation to provide discounted fuel to WAPA, the discount will end on Dec. 31.
WAPA estimates that will result in a 20 percent to 25 percent increase in electricity costs.
DeJongh suggested that the matter may wind up in litigation and said that there is a possibility that HOVENSA could try to void the contract entirely by filing for bankruptcy.
However, as he closed his speech, deJongh said he believes the issues can be resolved, although he again asserted that the company cannot just "walk away" from the obligations set forth in the contract.
The governor said he is committed to finding the best path for the future.
"I will work with these owners or future owners of the refinery to build a joint future that benefits us all," he said.
- Contact reporter Joy Blackburn at 714-9145 or email email@example.com.
They are asking that an existing contract be modified to relieve them of the obligations they have under the existing contract and that they be provided even more tax exemptions and reductions than they previously enjoyed.
I will not be recommending to the Senate that we accept the offer HOVENSA presented to us. Instead, I have presented to the owners of HOVENSA what is a choice of compromise proposals for it to consider all of which are designed to lead to the reopening of a more efficient and profitable oil refinery on St Croix.
We ask Hess and PDVSA to make plans with us for the reopening of a more efficient refinery jointly working to get the benefits of a lower cost fuel supply for the refinery that can also be a lower priced fuel supply for WAPA. And if they do not agree to do so, we ask them to proceed with us to find new owners who will work with us to achieve the result we seek: an operating and efficient oil refinery on St Croix providing jobs and revenues and using a fuel that will also allow us to produce more affordable electricity for our residents.
If HOVENSA chooses not to accept either of the compromise proposals I have offered, then I expect them to fully and completely comply with all of the requirements of the contract that is in place between the government and the company.
Never again will the owner of that refinery be in a position to threaten to hold the government and people of this territory hostage by threatening to withhold fuel, whatever fuel it is using or providing. If HOVENSA persists in its position that it is not bound by the decades-old obligation to provide discounted fuel to WAPA, that discount will end, at the end of our present agreement on Dec. 31.