Published: January 19, 2012
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ST. CROIX - After 45 years in operation as the territory's largest private employer, HOVENSA announced Wednesday that the 350,000-barrel-per-day refinery will shut down and more than 2,000 employees will be dismissed.
"It was a complete body blow. Quite frankly, it was the last bit of news that I wanted to hear," Gov. John deJongh Jr. said at a hastily arranged press conference Wednesday.
DeJongh said HOVENSA's chief executive officer, John Hess, called him Tuesday night to break the news.
HOVENSA began the process of ceasing refining operations Wednesday, and a full shut-down is projected for mid-February, said HOVENSA spokesman Alex Moorhead.
Workers will continue on the payroll through the next 90 days, and a smaller group will work through July 31 preserving the facility's equipment as HOVENSA transitions to an oil storage terminal with about 100 employees who will remain.
"We explored all available options to avoid this outcome, but severe financial losses left us with no other choice," HOVENSA President and Chief Operating Officer Brian Lever said in a prepared statement. "We will provide significantly enhanced benefits for those union and salaried employees who are impacted."
Lever said HOVENSA will work closely with the V.I. government in easing "the transition for the rest of the community."
Citing $1.3 billion in losses during the last three years and dismal market projections for refining operations because of global economic conditions, the controlling entities decided to cut the off the hemorrhaging asset, according to HOVENSA officials. The decision was made by Hess Corp. and the Venezuelan state-owned oil giant Petroleos de Venezuela, S.A. - each of which owns 50 percent equity in HOVENSA, Moorhead said.
The news Wednesday produced widespread anxiety and speculation across the territory.
With the government crippled by budget deficits and residents suffering from high power bills and rising unemployment, many talked about the closure as a doomsday scenario for the territory. Many local officials had a difficult time thinking of a single sector of the economy that HOVENSA does not touch.
"This is a catastrophic event. This is like a hurricane hitting a community or an earthquake," said Sen. Louis Patrick Hill, who began a Senate committee hearing with an announcement of the news Wednesday.
HOVENSA has 2,150 direct and contract employees, and its operations account for about 20 percent of the territory's gross domestic product.
The refinery's closure represents "at a minimum" a loss of about $60 million in annual tax revenue for the government, from real property taxes and employee income taxes, deJongh said.
V.I. Delegate to Congress Donna Christensen described the situation as "a financial crisis on top of a financial crisis."
Senate President Ronald Russell said such challenges "force us to be really creative and dig deep."
The governor, all 15 senators and Christensen are to meet at Government House on St. Thomas today to discuss the overall financial crisis and the government's next steps.
"The last thing we need right now is the dismissal of more government workers," deJongh said, referring to about 500 government positions that were dismissed late last month because of the Fiscal Year 2012 budget deficit.
During his press conference Wednesday, deJongh talked about the need to ramp up efforts to develop a proposed sports complex and reinvigorate stalled hotel projects on St. Croix to create jobs.
In the immediate future, the territory appears to qualify for a national emergency grant from the U.S. Labor Department, which is eligible for layoffs affecting 50 or more workers in a single plant, Christensen said. The money would be used to help the territory address the needs of workers and families affected, she said.
"It seems to me that we're eligible," Christensen said. "And if we're not eligible, then that's when we go to the White House."
While the news came as a shock to many people in the territory, industry analysts were not as surprised by the announcement.
"It has been losing money in the last three years," said Fadel Gheit, the senior oil and gas analyst for Oppenheimer and Co. "Stopping the refinery does not make it profitable. It just stops the loss. It's the lesser of two evils."
In addition to the lull in demand for refined products, HOVENSA and other domestic refineries were put at a competitive disadvantage by the construction of new, highly efficient refineries in developing regions such as Asia and the Middle East, Gheit said.
"Every company I know of is bailing out of refining," he said.
The possibility of another entity buying the refinery and refurbishing it is "not likely" to happen in the current economic landscape, according to Gheit. The cost of upgrading the refinery to a level where it could compete globally would cost about $5 billion, he said.
HOVENSA officials said they explored all available options to try and keep the refinery viable, including investigating the possibility of bringing in natural gas to reduce its own power bill, given that it was burning its own product to generate electricity.
Losses were not limited to the refinery's operations, however, and the future held at least $700 million in environmental upgrades required by the U.S. Environmental Protection Agency under terms of a consent decree lodged in federal court about a year ago.
Quarterly stockholder reports from Hess consistently have painted a dire picture of the refinery's situation, and a report from Goldman Sachs released last week speculated about how much longer HOVENSA could actually hold out.
In the end, there was "no other choice," HOVENSA officials said.
On Wednesday, Hess stock on the New York Stock Exchange jumped to $59.67 - rising almost 4 percent - even after Hess announced that it would take a $252 million after-tax charge against its 2011 fourth quarter earnings as a result of the refinery's closure.
The terms of severance packages offered to HOVENSA employees were unclear to union leaders Wednesday.
"My superiors are in the plant talking with HOVENSA. I don't have any information at this time," said Ira Hobson, president of United Steelworkers Local 8248, representing about 120 Wyatt workers.
Ricky Brown, President of Our Virgin Islands Labor Union, which represents more than 100 employees, also had no details about severance packages.
"I have no official word," he said. "Obviously, it's not good news for anybody - not the employees or the community at large."
No specifics were available from HOVENSA officials, who will be meeting with employees to explain the final phase of their employment at the refinery.
"We intend to offer all HOVENSA employees significantly enhanced benefits, which will be contingent on signing a release and completing their work safely and satisfactorily," Moorhead said. "Group meetings with employees will be held throughout the week to provide explanations of the severance package. Outplacement services and assistance will be provided to employees."
HOVENSA notified its managers and employees of the shut-down Wednesday morning, officials said. Most had already heard the news by the time Lever entered an employee notification meeting around 7 p.m., with the news dominating the community throughout the day.
"My focus has to be meeting with employees and reassuring them that their interests will be taken care of and ensuring the safe shut-down of the refinery," Lever said.
- Contact Daniel Shea at 714-9127 or email email@example.com.