HOVENSA's answers to senators' ideas paint bleak picture

ST. CROIX - Anger and frustration sometimes boiled over as senators questioned HOVENSA officials Thursday about why they decided to shut down the refinery and whether the refinery owes the territory anything for doing so.

The discussion shifted back and forth throughout the day - moving between senators leveling accusations and searching for solutions.

Senators explored various ideas for how the facility could be used to help the territory, questioned HOVENSA's reasons for closing the refinery and demanded some kind of concessions from the company for its abrupt halt in operations.

Some senators even asked if there was any way HOVENSA officials might change their minds.

Concerns ranged from elevated costs for fuel and power to lost revenue to environmental issues.

Senators claimed HOVENSA was breaching its contract on several fronts, and HOVENSA officials emphatically denied that.

Very quickly into the hearing, senators decided that they were not speaking to the decision-makers and decided they needed to call in representatives of Hess Corp. and the Venezuelan state-owned oil company Petroleos de Venezuela S.A. - or PDVSA - which jointly own HOVENSA.

Throughout, however, the HOVENSA representatives reiterated several messages: The refinery is not economically viable in the current global market; they had explored all possible options; and closure of the refinery to operate as an oil storage terminal was the best option, and it kept them from filing for bankruptcy.

"We've looked at all scenarios - believe me," said HOVENSA President and Chief Operating Officer Brian Lever. "We left no stone unturned."

The reconfiguration of the refinery by shutting down 30 percent of its refining capacity in January 2011 was one aspect of that, he said.

"While we saw some improvement, the overriding economic situation continued to deteriorate," he said.

"All our planning up to this point has been to avoid bankruptcy," said George Dudley, outside counsel to HOVENSA.

HOVENSA announced on Jan. 18 that it would cease operating the 350,000-barrel-per-day oil refinery and operate as an oil storage terminal with a capacity to store some 10 million barrels of product after sustaining $1.3 billion in losses during the last three years. The move means that more than 2,000 direct and indirect employees will lose their jobs, while 100 workers - drawn from HOVENSA's current workforce - will remain to operate the storage facility.

Many senators spoke about HOVENSA leaving, though the company's representatives continually pointed out that it planned to remain.

"I know you're saying you're not walking away, but what you're doing is tantamount to walking away," said Sen. Neville James.

A number of senators likened the situation to a broken romance.

"I took this as somewhat of a long-standing relationship ending in a break-up," said Sen. Janette Millin Young. "And we didn't have any counseling sessions."

Millin Young asked why the territory had not been warned - it deserved at least that, she said.

"There are financial consequences to this decision and there are federal regulations that prevent that information from being released early," Dudley said, referring to Securities and Exchange Commission regulations to prevent insider trading.

Sen. Terrence Nelson wanted to know what kind of compensation HOVENSA was going to pay the territory.

"You say that, with you converting from a 2,500-employee refinery to a 100-employee storage facility, you're meeting your obligations?" asked Nelson.

All HOVENSA representatives present answered simultaneously: "Yes."

"You can't pregnant me, leave me with five children and walk out the door," Nelson said. "The people of the Virgin Islands deserve something."

Many senators said they felt HOVENSA had violated the contract - the most recent of which was negotiated in 1998 and goes through 2022. Some said they felt HOVENSA was required to run the refinery; others said its proposal to cut its workforce and operate as an oil storage terminal breached the intent of the agreement.

"Now you're going to hurt our environment, occupy prime industrial land and employ hardly any people," said Sen. Craig Barshinger. "Don't we actually have to make a new deal?"

"Currently, the company is analyzing what it will need," Dudley said. "When we conclude that analysis, we will meet with the executive branch - which is what we're supposed to do - for a new agreement."

That is, he said, "if we determine that it needs to be modified."

Senate President Ronald Russell said the senators should be involved in that process.

Dudley advised Russell, however, that the V.I. Legislature's job would be to vote the contract up or down. Many senators expressed frustration that the previous agreements had not been negotiated with some kind of closing penalty.

"There is nowhere in the agreement a requirement to operate the refinery," Dudley said. "The agreement provides that if we run the refinery, it's entitled to certain benefits."

"There is no requirement in the agreement for HOVENSA to compensate the government for closing down the refinery," he said.

Sen. Nereida Rivera-O'Reilly said the territory entered the agreement with the understanding that it would be operating and contributing to government revenues with the construction of the delayed coker unit, which was completed in 2002.

Referring to Gov. John deJongh Jr.'s statement that the loss of HOVENSA represents an annual loss of about $100 million, Rivera-O'Reilly said that adds up over the 10 years left on the contract.

"There has to be a discussion for how the territory is going to make provision for the loss of those resources," Rivera-O'Reilly said. "At my estimation, we are looking at walking away from a potential $1.1 billion, without future values applied."

"From that premise alone, there must be a discussion for how much HOVENSA is going to pay for breaking the agreement," she said.

Some talk was about whether WAPA could use HOVENSA's turbines to produce power and whether conversion to natural gas would solve the situation.

"We explored every option," Lever said repeatedly. "We came to the conclusion that to convert the refinery to run on liquified natural gas was not economically feasible."

Other questions were about selling the refinery to Citgo or another company. Barshinger even threatened the use of eminent domain to obtain rights and have someone else run the refinery.

"The owners of this refinery invested $1 billion in building this," Dudley said, referring to the coker unit and other expansions. "They are not going to walk away from a billion-dollar investment unless they think there is no way to run it profitably. In its current configuration, it doesn't work."

Even if someone did buy it, the new owners would inherit the consent decree with the U.S. Environmental Protection Agency which mandates some $700 million in capital improvements.

"Unless you meet all the conditions of the consent decree, EPA won't allow you to turn the key," he said.

Other talk was about the Third Extension Agreement and HOVENSA's obligations to supply WAPA with fuel oil. HOVENSA has said it would supply WAPA until the end of June, when its current contract expires. Some senators pushed HOVENSA on the matter, and Dudley said that under the agreement, HOVENSA must bid to supply WAPA with fuel. Two pricing formulas are listed. One deals with crude oil brought in for refining, but that formula no longer will be viable because HOVENSA will not be refining. The other, which is the one HOVENSA will have to use, is the New York Harbor price, minus $2 per barrel, Dudley said.

Russell proposed continuing to bring in the amount of crude necessary to supply WAPA and having WAPA run the refinery to process it. That idea received little response from the testifiers.

A number of the senators had trouble understanding just how HOVENSA - a subsidiary of PDVSA, which supplies fuel - could be losing money.

"Refining is a margin business," Lever said. The refinery's margins have been squeezed, and the cost of crude, operating expenses and energy costs amounts to more than the price of the refined products, according to Lever.

Then why does PDVSA not supply crude to HOVENSA at a reduced rate?

Because PDVSA can sell it on the world market for more, Dudley said.

The senators said they thought that HOVENSA was one of the only places able to refine Venezuela's heavy crude and that that was the reason the refinery built the coker unit.

Coker units are not as unique these days, however, and the heavy crude can be processed by a number of refineries, Lever said.

Rivera-O'Reilly and others questioned whether profits were just being moved around and called for the closing to be postponed until an independent audit could be conducted.

HOVENSA spokesman Alex Moorhead pointed out that the company already is audited annually by an independent arbitor.

In the end, however, senators said they needed to speak with the "decision-makers" - the HOVENSA executive committee, which is made up of six people, half representing Hess Corp. and half representing PDVSA. Lever likened the committee to a board of directors.

"We're talking to the wrong people," Nelson said.

Russell said he is attempting to reach out to bring those representatives in to answer the senators' questions.

- Contact Daniel Shea at 714-9127 or email dshea@dailynews.vi

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