Large US Refinery Shuts Down — Lack of Natural Gas, Increased Regulations, Rising Raw Material Cost

In case you haven't been to the US Virgin Islands (St. Croix, St. John, St. Thomas and several smaller islands, or "cays" as they're known locally) you might think of them as nothing more than charter boat resort destinations with pleasant weather, duty free goods and inexpensive yet tasty rum. There's also the peculiar practice of driving on the left side of the road, using left-hand steering vehicles -- a carryover from Danish (the islands were the Danish West Indies until 1917) rule but with US cars.

Unfortunately, the islands have now taken a major step towards the tourist trap end with the shuttering of what was once the world's largest refinery, HOVENSA, with a peak capacity of around 550,000 barrels of oil per day in its heyday. Since its start in 1966, HOVENSA was operated by Hess Oil until 1998 when it entered into a Joint Venture with Petroleos de Venezuela (PDVSA) -- with the bulk of its fuel being Venezuelan heavy sour crude.

A few years ago, I had the pleasure of spending a (working) week at the refinery, training HOVENSA's buyers in e-sourcing solution use. In a way it saddens me to see the 12-square mile facility go to waste. I had to look into the reason for the closure -- I mean, I thought all evil oil companies were raking it in, hand over fist? Isn't that the media message?

Why did HOVENSA turn its refinery into a storage facility? Turns out there were many factors that combined into a perfect storm, although not of the Hurricane Hugo kind that destroyed most of the island, including the refinery in 1989 causing more than $1 billion in damages. A substantial factor was the lack of power generating capabilities on the island, thus HOVENSA had to generate its own power by burning off a portion of the refined product to generate 160MW through multiple gas turbines and boilers for steam. HOVENSA had enough power generation capability to power the needs of the entire U.S. Virgin Islands, but it's ultimately not cost effective to burn product and not natural gas.

Another blow to operations was EPA regulations that would have cost HOVENSA at least $700MM to upgrade the refinery to suit the bureaucrats -- ostensibly to improve air quality for people living near the refinery. Now that the neighbors are unemployed I guess they have time to enjoy the cleaner air.

Thirdly, recently built refineries from China and India with newer technology and a lower cost structure were able to put downward pressure on market pricing, especially since other refineries are more likely to rely on WTI (0.24% sulfur) or Brent (0.37% sulfur) crude and not sour (4.5% sulfur!) Venezuelan Orinoco crude, which needs expensive catalysts to crack. Catalysts, I was told when I trained the buyers, would be the only absolutely critical commodity (other than crude itself) to run HOVENSA, and they spent a good deal on it.

The shutdown hits about 20% of the local economy as over 2,000 employees and contractors have been let go, and the multiplier effect is enormous, especially as there really is no competing employer of size. There are few other jobs of technical complexity where islanders can develop the same professional skills as those at HOVENSA.

In 2011, HOVENSA provided the Water and Power Authority (WAPA) a $50 million subsidy as part of its agreement with the territory of the Virgin Islands. That subsidy will end at the end of the year and the already high cost of electricity (highest in the US) on the island will now climb, as they have to pay higher fees for fuel as well as transportation. For St. Croix, gasoline and diesel prices will rise as they will have to import this as well -- not that they have far to drive, but probably worse for the boating and fishing industries. Additionally, since local private schools on St. Croix, charities, and various other infrastructure were subsidized by HOVENSA, the overall impact is staggering to the economy and life as an islander and will take time and planning to overcome. The University of the Virgin Islands offers 2-year process technology degrees that HOVENSA originally created and taught but will now be continued by local rum manufacturers.

Top off the above with government mismanagement and corruption and the US Virgin Islands are in serious trouble. Reference our stories on Walmart and Mexico and you realize that you don't have to go south of the border to experience large-scale corruption. A long line of references to corruption cases (unrelated to HOVENSA) involving St. Croix officials are readily available via internet searches.

Granted it's hard to find a single point of business failure. As you have read, many factors conspired to bring HOVENSA down. As much as I would like to say that the EPA-mandated changes and their $700MM (and counting...) environmental price tag did the plant in, the main factor was the cost of upgrading infrastructure to lower the cost of energy. It would have taken about $2 billion in investment to either bring in LNG or do a (rare but proven technology) coker gasification project. However, any factor alone would not have been enough to topple HOVENSA.

"The fact that the company lost $1.3 billion over the past three years and that losses were predicted to continue led to the decision to close the refinery and convert the facility into an oil storage terminal," said David Roznowski, HOVENSA spokesman. "While the EPA consent decree was one factor, the high cost of energy coupled with weakening global demand for finished product and increased production from emerging markets made it difficult for HOVENSA to compete."

Roznowski added that prior to the HOVENSA announcement and Valero's announcement of plans to idle its refinery in Aruba, between the US and Europe, 18 refineries had closed in the previous two years!

One small light at the end of the Cruzan tunnel is Diageo. They are distilling rum (their Captain Morgan brand) in substantial quantities on the island, and since a refinery and a distillery are somewhat similar, I guess they can have the pick of the litter of ex-HOVENSA employees since they will not hire more than around 50 of the 2,000 displaced by the HOVENSA shutdown. Let's see if Diageo can also fend off politicians looking for a new funding source for the VI Government.

It's certainly sad to see the loss of US manufacturing capacity. But best of luck St. Croix. I'll try to pick up a bottle of Cruzan Single Barrel next time I need to restock my rum supplies!

- Thomas Kase

Voices (5)

  1. Thomas Kase:

    @Bubba & Maverick: Thanks for your input. Before you get all up in arms – try to read the entire article – I think you missed an important passage:
    "As much as I would like to say that the EPA-mandated changes and their $700MM (and counting…) environmental price tag did the plant in, the main factor was the cost of upgrading infrastructure to lower the cost of upgrading infrastructure to lower the cost of energy"
    Perhaps that’ll cool off the heat a little?

    Not that the EPA isn’t out to get us – industry that is – almost $1 billion is nothing to sneeze at.

    @Maverick: the air in St. Croix felt clean enough to me when I was there – your comparison to Beijing is an absurd straw man position.

    Don’t forget to take a look at today’s post around PV electricity in Germany – just read the details before jumping to conclusions!

  2. Maverick:

    Hey Bubba, why don’t you move to Beijing and take a deep breath of what environmental deregulation brings? Conversely, check out US progress:
    I hate bloated bureaucracy, but smart regulation is worthwhile.
    I’ll take my air and water clean thank you very much.
    I’m surprised you actually were able to get on the Internet – congratulations! Do they have WiFi access at the trailer park?

  3. Thomas Kase:


    Thanks for sharing – I trust your perspective. I got my details from two Hovensa supply chain managers, so I can only add your perspective to their assessment that multiple factors brought HOVENSA down. Too bad, I enjoyed the brief time I spent down there.


  4. Bob D:

    Having worked as an engineer at HOVIC I can say alot of what you say is accurate. Except your economic analysis of natural & fuel gas. Hovic produced TOO MUCH C1’s to C4’s from refinery cracking units and had no place to put them. Their dimerization unit converted C3’s to C6’s to make gasoline. I don’t think these units are operated anywhere else in the US because they are so expensive to operate. But it was a choice between converting the c3’s or flaring them. A litlle better up front design (using the excess fuel gas to run a Cogen unit from the beginning, for example) might have helped.

  5. bubba:

    Does anyone else have a feeling that the EPA has become a secret branch of the Chinese government with a charter to harm the US economy and increase dependence on Chinese exports?

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