Hovensa files for bankruptcy, ending a long-running dispute
The shuttered Hovensa Refinery in the US Virgin Islands has filed for bankruptcy, closing a long-running dispute between the owners of the facility and the Virgin Islands
The shuttered Hovensa Refinery in the US Virgin Islands has filed for bankruptcy. This could mark the closing stages of a long-running and bitter dispute between the owners of the facility, Hess and Venezuelan national oil company PdV, and the Virgin Islands government.
Hovensa filed for bankruptcy 15 September, saying that it lacked the resources to cover $1.864bn in debts and that it had reached a $184m deal with Limetree Bay Holdings, an affiliate of energy-focused private equity firm ArcLight Capital, to sell the facility’s storage terminals, according to court documents. Hovensa’s bankruptcy filing came days after the US Virgin Islands government filed a $1.5bn suit against Hess. That suit faulted Hess for shutting the refinery down before the end of the operating agreement and alleged that Hess executives had engaged in a pattern of misconduct.
Tension between the sides has been rising since Hess and PdV mothballed the Hovensa Refinery in early 2012. With a capacity of 500,000 barrels/day, the facility on the island of St Croix, was once one of the largest refineries in the world and a key entry point for Venezuelan heavy crude into the US. It was also central to the Virgin Islands economy. At its height, the refinery employed a quarter of the island’s workforce and generated tens of millions of dollars a year in tax revenue.
But trouble hit the refinery after crude prices plunged amid the financial crisis. Hovensa says that the refinery, which is 50 years old, was no longer competitive because it couldn’t make the switch to cheaper natural gas that other US refiners had made to power their facilities.
It also said the facility needed significant investment to upgrade facility to make it competitive with other US and Caribbean refineries. A string of multi-million dollar fines related to environmental violations at the plant added to the financial woes.
Some of the plant’s distillation units were closed in 2011 in an attempt to make the refinery more competitive. But it didn’t work, and in court filings Hovensa says that it lost around $1.3bn between 2009 and 2011. In spite of closing the refinery, Hovensa had kept its storage terminal business running until earlier this year.
Following the closure, the Virgin Island’s government rejected Hovensa’s plan to operate the facility only as a storage terminal, and pushed for a sale to someone that would operate the refinery.
Hess found a potential buyer in a newly formed venture called Atlantic Basin Refining (ABR) and agreed to sell. But the sale was vetoed in 2014 by the Virgin Islands government. After extended negotiations the sides couldn’t come to terms over an operating agreement that would have included tax breaks and other incentives for ABR to re-open the refinery. The government also expressed doubts that the newly-formed ABR could raise the more than $1bn in financing needed to invest in the plant to see through its plan to start refining light oil coming out of the US’ shale oilfields. It also worried that the sale would release Hovensa from a $40m liability the company agreed to pay in a settlement with the government over alleged environmental damage on the Island.
With options and cash dwindling, Hovensa’s Chapter 11 bankruptcy filing came as little surprise. Hovensa said in court filings that Limetree was just acting as a stalking horse to smoke out other bids and it would hold a competitive auction for the assets if the court approved its bankruptcy plan.
Keeping it going
The Virgin Islands government would clearly prefer a bidder that planned to re-open the refinery, though it is doubtful that will happen. Hovensa argued for the economic benefits of the deal with Limetree. “The sale transaction will allow [Hovensa’s] oil storage terminal facilities to resume operations, thereby ensuring that the facilities remain a vital part of the St Croix economy as a business, employer, and taxpayer,” the company said in court filings. It also said that the sale would generate enough cash for Hovensa to pay the $40mn in outstanding environmental damages owed.
Limetree’s parent company ArcLight Capital owns pipelines and storage facilities across the US and will seek to operate the terminal, rather than the refinery as a whole.
Whether the government is open to a deal that will leave the future of the refinery in doubt is uncertain, though. The government in the past has been steadfast in its belief that the refinery should be re-opened. It could be a drawn out process.
That said, Hovensa’s 32m barrels in storage terminal facilities on their own will be a very attractive asset if put up for competitive bidding. The Caribbean has been a bustling hub for oil traders looking to take advantage of the premium on the forward price curve amid the volatility and low prices brought on by the downturn. Storage in the region is brimming and demand is outstripping storage capacity. Some traders are even looking at much costlier floating storage in the Caribbean as onshore tanks fill up, making the Virgin Islands capacity valuable.