St. Croix and the refinery disaster

In 2012, the US Virgin Islands suffered a major negative impact to the economy of St. Croix when the island’s oil refinery closed. The refinery was owned by Hovensa, and had first begun producing oil products in 1966. It was a joint venture between Hess Petroleum and Petroleos de Venezuela. For most of its life, the refinery processed sour crude from Venezuela. it was one of the largest refineries in the world, capable of processing up to 500,000 barrels of crude oil a day when operating at peak capacity.

The refinery’s closure was for the same reason that several other refineries in the USA have closed in the last 10 years – its equipment was worn out and obsolete, and the purity requirements for newer fuels such as low-sulphur diesel would require additional equipment to be installed. In addition, the refinery used oil to run its equipment, whereas modern refineries use natural gas or have been converted to use natural gas, which is cheaper than crude oil as an energy source. Margins in refining are very low (1-2%) so if your costs are 3% higher than a competitor, you lose money, and because of the size of the refinery, the monthly losses were in the hundreds of millions of dollars.

After closure, the site was mothballed except for the storage facility. The closure put thousands of people out of work on the island. So the US Virgin Islands government began exploring ways in which they could get the refinery to re-open. At the time that the refinery closed, it was estimated that $2bn of upgrades and rework would be required to make the refinery competitive.

In 2015, the US Virgin Islands government sued Hovensa, claiming that the closure was illegal. How they could expect to force a business entity that had made an economically obvious decision to close a loss-making plant was not exactly clear. The owners responded by filing Chapter 11 bankruptcy. After the usual legal manouvering, the government settled with Hovensa, and the refinery was sold for $800m to a venture capital consortium. 

Now named LImetree Bay, the new owners had to work hard and spend a lot of money to re-activate an old (and in many ways, obsolete) facility that had not been operational for 8 years. They spent $2.7bn on updates, repairs and upgrades, with a focus on creating low-sulfur maritime fuels, and Limetree Bay Refinery re-started operations in 2020.

Almost immediately there were problems. And the problems have been continuing, to the point that the EPA is considering cancelling the plant’s operating approval. Limetree Bay was an environmental problem in its previous life, and the new version of the facility seems to be no better.

The underlying challenge is a real one. Island archipelagoes lack good sources of employment for residents. Tourism only provides so many jobs. There are little to no employment sources for regular blue-collar men. The refinery generates a lot of cash into the local economy when operational, so the government had a powerful political and societal incentive to get it re-activated. However, the age of the refinery’s base equipment was always going to result in problems. Ideally they would have bulldozed the facility and started over, but that would have been cost-prohibitive. 

In the meantime, the US Virgin Islands is stuck with a leaky bucket economy job generation engine, which sooner or later will generate yet another environmental mini-disaster.

 

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