While many eyes are focused on recent mechanical and environmental problems at Hovensa, structural changes in the economics of refining are putting Hovensa at a competitive disadvantage, making layoffs and a smaller operation a possibility. Labor Commissioner Albert Bryan, who has been involved in discussions with Hovensa regarding its employment outlook, acknowledged that workforce reductions are possible in 2011.
The giant south shore refinery has had a profound impact on St. Croix since its creation more than 40 years ago, touching the lives of Crucians on a daily basis.
Everywhere you go you see Hovensa’s direct effects on the island and, more subtly, its indirect effects. Hovensa at peak capacity can refine 495,000 barrels of oil a day and produce 175,000 barrels of gasoline. It is among the ten largest in the world and is fourth largest in the Western Hemisphere, after a refinery in Venezuela and Exxon refineries in Baytown, Texas and Baton Rouge, La. It’s also an economic engine for territory, directly employing upwards of 1,300 and hundreds more through its subcontractors.
The refinery also fills government coffers with many millions in tax dollars—including fuel, property, income and gross receipts taxes—and plays a large role in the V.I. community, helping to fund Christmas Festival and Fourth of July fireworks displays, sponsor scholarships, and give generously to a wide array of local charities.
Sullying the refinery’s V.I. image have been a number of recent mishaps in which Hovensa has repeatedly sprayed a fine aerosol of partially refined oil into the air above St. Croix, contaminating the drinking water cisterns of nearby neighborhoods.
While the refinery has its critics—and everyone from Gov. John deJongh Jr. to Hovensa’s acting CEO John George has said Hovensa needs to prevent future airborne oil releases—few would want to see its high-paying jobs and tax revenues shrink one iota. But the refinery has been losing money in recent years and layoffs and reduced production may be in the works if it tries to reduce losses by shutting down its most inefficient operations.
“Hovensa has had significant operating losses for the past two years,” refinery spokesman Alex Moorhead said in an email to the Source. “These losses reflect difficult conditions facing the refining industry that are expected to continue for the foreseeable future,” he said.
The worldwide economics of refining are one part of the picture. After several years of high earnings, average refinery margins (i.e., the price differential between refined oil and crude) for all U.S. Gulf Coast refineries dropped from more than $10 per barrel in 2008 to zero in 2009, rising only to $4 per barrel this year, according to the International Energy Agency, an intergovernmental organization dedicated to maintaining stable worldwide energy supplies and prices.
According to publicly available online financial statements for Hess Corporation, its 50 percent stake in the refinery turned a profit of $176 million in 2007 — meaning Hovensa as a whole made $352 million. But in 2008 that dropped to $44 million; and in 2009, the refinery went into the red, losing a whopping $458 million.
At the same time, Hovensa is doing worse than many refineries because of shifts in the energy markets that make refining at Hovensa more expensive than on the mainland. The increasing price of oil has ironically squeezed Hovensa, because it relies upon oil to supply the heat and energy for refining, while stateside refineries are able to connect cheaply with natural gas, whose price has been falling and is projected to remain low for many years to come.
Many competing refineries also benefit from lower overall energy costs, by being connected to an electrical grid partly fed by relatively inexpensive coal, hydroelectric and nuclear power, according to sources within the industry.
Asked about the cost of refining in the territory, Moorhead confirmed that the low price of natural gas being used by other refineries makes it tougher for Hovensa.
“As the result of being located on an island with no natural gas, Hovensa must use fuel oil and fuel gas as its source of energy in the processing of crude oil into products, a process which requires large quantities of heat,” Moorhead said in an email.
“Fuel oil is generally more expensive than natural gas. Refiners on the mainland have access to natural gas through pipelines. Therefore, Hovensa is forced to compete with other refineries with this disadvantage.”
When questioned about Hovensa’s plans, Moorhead responded cautiously. When asked if Hovensa planned to replace or upgrade any portion of the refinery, Moorhead said flatly the refinery “has no plan in the foreseeable future to replace a part of the refinery.”
Asked if any portion of the plant may shut down in the next five to 10 years, Moorhead replied, “We decline to respond to this speculative question on possible developments years in the future.”
And when asked about potential layoffs, he was again wary, “We have not determined our manpower requirements for the next two years.”
Since the V.I. Labor Department would play a role if there were any large changes in employment or in operations at the refinery, the Source contacted Labor Commissioner Albert Bryan seeking more information. Bryan confirmed there have been discussions about Hovensa’s plans going on between the Labor Department, the EPA, Hovensa and its unions, and that something may be in the works; but he said no decisions had been made yet.
“I have sat down with them and had discussions about the possibility of them taking some of their facilities offline, which would result in some reduction in the workforce, but they have not submitted any numbers,” Bryan said. “But we do expect some reduction in their workforce next year.”
Bryan said he believed the refinery was considering taking some of its least efficient units offline because the relative inefficiency is costing too much money, and bringing others up to EPA requirements is too costly. While these possibilities were discussed, Bryan stressed the ultimate outcome is undecided.
“They told me by January they would have a firmer grip on how they were going to move forward and what impact taking any facilities offline, if any, might have on personnel,” he said.
Editor’s Note: An earlier version of this story gave Hovensa a different size ranking. Hovensa is currently the fourth largest refinery in the Western Hemisphere.
