Last week Monarch Energy Partners Inc. reaffirmed its interest in purchasing the shuttered Hovensa oil refinery on St. Croix in hopes of operating the facility at full capacity and returning jobs to the territory.
According to Monarch’s press release, the company “stands ready, willing and capable to acquire, clean and operate the St. Croix Refinery.” But the difficulty of reaching a purchase sales agreement that Hovensa’s owners, the purchasing party and the V.I. government agree on — or even getting to that stage of the sales process, as well as the costs of improving the refinery enough to make it profitable again — are major barriers to the sale of the refinery.
Monarch’s statement comes on the tail of Gov. Kenneth Mapp’s announcement on Sept. 14 that the owners of Hovensa have identified a potential buyer for the refinery’s terminal facilities. Monarch wants to make it clear that it’s interested in buying the refinery and its terminals as a whole package.
Hovensa’s owners have reached a deal with Limetree Bay Holdings LCC, an affiliate of ArcLight Capital Partners LLC, for sale of the refinery’s oil storage, racking and docking facilities. Hovensa is owned by Hess Oil Corporation and PDVSA VI, a subsidiary of Venezuela’s national oil company, Petroleos de Venezuela. According to Hess, the purchasing price for the terminal segments is $184 million.
After the V.I. Senate rejected a proposal from another company last year to purchase and reopen the refinery during the first sales process, Hovensa decided to only put the terminal facilities up for sale and not the refinery section. It’s not clear why Hovensa would only want to sell the terminals during this second sales attempt, but at least one source close to the situation said it could be a way for it to maximize the value of its assets or to sell off whatever it’s able to even if it’s just part of the refinery.
Monarch said it’s not interested in just purchasing the terminal.
“We have, since the initial sales process, maintained interest in purchasing and operating the refinery,” Robert Shrader, chief executive officer of Monarch Energy Partners, said.
Limetree Bay Holdings, according to the proposed sales agreement, would employ 70 workers. If Monarch is able to purchase the refinery, it says it would employ between 1,500 and 1,600 people and would allow workers who lost their jobs after Hovensa closed to have priority consideration. In its publicly available business plan, the company also detailed its plans to start a foundation that would pledge a minimum of 1 percent of net profits to fund community-based economic recovery projects.
Hovensa’s assets can be purchased during the company’s current bankruptcy proceedings that began Sept. 17.
“We are seriously looking at the opportunity to acquire and operate the refinery whether it be through the bankruptcy proceedings or other legal means,” Shrader said.
In order to finalize the sale of the terminal facilities, the V.I. government must approve an operating agreement with Limetree Bay Holdings. Because the proposed sales agreement requires that the government release current and former owners of the refinery from liabilities and contracts, it’s likely to be shot down by the territory’s senators when it is voted on in the next month. Mapp hopes to have the bid approved by the government by the end of November.
Monarch claims it was excluded from the initial bidding process late last year even though it believes it complied with the formal procedures set by Lazard Asset Management, the brokerage firm Hovensa hired to facilitate the sale of the refinery.
In written testimony submitted to the Senate last December, Doug Fordyce, managing director of Lazard, explained that Monarch contacted Lazard about purchasing Hovensa 10 months after the official sales process had been announced and two months after the final deadline for bids.
All interested parties were required to provide proof of means to purchase and restart the refinery, but Fordyce said Monarch’s letter was insufficient and the company didn’t resubmit a revised letter when given the chance to do so.
“The letter did not contain any of the customary language for proof of financial capacity and was submitted on letterhead from a private personal wealth financial advisor with Wells Fargo Advisors, the brokerage arm of Wells Fargo. We viewed the form, substance and source as unusual,” Fordyce said.
Ultimately, only one party, Atlantic Basin Refining Inc., submitted a bid and reached a purchasing sales agreement last year, but the Senate rejected the deal due to disagreements over terms that exempt owners from most taxes, as well as release current and former owners from liabilities and contracts much like the current terms of Limetree Bay Holdings and Hovensa’s purchase sale agreement for the storage terminal.
Shrader said Monarch turned in an improved proposal shortly after ABR’s proposal was turned down but that Hovensa never contacted them.
“Based on our involvement, while the company says it wants to “sell” the refinery, the flawed sales process and limited communication that we were able to have makes me believe otherwise,” Shrader said.
In early 2015, Lazard contacted Monarch about entering a sales process to buy Hovensa’s terminal facilities, but Shrader said his company declined to participate since it didn’t believe the sales agreement would be passed by the V.I. government and it wasn’t interested in buying just the terminal segment.
Probability of Profitability?
When asked why Monarch thinks it can turn the refinery into a profitable venture, Shrader said he thinks operating as an independent oil refinery could prove beneficial in the current oil industry landscape.
“While we may have related companies that would help reduce operational cost, smaller companies can be flexible in operational and policy changes,” Shrader said. “In the rapidly changing industry it is vital to be able to adapt quickly.”
Fadel Gheit, a leading oil and gas analyst at Oppenheimer & Co. Inc. who is familiar with the current Hovensa situation, agrees that in today’s climate, independent refineries are proving more successful than larger corporations.
“As for big oil interested more in exploration and production, that was true, until the oil price collapse. Now refining is thriving. But, more importantly, it is the independent refiners, not the big oil, that have turned this business around and became very successful leading the energy sector in return to shareholders in the last four years,” Gheit said.
But still, Gheit thinks that Hovensa’s improvement needs are too large for it to be worth restarting. Gheit said the refinery just isn’t competitive anymore.
“To restore full refining operations, it needs significant investments, in the billions, not millions of dollars, depending on the final configuration of the facility,” Gheit said.
In his Senate testimony last December, Fordyce wrote that most of the parties interested in purchasing the refinery estimated that $1 billion or more would be needed in investments to make the refinery generate a cash flow.
To date, Monarch has not toured the facility, but its officials believe they can reopen the refinery and make it profitable. It’s relying on inside sources to provide reports on the refinery’s conditions, according to Shrader.
Shrader mentioned that critical equipment may have been removed that Monarch would need to have replaced after a detailed engineering inspection.
According to Monarch’s official business plans, it has a $1.5 billion cash-credit facility for acquisition, operation and cleanup. Their plans include spending $400 million of this on converting the refinery to run on liquefied natural gas, a cleaner and less expensive option than the crude oil it’s powered by now.
The high costs of running the refinery were one of the reasons cited for Hovensa’s operating losses before it closed in early 2012.
Fordyce said converting to LNG won’t necessarily make the refinery profitable though, since it’s just one of many issues, which also include the matter of energy efficiency. The benefit of converting the plant to run on LNG is still an open debate.
In 2012, the V.I. government commissioned a comprehensive analysis of Hovensa that concluded that converting the plant to run on LNGs would allow it to become profitable. (See Related Links)
“Based on what we know today, the facility must be reconfigured. Over the course of many years it may be true a billion dollars could be spent to return the refinery to its maximum permitted capacity. We are looking one step at a time,” Shrader said.
One issue all parties involved agree on in is the inevitable deterioration of the idle refinery. The longer the refinery sits, the more difficult it will be to restart.