350,000bpd refinery in Virgin Islands to close. Hess to add US$525 million after tax charge to its 4Q11 earnings.

Hess Corporation has announced that the Hovensa refinery in St. Croix, US Virgin Islands will close and be converted into an oil terminal. The refinery was a 50/50 joint venture between Hess and Venezuela’s PDVSA and the refinery sourced much of its crude from Venezuela. The closure will add a US$525 million after-tax charge to Hess’s 4Q11 earnings.

“Losses at the refinery have totalled US$1.3 billion in the past three years alone and were projected to continue. Hovensa’s losses have been caused primarily by weakness in demand for refined petroleum products due to the global economic slowdown and the addition of new refining capacity in emerging markets... The low price of natural gas in the US has put Hovensa, an oil-fuelled refinery, at a competitive disadvantage,” Hess said in a press release.

Hovensa said it had explored all available options to keep the refinery operating but severe financial losses left it with no other choice.

According to Hess’s company website, Hovensa has a 150,000bpd FCC unit and produces gasoline to US standards. It has a coker unit, commissioned in 2002, that allows the refinery to process heavy crudes into gasoline and heating oil. In January 2011, Hovensa announced its decision to reduce its crude distillation capacity to 350,000bpd from 500,000bpd, through the shutdown of “older, less efficient units”.

Hess’s 2010 annual report indicates that gross crude runs at the refinery averaged 390,000bpd in 2010, compared with 402,000bpd in 2009, with the reduction “primarily as a result of the weak margin environment”.

In 2010, Hess’s marketing and refining operations recorded an after-tax charge of US$289 million to reduce the value of the company’s interest in the refinery, with the write-down reflecting “our outlook for continued weakness in refining margins”, according to the company’s 2010 annual report.

Jeffrey Quigley, downstream manager at PFC Energy, told GTForum: “What’s surprising is that the potential Panama Canal expansion...could offer up opportunities for Caribbean-based refineries. But Hess has made a decision that it’s not worth waiting for. They could send product to Asia if that was of interest to them. It’s tough to compete with inexpensive product coming from Europe and then you have a lot of these PADD 3 refineries that are very complex and now have greater access to crudes that seem to be doing well. It’s an incredibly competitive marketplace for a refiner that doesn’t have a super-strong position.”

“In the end it comes down to the margins. They can’t sell their gasoline output in New York Harbour any more if Europe keeps on moving that cheap product in and pushing them out. It’s an East Coast issue for the most part,” Quigley adds.

“It’s a statement over the state of gasoline in the Atlantic Basin and a continuation of the trend seen so far. Hess was probably in a challenging agreement with a tough company to do business with [PDVSA]. This decision has been a long time coming,” he says.