Get Ready for Higher Gas Prices

January 22nd, 2012

By Dan Miller

U.S. Virgin Islands Oil Refinery (AP)Why an oil refinery in the U.S. Virgin Islands will shut down by mid-February.

An oil refinery in St. Croix, U.S. Virgin Islands, will shut down by mid-February. It is owned by Hovensa, a joint venture of U.S.-based Hess Corp. and Venezuela’s state-owned oil company Petróleos de Venezuela, S.A. (PDVSA).

Losses at Hovensa … have totaled $1.3 billion over the past three years and were projected to continue due to reduced demand caused by the global economic slowdown and increased refining capacity in emerging markets, said Brian K. Lever, president and chief operating officer of Hovensa LLC.

There are various other causes for the shutdown and this may be among them:

In January, Hovensa entered into a consent decree with the U.S. Environmental Protection Agency and Justice Department in which the company agreed to invest $700 million on pollution controls after a series of chemical releases affected people living downwind from the refinery. Hovensa also agreed to pay a $5.4 million penalty for violating the Clean Air Act.

Under current market conditions and having experienced substantial losses during the past three years, investing an amount equal to 53.85 percent of those losses as required by the EPA could be quite burdensome.

Closure of the St. Croix refinery may well effect U.S. domestic gasoline prices adversely, particularly on the East Coast:

[T]he coming loss of gasoline supply shocked markets for gasoline futures, which are likely to be soon reflected at the pump. Gasoline for February delivery rose 5.41 cents to $2.8254 a gallon on the New York Mercantile Exchange on Thursday, settling at the highest point since Sept. 8.

In St. Croix, the refinery employs about 1,200 people in addition to about 900 contractors. In 2010, the population of the island was 50,601, so the loss of about 2,100 jobs will have a substantial direct economic impact plus a significant multiplier effect. Food stamps and other welfare benefits are available there and the U.S. federal government contributes. There will also be significant long-term impacts on the tax revenues of the U.S. Virgin Islands, reducing them by at least $60 million per year through diminished real property taxes and employee income taxes.

U.S. mainland-based refineries

Existing U.S. mainland-based refineries have difficulty competing with new refineries in developing countries such as India and China as well as in the Middle East (where the tentacles of U.S. environmental restrictions don’t reach) and we rarely build new ones. Environmental groups have asked a state judge in South Dakota “to strike down a state permit that would allow … the first new U.S. oil refinery built since 1976.” It would “process 400,000 barrels of Canadian tar sands crude oil each day into low-sulfur gasoline, diesel, jet fuel and liquid petroleum gas.”

Construction had been delayed because securing financing had been difficult due to the recession and because of a previous appeal from grant of an original state permit.

The board issued the revised permit in September, approving changes to reflect updated national air quality standards and new pollution-control technology. The revised permit also gives Hyperion until March 2013 to start construction.

After the hearing, Hyperion Vice President Preston Phillips said efforts are progressing to secure financing and an oil supply for the project. “We have to perfect this air permit before we can finalize those aspects,” he said.

In Thursday’s hearing, Graham [counsel for the environmental groups] also argued that the board was wrong to extend the deadline for construction to begin. The original permit expired last February, and Hyperion should wait to seek a new permit based on the latest standards and technology when it is ready to begin construction, he said.

The tactic of delaying regulatory approval for as long as possible, then attacking the approval in court and demanding that the regulatory process begin anew has unfortunately been effective. It doubtless accommodates desires for long and profitable legal careers.

Refineries in the U.S. with capacities of 949,000 BPD recently closed or are for sale while others have curtailed production due to “economics.” Meanwhile,

U.S. oil companies are bracing for a potential strike by refinery workers and have plans to keep plants operating if negotiations which began this week for a new labor deal break down.

Representatives of the United Steelworkers union and oil companies began meeting to hammer out a new three-year national contract before current contract expires at 12 a.m. on Feb 1.

In September, the head of the USW negotiating team, union International Vice President Gary Beevers, said without improvements in health and safety protections in the new contract, USW members would walk off their jobs.

Continue reading this article at Pajamas Media »

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