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Hovensa Chief Addresses Fuel Costs, Energy Future

Oct. 31, 2008 — Nearly three dozen members of the St. Thomas-St. John Chamber of Commerce heard Hovensa President Lawrence Kupfer take on Hovensa's role in the V.I. economy and other energy issues at their quarterly luncheon Friday.
Kupfer addressed how Hovensa's agreement with the Virgin Islands government is largely misperceived by the territory's population and some of its legislators, who think that Hovensa is an economic development corporation (it's not) that is given tax exemptions; who think that Hovensa gets discounts on taxes (it actually pays a surcharge on some); and the company overcharges the V.I. Water and Power Authority (it gives them a 20 percent discount).
Kupfer explained to the chamber that Hovensa employs about 1000 people and pays corporate income taxes at 38 percent.
"At the end of the year, you figure out the total tax liability and we get a 10 percent surcharge," Kupfer said.
In 2007, taxes were about $90 million for the joint venture (Hovensa is made up of PDVSA and Hess Oil), including $14 million in property tax, $6 million in gross receipts, $3 million in export fees.
After adding in the 20 percent discount for fuel sold to WAPA, Hovensa has sent some $149 million to the V.I. government, according to Kupfer. He also noted that the discount it gives to WAPA accounts for another $36 million that stays in the local economy.
Earnings for 2007 were around $350 million, based on information in the Hess annual report, according to Kupfer.
"People need to keep in mind… the better Hovensa is doing, the better the Virgin Islands are doing," Kupfer said.
Kupfer said the hottest topic that people want to ask him about is WAPA's power costs, and he keeps hearing that Hovensa needs to do more to help lower prices.
Kupfer explained that energy from WAPA has cost some .40 cents per kilowatt hour in the Territory, while in the states, the average is somewhere in the .08 cent range.
WAPA purchases heavy fuel oil and diesel from Hovensa to power its plants.
"Coal is eight times less than even the discounted fuel that we sell to WAPA," Kupfer said. "To get to parity with coal [based on May 2008 figures] we'd have to discount $190 million WAPA. We can't afford that. WAPA really needs to move away from their very expensive fuel."
Kupfer noted an out of service 50-megawatt coal-fired power-generating plant near Hovensa owned by St. Croix Renaissance that could become a viable alternative to WAPA's petroleum-fueled plant. The plant could take care of a lot of the island's power needs, according to Kupfer, who also said the facility is waiting to be revamped.
Kupfer believes WAPA should sit down with St. Croix Renaissance as well as entertain proposals from other experienced producers, emphasizing the importance of experience.
"If you are going to get on that list, you [should] have already built a plant somewhere else." Kupfer said, suggesting that WAPA not waste time with proposals from companies that have no experience.
He said he expects oil to be back above $100 per barrel in the next five years and that the Virgin Islands' first step during this time is talk to St. Croix Renaissance about the coal-fired power plant.
"Get away from oil and go to alternative sources," Kupfer urged. "The price at the pump is irrelevant."
Following the luncheon, Kupfer noted that alternative and renewable power sources were more viable as supplementary sources of energy and were not likely to be able to supply 100 percent of the territory's fuel needs.
In the longer term, the V.I. government needs to consider what happens if the refinery becomes obsolete. Kupfer says that coal is a viable power source for the Territory.
"Oil is not going to be around forever," Kupfer said. "Eventually refineries will go the way of the people who made buggies for horses."
Kupfer noted that every year his refinery reviews its production and performance and benchmarks itself against other such businesses, and suggested that WAPA do likewise.
"WAPA needs to be held accountable to become more efficient," Kupfer said. "They hide behind fuel costs to hide their inefficiencies."
Many people think price on St. Croix is too high, Kupfer said, but he is "very comfortable in the price that we set as a starting price for selling to gas stations in St. Croix.
Confidentiality agreements with customers on St. Thomas precluded Kupfer from directly discussing issues tied to a recent subpoena for St. Thomas gas station records.
Kupfer said Hovensa is cooperating with the investigation and has nothing to hide. Kupfer showed Chamber members an equation for what gasoline should have cost during the month of September. He added that there could be some gross sales tax or other fee that he may have omitted unintentionally.
The Department of Licensing and Consumer Affairs was unable to verify the accuracy of the equation by press time.
To populate the equation, Kupfer said he used only information available in the public domain: figures from the U.S. Department of Energy and the New York Mercantile Exchange, and regular taxes and duties applied in the Territory.
According to Kupfer's math, for September, we should have been able to bring gas into St. Thomas for $2.63, then add an import duty of .16 cents, add a VI fuel tax of .07 cents, then add a distribution and marketing fee of .29 cents (that covers gas stations' cost and taxes and profit), then finally add a gross receipts tax of .13 cents and that brings the retail price to $3.28."
But according to Kupfer, the average price on St. Thomas for a gallon of gasoline was $4.49 in September.
"We are off by about $1.25 per gallon," Kupfer said. "That is a huge difference. Typically in the U.S., you don't see much more than 20 cents of difference in the price."
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