The owners of Hovensa said they might close the fuel storage and fuel rack at the shuttered St. Croix facility if the government insists on collecting customs duties on oil stored in the territory.
In a letter to the V.I. Government, George Dudley, the St. Thomas attorney representing Hovensa and the two entities that own it, said the company hopes that this closure does not come to pass, but laid out the circumstances under which it could in his Monday letter.
Dudley also reiterated that the company will not reopen the refinery.
The letter from Hovensa’s owners’ attorney was in response to Gov. John deJongh Jr.’s letter last week officially confirming the defeat last week by the V.I. Senate of the proposed Fourth Amendment Agreement that would have governed the sale of the refinery.
Dudley’s letter was released Tuesday by Government House.
Tuesday night, deJongh called on the Senate to provide the resources necessary for a legal battle with the multi-billion dollar company.
"We are now on a collision course that I did not want for us, but it is clear that we are on a confrontation path with the owners of Hovensa," the governor said.
"The decision of the senators is final and there will be periods of uncertainty, but with the resources the senators provide for our next steps, I am confident all will be done in the best interest of our community," deJongh said.
The agreement would have governed a sales process for the facility in the hope that a buyer would emerge to operate the refinery. Both sides in the negotiations – the government and the company – said the deal was an attempt to go beyond a basic disagreement about whether the company was in breach of contract for stopping operations at the refinery.
DeJongh said the 16 months of negotiations had been aimed "to offer our community a calmness within the turmoil of their decisions, to be firm in achieving a sale and minimizing the financial resources we expended on this effort."
In his letter last week, deJongh told the company the failure of the agreement, which was rejected by the Senate on Aug. 7 in an 11-3 vote, means the Third Concession Agreement will continue in full effect. He also directed the attorney general to send a letter to U.S. Customs and Border Protection asking them to resume collecting duties on nonexempt shipments of petroleum products for storage at Hovensa.
In his letter of response, Dudley firmly reiterated his belief that Hovensa is not in breach of the Third Concession Agreement, which governs relations between the company and the territory.
"We respectfully disagree with your assertion that Hovensa has an obligation to operate the refinery," he wrote to deJongh.
According to Dudley, the first Concession Agreement and the subsequent agreements obligated the company to construct the refinery, but "in none of those negotiations and the resulting modifications to the Concession Agreement did HOVIC or Hovensa specifically undertake to operate the refinery. Consequently, and for the same economic reasons that led to the shutdown of the refinery, Hovensa and its owners will not agree to restart refining operations upon the expiration of the Fourth Amendment Agreement," which expires Friday.
Hovensa will bid for supplying fuel to the V.I. Water and Power Authority, but not at the discounted rate it used to, because that rate was based on an operating refinery on St. Croix, Dudley said.
He also said the company will maintain its property "in full accord with applicable federal and territorial environmental laws and regulations."
Of more immediate concern is the company’s willingness to maintain sufficient fuel storage to meet the fuel needs of the territory.
Dudley said the obligation asserted by the government is the result of taking a section of the Concession Agreement out of context. Dudley said the duty to maintain fuel supply is based on the context of a refining operation.
"The obligation alluded to in your letter is contained in Section 12 of the Extension and Amendment Agreement between the Government of the Virgin Islands and Hess Oil Virgin Islands Corp., dated April 24, 1981 … which imposes the duty to maintain adequate supplies for local consumption ‘prior to the exportation of any such fuels,’" Dudley wrote.
"In the context of a refining operation, before HOVIC/Hovensa could export products refined at the refinery, it first had to have in storage sufficient amounts of that refined product to meet local fuel needs," he wrote.
"In light of the fact that Hovensa no longer is engaged in refining, the obligation to retain refined products in storage for local consumption prior to export is of no effect," Dudley said.
In regards to the government’s instructions to the Customs and Border Protection to resume collecting a 6 percent customs duty on all import of petroleum products not intended for local use, Dudley said the attempt to collect those duties will be a breach of the original 1965 agreement and subsequent Concession Agreements. Further, he said, that tax could be expected to make importers unwilling to use the facility.
"Hovensa has no control over the decision of its customers to cease shipments to St. Croix for storage because of the tax that would be collected by (Customs) upon arrival," Dudley pointed out.
He said the government’s own consultants, Duff & Phelps, had testified that no other storage facility in the Caribbean collects such taxes.
"It is likely that no one will use the storage facility on St. Croix if such taxes and duties are imposed," Dudley said.
The Virgin Islands does not create enough business demand on its own to economically justify continued operation of the storage facility and fuel rack, he continued.
"Consequently, when the inventories presently in storage at the refinery are exhausted, they will not be replaced and the storage facilities and fuel rack will be shut down," Dudley said.
"In this regard, I again note the testimony by Duff & Phelps at the Senate hearings, that the absence of an operating storage facility would make the refinery less marketable. It is the hope of Hovensa and its owners that this does not come to pass," he concluded.