Canadian Manufacturing

U.S. Virgin Islands sue oil firm Hess Corp. for US$1B

The U.S. territory claims the oil giant cut-and-run, abandoning a huge refinery and stripping its assets, rendering it inoperable

WASHINGTON—The government of the U.S. Virgin Islands sued oil company Hess Corp. for more than $1 billion, alleging the firm abandoned a massive oil refinery it had pledged to run through the year 2022.

The complaint alleged a pattern of misconduct by executives at Hess, which operated—along with Venezuela’s state-owned oil company—what was once the world’s largest refinery before closing it in 2012. It said Hess conspired to strip the facility’s assets in order to leave the government with claims against a broke, polluted and inoperable refinery.

“This is not about a business disagreement. It is about Hess breaking the law,” said Kenneth Mapp, governor of the U.S. Virgin Islands.

In an emailed response to questions from The Associated Press, Hess spokeswoman Lorrie Hecker said, “We believe this suit is wholly without merit.”

The legal dispute marks a low in Hess’s nearly 50-year history in St. Croix, whose 51,000 residents account for nearly half the population of the U.S. Virgin Islands. With an economy once based on sugarcane, rum and slaves, the impoverished island proved welcoming when oilman Leon Hess first built a refinery on the island in 1965. The facility came at a significant environmental price: Hess built the refinery on the largest mangrove lagoon on St. Croix, and the mishandling of crude oil and its byproducts at the facility led to extensive contamination of the aquifer.

In return for its largesse, Hess ultimately received billions of dollars in tax breaks from the territorial government. The case focuses on the terms of those tax breaks, which included conditions to promote the establishment and operation of refining operations. Subsequent agreements included one that went into effect in 2002 and was to last two decades, according to the agreement.

Hess pulled in huge sums—more than $6.2 billion in tax breaks and other benefits by 1992 alone, according to a Government Accountability Office report from that year. In 1998, it sold a 50 per cent stake in the refinery to Venezuela’s state-owned oil company, Petroleos de Venezuela S.A., or PDVSA, for $625 million. Owned through a joint venture called HOVENSA LLC, the refinery spun off billions of dollars more to its owners, according to financial records.

The lawsuit said Hess and PDVSA entered into contracts that artificially boosted the cost of the Venezuelan crude it purchased and suppressed the cost of the petroleum products the refinery sent to Hess gas stations along the East Coast. Meanwhile, the Hess executives overseeing the refinery loaded it with debt, the lawsuit said.

By late in the last decade, the refinery was struggling amid competition from emerging markets and other factors. Hess also had a sizable environmental liability: The U.S. Environmental Protection Agency was working toward what would eventually be a $700 million settlement in 2011 requiring the refinery to upgrade its equipment to improve safety and reduce pollution.

For more decades, EPA has also overseen an effort to pump up a massive plume of leaked oil from beneath the refinery that threatens the island’s groundwater. So far, EPA said, the project has recovered more than 43 million gallons of spilled oil.

Meanwhile, Hess halted routine maintenance and began drawing down the hundreds of millions of dollars of oil it had stored on the island. The company wanted to convert the refinery into a holding facility for oil, the lawsuit said.

Instead of negotiating with the government over modifying its agreement, the suit alleges Hess pursued a “secretive plan to abruptly cease operating the refinery without notice prior to the end of the contract term to create panic within the government due to the ensuing economic crises. The company provided the territorial government only a day’s notice of its intent to shut down the refinery, the suit says.

Even after the shutdown and mass layoffs, the government and Hess continued to negotiate over a potential reopening or sale of the company. But Hess’s neglect of the facility has left it unsellable, the government said.

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