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Philadelphia Energy Solutions to close refinery damaged by fire; gas prices spike

Closing the refinery would have a huge impact on the Philadelphia economy and the oil industry.

A view of the Philadelphia Energy Solutions on June 26, 2019 in Philadelphia, Pa. Mayor Jim Kenney on Wednesday said that PES plans to permanently close its oil refinery complex in South Philadelphia.
A view of the Philadelphia Energy Solutions on June 26, 2019 in Philadelphia, Pa. Mayor Jim Kenney on Wednesday said that PES plans to permanently close its oil refinery complex in South Philadelphia.Read more / File Photograph

Philadelphia Energy Solutions (PES) on Wednesday confirmed it will soon close its South Philadelphia oil refinery after last week’s devastating explosions and resulting fire and “position the refinery complex for a sale and restart.” Wholesale gasoline prices surged on news of a closure.

The announcement is expected to set off a scramble among various interest groups -- industry, labor, and climate activists -- over the possible reuse of the 1,400-acre site. The riverfront property contains extensive infrastructure and fuel storage facilities, including a rail unloading facility, pipeline interconnections, and a link to the seaport.

Philip Rinaldi, the refinery’s former chief executive, is talking to stakeholders about saving the plant, said former U.S. Rep. Bob Brady, who was instrumental in organizing the plant’s 2012 rescue by Sunoco Inc. to stave off a threatened closure. “It’s worth saving," said Brady, who is still the city’s Democratic Party chairman. "Phil has some ideas.”

Rinaldi, 73, who retired at the end of 2017, confirmed Wednesday he was engaged in “exploratory meetings looking at the role for this asset."

PES officials told Mayor Jim Kenney that they planned to shut down the refinery within the next month. “I’m extremely disappointed for the more than one thousand workers who will be immediately impacted by this closure, as well as other businesses that are dependent on the refinery operations," Kenney said in a statement.

Closing the refinery would have a huge impact on the Philadelphia economy and on regional fuel markets. The 335,000-barrel-a-day refinery, the largest on the East Coast, employs more than 1,000 people directly, including nearly 700 hourly union workers, and thousands of contractors. The plant has long been a thorn in the side of environmentalists and neighbors who say it is a health risk.

“Today, Philadelphia Energy Solutions made the difficult decision to commence shutdown of the refining complex,” the company’s chief executive, Mark J. Smith, said in a statement. “While our teams include some of the most talented people in the industry, the recent fire at the refinery complex has made it impossible for us to continue operations.”

Smith said the company would conduct an orderly shutdown. “As part of the wind-down, the company will position the refinery complex for a sale and restart," he said.

Spot market wholesale gasoline prices in the New York Harbor surged about 5.3 cents per gallon in trading Wednesday, and futures prices spiked about 7 cents per gallon, or 3.6 percent. PES is a major supplier to regional markets.

AAA warned the closure would likely affect retail gasoline prices. “Motorists in the region will likely continue to see modest increases in pump prices – especially leading up to what is expected to be a high-demand travel period for the Fourth of July," said Jana L. Tidwell, a spokesperson for AAA Mid-Atlantic.

A full or partial closure of the refining capacity might not have a huge impact long term on fuel supplies in the region, which is readily served by producers through pipelines or by sea. The short-term market would be affected the most until traders can respond to the closure, Tom Kloza, the global head of energy analysis for the Oil Price Information Service, said in a note Wednesday to clients.

Reuters first reported the closure plans.

'Cashing the check’

Ryan O’Callaghan, the president of the United Steelworkers Local 10-1 representing the refinery workers, was irate over the decision to close.

“USW is going to fight for every job there,” he said. The union is investigating whether the company’s insurance covered the destroyed alkylation unit and business losses, and would push it to rebuild the unit.

“It appears they’re cashing the check and heading for the doors,” he said.

O’Callaghan lamented the loss of jobs, which would extend far beyond the refinery’s 1,000 employees. Refineries typically hire many specialized contract workers, such as pipefitters and steamfitters, to work on the complex processing units. The 614 steelworkers employed by PES — nearly half of whom are older than 50 — will be laid off July 12, he said.

“It’s a disgrace,” O’Callaghan said. He said the refinery’s emergency workers and operators heroically worked through the conflagration early Friday to bring the fire under control and to shut down the unaffected processing units. “This is what they do to us after we safely shut down the plant while fighting a fire.”

» READ MORE: From bankruptcy to fire to closure, a rocky end for Philadelphia Energy Solutions

» READ MORE: Philly had just trained for an incident like refinery fire: ‘It worked out exactly how it should have’

O’Callaghan said most steelworkers at the refinery, many of whom live in South Philadelphia and Delaware County, would have to travel to the Gulf Coast if they wanted to stay in the industry. The average union member made $42 an hour, plus overtime and shift differentials, he said.

If the refinery closes, it would “potentially wipe out a way of living,” he said.

Other workers said a closure or a reduction was not surprising. The mood was glum at the refinery in the aftermath of the explosions and fire, and some supervisors were expected to be immediately laid off.

Under state law, PES must provide a 60-day notice of layoffs, but labor leaders said the company might argue that its obligation in the Worker Adjustment and Retraining Notification (WARN) Act can be overridden under emergency circumstances.

In a letter to O’Callaghan about the layoffs dated June 26, William Goodhart, senior vice president of human resources at PES, wrote: “Unfortunately, it was not feasible for PES to provide earlier notice because the business circumstances that followed the fire and explosion were not reasonably foreseeable.”

Kenney said the city was committed to helping the workforce, and planned to convene work groups of city officials and “quasi-governmental organizations” to assess the impact.

“I’m sad for the workers there,” Kenney said. "I recognize the economic challenges to the company especially in light of this disaster, but we have an opportunity now to refocus our efforts on what comes next. "

Gov. Tom Wolf also expressed support for employees and said he was organizing state agencies to assist.

“This is devastating news for these workers and their families,” Wolf he said in a statement. “These are skilled and hardworking people who helped to prevent the fire from doing more damage. They deserve to be treated with dignity and respect by a company that has profited from their labor.”

The Inquirer has reported that the cost of repairing damage from Friday’s devastating fire at the refinery could push the cash-strapped owner closer to the financial brink, just a year after emerging from bankruptcy.

» READ MORE: In Philly, a history of oil refinery fires going back decades

Big debt

It was uncertain Wednesday whether PES intended to sell the refinery site or to declare bankruptcy and liquidate the property -- the company has $755 million of long-term debt, according to quarterly reports that its parent company, PES Holdings LLC, files with U.S. Bankruptcy Court in Delaware.

Federal investigators began this week to examine what triggered the fire, which injured five refinery workers who were treated on the scene. What is clear is that PES was on shaky financial ground before the explosions reverberated across the city.

» READ MORE: Blocks away from South Philly refinery explosion, residents saw what looked ‘almost like a nuclear disaster’

» READ MORE: Massive fireball from South Philadelphia refinery explosion seen by satellites in space

“I would be really skeptical they’re going to be able to raise the money to retool,” said Christina E. Simeone, an energy analyst. She wrote a report for the University of Pennsylvania’s Kleinman Center for Energy Policy last fall that suggested the refinery is so uncompetitive and debt-burdened that it is “likely” to face bankruptcy again by 2022.

The company this year has shuffled its management team, frozen employee bonuses, and told employees it was deferring matching payments to their retirement accounts until 2020.

What’s on the site

The PES complex is actually two refineries, Girard Point and Point Breeze. The fire damaged part of the Girard Point refinery. The Point Breeze facility, which has a capacity of 145,000 barrels per day, could still be operated as a standalone plant, though perhaps not profitably.

Sunoco acquired the two refineries three decades ago and merged them. But Sunoco threatened to close the complex in 2012, until public officials and the union’s leadership helped engineer a joint venture between Sunoco and the Carlyle Group private equity firm.

The new owners kept the plant running, with a large assist from an influx of cheap crude oil from North Dakota shale development. But the refinery’s fortunes fell as the price of oil fell, and it declared bankruptcy last year.

The Wall Street investors who controlled the refinery’s debt assumed ownership after bankruptcy: Credit Suisse Asset Management and Halcyon Capital Management, now known as Bardin Hill Investment Partners. Carlyle and Energy Transfer Partners LP, Sunoco’s parent, have a combined 25 percent minority share.

» READ MORE: Officials say air tests from refinery fire showed no immediate danger. EPA data show company has past high-priority violations.

» READ MORE: ‘It looked like Armageddon’: Refinery fire puts focus on toxic chemical

The site’s possibilities

The site is profoundly polluted from more than a century of refining, and not easily repurposed to a nonindustrial use, though green activists will pressure the city to turn some or all of the land into a park.

The PES site has extensive infrastructure that would be valuable to other energy-related enterprises. ETP, Sunoco’s parent, has some legal claims on the refinery’s associated pipelines and storage facilities, which connect to Energy Transfer’s ship-loading facility at Fort Mifflin, near the Philadelphia International Airport.

The refinery site may be attractive to Energy Transfer or another company as a fuel terminal either for products entering Philadelphia by sea or for exporting fuel that moves into the site by rail, road, or pipeline. Energy Transfer operates similar storage terminals at two other former Sunoco refineries on the Delaware River -- in Westville, Gloucester County, and in Marcus Hook, Delaware County.

But the site may also host newer, clean-energy options -- solar panels, battery storage, or the production of hydrogen fuel or carbon-neutral methane.

“Use of this site goes back to the Civil War era,” said Alex Bomstein, a lawyer with the Clean Air Council, which is a frequent adversary of the refinery. “And there are going to be a lot of issues. There are issues with groundwater, there are issues with land contamination. I couldn’t even begin to characterize the extent of them.”

Sunoco still retains responsibility for pre-2012 environmental liabilities through a subsidiary called Evergreen Resources Management Operations. Sunoco set up a mechanism to finance environmental remediation at all its former properties, an insurance plan valued at $207 million at the end of 2017, according to the Penn report.

Brady’s effort to recruit former CEO Rinaldi to save the refinery is likely to generate backlash from environmentalists, who dubbed him “Fossil Phil” for actively promoting an “energy hub” in Philadelphia. When Rinaldi was enlisted to run the refinery in 2012 -- he had previously rescued a Kansas refinery with support from the private equity firm Carlyle -- he had many ideas for building other industries on the PES site, such as a natural gas power plant and a fertilizer factory. Those plans went unfulfilled.

Under Rinaldi, Carlyle invested $700 million in the plant, including adding rail-unloading terminal in PES’s North Yard that allowed the facility to tap into domestic crude oil shipments. But Rinaldi’s plans went largely unrealized, and Carlyle declared bankruptcy only a few months after he retired.

Staff writers Sean Walsh, Frank Kummer, Patricia Madej, Juliana Feliciano Reyes, and Joseph A. Gambardello contributed to this article.