Philadelphia Energy Solutions to close refinery damaged by fire, Mayor Kenney says; gas prices spike

Jun. 26--Philadelphia Energy Solutions (PES) plans to permanently close its South Philadelphia oil refinery complex after last week's devastating explosions and resulting fire, Mayor Jim Kenney said Wednesday. Wholesale gasoline prices surged on the news.

"I spoke with the CEO and leadership of Philadelphia Energy Solutions this morning and can confirm that PES intends to shut down the refinery within the next month," Kenney said in a statement. "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."

Closing the refinery would have a huge impact on the Philadelphia economy and on regional fuel markets. The 335,000-barrel-day refinery, the largest on the East Coast, employs more than a thousand 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.

A closure will also set off a scramble among various interest groups -- industry, labor and climate activists -- over reusing 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. But it is profoundly polluted from more than a century of refining, and not easily repurposed to a non-industrial use.

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.

A full or partial closure of the refining capacity may 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 impacted 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.

Ryan O'Callaghan, the president of the United Steelworkers Local 10-1 representing the refinery workers, said the company had not notified him about any plans for closure or layoffs. He said he is scheduled to meet the company's human resources director today.

"USW is going to fight for every job there," he said. The union is investigating whether the company had insurance coverage for the destroyed alkylation unit, 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 that would come from a closure, 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.

"It's a disgrace," he said. He said the refinery's emergency workers and operators worked through the blasts and fires early Friday 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."

Other workers said a closure or a reduction was not surprising. The mood was glum at the refinery in the aftermath of the accident, and some supervisors were telling staff they should consider buffing up their resumes.

Union leaders were scheduled to meet with the company at midday Wednesday. Some supervisors were expected to be immediately laid off.

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

Kenney, in his statement, said the city was committed helping the workforce.

"We will immediately convene a group of city and quasi-governmental organizations to discuss the economic and employment impacts, and what the city is able to do in response," he said.

"We are also retooling the plans of the working group led by the city's managing director and fire commissioner to focus efforts on determining the future of the refinery, assisting PES to transition the site safely, communicating with local residents, and supporting the employees impacted PES' decision," Kenney said.

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

It was uncertain Wednesday whether PES intended to sell the refinery site or to declare bankruptcy and liquidate the property. The complex is actually two refineries, and Friday's fire affected the Girard Point refinery, which opened in 1926.

Federal investigators began this week to examine what triggered the fire, which injured five refinery workers who were treated on the scene. The cost and the extent of the damage remained unclear.

What is clear is that PES was on shaky financial ground before the explosions reverberated across the city.

The refinery's cash balance has declined over the last six months, according to quarterly reports that its parent company, PES Holdings LLC, files with U.S. Bankruptcy Court in Delaware. Its long-term debt increased 7.5 percent during the first quarter of this year, to $755 million. The value of the owner's stake declined 43 percent in the first quarter, to $82 million at the end of March.

The owner may not have the resources to finance the cost of replacing the equipment that was destroyed in Friday's fire, an alkylation unit that produced a high-octane additive required for making premium gasoline. The cost of replacing the equipment could easily top $100 million, say industry experts.

"I would be really skeptical they're going to be able to raise the money to retool," said Christina E. Simeone, an energy analyst who 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. The company has sought to reopen contract negotiations and asked for concessions ahead of the September contract expiration.

The plant's permanent closure would have sweeping implications for the city.

The PES complex, at 1,400 acres, is the largest refining complex on the eastern seaboard, according to the company. Its two refineries, Girard Point and Point Breeze, are next to each other with easy access to highways, pipelines, rails and docks.

The complex produces gasoline, low-sulfur diesel fuel, jet fuel, kerosene, butane, propane, home heating oil, and the petrochemical cumene, PES says.

If it closes, the refinery could lead to profound environmental issues for the city, state Department of Environmental Protection and likely the U.S. Environmental Protection Agency.

Refining fossil fuels is a chemically complex process, and the facility is just off the Schuylkill River.

The PES complex his a long history as a refining site. The Atlantic Refining Co. first opened for business in 1870 at Point Breeze. The Gulf Oil Corp. opened the second site at Girard Point in 1926. Sunoco, then under different ownership, acquired both plants in 1988 and 1994.

Sunoco formed a joint venture in 2012 with the private-equity Carlyle Group. The joint venture declared bankruptcy in January 2018, and completed the $635 million financial restructuring Aug. 7.

The EPA has already overseen a cleanup of the site when it was still owned by Sunoco.

The federal agency issued a plan for cleanup in November 2011 and it took until 2018 to finish the process. It took "corrective action" at several locations at the site including a lead tank bottom treatment area, and a stormwater pond that drained the tank area and discharged into the Schuylkill.

In addition, the current refining system used an alkylation unit that converts crude oil into fuels and other products. The unit uses hydrofluoric acid as a catalyst, one of the most toxic materials handled in the refinery. In its gaseous state -- hydrogen fluoride -- it can drift beyond the refinery fence line and imperil the public.

Officials said there was no release of HF during last week's fire.

Alex Bomstein, a senior litigation attorney for the nonprofit Clean Air Council, cautioned that shuttering refinery operations doesn't preclude a future fossil fuel use for the site.

The PES site has extensive infrastructure that would be valuable to other energy-related enterprises:

He cited the Marcus Hook complex, about 15 miles south on I-95. The complex once had a refinery, but it was closed in 2011. It was repurposed to store natural gas liquids like propane, produced in western Pennsylvania and Ohio, which are carried across the state in two Mariner East pipelines.

This year, Energy Transfer Partners, the parent company of Sunoco Pipeline LP, announced $200 million in new projects that could employee 1,200 workers over the next two years at the complex, which serves as the terminus of Sunoco's Mariner East pipeline project.

But the PES refinery complex is much larger. And, if Philadelphia Energy Solutions does shut down all operations at the site, it could take years just to figure out the extent of contamination at the site, Bomstein said.

"Use of this site goes back to the Civil War era," Bomstein said. "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."

Dismantling the facility, which sprawls over 1,400 acres, could also take years, if not longer.

Figuring out liability for any cleanup or remediation could be complex because of its tangled financial history.

Although the facility has been owned by PES since 2012, Sunoco assumed liability for contamination prior to that.

Sunoco is currently in the process of working with the state Department of Environmental Protection on the site as a brownfield facility, and it's working with the EPA.

Sunoco signed an agreement in 2011 that started a cleanup process that includes addressing hydrocarbon remediation, tackling an underground plume of contamination. The Girard Point processing area, the west yard and Schuylkill River tank farm all were included in the cleanup plan.

Some of the contaminants of concern: petroleum hydrocarbons on land and concentrations of benzene, toluene, ethylbenzene, and xylene (BTEX) in the groundwater.

Bomstein said he was unclear what legal liabilities PES will assume for its years of operation, suggesting time-consuming legal work could be involved.

David Masur, executive director of PennEnvironment, said nonprofit environmental groups such as his have been clamoring for the facility's closure for years. He said he understands that the loss of jobs would be painful and hopes another productive use can be found -- such as a conversion to a renewable energy facility.

"Certainly, this is the right step," Masur said. "We understand there are hard decisions to make. But you need to rip off the band aid and start the transition process."

"I've heard recent conversations about whether the facility could be turned into a clean energy site," Masur said. "You can still tap into it to create jobs using 21st Century energy production instead of using 19th Century energy production."

Masur conceded he is not an expert in what it would take to convert the plant or its potential uses. But he said some in the environmental community have wondered whether its possible to turn it into a solar farm that would provide good jobs.

This is a breaking story that is being updated frequently.

Staff writers Sean Walsh, Claudia Vargas, Patricia Madej and Joseph A. Gambardello contributed to this story.

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