UPDATE 3-China oil storage lease helps revive Caribbean refiner Hovensa

(Recasts, adds details of agreement, background)

NEW YORK, Dec 1 (Reuters) - A long-sought deal to bring a Caribbean oil refinery out of bankruptcy emerged on Tuesday, unexpectedly including a partnership with U.S. commodity trader Freepoint and handing Asia’s biggest oil refiner, Sinopec, access to a huge oil storage facility.

U.S. private equity firm ArcLight Capital, together with Freepoint, unveiled plans on Tuesday to buy the Hovensa refinery complex in St. Croix, U.S. Virgin Islands, and turn it into an oil storage hub. ArcLight’s interest in buying the facility was well known, but Freepoint’s and Sinopec’s roles in the deal had not been previously reported.

The deal includes a 10-year Sinopec lease for most of Hovensa’s enormous oil storage tanks, and marks the latest move by a Chinese firm to expand in the Americas as an oil trading powerhouse. China needs storage space in the region since it is trading growing volumes of Latin American crude oil it controls, including shipping it to U.S. markets.

The partners said Sinopec would lease 75 percent of Hovensa’s existing oil storage capacity. The site has operational crude and oil product storage tanks with capacity to hold 13 million barrels, according to a news release. The partners also plan to more than double storage capacity at Hovensa with new investment.

The purchase of Hovensa, a refinery and tank farm emerging from bankruptcy after halting crude processing in 2012, appears to end a long period of uncertainty over the future of the site. It is perched strategically near U.S. oil markets and can also serve as a staging point for crude and fuel shipments between Latin America, Asia and other regions.

Crude storage tanks in the Caribbean have been in high demand even as global oil prices have plunged. In the current oil market, companies can profit by storing oil and selling it for future delivery at a higher value than spot sales.

In recent years, China has made billions in loans to state-run oil producers in Venezuela, Ecuador and other Latin American countries in exchange for crude.

Sinopec did not return phone calls requesting comment on Tuesday.

Stamford, Connecticut-based Freepoint supplies fuel oil to Puerto Rico’s power utility and said it would also lease 2 million barrels of fuel oil storage at the site. Freepoint, a growing force in oil trading, helped negotiate the long-term tank lease deal with Sinopec. Financial terms of the lease were not disclosed.

Boston-based ArcLight, which has operated oil storage facilities around the world, will be the majority owner of Hovensa, a refinery site formerly owned by Hess and Venezuela’s state oil company, PDVSA. Freepoint will have a 20 percent stake in the venture.

The companies did not offer a total cost for their acquisition of Hovensa, but said they were committing up to $370 million to the local government and Hovensa’s bankruptcy estate, while pledging $125 million in investment over two years, and covering ongoing tax, legal and environmental liability payments.


The partners plan to invest at least $125 million to boost storage and Hovensa’s tanker loading and unloading capacity by the end of 2016, a source familiar with the plans said.

The plans include refurbishing idle tanks and would bring Hovensa’s total oil storage capacity to as much as 30 million barrels, they said, making it one of the premiere Caribbean oil storage and trans-shipment hubs, the source said. The plans also involve deepening the port to allow for fully loaded very large crude carriers (VLCCs) to dock at the hub.

As Reuters reported in September, the revival of Hovensa comes as competing oil traders scramble for storage space.

Another Chinese oil giant, PetroChina, also holds tank leases in the region. To see who controls Caribbean crude and oil product storage and blending facilities, click here:

When it reaches full capacity, Hovensa’s tank farms could boost the Caribbean region’s available merchant oil storage space by as much as 42 percent, ArcLight and Freepoint said, and establish them as market rivals to Buckeye Partners, currently the biggest regional player.

Earlier this year, ArcLight, a $15.7 billion energy-focused private equity firm, agreed to purchase U.S. fuel distributor Gulf Oil, which controls a dozen refined product terminals and a distribution network spanning 31 U.S. states.

ArcLight’s Hovensa purchase was approved this week by a Delaware judge overseeing Hovensa’s bankruptcy proceedings, according to court documents. The ArcLight bid had already gained the blessing of U.S Virgin Islands Governor Kenneth Mapp, although local press reports said it still must be formally approved by the Islands’ Legislature.

The bidding process has not been without controversy. Buckeye Partners had also bid for Hovensa, and its bid by some measurements had appeared more attractive to Hovensa’s creditors and local groups. Other bidders or potential bidders also complained they were excluded or disqualified from pursuing Hovensa.

Buckeye did not immediately return requests for comment.

ArcLight and Freepoint said on Tuesday their offer would provide the government of the Virgin Islands with $235 million and hundreds of millions more in future tax revenues, plus ensuring additional funds to Hovensa’s creditors and more jobs for islanders as the site expands.

Whether the Hovensa refinery will eventually be brought back into operation was not immediately clear. The plant had been one of the region’s largest oil refiners. (Reporting by Joshua Schneyer; Additional reporting by Marianna Parraga, Tom Hals and Jarrett Renshaw.; Editing by Jeffrey Benkoe and Peter Cooney)