After the Fire: Philadelphia’s Responsibility to the Bigger Picture

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Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

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Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and the founding faculty director of the Kleinman Center for Energy Policy. 

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is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and the founding faculty director of the Kleinman Center for Energy Policy. 

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After the explosion and fire at the PES refinery, the City of Philadelphia should connect the dots among a range of related environmental issues, events, and crises and raise the visibility and influence of the City’s environmental policy makers.

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After the explosion and fire at the PES refinery, the City of Philadelphia should connect the dots among a range of related environmental issues, events, and crises and raise the visibility and influence of the City’s environmental policy makers.

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Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

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Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

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It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

[summary] => [format] => full_html [safe_value] =>

It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

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Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

[summary] => [format] => full_html [safe_value] =>

Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

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Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and the founding faculty director of the Kleinman Center for Energy Policy. 

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is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and the founding faculty director of the Kleinman Center for Energy Policy. 

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After the explosion and fire at the PES refinery, the City of Philadelphia should connect the dots among a range of related environmental issues, events, and crises and raise the visibility and influence of the City’s environmental policy makers.

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After the explosion and fire at the PES refinery, the City of Philadelphia should connect the dots among a range of related environmental issues, events, and crises and raise the visibility and influence of the City’s environmental policy makers.

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Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

[summary] => [format] => full_html [safe_value] =>

Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

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It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

[summary] => [format] => full_html [safe_value] =>

It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

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Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

[summary] => [format] => full_html [safe_value] =>

Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

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The explosion in June at the South Philly refinery
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Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

[summary] => [format] => full_html [safe_value] =>

Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and the founding faculty director of the Kleinman Center for Energy Policy. 

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is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and the founding faculty director of the Kleinman Center for Energy Policy. 

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After the explosion and fire at the PES refinery, the City of Philadelphia should connect the dots among a range of related environmental issues, events, and crises and raise the visibility and influence of the City’s environmental policy makers.

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After the explosion and fire at the PES refinery, the City of Philadelphia should connect the dots among a range of related environmental issues, events, and crises and raise the visibility and influence of the City’s environmental policy makers.

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Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

[summary] => [format] => full_html [safe_value] =>

Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

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It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

[summary] => [format] => full_html [safe_value] =>

It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

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Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

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Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

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Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

[summary] => [format] => full_html [safe_value] =>

Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and the founding faculty director of the Kleinman Center for Energy Policy. 

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is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and the founding faculty director of the Kleinman Center for Energy Policy. 

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After the explosion and fire at the PES refinery, the City of Philadelphia should connect the dots among a range of related environmental issues, events, and crises and raise the visibility and influence of the City’s environmental policy makers.

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After the explosion and fire at the PES refinery, the City of Philadelphia should connect the dots among a range of related environmental issues, events, and crises and raise the visibility and influence of the City’s environmental policy makers.

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Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

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Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

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It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

[summary] => [format] => full_html [safe_value] =>

It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

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Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

[summary] => [format] => full_html [safe_value] =>

Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

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Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

[summary] => [format] => full_html [safe_value] =>

Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

[safe_summary] => ) ) [#formatter] => text_default [0] => Array ( [#markup] =>

Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

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Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

[summary] => [format] => full_html [safe_value] =>

Since humankind’s invention of fire, energy systems have carried operational risk. Some forms of energy are more dangerous than others, but all can cause devastation. A hydrocarbon-based refinery explosion or a solar-powered grid blackout are both capable of killing people, and both require expert management of complex and risky operations.

Last Friday’s explosion and fire at the Philadelphia Energy Solutions refinery will be scrutinized for negligence, assessed for impacts, and debated as evidence on whether the refinery should or should not be allowed to operate. It is altogether fitting that we should do all these things.

But it will be important as we proceed to avoid the trap of “yes or no” and to proceed on the basis of “under what conditions?” What do we care about? How much of it do we want? Can PES perform in accordance with our conditions?  Are our conditions legal and enforceable?

The operations and markets in which PES operates are regulated by federal and state agencies and the laws that empower them. However, when it’s Philadelphia firefighters who respond to two fires in two weeks, it’s the mayor not the president who calls the press conference.

Frankly, I do not know the extent of the City’s leverage over PES with respect to its power to protect public health and safety. I suspect that there are many compelling legal and regulatory theories that could be mobilized as a basis for action.

But I do know that the City can have an environmental policy and, in fact, it does have one in Greenworks. That policy was the first sustainability plan among major U.S. cities to be designed around equity in terms of environmental and economic outcomes.

When Greenworks was launched in 2009, I was the director of sustainability, the chief policy adviser to the mayor, the recovery officer for the Obama stimulus funding, and a member of the senior cabinet along with the four deputy mayors and city charter officers.  Having three jobs and a seat on the cabinet meant that it was one person’s clear responsibility to understand, prioritize, and implement the City’s environmental policies.

That span of responsibility and authority makes it possible to connect the dots among a range of related environmental issues, events, and crises. Otherwise, every event seems like the most important issue, and it is, because of media attention and constituent politics....until the next event. And when the next event happens, attention shifts from lead poisoning to the refinery fires, and then to the waste stream, and so on. And not enough gets done on any of these serious issues.

It is a privilege of each administration to organize itself as the mayor sees fit. There is no one right way to organize the job of governing the City. But however it is organized, the PES fires make a strong case for permanently raising the visibility and influence of the City’s environmental policy makers. The health and safety of air, land, and water have a powerful effect on the prosperity and justice of life in Philadelphia. The regulation of land use is squarely under the City’s control. The City has an ambitious set of environmental goals.

Put the people responsible “in the room where it happens.”

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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Mark Alan Hughes is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and founding faculty director of the Kleinman Center for Energy Policy. He is also a faculty fellow of the Penn Institute for Urban Research and a research fellow of the Wharton Risk Center. Hughes joined the standing faculty of Princeton University’s Woodrow Wilson School in 1986 at the age of 25 and joined the associated faculty of the University of Pennsylvania in 1999. He has published in the leading journals of economic geography, urban economics, political science, policy analysis, and won the National Planning Award for his research in city and regional planning in 1992.

He was chief policy adviser to Mayor Michael A. Nutter and the founding director of sustainability for the City of Philadelphia, where he led the creation of the Greenworks Plan in 2009. He has designed and fielded national policy research projects in a variety of areas including the Bridges to Work program in transportation, the Transitional Work Corporation in job training and placement, the Campaign for Working Families in EITC participation, and the Energy Efficient Buildings Hub in regional economic development. This work has been funded by H.U.D., H.H.S., D.O.E., Ford, Rockefeller, Pew, Casey, WmPenn, and others.

He was the inaugural nonresident senior fellow at the Brookings Institution’s Center for Urban and Metropolitan Policy founded by Bruce Katz; the first vice president of policy development at the national intermediary Public/Private Ventures established by the Ford Foundation in Philadelphia; and a weekly opinion columnist for five years at the Philadelphia Daily News, where he was named one the best columnists in the U.S. by The Week magazine in 2004.

Hughes earned a Ph.D. in regional science from the University of Pennsylvania in 1986, and a B.A. in religion and art history from Swarthmore College in 1981.

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is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and the founding faculty director of the Kleinman Center for Energy Policy. 

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is a professor of practice at the University of Pennsylvania Stuart Weitzman School of Design and the founding faculty director of the Kleinman Center for Energy Policy. 

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After the explosion and fire at the PES refinery, the City of Philadelphia should connect the dots among a range of related environmental issues, events, and crises and raise the visibility and influence of the City’s environmental policy makers.

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After the explosion and fire at the PES refinery, the City of Philadelphia should connect the dots among a range of related environmental issues, events, and crises and raise the visibility and influence of the City’s environmental policy makers.

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Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

[summary] => [format] => full_html [safe_value] =>

Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

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It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

[summary] => [format] => full_html [safe_value] =>

It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

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Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

[summary] => [format] => full_html [safe_value] =>

Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

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Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

[summary] => [format] => full_html [safe_value] =>

Report Update: At the time of original publication in November 2018, the report author had made regulators aware of perceived shortcomings in the public participation process conducted by Sunoco affiliate Evergreen with respect to environmental remediation at the Philadelphia refinery under Pennsylvania’s Land Recycling Act. These shortcomings were presented in the original release of the report. This included deficiencies in the public participation plan, absence of public notice, absence of documentation available at designated public libraries, and lack of public comment and response submission. In June 2019, Evergreen launched a public website that proposed a new public involvement plan and public comment period, provided proof of public notice, and made relevant documents available online (and in designated public libraries). As of July 2019, these actions by Evergreen are acknowledged with this update.

EXECUTIVE SUMMARY

Some may believe that after emerging from bankruptcy reorganization in August 2018 there is no longer a need to pay attention to what's happening at Philadelphia's neighborhood refinery, Philadelphia Energy Solutions (PES). But, the exact opposite is true. Now, more than ever, involvement from municipal leaders and the public is pivotal.

LEGACY OF POLLUTION

The sprawling 1,300-acre footprint of land located just a few miles southwest of Center City, Philadelphia has been home to petroleum storage and refining activities since 1866. PES is the current owner of the facility, the oldest and largest refinery on the East Coast.

The history of pollution contamination at the refinery site is profound, given it has been home to hydrocarbon processing for over 150 years. The soil and groundwater at the site are heavily contaminated with hydrocarbons. Light non-aqueous phase liquids (e.g., refinery products like gasoline) are present on the groundwater in many areas of the facility. Specific chemicals of widespread concern include benzene (a known human carcinogen), lead, MTBE, toluene, benzo(a)pyrene, and many other toxic compounds. In some areas, contaminants have migrated offsite, and a drinking water aquifer used by the state of New Jersey could potentially be impacted. (Appendix C provides a detailed explanation of site contamination.)

Sunoco (owned by Energy Transfer Partners) is a part owner of PES and maintains legal liability for historic contamination at the site. Sunoco entered the facility into Pennsylvania’s voluntary Land Recycling Program (Act 2 of 1995) and has been taking steps for years to characterize pollution at the site, stabilize migrating pollution plumes, develop site-specific risk-based pollution concentration standards to achieve (i.e. standards less stringent than statewide health standards), and complete other required tasks. These activities—along with performing remediation and demonstrating to the satisfaction of the Pennsylvania Department of Environmental Protection (PA DEP) and the U.S. Environmental Protection Agency (U.S. EPA) that site-specific standards have been achieved—will provide Sunoco with relief from further federal and state liability for legacy contamination at the site.

LACK OF PUBLIC INVOLVEMENT

The City of Philadelphia, local communities, and other interested stakeholders have not been afforded an adequate opportunity to be informed or involved in remediation planning for the refinery. This is inconsistent with the legal requirements of Pennsylvania’s Act 2.

In 2006, the City of Philadelphia timely submitted a request to Sunoco to develop a public involvement plan. However, the plan subsequently developed by Sunoco does not meet the minimum requirements of Act 2 related to community involvement and public notice and review. For example, the plan does not include measures to notify or involve the public in the development and review of key reports and plans—e.g. remedial investigation reports, risk assessment reports, cleanup plans, or final reports. As a result, remedial investigation reports for eight of the eleven “areas of concern” at the refinery—as well as approval of a soil lead cleanup standard that is more than twice the statewide health-based maximum—have been approved without the benefit of municipal or public input.

Sunoco’s failure to fully comply with the relevant community involvement and public notice and review requirements of Act 2—for example, soliciting and submitting public comments and responses to those comments to PA DEP for the agency’s consideration prior to approval of relevant plans and reports—raises serious legal questions about the validity of the approvals thus far awarded.

Two of the three remaining areas of concern for which site characterization reports have yet to be approved involve pollution that has migrated off site, and one area of concern involves the New Jersey drinking water aquifer. Separate from PA DEP, the U.S. EPA is expected to open a public comment period on the proposed site cleanup plan, which is estimated to be available by 2020.

The omission of public involvement in the remediation planning for the refinery is a meaningful grievance. Given the magnitude, severity, and toxicity of the site’s contamination, coupled with its proximity to highly populated environmental justice neighborhoods, population centers, and drinking water resources, public involvement is critical to informing the municipality and community about existing risks, appropriateness of site-specific standards, and remediation options. In turn, this input could inform, improve, and garner public support for the project approach and goals. (See Section 5 for more information.)

PES LIKELY TO FACE BANKRUPTCY AGAIN, BY 2022

To add another wrinkle, although PES successfully navigated bankruptcy reorganization in August 2018, it is likely the facility will again face bankruptcy on or before 2022, when its debts mature. This is crucial to site remediation activities because it impacts the future use of the site, and therefore the appropriateness of the site-specific remediation standards Sunoco is pursuing.

WHY PES WENT BANKRUPT

Sunoco had lost money on the refinery for years, before entering into the PES joint venture with the Carlyle Group in 2012. The effort initially looked like it might pay off, and plans for an initial public offering were launched in 2014. However, by January 2018, PES had declared bankruptcy citing burdensome compliance costs associated with the federal Renewable Fuels Standard (RFS), loss of economic rail access to cheap domestic crude, and compressed refinery crack spreads. (See Section 1 for more information.)

Petroleum refineries generally object to the RFS because it reduces the amount of fuel they can sell (i.e. by displacing it with non-petroleum fuel like ethanol) and creates compliance costs. In spite of this, many merchant refineries (PES is a merchant refinery), have remained profitable while complying with the RFS. More meaningful to PES’ bankruptcy is the refinery’s uncompetitive technology, loss of economic rail access to cheap domestic feedstock, and inability to process even cheaper Canadian heavy crudes.

Although PES is a large facility, it is not state of the art. Rather, it is below average in all of the technical measures examined in the report. PES is a rather simple refinery compared to the rest of the U.S. fleet. It has below-average conversion capacity (limited to fluidized catalytic cracking) that is reliant on higher quality, higher cost feedstocks. On top of this, the facility falls short on reliability, operating with a lot of costly down time.

Absent additional and significant disruption (e.g. changes to the Jones Act, oil production increases from the nearby Utica shale), and unlike many of its peers, PES may not be able to benefit from changes in North American crude oil production patterns. Policy changes or strategic investments that reduce RFS compliance costs—such as the RIN-generating biodigester partnership with RNG Energy—could benefit the facility. (See Sections 2 & 3 for more information.)

PES IS FACING MANY FUTURE CHALLENGES

The bankruptcy reorganization allowed PES to postpone debt maturity, raise capital, and shed some costly obligations. However, post-bankruptcy, the company is more highly leveraged than it was before. Bankruptcy did nothing to change the fundamental structural challenges facing the refinery, nor did it address new challenges on the horizon. These new challenges include:

  • Costly capital needs for refinery turnarounds,
  • Required investments to meet domestic and international rules to limit sulfur in motor and marine fuels,
  • Increased competition from Midwestern refineries,
  • Proposed interstate flow adjustments to a key offtake pipeline,
  • Significant unresolved back tax liabilities,
  • Loss of competitive advantage in supplying summer gas to the Pittsburgh market, and
  • Several other obstacles. (See Section 4 for more information.)

It is possible that PES could navigate these challenges and maintain viable refinery operations. It is also conceivable the facility could function as a fuel-storage terminal and logistic facility, even if refining operations cease. Post-bankruptcy, PES is now majority owned by creditors (e.g. financial institutions) with Sunoco and the Carlyle Group relegated to minority interests. PES’s January 2018 bankruptcy filings estimate the company could recover about $700 million upon liquidation (i.e. converting assets to cash to pay down debts), at best.

EXPLORING REDEVELOPMENT OPPORTUNITIES

In 2013, Philadelphia released and began to implement a “Master Plan” for redevelopment of the 3,700 acre industrial Lower Schuylkill corridor, of which 1,300 acres includes the PES property. This plan was comprehensive in nature, but chiefly explored economic development opportunities outside of the refinery’s footprint. The plan assumed ongoing operations at the refinery and did not consider the opportunity for industrial redevelopment of all or parts of the refinery complex.

It is not often that 1,300 acres of contaminated land gets remediated near the center of a major metropolitan area. Remediation activities should consider potential alternative future uses for the site, informed by a redevelopment planning exercise based on highest and best use, and assuming cessation of refinery operations. To minimize worker hardship, early planning to prepare for displacement of workers and supply chain businesses should take place in the event that the refinery closes.

THE NEED FOR ENGAGEMENT

The City of Philadelphia, neighboring residents, community leaders, local businesses, and other stakeholders should prepare for engagement.

  • Achieving Compliance with Public Involvement Requirements. Sunoco, PA DEP, the City of Philadelphia, communities surrounding the refinery, and other stakeholders need to determine how to correct Sunoco’s omission of community involvement and public notice and review requirements in a manner consistent with Act 2. This includes 1) reviewing the entire remediation project to determine public involvement deficiencies, 2) developing an approach to ensure PA DEP has the opportunity to meaningfully consider public input for all regulatory milestones already approved (e.g. eight remedial investigation reports (RIRs), risk assessments, site-specific standards), and 3) revising Sunoco's public involvement plan to ensure compliance for the remaining three RIRs, risk assessments, cleanup plans, and final reports. Ameliorating some of these grievances may be complicated given the law envisions public comment and remediator responses being inputs into PA DEP’s review prior to approval or rejection of the relevant plans and reports.
  • Exploring Redevelopment Opportunities. Given the near-term potential for closure of refinery operations, stakeholders should begin exploring redevelopment options for the site. This could include consideration of a wide range of potential industrial and recreational uses for site parcels that would add value to the City. The opportunity to reclaim such a large footprint of land so close to Center City deserves thorough and creative exploration and analysis for the highest and best use. These potential future site uses should also inform the appropriateness of site-specific remediation standards being pursued by Sunoco. 
  • Preparing for Worker Dislocation. Closure of PES will create hardships for many employees and businesses dependent on the refinery. Relevant stakeholders should acknowledge the potential for the refinery’s near-term closure, understand the magnitude of related worker displacement, and plan for the associated needs of refinery workers and those employed in the refinery’s business supply chain. Evaluation and planning should take place for the potential need to deploy re-employment services (e.g. retraining, trade adjustment assistance), including assessing local, state, and federal funding resources.

PHILADELPHIA’S FUTURE

PES is the largest single source of toxic, criteria, and greenhouse gas emissions pollution in Philadelphia County. Closure of the refinery will result in significant reduction of air pollution that is harmful to human health and the environment. In addition, reduced local air pollution emissions may ease permitting requirements for new or existing industrial entities—with the potential for job creation and economic development—given the regulatory air quality attainment status of the region.

There is only one chance to inform and influence Sunoco and Energy Transfer Partner’s legal obligation to fund the cleanup of Philadelphia’s neighborhood refinery. This remediation project is important to the future of the City and its residents, and the project will benefit from active public involvement and support.

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It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

[summary] => [format] => full_html [safe_value] =>

It seems that Philly’s neighborhood refinery, since 1870, is stuck in a rut and looking for a way out. After initial plans to go public were postponed, the refinery’s owners are reportedly looking for buyers in the private equity market.

Philadelphia Energy Solutions LLC (PES)-  a joint venture of the Carlyle Group, PES Equity (a subsidiary of Energy Transfer Partners) and members of PES’ management team – owns the sprawling refining complex in southwest Philly, the largest refining complex on the eastern seaboard. 

The refining complex includes two refineries (Girard Point and Point Breeze) and a robust rail logistics operations.  It has the capacity to process 330,000 barrels of oil per day into various refined products, for example, gasoline, diesel, and jet fuel.  The logistics segment, primarily the North Yard Terminal, is the largest crude oil rail unloading terminal on the east coast.  The refinery complex can also receive marine-based feedstock.

In December 2011, Sunoco sought to offload the refinery, which at times was losing up to $1 million per day.  By July 2012, investors and politicians succeeded in resurrecting the plant under the PES banner, due to $500 million in capital infusions to upgrade the facility’s refining equipment and rail unloading facilities.

Under the new PES management, the refinery complex performed a turnaround, operating with positive margins, according to SEC filings.  The timing seemed right to attract new investors.

PES LLC planned to create PES Inc. (or PECS, the prospective NY stock exchange symbol) as the parent holding company for two separate business segments, refining and logistics, in order to raise capital through a public offering. In September 2014, PES filed IPO paperwork with the SEC for its logistics segment, dubbed PES Logistics Partners, L.P. (PESL), targeting a $250 million raise. In February 2015, PES filed paperwork with the SEC indicating plans for an IPO of its broader business including refining (PESC), to raise $100 million. However, in August 2015, PES announced plans to postpone IPO plans due to unfavorable market conditions, namely the collapse in oil prices and corresponding tightening of capital markets.  I am assuming both IPOs are being postponed.

Current market conditions aside, analysts were skeptical of the PES IPO offerings from the beginning. Observations included, for example:

  • Refining is a margin-based business that is highly competitive and subject to the volatility of commodity and refined product price fluctuations.  Operating efficiencies, reliability, product mix and product transport costs also critical. PES operates as a merchant refiner, putting it at a disadvantage to its integrated competitors that have more resources to weather downturns.
  • There is stiff competition from nine refineries in the region, including Phillips 66 and American Refining Group.
  • Comparing the three month period of Q1 2014 to Q1 2015, revenues to PES declined by almost $1 billion, though income increased by about $4 million in that time frame.
  • The company’s valuation is aggressive, given the state of the energy industry.
  • Dividend yield of $0.10/share is lower than comparable peer refiners with logistics operations, with the market likely to demand a higher yield coupled with a stock price drop.

In addition to these factors, PES felt one of its key competitive advantages was the ability to profit from the discount presented by U.S. shale-based oil. The company invested in equipment to maximize the oil shale value proposition, only to see the feedstock's discount largely disappeared when global oil prices plummeted.

Early reports of PES’s search for a new, non-public buyer suggest the public market felt the company’s $1.3 billion valuation was too high, by about 50 percent.  A $650 million valuation is near the $500 million in capital reportedly invested in upgrading the complex, painting a dim view for the company’s current investors.

UPDATE:  Reuters reported on July 6th that PES had cut output by 10 percent due to low gasoline profit margins.  This move is atypical for the summer driving season, when gasoline demand and prices usually rise prompting refineries to up production.  However, the RBOB crack spreads - the profit margin realized between buying oil and selling refined gasoline - has been dropping, forcing many refineries on the east coast to cut production.

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Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

[summary] => [format] => full_html [safe_value] =>

Back in a June blog post, I outlined some of the economic stresses impacting Philadelphia’s neighborhood refinery - Philadelphia Energy Solutions (PES), a joint venture between Sunoco and the Carlyle Group - which included ending its bid to go public and reducing gasoline output due to low profit margins.

Since June, things have only gotten worse for PES. 

In September, PES froze company contributions to employee pensions, cut health benefits, and offered buyouts to salaried employees.  The company also planned to delay costly maintenance projects until economics improved. In October, reports surfaced that PES was laying off certain non-union workers, after the voluntary September employee buy-out strategy failed to materialize the desired level of cost reductions.

It is important to note that overall, the U.S. refinery industry is under stress at the moment, and PES isn’t the only refinery feeling the burn.

However, PES has the added burden of a heavy debt load and structured payments (totaling $480.9 million from 2013 – 2015) to private equity investors at the Carlyle Group.  According to Reuter’s Business Insider, the payouts to Carlyle helped lead to PES recording a $65.7 million loss in 2015.  In September 2015, the company’s debt to earnings (before deductions) ratio was a respectable 1.0, but nearly doubled to 1.9 by the end of that year.

The future of PES is unclear, and a resurrection is certainly possible (and has happened in the past). Although Wall Street investors didn’t value PES, the boom-bust cycle of oil and gas refinery economics will again trend positive, but the timing of a recovery is uncertain and the company is bleeding money. 

I doubt another massive bipartisan political push and taxpayer funded bailout of the facility will materialize again, as it did in 2012.

So, what happens if PES’ owners decide to close up shop and declare bankruptcy?

First of all there will be a crisis.  A plan to assist (e.g. retrain) and reemploy displaced refinery workers will need to be developed. Gasoline prices in the region will go up, negatively impacting consumers. Luckily, prices are at a low point to begin with.

Longer-term there is massive redevelopment opportunity (not to mention the significant improvement to air quality that will result from shutting down refinery operations).

PES sits on top of 1,400 acres of urban landscape within the City of Philadelphia. This is landscape that could be reimagined for a variety of new uses. For example, accommodating a much needed expansion of the neighboring airport operations, expanding housing or commercial operations, creating new urban greenspace, and more. 

But the site has soil and groundwater contamination, mainly from hydrocarbons, lead, and arsenic. In addition, the complicated refinery equipment at the site will eventually (note that some refineries can mothball for decades) need to be dismantled and decommissioned. 

Before the Carlyle Group agreed to purchase the site, they entered into an agreement with the U.S. EPA to protect PES (and themselves) from potential liabilities associated with pollution and contamination that had occurred in the past. However, Sunoco is still on the hook for cleaning up some of this past contamination.

If PES can’t make it through this latest rough patch, and a buyer can’t be found, Sunoco will be left with a big liability on its hands.

The City of Philadelphia (and state) has successfully revitalized contaminated land before (e.g. the Navy Yard).  Perhaps with the right negotiators and terms, Sunoco’s liability headache could become Philadelphia’s next asset?

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