After Explosion, Philadelphia Refinery to Be Permanently Shut Down

PES Refinery
Source: Pittsburgh Post-Gazette
February 25, 2020
This piece was first published in Forbes on February 17, 2020. It is reprinted with their permission.

On June 21, 2019, part of the Philadelphia Energy Solutions refinery, the largest oil refinery on the East Coast of the United States, blew up. The explosion, which resulted from a burst pipe that allowed the release of a mixture of volatile and highly toxic gasses, scattered debris into surrounding neighborhoods, and lofted a school bus-sized chunk of the facility across a nearby river.  Quick action on the part of refinery operators prevented an even larger disaster.  Miraculously, no one was seriously hurt in the moments following the blast.

In the months since, a dramatic struggle has been playing out over the fate of the site in Philadelphia, a city that finds itself in the midst of a fraught transition from a gritty industrial past toward a future focused on technological innovation and twenty-first century jobs.  Philadelphia was the nation’s first capital.  It was also the United States’ first true energy center, where a refining industry appeared in the years following the Civil War to take advantage of a Pennsylvania oil rush that had begun a decade earlier, with the drilling of the world’s first successful oil well in the hamlet of Titusville in 1859.

The refinery that subsequently grew at the junction of the Delaware and Schuylkill Rivers today occupies 1,300 acres of urban South Philadelphia landscape, an area that is larger than the commercial center of the city itself.  

The explosion should have brought PES’ history to an end. The refinery had emerged from bankruptcy just a year before, in 2018, and appeared headed toward insolvency once again.  Nevertheless, in the weeks following the explosion it became clear that permanent closure was not foreordained.  

In the last decade, the 335,000-barrel-per-day PES remained profitable thanks to a fleeting set of oil market circumstances.  Beginning in the early 2010s crude oil from North Dakota’s Bakken region began to arrive in Philadelphia by rail.  At the time Bakken producers had few options to get their oil to market, as pipelines had yet to be expanded to transport the volume of new crude to the country’s refining centers along the Gulf coast.

PES was a beneficiary, and for a few years it purchased Bakken crude on the cheap and sold the refinery’s output — gasoline and other fuels — at prices competitive with fuels from newer and more efficient refineries located elsewhere across the U.S.  Yet when the Dakota Access pipeline opened in 2017, PES’ lifeline of low-cost crude began to dry up, and the refinery turned to costly imported oil priced on the international Brent benchmark.

The rising cost of feedstock, combined with the burden of private equity debt from a 2012 sale to the Carlyle Group and mismanagement of the refinery’s renewable fuels blending obligations, eroded profits at PES.  From 2012 to 2017 revenue related to crude supply dynamics fell by an estimated $1.8 billion.  The refinery continued to bleed cash after it emerged from its eventual bankruptcy in 2018.

Following the explosion, the city of Philadelphia convened a series of six meetings throughout the fall where stakeholders presented their vision for the site’s future as protesters demonstrated outside the charter school where the meetings took place.  At stake were the well-paying jobs of 1,100 workers directly employed at the refinery, many of whom had been summarily laid off by PES following the explosion. 

There were also the larger interests of Philadelphians, for whom PES stood out as the city’s largest single source of air pollution, accounting for one-tenth of airborne fine particulate emissions and 56% of its air toxics.  In surrounding  neighborhoods asthma rates were double the Philadelphia average and four times national rate.

Proposals were floated to repurpose the site, which is located at a nexus of navigable rivers, rail and highways, as a logistics hub.  One group proposed to return the site to its natural state as a tidal marshland.  Yet the 150 years’ worth of unrecoverable toxins mixed into the soil under PES make it unlikely that the site can be returned to its natural state, or used for residential purposes.

Along the way, the refinery’s former CEO, Philip Rinaldi, resurfaced, seeking to purchase the refinery with the intent of reopening it, though the path to profitability was never clear.

Ultimately, the decision on what to do with PES and its vast acreage was to be decided in a private auction organized by the company and its creditors with final approval to come from a Delaware bankruptcy court.

Bids were submitted on January 10.  On January 21, PES announced the winning offer of $240 million from Hilco Redevelopment Partners, a real estate company headquartered in Chicago that has a history of redeveloping polluted industrial sites for new, and often cleaner purposes.

While Hilco has yet to provide a specific vision for the site, Philadelphia Mayor Jim Kenney summed up the relief felt by the majority of his electorate in stating, “We are optimistic that [Hilco] can develop this site in a way that…puts the public’s safety as a top priority, has a more positive impact on the environment, engages meaningfully with the surrounding communities and contributes significantly to the region’s economy.”

Yet proponents of reopening the refinery weren’t finished. Before the Delaware bankruptcy court could approve the sale to Hilco, a losing bidder, Industrial Realty Group, teamed with PES’ former CEO to challenge the deal.  IRG argued that its offer of $265 million for PES, which it planned to reopen, was in the best interest of the refinery’s creditors.  

Local union leaders allied themselves with the effort and sent representatives to meet with Peter Navarro, President Trump’s assistant for trade and manufacturing policy, hoping to recruit the White House to pressure the bankruptcy court to deny the Hilco deal.  The group also sought to summon the weight of the U.S. Environmental Protection Agency, claiming that the agency would never approve the type of cleanup needed to repurpose the site.

“But reopening the refinery does not take the contamination of that site off the books,” says Mark Alan Hughes, Philadelphia’s first sustainability director and now director of the Kleinman Center, an energy policy center at the University of Pennsylvania.  

“When the refinery closes down inevitably, that contaminated land will remain, and that liability will remain,” says Hughes.

Responsibility for the site’s remediation lies largely with Energy Transfer Partners, owner of the refinery before majority ownership passed to the Carlyle Group in 2012 during an earlier financial crisis.

Regardless, the bankruptcy court announced that its ruling would be delayed.  Philadelphia communities that had believed the long-troubled refinery would be gone instead found themselves in a familiar state of uncertainty.

Their angst was short lived.  On February 13, Delaware bankruptcy judge Kevin Gross approved the sale to Hilco at a price of $252 million, adding a provision for $5 million in severance to be paid among the workers that PES had laid off and $20 million to appease unsecured creditors.

With the sale outcome decided, Philadelphia now finds itself with an unprecedented opportunity to move away from a dependence on a fossil-fueled economy, should Hilco’s cleaner intentions play out.  It is a situation that more communities around the country are sure to encounter due to refining overcapacity and soft demand growth for transportation fuels, as the U.S. Energy Information Administration forecasts.

It’s worth noting that Philadelphia doesn’t have the power to mandate what will become of the former refinery.  That decision rests with Hilco and its future partners in developing the site.

Yet the city will have a say in future use of the site, and its experience may be instructive for other cities facing the closure of local fossil fuel businesses.

“Cities have the right, the power, and in fact the obligation to well regulate and manage the operation of the land market inside their borders,” says Penn’s Hughes.

“Probably the most important tool that Philadelphia or any city in the United States has at its disposal is its jurisdiction over the regulation and planning of land use, so that this is what people will recognize as zoning.”

Markets, in addition to regulations, will also play a role.

“The true value of what Hilco could do with the PES site is not just the value of putting in some warehouses and connecting them to the amazing infrastructure already at the site,” says Hughes.  

“The full value comes from suppressing the 20% of Philadelphia’s greenhouse gas emissions every year that the refinery produced. Yet Hilco can't get paid for it. And because they can't get paid for it, they can't raise money for it. But the real value of that site is hundreds and hundreds of millions of dollars more.”

Such value could be realized with a $40 and up per ton price on carbon emissions.  Bipartisan proposals that would do just that have been raised in Congress. Green bond initiatives, such as those in California and New York, raise capital for projects that turn a brownfield site like the refinery to green. In the future, proposals for clean development might access low-cost green financing, providing them an advantage over other suitors in auctions like the one that just consumed the attention of Philadelphians.

While the old refinery’s future is not yet laid out, what is clear is that the city will be a much cleaner place whatever that future will be.  All eyes will be on Philadelphia to see how its transition plays out.

Our blog highlights the research, opinions, and insights of individual authors. It does not represent the voice of the Kleinman Center.

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