An Unrefined Ending

This is a condensed, online version of the report. For all figures, references, and the full text, please download the full report PDF.

Executive Summary

An Unrefined Ending informs stakeholders in US refining communities about some issues they may encounter as demand for refined petroleum products decreases. More specifically, to educate and prepare these stakeholders, this report distills lessons learned from events surrounding the Philadelphia Energy Solutions (PES) refinery, including the creation and closure of PES. It does not seek to reflect all the important and diverse stakeholder perspectives associated with those impacted by the refinery’s operation, closure, and redevelopment.

The sprawling Philadelphia refinery property hosted petroleum storage and refining activities beginning in 1866. In 2011, long-time refinery owner Sunoco made a companywide decision to exit the refining business, threatening the shutdown of the Philly facility. Subsequently, a private equity giant, the Carlyle Group, acquired a majority interest in the aging refinery. In 2012, the Carlyle Group’s investment and Sunoco’s ongoing participation, as well as public subsidies and regulatory leniency, contributed to the establishment of the rebranded Philadelphia Energy Solutions refinery business.

Initially, PES financially prospered by exploiting shut-in Bakken crude supplies delivered via rail car. Shut-in meant that oil was coming out of the ground but there was too little or pipeline capacity to move it to refineries. Eventually, pipelines were built to move Bakken crude to Midwest and Gulf Coast refineries, forcing PES to rely once again on higher-priced crudes, now delivered via marine vessels. This loss of feedstock competitive advantage, along with aging infrastructure using low-conversion technology and the high costs of complying with renewable fuels standard (RFS) regulations, forced PES into bankruptcy in 2018. PES successfully navigated the 2018 bankruptcy, based in part on the decision of the Environmental Protection Agency to excuse $350 million in RFS compliance costs. Majority ownership of the reorganized PES was transferred to a bank (Deutsche Bank) and a private investment firm (Bardin Hill).

That year, however, Christina Simeone predicted that PES, facing market headwinds and a large debt obligation due in 2022, would soon again face bankruptcy. Also, she discovered the facility had not been complying with regulatory requirements for public participation associated with characterization and remediation planning for legacy soil and water contamination. State and city regulators had lost track of the refinery’s remediation process. Unfortunately, when regulators and representatives of Sunoco (the party responsible for cleanup costs) negotiated a solution to this oversight, they did so largely outside of the public purview. In January 2019, as the refinery’s financial position deteriorated, the owners made a remarkable decision: they abandoned a major maintenance turnaround one week before its planned execution. Then, in June, the breech of a metallurgically deficient pipe carrying toxic hydrofluoric acid resulted in an explosion and a 24-hour fire. City officials reassured neighboring communities that neither presented a threat to public health, but subsequent analyses put those claims into doubt.

The explosion precipitated PES’s second bankruptcy and eventual closure. Although the refinery’s economic viability had been called into question before this, city leaders had declined to envision a future for the property beyond refining until it was too late. Ultimately, a bankruptcy-court auction determined the fate of the 1,300+ acres of city-center land, with minimal opportunity for input from city leaders or community members.

Myriad lessons can be learned from the PES refinery closure.

First, these businesses go down fighting, using a portfolio of aggressive legal strategies. Many of the strategies seek to reduce regulatory (e.g., environmental, taxation) compliance costs.

Second, operational risks may increase as finances dwindle. Financially driven decisions to reduce costs, coupled with insufficient insurance to cover catastrophic risks, may expose neighboring communities to greater risks. There do not seem to be regulatory mechanisms in place to enhance oversight of refineries that are under financial duress. In populated areas, this omission is particularly critical given the capital-intensive nature of the refining business and the potential risks associated with the hazardous and toxic chemicals (e.g., hydrofluoric acid) used in refinery operations.

The third lesson concerns ensuring funding to maintain the communications and technical capacity required to hold refineries accountable. Unlike the situation in some areas of the United States (e.g., California), the imminent demise of PES was not widely anticipated. As such, environmental and community organizations lacked discretionary funding to respond fully to the complicated and dynamic situation, and a delay ensued to securing new funding streams. Although the refinery’s closure yielded environmental benefits (e.g., it reduced toxic, criteria, and carbon emissions), an opportunity was missed to exert leverage in high-value areas. Specifically, capacity and resource constraints inhibited the ability to publicize the refinery’s public participation failure, secure a more stringent, negotiated solution for shutting out the public, procure robust technical resources to evaluate contamination data, and ensure historic, long-term oversight of the multi-decadal remediation process. Advocacy groups on the ground—such as the Clean Air Council and Philly Thrive—did a tremendous job with the PES situation, under difficult circumstances. Yet one wonders if even better outcomes could have been secured if local environmental and community groups had more funding from the philanthropic community, government, or the company and greater support from statewide and national advocacy organizations.

Perhaps the most important lesson concerns working with and empowering unions. Refinery management may seek to deploy the political capital of unions to the benefit of a facility’s financial bottom line, yet often doing so without sharing the company’s plans and strategies. If refinery owners were honest with unions about a refinery’s poor outlook, unions might choose to focus more time and resources advocating for worker transition assistance, and comparably less time advocating for ongoing refinery operations. This creates a potential incentive for refinery management to withhold certain information from unions. Union members depend on refinery operations, yet they may have experienced refineries acting against union interests in the past. For example, refinery management may have resisted calls for more stringent worker safety standards, benefitting the facility’s financial position but not worker safety. As refinery markets contract, unions will benefit even more from impartial, accurate sources of information about refinery markets, economics, and competitiveness.

Refinery closure represents a loss of employment for refinery workers—union and non-union—but refinery redevelopment opens up the possibility for significant new employment—union and non-union—in various fields depending on future uses of the site. This may result in a redistribution of union employment, depending on the ability of labor unions to secure agreements for union construction and the operation of any future facilities. This creates a complicated situation for local union and political leaders to navigate.

Supporting union worker transition assistance is an important opportunity for environmental advocates to ally with unions. In the PES case, however, environmental groups generally lacked credibility with union leaders and workers. Moreover, the use of terms like a “just transition” may be counterproductive, as unions in Philadelphia perceived the term as “just transition already” rather than as “equitable transition.”

Similarly, attempts by environmentalists to develop and define transition programs without the leadership of impacted refinery workers and deep engagement from labor may be counterproductive. Such attempts may make it more difficult for labor and environmental leaders to collaborate on refinery closure issues, whereas partnerships may be less tenuous on redevelopment opportunities after a refinery closure has been determined.

Some similarities and differences between the PES situation and the California refinery market should be considered. Both the East Coast and West Coast refinery markets are contracting. Unions have a strong presence in both regions. And some California refineries use modified hydrofluoric acid. All these refineries have environmental contamination, and the US Environmental Protection Agency requires most to remediate. On the other hand, California’s much stronger policy drivers negatively impact refinery markets, making it easier to anticipate the demise of a refinery(s). There is far greater regulatory oversight and far more publicly available data on California refineries (e.g., through the California Energy Commission), and these refineries tend to be technologically more sophisticated than PES. Lastly, integrated, public companies, not private equity firms or banks, own most California refineries.

The victories and missteps associated with the PES refinery closure offer myriad learning opportunities. The inability to anticipate, build capacity, and plan for the refinery’s closure left Philadelphia unprepared for the dynamic, fast-moving situation that ensued after the 2019 explosion. Primarily, the events represented a failure on the part of city leadership. Ultimately, a bankruptcy court auction determined the fate of the refinery property, with minimal input from city leaders and impacted workers and communities. Therein lies the greatest missed opportunity. Yet what transpired in Philadelphia could have been far worse had the explosion resulted in greater damage to public health. Perhaps that leads to the most critical lesson. If a well-established refinery operator sells a refinery asset to a less-experienced investor, the degree of attention, oversight, and planning must increase.