Negotiations between Hovensa and the government of the Virgin Islands on amendments to Hovensa’s concession agreement for the company to operate the refinery complex as a storage terminal continue on a longer-term agreement, he said.

Without amendments, existing customers at Hovensa oil storage facility on the U.S. Virgin Islands may have to pay higher costs at the end of this year if they want to continue using those strategic tanks in the Caribbean or ship out.

Hovensa used to operate a 500,000-b/d refinery at St. Croix, which supplies products to the Caribbean and U.S. East. Since its shutdown earlier this year in February, it has been converted to a fully operational storage terminal for imports and exports. Its strategic position in the Caribbean is also crucial for breaking and building bulk volumes for arbitrage trading purposes.

Companies which are currently storing petroleum products at the refinery have been informed that they may have a tax liability to the Virgin Islands government if Hovensa is not able to successfully complete those negotiations by the end of December 2012, the Hovensa spokesman said in October 2012.

The spokesman said that there are no plans to evict customers from Hovensa or shut the storage facility as talks with the government remain ongoing.

Industry sources said that storage tenants at Hovensa include Vitol, Hess and Total.

“It means that Hovensa cannot guarantee these customers won’t be liable for these government taxes if Hovensa fails to reach agreement with the island’s government. They (customers) are therefore considering their options including exiting,” a source said in October.

In May, OPIS reported that Hovensa had offered about 16 million bbl of storage capacity or about 50% of its maximum capacity of 32 million bbl. The balance of unused capacity would be mothballed.

The company considered the offer of 16 million bbl to be the optimal capacity based on practical operational costs and regional market demand.

In the past few months, Hovensa and the Virgin Islands government have locked horns on the issue of tax break extension.

Hovensa had received tax concessions from the government when it was operating the now-shut 500,000-b/d St. Croix refinery, but those concessions were viewed as a government subsidy for refinery operations only.

Hovensa is seeking an extension of the tax concessions for the operation of its storage facility. However, that has been met with resistance from the government, which wants Hovensa to restart its refinery operations for local economic reasons.

Hovensa employed close to 2,000 employees and contractors when it was operating its refinery, but that number was slashed to about 100 for the storage facility.

Also, Hovensa provided relatively cheap fuel to the islands’ public utility companies, which are now forced to buy fuel oil to run their power plants from the open market. The barrels are likely to be sourced from the U.S. Gulf Coast.

The Hovensa spokesman said that the company has no plan to resume oil refining operations in response to a query by OPIS about options to mitigate the local government’s demands.

Currently, Hovensa only has an interim agreement with the Virgin Islands government to operate as a storage terminal until Dec. 31, 2012.

Hovensa cannot make any long-term arrangements for 2013 and beyond until it has a permanent agreement with the territory government.

Of the total storage capacity offered at Hovensa, about two-thirds will be dedicated to clean oil products and the remaining one-third to crude oil and fuel oil.

Most of the clean product tanks are already operational, and the shut-in capacity is for mostly dirty products and crude.

Hovensa had said that the company had preliminarily planned for 10-15 million bbl of storage capacity and its long-term plans hinge on signing a new agreement with the Virgin Islands government to operate that facility as a storage facility.