Credit...Matt Rourke/Associated Press
PHILADELPHIA
— It’s not often that 1,300 acres of industrial land become available
on the edge of a major city center, especially not with good road, rail
and water links to the outside world. But the shutdown and bankruptcy of
a major refinery have put the site and its infrastructure into play.
More
than a dozen entities are interested in buying all or part of the South
Philadelphia Refinery, which was shut down in June after an explosion
caused an extensive fire. Before its closing, the refinery produced
more gasoline, diesel, jet fuel and other refined products than any
other refinery on the East Coast.
The
large size of the parcel, its location in the heart of the Northeast and
its proximity to transportation make it an attractive proposition to
energy companies that want to restart all or part of the refinery, or
combine its previous output with biofuels or renewable energy such as
solar.
“For this mass of ground to
become available is extraordinary,” said J. Eustace Wolfington, the
senior managing director in the Philadelphia office of Newmark Knight
Frank, a real estate firm.
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But
the refinery’s future is clouded in part by questions over viability.
Its current owner, Philadelphia Energy Solutions, filed for bankruptcy
protection twice in less than two years, citing the rising cost of crude
oil and the high expense of buying biofuel credits to meet federal
requirements. In its latest filing in July, the company blamed its woes
on damage caused by the explosion.
The plant’s ability to survive was also called into question in September by an industry report
from the consulting firm IHS Markit, which projected declining demand
for gasoline and other refined products over the next 30 years because
of increased fuel efficiency and greater use of electric vehicles.
Refineries,
especially those on the East Coast, are expected to respond to the
projections by cutting production by two-thirds by 2050, IHS said in the
report, which examined the future of the refinery for the City of
Philadelphia.
Still, a refinery could
be reopened on the site, IHS said, or the plant could be overhauled to
make biofuels, renewable energy, petrochemicals or heavy manufacturing.
The size and location of the site could also make it suitable for a new
logistics and warehousing center, the report suggested.
Other
refineries have been repurposed, it noted, including the Imperial Oil
Refinery in Nova Scotia, which became a port terminal after closing in
2013, and a Shell Haven refinery in Britain that closed in 1999 and was
converted to a container port with distribution facilities.
Demand
for the site may be limited by heavy contamination from some 150 years
of refining, which left behind a cocktail of hazardous chemicals such as
benzene and toluene. Contaminants are being cleaned up by a contractor
for Sunoco, an oil company that owned the site until 2012, overseen by
state and federal environmental regulators.
Potential
buyers may consider the site’s vulnerability to a possible rise in the
sea level, given that it is bordered by a tidal section of the
Schuylkill. The river has already flooded some sections of the complex
and is expected to inundate it further in coming decades.
Another
challenge is the densely populated sections of South Philadelphia,
where residents, many of them impoverished, blame decades of air
pollution from the refinery for high rates of asthma and other
illnesses.
Still, Mr. Wolfington of Newmark Knight Frank said the site offered a rare opportunity for redevelopment.
“The
site’s gold. It’s right on the Schuylkill River, you have incredible
infrastructure for rail and waterway freight, you have great highway
access and plenty of natural resources,” he said. “So it could be
industrial, retail, residential, office. The real estate possibilities
are endless.”
The
environmental issues are “not insurmountable,” Mr. Wolfington added. As
an example, he pointed to the nearby Philadelphia Navy Yard, a formerly
contaminated site covering about the same amount of land as the
refinery. That site has been successfully redeveloped as a mixed-use
business hub and now has about 170 tenants from different industries and
institutions, occupying around 7.5 million square feet of new or
refurbished space.
Not everyone agrees on the site’s reuse possibilities.
Its
contamination would make a mixed-use development implausible, said
Kevin C. Gillen, a real estate economist and senior research fellow at
Drexel University’s Lindy Institute for Urban Innovation in
Philadelphia. Instead, he said, its size and location make it more
suitable as a logistics center.
“Cheap
land, lots of it, access to plenty of infrastructure and a significant
circumscribing of alternative uses all pretty much point in one
direction,” he said in an email.
Any
purchase agreement will have to be approved by a bankruptcy court in
Delaware, where Philadelphia Energy Solutions filed for reorganization.
In November, Judge Kevin Gross set an auction date of Jan. 17 for bids
by 15 parties, most of them unidentified, that have expressed an
interest in the company’s assets.
The
company said in court documents that the sale of some or all of its
assets would be the “best alternative” for all stakeholders, but it has
also proposed a debt-for-equity swap as an option.
But
the court, which has scheduled a bankruptcy confirmation hearing for
Feb. 6 and 7, might decide that the sale of the site, rather than the
business on it, would be the best way to pay creditors, said Bruce
Grohsgal, a professor of bankruptcy law at Widener University’s Delaware
Law School.
Although
such a ruling is rare, “this might be an example of where that’s the
case because the going concern of a refinery has been lost from the
fire, and the real estate might very well be worth more than the
enterprise,” he said.
One possible
buyer that has announced its interest is Philadelphia Energy Industries,
a new company set up by Philip Rinaldi, a former chief executive of
Philadelphia Energy Solutions. Mr. Rinaldi retired in 2017 but wants to
restart the refinery in cooperation with a partner that would also make
renewable diesel and build solar cells on the site.
The
City of Philadelphia has avoided taking sides, saying it has limited
authority over the privately owned site. But in late November, it issued
a 45-page report that concluded any future use should protect public
health, be economically beneficial and establish “openness, transparency
and trust” with local residents.
The
city is aiming to cut carbon emissions by 80 percent by 2050, and it
would like to see renewable energy production on the site, said the
city’s managing director, Brian Abernathy. But it is unlikely to be able
to stop refining operations there despite calls by environmental and
residents’ groups for it to do so.
Still,
the bankruptcy suggests that any new refiner will have to make
significant changes to run a viable business, Mr. Abernathy said.
“This
was a difficult financial model to make work as an independent
refiner,” he said. “Those economics would still be challenging even with
a new buyer.”
Mr. Abernathy said a
restarted refinery would have the best chance if it was bought by a
larger company with the resources to add a fuel-blending capacity, which
would enable it to avoid the heavy costs of buying credits to comply
with federal renewable fuel rules.
Another
option is a hybrid of refining and renewable fuel production,
reflecting both market signals and policy goals, said Mark Alan Hughes,
the faculty director of the University of Pennsylvania’s Kleinman School
for Energy Policy and a member of the city’s advisory committee on the
site.
“They’re predicting a steadily
declining place for things like the refinery that was,” Mr. Hughes said,
referring to lower projections for gasoline demand. “The kind of mix
that tries to lower the profile of fossil fuel activity is, I think, the
most likely outcome.”
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