Local officials said the closure will slam the economy of the small U.S. territory, though oil analysts said it was unlikely to have a major effect on the global oil market.
The refinery, the largest private employer in the U.S. Virgin Islands and once one of the largest refiners in the Western Hemisphere, will be converted to an oil storage terminal, said Brian K. Lever, president and chief operating officer of Hovensa LLC.
Losses at Hovensa, a joint venture of U.S.-based Hess Corp. and Venezuela's state-owned oil company, have totalled $1.3 billion over the past three years and were projected to continue due to reduced demand caused by the global economic slowdown and increased refining capacity in emerging markets, Lever said in a statement.
"We deeply regret the closure of the Hovensa refinery and the impact on our dedicated people," Lever said. "We explored all available options to avoid this outcome, but severe financial losses left us with no other choice."
Hess announced in New York that it will take a $525 million after-tax charge against its fourth-quarter 2011 earnings due to the shutdown.
The refinery employs about 1,200 people in St. Croix and has approximately 950 contractors, according to Hovensa spokesman David Roznowski. About 100 people, including contractors, will work at the oil storage terminal, the company said.
The refinery, founded in the 1960s, has been producing about 350,000 barrels per day during the rough economic climate.
The company's website says it is still one of the 10 largest oil refineries in the world, but the closure is not expected to have a major effect on the oil industry because it had not been operating at full capacity, said Fadel Gheit, senior energy analyst for Oppenheimer & Co.
Hess benefits because it had been hemorrhaging money through the refinery, he said.
The closure reflects a three-year trend across the U.S. of refineries closing because of the global financial crisis, a drop in gasoline consumption and a shift in growth elsewhere, Gheit said.
"They cannot compete with the modern refineries being built in India, China and the Middle East," he said.
Despite the closure, the U.S. remains Venezuela's largest customer, and Venezuela is still among the top four suppliers of crude oil to the U.S., he said.
Hovensa spokesman Alex Moorehead said the refinery equipment will shut down by mid-February, but that the company will continue to provide fuel oil to the island's Water and Power Authority through end of June.
The announcement seemed to take officials by surprise on an island already struggling with the layoffs of hundreds of state workers to offset a budget deficit.
"This is a blow in the gut," Senator Terrence Nelson told The Associated Press. "We have to organize an economic plan, and it might involve assistance from the federal government."
Nelson accused Hovensa of violating a long-term agreement with the government to continue refinery operations on the island. Nelson said it is unclear what Hovensa will need to do to compensate the government for breaching the agreement.
"It's devastating," Senator Samuel Sanes said. "It was something I suspected was going to happen, but of course it took me by surprise. On a personal level it affects many people in my family. I have many in my family working for Hovensa."
In January, Hovensa entered into a consent decree with the U.S. Environmental Protection Agency and Justice Department in which the company agreed to invest $700 million on pollution controls after a series of chemical releases affected people living downwind from the refinery. Hovensa also agreed to pay a $5.4 million penalty for violating the Clean Air Act.
It is unclear how the agreement will be affected by the closure. EPA spokeswoman Mary Mears did not return messages for comment, while Moorehead said Hovensa representatives were meeting with EPA and U.S. Department of Justice officials on Wednesday to talk about the issue.
Associated Press writer Danica Coto contributed to this report from San Juan, Puerto Rico.