(Adds confirmation that Hovensa will stop selling fuel on the island in paragraphs 3-4)
HOUSTON, Dec 19 (Reuters) - The U.S. Virgin Islands' legislature turned down an agreement on Friday that would lead to the reopening of the 350,000 barrel-per-day Hovensa refinery, after its counsel warned that the would-be buyer might not be able to uphold the contract.
U.S. oil producer Hess and Venezuela's state-run PDVSA, owners of the shut refinery on the island of Saint Croix, had hired investment banking firm Lazard to sell the plant.
While the refinery shut in 2012, the facility is still being used as a terminal to supply fuel to the island, among other operations. Without a new agreement, Hovensa said it will proceed with its previously announced decision to completely shut down the whole facility and stop selling gasoline and diesel to the island by February.
Hovensa said its finances are deteriorating, so it cannot fund operations beyond that date and the company's owners will not provide any money to support domestic sales.
Hovensa added that a deal will not be possible after the Senate's rejection. PDVSA and Hess were not available for comment.
In September, only Atlantic Basin Refining (ABR), a consortium specifically formed to acquire the facility, stepped forward to buy and operate it.
But the legislature's counsel voiced concerns about the pending deal, arguing the government would have no recourse against ABR if it were to breach the contract.
It would have the effect of "severely limiting the government's legal remedies," the legislature's counsel said according to a memorandum from the office of the attorney general.
Even though the Virgin Islands' attorney general backed the agreement, it was finally rejected by 13 of 15 members of the legislature, according to local media, setting back the sale that needed its operating agreement to be ratified.
The agreement would require ABR to rebuild and restart the refinery, employ local personnel and pay the government more than $1.6 billion over the life of the 22-year deal.
If the contract were approved, an engineering analysis and a restart plan would take nine to 12 months, while rehabilitation would take another 24 months and cost more than $1 billion. Low oil prices also contributed to the uncertainty.
"I do not think the deal had a chance to work and it was being rushed by the governor, who is leaving office," a refining source with knowledge of the deal told Reuters.
Governor John deJongh Jr. in September said he would like to see the sale done before he leaves office in January. (Reporting by Marianna Parraga; Editing by Terry Wade, Christian Plumb and Lisa Shumaker)