Refinery owners battle in court

SAN ANTONIO — The Eagle Ford Shale is bringing prosperity to all sectors of the energy industry, including to refineries that process crude from the play.

A small refinery in Nixon, about 54 miles east of San Antonio, promised to be one of the most recent entities to flourish from the shale. Owner Blue Dolphin Energy Co. bought the mothballed plant and restarted it in early 2012 after refurbishing it. It uses only crude from the Eagle Ford to make its products.

Yet Blue Dolphin said that as of June 30, it was in violation of certain covenants in its loan agreement. At the time of its most recent regulatory filing in mid-August, however, the company said it was back in compliance.

Blue Dolphin CEO Jonathan Carroll said the violation is “more a technical issue than anything else.” Because the company is preparing its next quarterly report, he said the company is in a quiet period, but “it's not something to be concerned about.

“In general, we believe the business overall will be profitable or we wouldn't be doing it,” Carroll said.

Blue Dolphin's main asset is the Nixon refinery, and for the six months ended June 30, the company swung to a profit of $7.6 million compared to a net loss of $5.9 million for the same period in 2013.

But companies affiliated with Blue Dolphin have stumbled before in buying a refinery.

Lazarus Energy Holdings LLC is a defendant in a February 2014 lawsuit filed in Harris County's 215th District Court by Gregg County Refining LLC.

Carroll, in addition to serving as CEO of Blue Dolphin, is president of Lazarus Energy Holdings and is its majority owner, according to regulatory documents.

Houston-based Gregg seeks to collect on a judgment of almost $4.53 million, along with 18 percent interest for a two-year period, arising from a lawsuit it filed in 2008.

Gregg said it sold a refinery in Longview, in East Texas, for $5.5 million to an entity called Lazarus Texas Refinery II for a cash payment and a note. Gregg alleges that Lazarus Texas defaulted, prompting the 2008 lawsuit.

Lazarus Texas said in court documents that it was “induced” to buy the Longview plant and wasn't informed of significant environmental problems with the site. Lazarus Texas also said it was a “newly formed entity whose principals were unsophisticated in environmental matters.”

Ken Williams, the managing partner of Gregg, declined to comment about the dispute. But in 2012, he spoke to the Longview News-Journal about what happened after he bought the idled refinery for back taxes.

“All of a sudden a guy comes in and lays down substantial money and wants to buy it,” Williams told the newspaper. “I'm looking at a note for $50 million to get it operational or I can sell it.

“Which is riskiest? We were assured they (Lazarus Texas Refinery) would move forward and do something worthwhile. But it just never happened. Lots of things never happened with Lazarus.”

The dispute went to mediation in March 2010 and the parties reached a settlement for an amended loan, but Lazarus Texas Refinery defaulted on that note.

In January 2011, a judge found in favor of Gregg, ruling that Lazarus Texas must pay Gregg almost $4.53 million plus accrued interest. Gregg foreclosed on the property on Dec. 1, 2011.

Carroll said in a phone interview that Gregg County “basically sold us a facility that was very similar to Nixon back in 2006, around the same time we bought Nixon.

“I'll be very careful here, but there were some issues with the EPA (Environmental Protection Agency) that we were not made aware of, and those issues have yet to be resolved,” he said.

Carroll said Gregg is trying to drag Lazarus Energy Holdings LLC, a privately held company, into the dispute, he said. Instead, it was Lazarus Texas Refining II that agreed to purchase the Longview plant and the judgment went against that company.

In court documents, Lazarus Energy Holdings has denied that it is the alter ego of Lazarus Texas Refinery II. The entities are “separate companies,” Carroll said. “There is an affiliation, but it's not direct.”

In the 2014 lawsuit, Gregg said half of the initial down payment for the plant was paid by Lazarus Energy Holdings and the other half by Lazarus Texas Refining II. The suit alleges that Lazarus Energy Holdings is the alter ego of Lazarus Texas Refining II and is liable for its conduct.

Carroll, sounding upbeat, said he's in formal talks with Gregg County Refining representatives “almost every day.”

A good resolution “would be that we'd end up owning the facility, cleaning it up and moving on,” he said. “At the end of the day, I plan on resolving this.”