Published On: Mon, Dec 24th, 2018

Refinery’s new operator faces major challenges

Oil RefineryWILLEMSTAD - Curacao recently selected Saudi Aramco's US refining subsidiary Motiva Enterprises as the preferred bidder to manage and operate the Isla refinery after PdV's long-term lease expires, with a possible "early step-in" to restart the facility that PdV has effectively abandoned.

The island government's refinery owner, RdK, aims to sign a Memorandum of Understanding (MOU) with Motiva in January. Local utility services to the refinery were recently repaired in anticipation of a restart by PdV. For Curacao, some 2,000 local jobs are at stake.

Neither Motiva nor PdV have commented on the planned transition to a new refinery operator, but a senior executive close to the talks confirmed them.

"We are watching and waiting to see if the reported negotiations reach a firm MOU, but these are always complicated with uncertain outcomes," the Venezuelan energy ministry official said.

"Curacao tried and failed to reach a deal with the Chinese over a year ago. The negotiations with Motiva could fail too," the official added, referring to Curacao's aborted deal with China's state-owned Guangdong Zhenrong Energy (GZE) GZE and a related company Baota.

According to S&G Global Platts, the draft of Curaçao’s memorandum of understanding includes a list of needs for the transfer of the installation to a new operator for a minimum period of 25 years.

The conditions included "a refinery investment plan, reduction of environmental impacts, financial benefits for the Curacao government, a secure supply of fuel for the local market, and the maintenance of local jobs at the same salary and conditions for contract and subcontract workers."

The MOU lists the following projects as necessary upgrades:

1. Modernization of the refinery, including the replacement of the residual fuel that currently is used in industrial processes with natural gas and natural gas liquids. Curacao has been looking to construct an LNG plant to diversify its energy supply.

2. Expansion of storage capacity at Curoil, the local fuel distribution company.

3. Adopt the use of natural gas at Aguaelectra, Curacao's water and power company.

4. Expand and modernize the Bullenbay terminal.

5. A design of programs and initiatives for the training of the local labor force.

In their article S&G Global Platts also indicated that an advisor to PDVSA familiar with Isla operations, said several challenges await the new operator.

1. The refinery operates at a negative margin because between 30% and 40% of each barrel is converted into fuel oil or asphalt, rather than diesel and gasoline. The plant will need to be able to meet new low sulfur bunker fuel specifications starting in 2020 in order to compete. Installing deep conversion units is costly, and a payoff on the investment is uncertain, as the plant would be competing with US Gulf Coast refiners for regional market share.

2. Unspecified investments are needed to resolve emissions problems.

3. The industrial services plant is not reliable and needs additional investment. The plant must be operated directly by the refinery and not by a third party.

4. Local labor and expertise is scarce. Currently, the refinery employs 1,000 people. The government restricts work permits for foreigners to avoid increasing unemployment which would carry a heavy political cost

5. Environmental groups have asked that the refinery be closed. The risk of fines and forced shut-ins of operations is high.

"PDVSA has gone all these years absorbing the losses because it has geopolitical interests in the Caribbean region, but a private operator would close it if the numbers are negative," said the PDVSA advisor.

Closing the facility is not an option.

"That would have serious implications for Curacao. 2019 will be a difficult year. Curacao will sink if the refinery closes," the advisor said.

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