Published On: Mon, Sep 26th, 2016

PDVSA risks losing Curaçao on failure to invest: Fuel for thought

islaThe failure of Venezuelan state-owned oil company PDVSA to live up to its contractually obligated investments in Curacao’s Isla refinery has come back to bite them and they now risk losing it to China, which has stepped up to the plate with its own plan.

PDVSA has operated the Di Korsou refinery, also known as Isla, and the Bullen Bay oil terminal since 1985 under a lease agreement due to expire at the end of 2019.

Whether a renewal of the lease would be in order has been a hotly debated topic because PDVSA has not lived up to its end of the deal.

The 335,000 b/d refinery alone needs an estimated $3.5 billion investment, and PDVSA is supposed to cover two thirds of that amount.

As a result, Curacao signed an memorandum of understanding with China’s Guangdong Zhenrong Energy Co. for the modernization of the refinery, oil terminal and a 20 year lease of those facilities after the lease with PDVSA ends.

The loss to Venezuela could be crippling as it has become increasingly reliant on Isla and the terminal to make up for the shortfalls of its own facilities.

The Isla refinery supplies the Venezuelan market with gasoline and diesel from Curacao when its domestic Amuay and Cardon refineries don’t produce enough for their home market.

Since those refineries regularly produce at severely reduced rates, having Isla as a backup is a necessity.

For instance, Venezuela’s 955,000 b/d Paraguana Refining Center was operating at 33.5% in the beginning of September and was recently forced to shut a 180,000 CDU at its Amuay refinery due to a problem with its ventilation system.

In addition, PDVSA coordinates all the logistics of supplying crude and refined products to countries that make up Petrocaribe, an agreement of great geopolitical importance to the Venezuelan government.

China taking advantage of PDVSA ’s missteps

From the Bullen Bay terminal, which also has heavy crude storage facilities, PDVSA sends a large portion of Venezuela’s crude shipments to China and India. The terminal also receives increasing volumes of imported light crude for refining at Isla and to dilute the extra heavy crudes from the Orinoco Belt in Venezuela. Some of that light crude—up to 90,000 b/d in May—was imported from the US.

Without a deepwater port at its disposal, PDVSA would face challenges paying back its numerous crude-for-cash deals.

Losing the refinery lease could also have a ripple effect on PDVSA’s European operations.

There is a commercial agreement between the Isla refinery and Nynas AB, a mixed venture that is 50.001% owned by PDV Europa B.V. and 49.999% by Neste Oil. PDVSA is the parent company of PDV Europa B.V. Nynas buys all of Isla’s production of napthenic base oils, which average about 2,500 mt/day.

In terms of strategic value for Curacao, those sales help the refinery’s cash flow that has suffered over the last several months since PDVSA has stopped paying its share of the refinery’s operating costs.

The refinery is operationally self-sufficient with sales to the local Curacao market and to Nynas.

Due to the geographic advantages of a Caribbean refinery like Isla with its access to the North American market, the widened Panama Canal, and to the small but  lucrative Caribbean market, Curacao makes for an ideal investment.

The entry of China into the region would be added competition for Venezuela as well.

China has been looking at other potential assets in the region. It has been in talks to get involved in the recently mothballed US Virgin Islands refinery, but that refinery needs millions of dollars in repairs just to be restarted. Isla would give China a ready-to-go facility
Underscoring the importance of Curacao to its operations, PDVSA still claims the Isla refinery will remain integral to its operations.

Several days after the MOU, Venezuela’s mining and oil minister and PDVSA president Eulogio Del Pino said, “The commitment and operational continuity of the Isla refinery is part of the strategy of our company in the short, medium and long term.”

But given the neglect and lack of investment to the refinery over the years, some think it’s unrealistic to believe Curacao would reward such behavior with a new lease.

“PDVSA’s behavior on Curacao refinery has been unprofessional and negligent to the point that the government of Curacao is saying goodbye at the end of the contract. Hence the statement of Eulogio Del Pino has little to do with reality,” said Gustavo Coronel a Venezuelan energy expert.

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