Update Country Report Curaçao 20 Jun 2017

Event

The Isla oil refinery on Curaçao is struggling to recover from a fire on May 21st that left it operating at around 50% capacity. Three weeks on, capacity had only risen to 60%, indicating that the refinery will be operating below par in the short to medium term.

Analysis

The 335,000-barrels/day facility is operated by Venezuela's state oil firm, PDVSA. According to a PDVSA statement, the fire broke out in one of its crude distillation units and burned for several hours. The company did not give details about the cause of the fire or the extent of the damage, although it stated that it would launch an investigation.

According to press reports, the refinery was only operating at 60% of its capacity by early June, indicating either that the damage was extensive or that PDVSA had not yet invested in the full repair required. The latter is possible, given that PDVSA is struggling to maintain its operations, but Isla's importance as a refinery and a reshipment point to Asian markets, primarily China, means that PDVSA is likely to seek to keep it operating at as close to full capacity as possible.

The fire damage and repair requirements are likely to play a part in talks regarding the renewal of PDVSA's ten-year lease of Isla, which expires in 2019. If neither Curaçao nor Venezuela withdraws from the agreement by late 2017, the lease will automatically renew for another ten years. However, the Curaçao government has been in talks with China's Guangdong Zhenrong Energy regarding taking over the lease. According to press reports, this would involve a major upgrade investment and construction of a new gas terminal. A formal proposal is due to be submitted by the end of June, although Curaçao's national election in April and the formation of a new government may have delayed this timetable.

Impact on the forecast

The fire damage will add weight to the government's long-standing calls for increased investment in the Isla facility. If the China lease goes ahead, this would boost employment prospects and economic growth on the island from the project's start date in 2020. However, the outcome of lease talks is still uncertain, and any benefits to Curaçao would be felt beyond our two-year forecast horizon. Our economic forecasts for the island remain unchanged.