Update Country Report Curaçao 27 Feb 2018

Event

The deterioration of the Isla oil refinery, on lease until December 2019 to PDVSA, the Venezuelan state-owned oil firm, is accelerating.

Analysis

Despite operating the refinery, PDVSA has been unable to invest in upgrade work owing to its straitened financial situation in recent years. Chronic mismanagement has led to rising fears that the refinery will become inoperable in 2018. Currently, three of the refinery's six boilers remain in operation.

Curaçao has been seeking a new operator but may now struggle to find a new partner in time to ensure a seamless handover from PDVSA in 2019. The government had selected a Chinese firm, Guangdong Zhenrong Energy (GZE), but in late December the Curaçao authorities cancelled the preliminary agreement with GZE. The government chose to terminate the agreement on the grounds that GZE had misrepresented its capabilities and was unable to provide the level of investment pledged in the initial memorandum of understanding signed in 2016. GZE had initially agreed to invest US$10bn in upgrading the facility. GZE subsequently released a letter denying having misrepresented its capabilities to the Curaçao government and warned that the termination of the agreement violated the terms of the contract. GZE may seek private arbitration to resolve the dispute, which could further delay efforts to find a new operator for the refinery, as a new firm might not wish to sign a contract until the dispute has been resolved.

Curaçao's increasing anxiety over the handover might benefit PDVSA if the firm seeks to take advantage of the collapse of the GZE deal to propose a medium- rather than short-term extension of its lease. One option is for the government to extend the lease with PDVSA, which might be willing to accept a short-term extension in return for a guarantee of continual operation. However, we deem this highly unlikely, as PDVSA will be hard-pressed to continue to operate the refinery. Moreover, a transit ban that Venezuela extended to Curaçao in January has soured relations. A more realistic option would be for the government to seek a partnership with a Chinese state-owned firm that has the financial backing that the government claims GZE lacked.

Impact on the forecast

Mismanagement and uncertainty over the future of the Isla refinery supports our expectation for slow real GDP growth in 2018. We will be revising our growth forecast downwards slightly in our next forecast cycle, from 0.7% currently.