Update Country Report Curaçao 14 May 2018

Event

A court in Curaçao has ruled that ConocoPhillips (US) can seize local assets belonging to the Venezuelan state-owned oil firm, PDVSA. As PDVSA currently operates the Isla oil refinery on Curaçao, this could lead to a shutdown of oil production.

Analysis

The longstanding dispute between ConocoPhillips and PDVSA stems from Venezuela's nationalisation of the oil industry a decade ago, which included assets belonging to the US firm. Conoco has since been awarded US$2bn following an arbitration process, and the court ruling permits it to seize PDVSA assets in the Caribbean in payment.

This affects PDVSA assets on several islands: Curaçao, Aruba, Bonaire and St Eustatius. The Isla refinery is set up to refine Venezuela's blend of heavy crude and produces an estimated 335,000 barrels/day. However, PDVSA plans to halt oil shipments to its Caribbean operations to prevent the oil being seized, which would lead to a shutdown at Isla.

This would have an immediate negative impact on Curaçao, as Isla production comprises an estimated 10% of GDP, as well as providing direct and indirect employment for Curaçao nationals. A prolonged shutdown on Isla would weigh on the economy in 2018 as it already struggles to overcome a downturn in tourist arrivals, particularly from Venezuela. The most recent report from the Central Bank of Curaçao and Sint Maarten estimated that Curaçao's economy contracted by 1.4% in the third quarter of 2017, driven by a decline in manufacturing and tourism.

The ConocoPhillips ruling will increase concern in Curaçao about PDVSA's ongoing operation of the Isla refinery. The Venezuelan firm's operating contract expires in 2019 and Curaçao has been seeking new bidders to take up the contract. However, negotiations so far have failed to result in a deal, leaving Curaçao dependent on increasingly uncertain oil shipments from Venezuela. Although PDVSA may try to reach an agreement with ConocoPhillips, Venezuela would find it extremely difficult to make the full US$2bn arbitration payment. As a result, the threat of asset seizures is likely to persist into the medium term, increasing economic uncertainty for Curaçao.

Impact on the forecast

This development will lead us to revise down our forecast of 0.3% GDP growth in 2018 in our next forecast cycle. We maintain our forecast for a recovery in 2019.