Update Country Report Curaçao 16 Jul 2018

Event

In late June Curaçao's Isla oil refinery began to approach oil companies about taking over the refinery's operating lease from Venezuela's state oil firm, PDVSA. This follows a sharp drop in PDVSA refining activity at Isla, the result of falling Venezuelan oil output and interruptions to supply to the refinery.

Analysis

Local media reported that Isla had sent out a notification asking potential partners to submit a formal notice of interest in taking over the lease. PDVSA's current lease expires at the end of 2019, and the new partner would take it over for 18 months. However, this partner would then be well placed to bid for a longer-term operating lease, which is also up for offer.

The move to replace PDVSA is likely to have been sparked by the Venezuelan company's troubles in recent months. Production has been steadily declining for several years, as a result of deteriorating infrastructure and falling investment. This situation was exacerbated in May 2018, when ConocoPhillips, a US-based oil firm, secured a court ruling allowing it to seize assets belonging to PDVSA. This related to US$2bn that the firm was awarded in arbitration following Venezuela's nationalisation of its oil industry. As Venezuela has not yet paid these funds, ConocoPhillips would have been able to seize Venezuelan oil being refined at Isla. As a result, Venezuela halted oil shipments to Isla to prevent them being seized.

Isla is currently operating at minimum capacity, which will have negative implications for revenue paid to the Curaçao government. Along with tourism, revenues from Isla are one of the main pillars of the island's economy, and the government cannot afford to forego any income from the refinery until the end of PDVSA's lease in 2019. However, it is unclear whether Isla will be able to secure a new partner speedily. Negotiations in 2017 and early 2018 with China's Guangdong Zhenrong came to nothing. Moreover, PDVSA may challenge efforts to replace it as Isla's operator, potentially leading to a lengthy legal debate that could deter potential investors.

Impact on the forecast

A prolonged stoppage at Isla will have negative implications for Curaçao's economy, and carries downside risks to our real GDP growth forecast for 2018. Even if a deal is secured, a new partner is not likely to begin operations at Isla until 2019, putting downside pressures on economic activity in the first half of 2019 as well.