Update Country Report Curaçao 28 Dec 2018

Event

In mid-December Curaçao's local media reported that the government had chosen Motiva, a US-based subsidiary of the Saudi Arabian state oil company, Aramco, as the new operator of the Isla oil refinery. The final agreement is yet to be signed, however.

Analysis

The Isla refinery is currently operated by PDVSA, Venezuela's state-owned oil firm, whose lease will expire at end-2019. However, the refinery has barely operated in 2018, owing to maintenance issues, lack of feedstock and a commercial dispute with ConocoPhillips (US). As a result, the Curaçao government has been looking for a new partner to take over PDVSA's lease and sign a new long-term deal. As such, Curaçao's revenues from Isla have declined sharply in 2018, putting pressure on economic activity. Falling refinery revenues, combined with reduced tourist arrivals and spending, have led to repeated downgrades in real GDP growth forecasts. Indeed, in our latest report, dated December 8th, we downgraded our real GDP growth forecast for 2019 from 1% to 0.4%.

Curaçao's government would not confirm the identity of the preferred refinery bidder but did confirm that a partner has been selected and that it hopes to sign an agreement in January. Motiva has extensive experience in refinery operations. Owing to PDVSA's lack of maintenance, significant investments must be done to restore the refinery's nominal capacity of 335,000 barrels/day.

It is unclear as yet whether PDVSA will agree to end its lease early and allow Motiva to take over. Although official reports are lacking, the refinery itself is reportedly of little use to PDVSA as, given its falling output, it can no longer supply the refinery reliably. As such, PDVSA's main interest in Curaçao is the Bullen Bay terminal. Decaying and limited infrastructure in Venezuela makes the terminal necessary for PDVSA's capacity to load larger vessels destined to repay pre-paid export deals with China and India.

Impact on the forecast

A new lease, especially if Motiva takes over in 2019, would boost economic activity in Curaçao. However, the full economic benefits would only be apparent in 2020, as investments must be made in the refinery first. For Venezuela, the main concern is the Bullen Bay terminal. Losing the terminal would likely severely impair exports and compliance with creditors. We will monitor the new lease and the outcome for PDVSA's access to the terminal.