Update Country Report Curaçao 07 Jun 2019

Event

The government has initiated closure requirements for the end of the long-term lease of the Isla oil refinery held by Venezuela's state-owned oil firm, PDVSA, requesting that the operator return the refinery in good condition. PDVSA has refused to share operational data with the government and has denied the refinery is in poor condition.

Analysis

After the government ramped up its efforts to replace PDVSA, co-operation between the Venezuelan operator and the government has deteriorated. According to the local press, the government's requests for data and US$26m for unpaid utility bills were rejected. Representatives from the government lamented the unwelcome development, citing the need to share data with potential bidders.

PDVSA's lease will expire at end-2019. Although the Venezuelan company has maintained the facility for several decades and carried out some upgrades to the refinery, activity has fallen sharply in recent years owing to Venezuela's deteriorating economy and declining oil production.

The refinery has the capacity to refine 335,000 barrels/day, but it has not operated at full capacity for several years owing to reduced oil shipments to Isla and, more recently, sanctions on Venezuela's oil industry. It is unclear whether minimal production and upkeep have degraded the capacity of the refinery; PDVSA has maintained lease payments but made no other investments.

The government's request that the refinery be left in good condition may be an attempt to present the refinery to potential operating partners as a fully functioning facility. However, if Isla's capacity has been degraded, Curaçao has limited leverage over PDVSA, and by extension Venezuela, since the country would be unlikely to honour any demands for breach of its lease commitments.

Lacking operational data for the refinery, the search for potential partners will become increasingly drawn out and could mean a new operator will not be found before the end of PDVSA's lease. The director of the government-owned refinery, Marcelino de Lannoy, has stated that current production costs at the refinery (which he estimates at US$12.5m a day) are a deterrent to bidders and make it financially impossible for the government to take over operations.

Impact on the forecast

Our growth forecast for 2019-20 assumes that an acceleration in activities related to the tourism sector would offset the protracted woes facing the refinery's operations. The latest developments, however, pose a considerable risk to this assumption. Spillover effects from a halt to refinery operations would be likely to drag growth into negative territory in 2020.