Update Country Report Curaçao 01 Aug 2019

Event

In late July Curaçao's government confirmed that it was in discussions with its Venezuelan counterpart regarding the possibility that Venezuela's state-owned oil firm, PDVSA, could continue to operate the island's oil refinery.

Analysis

PDVSA's lease at the Isla oil refinery expires at the end of 2019 and the process to find a replacement operator has been protracted, costly and disappointing. The Curaçao government, which owns the refinery, has been seeking a new partner for more than a year, and the latest announcement indicates that it has had no success in attracting one. Moreover, the government does not expect to sign a deal before year-end. Allowing PDVSA's lease to lapse without securing an alternative would lead to job losses at the refinery and would have negative implications for related industries, all of which would be damaging to the economy and the government.

The Isla refinery remains one of Venezuela's few options for refining and exporting its oil, which provides the ailing country with its primary source of hard currency. The Venezuelan government is likely to be keen to maintain access to Isla for as long as possible, despite the fact that its oil production has fallen to such low levels that refinery activity is now minimal. According to the director of the government-owned refinery, Marcelino de Lannoy, there has been no revenue for months at the refinery while expenses mount.

Operations at the refinery are due to resume in August, according to PDVSA officials, although it is unclear how much oil will be shipped to Curaçao. This is especially unclear as the country's exemption to US sanctions ends in January 2020. However, the Curaçao government, led by the prime minister, Eugene Rhuggenaath, might secure a renewal of the sanctions waiver as relations with the US have warmed. In view of the pressure facing PDVSA, the government may be able to ensure that the company signs a new lease on more favourable terms, such as on a shorter lease, with an annual renewal option. This would leave Curaçao able to continue seeking a new operating partner, while maintaining some revenue, however small, from PDVSA's operations at Isla.

Impact on the forecast

Our forecasts are unchanged. The renewal of PDVSA's lease will not affect our baseline economic forecasts; we do not expect activity to ramp up significantly at Isla, given ongoing constraints on PDVSA's oil production.