Update Country Report Curaçao 15 Jan 2020

Event

A Switzerland-based firm, Klesch Group, has reached an agreement to take over operations at Isla, a 335,000-barrel/day oil refinery. Klesch will become the new operator of the refinery, a utilities facility and the Bullen Bay oil terminal.

Analysis

After more than a year the government's struggle to find a new operator appears to have come to an end. Although two further agreements are due to be signed in the second quarter of 2020, the asset purchase and sale agreement with Klesch was signed in late December 2019 in a symbolic US$1 deal. The Switzerland-based group will pay a reported US$15m annually for the operating lease, which it will take over from the Venezuelan state-owned oil firm, Petróleos de Venezuela (PDVSA). PDVSA's lease expired at the end of 2019, but the company continues to operate Isla on a temporary basis. Klesch has indicated that it could take over in April 2020, earlier than initially reported (June/July).

The agreement with Klesch is highly positive for Curaçao, as production during PDVSA's lease has declined steadily, to far beneath the refinery's full capacity. This is partly due to capacity constraints, but is also an effect of the economic and political crisis in Venezuela, which has led to declining Venezuelan oil production and reduced exportability. Curaçao's government has therefore had to bear some of the costs of maintaining the labour force at Isla in order to prevent mass lay-offs.

Given the importance of the refinery to the island, the government will hope that the Klesch agreement will pave the way for an uptick in economic activity, with Klesch committing to an infrastructure investment programme as well as to taking over operations. It is still unclear what this programme will involve, or how much the Switzerland-based group will invest, but it is likely to include repairs and upgrades to the refinery after the prolonged period of inactivity under PDVSA. This should help to boost employment over the initial two-year period of Klesch's operations.

Impact on the forecast

Our forecasts, which assume limited refinery activity rather than a cessation of operations, are unchanged. Still, the Klesch agreement is positive because of the much-needed economic boost that it will provide, and because PDVSA's departure reduces the risk that Curaçao will be affected by US sanctions on Venezuela. We will assess the upside risk to our forecasts once more details are released about Klesch's investment plans and takeover date.