Curacao refinery idle, PdV looks to revoke liens

Fresh produce has reappeared at the famous floating market in the Dutch Caribbean island of Curacao, but the 335,000 b/d Isla refinery is once again idle in the absence of fresh crude supply in Bullen Bay.

In recent weeks, Venezuela's beleaguered state-owned oil company PdV, which operates the refinery and Bullen Bay terminal under a long-term lease, had been running one small crude distillation unit at Isla to comply with an 18 May Curacao court order to supply fuel to the local market. Similar orders were issued by courts in fellow Dutch Caribbean islands Bonaire, Aruba and St Eustatius where PdV has stored crude. The orders partially lifted debt-related liens on PdV´s assets levied by US independent ConocoPhillips, on the condition that part of the revenue from the local fuel sales go into escrow accounts to pay a $2bn arbitration award. PdV has so far complied, signing an agreement to set up the account for Curacao and Bonaire last week, lawyers close to the case say.

But continued compliance requires PdV to bring more crude to Curacao, a message that a Curacao government delegation brought to Caracas three weeks ago. The stored 12°API Tía Juana Heavy crude that PdV was using at the refinery´s 2B distillation unit, equivalent to about 12 days of supply, has now run out, a senior refinery official tells Argus.

Additional local stocks of Venezuelan Merey crude, with a quality of around 16°API, could provide another four to six weeks of refinery runs. But Merey cannot be economically processed at Isla without blending it with a lighter grade. In better times, PdV regularly imported domestic light sweet (DSW) from the US to blend with Merey. But at best the refinery throughput only reached around 220,000 b/d.

Curacao distributor Curoil is purchasing fuel on the open market to meet local needs, but the refinery´s new shutdown revives a threat to some 2,000 local jobs.

The predicament of the Shell-built Isla refinery, which had already been working only sporadically even before ConocoPhillips started levying the attachments in early May, is a window into the crisis afflicting Venezuela´s oil industry. Crude production in the Opec country is quickly falling, and is currently around 1.2mn b/d. Official estimates remain at 1.5mn b/d. More than 700,000 b/d of production has been lost over the past year.

Oil exports, virtually the only source of revenue for the government of autocratic president Nicolas Maduro, started backing up in May when PdV pulled its tankers out of Dutch Caribbean waters to spare them from debt-driven seizures. Now it is struggling to replicate the transshipments and other logistical operations that it used to carry out in Curacao and the other Dutch Caribbean islands. A shift to fob sales, forcing buyers to come to Venezuelan terminals, often with their own transshipment gear, has been only partially successful, shipping sources say.

PdV and the Venezuelan government regularly blame the oil industry´s woes on US financial sanctions, first imposed in August 2017 and recently tightened to close loopholes. The sanctions effectively block PdV and the Venezuelan government from using the US financial system to access credit.

As oil production dives and tankers pile up at PdV's dilapidated domestic terminals, Caracas is eyeing the chance for a reprieve in the local Dutch Caribbean courts. Starting in August, courts in Curacao, Aruba, Bonaire and St Eustatius will consider whether to recognize the validity of the 24 April arbitration award issued by an International Chamber of Commerce tribunal. The $2.04bn award stems from PdV's 2007 takeover of the Hamaca and PetroZuata heavy crude upgrading projects.

These local court procedures, which could take four to six months, are necessary in order for ConocoPhillips to enforce the judgments.

"The embargoes were the beginning of the process in anticipation of the procedure, but they did not give final title to the assets," one attorney says. "We have to wait and see if ConocoPhillips gets legal title from a local judge to enforce the arbitration."

If the courts were to reject the validity of the award, the liens would be overturned. That scenario is remote, two other lawyers say, citing the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which Venezuela is a signatory. But the opportunity for legal maneuvers cannot be discounted.

A court in Bonaire, where PdV has a 10mn bl storage facility, will start the procedure on 14 August. A separate court in Aruba will begin the process on 4 September. No dates have been set for procedures in Curacao and St Eustatius, where PdV leases storage.

On a broader level, Venezuela's border closure with the Dutch Caribbean islands, imposed in January officially because of illegal smuggling, has been lifted but relations remain cool, diplomatic officials say. Curacao is now receiving fresh fruit and vegetables from the Dominican Republic and Colombia, rather than Venezuela.