Caribbean refiners under heavy pressure
The economic model behind the region’s processing plants is coming under severe strain
The Caribbean refining sector continues to weather turbulent business conditions, as costs remain high, uncertainties grow over the future of cheap Venezuelan oil exports, and US Gulf Coast refiners soak up supply from North American shale oil production. Two of the largest refineries in the region closed in 2012 and remain so today, despite efforts to revive their fortunes.
The Hovensa refinery at St Croix in the US Virgin Islands has been shut since January 2012, when owners Hess and Venezuela’s state oil firm PdV pulled the plug on the venture. More than $1 billion of investment to make the facility more competitive couldn’t save the refinery. Once the largest refinery in the world, with a 650,000 barrel a day (b/d) capacity, the facility had been slimmed down to 350,000 b/d by the time it closed, though it still maintained strong sales to the US market. Increased refining capacity elsewhere in the world and a drop in global demand for refined products due to the economic recession were key reasons for the shutdown. High electricity costs played a role too, as the refinery was dependent on its own output of fuel oil to generate power, while some rival refineries could count on cheaper electricity from gas.
The fate of the refinery, which is being used for oil storage, is uncertain. Investment bank Lazards was appointed to seek new buyers for the facility, but, while there are hopes that increased oil production in the US could yet find its way across the Caribbean, a sale does not appear imminent. The US Virgin Islands’ leadership is keen to reopen what was a key part of the local economy. Hovensa employed more than 2,000 people.
Valero Energy’s Aruba refinery in the Netherlands Antilles was also shut down in 2012. Like the Hovensa facility, high running costs were blamed for the closure. The 235,000 b/d plant produced various high-yield finished distillate products and intermediate feedstocks, but did not have capacity to create more valuable light products from crude.
Since closing, Valero has used the refinery to store refined products from its production elsewhere and also that of PdV. It has 63 storage tanks with around 12 million barrels of storage capacity, according to Valero. In December 2013, Valero was reported to be running tests at the plant in partnership with PdV, with a view to reopening five units for the Venezuelan company to process some of its crude there.
Reuters reported that cash-strapped PdV could lease the capacity – potentially two crude distillation units, one hydro-treater, one hydro-cracker and one coker – and pay for it with oil.
The largest Caribbean refinery still operating is the 335,000 b/d Isla refinery on the island of Curaçao, also in the Netherlands Antilles. PdV has leased the plant from the government since 1985, following the withdrawal of Shell, which built the refinery. Isla’s output is shipped to the US, South America and other Caribbean markets.
The island’s leadership is keen to negotiate a new deal to extend the life of the refinery beyond 2019, when PdV’s lease runs out, as its sales account for up to 9% of the country’s GDP. Protracted talks have been going on with cash-strapped PdV over a possible joint investment in the refinery, allowing for further investors to be brought in if necessary. Crucial to any deal to keep the Isla refinery open will be finding the funds to modernise the facility, which has suffered from a lack of investment. The government will also have to deal with mounting criticism that the facility blights the landscape in the capital Willemstad, where cruise ships pull into port. Tourism has eclipsed the refinery as the country’s economic engine.
The region’s other major refiners are in Cuba, which has four refineries with total capacity of around 300,000 b/d, and Trinidad and Tobago, home to the Pointe-à-Pierre refinery. State-owned Cuba Petroleos (Cupet) has been working with PdV on ambitious plans to expand its refining capacity, aiming to increase the output of its largest refinery, the 65,000 b/d Cienfuegos facility, to 150,000 b/d. However, financing for the project, which could cost more than $6bn, needs to be secured first.
In Trinidad and Tobago, the Petroleum Company of Trinidad and Tobago (Petrotrin) processes 175,000 b/d at Pointe-à-Pierre. An upgrade to the refinery, which has faced spiralling costs and missed repeated deadlines, is due for completion soon. The addition of units to produce higher-quality, cleaner-burning transport fuels is designed to ensure the refinery’s products continue to find markets, as environmental regulations are tightened up globally.
The chances of attracting further major investment to the Caribbean refining sector hinge on two major unknowns. The first is the affect of more oil flowing to the US Gulf coast from US shale deposits and from Canada via the Keystone XL pipeline, should it be approved. Caribbean refiners are hopeful that US refining capacity, although substantial, will be unable to handle all of the new supply, providing an opportunity for their facilities. However, it will be tough for many Caribbean refineries to compete with Gulf plants that can count on cheap US gas supply to provide power.
The second is whether Venezuela can maintain its pivotal role in the sector. The nation with the world’s largest proved oil reserves has provided vital support for the region’s refining sector in recent years. Refiners have benefited both through PdV’s investments in projects and also via Venezuela’s PetroCaribe initiative, which has effectively enabled several countries across the region to buy Venezuelan oil cheaply, often in exchange for other commodities, rather than paying hard currency.
But Venezuela is in the grip of a political and economic crisis. Oil production is on the decline and President Nicolas Maduro’s government is suffering from a shortage of dollars. Governments across the Caribbean are worried this will lead to tougher terms for oil sales. PdV accounts for well over 90% of Venezuela’s foreign revenues.
If that happens, PetroCaribe member countries would suffer. They include states with some of the Caribbean’s smaller and potentially most vulnerable refineries, such as Jamaica, Suriname and the Dominican Republic. Cuba is also a member of PetroCaribe, and, while it has separate oil buying arrangements with Venezuela, the generosity of its terms could also come under threat, though Havana has forged close ties with Maduro’s government in a bid to prevent that from happening.
While Venezuela has gone to pains to insist that PetroCaribe arrangements remain in force, doubts are growing that Venezuela will be able to remain so profligate with its oil sales in the future, not least because a growing amount of Venezuelan oil is now going to China to repay around $40bn in oil-for-loans deals.
Governments in the region will want to keep open refineries that are often regarded as national economic flagships, but the wave of closures that has also swept across the sector in the US, Europe and elsewhere may yet inflict further casualties in the Caribbean.