Aruba souring on Citgo upgrader: Update

Adds Citgo Aruba response.

Aruba is losing patience with Venezuelan state-owned PdV subsidiary Citgo's slow-moving, ambitious plan to transform the rusty skeleton of Valero's former 235,000 b/d oil refinery into a heavy crude upgrader.

"Under the current circumstances the chances that Citgo can carry out the deal are slim," Aruba Prime Minister Evelyn Wever-Croes told Argus. The project is "very important" to diversifying the island's tourism-based economy, but if Citgo fails to have it up and running by an October 2020 deadline, the government would be willing to terminate the deal and find another partner, she said.

The $1.1bn downstream project "makes business sense" to the senior government officials and oil industry executives interviewed by Argus on the tiny Dutch Caribbean island. Under a 2016 long-term lease signed by Venezuela's former PdV chief executive Nelson Martinez with the Aruban government, Citgo Aruba Refining would refurbish the San Nicolas installations and build a 110km natural gas pipeline from Venezuela's Tiguadare gas treatment facility to run the complex, which includes two cokers. Around 209,000 b/d of diluted crude oil (DCO) from Venezuela's Orinoco heavy oil belt would be upgraded into 125,000 b/d of 22.5° API Maya-like synthetic crude with 1.2pc-1.5pc sulfur. The stripped-out naphtha would be recycled back to Venezuela, and sulfur and coke sold. The estimated refurbishment cost of $600mn-$700mn seems high to some officials, but it is dwarfed by the $8bn cost of a greenfield upgrader, one said.

What the project lacks is financing and stakeholder confidence in Citgo's ability to fulfill the directly awarded contract, which Aruba's year-old government inherited from the previous administration. So far Citgo has plowed in little money and has not completed a Phase 2 inspection or control budget cost estimate, even after work was supposed to pick up following the stunning November 2017 arrests of Martinez and former Venezuelan oil minister Eulogio Del Pino on unrelated corruption charges. In August Citgo committed a sparse $35mn for Phase 2, before the final refurbishment phase kicks off in second quarter 2019.

"The contract is not very favorable to us," said Richard Eman, chairman of the board of RdA, the government entity that owns the refinery. The agreement has inadequate safeguards for Aruba, making it difficult to sever before October 2020, he said. "There is a lack of confidence in Citgo because it has not produced, but they have time to prove us wrong."

A Citgo Aruba official told Argus this afternoon that Phase 2 started in early September and "entails detailed inspection of units, piping, buildings and relevant equipment to come to a Class 2 cost estimate of the actual refurbishment," reiterating the message that Venezuelan energy minister and PdV chief executive Manuel Quevedo recently conveyed to the Aruban government. Phase 2 will be completed in March 2019 and involve around 471 workers, of which some 85pc will be local, the Citgo Aruba official said, reconfirming "the commitment of PDVSA to the development and successful completion of this strategic project."

PdV officials say privately that they "understand the island's concerns." The Venezuelan company regularly blames US financial sanctions for thwarting financing options. Aruba had tried to secure a waiver from the US Treasury's Office of Foreign Assets Control (Ofac) on Citgo's behalf, but it was rebuffed because Washington wants to block money flowing back to Caracas. That leaves the heavily indebted island with little choice but to hope Citgo delivers within two years.

In the meantime, Citgo is using Aruba as a terminal, routinely unloading DCO tainted by excessive water into storage tanks to allow it to settle before reloading it for export to the US and Asia, a local shipping source said. Around three 500,000 bl cargoes of DCO and occasionally Boscan crude or fuel oil come through Aruba from Venezuela each month.

In contrast to fellow Dutch Caribbean islands Curacao and Bonaire, Aruba was relatively unscathed by debt-related liens that US independent ConocoPhillips levied on PdV's local assets in early May, because the oil cargoes coming to Aruba and the 15-year refinery and terminal lease plus a 10-year optional extension belong to Citgo, not PdV. But the episode caused delays, and left Aruba waiting for the other shoe to drop.

That shoe could be Crystallex. The now-defunct Canadian mining company, like ConocoPhillips, is seeking to enforce an international arbitration award for the takeover of its Venezuelan assets. Crystallex in August secured an order from a US federal court in Delaware to attach the shares of PdV Holding, the parent of Citgo Petroleum and Citgo Aruba Refining. The case is now winding its way through appeal, but Crystallex has said it is already preparing to auction Citgo.

The Aruba project would be an afterthought if not a liability to parties eyeing Citgo's 750,000 b/d of US refining capacity. If a new Citgo owner sought to retain the Aruba assets, the US ruling would have to be ratified by a local court, a Dutch Caribbean attorney says.

Aruba would jump at the chance to replace Citgo with a robust and unencumbered counterparty. But the project still relies on Venezuelan crude and gas supply, which a truncated PdV would be reluctant to sell to a newcomer that had scooped up its prized US asset.