BMI View: Caribbean refineries have come under considerable pressure in recent years as the shale boom has benefited the US downstream sector at the expense of the rest of the Atlantic Basin. With these dynamics likely to remain in place, and much of the region's refining operations vulnerable to policy changes in Venezuela, a country's whose macroeconomic outlook is fast deteriorating, we hold a cautious outlook on the Caribbean's downstream sector.
Even after a sharp reduction in the Caribbean's crude oil distillation capacity in recent quarters, we take a cautious outlook on refining activity in the region. Through the past decade, the countries with the greatest refining capacity had been the US Virgin Islands (USVI), the former Netherland Antilles, Cuba, Aruba and Trinidad & Tobago (T&T). In recent years though, we have seen a significant shift in the downstream dynamics of the entire Atlantic Basin, as the US shale boom has bolstered US refiners' margins at the expense of competitors in Europe and the Caribbean.
This shift has already prompted the facilities in the USVI and Aruba to close, and we see the downstream capacity of Curacao and Cuba as being largely propped up by the presence of Venezuela - an unenviable position given the unstable macroeconomic position of the oil producing giant. Finally, while we are more optimistic on the longer-term prospects of T&T's downstream segment, we believe that in the short term, the country's refinery will continue to face pressure on its margins.
Major Refineries In The Caribbean
| Country || Number of Refineries || Capacity (b/d) || Company Operating || Status |
| US Virgin Islands || 1 || 500,000 || Hovensa LLC || 150,000b/d idled in 2011; Closed in 2012 |
| Curacao/ Former Netherland Antilles || 1 || 335,000 || PdVSA || Operating |
| Cuba || 4 || 301,400 || Cuba Petroleos || Operating |
| Aruba || 1 || 235,000 || Valero || Closed in 2012 |
| Trinidad & Tobago || 1 || 175,000 || Petrotrin || Operating |
| Puerto Rico || 1 || 85,000 || Buckeye Partners || Operating |
| Dominican Republic || 2 || 50,000 || Falconbridge Ltd, Refineria Dominicana de Petroleo || Operating |
| Jamaica || 1 || 35,000 || Petrojam Ltd. || Operating |
| Martinique || 1 || 17,000 || Societe Anonyme de la Raffinerie des Antilles || Operating |
| Suriname || 1 || 7,000 || Staatsolie Maatschappij Suriname || Operating |
| Source: EIA, O&G Journal, Bloomberg |
Little Chance To Return To Former Glory: USVI & Aruba
We have already seen processing units in the USVI and Aruba shuttered, and while there have been talks to sell both, with some holding out hope that a new buyer will resume operations, we take a more cautious stance.
USVI: In February 2012, the USVI's 350,000b/d Hovensa refinery, owned jointly by US-independent Hess and Venezuela's PdVSA was shut down. Previously one of the 10 largest crude refineries in the world, the facility had already mothballed around 150,000b/d of refining capacity in 2011. However, it could not stem its financial losses, ultimately totalling US$1.3bn between 2009 and 2012, as the refinery struggled in the face of stagnating demand in the US, as well as rising pressure from more cost-competitive US refiners ( see 'Structural Shift In Fuels Trade To Gain Momentum', November 22, 2013).
Aruba: Similarly, Aruba's refinery was idled in March 2012 due to weak profit margins as growing US production of cheaper light crudes cut into the role it had traditionally played. Namely, while US refiner Valero, had bought the Aruba plant in 2004 to ensure a steady supply of distillates and intermediate feedstock, the shale boom has tempered demand for such products in the US, while simultaneously increasing competition in other markets.
In both cases, given the structural disadvantages facing the facilities, with US refiners able to source less expensive domestic feedstock, as well as run on natural gas as a power source while the Caribbean refiners remain dependent on costlier fuel oil, we see little scope for a return to their previous processing levels. Furthermore, although in recent months Valero and PdVSA have been in talks over restarting a few units at the Aruba based-refinery just to process Venezuelan heavy crude, local news sources suggest a formal agreement remains some way off.
| Caribbean Refiners Forced Out |
|US - Fuels Imports By Country, '000b/d (LHS) & Percent Of Total Fuels Imports (RHS)|
Dependent On An Unstable Ally: Curacao & Cuba
In contrast to Aruba and the USVI facilities, the main refineries in Curacao and Cuba have managed to remain afloat for now, though largely due to Venezuela's presence. Given PdVSA's perilous financial state though, this is no guarantee of long-term stability for the Caribbean countries' downstream segments ( see 'PdVSA Looking Increasingly Precarious', November 20, 2013).
Curacao: In the case of Curacao, the country's 335,000b/d Isla refinery is leased from the government of Curacao by PdVSA to process Venezuela's heavy crude before exporting it in very large crude carriers (VLCC) to the Asian market. However, the nearly century-old facility is in need of significant investment to upgrade and modernise it, including addressing concerns over the high levels of sulphur dioxide emitted. With PdVSA already struggling in merely keeping its own facilities operational after years of underinvestment though, we question whether this is a liability that Venezuela is capable of taking on at this time. As such, we cannot rule out that after the lease with PdVSA ends in 2019, we could see the refinery decommissioned.
Indeed, while a Curacao government-commissioned study determined that the economic benefits of upgrading the facility outweighed closing it and redeveloping the area, the report also acknowledged that given current refining dynamics in the region and the massive investment that will be required, there is significant uncertainty as to whether PdVSA or, indeed any other foreign party, will be willing to take on the project. With refining operations estimated to account for nearly one-tenth of GDP, this calls into question not only the future of the refinery, but Curacao's growth prospects.
| Major Refiners Under Pressure |
|Caribbean - Crude Oil Distillation Capacity, '000 b/d|
Cuba: Cuba's downstream sector is also intertwined with Venezuela. Aside from promises of infrastructure investment by Venezuela, including doubling the capacity of the 65,000b/d Cienfuegos refinery to 150,000b/d with the funding for the project to be backed by Venezuelan oil, Cuba is provided with around 120,000b/d of heavily subsidised crude feedstock for its refineries.
However, Venezuela's policy of subsidising foreign countries' fuel imports is coming at an increasingly high cost to the Andean country, and as macroeconomic imbalances continue to rise, we see increasing scope for a change in policy by the Andean government ( see 'End of Petrocaribe Would Elevate Systemic Risks', August 2, 2013). This indicates not only little chance for further downstream investment in Cuba, but more problematically, suggests risks to Cuba's access to cut-rate feedstock. While Cuba has some domestic production capacity, largely from its northern Matanzas province, and there is scope for offshore discoveries to boost output, exploration is still nascent. As such, at this stage, should Venezuela halt its petro-diplomacy, this would have a significant impact on Cuba's refining sector.
| Hooked On Cheap Oil |
|Petrocaribe - 2012 Oil Exports Under Preferential Trading Agreements, % of Daily Consumption|
T&T: Best Of A Bad Bunch
Finally, over the coming years we see margins at T&T's 168,000b/d Pointe-a-Pierre facility as likely to remain under pressure. First, long delays in completing upgrades to the refinery due to labour disputes as well as technical difficulties in bringing the project online have seen costs balloon from the originally planned US$430mn to US$1.9bn. While the project is finally nearing completion, with the gas optimisations programme in full commercial operation, and the ultra-low sulphur diesel plant set to come online in September, we cannot completely rule out further delays.
Second, as with many of the Caribbean refiners, T&T is facing greater competition from US refiners. Indeed, while Petrotrin is an integrated company, and so can source some crude domestically, with liquids production having fallen off starkly in recent years, the state-owned refinery has been accessing the majority of its feedstock from abroad. As of FY2013, T&T's domestic crude represented only around 44% of the refinery's feedstock, with the rest sourced from Colombia, Russia, and West Africa.
| Foreign Crudes Comprise The Majority Of Feedstock |
|T&T - Pointe-a-Pierre Refinery Crude Oil Receipts (FY2013), %|
This is not to say the outlook for T&T's refining margins is completely bleak. Rather, we believe the country's downstream sector may be better positioned than many of its Caribbean counterparts. Not only is there potential for increased availability of domestic feedstock over the long term, as recent tax incentives and more attractive contract terms boost exploration, but also the aforementioned upgrades should help to make the Point-a-Pierre facility more competitive over the long term. Specifically, they are aimed at boosting the value of the fuels produced, including increasing the finished gasoline content, from around 25% to 31%, as well as the removal of additional sulphur from diesel, in order to ensure that the fuel can be sold in markets that have tightened their specifications. That said, we stress that these long-term factors will only slowly begin to benefit the sector over a multi-year basis.
Further Troubles In Paradise
Despite some light at the end of the tunnel for T&T, we retain a cautious stance on the region's downstream activity at large, and this weak outlook only further underscores our concerns over the macroeconomic position of the Caribbean ( see 'Special Report: Still Trouble In Paradise, Four Years On', October 2013). Our Country Risk team has previously highlighted that while the global environment has improved considerably in the years following the 2008 financial crisis, the Caribbean nations have not only largely failed to evidence meaningful economic recoveries, but going forward, growth looks set to continue to struggle. The tourism sector, a crucial driver of growth is set to be structurally weaker given growing competition from new destinations. Meanwhile, the offshore financial services industry is in secular decline following a coordinated international crackdown. With the refining sector of many of the Caribbean nations also facing considerable challenges - knocking out yet another pillar of growth - this only supports our cautious stance toward the region.