Downbeat Outlook On Downstream Sector
BMI View: While we forecast an uptick in Venezuela's nameplate refining capacity, from 1.3mn b/d in 2012 to 1.5mn b/d in 2017, this is well below the level implied by PdVSA's number of planned projects. Our cautious stance is based on the fact that a lack of investment into the country's current refineries has ensured that they remain vulnerable to impairment, and although a number of new facilities are set to come online over the coming years, they have already been delayed several times, stemming our optimism.
There is room for considerable growth in Venezuela's downstream segment, with exploration in the expansive Orinoco heavy oil belt likely to bolster the country's crude output over the long term. While the government seems to have recognised this fact - launching Plan Siembra Petrolera in 2005, which among other things was meant to bolster refining processing capacity by 500,000 b/d by the end of the decade - for now we take a cautious stance. Indeed, our forecasts imply only moderate refining capacity growth, climbing from 1.3mn b/d in 2012 to 1.5mn b/d in 2017, as neglect of current facilities, as well as continued delays in bringing new refineries online having tempered our optimism.
|Location (State)||Ownership||Refining Capacity, '000b/d|
|Note: This breakdown is taken from PdVSA's 2012 annual report, and implies refinery capacity of 1,303,000. The EIA reports capacity of 1,281,200; Source: PdVSA, BMI|
|Paraguaná Refinery Complex||Falcón||PdVSA (100%)||955|
|Puerto La Cruz||Anzoátegui||PdVSA (100%)||187|
|El Palito||Carabobo||PdVSA (100%)||140|
|Bajo Grande||Zulia||PdVSA (100%)||16|
|San Roque||Anzoátegui||PdVSA (100%)||5|
Underinvestment Breed Impairments
First, we believe that underinvestment and mismanagement act as considerable obstacles the sector. In this regard we note that the government has long utilised the state-owned PdVSA's coffers to fund social programming instead of allowing for much-needed reinvestment into maintenance and upgrades. Furthermore, the tendency to hire based on loyalty to the government rather than technical skill has resulted in insufficient high-level expertise.
Together, these two factors have contributed to a number of costly accidents at Venezuelan refineries in recent years. The Centre for Energy Guidance, a local think tank, reports that PdVSA's safety record and recovery time after a major event are considerably worse than its peers, and further, that these metrics have deteriorated noticeably over the past decade. The most spectacular example of this was last year's deadly explosion at the Amuay refinery, part of the country's largest, 955,000 b/d capacity Paraguaná Refining Centre. Though the government issued a report claiming the incident was caused by sabotage, an external auditor's report flagged up ongoing maintenance problems - including poor fire protections, delays in scheduled equipment replacements, slow implementation of corrective measures - which we see as a far more likely culprit.
|PdVSA - Accidents (LHS) & Number Of Days Lost (RHS) Per Million Man Hours|
Indeed, as a result of the continued mismanagement, refined product output has been sluggish, easing from 1.2mn b/d in 2002 to 1.1mn b/d in 2011, and we see further downside. Moreover, while the current levels of refined product output imply a fairly solid 88% capacity utilisation rate, a recently leaked internal document from PdVSA suggests an even more dire picture ahead, reporting a refining capacity utilisation rate at 74% according to an August 2013 Reuters article. While this could be a reflection of the Amuay explosion, even with the large refineries capacity slowly having returned to its normal level of operations in recent months, we maintain a cautious stance, noting that the poor maintenance means that potential for continued accidents.
Lots Of Promise, Lots Of Delays
On top of potential for continued impairments, we also highlight that although PdVSA has touted that it intends to expand its refining capacity, there have been considerable delays, encouraging a cautious stance. Under the Siembra Petrolera Plan of 2005, three new refineries were meant to be built along the Orionoco-Apure axis, adding an additional 500,000b/d in processing power by 2020. These included:
Cabruta Refinery - Located in the eastern State of Monagas, this refinery was expected to process 400,000b/d of 8.5 degree API crude into distillates, earmarked for export. The US$6bn Cabruta project was expected to start up in Q211 initially, though later documents suggest a phased approach, with construction expected to start in 2017, and refining capacity revised down to 200,000b/d.
Caripito Refinery - This plant was expected to process 50,000 b/d from the area around Lake Guanoco, turning it into asphalt to meet domestic demand in Sucre and Anzoategui. The project was estimated to cost US$500mn.
Batalla de Santa Ines Refinery - This plant is expected to be located in the state of Barinas, and was initially expected to process 50,000 b/d of 28 degree API crude, to come online by end-2010. Since then, the start date has been moved back to 2013, but with little indication of substantial progress, we remain sceptical that it will meet this deadline, and instead are not factoring in the additional capacity until 2015.
Aside from the new projects it has put forward, we also note that PdVSA has indicated plans to upgrade the Puerto La Cruz refinery, increasing capacity from 187,000b/d to 210,000b/d, as well as doubling capacity at the El Palito refinery, from 140,000b/d to 280,000b/d over the next three and a half to four years. As these projects have seen a bit more movement, including the awarding of hydrocarbon reformer supply contract to Technip, we believe there is a better chance they may be completed in a timely manner.
With many of the aforementioned projects still in the proposal stage only, this has encouraged us to temper our expectations, such that for now, we are only factoring in the addition of 50,000b/d of refining capacity in 2015 when Santa Ines comes online, and another 163,000 in 2017 due to upgrades. While we acknowledge that there could be upside risk to these projections, given past events, we believe the far more likely scenario is that we will see further delays, suggesting downside risk to our already relatively modest growth forecasts.
|Picking Up, But Nowhere Near Its Potential|
|Venezuela - Refining Capacity, '000b/d|