Virgin Islands refinery shutdown to hit Venezuela hard - Americas - MiamiHerald.com

Virgin Islands refinery shutdown to hit Venezuela hard

This week’s announced shutdown of a major oil refinery in the Virgin Islands could have major ramifications for the Venezuelan oil company, PDVSA.

By Antonio Maria Delgado

adelgado@elnuevoherald.com

The announced shutdown of an oil refinery in the Virgin Islands will hit hard the state-run Petróleos de Venezuela, S.A. (PDVSA), a company that loses a major customer for its hard-to-place heavy crude and a major supplier of components for the gasoline consumed in the country, analysts said.

The experts added that the closing of the refinery — one of the world’s 10 largest — could also impact the cash flow of the state-owned company, as the complex, where PDVSA has a 50 percent share, is one of the clients that best pays for Venezuelan crude.

“It’s a very important customer for Venezuela,” said former state oil company manager Horacio Medina. “It is one of the places where they were sending large amounts [of crude] every month.”

The refinery, operated by the joint venture Hovensa has the capacity to process 495,000 barrels a day, 248,000 of which are supplied by PDVSA.

Hovensa, which belongs to PDVSA and the U.S. company Hess Corp., announced this week it will close the refinery in a month after accumulating losses totaling $1.3 billion in the last three years.

Hovensa said the company had lost its profitability due to the global economic downturn and strong competition from a number of new facilities built in emerging markets.

Jorge Piñón, an oil market analyst, said in Miami that the St. Croix refinery also faced difficulties in competing with U.S. refineries because it uses the oil itself as fuel for its facilities.

“U.S. refineries use natural gas, which is selling at one of the lowest prices in its history,” Piñón said.

So the closure makes sense for Hess, a company that was bleeding from the sustained losses.

But the situation is different for PDVSA, said analysts, describing the shutdown of the refinery as a strategic mistake.

“If I see myself only as a refiner, then obviously the decision is correct; the refinery has to be closed. But if I see myself as a producer, you’re depriving me of 300,000 barrels of production that now I have to place somewhere else,” said Juan Fernández, former PDVSA planning manager.

The problem is that the heavy Venezuelan crude is difficult to place in a global network of refineries designed primarily to process light crude. For Venezuela, it would have been more convenient to reach a financial settlement with the refinery so it could stop operating at a deficit.

The cost of such an arrangement, which could be below $4 a barrel, a small fraction of the more than the $100 per barrel it currently charges, would be far below the cost of losing access to a market that generated revenues of over $9 billion a year.

It was the difficulties in placing its heavy and extra-heavy crude oil in international markets that led PDVSA to invest aggressively in the refining industry, buying stakes in refineries and modifying them so they could process the thick Venezuelan oil.

But that strategy, which had provided Venezuelan industry with an enviable vertical integration, was abandoned during the presidency of Hugo Chávez.

“The Venezuelan government has been destroying its refining capacity abroad. It had about 2 million barrels, with the sales of the refineries it owned in Europe and the U.S., and now comes Hovensa, which, along with Citgo, was one of the few customers that pays it correctly,” said Fernández.

The rest of Venezuela’s customers, like China, Cuba and other ALBA countries, receive oil under economic terms that are unfavorable for the nation, he said.

And the shutdown also could cause problems for the supply of gasoline in the country, because the Virgin Islands refinery had begun to supply components used in the production of gasoline that were no longer produced in Venezuela due to problems in domestic installations.

The problems in the Venezuelan refining system continued during November and December, according to local press reports that highlighted the serious problems faced in the Venezuelan refineries El Palito, Amuay and Cardón.

These problems, coupled with the closure of Hovensa, could exacerbate the problems in fuel supply that have started to become frequent in Venezuela, Fernández said.

“It’s a grim picture, but Venezuela seems to be following in the footsteps of countries like Libya and Iran, which, while big producers of oil, don’t have gasoline,” he said.

Read more here: http://www.miamiherald.com/2012/01/19/2598119/virgin-islands-refinery-shutdown.html#storylink=cpy
Virgin Islands refinery shutdown to hit Venezuela hard - Americas - MiamiHerald.com

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