Hot, Hot, Hot – Caribbean Refinery Developments

Authors: Robert Auers and John Auers

The classic reggae tune “Hot, Hot, Hot” brings to mind many thoughts – partying on the beach, sipping tropical cocktails, even Michael Scott strumming on a souvenir steel drum (for you “Office” fans).  One thought that doesn’t usually pop right up is petroleum refining.  However, recent events in the Caribbean refining world might actually make the tune relevant in that context.  This includes the most recent event, the confirmation by the government of Curacao that they have chosen a new operator for their idled Isla refinery and rumors that Motiva might be that entity.  This news brings hope for a restart and together with the continuing progress in the refurbishment of the former HOVENSA St. Croix refinery, adds to the potential for Caribbean refineries again becoming an important source of refined product in regional and even U.S. East Coast markets.   Events in Curacao and St. Croix are not generating the only industry news coming out of the region and they do not all involve adding capacity.  While projects are being promoted for new facilities in the Bahamas (not technically the Caribbean), the largest currently operating refinery in the Caribbean, Petrotrin’s Trinidad plant, has been slated to be shut down. In today’s blog we will discuss all of these developments, along with what they might mean for regional markets and the USGC refineries for whom those markets have become ever more important.

“What to do, on a night like this” – What’s next for the Curacao Isla Refinery

The Isla Refinery was originally constructed by Shell and began operations in 1918.  The refinery was slowly upgraded and expanded through the early 1970s.  It began to struggle later in that decade and into the 1980s due to high oil prices and narrowing refining margins that resulted from slowing product demand.  This eventually led Shell to close the refinery in late 1985, after operating it well below capacity for several previous years.  Upon closure, ownership was transferred to the Curacao government, which shortly thereafter reached an agreement with PDVSA to restart the refinery under a long-term lease agreement which has been in effect ever since. While this agreement seemed to work well for the two decades or so, the lack of proper maintenance at the facility began to markedly take its toll by the mid-2000s. Operating performance slowly deteriorated from the mid-90s until 2016 with crude inputs declining from ~250 MBPD (75% utilization) for the 1993-1996 period to 157 MBPD (47% utilization) in 2016.  Operating performance has continued to deteriorate, as 2017 crude inputs averaged just 95 MBPD (28% utilization), and the refinery was completely shut down earlier this year, in May.  The chart below displays the historical annual crude runs at the facility since 1980.  Note the stated capacity of the facility was 335 MBPD during this entire period.

Since the shutdown, the Curacao government has been looking for a new operator to rehabilitate and restart the plant with the PDVSA lease expiring at the end of next year.  Reuters first reported that Curacao had inked a preliminary deal with China-based Guangdong Zhenrong Energy to operate the plant but this deal reportedly fell through.  Then, just this past weekend, it was reported that Curacao and Motiva had come to a preliminary agreement to restart the refinery, potentially as soon as next year (even before the expiration of the existing lease with PDVSA).  Both parties have declined to comment on the agreement (or confirm its existence) until a Memorandum of Understanding is signed, which is expected in mid-January.  Given the strong operating experience and financial resources of Motiva and Saudi Aramco, we expect that if indeed they are the chosen operator, the potential of resumed and eventually substantial operations is significant.  However, due to the current depilated state of the refinery and the extensive capital expenditures that will be needed to fully restart the plant, it is difficult to predict either the timing of the restart or the eventual level of throughput.  The type of crude processed and products generated is also an unknown, although Saudi ownership should give a clue to the crude side of those questions.  Adding more intrigue to the speculation is the extent to which the impending 2020 IMO LS bunker regulations will play a part in the timing and operating plans for the Isla Refinery.

“Come on, let’s do it”” – Progress and prospects at the St. Croix Refinery

Progress in refurbishing the former HOVENSA refinery in St Croix, US Virgin Islands has been proceeding for awhile now and could have an even bigger impact than an Isla restart.   The St. Croix plant was originally constructed by Hess Oil  in 1966 and reached an official capacity of 650 MBPD in 1974, making it the largest refinery in the world at the time.   In 1998 the refinery became a JV of Hess and PDVSA.  The refinery continued to see investment throughout its operating history, with the addition of a new FCC 1993, a coker in 2002 (a main driving force for the formation of the JV), and a cat gasoline hydrotreater in 2007.  Due to deteriorating economics, the official capacity of the plant was reduced to 350 MBPD in 2011, before ultimately shutting down in 2012.  The refinery was later purchased by an affiliate of Private Equity firm ArcLight Capital Partners and has been operated as a terminal ever since.  However, in June 2018, ArcLight announced plans to invest $1.4 Billion in an effort to restart the plant in time to take advantage of the new IMO regulations.  This timeline may be aggressive and the ultimate amount of time needed to restart the plant may depend on the condition of the equipment at the refinery.  Still, it does appear likely that the project will be completed (even if after the January 2020 target date), with work already beginning at the site and BP agreeing to supply crude and off take products.  The current plans call for the processing of 200-300 MBPD of U.S. light tight oil (LTO), allowing for the production of low sulfur bunker fuel.  It appears that they will also pursue a restart of the coker at the sight, which is no surprise given the forecast for strong coking margins beginning in 2020. Yet, it appears unclear exactly how they plan to fill the coker, whether by purchasing discounted resid from less complex facilities or supplementing the LTO with sufficient volumes of heavier crudes in order to produce more coker feed.

“Ole, Ole – Ole, Ole” – Other Caribbean developments

While these are the only likely new refinery startups in the Caribbean in the near future, there have been other developments of note in the region as well.  First, Government-owned Petrotrin announced the closure of its only refinery at Poite-A-Pierre, Trinidad in September 2018 on the back of years of poor financial results.  The official capacity of the facility was 175 MBPD, and it has typically processed about 140 MBPD of crude oil over the past several years.  Conversely, Oban Energies has announced they are planning to construct a new $5 billion 250 MBPD greenfield refinery in the Bahamas, but that project has stalled and we believe it is very unlikely that anything will actually come of the proposal.  Nonetheless, negotiations continue around the construction of the facility and Oban Energies is still pursuing the project.

Turner, Mason & Company continually monitors refining projects, start-ups, shutdowns and other developments impacting refining capacity.  We attempt to handicap the likelihood of each of these potential events and quantify their impacts on crude demand, refined product supply and ultimately prices for both crude and products.  Our latest views are being incorporated in our Crude & Refined Products and World Refining Construction Outlooks, which will be issued to clients with our 2019 publications in February and August. If you would like more information on this, or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or give us a call at 214-754-0898.