A Curaçao court has ruled that the local subsidiary of US oil major ConocoPhillips can seize Venezuelan state oil company PDVSA’s assets on the island which are valued at around US$636m. The decision comes as the company has seized PDVSA assets in Bonaire and is moving to do the same in Aruba.
The decision responds to one of a multiple number of actions brought by Conoco to recover US$2.04bn from PDVSA following the expropriation of the company’s Venezuelan assets in 2007. An International Chamber of Commerce arbitration panel found in late April that Venezuela had illegally expropriated the US company’s joint venture operations with ConocoPhillips.
The 4 May court ruling enables the company to seize all oil products stored at the Isla and the Di Korsou refineries on Curacao. The court also said Conoco can take control of any crude oil shipments en route from Venezuela to the island that are within 19km (12 miles) of the Curaçao coast.
Elsewhere in the Dutch speaking Caribbean, ConocoPhillips has imposed a lien on PDVSA’s 10m barrel Bopec storage terminal in Bonaire after reaching an agreement with the Dutch government to provide gasoil to keep local power generation operations running. Reports in the Dutch media indicate that oil stored in Aruba is similarly embargoed.
The seizures seriously exacerbate the ongoing collapse in crude oil production by PDVSA, as the Caribbean terminals are central to its ability to refine, blend, store and export oil. With an estimated 150,000 barrels per day (b/d) exported by the offshore logistical network targeted by Conoco, Venezuela’s production levels are now likely to fall further below the 1.26m b/d it exported in April.
The decline is dramatic, considering that monthly production averaged 2.3m b/d as recently as early 2016. As a result, PDVSA will find it increasingly difficult to meet the terms of its existing contracts with its main markets in China, the US and India.
In an indication of the seriousness of the issue, PDVSA has ordered cargoes already at sea back to Venezuela to avoid their sequestration. However, PDVSA lacks the domestic facilities to handle super tankers or to blend its heavy crude with lighter oils. Reports in the trade press also suggest that as a legal safeguard PDVSA is now designating all its oil exports as fob cargoes, meaning that PDVSA will no longer assume the cost of shipments seized at sea.
Potential for further seizures and sanctions leaves the Caribbean in the crossfire
The seizures come at a critical time, just before Venezuela’s May 20 presidential election. Although Maduro is widely expected to win the poll- which has widely been described as illegitimate- the seizures by Conoco appear to have focused the attention of the Venezuelan government.
According to industry analysts, PDVSA had been hoping to negotiate a deal with Conoco in part involving third party finance under which it could have continued access to the facilities in the Dutch speaking islands. However, any settlement between Conoco and PDVSA could pave the way for other creditors to follow suit, including ExxonMobil, which has brought two separate arbitration claims over the 2007 nationalization of its projects by Venezuela, and SNC-Lavalin, a Canadian engineering group. Similarly, holders of US$23b of PDVSA Eurobonds may also look to seize assets as a means to recover funds or pressure the Venezuelan government into meeting debt obligations.
Regardless of the outcome of any negotiation between PDVSA and Conoco, the seizures of assets by creditors are set to have uncertain economic and social consequences for the Caribbean. Significant proportions of economic activity in the Dutch-speaking islands of Aruba, Bonaire and Curacao are based around the oil industry, with the Curacao Isla Refinery alone responsible for 2,000 jobs. As reported in previous editions of Caribbean Insight, production at the Isla Refinery has long been in decline due to underinvestment, and its future already subject to significant uncertainty as the PDVSA lease comes to an end at the beginning of 2020.
Compounding the risk to the Caribbean of actions against PDVSA is the potential for further sanctions by the United States against Venezuela. Financial sanctions against key figures in the Maduro regime may be followed by direct sanctions on the oil sector, specifically the export of Venezuelan oil exports to the US. Discussions in Lima at the Summit of the Americas and comments made subsequently by US Vice President Mike Pence about the need for regional governments to do much more to impose sanctions on Venezuela suggest that sanctions on Venezuelan oil exports may be the direction of travel of US policy, despite the upward pressure this may put on prices at the pump as the US midterm elections approach.
The practical consequences such a decision would not only be catastrophic for Venezuela, but also for the Caribbean. The decision could push global oil prices back above the US$100 mark, undermining growth across the Caribbean region due to its continued reliance on imported diesel to power their economies. Meanwhile, for the countries that are geographically proximate to Venezuela, a refugee crisis looms. There are already three million Venezuelan economic refugees in Colombia, Brazil, Trinidad, Guyana and the Dutch speaking Caribbean, and there is little capacity to support more.
This is a lead article from Caribbean Insight, The Caribbean Council’s flagship fortnightly publication. From The Bahamas to French Guiana, each edition consists of country-by-country analysis of the leading news stories of consequence, distilling business and political developments across the Caribbean into a single must-read publication. Please follow the links on the right-hand side of this page to subscribe, or access a free trial.
Photo credit: Falco Ermert, ‘Bohrinsel Karibik’, Flickr