This is what Standard & Poor analysts actually said about the refinery deal, and I am quoting, more or less, consider this a bad movie with subtitles:
Relax, don’t party yet, don’t count your chickens before they’re hatched, an opaque agreement between CITGO Aruba and the Aruba Government to reopen the refinery in San Nicholas was indeed signed in Caracas. That agreement says S&P report, could improve Aruba’s growth however, uncertainty remains about the investment. The reopening of the refinery could result in higher economic growth, but let’s not forget that Venezuela is very sick, practically at the intensive care unit with one foot in the coffin and the other on a banana peel, so hold off on the fireworks.
Ok, on June 6, 2016, S&P analysts revised their global outlook on Aruba from stable to positive.
Why? Because the revision reflects the agreement to reopen Aruba’s refinery, BUT “uncertainty about CITGO’s capacity to have the refinery working in the planned timeframe weighs on their analysis,” notice the if, “if the agreement is implemented, S&P would expect to see more investment and stronger GDP growth. “ Note how careful and diplomatic, the S&P writers are, they don’t take anything for granted.
Bottom line, another if: If we see faster growth, and stick to Aruba’s fiscal agreement with the Netherlands, this could result in fiscal consolidation and debt decreasing faster than expected. Could. Should.
The report goes on to say that the positive ratings of Aruba reflect its stable political system based on parliamentary democracy, its status as a member of the Kingdom of the Netherlands, and its relatively high $25,000 per capita GDP. These are all strengths. Good. They also reflect its narrow, open economy, which is highly dependent on tourism, and its limited monetary flexibility due to its fixed exchange rate. These are all challenges. Not good.
So what’s in the agreement according to S&P: CITGO will run the refinery under a 15-year lease agreement (with a 10-year extension option), and they expect it to invest around $1 billion on upgrading works — the Venezuelans quote a much-much lower figure — and blend around 235,000 barrels per day of heavy Venezuelan oil. According to the plan, if everything goes well, and everyone cooperates the refinery will be operating in 2018. That’s in two years. That’s a very long time down the road.
ATOMIC BOMB: The agreement also involves the refinery’s former operator Valero Energy Group, a U.S. oil company, which transferred the facility and gasoline stations assets to the Aruban government in exchange for a relief in its contractual obligations regarding environmental contingencies and the dismantling of the refinery.
Make a short pause to reread the last sentence, and then cry big tears: The agreement signed this week released Valero from all environmental obligations for the clean up! Also think about it, we are very dependent on Valero to supply us with jet fuel and gas for our cars, what will happen if that responsibility to keep the island ticking, and consequently in constant supply of tourists, is transferred to CITGO, that might be sold by PDVSA in order to raise money, see below. What will happen to us if our stable supply of jet fuel is compromised??
P.S. Valero is planning to ship out of here anyway in 2017.
S&P continues to state that the sizable investment in the refinery, which is equivalent to 40% of the Aruba GDP, and the subsequent refining operations, should bolster our GDP growth, and gradually improve our external position, and potentially strengthen fiscal revenues. Pay attention to the careful language. Should bolster. Potentially strengthen. Adding, that the new fiscal framework will be discussed in parliament, which means it’s a SPECULATION not a done deal, it’s still in the pipeline.
FINAL BLOW: There is uncertainty about the timely execution of the agreement, says S&P. We believe the possibility of CITGO being drawn into a potential PDVSA bankruptcy is low, but the company’s highly leveraged profile might limit its capital expenditure capacity. They are broke. Moreover, the report continues, we cannot rule out the possibility of PDVSA selling assets abroad, which could include CITGO, to generate additional foreign currency funding to make timely payments on its external debt. Maduro owes money, she he may consider to sell a chunk of his assets off. This could result in a significant delay of the planned reopening, and it’s the main reason we don’t include this operation in our base-case forecast.
So, relax, don’t party yet, don’t count your chickens before they’re hatched, best case scenario, they will be running something in San Nicholas in 2018, but the road is still long and winding.
