Should Venezuela participate in the Abreu y Lima refinery?
A few days ago, Petrobras and PDVSA announced they had come to an agreement on forming a company to construct and operate a refinery in Brazil. The refinery, whose construction has already started, is situated in Pernambuco State in the north east and named Abreu y Lima after the hero of independence who was born in Recife. The refinery, with a capacity of 230,000 barrels per day, will process heavy crude to be supplied in equal parts by both companies and be geared to maximising the production of diesel for the local market. Petrobras will have 60% and PDVSA 40% of the shares.
The two companies have been discussing the proposed deal since 2005. Why has it taken so long to reach an agreement? The reason is neither party really wanted to go ahead and have only done so after having been obliged by Presidents Lula and Chávez. The latter are pleased with the agreement which they say is an important achievement for South American energy integration.
One cannot question the presidents' right to foment energy integration by building a refinery in Brazil, but the fact remains it makes no commercial sense. Let us look first at Brazil: a) the country already produces sufficient oil to meet national demand, b) large oil reserves have recently been discovered offshore and are being developed, c) so though national demand will increase due to economic growth, it will not need to import oil, d) all refinery capacity will be required to process its own crude production, and e) the country is a good credit risk and would have no difficulty financing 100% of the construction cost.
Let us now turn to Venezuela. It is well known there is a lack of capacity to refine heavy crudes and the country will lose out on several important benefits if such a refinery is built in Brazil rather than Venezuela: a) the construction stage would provide employment to a large number of workers and the subsequent operation to a smaller number, b) the added value from refining would remain in the country rather than largely going to Brazil, c) income tax payable on the profits generated in Brazil would be saved, and d) vulnerability as minority shareholder in any disputes, e.g. on the price to be paid to each party for its crude, would be avoided.
The original construction cost was estimated at $2.0 billion. It is now gone up to $4.5 billion, but recent reports from Petrobras say it could be much higher. The latter has spent around $1.0 billion which means PDVSA already owes $0.4 billion. Normally this would not be a large sum for PDVSA, but we know the company is short of funds and owes money everywhere.
Brazil intends to build five new refineries and double present capacity to 3,600,000 b/d by 2015 in order to process its own crude. This means it will not need to import heavy crude from Venezuela. Likewise, Venezuela needs to increase capacity to refine heavy crudes and provision for this has existed in the "Plan Siembra Petrolera." for some years. Procrastination first, and the lack of funds now, has meant construction of the 400,000 b/d refinery has not yet started. It is incongruent that Venezuela should participate in constructing a refinery for heavy oil in Brazil when one is so much needed in its own country.
A policy of South American energy integration is an admirable ideal, but does it make sense when each country has enough indigenous crude to meet internal demand? In fact, Brazil will soon be a crude exporter and sending Venezuelan crude to Brazil seems a case of "carrying coal to Newcastle."
The political motivation is understandable but it comes at the heavy cost of lost job opportunities--there is much unemployment in Venezuela and construction of a refinery would provide jobs for many unskilled workers. Admittedly, PDVSA would have to bear the construction cost, but a heavy oil refinery is in the capital budget. The added value from refining would also boost PDVSA'S net profit and cash flow. Should it be confirmed the Abreu y Lima refinery will cost substantially more than $4.5 billion, that would be a good reason for both parties to reconsider the need for Venezuelan participation.