Oliver L Campbell :Abreu y Lima Refinery
should be cancelled
The vice-president of PDVSA, Asdrubal Chavez recently informed the press the company now has $400 million available to make the first payment on the Abreu y Lima refinery in Brazil whose construction started several months ago. He stated the estimated cost has shot up to the staggering sum of $12.0 billion. The original estimate was only $2.0 billion, though it was subsequently increased to $4.5 billion. The cost of $12.0 billion for a refinery with a capacity of 230,000 barrels per day (b/d) must make it the most expensive in the world. On the basis of this cost, CITGO'S three refineries, with a processing capacity of 750,000 b/d, would be worth $39.1 billion which is clearly nonsense.
Under the joint venture, PDVSA acquires 40% of the refinery which means it is paying $4.8 billion for a capacity of only 92,000 b/d. In its Annual Report for 2009, the company says the Zulia refinery, which is to be built with a capacity to process 200,000 b/d of heavy crudes, will cost $3.5 billion. The cost differential needs some explaining.
But why process Venezuela's heavy crudes in Brazil? Let's look at some of the reasons why they should be refined instead in Venezuela.
1) Employment. The construction stage of the refinery, with its associated infrastructure, will employ over a thousand workers. The subsequent operation will employ a lesser number but, with so much unemployment in Venezuela, creating jobs is most important.
2) Added value. Any additional value from refining the crude will accrue to Venezuela and not Brazil. Why add the value in another country?
3) Saved income tax. No tax will be paid in Brazil on the income generated by refining. Why give money away to South America's richest country?
4) Saved freight costs. The substantial costs of transporting the crude by sea to Recife and then overland to the refinery will be saved. The oil can be sold fob Venezuelan ports.
The joint venture does not make sense for Brazil either. The country already produces sufficient crude to meet internal demand, and will soon be an exporter in competition with Venezuela for markets in South America and the USA. Brazil has recently found large oil reserves offshore and smaller ones on land. The fact is it will soon need all its refinery capacity to refine its own crudes and will not need Venezuelan oil.
The joint venture was thought up by Presidents Lula and Chavez back in 2007 as a means of promoting energy integration. The original idea was that Petrobras would invest 40% in a company to develop the Carabobo1 field in the Orinoco Belt and PDVSA would put up 60%. The oil produced would be refined in Brazil where PDVSA would hold 40% of the equity and Petrobras 60%. All was going fine and dandy when Petrobras decided to pull out of the production side of the deal. Their spokesman declared, "Despite the huge oil reserves, production costs in the region are very high because upgrading is required before crude refining can take place and Petrobras has other more viable projects in its portfolio". Translated this means Petrobras prefers to invest developing its new finds in Brazil, offshore and onshore, rather than in Venezuela.
However, the chief executives of Petrobras and PDVSA never showed the same enthusiasm for the joint venture and, for that reason, PDVSA has yet to make the first payment of its 40% stake. Promoting energy integration may be a fine goal conceptually, but this particular joint venture makes no financial sense. The $12 billion cost for a 230,000 b/d refinery can only be called excessive and Venezuela would benefit much more by investing its $4.8 billion share in one or more new refineries in its own country.
Oliver L Campbell , MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.
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Petroleumworld News 11/09/2010
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