This Century-Old Refinery Is Up For Sale

Each and every market recession seems to resurrect intense speculation that such and such underperforming refinery would need to be closed down for good as it is no longer expedient to maintain a loss-making asset. Europe had a wave of refinery closures after the 2008 financial crisis, with almost 20 refineries mothballed. Asia will most probably see a wave of downstream destruction in the coming decade as new capacity continues to come online. Latin America, however, is a story of its own - a continent where a sizeable 7.5mbpd refining capacity has been hindered by decades of underutilization. Although Trinidad and Tobago can hardly be called part of Latin America, its downstream story carries a lot of similarities to its southern neighbors.  The Pointe-a-Pierre (PAP) refinery was built in 1917, only a couple of years after the smaller Point Fortin refinery was commissioned. At that point, Trinidad was producing oil for 10 years already, propelled to regional prominence by the game-changing ascent of Venezuela. Initially, a private enterprise, the U.S. firm Texaco sold it to the Trinidadian government in 1985. During the 1990s it underwent a $355 million upgrade so as to spare it the fate of the Point Fortin refinery (closed in 2000), in an endeavor sponsored by the Inter-American Development Bank despite the refinery already being loss-making at that point. The revamp has increased PAP's lighter yields, bringing the gasoline, diesel, and jet fuel aggregate to 63%, whilst decreasing the fuel oil yields. 

Initially, it might have seemed that the Trinidadian plan worked - Petrotrin's refining turned profitable by 1998. The new millennium, however, has seen previous drawbacks resurface and pressurized the Trinidadian downstream segment back into negative numbers. For example, the Pointe-a-Pierre refinery was not configured fully to process local Trinidadian crudes which would have been ideal considering the lack of shipping cost involved. The difficulties of maintaining a century-old refining asset, located in the Caribbean with a very small chance of carving out a market outlet in the United States, proved too much. In the end, the Pointe-a-Pierre Refinery saw its operations halted in November 2018.

Two significant developments have contributed to the downstream decline of Trinidad and Tobago. First, domestic crude production has been declining steadily - from the halcyon days of the 1970s when output was in the 230kbpd range, it fell to 82kbpd (see Graph 01). The necessity to import crude has placed an additional burden on the national oil company as crudes were sourced from all over the world (before the shutdown), combining occasional cargoes from Brazil (Roncador and Lula), Colombia (Vasconia), Russia (Urals and ARCO) or Gabon (Aguendjo). Needless to say, neither of the cargoes was sourced from within the company itself. 

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Graph 1. Crude production in Trinidad and Tobago in 1970-2019 ('000 barrels per day).

Source: BP Statistical Survey 2020. 

Second, the erstwhile owner Petrotrin has invested in a 40kbpd ultra-low Sulphur diesel unit, an endeavor that has gone spectacularly awry. The ULSD unit's construction costs have spiraled out of control, to almost fourfold the $200 million that was initially assumed in 2009, moreover, the Trinidadian authorities found the unit's condition to be inadequate in 2016. This in turn has led to Petrotrin canceling the ULSD construction deal with Samsung, despite stating that an additional $300 million would be needed to finalize the unit (and with more than $420 million already spent). End result - Trinidad and Tobago no longer refines crude, produces less and less, and has become a net importer of products. 

Almost concurrently with the PAP Refinery shutting down, the Trinidadian government began looking for a buyer for Petrotrin. Roughly at the same time, a new entity fittingly called Patriotic Energies and Technologies (PET) was created, with the specific aim of saving the refinery. PET is composed of shareholders including Trinidad's oil labor union OWTU, a Suriname-based private equity company, and oil independents. Perhaps surprisingly to some, PET was chosen as it was the only bidder opting for a direct financial transaction of $700 million, whilst U.S. private equity firm Beowulf offered a fixed monthly lease for the asset over a 15-year period and German trader company Klesch offered to pay for the 100-year refinery by means of future taxation.

As twisted as the story of Trinidad's refining seems, it is far from over. The latest move in the Trinidadian refinery saga was taken by the Energy Ministry, which rejected PET's offer for the purchase of the refinery, claiming that their final proposal has failed to meet "key issues" in terms of the refinery's future financing. This has taken the government back to square one as it has to pick the better of the bids from Beowulf and Klesch or to restart the tendering process - likely nullifying its pledge to relaunch the 160kbpd Pointe-a-Pierre refinery in Q3 2020. Further delays will worsen Trinidad's trade balance as it continues to buy some 25-30kbpd of oil products from third parties. Alas, in times of market slumps this story is merely one of the many to come.

By Viktor Katona for Oilprice.com

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