Fitch Discusses Potential Impact of Exxon’s Freeze on PDVSA Partnered Refineries
Posted on February 15, 2008 – 4:21 pm | by oilandgaspress.com
NEW YORK–(BUSINESS WIRE)–Fitch Ratings said Friday that it views a British court order to freeze up to US$12 billion of Petroleos de Venezuela S.A.’s (PDVSA; rated ‘BB-’with a Negative Outlook by Fitch) worldwide assets as a potential concern for the PDVSA partnered refineries, HOVENSA and Merey Sweeny Limited Partnership (MSLP). While day to day operations have not currently been impacted, the potential exists for a weakening in their credit quality and financial flexibility. Fitch will continue to monitor the current situation for any potential rating impact. Fitch currently rates both, HOVENSA’s and MSLP’s, debt at ‘BBB’ with a Stable Rating Outlook.
Our concerns related to HOVENSA stem from HOVENSA’s exposure to crude supply risk from PDVSA related to terms in the crude supply agreement. Currently, of the 500,000 barrels per day (bpd) processed at HOVENSA, PDVSA supplies around 270,000 bpd of Mesa and Merey heavy crude oil to the refinery. Since the heavy crude is purchased by HOVENSA at St. Croix, U.S. Virgin Islands, the oil is potentially exposed to confiscation risk before HOVENSA takes title to the crude. Should the crude supply agreement be amended to take ownership of the crude in Venezuela, HOVENSA may need to make additional investments in working capital to purchase and store additional heavy oil so as not to affect daily operations. Currently, PDVSA sells crude oil to HOVENSA either directly from the tankers or from the storage facilities held at the refinery complex in St. Croix. While we note that there exists a potential for increased levels of working capital, given HOVENSA’s low leverage and ready access to a $400 million long-term committed borrowing facility, we believe the company has the flexibility to deal with this change.
In the case of Merey Sweeny, the off-take agreement stipulates that PDVSA sells crude oil to Conoco Phillips at Puerto la Cruz port in Venezuela. As a result, Fitch views the risk of crude supply disruption to MSLP associated with the court order with less of a concern.
While the risks differ between projects based on when ownership of the crude is transferred, both of the PDVSA partnered refineries remain exposed to reduced Venezuelan crude deliveries. The recent court action has increased the risk of sale of Venezuelan crude to the U.S. Fitch continues to believe that U.S. refineries remain the natural and economic home for this crude oil. Nonetheless, Fitch views the potential for crude supply disruption to the U.S. with concern. In the case of a supply disruption, the refineries have the ability to procure alternate crude, and as in the past they have successfully secured alternative crude supplies. However, the timeliness of alternative crude supply procurement could have economic implications.
HOVENSA and MSLP, in the past have made substantial distributions to the equity partners; $600 million in 2007 by HOVENSA and $292 million, as of September 2007, by MSLP. Going forward, changes in distribution policies remain a potential source of concern should either of the projects move to accelerate distributions ahead of any future court orders. Currently, Fitch understands that dividends from HOVENSA to PDVSA are deposited into a European Bank and that distributions from MSLP to PDVSA are deposited into an U.S. bank.
HOVENSA, L.L.C.:
Situated on the island of St. Croix, HOVENSA is one of the world’s largest refineries, with capacity to process up to 500,000 bpd of crude oil. The complex benefits from a 58,000-bpd delayed coking unit with capacity to process the short residue derived from heavy and medium sour crude oil into intermediate products that are further refined into motor fuels and other finished products. HOVENSA is a limited liability company indirectly owned 50% by Hess and 50% by PDVSA.
Merey Sweeny Limited Partnership:
ConocoPhillips and PDVSA formed a partnership in 1998 to build, own, operate and maintain certain facilities and improvements to ConocoPhillips’ existing refinery at the Sweeny complex near Sweeny, Texas. The project consists of a vacuum distillation unit, a delayed-coker, and related facilities that give the refinery the ability to process an average of 182,000 barrels per day of heavy sour crude. The refinery is an integral part of ConocoPhillips’ flagship petrochemicals complex situated near Sweeny, Texas.
Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.
Contacts
Fitch Ratings
Sam Kamath, 212-908-0552 (New York)
Azul Del Villar, 212-908-0684 (New York)
Adam Miller, 312-368-3113 (Chicago)
Christopher Kimble, 212-908-0226
(Media Relations, New York)
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