OREANDA-NEWS. November 24, 2016.  Curacao may prematurely revoke Venezuelan state-owned PdV's lease to operate the 325,000 b/d Isla refinery in favor of a Chinese state-owned company that is pledging to upgrade the century-old facility, Venezuelan and Chinese officials familiar with the discussions tell Argus.

The Dutch-controlled government of Curacao signed an agreement on 19 November with China's Guangdong Zhenrong Energy (GZE) that would transfer operational control over the refinery before PdV's current lease expires at end-2019, if PdV's current financial and operational difficulties disrupt the refinery's operations, two Venezuelan government officials familiar with the situation said.

The agreement signed in Willemstad by Prime Minister Bernhard Whiteman, Refineria di Korsou NV (Curacao Oil Refinery Inc) director Jose van der Wall-Arnemann and GZE chief executive Chen Bingyan stipulates that GZE must submit written financial guarantees by 17 December 2016 that it can fund a planned \\$5.5bn upgrade of the refinery.

An executive with the Curacao refinery told Argus that the facility is currently operating at around 50pc of its capacity, and would continue to operate while an upgrade is underway. The ageing complex would require new crude distillation and desulphurization units, among other plants.

A complete first draft of GZE's technical upgrade plans for Isla and the Bullen Bay terminal is due in April 2017. GZE's plans would include an associated LNG terminal.

Curacao's government and GZE previously signed a memorandum of understanding (MOU) in September 2016 committing up to \\$10bn of potential capital expenditures to upgrade the refinery, expand oil storage and build the regasification terminal. But early engineering and cost projection studies indicate that the entire project including the expanded storage and LNG terminal could be completed for under \\$6bn, Chinese officials say.

The MOU signed in September states that GZE would be granted a 20-year lease to operate a modernized Isla refinery, export terminal and regasification facility. But the agreement signed on 19 November apparently doubles the lease the Chinese company would be granted to up to 40 years, the Venezuelan officials said.

GZE signed a separate MOU with BP on 9 November under which BP would supply all of Isla's future crude requirements and lift all of its products output after it takes over operational control of the refinery, the Chinese officials say. BP declined to comment.

The 19 November agreement between Curacao's government and GZE suggests that Curacao views a commercial divorce with distressed operator PdV as inevitable and is keen to start a new relationship with a deep-pocketed suitor as quickly as possible.

PdV currently uses Isla to blend diluted extra-heavy crude oil from the Orinoco oil belt with imported light crude to produce export-bound 16°API Merey, but the operations appear to be choppy because PdV is unable to make timely cash payments for the waterborne imports.

PdV also is importing gasoline from Isla as gasoline production at its mainland Venezuelan refineries has collapsed because of persistent downstream impairments.

GZE has signed framework cooperation agreements with engineering and construction units of Chinese state-owned oil companies CNPC, Sinopec and CNOOC.

Sinopec likely would be contracted to upgrade the refinery's crude processing units and CNOOC would build and operate the planned LNG terminal. CNPC subsidiary China Petroleum Engineering and Construction (CPECC) is the candidate to double Bullen Bay's crude and product storage capacity to 36mn bl.

GZE has no experience operating oil refineries and LNG terminals. But likely Chinese partners Sinopec and CNOOC would be the actual operators, local Chinese officials told Argus earlier this month.

PdV has operated Isla, also called the Di Korsou refinery, since 1985.

Venezuela's energy ministry and PdV declined to comment on the new Chinese agreement with Curacao. The ministry had said in September that PdV expects to continue operating Isla after its current lease expires in 2019, saying it is too early to start lease renewal discussions.