Meeting Valero-Aruba
Topic: Energy
Valero Refineries [image from Valero] (Click for larger image)
Earlier this month there was a meeting scheduled between the island officials and Valero management. Aruba Prime Minister met with the CEO of Valero Energy Corporation here in Aruba. Several topics of interest were discussed, especially Valero’s intentions on selling the refinery and Aruba’s intentions of new taxes.
For Sale
As was announced a while back Valero Energy Corporation put a ‘For Sale’ sign on its refinery in Aruba. This 275,000 barrel-a-day refining capacity facility has raised interest from several parties who were serious in acquiring this aging facility.
Reportedly there where 17(!) interested parties, including (albeit rumored at times) Brazil state-owned giant Petrobras, Venezuelan state-owned Pdvsa and more recently Colombian Ecopetrol and Chinese state-owned giant PetroChina. No agreement could be reached thus far, this due to several factors.
The group that showed most interest at first was Brazil’s Petrobras. The deal fell through because of several factors. Especially one major incident that occurred made the deal bust. A major fire ruined an important part of the facility, therefore requiring major investments to return production back to normal.
New Taxes
Two years ago the island government introduces a new method of taxes in Aruba: sales tax of 3%. Many sectors of the society where alarmed as these taxes could spiral into a vicious and debilitating inflation-wage circle. The taxes also included a 1% sales tax on all export.
Aruba doesn’t export much. The vast majority of the export, if not all, is by the Valero Refinery. This new tax meant that Valero had to start paying taxed for the first time ever. Currently Valero enjoys a tax exemption. This legally permits them to withhold payment on any profit they make during the duration of the exemption.
Island officials insisted that the exemption was only for profit-tax, while Valero said it was valid for all forms of taxes. The parties couldn’t reach an agreement. Valero brought case to a special appeals court specializing in this type of dispute in Rotterdam, The Netherlands. Ever since the sales tax introduction Valero is depositing that 1% faithfully on an escrow account at a local bank, waiting for the ruling. After almost two years there is believed to be over $140 million on that account.
The Meeting
A meeting between the two parties was necessary to discuss some of the burning issues. In short, Valero would like to know if anything is going to be done about the 1% sales tax, while the Aruba officials would like to know what Valero is going to do the with the facility on the long term. After the bad experiences with Exxon and the closure of the original refinery back in the 80s, people are very skeptical on the relationship with oil companies.
The island government is willing to make concessions as long as Valero gives some assurances. Removing the 1% sales tax is negotiable as long as Valero contributes responsibly with the society. Additionally steep investments are required to keep the refinery viable and lastly investments in lowering the impact on the environment.
Valero on the other hand just wants to retain the status quo. New tax holiday in 2011 and no sales tax. This saga is to be continued.
Outsider’s Take
There is a lot to be said on both sides of the table. On the one side, there is the island government demanding that the refinery act responsibly, while Valero demands the island to ‘respect’ previous agreements.
Locally there’s a lot of bickering back and forth between the government and the opposition as how to proceed forward.
I believe taxation on exports is absurd. It will undermine the position of any company, plus it doesn’t sound very attractive to any new potential investor to the island. Having said that, I also understand the frustration of the government trying to receive some revenue of a giant that’s not been a good citizen in many aspects.
Reportedly the refinery in St. Nicolas is going to need at least $2 billion in the coming years to make it viable again. That’s a lot of money indeed. From what I understand a new refinery hasn’t been built in the last 30 years in the US and to build one in this day and age, for the permits, consultants and lawyers alone it’s going cost at least that much.
As a comparison, Aruba’s total economy is over $4 billion, while the government’s revenue is just under $2 billion. Valero, on the other hand, had a revenue in 2007 of over $95 billion with a net income of over $5 billion.
So…
I truly believe that taxation on exports has to end and that the refinery should take some responsibility and become a full partner to this island. The time that oil companies received all of the benefits at cost of the location and its population is long gone.
November 20th, 2008 Read more » valero