| NEW YORK/HONG KONG
NEW YORK/HONG KONG PetroChina Co Ltd (0857.HK) is in talks to buy Valero Energy's (VLO.N) shuttered refinery in Aruba, sources said, the latest move by China's oil giants to take advantage of a global refining downturn to beef up supply.
PetroChina, Asia's largest oil and gas producer, has made a string of overseas refinery acquisitions in the past few years to strengthen its global refinery foothold and boost its trading and marketing capabilities.
In a filing with the U.S. Securities and Exchange Commission, Valero said it had received a non-binding indication of interest for the 235,000 barrel-per-day Aruba plant for $350 million plus working capital, but did not identify the interested party.
Sources familiar with the negotiations said the approach had been made by PetroChina. It was the second time in two years the Chinese company had discussed the purchase of the plant, which is located near Venezuela, China's fourth largest crude supplier, sources said.
A local media website, Amigoe, reported that PetroChina signed a memorandum of understanding with the government of Aruba on April 30, 2012, but details of the deal had not been made public yet due to the sensitive nature of the negotiations.
"The agreement is 90 percent completed," a plant source with knowledge of the negotiations said.
He added that the final signing of the agreement, which also includes the refinery docks, storage tanks and other assets in the Caribbean prized for its strategic location, could happen in about a month.
PetroChina was not immediately available for comment.
Chinese oil giants, which have been suffering heavy refining losses at home due to state-controlled oil products prices, are pushing into the overseas refining sector to optimize their refinery operations and maximize the value of crude they produce overseas, energy bankers and analysts say.
Sinopec Group, parent of Asia's largest refiner Sinopec Corp (0386.HK), signed a deal with Saudi Aramco SDABO.UL earlier this year to build a new 400,000-barrel-a-day (bpd) oil refinery in Yanbu in Saudi Arabia, its first overseas refining project.
"They hold the concept of building a global trading business. The concept is it allows them to get cheaper crude to China," James Hubbard, head of Asia oil and gas research at Macquarie, said of Chinese oil firms' overseas refining strategy.
PetroChina has said it wants to double its global trading and marketing of oil -- including crude oil and refined fuel -- to 8 million barrels a day by 2015 from 2010 levels.
PetroChina bought a 50 percent stake in chemical group Ineos' INEOS.UL European refining business last year for $1 billion, its third overseas refinery deal after acquisitions in Singapore and Japan for more than $2 billion combined.
Sources said PetroChina has reached a deal with Petroleos de Venezuela (PDVSA) to supply the Aruba plant with heavy crude.
"PetroChina has a presence in the Venezuelan upstream. This is related to them looking for an upgrader for that heavy crude," said John Auers, a refinery specialist with Houston-based Turner Mason.
The Aruba plant has two fairly new coker units to handle the heavy Venezuelan crude as well as recently upgraded hydrotreating capability, sources familiar with the refinery said.
This would allow PetroChina to semi-process heavy crude and then ship the product to China for finishing in the mainland refineries there, which can only run lighter grades.
One of the sources specified that PDVSA and PetroChina could be negotiating two separate supply agreements: one of 16 degrees API crude that is produced by a joint project between Chinese firms and the state in the vast Orinoco Belt and a subsequent one for the supply of liquefied natural gas.
Valero was considering building a floating regasification unit that would allow the refinery to have the gas needed to operate power plants that currently use diesel.
Venezuela is currently supplying 460,000 barrels of oil per day to China, and is set to increase its shipments to 1 million barrels per day by 2015, government officials said.
China National Petroleum Corp (CNPC), parent of PetroChina, and PDVSA are also building a $9 billion joint refinery on China's southern coast in April, paving the way for more Venezuelan oil to flow to the world's second-largest oil user.
China has become a major partner of President Hugo Chavez's government, supplying billions of dollars in credits, some of which are being canceled with crude shipments from the South American OPEC member.
WEAK REFINING MARGINS
The Aruba refinery has been idled at least twice in the past few years, most recently earlier this year, due to poor profit margins that have plagued refiners in Europe, the Caribbean and on the U.S. East Coast.
Earlier this year, more than 2 million barrels of refining capacity were threatened with closure across the Atlantic Basin, driving up gasoline prices on the U.S. East Coast as supplies to the region looked short ahead of the U.S. summer driving season.
But in recent weeks buyers have begun to emerge to snap up plants at low prices, with Delta Air Lines buying Conoco's (COP.N) Pennsylvania refinery and oil trading companies Vitol Group and Gunvor Group purchasing two European refineries.
Refineries have seen a combination of weak demand as well as rising fuel costs -- especially for plants that receive crude from Europe and West Africa -- hit profits in recent years.
Aruba also faces higher costs relative to U.S. plants on the Gulf Coast because it uses fuel oil to power its units. U.S. refiners have benefited from a growing supply of cheap natural gas that reduces operating costs.
(Additional reporting by Judy Hua in BEIJING; Marianna Parraga in CARACAS; Editing by Leslie Gevirtz, Richard Pullin and Jacqueline Wong)