Petrojam: Venezuelan crises!
“Thou hast seen nothing yet.”
– Don Quixote, Miguel de Cervantes
ASSETS VALUATION AND UPGRADE PROSPECTS
IN 2018, the Petrojam oil refinery retained Muse Stancil, a United States consulting firm, to provide fair market value of its assets. Muse estimated the “replacement cost for a new terminal” at US$315 million and for the refinery at US$685 million (no upgrade or expansion scenario?).
The current plant, process, and equipment value was estimated at US$149 million (in line with the draft-audit book value of financial year FY, 2016-17), which has been fully depreciated for tax purposes.
For the refinery to remain operating, an immediate investment of US$102 million in a new vacuum tower is required. This excludes sustaining capital cost that is likely to average at US$10 million annually.
Without expansion and upgrade, the only option that the refinery has is to shutdown the unit on January 1, 2020. The refinery, therefore, is only worth its ‘scrap value’, less the removal cost.
Assuming that the refinery shuts down in 2020, the terminal (operating in perpetuity) is valued at US$34 million, at 10 per cent discount rate (over 22 years economic life). This includes a severance payment to 70 per cent of employees of US$18 million in FY2019-20. Thirty per cent of the employees will be absorbed in terminal operations. The terminal will require sustaining capital at an average of US$9.2 million annually.
The terminal itself has a total storage capacity of 2.5 million barrels. Of this, the crude oil storage is 1.1 million barrels (four floating roof –FR– tanks); heavy fuel oil storage of 440,000 barrels (four cone roof – CR – tanks); asphalt storage of 45,000 barrels (four CR tanks); and 16 clean product tanks with a storage capacity of 834,000 barrels (FR, CR).
It is important to note that FR design is used in order to minimise evaporation losses. The FR tanks at the refinery are old and suffer from operational problems, thus resulting in ‘high product losses’. The terminal would need to be rehabilitated. In addition, the dirty products’ tanks must be cleaned and converted to lighter products. The terminal would have a surplus operating capacity.
OIL FINANCING ACCORDS
Before we proceed to our conclusions, I would like to comment on the oil financing facility that had helped Jamaica over the years to access extended cheap loans when the price of oil exceeded agreed thresholds.
The successive accords were based on political considerations. Their terms were reviewed and renewed annually. My view was always that Jamaica must not base its long-term policy decisions in the hope that the oil accords benefits would continue indefinitely.
They could vanish into thin air without warning.
Mexico was in and out. PDV Caribe was designed for Venezuela to control the Central America and Caribbean oil markets.
With respect to Petrocaribe, we have now come to a full circle.
Like many other oil-producing countries, Venezuela has been suffering from the ‘Dutch Disease’ (a term coined to explain the impact of a single commodity boom by The Economist in 1977). Following excess oil supply, increased production in the United States (owing to fraking and condensate recovery) and a fall in the price of oil, Venezuela has now plunged into deep financial crises.
Once the price of oil fell below US$40/b, Petrocaribe became unattractive for the member countries.
SOCIO-ECONOMIC UPHEAVAL IN VENEZUELA
Venezuela’s domestic economy has been strapped for cash, and its socioeconomic programmes have come to a grinding halt. Venezuela now faces a serious economic and political chaos.
America’s current policy towards Venezuela makes the matters worse.
Not that this policy is informed! It is primarily based on fear-mongering and whims of a president. For example, the US foreign policy towards Venezuela is being guided by a non-scheduled February 2017 meeting at the White House.
I gather that Senator Marco Rubio had brought Lilian Tintori, wife of Leopoldo López Mendoza, a Venezuelan politician sentenced in 2015 to nearly 14 years in prison for “inciting violence”, to meet with Vice President Mike Pence.
After the meeting, Vice President Pence surprised them by taking both to the Oval Office where she spent 40 minutes chatting with the President.
Following a photo-op, the president tweeted:
“Venezuela should allow Leopoldo Lopez, a political prisoner & husband of @liliantintori (just met w/ @marcorubio) out of prison immediately,”
David Nakamura of the Washington Post (October 6, 2017) writes about the foreign policy impact that this meeting had:
“President Trump’s decision to suddenly announce a major change in US policy toward Venezuela in February [2017] began with an unexpected Oval Office meeting with Lilian Tintori, wife of the country’s most prominent political prisoner…
“With that, the president upended years of US policy toward Venezuela and signaled that his administration would take a tougher stance with President Nicolás Maduro’s repressive regime amid a deepening socioeconomic crisis in the South American nation.”
Since then, the Trump administration has put unrelenting economic and political pressure on Nicolás Maduro’s regime.
The Trump administration is notorious for its reliance on the overuse of sanctions. It is oblivious to the impact that they are having on developing or developed countries, whether they are allies or not.
According to the analysis by the legal firm of Gibson and Dunn (February 5, 2018), during the first year of Trump’s term:
“Nearly 1,000 entities and individuals were added to the Specially Designated Nationals (SDN) and Blocked Persons…
“While the increasing use of sanctions is noteworthy and brings to mind concerns raised by observers about an ‘overuse’ of sanctions, neither the administration nor Congress appears likely to cease their reliance on the tool as a ‘go to’ instrument of coercion. The past year saw increased sanctions pressure on Iran, Syria, Russia, and North Korea as well as a roll-back of the Cuban sanctions relief provided under President Obama.”
In the ‘2018-Sanctions Update’, Gibson and Dunn (February 11, 2019) observes:
“The total number of persons designated in 2018 to approximately 1,500 – 50 per cent more than has ever been added to the SDN List in any single year…
“As with years past, 2018 witnessed the expanding use of sanctions as a foreign policy tool and will provide much fodder for those debating the long-term geopolitical impact of economic sanctions …
“Venezuela’s economy – which remains heavily dependent on the state-owned oil company, Petróleos de Venezuela, S.A. (‘PdVSA’) – continued its sharp decline amid a collapse in oil production. Against that grim backdrop, the United States continued to gradually expand sanctions targeting members of President Maduro’s inner circle and sources of financing for the Venezuelan state. On January 28, 2019, OFAC [Office of Foreign Assets Control] formally designated PdVSA.”
The members of the Petrocaribe group, including Jamaica, are all feeling the pinch and are scurrying to conform to the so-called American political agenda.
Our long-term strategy seems to be guided by disinformation and short-term expediency.