What’s the plan for Petrojam?
THIS WEEK’S mayhem on global oil markets will reignite debate over the opaqueness of the pricing mechanism used by Petrojam, the stateowned oil refiner and importer. It should also serve as a reminder that the Government has done little to settle the future of the company since it received the report, tabled by businessman Chris Zacca nearly a year ago, recommending Petrojam’s privatisation. At the time, Prime Minister Andrew Holness promised full stakeholder engagement on the proposal, which, given the issues facing Petrojam, should have been expedited as a matter of urgency.
Eleven months later, with the Government dealing with the fallout of the COVID-19 pandemic, and the company possibly in line for a windfall from the collapse of oil prices, there will be an inclination to argue that the time isn’t right for Petrojam to return to the national agenda.
We make two observations. While responding to COVID-19 is, rightfully, the administration’s immediate priority, it doesn’t mean all other business of Government should be at a standstill. Second, oil, as a source of energy, remains, despite its decline in the fuel mix for electricity generation, a crucial input to Jamaica’s economy. Further, with Jamaica reeling from the COVID-19-induced global recession, domestic producers and consumers, appropriately, ought to benefit from falling prices for imported commodities.
On Monday, in the face of weak demand for oil – as a result of the recession and bulging inventories because of an earlier production war between Saudi Arabia and Russia – sellers were willing to pay buyers US$36.60 to benchmark West Texas crude, for May delivery, off their hands. It was the first time in history that the price of oil had turned negative. Prices have since returned to positive territory, but, at US$13.94 per barrel on Wednesday, remained low.
Jamaicans will expect to see a pass-through of these prices at the pumps. That’s unlikely, at least to the extent anticipated. Petrojam’s bosses will, as usual, lecture consumers that its prices are not based on the market for crudes. Instead, it uses the Gulf Coast references, which cover refined, or finished, products.
That’s appreciated. Except, as the Petrojam Review
Committee (PRC), which was headed by Zacca, pointed out, as others have done before, Petrojam’s pricing mechanism isn’t transparent, and is without oversight. Indeed, the auditor general’s 2018 probe into corruption and cronyism at the refinery disclosed instances of a former chairman unilaterally dictating price reductions, presumably for political ends.
MARKET ADJUSTMENTS
Said the Zacca report: “Petrojam sets a refinery billing price (RBP), posted on a weekly basis, for all products based on a cost, insurance and freight (CIF) of sourcing products, to which is added an acquisition differential, various taxes payable to GoJ, terminal and rack fees, and ‘other market adjustments’ added by Petrojam.”
These ‘other adjustments’, which include ‘marketsmoothing adjustments’, the Zacca report noted, “are subjectively set by the Petrojam pricing committee and these vary from time to time”. They have contributed significantly to the company’s profits in recent years.
In the aftermath of the auditor general’s review, when the laxity of Petrojam’s approach to pricing was again highlighted, including the fact that the minutes of its pricing committee weren’t available, an overhaul of the system was promised. The Zaccaled committee followed up with a call for a more transparent approach to pricing. Little, if anything, insofar as this newspaper is aware, has happened.
The committee argued that the nearly 60-year-old, 36,000bpd refinery, which would require significant investment to be upgraded to handle light crudes, was not critical to Jamaica’s energy security. It gave greater weight to Petrojam’s terminal/storage operations and raised the possibility of decoupling the two business segments. More critically, though, the committee recommended the establishment of an enterprise team to work on a divestment plan, possibly along the line of a public-private partnership.
The Government should say where it stands on this matter; what has been, or is being, done to bring transparency to Petrojam’s pricing mechanism; as well as to give consumers the assurance that they will benefit fully from the fall in oil price.
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