Petrojam buyout was inevitable
JAMAICA AND Venezuela have had friendly relations going back to the 19th century and diplomatic relations going back to the 1960s. We have also engaged in various energy cooperation efforts, notably, the San José Accord, out of which developed the PetroCaribe arrangements.
The primary purpose of the partnership between the Petroleum Corporation of Jamaica and PDV Caribe, a Venezuelan state agency, was to facilitate the upgrade and expansion of the Petrojam refinery, which, even from 2007, was seen as important to Jamaica’s energy security.
Twelve years later, it is even more so as the upgrade of the refinery has not been undertaken. Twelve years later, Venezuela is also now the subject of US sanctions that create international banking and operating risks for Petrojam. The status of the Petrojam refinery is now a risk for the economy and the country.
Given the clear importance of the upgrade of the refinery, early in the life of the administration, in May 2016, Prime Minister Holness and senior members of the Cabinet met with President Maduro and senior ministers in his administration. At that meeting, a commitment was given by President Maduro that within three months, action would be taken on the upgrade.
Even with that commitment and with efforts consistently being made at the technical level, it took us until January 2017 to sign a letter of intent, and then in February 2017, an agreement was signed between PCJ and PDVSA (PDV Caribe’s parent company).
In spite of Jamaica’s best and consistent efforts to encourage our Venezuelan partners to honour their commitment, and despite Jamaica having put in place the financial provisions to undertake Phase 1 of the upgrade in accordance with the agreement, it expired in February 2018, with PDVSA still not fulfilling its obligations.
It should be noted that before the expiration of the Refinery Upgrade Agreement, recognising that the obligations for the first six months had not been undertaken, and that it was increasingly less likely that PDVSA would participate in the upgrade, we started informal discussions about repurchasing PDV Caribe’s shares in Petrojam.
In November 2017, the matter was officially placed on the table with Venezuela and alluded to in a statement to Parliament by our former minister of energy, who advised that the Government of Jamaica would have to take steps to safeguard the viability of our assets, even as we acknowledge, value, and appreciate the support provided to Jamaica and to the energy sector by Venezuela.
Efforts at discussions on both the upgrade and the sale of shares continued, albeit without much concrete progress, and we made our first formal offer regarding the shares in March 2018.
CHANGES IN THE RISK LANDSCAPE
It is important to note that even as our efforts at cooperation and implementing the upgrade under the 2017 RUP Agreement were ongoing, the landscape was changing in ways that continued to make upgrade of the refinery an imperative:
One major development was that New Fortress Energy broke ground on its LNG plant and JPS confirmed its plans to convert to LNG in 2019. They have since confirmed those plans. As JPS comprises close to 50 per cent of Petrojam’s market for heavy fuel oil (HFO), and, accordingly, a large part of Petrojam’s revenue, its conversion to LNG is of significant impact.
Another major development was that the International Maritime Organization confirmed that it would not postpone its implementation of regulations setting new fuel specifications. As a result, as of January 1, 2020, we will not be permitted to sell HFO in the way it is currently produced by Petrojam.
VENEZUELA’S RELATED RISKS
We have also continued to make clear our deep appreciation for the financing arrangements made available by Venezuela, particularly under the PetroCaribe Agreement.
Let me make it clear that our decisions regarding efforts to ensure the viability of Petrojam have not been political. They are purely economic.
While we have been trying to negotiate an agreement to buy back, the urgency of the matter has increased as geopolitical conditions related to Venezuela have not improved since the issuance of the US executive order in August 2017.
The circumstances increase the potential for it to become even more difficult for Petrojam to operate – to make payments and use international banking services, solely because of the ownership stake held by Venezuela. All of these challenges have had to be addressed at great cost to Petrojam.
In an effort to find common ground in making our formal offer last year, Jamaica not only engaged the internationally recognised company that valued the shares in Petrojam for the sale in 2007, and used the same methodology to determine the price back then. We increased the offer in order to get us closer to an amicable agreement. Without going into all the details, the counterproposed price was multiples of the valuation-based price despite the fact that the economic prospects of the entity have become less certain.
Jamaica has since indicated that in good faith, even as we undertake this legislative process, we would leave our offer open and would keep the communication doors open. The action proposed is in the public interest as it is in the interest of each and every Jamaican that we ensure our energy security.
The Government has not changed its free-market policies, its support and respect for property rights, its promotion of foreign direct investment or its belief in and appreciation for international cooperation.