Petrojam buy­out was in­evitable

Jamaica Gleaner - - OPINION & COMMENTARY - Kam­ina John­son Smith is Ja­maica’s min­is­ter of for­eign af­fairs and for­eign trade. Email feed­back to col­[email protected]­erjm.com. Kam­ina John­son Smith GUEST COLUM­NIST

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.

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