Sun | May 26, 2019

Zia Mian | Petrojam, some simple questions!

Published:Sunday | February 3, 2019 | 5:43 AM
Why did Esso find it necessary to divest and sell the refinery?
Zia Mian
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Following the publication of my column in the Sunday Gleaner on January 27, 2019, I received a number of comments. One of the writers has urged me to “fast-forward to the present, given the imminent nature of a proposed ‘hostile’ government takeover and also a private outside offer”. This comment seems to allude to the politics of the Kingston refinery.

While I am mindful of the current urgency, my take on this is that the underlying issues need to rise above politics and must be addressed from an informed position and objectivity.

For too long, successive administrations have made policy decisions that were based on either crisis or vested-interest positions.

We must commission a comprehensive overview of the ‘energy sector’ and make an informed decision with respect to the future of the Kingston refinery.

In 2001, I had recommended to the Government to introduce natural gas into Jamaica’s energy-supply mix. I am glad that after 15 years of protraction, Jamaica has finally taken natural gas on board. This development would change Jamaica’s economic scene and must be taken into account while we address the refinery issue.

It is within this context that I intend to provide some historic insight into the petroleum sector and rationale for a refinery in Jamaica (with or without an upgrade).

THE QUESTION

Therefore, the question that we need to ask is not ‘if Government should buy back the shares owned by PDVSA Caribe’? The question is much wider. Now, what we need to ask is if a continued operation of a refinery in Jamaica is indeed the least costly option and is in the economic interest of its people.

The management of the refinery would like us to believe that a ‘national’ refinery is critical for the security of petroleum supplies to the Jamaican market and makes a net contribution to the national economy, while employing a staff of about 211 Jamaicans.

Believe you me, that a ‘national airline’ and a ‘national refinery’ are not necessary to reinforce national sovereignty or economic independence. However, I shall address the security of supply concerns in a separate article.

WHAT WE NEED TO KNOW

To make an informed decision, we do need answers to a number of simple questions, that among others, might include:

a) Why Esso built a refinery in the first place when there existed a large refining capacity in the Caribbean basin;

b) Why was it designed to be a simple hydro-skimming operation;

c) Why, after the nationalisation of petroleum reserves in Venezuela, did Esso needed government support so that the refinery could remain financially viable (even when Esso still had a tax holiday);

d) Why Esso found it necessary to divest and sell the refinery;

e) How could a small refinery, which has consistently been operating at about 60 per cent or less of its capacity, be financially viable while larger refineries, with secondary conversions facilities, found it difficult to survive (for example, Aruba, Curacao, Trinidad and Tobago, etc.) and had to shut down;

f) Why does the refinery operate at suboptimal capacity and a major source of its revenues in fact is direct import of fully refined products, that in 2017 accounted for 54.4 per cent of its market sales;

g) On what basis do the operators of the refinery contend that the refinery is in Jamaica’s national interest, while over the years it has continued to sustain financial losses?

 

At the same time, the management would like us to believe that the country must invest US$1.2 billion to upgrade the refinery (crack the heavy fuel oil into lighter products) to survive. Is it Luana all over again?

But that is a story for another time.

These are some common sense questions. To answer them, I must have my storyline fully supported by economic realities and historic facts as they relate to the energy environment in Jamaica. So I ask the readers to bear with me in our quest for some common sense answers.

FINANCIAL LOSSES

Right from the time of purchase by the Government of Jamaica in 1982, the Kingston refinery experienced financial losses on its refining operations. The on-and-off losses have continued to the present day. The refinery management has generally blamed away these losses on causes other than the non-viable nature of the Kingston refinerys suboptimal operations.

The management has not acknowledged the fact that small, old refineries have constraints and inherently suffer from financial-viability problems. To keep them operating, we must find means to provide financial support either directly or through a pricing mechanism as was done for Esso in the 1970s.

For example, the 1983 and 1984 financial losses of US$8.8 million were blamed on “expensive procurement of crude tankers and payment of demurrage and financing charges”. In the 1990s, recurring losses were attributed to difficulties with refinery-processing units.

In 2009, Petrojam posted a heavy financial loss of about J$7,176 million (US$81 million equivalent) before tax. The then prime minister directed the minister of finance to commission an operational audit of the company.

The operational audit concluded that the losses incurred in Petrojam arose largely as a result of the extraordinary price volatility in the world petroleum industry that imposed heavy pressures on oil-importing countries, Jamaica being no exception.

“Faced with this situation, Petrojam made certain judgment calls in its import patterns and market pricing, which, in retrospect, impacted unfavorably on the company’s profitability,” the audit stated.

The operational audit recommended a number of measures to avert future losses.

Recently, the auditor general discovered that over a period of five years, the refinery lost about US$140 million. Many of the auditor general’s recommendations are a repeat of the recommendations that were made in the 2009 audit.

Obviously, the management did not take time to implement those recommendations. Here arises an issue of regulatory oversight that was recommended during that 2009 audit, but was not implemented.

I had promised to address in this article the partial liberalisation of the petroleum sector and Government’s efforts in the 1990s to privatise the Kingston refinery. It seems that I have reached the limit of my column and would have to take these up in the next article.

 

- Zia Mian, a retired senior World Bank official and former director general of the OUR, is an international consultant on energy and information technology. He writes on issues of national, regional and international interest. Send your comments to mian_zia@hotmail.com or columns@gleanerjm.com