Thu | Aug 22, 2019

Zia Mian | Petrojam Review: Why Jamaican motorists pay too much for petrol

Published:Sunday | July 28, 2019 | 12:26 AM

“The RBP [refinery billing price] is determined internally by Petrojam, and there appears to be no oversight by the Ministry of Energy or other governmental authority. (GCA pp. 40).”

- Petrojam Review Committee (PRC) Report Page 14

 

 

The consulting firm of Gaffney Cline and Associates (GCA) was retained by PRC to provide “the Strategic Review of Petrojam”. With regard to the determination of petroleum product prices and margins that the refinery produces, the GCA analysis shows that during the past four years the refinery margins have averaged at US$14.96 per barrel (bbl) for motor gasolene 90 (premium), US$17.62/bbl for motor gasolene 87 (regular), US$23.01/bbl for Ultra Low Sulphur Diesel (ULSD), and US$7.32/bbl for heavy fuel oil (HFO) 2.5 per cent sulphur. These margins are inclusive of US$3.15/bbl terminal and rack fee, except for HFO.

The consultants label the margins net of the terminal and rack fee as ‘other adjustments’.These amount to US$11.81/bbl for premium gasoline, US$14.47 for regular gasolene, and US$19.86/bbl for ULSD. Based on the GCA analysis, the PRC concludes that:

“…The calculated historical impact of these ‘other adjustments’ are significant in all years examined and are responsible for the contribution of over half of the gross margin of the company. Without them, the historical (2014-18) financial performance of Petrojam would have been significantly worse, and the company would have operated at a substantial loss.”

“The ’other adjustments’ comprise market-adjustment factors that are subjectively set by the Petrojam pricing committee, and these vary from time to time.” (PRC page 17)

The CGA report, while explaining the arbitrary ‘other adjustments’ states:

“The additional difference could only be from additional adjustments made to the product sales prices. Some of these adjustments reflected the capital recovery fees that were being recovered in the case of ULSD [ultra low sulphur diesel] (expected to be US$2.62/bbl) and/or price adjustments made to Mogas 90 to capture a portion of the high differential that the marketers charged at the pump for the two products (expected to be US$1.90/bbl). However, the ‘others’ differentials exceeded these adjustments.” (GCA Report page 50)”− PRC page 16.

Let me make a few important observations before proceeding any further: a) the terminal and rack fee as fixed by the Kingston refinery at US$3.15/bbl is higher than the normal industry average and standards; b) the reference import parity that the refinery uses in its pricing formula already includes embedded refinery margins (a case of double dipping); c) the specifications of reference products from the US East Coast are more stringent than those produced by Petrojam.

The refinery, however, does apply a quality differential factor, which is not subject to verification or monitoring by a government agency or a regulatory body; the refinery enjoys a protection under the Custom Administration Fee (CAF) mechanism (estimated to average around US$3.90/bbl); d) since the acquisition of the refinery by the government, its staff contingent has increased from 111 employees to 211 while its plant utilisation factor has declined to around 60 per cent; and there is a hidden element of freight overcharge that results from the fact that Jamaica historically imported products from the Caribbean refineries, which used the US East Coast as a pricing reference point to calculate import parity CIF cost.

Changing times

In the past, the US East Coast was a net importer of products. The US postings, therefore, reflected a freight component from the Caribbean refineries to the US market. As Jamaica is halfway between the US and the Caribbean, the reference CIF increased the freight recovery by a round trip between Jamaica and the US East Coast (averaging around US$2.00/bbl to US$3.50/bbl). With the closure of Caribbean refineries and the US Gulf Coast becoming a net exporter of petroleum and petroleum products, this situation is likely to change.

Let me give the readers some historic perspective on the refinery pricing formula. In 2005, the Cabinet Office commissioned an energy policy analysis. While commenting on the petroleum product pricing from the refinery, the analysis provided us with some insight into Petrojam’s pricing formula:

“Jamaica adopts the import parity principle for pricing its product imports, with the Gulf region in the USA as the reference point. The reference price is the weekly mean of the US Gulf Coast waterborne postings published in Platt’s Oilgram. To this reference price is added acquisition costs, including the Trinidad differential, freight charges, insurance, ocean loss, finance charges, customs fees, and a terminal storage fee (which is to be the actual costs incurred over the last fiscal year, plus a profit margin), tankages and rack fees (the latter being the cost of running the product to the loading operations). This covers all costs for landing the product in Jamaica and delivering it at the refinery gate to give rise to the ex-refinery selling price.

“There is a quality differential, allowing for differences in the Jamaican product specifications, as opposed to the standard specification from US Gulf reference products as well as the Trinidad cargo size differential which allows for premium charged for the small size of cargoes normally required by the refinery. The other costs are finance charges, i.e. cost of letter of credit and exchange rate changes.

“The reference price is, therefore, the principal determinant of the ex-refinery selling price normally accounting for about 77 per cent of the final selling price. All these costs are either fixed or form a fixed percentage of the CIF costs. To the ex-refinery selling price is added the special consumption tax, which is a fixed amount and not a percentage (or an ad-valorem tax). This then gives rise to the refinery-billing price…

“… As the Gulf East Coast market, which is used, may not be the least cost postings point for Jamaica as it is influenced too much by US national supply demand situation. Gulf postings could result in higher margins and prices …”

- Cabinet Office, The Jamaica Energy Policy Analysis 2005, December 2005

An earlier World Bank study had pointed out that:

“…Price-setting formula does not capture the dynamics of the market and has been found to have inherent biases which raise the cost of products to consumers as well as to the country …”

- ESMAP: Jamaica Energy Sector Strategy and Investment Planning Study Volume II: Liquid Fuels, August 1992.

The GCA’s four-year financial performance review reveals, “the refinery production accounted for on average 47 per cent of Petrojam’s total sales volumes, and 43 per cent of sales revenue” (PRC page 19).

While the refinery as a separate business line raked in about US$120 million in gross margins over four years, it posted a net loss of US$55 million. This loss was offset by the terminal operations, and the net result was a profit of US$43 million. If the refinery margins are adjusted for CAF, the net refinery loss over the four-year period was US$250 million or US$8.33/bbl. The terminal operations posted a net margin of US$197 million.

We do not have to be rocket scientists to recognise that there are gross overcharges by the refinery to keep its uneconomic operations going. By overcharging for the terminal operations, the refinery posts consolidated profits and claims that it is a financially viable entity. Motorists grossly overpay to keep this expensive entity going.

If the refinery continues business-as-usual, the result will be, on average, a net foreign exchange outflow of about US$37 million per annum, as compared to the terminal-alone option.

By streamlining the pricing formula and shutting down the refinery we can reduce the cost of petroleum products for Jamaicans and the country, while at the same time enhancing the Government’s revenue.

We will conclude this series in next week’s column.

- 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.