Sat | Nov 28, 2020

Petrojam review committee says gov't should exit refinery operation

Published:Thursday | June 27, 2019 | 10:30 AM

The Andrew Holness-appointed Petrojam Review Committee has proposed that the Government get out of oil refinery operations and instead turn it over to the private sector.

It's one of 12 recommendations contained in a 39-page report prepared by the committee, chaired by businessman Chris Zacca.

Zacca detailed the recommendations at a press conference at Jamaica House this afternoon. 


In Photo: Chris Zacca

The committee said the government should consider leasing the state-owned refinery and commission a petroleum industry enterprise team to chart its exit from the operational management of Petrojam.

In the past few months, the Petrojam management has attracted intense public scrutiny amid a series of scandals over its management including hiring practices and asset security.


In Photo: A sign at the Petrojam oil refinery on Marcus Garvey Drive in Kingston

In the meantime, the committee has also recommended that in the short term, Petrojam make every effort to maximise the processing of sweet crude oil to reduce heavy fuel oil production.

This is because Petrojam will take a hit when it's largest consumer, the Jamaica Public Service Company, switches from using heavy fuel oil to liquefied natural gas to produce electricity. 

At the same time, come January 2020, a climate change treaty to which Jamaica is a signatory, will restrict high-sulphur heavy fuel oil being sold to the maritime/shipping sector.

"These two situations will create a severe marketing constraint for the current high-sulphur fuel oil products of the refinery and pose an existential threat to the refinery's continued operation," read a section of the report.

SEE FULL LIST OF RECOMMENDATIONS BELOW:

1. The PRC is of the view that transfer of active management of the refinery and terminal to the private sector provides the only credible opportunity to improve the operating performance of both entities while also mitigating the operating and project execution risks to GOJ. Irrespective of GOJ’s policy decision to maintain the CAF Margin or otherwise, the PRC, therefore, recommends that GOJ exit active management of both the terminal and the refinery through a lease of Petrojam’s underlying assets.

2. The PRC recommends that the GoJ commission a Petroleum Industry Enterprise Team to chart a course for the government’s exit from the operational management of Petrojam. 

3. Pricing

I. With the exception of price adjustments related to terminal fees, rack fees and the CAF margin, no other price adjustments should be applied by
Petrojam, without the oversight of an independent authority.

II. Petrojam should with immediate effect begin reporting the impact of all price adjustments separately on its financials. Keeping track of such
adjustments above CIF pricing allows for a better understanding of the contribution of these market adjustments and facilitates the ongoing
management and reporting of their impact.

III. GOJ should immediately begin the process of establishing an appropriate regulatory framework for the petroleum industry including oversight with a “maximum price” at the terminal rack that incorporates CIF costs, terminal fees and taxes, but restricts or eliminates the use of "other adjustments" which are to be approved only by the nominated regulator.

IV. Regulations should also require that all terminals operating in Jamaica be obliged to post prices at the same time.

V. Pending legislation and implementation of a revised regulatory framework, GOJ should appoint an independent expert to the current Pricing
Committee at Petrojam. This independent expert should be mandated to ensure that the prices posted by Petrojam adhere to the GOJ’s new
pricing policy.

VI. Also as part of the regulatory design process, the Ministry of Energy should examine opportunities for increasing the number of marketing
companies and instituting other measures to increase competition in the distribution and retail value chain.

4. Petrojam should make every effort in the short run to maximise processing of sweet
crudes to reduce production of HFO and increase production of more marketable LSFO. ie. the 'Sweet’ operating scenario

5. Petrojam should immediately commence commercial investigation of the best
arrangements for long term supply of sweet crude feedstocks.

6. Petrojam should also commence market investigations for the potential sale of low sulphur fuel oil.

7. Further detailed feasibility studies should be conducted, as part of the efforts of the Enterprise Team, to include a detailed engineering design which would determine the process plant improvements required for the refinery to enable processing extra-light crudes such as the Eagleford or Permean crudes from the USA. Such a study would clarify in greater detail the investments required and schedule for the refinery modifications, as well as the yields that could be obtained by the refinery for various products.

8. The Committee does not recommend the continued pursuit of the VDU or RUP projects.

9. Petrojam management should be tasked to undertake a major cost reduction effort with a
targeted 20 per cent reduction in current operating costs of the refinery.

10. Petrojam management should be tasked to implement an ‘operations improvement
program’. Management should define with refinery consultants Solomon Associates the potential improvement in the operation that can be achieved and prepare a defined work plan to achieve such improvements. These improvements should be closely monitored at the Board level and play an important role in overall management of performance for the organisation.

11. Further analyse the potential improvements in the operation of the terminal to allow for a
lower cost operation including demurrage costs, reception of larger product cargoes, product blending capabilities and rack loading operations.

12. A fully functioning Board for Petrojam needs to be appointed as soon as possible, with an appropriate mix of private and public sector individuals with the requisite skills. The board should have in its composition or as an advisor, expert petroleum industry advice and perspective independent of the Company’s management.

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