Sat | Dec 10, 2016

Vin Lawrence recommends oil hedges to offset eventual price rise - Cheap oil will not change energy policy

Published:Wednesday | January 14, 2015 | 12:00 AM

Avia Collinder, Business Reporter

Dr Vincent Lawrence, the head of the Electricity Sector Enterprise Team (ESET), says Jamaica's energy policy - crafted to escape the impact of rising oil prices - will remain unchanged even as oil prices tumble worldwide.

Lawrence further predicts that oil prices which have currently fallen below US$50 per barrel will again rise closer to the US$70 dollar mark when the market resumes "normalcy".

On Tuesday, oil prices fell again to US$45.89 a barrel in New York, while Brent crude dropped to US$46.59 in London.

The ESET team leader is recommending that local importers start hedging to protect against the return to higher prices.

"Unlike when oil prices similarly fell in 2010, the policy now should be for Jamaica to assess possible oil hedging and thus in the short term ensure that the economy - on a sustained basis - benefits from the lower prices and protect against sudden increases in the price of oil later in the year as the market returns to normal."

In May 2014 ESET was created to reformulate Government's energy programme after yet another failed effort to issue a LNG licence.

Several energy projects are now under consideration including a foray into ethane by Rusal Jamaica.

Oil prices were trading above US$100 less than a year ago, a period in which Jamaica's energy bill - at the country level as well as the firm and household levels - appeared unsustainable.

Lawrence said Tuesday that the drop in prices will not lead to a change in energy policy, because prices will eventually head north again.

Minister of Energy Phillip Paulwell was even more emphatic, when asked whether prevailing conditions would lead to a change in focus on renewables and other aspects of energy policy.

"The answer is a resounding and absolute no," he said.

"It is not going to change by one iota. We are going to be even more relentless. We do know that the price of oil will go higher one day. We do not want our repeated mistakes to reoccur."

Paulwell said all base-load projects will be pursued along the same timetable.

"The three major projects are going to happen - the two wind farms and the solar project will break ground this year. The net billing policy will remain unchanged. Energy conservation projects will be pursued vigorously," he said.

Rebounding oil prices

The various energy projects proposed are expected to be executed by their investors on varying timelines up to 2018.

Analysts are predicting that when the ground shifts for oil, prices will not return to the US$100 mark but may fall within the US$60 to US$80 range.

Lawrence is confident that oil prices will rebound by year end.

"I personally expect current prices generally to hold for 2015 Q1 and Q2, but to increase to between US$75 and US$80 for 2015 Q3 and Q4," he told Wednesday Business.

He affirmed that the short term swings would not affect government's long term energy strategy.

"It should not impact current plans and projects as the long term price projections suggest continued relatively higher fuel oil prices.

Speaking specifically to the proposals for coal fired plants by commodity exporters in the cement and bauxite industry, Lawrence said he expected no changes there.

"This is not generally expected," he said, "although ESET continues to monitor and re-analyse, especially as it relates to attracting investors."

ESET announced in September that the Jamalco alumina refinery had selected a developer to build, own and operate a coal fired co-generation facility. The power plant is slated for the Jamalco site at Halse Hall, Clarendon. Its projected completion date is the first quarter of 2018.

Rusal-owned Alpart has also has selected a developer to build, own and operate an ethane-fired combined gas turbine co-generation facility at Nain, St Elizabeth. Ethane will be shipped from the United States. That project is due for completion in the second quarter of 2017.

Christopher Cargill, Chairman of the Petroleum Corporation of Jamaica, also expects low oil prices to be short-lived, and that he sees prices moderating in the medium term

"I believe that it is difficult to be accurate, to guess prices 12 months away. What the various authorities are saying today is about US$60-US$63 per barrel by end of year," he said.

He too says the plans for coal unlikely to change, notwithstanding the performance of oil prices.

"The only coal plans are for the bauxite refineries and they would be looking at 20-year solutions. I believe that coal will be lower over 20 years than petroleum," Cargill said.

avia.collinder@gleanerjm.com