Zia Mian | Petrojam: history matters!
With the 1973 oil crisis, the average oil price increased from US$2.48/barrel in 1972 to US$11.58/barrel in 1974, thus causing economic disruptions in many oil-importing developing countries (OIDCs).
In response to a call for a ‘New International Economic Order’ (NIEO) by the affected non-aligned nations, in 1975, the Seventh Special Session of the United Nations convened the ‘Conference on International Economic Cooperation’ (CIEC), also known as the North-South Dialogue.
To promote trade and collaboration among developing countries, the United Nations (UN) had earlier established an Office for South-South Cooperation.
Paris hosted the CIEC between December 1975 and June 1977. There were 27 participants: eight industrial nations, seven oil-producing countries (including Venezuela), and 12 developing countries (including Jamaica).
The Late Sir Egerton Richardson, Jamaica’s first permanent representative to the United Nations and a former ambassador to the United States, headed the Jamaican delegation to the CIEC.
Within the spirit of south-south collaboration, oil producers sought the OIDCs’ support for their position on oil prices.
Along with the Brazilian delegation, I raised concerns regarding the adverse impact that the high oil price was having on the OIDCs economies. At an energy commission discussion, I asked how the oil producers, as part of south-south cooperation, intended to help the OIDCs abate this negative impact?
These initiatives led to the signing of the San José Accord in 1980. Under the accord, Mexico and Venezuela were to supply 160 thousand barrels per day (b/d) of crude oil to 11 Central American and Caribbean countries at a ‘discount’. I was a member of the San José Accord drafting committee, which met in Costa Rica.
The accord did not provide discounts. It actually offered an extended loan facility. Initially, the facility converted 30 per cent of the upfront oil bill into a five-year promissory note bearing a four per cent per annum (p/a) interest.
If a recipient invested the funds, subject to a no-objection, in energy or other development-related projects, the promissory note could be converted into a 20-year loan, with a five-year grace period, at a two per cent p/a interest.
In 2000, Venezuela launched the Caracas Accord. Under this accord, 11 Central American and Caribbean nations would receive about 80,000 b/d of ‘crude oil and products’ from Venezuela and benefit from extended credit facility (17 years at a two per cent p/a interest and a two-year moratorium) applicable to five per cent to 50 per cent of the upfront oil bill, depending on the price of oil. Payments could be made in goods and services.
SINGLE LARGEST BENEFICIARY
By 2005, the price of oil had reached over US$50/b (West Texas Intermediate) and Venezuela foresaw that the price would surpass US$100/b level, which happened in 2008.
In 2005, Venezuela replaced the San José and Caracas Accords with the Petrocaribe Cooperation Agreement (Petrocaribe).
Petrocaribe increased the credit financing to 14 countries by adding Cuba, the Dominican Republic, Suriname, and Belize to the beneficiaries’ list.
In 2017, Petrocaribe had 19 members.
Under Petrocaribe, a country could take 17 years to repay the loans at a two per cent p/a interest when the price of oil was below US$40/b. When the price of oil exceeded US$40/b, the repayment period was extended to 25 years and the interest rate reduced to one per cent p/a.
In 2006, Jamaica established the Petrocaribe Development Fund (PDF) to manage the funds that accrued from the Petrocaribe loan facility.
In the FY2014-15 (the last available PDF Annual Report), Jamaica owed Venezuela about US$3 billion.
In the FY2014-15, the Kingston refinery borrowed US$412 million from the PDF. The refinery also enjoyed a revolving trade facility of US$125 million from the fund.
The Kingston refinery was a single largest beneficiary of these funds. Perhaps it used these loans to finance feasibility and FEED studies, hire consultants, or to ‘Band Aid’ the old refinery.
Although the extended facility supported balance of payments, it also increased Jamaica’s debt burden. In the FY2014-15, Jamaica’s public debt, as a percent of (gross domestic product (GDP), stood at 139.5. This adversely affected the country’s ability to borrow on the international markets at favourable interest rates.
In 2015, Jamaica swapped this debt by paying US46¢ on the dollar (a discount of 54 per cent) to retire the Petrocaribe obligation. Of the US$2 billion raised from the Euro Bond market, US$1.5 billion was used to settle about US$3.25 billion of the Petrocaribe debt. In the FY2017-18, Jamaica’s public debt to GDP ratio was down to 111.9. (International Monetary Fund, IMF, estimates).
In 2005, PDVSA established PDV Caribe as a subsidiary. PDVSA used it to develop in the Petrocaribe member countries:
a) shipping networks
b) increased refining and storage capacity, and
c) distribution facilities.
With oil prices over US$100/b, PDVSA had plenty of cash at hand. PDV Caribe started purchasing assets in facilities through joint ventures (JVs) in the member countries. By 2014, it had JVs in 432 projects, at a cost of about US$3.9 billion.
The Kingston refinery believed that it could now access petro-dollars to finance its ambitious refinery upgrade while fulfilling the ‘pipe-dream’ policy decision of 2004.
THE JAVAMEX SAGA
As history is not irrelevant, let us revisit our joint venture efforts with Venezuela!
I am reminded of an export refinery project that Jamaica proposed to build at Luana point in the 1970s. Jamaica sought support from Venezuela and was promised a loan of US$70 million, but only to be channelled through the Inter-American Development Bank (IDB).
You may also recall Jamaica’s protracted negotiations with Mexico and Venezuela for developing a joint energy/aluminum project (Javamex) that despite promises, got nowhere.
While there is still institutional memory around, I hope that someone will enlighten us about the Javamex saga.
On August 14, 2006, the Government of Jamaica, through the Petroleum Corporation of Jamaica, sold 49 per cent of its shares in the Kingston refinery to PDV Caribe and entered into a joint venture agreement. The cost of the shares was to be determined via a professional valuation of the refinery and by negotiations between the parties.
PDV Caribe had now become a 49 per cent owner of refineries in Cuba, the Dominican Republic, and Jamaica.
All World Bank, IMF, or multilateral agencies have a mandatory section in their appraisals or project reports. It is known as ‘Lessons Learnt’. Its purpose is to avoid the mistakes of past operations while considering new operations.
To these agencies, history matters.
- 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 email@example.com or firstname.lastname@example.org.