PETROJAM: Let’s connect the dots!

ONCE, WE were in love with our national airline, Air Jamaica (AJ).In order to keep flying, AJ bled the economy for almost 40 years, while its annual losses increased to US$100 million.

We were afraid to ground AJ, lest our tourism sector suffer.

We entered into a partnership with Caribbean Airlines (Caribair). In 2015, Caribair found it prudent to discontinue AJ.

We have no national airline, and yet, our tourism sector is booming. Tourists’ arrivals are at an alltime high. We are still connected with the rest of the world.

SACRED COW

The historical analysis going back 40 years has shown that the Kingston oil refinery, Petrojam, has consistently operated below financially viable capacity and lost money. Notwithstanding, successive administrations have treated it as a sacred cow – untouchable!

The alarmism and disinformation that were used to guide policy decisions for an upgrade served narrow vested interests.

Efforts to privatise it or attract investments to upgrade were unsuccessful. Management kept advancing assumptions that normally overvalued the assets. No attention was paid to the social or opportunity cost that the country endured.

By an ostrich-in-sand approach, we cannot wish the refinery to become economically viable.

A 54-year-old small hydro-skimming unit has no place in today’s world and is only worth its scrap value.

The refinery’s consolidated profits and cash flow are attributable to the terminal operations and ex-terminal pricing mechanism. If the refinery is taken out of the equation, other things remain the same, the consolidated profits of the remaining ‘operations’ are likely to improve or the consumers will benefit from lower prices.

Regrettably, there is no regulatory oversight of the petroleum sector.

While about 45 per cent of the Jamaica Public Service’s (JPS) tariffs are under strict regulatory control, 55 per cent of our electricity bill (fuel portion) has no scrutiny.

Although JPS can import fuel directly, the fuel cost is a direct pass-through, and JPS has had no incentive to make investments in a storage facility.

Now that a wider use of LNG is being pursued, this concern is not relevant, as, with the closure of the refinery, there would remain excess storage capacity at the Kingston terminal.

The refinery management, over the years, has successfully convinced the unversed that for the survival of the Jamaican economy (fear factor), the refinery must be expanded and upgraded to convert heavy ends of the crude oil into lighter products.

The cost of the upgrade and expansion is now estimated at US$1.3 billion, an uneconomic option for a refinery of this size.

The upgraded plant will need either direct financial support from the Government or a regime of creative pricing mechanisms.

The policy decision that supported this upgrade was not informed by independent expert advice.

COMMON CARRIER TERMINAL OPERATIONS

To conclude, the refinery unit must be shut down and the site converted into a ‘common carrier’ industry oil terminal.

An independent, private or public entity, or an industry consortium, may own and operate the terminal. This would enhance the financial health of the remaining operations.

The taxes that the refinery now collect on behalf of the Government can still be collected and deposited into the treasury by the terminal operator (Esso performed this function when it owned the Kingston refinery).

If we decide to shut down the refinery, there is no need to spend US$60 million or US$70 million in buying back the shares of a ‘heap of junk’ or spend money on a new vacuum tower.

The fair payment would have to be based on the valuation of remaining assets that are jointly owned by the Government and Venezuela’s PDV Caribe.

Muse Stancil (using income stream and 10 per cent discount rate) has estimated the fair value of the terminal at US$34 million (this includes severance pay of US$18 million to the 70 per cent of the staff).

A purchase of the refinery unit by a private group would entail that the Government would be obliged to support the price manipulation, as well as high terminal throughput fees.

These are not in the public interest. It is time that we set the politics aside and face reality.

IF WE DISCOVER OIL

A reader had asked,in case Jamaica discovers oil, what would happen if we shutdown the refinery?

My answer: Refineries are designed for a specific or a select combination of crude oils. They cannot process any or every crude oil. The ability of a domestic refinery to process the newly discovered crude oil would depend on how compatible its ‘assay’ is with the refinery design.

Hopefully, Jamaica discovers oil and gas. But a domestic crude oil may not be suitable for newly configured refinery that was not designed to process such a crude oil. The newly discovered oil would have to be exported to a refinery that can process it profitably.

For example, in 2018, Trinidad and Tobago (T&T) produced 54,400 b/d of crude oil and exported 22,000 b/d (Galeota Mix and Calypso). T&T’s refining capacity was at 170,000 b/d. It processed about 118,500 b/d.

At a 69 per cent utilisation factor, T&T did not find it financially viable to continue refining operations.

The Pointe-a-Pierre refinery was designed for imported crude oils. It did, however, process a small volume of domestic crude.

In 2018, the Pointe-a-Pierre refinery, on the average, imported 75,300 b/d of crude oil. The major sources were Russia, Colombia and Gabon. Under a processing agreement with Barbados, Petrotrin also processed a small volume of crude oil (Woodbourne) that Barbados produced.

One may recall that Barbados used to have a ‘teakettle’ mobile refinery sitting across the Hilton Hotel. It was shut down in 1998. I shall relate the interesting story behind this construction at another time!

For financial and economic reasons, the T&T refinery at Point-a-Pierre was also shut down in October 2018.

T&T now imports fully refined products to meet its domestic demand, and all of the domestically produced crude oil is exported.

I can assure you that this has not created a supply security issue or shortage of products in T&T.

With the Pointe-a-Pierre refinery closure, which Caribbean refinery does the Common External Tariff now protect? Need I say more?

This brings me to the occlusion of this series. Next, I shall address the issue of JPS’s high electricity transmission and distribution losses in Jamaica.

“Now, here, you see, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

– Alice’s Adventures in Wonderland, Lewis Carroll