Tue | Jul 23, 2019

Editorial | Energy uncertainty, war and Petrojam review

Published:Wednesday | June 26, 2019 | 12:29 AM

Oil futures rose six per cent last week in the face of rising tension between the United States and Iran. This upward movement follows a ratcheting up of military activities by the US in the Persian Gulf. The US has been imposing a series of crippling sanctions to wreck the Iranian economy, with the hope that the Iranian people will be sufficiently starved or frustrated, that they will rise up and overthrow the regime, and put in place one favourable to American interest. There are grave doubts about such a scenario playing out anytime soon. It is the same strategy being applied, without success, in Cuba over the last 60 years.

The situation in the Gulf, last week, escalated to a point where the US and Iran were literally 10 minutes away from military action that could have spiralled into a full-blown war, with incalculable loss of life and material damage.

It is quite evident now that there are powerful forces in the US administration that want to attack Iran and inflict as much damage as possible. The fact that Iran is unwilling to back down in the face of threats makes it quite possible that military action could break out anytime, and countries, including Jamaica, must prepare for such an eventuality.

A major US-Iran war in the Gulf would push oil prices up sharply, possibly to record levels. Shortages of petroleum products could even occur. The impact of such a rise on the Jamaican economy would be negative, and could halt the nascent growth and macroeconomic improvements under way. Our economic managers in the Ministry of Finance and at the Bank of Jamaica must start looking at the scenarios that such an outcome could present.

VULNERABLE TO SHOCKS

Jamaica’s vulnerability to external shocks is being exacerbated by the continuing developments in Venezuela. The evolving political chaos in that country, as the USA seeks regime change there also, has cemented the end of the PetroCaribe Arrangement under which the country used to get a significant portion of its petroleum products.

Relations between Jamaica and Venezuela are all but frozen. The Americans will not allow free trading relationships. Further, there is an unresolved and deepening dispute between Jamaica and Venezuela over the Holness administration’s decision to compulsorily acquire the PDVSA’s 49 per cent share ownership in the Petrojam refinery. The legal battle over this decision could be protracted, thus affecting financing and investment decisions of the refinery.

Jamaica’s energy-related problems are compounded by the shambolic manner in which the Petrojam refinery has been managed over the years, and the country’s seeming inability to make a timely decision about its expansion. The ongoing parliamentary investigation into the operations of the refinery has revealed significant shortcomings in governance and management effectiveness, in addition to fraud and cronyism. This has overshadowed the importance of the refinery and the need for urgent decisions about its future.

The age and size of the refinery are arguments to support its modernisation to increase throughput and incorporate new technologies. That decision has been delayed for close to a decade now. There are many, however, who question the business case for the more than US$1 billion needed for the expansion. They have put forward an argument for the closure of the refinery, and the facility being converted to store and distribute imported petroleum products.

On February 12, 2019, at a press conference at Jamaica House, Minister of Foreign Affairs, Senator Kamina Johnson Smith, told the country that the Zacca Petrojam Review Committee, which was set up in 2018 to study the operations of the refinery in light of the scandals engulfing the entity, would shortly submit its report.

Since then, the country has heard nothing about the committee or its report. We presume that the minister of energy or the Cabinet has a final report in hand, and will shortly be sharing its findings and recommendations with the country.

This matter takes on greater urgency in light of recent developments in the global energy market and the threats the country faces.

We also note that the Petrojam refinery is set to lose a significant share of the market for its current products. The market for the heavy fuel oil that is supplied to the Jamaica Public Service for generating electricity is being sharply reduced, as the power company switches to the cleaner LNG fuel. In fact, with the coming on stream of the 190MW power plant in Old Harbour later this year, this will have a dramatic impact on the viability of the refinery.

Given the growing global energy instability, the impending developments at the Petrojam refinery and the unresolved issues with Venezuela, it is very urgent that the minister of energy gives the country an update on these developments.