Sat | Jan 23, 2021

Editorial | Unlock Petrojam’s potential

Published:Wednesday | December 2, 2020 | 12:13 AM

It’s a year and a half, a general election and two portfolio ministers since the Zacca committee presented its report on Petrojam. Yet, the Andrew Holness administration seems to have no clarity on what it intends to do about the task force’s recommendations, among which is that the Government quit the oil business. If the Government has a response, it hasn’t shared it with the public.

Indeed, from our vantage point, which, admittedly, is far from the centre of operations, things at the oil refinery are drifting back to the routine. Which is of concern to this newspaper, as it should be for all Jamaicans. For there are consequences for complacency.

Just before Chris Zacca and his colleagues set about the review of the old, 38,000-barrels-a-day refinery, Petrojam, we remember, was in the spotlight over allegations of cronyism, nepotism and other forms of corruption by apparently party-loving managers, who binged with taxpayers’ money.

Economic and technical analyses, rather than allegations of impropriety, informed the findings of the Zacca report. The Government, nonetheless, should be sensitive to the issue, encouraging it to transparency and urgency in responding to the report. There has been enough time for the Government to have studied the findings and determined whether they, or any portions thereof, should be embraced or chucked out.

A critical conclusion of the Zacca group was that the small and inefficient oil refinery, which would require substantial capital to upgrade, wasn’t “essential to ensuring Jamaica’s energy security”. However, Petrojam’s terminal operation, “because of its storage capacity and ability to receive petroleum product cargoes, and to supply distributors via its terminal racks, is deemed to be critical to ensuring energy security for the nation”. What the Government, by its lethargy in having an open discussion on these questions, has done is slow any unlocking of a potentially large source of revenue which would be vital in the COVID-19-induced recession, or might be used to finance capital projects.

Insofar as the Petrojam refinery is a viable business, it is largely because of Government’s tax policies, including a heavy Customs Administration Fee (CAF), on refined petroleum products imported into the island. “This CAF differential provides a significant tax incentive to refining over the importation of finished products and this CAF differential represents a major contributor to the economic viability to the refinery,” the report said.

For example, the committee’s disaggregation of Petrojam’s cost centres (which isn’t a norm for the company) revealed that 47 per cent of its sales by volume, and 43 per cent of the sales revenue, were from its refining operations. Interpreted another way, 53 per cent of the products Petrojam sold weren’t refined by it. They were imported. These accounted for 57 per cent of its revenue. On the other hand, the review concluded, 70 per cent of Petrojam’s overall costs “could be allocated to the refinery and the balance to the terminal”.

In other words, the oil refinery – which functions at less than two-thirds of its rated capacity – has been able to operate in its current form because the prices Jamaicans pay for petrol at the pumps are stuffed with steroids of taxes – 36 per cent on average, according to the report.

The Zacca committee highlighted a series of operations, including a US$1.2-billion investment to allow the refinery to process heavy crudes, such as is found in Venezuela, but ruled this out as feasible. A much smaller investment (US$78 million), which would allow Petrojam to refine light (sweet) crude was a possibility, although that wouldn’t add too much to the company’s long-term cash flow and viability. It, however, should be studied.

BEST OPTION

From the standpoint of the revenue to the Government, the best option, the Zacca committee argued, would be to close the refinery and operate only the terminal facilities. The Government, in that scenario, would receive the higher CAF charged on imported finished products. “.... And if GOJ (Government of Jamaica) were willing to sacrifice all or part of these additional revenues, the option would exist to further reduce fuel costs to the economy, with attendant benefits in terms of improved competitiveness of the broader economy.”

Or, the Government might consider allocating more from a fatter kitty to the rehabilitation of the island’s battered infrastructure, that has been made worse by recent floods and landslides.

But the Zacca committee argued that transferring the “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”. Privatising, therefore, was crucial.

Notably, the Government has talked around the Zacca report, mostly about efforts to bring transparency to Petrojam’s opaque pricing mechanism. We have seen little concrete action, even on that front. The energy minister, Daryl Vaz, and Prime Minister Andrew Holness must say what they plan to do. When! And how!