Press Briefing On Shares In Petrojam

(Jamaica Observer, Kamina Johnson Smith, 9.Jan.2019) — Below are the notes from Minister of Foreign Affairs Kamina Johnson Smith in her press breifing yesterday:

Ladies and gentlemen of the media, thank you all for being here today for us to address a matter related to Jamaica’s energy security.

It is one that also involves Jamaica’s bilateral relations with one of our partner countries, the Bolivarian Republic of Venezuela.

In October last year, Cabinet decided that I should lead a team, together with Minister Fayval Williams and Mr P B Scott, chairman of DBJ, to take forward negotiations to purchase the 49 per cent shareholding in Petrojam held by PDV-Caribe. We have been supported in these efforts by representatives of my ministry, Petrojam and the Attorney General’s Chambers, who have joined us today.

Today I will update you on where we are regarding those shares, but before I do so, it is important that I provide some background.

BACKGROUND

Jamaica and Venezuela have had friendly relations going back to the 19th century, and diplomatic relations going back to the 1960s. We have also engaged in various energy cooperation efforts, notably the San Jose Accord out of which developed the PetroCaribe arrangements.

In August 2006 and February 2007, respectively, the Petroleum Corporation of Jamaica (PCJ) Petrojam Limited and PDV-Caribe — a Venezuelan State agency — entered into a joint venture agreement and an agreement to sell 49 per cent of PCJ’s shares in Petrojam to PDV-Caribe.

The primary purpose of the partnership and the related agreements was to facilitate the upgrade and expansion of the Petrojam refinery, which even from back then was seen as important to Jamaica’s energy security.

12 years later, it is even more so.

12 years later, the upgrade of the refinery has not been undertaken.

12 years later, acknowledging that during the global financial crisis which impacted everyone’s fiscal capacity — including Jamaica’s — but also noting that despite subsequent efforts, including a further Refinery Upgrade Agreement entered into in February 2017 between PCJ and PDVSA, PDV-Caribe has not fulfilled its commitments in that regard.

12 years later, Venezuela is also now [the] subject of US sanctions, which create international banking and operating risks for Petrojam.

12 years later, the current status of the Petrojam refinery is now a risk for the economy and the country.

RECENT HISTORY

At this point, let us go back to 2016 when this Administration took office.

Given the clear importance of the upgrade of the refinery, early in the life of the Administration, in fact, in May 2016, Prime Minister Holness and senior members of the Cabinet, including the then minister responsible for energy, met with President Maduro and senior ministers in his Administration, including

Venezuela’s then minister with responsibility for energy. At that meeting, a commitment was given by President Maduro that within three months action would be taken on the upgrade.

Even with that commitment and with efforts consistently being made at the technical level, it took us until January 2017 to sign a Letter of Intent and then, in February 2017, an agreement called the ‘Agreement in relation to the Kingston Refinery Upgrade Project’ (the RUP Agreement) was signed between PCJ and PDVSA (PDV-Caribe’s parent company).

In spite of Jamaica’s best and consistent efforts to encourage our Venezuelan partners to honour their commitment, and despite Jamaica having put in place the financial provisions to undertake phase 1 of the upgrade in accordance with the agreement, it expired in February 2018, with PDVSA still not fulfilling its obligations.

It should be noted that before the expiration of the RUP Agreement, recognising that the obligations for the first 6 months had not been undertaken and that it was increasingly less likely that PDVSA would participate in the upgrade, we started informal discussions about repurchasing PDV-Caribe’s shares in Petrojam.

In November 2017, the matter was officially placed on the table with Venezuela, and alluded to in a statement to Parliament by our former minister of energy, who advised that the Government of Jamaica would have to take steps to safeguard the viability of our assets — even as we acknowledge, value and appreciate the support provided to Jamaica and to the energy sector by Venezuela.

Efforts at discussions on both the upgrade and the sale of shares continued, albeit without much concrete progress, and we made our first formal offer regarding the shares in March 2018.

CHANGES IN THE RISK LANDSCAPE

It is important to note that even as our efforts at cooperation and implementing the upgrade under the 2017 RUP Agreement were ongoing, the landscape was changing in ways that continued to make upgrade of the refinery an imperative:

  • One major development was that New Fortress Energy broke ground on its LNG plant and JPS confirmed its plans to convert to LNG in 2019.

They have since confirmed those plans. As JPS comprises close to 50 per cent of Petrojam’s market for heavy fuel oil (HFO), and accordingly a large part of Petrojam’s revenue, their conversion to LNG is of significant impact.

  • Another major development was that the International Maritime Organization confirmed that it would not postpone its implementation of regulations setting new fuel specifications. As a result, as of January 1, 2020 we will not be permitted to sell HFO in the way it is currently produced by Petrojam.

VENEZUELA-RELATED RISKS

Furthermore, during all this time Venezuela had become increasingly impacted by domestic and hemispheric challenges, and still is.

We are not at all insensitive to this and have continued to express, privately and publicly, our best wishes for the well-being of the Venezuelan people.

While we have expressed our principled concerns regarding certain issues, we have also at various stages agreed to be part of Caricom good offices groups and have spoken against any military intervention in Venezuela. We have also continued to make clear our deep appreciation for the financing arrangements made available by Venezuela — particularly under the PetroCaribe Agreement.

Let me make it clear that our decisions regarding efforts to ensure the viability of Petrojam have not been political — they are purely economic. But it has become clear that the previously shared interest in and prioritisation of Jamaica’s energy security, which drove the PCJ and PDV-Caribe to agree to operate and upgrade Petrojam together, no longer exists.

The uncertainties arising from Venezuela’s ownership stake cannot be overstated. While we have been trying to negotiate an agreement to buy back, the urgency of the matter has increased, as geopolitical conditions related to Venezuela have not improved since the issuance of the US Executive Order in August 2017. The circumstances increase the potential for it to become even more difficult for Petrojam to operate — to make payments and use international banking services — due solely to the ownership stake held by Venezuela. All of these challenges have had to be addressed at great cost to Petrojam, and great diplomatic and political effort by the Government in seeking to ensure that our energy security is maintained.

We know that the issue of the availability of banking services to Petrojam has come off the public’s radar, as we have been able to manage the challenges as best as possible. But the risk has not been removed or even reduced. The fact is that the problems will persist as long as Venezuela continues to have a stake in the ownership of Petrojam; and it is also clear that they are not motivated to act with any urgency on this matter.

OFFER

In an effort to find common ground in making our formal offer last year, Jamaica not only engaged the internationally recognised company that valued the shares in Petrojam for the sale in 2007, and used the same methodology to determine the price back then, [but] we [also] increased the offer in order to get us closer to an amicable agreement. Without going into all the details, the counter-proposed price was multiples of the valuation-based price, despite the fact that the economic prospects of the entity have become less certain.

Jamaica has since indicated that in good faith, even as we undertake this legislative process, we would leave our offer open and would keep the communication doors open.

PROPOSED ACTION

It is proposed that the Government of Jamaica will take legislative action to take ownership of the 49 per cent shareholdings in Petrojam, currently held by PDV-Caribe.

The action proposed is in the public interest as it is in the interest of each and every Jamaican that we ensure our energy security. Petrojam impacts on all of us — energy security is relevant to public and private transportation, our hospitals, our homes, factories and business places, and current and prospective foreign investors.

It is important that I emphasise that the Government has not changed its free market policies, its support and respect for property rights, its promotion of foreign direct investment, or its belief in and appreciation for international cooperation.

However, for Jamaica to prosper and uplift our people, we must ensure our energy security. The Cabinet has, therefore, determined that decisive action is necessary in the public interest, and Parliament will act within its powers to make laws for the good governance of Jamaica.

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