Editorial | Whither Petrojam?

Last week’s revelation that the Ministry of Finance has been forced to bail out Petrojam with a J$5-billion working capital loan because creditors cut off lending cries out for further and better particulars, including what analysis went into the state-owned refinery’s decision to front-load purchases of US$120 a barrel crude.

The issue is also a reminder of the Government’s silence – if not inaction – on the future of the 36,000 barrels-a-day plant more than four years after Chris Zacca’s committee submitted its report on the options available to the administration. The most promising of these, Mr Zacca’s group concluded, was for the Government to exit the management of the operation, mothball the refinery, and lease the rest of the facility to private interests as an oil terminal. A model for the project would be the privatisation of the Sangster and Norman Manley international airports in Montego Bay and Kingston, respectively.

“.... [T]he existence of local refinery operations is not essential to ensuring Jamaica’s energy security,” the Zacca committee said. “However, the terminal, 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.”

The last time the Government spoke publicly about the Zacca report was 14 months ago when the energy minister, Daryl Vaz, told Parliament that it was still being considered by the Cabinet.

SELF-FINANCING ENTITY

Petrojam is supposed to be a self-financing entity whose profitability should allow it to return dividends to the Government’s coffers. Its current need for support – short term, its managers say – came to light as a line item in the J$14.8 billion of additional spending that the finance minister, Nigel Clarke, proposed for this fiscal year in the second supplementary estimates he presented to Parliament last week.

Subsequently, the refinery’s CEO, Telroy Morgan, told the legislature’s Public Administration and Appropriations Committee (PAAC) that the company needed the bailout because of an “impairment on our books based on the inventory that we are carrying”.

The upshot, Mr Morgan conceded, was that the company’s regular financiers “have suspended their usual quota of amounts to us, and hence, for the very short term, we have moved to the Ministry of Finance to bridge that gap”.

While it was stressed that this was a loan, to be repaid in 18 months, it didn’t disclose what, if any, interest Petrojam would pay on the debt.

This cash-flow crisis has its genesis, Petrojam’s chief financial officer (CFO), Delroy Brown, explained, in the company’s decision to build up its inventory at a time when the price of crude was spiralling in the face of Russia’s invasion of Ukraine. Although the specific timing of these purchases was not revealed, Mr Brown indicated that the purchases were at between US$100 and US$120 a barrel. Oil is now hovering at around US$80 a barrel.

Neither Mr Brown nor Mr Morgan disclosed how large the inventory was at its peak or its mix between finished products and crude. The CFO, however, said that Petrojam still had between 800,000 and one million barrels on hand at storage facilities in Jamaica and St Lucia.

Private firms do sometimes make bets of this kind, which, if they go bad, have far more profound consequences than faces Petrojam. When their bankers cut off funding, private firms usually can’t appeal to the national treasury.

STRATEGIC DECISION

Petrojam, of course, isn’t any other company. So bulking up on inventory might have been a strategic decision taken in the national interest. In that respect, it is unlikely that the company’s board and management would have acted on their own without the imprimatur of the line minister and Cabinet. If that was indeed so, not only was the Government obliged to provide the loan, it had a moral duty to provide cover to the managers. In that case, there oughtn’t to be any impression that they were on a frolic of their own.

Full transparency is, therefore, necessary, including the considerations that went into the decision and of the nature and the extent of the “impairment” suffered by Petrojam.

The latter couldn’t be independently determined in the absence of Petrojam’s financial reports. The latest of these that is readily accessible is for 2018-19 although the company’s website shows front-cover images of reports for 2020 and 2021-22. They, however, can’t be electronically opened.

However, other posted data showed that in the 2019-2020 financial year, Petrojam’s crude oil imports jumped by nearly 3.4 million barrels, or 49.5 per cent, to 10.2 million barrels. It declined by 29 per cent in 2021-2022.

There is also another context to this issue that ought to be seriously discussed without political hubris: the question of an oil hedge.

Hedges are, essentially, insurance that offer buyers and sellers cover in the event of adverse market movements. They can be complex instruments from which holders get no return.

Jamaica entered one for oil during the previous administration. That, unfortunately, became a matter of partisan political discord. The current administration, in 2020, decided to exit the hedge on the grounds of its value and efficacy.

Hopefully, the recent development will allow for a discussion of a hedge without a lot of ‘I-told-you-so’. But more importantly, the Government must break its silence on the Zacca report and the future of Petrojam. Four years is a long time.