JPS wants fuel security amid oil price surge beyond US$100 per barrel

Power provider Jamaica Public Service Company, JPS, fearing the energy market may soon face a supply crisis, has started engaging its suppliers on their contingency plans to continue providing fuel, amid war in Europe.

JPS has been reducing its exposure to oil over the past five years, but its continuing switch to natural gas is facing a new hurdle, with the world’s most powerful nations about to restructure the supply chain so that Europe can reduce dependence on Russia by tapping other markets.

The European Union bloc reportedly sources 40 per cent of its gas from Russia.

The war and its impacts on energy has sent oil prices to nearly US$111 per barrel, and natural gas back to US$4.76 per 1,000 cubic feet as of Wednesday. On Thursday, oil prices fell but were still above US$100 at midafternoon.

But for JPS, whose electricity grid is now fuelled two-thirds by LNG, the more immediate concern is not the price of the commodities, but energy security.

“The real crisis is one of fuel supply availability,” said JPS Chief Financial Officer Vernon Douglas in an interview with the Financial Gleaner.

“You might not have any to sell,” Douglas said, referring to JPS’ supply partners.

JPS as electricity provider, New Fortress Energy, NFE, as LNG supplier, and state-owned Petrojam as producer of gasolene and other petroleum products, are the three most consequential players in Jamaica’s energy sector.

Combined, they have a few weeks’ supply at any one time, the Financial Gleaner understands. JPS later said the country has three to four weeks of oil and gas reserves.

“JPS has engaged our supply partners Petrojam and NFE to understand how resilient they are,” said Douglas, adding that he wants the supply of fuel elevated from the private sector to Government level.

“The focus now has to be at the government level, with the Government taking steps, in conjunction with the fuel providers, to best ensure stability of supply during this time,” he said.

On Tuesday, New Fortress, An American company that is the sole supplier of LNG to Jamaica, said that it holds sufficient reserves for nearly four years that were acquired at cheaper prices.

Douglas said that despite those reserves, JPS wants assurances that, down the road, global players will not crowd out countries like Jamaica, leaving them without adequate fuel.

New Fortress, which procured most of its reserve gas in 2021 when prices were well under US$3 per 1,000 cubic feet, says it holds enough supplies for all its clients going forward.

The prevailing price, at under US$5, is still well below the US$6.44 that natural gas was selling for in February.

The American supplier holds 2.9 million tonnes of natural gas in storage, of which 2.2 million tonnes are already contracted for its clients. It plans to grow that reserve to over four million tonnes in the short term.

“Prices are expected to remain elevated for the foreseeable future,” said a New Fortress executive on a conference call on Tuesday. “But we have no need for LNG at the high spot prices to meet our client’s needs.”

JPS buys LNG from New Fortress at the going market rate on the day of purchase, plus a markup to pay for use of the gas company’s pipeline infrastructure, said Douglas.

He added that under its electricity licence, JPS cannot forward buy energy as a hedge, but instead, buys at the spot prices, which it passes on to consumers without a markup.

“NFE runs an unrelated business which allows them to forward purchase. JPS cannot do that. It is something we would love to change tomorrow morning,” Douglas said.

JPS now generates most of its electricity from LNG, with the other one-third produced from heavy fuel oil and renewables. The rest of the oil-fired plants are also to be converted to LNG.

Over time, some US$800 million has been invested, mainly by New Fortress, in the buildout of LNG infrastructure. Consequently, the price Jamaica pays for LNG as an end user is higher than the spot Henry Hub market prices, to recover the cost of the LNG infrastructure.

“We are paying for the infrastructure that came to Jamaica four years ago,” Douglas said.

New Fortress actually began supplying LNG to JPS, its very first client, in 2016. At the time, the world was just emerging from a volatile period in the oil market, during which crude traded beyond US$100 per barrel in 2014. So volatile is the oil market that during the height of the pandemic, prices actually fell below zero at one stage, which essentially meant suppliers were compensating buyers of the product.

Douglas further explained that the move to diversify fuel was meant to “de-risk” from an over-reliance on one fuel source, rather than save the country money.

“The transition from oil to LNG was more about diversification,” he said.

The good news, added the JPS executive, was that over the five years Jamaica has produced electricity “much more” efficiently.

Going forward, however, the world faces a more uncertain and volatile natural gas market.

“In the last two years, LNG has gotten much more volatile, with supply chain issues related to COVID-19; and now with the war in Russia, suddenly natural gas is as volatile as oil,” Douglas said.

business@gleanerjm.com