Petrojam assessing FCIB, other pitches on hedging oil bill
Published:Friday | July 1, 2011 | 12:00 AM
Marcella Scarlett, Business Reporter
FirstCaribbean is lobbying regulators and the monopoly oil refinery as it works on a plan to sell hedging services to the Jamaican Government relating to its oil purchases.
Petrojam and the Office of the Utilities Regulation (OUR), who were interested enough in the pitch on commodity risk to send representatives to a forum hosted by the regional banking group and its parent CIBC last week, have not yet given definitive response to the idea.
However, Petrojam, the state-owned refinery with capacity of 35,000 barrels per day, said it is considering FirstCaribbean's proposal.
"We are exploring it," said Winston Watson, Petrojam's general manager.
"We have spoken to FCIB, but we have to do it in conjunction with the Ministry of Finance and the board of directors. It is something we are looking at."
Last week in New Kingston, FirstCaribbean's Associate Director in charge of Client Solutions Group, Gregory Samuels, said a contemporary deal with Jamaica to lock in its oil prices would not only give the country predictability on what its biggest import will cost, but could result in lower electricity bills for businesses and households.
The banking group said, however, that its plan was proving to be a tough sell.
Watson indicated that FirstCaribbean was not the only company with which Petrojam is discussing the idea of hedging its oil purchases.
"We are currently meeting with people who offer the service, both locally and internationally," Watson said.
Watson's need for finance ministry's clearance for any such move would be in the context of Jamaica's oil purchasing deal with Venezuela under the PetroCaribe agreement.
PetroCaribe delivers 21,000 bpd of crude to Jamaica, for which Kingston, depending on the price of oil, pays cash for 60 per cent. The remainder is converted to a long-term, low-interest debt, and the 'saving' is used for development projects.
The OUR, which polices the energy and telecoms sectors, is not a direct player in the commodities markets but it does have an interest in the price the light and power company, Jamaica Public Service (JPS), pays for the oil that fuels its power plants, as well as those of the independent operators from which it purchases electricity.
Specifically, oil is a pass-through cost to consumers, which the company's customers see on their bills as a fuel charge.
Energy sources explained that in this regard, there would have to be a mechanism for the OUR to monitor the hedge price for JPS oil and how this is passed through to consumers.
"If the hedged cost went the wrong way, for example, there would have to be a system for determining if and how the consumer would pay," explained an energy source.
Acknowledging that it will take time to get the public sector on board, FirstCaribbean is pitching the service at the large companies in the meantime, some of which already hedge some of their risk.
"This is a matter of political will," said Samuels. "Until the Government can do something, we will go to the end-user and give it to them," he said, referring to entities such as JPS, Caribbean Cement Company Limited, Caribbean Broilers and the sugar sector.
Samuels says Petrojam's oil bill is about US$12-US$13 million per year.
Jamaicans pay 27-33 US cents per kWh for electricity, he said, while in Trinidad and Tobago the cost is 10-15 US cents per kWh and 5-7 cents in the United States.
The latter two are oil producers and Jamaica's trading partners.
World oil markets are constantly in flux and prices - now hovering at US$95 per barrel in New York and US$112 in London - are just as volatile.
Hedging, done right, will insure the country from rising prices, said Samuels.
"If oil prices were to rise up to US$150 per barrel, some companies will close," he said, alluding to the likely attendant rise in energy costs for businesses that buy electricity on the national grid.
"The product is not risky if used properly in our case. We will be managing the risk for you," said Samuels.
"Rather, companies can use it to smooth out cost, this is risk management and not an investment instrument. It is not for the clients to make profits but rather to maintain cost; we can look at it similar to insurance," Samuels told the Financial Gleaner.
The managing director of FirstCaribbean's Jamaican operations, Nigel Holness, further pitched hedging as added value to the bank's clients.
"We are building a product that will have our clients stay with us," he said.