PETROCARIBE: PUBLIC AND PRIVATE SECTOR CONCERNS

UNCLAS SECTION 01 OF 03 KINGSTON 002495

SIPDIS

STATE FOR WHA/CAR (WBENT),EB/ESC/IEC/EPC (MCMANUS, ESSER)

SANTO DOMINGO FOR FCS

SENSITIVE

E.O. 12958: N/A
TAGS: EPET ENRG ECON PREL JM
SUBJECT: PETROCARIBE: PUBLIC AND PRIVATE SECTOR CONCERNS

REF: A. KINGSTON 2026


B. KINGSTON 2083

THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE
ACCORDINGLY.

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Summary
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1. (SBU) Under the bilateral agreement signed between
Jamaica and Venezuela on August 23 (ref A),Jamaica receives
21,000 barrels of petroleum products and crude oil daily.
While the island pays market price for the products, a
portion of the payment can be converted into a concessionary
loan for social and economic development. Consequently,
Jamaicans do not realize the much-anticipated reduction in
prices at the pump, but instead benefit from the reduced
pressure on the country's foreign exchange reserves, a
development welcomed by Bank of Jamaica officials. However,
at least one Ministry of Finance (MOF) official thinks the
deal could have negative implications for fiscal policy.
Likewise, opposition party members as well as
representatives from marketing companies revealed misgivings
about possible unintended consequences of the PetroCaribe
deal, and expressed serious concerns about GOJ intentions in
light of recent statements from GOJ Energy Minister Phillip
Paulwell. End summary.

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Background
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2. (U) On August 23 a bilateral Economic Cooperation
Agreement was signed between Jamaica and Venezuela (although
Jamaica started receiving shipments of petroleum products
under the deal in July). A Second PetroCaribe Summit was
held in Jamaica on September 6, 2005 (ref B),jointly hosted
and co-chaired by Prime Minister P.J. Patterson and
President Hugo Chavez of Venezuela. The oil initiative,
which replaces the San Jose Accord and the Caracas Energy
Agreement of 2001, was presented by Chavez as an alternative
to free trade deals backed by the U.S.


3. (U) Chavez found perfect allies in Caribbean leaders and
people hurting from the effects of soaring oil prices. The
Jamaica summit was geared at concluding bilateral
arrangements and establishing the Ministerial Council to
govern the operations of PetroCaribe. Patterson, in
addressing the summit, pointed out that beneficiary states
would not receive oil at concessionary prices, as under OPEC
rules Venezuela is not allowed to sell below market prices.
Consequently, Jamaican consumers do not see a reduction of
prices at the pump. Under the bilateral plan, Venezuela
provides Jamaica with up to 21,000 barrels of crude oil and
petroleum products per day. In return, Jamaica pays full
market price for the products, but the agreement allows the
GOJ to finance a portion of the cost-per-barrel depending on
the market price at the time of purchase.


4. (U) The financing package ranges from a low of five
percent when oil prices are greater than or equal to USD 15
per barrel to a high of 50 percent when oil prices are
greater than or equal to USD 100 per barrel. The financing
period ranges from 15 to 25 years depending on the price of
oil. When the price per barrel exceeds USD 40, the
financing period will extend to 23 years plus a two-year
grace period at one percent rate of interest. The agreement
also allows Jamaica to make partial payments to Venezuela in
goods and services 'that are under threat from the trade
policies of rich countries,' an obvious response to the
dismantling of trade preferences for bananas and sugar. As
part of the agreement, the Jamaican oil refinery will be
upgraded to increase output from 36,000 to 50,000 barrels a
day. The refinery will also be configured to process the
heavier grades of crude oil that Venezuela extracts.


5. (U) While Jamaican consumers do not see any reduction in
prices, a number of benefits are expected to flow from the
oil deal with Venezuela. Proceeds from the concessionary
loan are supposed to be used for social and economic
development projects 'to improve the lives of the poor.'
With payments for a portion of Jamaica's petroleum products
being postponed, the country also benefits from reduced
foreign exchange outflows of between USD 150 and 180 million
annually, thereby reducing the pressure on foreign reserves.

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Concerns from within...
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6. (SBU) Chief Fiscal Economist at the Ministry of Finance
Courtney Williams told emboff on October 8 that the
PetroCaribe deal could have negative implications for fiscal
policy through a build-up in debt. Williams opined that the
loan would lead to increased capital expenditure without any
corresponding revenue flow, resulting in an increase in the
fiscal deficit. "I guess everything will depend on how the
financial markets and rating agencies view the deal,"
Williams continued. Keith Collister, of the Jamaica Chamber
of Commerce, told emboff that from an economic perspective,
the development had to be seen as positive. Collister
added, however, that: "nothing in life is free and
preliminary discussions in the Chamber have surrounded the
costs in terms of our relationship with the U.S."


7. (U) Opposition Leader of the Jamaica Labor Party (JLP)
Bruce Golding has also expressed concerns about the possible
use of the funds secured under the oil deal. Golding has
warned the Patterson administration that the JLP would
"scrutinize, monitor and police" the use to which the
savings were put. Golding, in a swipe at Finance Minister
Omar Davies, said: "We don't want another generation to come
and find that, in order to try to secure a fifth term, some
Minister of Government was motivated to `run with it.'"
(Note: Immediately after the 2002 election, Minister Davies
admitted publicly that the administration had engaged in
profligate pre-election spending on public projects in an
effort to sway undecided voters. End note.) He suggested
the GOJ spend the savings on education, power generation,
energy efficiency and improving productive capacity.


8. (U) Patterson nonetheless rejected a JLP proposal that
the use of funds saved through the PetroCaribe deal be
subject to parliamentary approval. Instead, he announced,
lawmakers will receive reports on fund use when the annual
budget and supplementary budgets are presented. Patterson
did show fiscal prudence in noting that priority for the use
of funds should go to those enterprises (such as increasing
energy efficiency, or mitigating the hazards of natural
disasters, for example),which have a capacity to repay the
portions they borrow from the PetroCaribe fund. It was
important to remember that: "these amounts represent loans,
not grant funds," he said.

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...and from without
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9. (SBU) Representatives from two of the largest petroleum
marketing companies in Jamaica have also voiced concerns to
emboffs. The General Manager of Esso (ExxonMobil),outlined
three primary - albeit hypothetical - issues:

-- Supply Stability: Previously, Venezuela accounted for
approximately 16 percent of Jamaican oil imports. Under
PetroCaribe, however, that figure would jump to close to 70
percent. McFarlane pointed out that such dependence could
lead to supply shocks in the future, noting that 2003 labor
unrest in Venezuela had seriously affected supply.

-- Reference Prices: Venezuela does not post its crude oil
prices, in stark contrast to all other oil-producing
nations. He wondered what, therefore, might happen if
internal factors impelled Venezuela to sell its oil at over-
market prices. He further noted that the provision for
repayment in the form of goods and services was post-
scripted: "at concessionary rates," without specifying who
sets these rates, nor by what formula.

-- Corruption Issues: GOJ has worked on a 45-day rolling
credit basis with regard to paying for crude oil. All of
the GOJ's financial mechanisms are established to meet this
target. Now, with a 25-year de facto "extension" on its
deadline, there need to be strong disincentives to the
misuse or misappropriation of these funds. Historically,
GOJ has not had a strong anti-corruption posture.


10. (SBU) On October 18, EconOff spoke to both the Regional
Manager for Policy, Government and Public Affairs, and the
Country Manager of Texaco (ChevronTexaco). While
acknowledging the points above, they were less worried by
any particular one of them. Instead, they pointed to the
overall uncertainty inherent in the deal. PetroCaribe, in
their view, is simply a financing deal, which does not
affect their day-to-day operations. Much detail regarding
actual logistics is still unwritten, however, creating the
possibility that "the playing field might not stay level,"
the concern being that the state-owned Petroleum Corporation
of Jamaica (PCJ) may undertake arrangements that are not
strictly free market-based. Shortly after our conversation,
this fear was borne out. On October 21, GOJ Energy Minister
Phillip Paulwell announced that Petcom, the retail
subsidiary of the PCJ, was scouting potential sites and new
franchisees for the Petcom brand as part of a major
expansion under PetroCaribe. "We want to take on the big
boys," Paulwell said.


11. (SBU) PCJ established Petcom in the 1980s as a
stabilizing mechanism at a time when the GOJ felt that
multinational marketing companies could hold Jamaica to
ransom if not for a counterbalancing force. Petcom
currently has 20 service stations, accounting for about ten
percent of the island's retail trade. Under the expansion,
these numbers would climb to 45 stations, capturing 35
percent of the market over the next three years. While
noting that he "welcomed competition, which always benefits
the consumer," Texaco's Country Manager noted that he had
very serious concerns about how the State-owned PCJ would
outmaneuver the private companies. Would they receive
preferential supply? Beneficial pricing? More efficient
distribution? "It is clear," he noted in an October 26 e-
mail, "that the present Government wants to vertically
integrate into the [retail] petroleum sector. This is a
significant policy shift which will have serious
implications for the market."

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Comment
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12. Jamaica is suffering not only from record oil prices,
but also from the dismantling of traditional trade
preferences. With many industries unable to compete with
lower cost producers, some Jamaican leaders view Venezuela
as a possible liberator to fill the void caused by the
falloff in trade. While private sector organizations
recognize the possible economic and social benefits, some
quarters are beginning to fear a backlash from the U.S., and
are starting to see hidden costs and consequences that had
been glossed over in the glow of the deal. However,
PetroCaribe could have a transforming effect on the Jamaican
economy, if the GOJ puts the savings to productive use. In
particular, the expected foreign exchange savings should
relieve pressure on the country's limited, albeit
increasing, stock of net international reserves. If the
loan proceeds are used to finance productive enterprises, it
will not only generate enough resources to repay the debt
but could very well produce additional resources to finance
other high cost debt. However, the Opposition's fear of the
savings being used by the current administration as a "slush
fund" to secure a fifth consecutive term should not be
overlooked, given the normally prudent Davies' post-election
admission of fiscal imprudence. Similarly, while
representatives of both Esso and Texaco in Jamaica have
indicated that the uncertainties have not affected their
short- or medium-term investment strategies in the country,
Paulwell's recent challenge to the industry has caused some
concern among some multinational corporations about GOJ's
intentions in this deal. End comment.

TIGHE