JAMAICA: LIQUID NATURAL GAS PROJECT IN DOUBT; SIGNIFICANT

UNCLAS SECTION 01 OF 03 KINGSTON 000342

SIPDIS

STATE FOR WHA/CAR (RBUDDEN),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR A FAIBISHENKO

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ENRG EPET PREL CARICOM JM TT XL
SUBJECT: JAMAICA: LIQUID NATURAL GAS PROJECT IN DOUBT; SIGNIFICANT
ECONOMIC AND POLITICAL IMPLICATIONS FOR THE REGION

REF: A. 06 KINGSTON 1592


B. 03 KINGSTON 467

C. 03 PORT OF SPAIN 2184

D. 04 PORT OF SPAIN 2042

E. 06 PORT OF SPAIN 529

F. 06 KINGSTON 1687


1. (SBU) Summary: Ostensibly because of production constraints,
Trinidad and Tobago (T&T) reportedly will renege on its promise to
supply Liquid Natural Gas (LNG) to Jamaica, thus jeopardizing a USD
1.6 billion expansion of Alcoa's alumina operations in Port
Esquivel. Jamaica's lead role in the negotiation of the PetroCaribe
agreement with Venezuela, which robbed T&T of a captive market, may
well have been a factor in the GoTT's decision. This has
significant political and economic implications, as Venezuela may
now replace T&T as the largest supplier of energy in CARICOM. This
latest development also underscores some of the difficulties faced
by the regional integration movement. End summary.

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Background
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2. (U) Jamaica has the dubious distinction of being one of the
highest per-capita consumers of oil among non-oil producing
countries (ref. A). During 2002 the country consumed 25 million
barrels of oil worth USD 600 million. By 2006 the figure was 27
million, costing about USD 1.74 billion and translating into 10.53
boe (barrels of oil equivalent) per citizen. Relatively cheap
prices (due to a flat versus variable tax on gas) combined with
soaring demand from inefficient electricity and bauxite companies
are the underlying reasons for the high per-capita consumption.
This high and growing dependence on imported petroleum prompted the
P.J. Patterson-led administration to embark on an energy
diversification drive in 2002. Anthony Hylton, a former government
minister at the time and now Foreign Affairs and Foreign Trade
Minister was appointed an Ambassador/Special Envoy to drive a
project to introduce Liquid Natural Gas (LNG) into the energy supply
mix by March 2007 (ref. B). Hylton commissioned a number of
studies, which concluded, inter alia, that the introduction of LNG
would slash the country's fuel bill by as much as 30 percent.



3. (U) To develop a supply agreement, Jamaica initiated dialogue
with Trinidad and Tobago (T&T) in 2002. In mid- 2003 discussions
stalled (ref. C),as Jamaica argued that T&T was obligated to sell
LNG on the same terms as it did to domestic firms (national
treatment) - a "Caribbean" price. With the GOTT dissenting, Jamaica
sought a legal opinion from the CARICOM Secretariat. Hylton, a
lawyer himself, argued that while the opinion might not be decisive,
it would be persuasive in Jamaica's favor. The response from the
Secretariat, in late 2003, largely agreed with Jamaica, and by the

SIPDIS
end of 2004 the two countries had signed a memorandum of
understanding for the supply of 160 million cubic feet of LNG a day
(ref. D). "This agreement is expected to lead to a competitive,
predictable and assured long-term supply arrangement for LNG on an
agreed base pricing and escalation basis," Patterson said at the
time. "This is to be seen as just one of the great benefits that
will flow from the integration of regional economies when the
CARICOM Single Market and Economy (CSME) comes into being," he
continued.

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The Rhetoric Fades
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4. (U) Despite this MoU, a final deal remained elusive, prompting
new Prime Minister Portia Simpson-Miller to journey to T&T in May
2006 to get a firm commitment from Prime Minister Patrick Manning
(ref. E). The visit was particularly timely, as the American-owned
alumina producer Alcoa, which had announced a USD 1.6 billion
expansion project based on the availability of LNG, reiterated its
intention to postpone the investment until a deal was sealed. By
the second day of Simpson-Miller's visit, Manning again reiterated
his commitment to sell Jamaica 158 million cubic feet of LNG per day
by 2009. The pricing provisions were expected to recognize Jamaica
as a CARICOM partner, extending the principle of national treatment.
However, by the end of 2006, the head of T&T's state-owned national
gas company, Frank Look Kim, revealed that the country would not
have enough natural gas to sell to Jamaica in the near future, thus
further jeopardizing the Alcoa investment, while forcing the GOJ on
the defensive.

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5. (SBU) The GoJ, clearly pessimistic about the LNG project, and
desperate to realize the Alcoa investment, changed their focus.
Jamaican Cabinet Secretary Carlton Davis revealed, in December 2006,
that the GoJ was placing coal firmly on its agenda as an alternative
source of energy for the Alcoa project. He added that coal was
always going to be an important part of the electricity company's
future. Initial plans for land-based LNG storage facilities were
changed due to cost and time factors, and the revised project cost
was scaled back to a quarter of the original USD 400 million. At
the same time, the GoJ began to look closely at ethanol as an
alternative. Basil Waite, a recent member of the administration and
now Executive Chairman of Global Energy Ventures, told emboffs that
a proposed ethanol plant will be built on the 20 acre site in Port
Esquivel which had been slated for the land-based LNG facility.


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Game On?
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6. (U) The saga took a new twist in February, 2007 when Manning
contradicted reports that T&T would renege on the MoU. Manning, who
was attending the CARICOM Prime Ministerial sub-committee on
external negotiations, noted that supply side constraints had indeed
emerged, but stated that he would shortly inform Jamaica on how T&T
could best satisfy Jamaica's LNG needs. He said that his government
had completed arrangements with three gas companies to arrange
supply, complete with time frames. "The GoTT is determined to
satisfy its contractual obligations to the GOJ. An agreement was
signed in good faith, and it is our determination, notwithstanding
statements to the contrary coming from dubious sources," he told a
press conference following the ministerial in Montego Bay, Jamaica.


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Game Off
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7. (U) However, the supply side argument re-emerged a week later,
with T&T again suggesting that due to increased demands for LNG
locally and internationally, its LNG deal with Jamaica was now
contingent on a formal cross-border agreement with Venezuela (Note:
T&T and Venezuela have a protracted dispute regarding LNG fields and
maritime boundaries. Endnote). The death knell was to be delivered
shortly after that, when Manning admitted that T&T might not be able
to honor its commitment due to supply problems. There is
speculation that T&T lost interest in supplying Jamaica with LNG
after the issues of national treatment and Petrocaribe arose. The
development helped induce the GoJ to turn to the Venezuelan
government. But whilst courting Chavez, the GoJ continues to
suggest that it expects T&T to act in good faith and honor their
commitment under the MoU.


8. (U) Manning's disclosure is not surprising given world LNG prices
at record levels. Any extension of concessionary rates would have
significant revenue implications for his country. In addition, T&T
firms enjoy significant competitive advantages in the region due to
their low electricity costs. Favorable terms for Jamaica would
erode these benefits and eventually allow Jamaican firms to replace
some of the goods now being imported from T&T, thereby narrowing
T&T's USD 500 million trade surplus.


9. (SBU) It is further understandable given the political
underpinnings of the Petrocaribe agreement. It is widely believed
in Jamaica that T&T was irked by the GoJ's decision to turn to
Venezuela to supply most of Jamaica's energy needs. The fact that
this oil is bought on concessionary terms is of little comfort to
T&T, since it lost a captive market. Commentators here believe that
Jamaica's position as lead negotiator was considered a slap in the
face to a CARICOM partner just when the integration process was
gaining traction.

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Comment
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10. (SBU) Jamaica's LNG initiative was contingent on the extension
of concessionary prices from T&T, invoking the principle of national
treatment. But given soaring international demand, supply
bottlenecks, and the attendant record prices, this was always going
to be challenging. Additionally, any extension of national

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treatment to Jamaica would have had important economic repercussions
in T&T, which now enjoys significant competitive advantages because
of its low domestic energy prices. Similar benefits to regional
firms would undercut T&T's favorable trade balance with Jamaica. At
the same time, Jamaica's role in negotiating the Petrocaribe
agreement, which robbed Port of Spain of a captive market, seemed an
undermining of the integration movement by one of its chief
protagonists. Nevertheless, the GoTT could not protest such a
lucrative deal, given its own reluctance to extend similar benefits
to overburdened regional partners (ref. F).


11. (SBU) Comment cont'd: From the Jamaican perspective, T&T always
has appeared to want to opt out of the MoU, and finally to have
found a strong and acceptable justification. The supply bottleneck
provided the perfect foil, and it therefore came as no surprise that
Manning eventually reported that T&T had to delay the deal for this
reason, while crudely suggesting that Jamaica seek refuge in
Caracas. This has significant political and economic implications,
as Venezuela may now replace T&T as the largest supplier of energy
in CARICOM. Further energy concessions extend Venezuela's political
reach in the region. Additionally, T&T might not escape unscathed,
as Trinidadian firms which export to Jamaica could face some
backlash (Note: According to a recent article in the Jamaica
Gleaner, Jamaica imports some 60 percent of Trinidadian manufactured
exports. End note). Additionally, there is the possible impact on
the CSME, as this latest episode serves as grist for the mill for
those opposed to the integration movement. (Note: Septel will
report on the implications of the recent agreement between the
governments of Jamaica and Brazil aimed at assisting the
modernization of the local sugar industry, and the development of
ethanol. End note).

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Media Dogfight
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12. (SBU) The fallout between the GoJ and GoTT has been reflected in
a series of vituperative editorials appearing in the Jamaica Gleaner
and the Trinidadian press. The Gleaner has accused the GoTT of
"myopic economic nationalism," and Trinidad's Guardian newspaper of
"jingoism." Likewise, both the Jamaican Chamber of Commerce and the
Private Sector Organization of Jamaica have made public expressions
of disappointment over the GoTT's actions. In an editorial in the
Jamaica Gleaner on March 11, former Jamaican Prime Minister Edward
Seaga also weighed in, comparing the LNG debacle to the disagreement
between the two countries over the establishment of the Esso oil
refinery in Kingston in 1958. At that time, Jamaica was accused
"ignoring the spirit of the Treaty of Chaguaramas," and of "putting
Jamaica first." Seaga argues against the "small-time thinking
prevalent in the region," and suggests that the way forward is to
position Jamaica as an independent supplier of LNG by building a
storage facility to facilitate transshipment of LNG from Nigeria,
Qatar, or elsewhere to the United States. End comment.

JOHNSON