Three years after Venezuelan President Nicolas Maduro declared he would continue to supply oil and cheap financing to Jamaica under PetroCaribe, the deal has collapsed. Blame falls on the troubles in Venezuela’s oil economy and the tough U.S. sanctions that have isolated its regime. But save some of the blame for corruption, malpractice and nepotism that undermined its core.
The arrangement signed between oil-rich Venezuela under the leadership of the late Hugo Chavez and several Caribbean countries, among them Jamaica, to purchase oil on preferential payment conditions, has fizzled — save somewhat for Cuba.
Launched in 2005, the PetroCaribe Arrangement allowed participating countries to purchase oil at market value, paying a percentage of the cost upfront with the balance being paid over 25 years at one per cent interest.
In July of that year, then Commerce, Science and Technology Minister, Phillip Paulwell, as reported by the Jamaica Information Service (JIS), announced that Jamaica had signed two agreements with Venezuela — one to significantly boost the country’s accessibility to petroleum, and the other to undertake a major expansion of the Petrojam oil refinery through a joint partnership.
In essence, the aim was for the agreement to shield countries within the region from “oil shock” even as it provided funding for the expansion of supply infrastructure, joint refining and co-ordination of hydrocarbon supply and distribution.
A Desperately Needed Deal
As former Chief Executive Officer of the PetroCaribe Development Fund, Dr Wesley Hughes, put it in an interview with CIJN, Jamaica desperately needed this deal.
Credit: JIS (Jamaica Information Service)
“The price of oil on the world market skyrocketed tremendously. And most oil-importing countries in the region were suffering significant losses of foreign exchange and were having a difficult time. The leader of the region, led by President Chavez at the time, along with Prime Minister [P J] Patterson and other Caribbean leaders came together and had a discussion about the possibility of some arrangement to ease the burden on the oil-importing countries. The Venezuelans came up with a scheme to assist,” Hughes said.
“There was no directive from Venezuela saying you must invest in that [or] must do that. The only requirement was that after the two years of grace, you start paying back the loan at one per cent or two per cent per annum.
Jamaica was unique in the sense that it established an arrangement called a PetroCaribe Development Fund. The oil was imported by Petrojam. Petrojam then paid Venezuela 50 per cent of the value of the oil and the other 50 per cent was remitted to the PetroCaribe Development Fund. That was the only arrangement between Petrojam and PetroCaribe. That 50 per cent which, over time, amounted to US$5 billion, between 2006 and 2019,” Hughes added.
From Hughes’ point of view, the deal was inked at the right time, rescuing Jamaica from the “huge crisis” the country found itself in following the global financial recession.
“None of the multilaterals were lending to us. The financial markets were closed doors. The only real source of funding for Jamaica was Venezuela. And during the period, US$2 billion flowed into Jamaica and what we got from the multilateral and bilateral and all the others amounted to less than US$900 million. So, Venezuela became the most important source of bilateral assistance in Jamaica through the PetroCaribe arrangement and that literally saved Jamaica financially. If that were not the case the exchange rate would not have been anything close to where it is now; it would probably be twice what it is,” Hughes argued.
Under the arrangement, Jamaica saw inflows of some 23,000 barrels of oil per day from Venezuela, covering almost 50 per cent of the country’s needs in that regard. The gap remaining was filled by Mexico, the United States, Ecuador, Nigeria, Brazil, and Trinidad & Tobago.
Jamaica, through its PetroCaribe Development Fund, accumulated some US$6 billion after administering loans to public sector bodies.
“We were only allowed to lend to public bodies but we found a way to ‘unlend’ the public bodies who could then ‘unlend’ to private sector firms. For example, we funded almost all the DBJ’s (Development Bank of Jamaica) investment in the BPO (Business process outsourcing) sector,” Hughes claimed.
Added to that, money saved through the agreement was used to develop Wigton Wind Farm, which was recently divested.
Wigton Wind farm Limited, a subsidiary of the Petroleum Corporation of Jamaica (PCJ), is the largest wind energy facility in the English-speaking Caribbean. It currently comprises three plants, the 20.7 MW Wigton I, which began operating in 2004 and Wigton II, an 18 MW extension facility that was commissioned in 2010.
“PetroCaribe was the main funder of this development. We put close to US$100 million in Wigton and they paid back their loans over time,” he revealed.
An essential feature of the agreement was that Venezuela put no demands on how proceeds from the financing mechanism would be spent. Thus, Jamaica could promote alternative energy e addition of energy-saving programmes to the supply-related agreements.
In other words, the oil based PetroCaribe arrangement could be put to work helping Jamaica reduce its reliance on fossil fuel.
“And so our investment in Wigton Wind Farm, which is still the largest wind farm in the Caribbean, is testimony to that,” Hughes raved.
The PetroCaribe arrangement was also able to provide grants for housing, school sanitation, assistance to children in the inner-city communities and investment in infrastructures, such as the port in Falmouth, renovation of the Norman Manley International Airport and the downtown markets, and Highway 2000, JIS reported.
Over the duration of the agreement, Jamaica racked just over US$3 billion in debt to Venezuela.
But Hughes contended that unlike other Caribbean countries that were unable to repay, Jamaica had “no difficulty repaying Venezuela”.
Some would argue that Jamaica benefited when Venezuela was strapped for cash.
Through the Ministry of Finance and the Public Service, the Jamaican Government negotiated with Venezuela to repay just US$1.5 billion, an almost 50 per cent discount.
After the debt buyback Jamaica received limited inflows of oil from Venezuela, currently owing the country approximately US$120 million. U.S sanctions have forced Jamaica’s Government to hold the money in an escrow account in the central bank. Hughes described the debt as a “minuscule amount” compared to what Jamaica owed Venezuela before and the assets of the PetroCaribe Development Fund.
Former investment banker and Public Administration and Appropriations Committee member Peter Bunting said the outcome was profitable for Jamaica.
“They essentially did some sort of a swap where I think they replaced the PetroCaribe debt with private debt, but it was heavily discounted by Venezuela. In fact, what it facilitated was a sharp drop…of debt to GDP (gross domestic product). So, from a Jamaican perspective, it was very advantageous. I suppose from a Venezuelan perspective, they may have been in a cash flow [bind] so they got, although discounted, they got immediate cash flow rather than having to wait…a protracted period to get those cash flows. You know, it was mutually agreed, and I think it was mutually beneficial given the situation that the respective parties were in at the time,” he reasoned.
Hughes called it significant the discounted repayment reduced Jamaica’s external debt fully 10 percent.
“And so much of what is championed in terms of the achievement of the IMF (International Monetary Fund) arrangement with a debt to GDP ratio dropped; PetroCaribe alone contributed 10 percentage points of that. So, if PetroCaribe had not been in the mix, rather than the debt being at 96 per cent of GDP now, it would be close to 116 per cent of GDP,” Hughes let out.
Maximum pressure by the United States to topple the Chavez Administration, and now that of his successor, Nicolas Maduro, signalled the end of a “very beneficial” deal. The U.S. has mustered the support of Canada, Brazil, Argentina and more than a dozen other member of the Organization of American States demanding a democratic transition in Venezuela.
As a result, Venezuela’s exports to Jamaica fell from 23,000 to some 1,300 barrels per day, Jamaica’s Foreign Affairs and Foreign Trade Minister Kamina Johnson Smith reported in April 2017.
The United States later declared Maduro’s re-election of a second six-year term as fraud and has accused him and his associates of enriching themselves while Venezuelans suffer brutality, violence and oppression allegedly at the hands of the intelligence, security and armed forces.
Deadly protests in addition to widespread food shortages, triple-digit inflation and rampant crime followed, crippling the country. Rival political forces are pushing for Maduro’s removal through early elections.
Jamaica Squeezed by Regional Politics
Jamaica, caught between a rock and a hard place, abandoned its relationship with Venezuela, out of fear those in some quarters say, of retaliation from the United States.
In January, Jamaica, along with 19 other members of the Permanent Council of the Organisation of American States (OAS), voted not to recognise the regime of Maduro.
The country’s Opposition Leader Dr Peter Phillips, as quoted in the Jamaica Observer, characterised the actions taken by the Government as premature and bringing disgrace to Jamaica’s reputation.
Jamaica’s Senate in February approved legislation to retake ownership of the 49 per cent shares in Petrojam held by the Venezuelan State-owned oil and natural gas company, Petróleos de Venezuela (PDV) Caribe.
Johnson Smith at that time said the decision was in a bid to safeguard the country’s energy security. She also said Petrojam, the State-owned oil refinery, and Jamaica have been left at risk due to years of inaction.
The United States’ Executive Order 13808 was cited as one of the reasons the Jamaican Government had taken the decision.
That order forbids United States persons from entering into specified transactions with the Government of Venezuela and any political division, agency or instrumentality thereof, including PDVSA.
“Having been advised that in no uncertain terms of the potential termination of services by suppliers and banks which would cripple the refinery and severely impact the Jamaican economy, the Government of Jamaica has reassessed its legal options. This is not a political issue for us, the Government is focused on Jamaica’s economic stability and our energy security which are necessary for the wellbeing of Jamaicans,” JIS quoted Johnson Smith as saying then.
Hughes suggested that this may have been a pitfall in the PetroCaribe agreement.
“Not in the sense of how it operated in Jamaica but on a wider context,” he stated, “because it became a political issue in the wider geopolitical environment. There was a struggle between Venezuela and the United States for influence in the region. It did harm and damage to countries that were bystanders in a sense. We were just involved in a commercial trading arrangement, but the way the world operates, people exert power and influence on smaller countries and from that perspective, it is not the arrangement itself. It’s just the dynamics of politics and geopolitical relations that flowed from it that would have done some harm and some damage to us. But in the wider scheme of things, if you were to take a net balance with all that pressure of sanctions and problems and threats, the net outcome is a great benefit to Jamaica,” he mentioned.
Jamaica’s takeover of Venezuela’s 49 per cent stake in Petrojam was met by a lawsuit from PDVSA. On Twitter, a PDVSA account warned the “legitimate Government of Venezuela” would defend PDVSA’s interests. Not only is the price of the compulsory acquisition disputed but it raises issues of who actually represents the legitimate government in Caracas.
Bunting was sympathetic to both parties, during his interview with CIJN.
On one hand, Bunting noted that the contentious situation in the country there was a risk to Jamaica maintaining only 51 per cent shares in Petrojam.
“…Venezuela was coming under sanctions and there was a risk, although it hadn’t come to pass. There was a risk that Petrojam could have been affected by those sanctions. So I think it made sense to repurchase the Venezuelan interests in Petrojam. What I didn’t agree with that time, and I still don’t agree with, I didn’t think it was necessary to unilaterally confiscate the shares so to speak. I think it could have been arrived at by amicable negotiation,” he suggested.
In the same breath, however, Bunting held the view that PDVSA was within its right to sue if it concluded that the price Jamaica paid was not fair. He believed also that PDVSA has strong arguments for court based on valuations commissioned by Petrojam and which have been made public in Jamaica’s parliament.
“So, you know, I think they have a right. And I think, you know, nobody can fault them for wanting to get fair value for the asset that was, you know, expropriated from them,” he reasoned.
The lawsuit now adds to loads of problems facing Petrojam and the Jamaican Government, whose Minister of Science, Energy and Technology, Dr Andrew Wheatley was forced to resign after public outcry, amid allegations of corruption and nepotism at the entity.
PetroCaribe Enabled Corruption Through Lax Oversight
Bunting said corruption mounted at the State oil refinery because successive administrations were derelict in their duties in terms of providing oversight.
“Absolutely,” he responded when asked if poor supervision by successive administrations provided room for corruption at Petrojam. “The auditor general provided a very damning report to the Public Accounts Committee of Parliament. In fact, even before the auditor general’s report, information started to leak out of corruption, just abuse of office, of malfeasance at Petrojam and a lot of that information was confirmed in the report of the auditor general’s investigation,” he said.
Petrojam, he noted, was being used as a “slush fund by the minister”.
The management, he added, made a lot of decisions that were very costly to the company that only seemed to benefit cronies employed on staff or outside Petrojam.
“The disappointment is that although hundreds of millions seem to have been wasted or stolen to date, nobody has been charged, you know, directors resigned, some persons had to pay back money for trips they didn’t take but you know, it’s really a travesty that nobody has been held to serious account from a criminal perspective,” he lamented.
Oil analyst and former PDVSA Security and Risk Analyst Jose Chalhoub went further with his assessment of what took place at Petrojam.
“No permanent Venezuelan work representation there (in Petrojam), just one manager as well. What can I tell you? The security issues on the Island were very threatening,” he stated, suggesting that there was little to no oversight as well on Venezuela and PDVSA’s part.
“We were told also, talking to people on the (Jamaican security) team, that there were cases like oil spilling, thefts and (unauthorized) pipelines connecting the storage tanks in the facility of Petrojam and they were denouncing that. They were denouncing to us that those cases were current and there had to be something done regarding these cases,” he added.
The December 2018 report: A Review of Aspects of PCJ and a Comprehensive Audit of Petrojam Limited, commissioned by Auditor General Pamela Monroe Ellis was conducted “in response to public concerns about allegations of malpractice at Petrojam”.
The audit revealed that over the last five years, Petrojam recorded total estimated oil losses of two million barrels valuing approximately $18 billion Jamaican dollars .
The report said the total oil loss included 1.5 million barrels utilized during refinery production and flaring. However, Petrojam could not account for 600,684 barrels valuing $5.2 billion Jamaican dollars. The reported unaccountable losses increased over the period by 60 per cent to 184,951 barrels in 2017-18 from 115,793 barrels in 2013-14 the report said.
Petrojam’s average annual unaccountable oil loss of 0.75 per cent, the report said was almost two times its own Key Performance Indicator (KPI) of 0.4 per cent.
The report also disclosed that while Petrojam identified the sources of the unaccountable oil loss, it was not successful in addressing the problem despite spending US$990,811 to implement measures aimed at minimising oil loss, for which it had control.
Chalhoub backed up the findings of the report confirming that oil was being stolen and sold at higher prices in the country.
But no one within PDVSA was willing to crack down on the diversion of fuel. Chalhoub said there was always the sense among the company’s own risk analysis team that at least two representatives from the security department should be present in each island where PDVSA had deals and joint ventures within the mechanism of PetroCaribe.
“PDVSA saw having permanent personnel in these countries a waste of time or waste of money. You know it was ironic, but it was really weird because we [had] 49 per cent to be specific of the shares in any of these joint ventures. We needed to have a safeguard in these businesses, you know?” he argued.
For political scientist and head of the National Integrity Action in Jamaica, Professor Trevor Munroe, Petrojam, with a projected revenue was in the region of US$1.3 billion, was a “kind of plum. It’s a diamond for those who are interested, not only in making the diamond shine but also in taking some of the proceeds that flow from it being the gem”.
The auditor general’s report also revealed that “Petrojam did not have an efficient system to validate the volume of products received against the volume ordered”.
Consequently, it said, Petrojam made payments for the volumes billed on the suppliers’ invoices without validating the actual volumes received.
“In keeping with industry practice, Petrojam used independent cargo surveyors to gauge the actual volume of product off-loaded by observing the pre and post-product volume readings of the ship. However, this method did not accurately compensate for normal temperature adjustment, which would have contributed to inventory inaccuracies.
“In an attempt to minimise the reported losses during custody transfers for one of its products, Liquefied Petroleum Gas (LPG), Petrojam acquired a meter and prover system in 2010, at a cost of US$495,611, to accurately measure the volume of LPG received. However, Petrojam has not commissioned it into use and an assessment conducted in February 2018 at a cost of US$11,100 revealed that a major component is now obsolete, rendering the system unusable,” the report read.
The report also revealed that with declining sales, Petrojam’s most liquid assets, cash and cash equivalents, covered only an average of 17 per cent of its liabilities over the five-year period.
As a result, and in an attempt to support working capital, Petrojam borrowed US$35 million from the Petrocaribe Development Fund in FY2014/15, augmented by a bank overdraft facility of J$101.5 million. Further, in FY2015/16 Petrojam converted dividends previously declared to PCJ, its majority shareholder, to a loan as it did not have adequate cash to meet this obligation.
Hughes declined to speak on what was uncovered at Petrojam, offering only that both the PetroCaribe Development Fund and Petrojam were separate entities.
Also, he wouldn’t say whether or not the PetroCaribe arrangement gave birth to corruption in the region and by extension Jamaica.
“I cannot speak to that because I have no knowledge of any of that. It didn’t happen at PetroCaribe Development Fund I can tell you that. We are well audited… We have no knowledge of what went on at Petrojam in terms of what would have been reported in the press. So, I can’t speak to any of that.”
PetroCaribe is gone but hardly forgotten. The uncomfortable questions about corruption in Petrojam and who was involved are not going away, either.
