JointUNDP/World Bank

Public Disclosure Authorized EnergySector Management Assistance Program

ActivityCompletion Report No. 061/86 Public Disclosure Authorized

County: JAMAICA

A,,tivity: REPORTON PETROLEtMPROCURM , REFINING ANDDISTRTIJTTON

NOVEMBER1986 Public Disclosure Authorized 1~~~~ Public Disclosure Authorized

Reportof the JointUNDP/ldbrd Bank Energy Sector Management Asstance Program Thisdocument has a restricteddistribution. Its contents may not be disdosedwithout authorizationfrom the Government,the UNDPor the WorldBank. ENERGY SECTORMANALENENT ASSISTANCE PROGRAM

The Joint UNDP/WorldBank Energy SectorManagement Assistance Program(ESMAP), started in April 1983,assists countries in implementing the main investmentand po.icy recommendationsof the Energy Sector Assessment Reports produced under another Joint UNDP/World Bank Program. ESMAP providesstaff and consultantassistance in formulating and justifyingpriority pre-investmentand investmentprojects and in providingmanagement, 'nstitutional and policy wupport. The reports produced under this Program providegovernments, donors and potential investorswith the informationneeded to speed up projectpreparation and implementation.ESMAP activitiescan be classifiedbroadly into three groups:

- Energy AssessmentStatus Reports:these evaluateachieve- ments in the year following issuance of the original assessment report and point oittwhere urgent action is still needed;

- Project Formulationand Justification:work designed to acceleraLethe preparationand implementationif investment projects;and

- Institutionaland PolicySupport: this work also frequently leads to the identificationof technical assistance packages.

The Program aims to supplement,advance and strengthenthe impact of bilateral and multilateralresources already availablefor technicalassistance in the energysector.

Fundingof the Program

The Programis a major internationaleffort and, while the core finance has been provided by the UNDP and tne World Bank, important financialcontributions to the Programhave also been made by a numberof bilateralagencies. Countrieswhich have now made or pledged initial contributionsto the programsthrough the UNDP EnergyAccount, or through other cost-sharingarrangements with UNDP, are the Netherlands,Sweden, Australia,Switzerland, Finland, United Kingdom, Denmark, Norway, and New Zealand.

FurtherInformation

For further informationon the Programor to obtain copiesof completedESMAP reports,which are listedat the end of this document, pleasecontact:

Divisionfor Globaland OR EnergyStrategy and InterregionalProjects PreinvestmentDiv. II UnitedNations Development EnergyDepartment Program World Bank One UnitedNations Plaza 1818 H Street,N.W. New York,N.Y. 10017 Washington,D.C. 20433 JAMICA

RIFIUIT AMDDISUI3I

NNE= M86 ABBREVIATIONSAND ACRCUINS

AFRA AverageFreight Rate Assessmentpublished by the London TankerBrokers Panel API AmericanPetroleum Institute bbl barrel b/d barrelsper day CIP Cost, Insurance and Freight Cs Centistrokesper second DVT deadweighttonnes FOB Freight-on-Board GO0 Governmentof Jamaica Intascale InternationalTanker Nominal Freight Scale JPSCo JamaicaPublic Service Company LIFO basis Last in, Firstout basis LPG LiquifiedPetroleum Gas MDWT thousanddeadweight tonnes mm million MMB/D millionbarrels per day 144K? Ministry ! Mining,Energy and Tourism PCJ Petroleu.Corporation of Jamaica PDVSA Petroleosde VenezuelaS.A. RIM Round IslandMovement 8SF Sayboltunits per second USOR U.S. Gulf Coast Refineries USOC U.S. Gulf Coast USEC U.S. East Coast TABLE OF CONTET

Page

I.*NRDCIN...... 1

II. SUMMARYOF FINDINGSAND RECOMMENDATIONS...... 2 Jamaica'sPetroleum Product Price Regulatory System..... 2 Refinery Performance...... 2 Economic Evaluation ...... 3 Outlook and Options ..... 4 III. BACKGROUNDINFORMATION ...... 6 Regional Petroleum Market...... 6 The JamaicaPetroleum Product Market...... 7

IV. REGULATORYSYSTEM ...... 10

Product Pricing System...... 00.00...... 010 Product Pricing Sse 10 ...... ecommendations...... 15

V. REFINERY PERFORMANCE...... o...... *****...... 16 Refinery ...... 16 Refinery Descriptiono.... 0. 0. 00 oo...... i.6 Analysisof Refinery Characteristics...... 18 FinancialAssessment of the RefineryOperation...... 19 Recommendation...... 21

VI. ECONOMIC EVALUJATION ...... 22 Least Cost Comparison...... *** .0 ..... 22 Recommendations ...... ,...... 25

VIIo OUTLOOK AND OPTIONS.....o...... oo00000 26 Petroleum Price Outlook...... 26 Impact on Refinery Sectoro ...... ooooooo 26 Outlook and Options for the Petrojam Refinery...... 26 Short Term Options.0000000000000000000000000000000000000.27 Longer Term Optionso. ..oo...o...ooo...... 30 Recommenda-ions .ooo..oooo..o....o..oo...oo.o.....o...... 31

TABLE

Table 3.1: Petroleum Product Demando.o... 00 ...... 7 Table 3.2: Refinery Saleso...... 0.o..0...... 00000000 8 Table 4.1: Jamaican Petroleum Product Pricing First Pricing Stage ...... 12 Table 4.2: Jamaica Petroleum Product Price Second Pricing Stage.... 13 Table 4.3: Jamaican Petroleum Product Pricing Third Pricing Stageo...... oa...... ooooo 14 Table 4.4: Allocation of Controlled Fees and Margins...... 14 Table 5.1: Kingston Refinery - Refinery Unit Capacities...... 17 Table 5.2: Crude Imports, 1983-84...... 11 Table 5.3: Petroleum Supply and Demand Balance ...... 19 Table 5.4: Refinery OperatingMargin...... 20 Table 6.1: Adjustment of Refinery Operating Margin to Least Cost Basis...... *...... 23 Table 6.2: Relative Cost of Refining and Purchasing at Current Production Levels...... 24 Table 7.1: Relative Cost of Refining and Purchasing at Increased Production Levels...... 29

AM

Annex 1 Comparison of Posted and Spot Prices in the Caribbean Region4...... 33 Annex 2 SanJose Accords...... 36 Annex 3 Freight Rates for "Dirty" and "Clean" Crude and Product Cargoes in the Caribbean Region...... 37 I. INTRODUCTION

1.1 In April, 1984, at the request of the Governmentof Jamaica (GOJ), the World Bank carried out an energy sector review in Jamaica under the Joint UNDP/WorldBank Energy SectorAssessment Program. Its AssessmentReport l/ outlinedthe overallplace of energyin the Jamaican economy and then reviewedin detail the electricpower, petroleumand renewable subsectors,as well as potential energy conservationand institutionalissues.

1.2 Subsequent to publicationof the Assessment Report, GOJ initiated further discussionson the sections dealing with Jamaica's petroleum procurement,refining and distributionsubsector, which it regardedas inaccuratein part. As a resultof those discussions,it was agreedthat the Bank would undertakea detailedreview of this subsector, in the light of the comprehensivedata providedby COJ and Petroleum Corporationo; Jamaica (PCJ). In particular,the reviewwould evaluate the economic costs and benefits of Jamaica'scurrent system of crude procurementand domesticrefining against the alternativeof closingthe refineryand directlyimporting products, as well as the operationof Jamaica's petroleum product price regulatory system. The analysis, conclusionsand recommendationsin the present report, dealing with issues coveredunder the petroleumsector, supersede those containedin the AssessmentReport of April 1985.

1.3 The findingsof this review,2/ which took place in February 1986 under the joint UNDP/WorldBank EnergySector Mangement Assistance Programme,with the assistanceof the CanadianInternational Development Agency,are set out below.

l/ "Jamaica:Issues and Optionsin the EnergySector" Report No. 5466- JM, of April,1985.

2/ This Report is based on the findingsof a Bank missionwhich visited Jamaica in February, 1986. The mission comprisedMr. I. Hume, Mission Chief; Ms. C. Bernard, Loan Officer; Mr. C. R. Poncia, Energy Planner; Mr. T. S. Nayer, Refinery Engineer and Mr. A. Hunter, Petroleum Consultant. Comments from the Governmentof Jamaicaand the PetroleumCorporation of Jamaicahave been included. - 2 -

II. SUMMARYOF FINDINGSAND RECOHNZDIDATIONS

Jamaica'sPetroleum Product Price Regulatory System

2.1 The Energy Division of the Ministry of Mining, Energy and Tourism, as the Government agency responsiblefor energy policy, coordinationand monitoring,regulates the pricing at each stage of productionand distributionof tontrolledpetroleum products (gasoline, domestickerosene, auto diesel and industrialdiesel). The system is designed to ensure that, at the refinery level, prices of petroleum products in Jamaica correspondto the landed cost of the equivalent importedproducts. At the cknsumerlevel, Government controls the final sellingprices of certain productsby the impositionof taxeb and the control of the margins to distribution,marketing and retail sectors. The followingchanges to improvethe efficiencyof the regulatorysystem are recommended:

(a) as directedby the Ministerof Mining,Energy and Tourism,the FOB price of productsshould be based on publishedsources of supplymore reflectiveof marketingconditions in the U.S. East Coast and Europe;

(b) the Terminal,Rack and the Round Island Movement (RIM) Fees payable to the Refinery operator, Petrojam, should be: ('i)audited to provide detailed informationas to the cost incurred in providingthese servicesand (ii) establishedat the levels which would prevail in a competitivesituation. Petrojam's efforts to reduce the Esso Throughput Fee by purchasingthe Esso tanks or installingnew tanks should be continued;and

(c) efforts should be maintainedto determineand ensure regular Accord/SubsidyFund transfersbetween GOJ and Petrojam.

RefineryPerformance

2.2 The refinery'sproduct slate, at its currentlevel of operation of 22,000b/d, is well matchedto domesticdemand of about 21,500b/d in 1983 and 1984, excludingthe private sector alumina industryfuel oil requirementswhich are importeddirectly.

2.3 Within its technical limitations.the refinery's operating costs should be low, reflectingits integratedprocess units and low manning. The refinery'sfixed operatingcosts at US$0.70 per barrel (bbl) are indeedlow but its variablecosts (includingterminal and rack costs)of US$1.43-1.71bbl, in 1983 and 1984 respectively,are 20% to 30% higher than normal for a hydroskimmingrefinery, partly due to the higher cost of purchasedelectricity and higher than normal fuel consumptionin these years. - 3 -

2.4 The crude procurementand processingcosts incurredby Petrojam in 1983 were lower by a margin of US$0.30/bblthan the costs that it would have incurred if it had directly imported its entire product slate. This differential,i.e., the refinery'soperating margi"n, was negative in 1984, by a margin of US$0.10/bbl,but would have been positivebut for repeatedinterruptions of refineryoperations because of lack of crude resultingfrom foreignexchange constraints.

2.5 Lack of foreignexchange not only restrictedPetrojam's ability to acquirethe cheapestavailable crudes but also causedfinancial losses throughdisruption of refineryoperations, expensive procurement of crude tankers,and paymentof demurrageand financingcharges amounting in 1983 and 1984 to a loss of US$8.8million. It is thereforerecommended that:

GOJ shouldensure that a specifiedamount of foreignexchange shouldbe made availablepromptly to Petrojamto avoid costly interruptions in refinery operation and to facilitate procurementof requisiteservices on a least cost basis.

EconomicEvaluation

2.6 The economicviability of the refineryto Jamaicais evaluated by comparisonof the economiccosts of procuringand processingspiked crude against the alternativeof directlyimporting equivalent products, on a least cost basis. For this purpose,the economiccosts of procuring and refining spiked crude are based on the actual costs incurred by Petrojamin 1983 and 1984, in procuringfrom Mexico and Venezuela.3/ The costs of directlyimporting equivalent products should, however, be determinednot on the actual productprices paid by Petrojam (basedon average Curacao/Aruba)posted prices, but on the least cost source of supply,i.e., an averageof the postedprices of the Venuzuelanational oil company,PDVSA, prevailing in 1983 and 1984.4/ Likewise,Petrojam's actual freightcosts in 1983 and 1984 are adjustedto reflectthe lower crude and productfreight rates which shouldbe available. The economic costs of importingand refiningspiked crude are still comparableto the economiccosts of directproduct imports (about US$0.03 per bbl lower in

3/ These countriesare the best source of crude supply for Jamaica because of Jamaica'snearby location to the regional crude oil exporting countries,and because the exporting countries crude pricesare set by referenceto the internationalcrude market.

4/ While Caribbeanspot productprices in 1983 and 1984 (as published in Platts),were consistentlylower than Caribbeanposted prices, the Caribbeanspot marketwould be too thin and pricestoo variable to be the basic sourceof productsupply. Of the Caribbeanposted prices in those years, PDVSA prices were close to the U.S. East Coast spot prices, while Aruba/Curacao posted prices were significantlyhigher. - 4 -

1983 and US$1.18 higher in 1984 - See Table 5.5). This conclusionis reachedwithout taking into accounteither the savingswhich would have accruedif the crude slatehad been optimizedor the benefitsof the San Jose Accordswith Mexicoand Venezuela,which would improvethe viability of domesticrefining by increasingthe margin, since their future level is in some doubt given current crude price trends and the prevailing Accordinterest rates.

2.7 The economicevaluation of Jamaica'spetroleum procurement and Refiningsystum should not depend exclusivelyon relativehistoric crude and productprices, given their volatility.Further analysis is possible by comparisonof the competitiveposition of the Petrojam refinery against that of the nearestproduct supplier whose pricesare determined in accordancewith internationalmarket forces, i.e., the U.S. GJ.f Coast Refineries(USGR). Products produced by the USGR in excess of their contractualcommitments would normallybe pricedat marginalcost only, an advantagecompared to the Petrojamrefinery. Offsettingthis, the Petrojamrefinery location means that its crude transportationcosts are lower assuming the same point of crude supply (Mexico,Venezuela or Colombia). Furthermore,supply costs from USGR, but not the Petrojam refinery,would includeproduct transportation costs from the Gulf Coast to Jamaica. On balance (see Table 5.6), the Jamaican refinery and transportationcosts remain close to the costs of USGR supply to the Jamaicanmarket across a wide range of crude prices.

2.8 The evidence does not, therefore, support closure of the Petrojam refinery. It is, however, recommendedthat in continuing refinery operations, Government should provide sufficient foreign exchangeto Petrojamto allow it to:

(a) procureits basic crude requirementsunder contractsincluding most favored nation price protectionand otherwisebased on generallyapplicable sales terms;and

(b) supplementits basic contract source of crude by periodic interventionon the spot market,when pricesare favorable.

Outlookand Options

2.9 The recent decline of crude prices should lead to higher production by existing refineries, discourage investment in new refineriesand push spot pricescloser to contractprices. The outlook suggeststhat it will becomeincreasingly difficult for Jamaicato obtain productsat marginalcost from the U.S. Gulf Coast Refineries,compared to continuedKingston Refinery operation. The future outlook for the refinery sector, therefore, supports continued Petrojam refinery operation as the least cost method of maintainingreliable product access. 2.10 A numberof refinerycost savingsmeasures are being pursuedby Petrojamto increaserevenues and reducecosts. Petrojamshould continue its effortsto:

(a) exchange its relativelyhigh value uncrackedfuel oil, which could be exportedto the U.S. and Europe, for a lower value crackedfuel oil;

(b) increaseproduiction and reducecosts throughchanges in various productspecifications;

(c) evaluate with the private sector alumina industry thr feasibilityof increasingproduction to capacity,35,000 b/d, based on an appropriateblend of heavy unspiked crude, for supplyto the industryof its fuel oil requirements;

(d) reduce fuel use and losses, while carefully evaluating individualinvestments against current fuel oil prices;and

(e) undertakea secondaryconversion feasibility study to upgrade its fuel oil production,as soon as the price differential betweenfuel oil and white productsstabilizes.

2.11 The volatility of petroleum marketing conditions makes it essentialthat Jamaica monitor the evolutionof these conditions to verify that the economic costs of the present system continue to be comparablewith the alternativeof direct product importation. It is recommendedthat:

GOJ shouldensure that adequateresources for this purposeare made available to the Energy Division of the Ministry of Mining,Energy and Tourism. -6-

III. BCDAcKAOUNDINFORMATION

RegionalPetroleum Market

3.1 Jamaica lies at the center of one of the world's traditional oil markets,the Caribbean. In the late 1970's,the Caribbeanwas still a major refining and trasnsshipmentcenter with six large export refineriessupplying products to the US and Europe and seven small refineries,each servingtheir respectivedomescic markets. The region was ringedby the two large Venezuelanexport refineries and the domestic refineriesin CentralAmerica, Mexico and Colombia. The large export refinerieswere originallydesigned to meet the large residualfuel oil importrequirements of the US East Coast but, as these droppedfrom 1.3 millionbarrels per day (MMB/D)in 1978 to 0.5 MMB/D in 1985, the main outlet for the outputof these refineriesdisappeared end renderedthem economicallyvulnerable.

3.2 Today,only three of the originalfive exportrefineries are in operation - St. Croix (Hess) in the Virgin Islands, Point a Pierre (Trintoc)in Trinidadand Curacao(now leasedby the Venezuelannational oil company, PDVSA) in the NetherlandsAntilles. Worldwide excess refining capacity, heightened competitionfrom the new OPEC export refineriesand reduced US and Europeanimport requirementshave forced the survivingrefineries to reduce operations. On the mainland, the Venezuelan,Mexican and Colombian refinerieshave been upgraded,and either are (Venezuelaand Mexico) or may become (Colombia)significant product exporters. In contrast,other Caribbeanand Central American domestic refinerieshave not been upgraded and have a considerably reducedthroughput.

3.3 While these changes have taken place, transshipmentand blendingoperations have continuedactive. Crude can be broughtinto the area for storage and/or transshipmentin smaller vessels at four terminalsin the Bahamas,Curacao and Bonaire. Products from diverse locationsand with differentqualities can be brought for blendingand shipmentto the US or Europeat four other terminals,all located in St. Eustacius. The sharpgrowth which occurredin the 1970s in this business was due, firstly, to unavailabilityof US ports able to rec-;ve huge crude carriersand, secondly,to the savingspossible by transhipping outsideUS territorialwaters in order to avoid using US flag vessels. Becauseof the continuedneed for intermediatestorage for US importsand the growth in product exports from other Latin American countries, principallyBrazil and Argentina,terminal operations have continued, albeitat a reducedlevel. In recentyears, transshipping crude has been less attractivethan lighteringit at the port(s)of destinationin the US. Storagehas tendedto be used duringtimes of oversupplyto "park" crude and productuntil sale.

3.4 Cheaper refining in the Middle East, and the likelihood (because of decliningproduction) of increasedUS crude and product - 7 -

imports suggest that Middle East producersand the new Arabian Gulf exportrefineries may again become significantusers of terminalsin the CaribbeanRegion for transshippinglarge cargoesinto the US. Caribbean export refineries'production may also rise to meet some the increasing US fuel oil import requirements,so long as the fuel oil price remains competitivewith other fuels.

The JamaicaPetroleum Product Market

3.5 Petroleumproduct demand in Jamaica in 1983 and 1984, broken down by productand by marketingcompany, is shown in Table 3.1.

Table3.1: PETROLEUMPRODUCT DEMAND (Barrels/day)

IGEL Bauxite Esso Shell Texaco Petcom Tropicana Alum Total

1963 LPG 119 376 14 - 580 - 1089 GasolIne 1627 1620 1419 - - - 4666 Distillates3361 3033 862 2 - 103 7361 FuelOil 4721 5437 100 429 - 13770 24457 Other Prod. 155 292 112 - _ - 559 Total 9983 10758 2507 431 580 13873 38132

1984 iPG 111 388 13 - 508 - 1020 Gasoline 1523 1422 1277 - - - 4222 Distillates2940 2482 1002 41 - 110 6}75 FuelOil 3851 5221 55 517 - 13637 23281 OtherProd. 124 20A 23 - - - 351 Total 8549 9717 2370 558 508 13747 35.449

Source:Ministry of Mining,Energy and Tourism.

3.6 The bulk of the above demandexcluding direct fuel oil imports by the aluminarefinery companies is usuallymet by productionfrom the Kingston refinery, which produced 20,319 b/d in 1983. In 1984, however, foreign exchangq constraints caused crude oil supply interruptions and the refinery produced only 12,575 b/d. In both cases, refinery production is supplementedby direct product imports. The refinery sales for 1983 and 1984 are shown in Table 3.2. -8-

Table3*2: REFINERYSALES (barrels/day)

1983 Esso Shell Texaco Others Total

LPGs 121 390 15 564 1089 Gasoline 1575 1664 1135 0 4374 Dlstillates2487 2933 708 2 6130 FuelOils 4790 4506 24 429 9749

OtherProd. 65 163 0 0 228 Total 9039 9656 1881 995 21571

1984

LPGs 115 385 12 508 1020 Gasoline 1635 1518 1073 0 4225 Distillates2502 2584 934 41 6060 FuelOils 4003 5410 56 517 9986 OtherProd. 37 90 0 0 127 Total 8292 9986 2075 1065 21418

Source: PetroJam"Statistics" 1983, 1984.

3.7 Regulationof the Jamaicapetroleum market, including petroleum product pricing, is the responsibilityof the Energy Division of the Ministryof Mining, Energy and Tourism (MMET),as part of its overall responsibilityfor formulatingnational energy policy and overseeingits implementation. The Energy Division also monitors energy use and evaluatesproposals for energysubstitution and conservation.

3.8 Reporting to the MMET, the PetroleumCorporation of Jamaica (PCJ), a parastatalholding company,is responsiblefor operatingthe Kingston refinery (through Petrojam Limited), for the provision of engineeringconsulting services (PCJ EngineeringLimited) and for limited marketing of petroleumproducts (Petroleum Company of Jamaica Limited (Petcom)). As operatorof the Kingstonrefinery, Petrojam arranges for the supply of refineryfeedstock (crude, spikes and finishedproducts), its transportationto Jamaicaand the re-exportof any surpluses.

3.9 Esso, Shell and Texacohave whollyowned marketing companies in Jamaica. Each owns a terminalin the Kingstonarea and retail outlets throughout the island. However, since operations of the refinery commencedin 1964, these tanks have not been operatedas a petroleum productterminal. Esso and Shell also have terminalsat MontegoBay to receivegasoline, kerosene and diesel transportedfrom Kingston. The companies are entitled to import finished products to make up any - 9 -

shortfallthat Petrojamhas been unable to fill. Since this does not occur frequently,they are basicallywholesalers, linking Petrojam to the retailoutlets through haulers. In addition,a numberof small companies handledirectly from the refinerysignificant volumes of LPG which they marketdomestically.

3.10 As shown in Table 3.2, Esso, Shell and Texacomarketed over 95% of the total refineryoutput in 1983 and 1984. With the exceptionof LPG sales to small marketingcompanies, the balance of refineryproduction was purchasedby Petcom which suppliedKaiser's bauxite operations and CaribbeanCement Company. In addition,Petcom has a contractto supply fuel oil to the cementcompany and to refuelcruise ships at MontegoBay from a tender moored offshore,as a temporarymeasure to evaluate the economicsof an onshoretank. Petcomdoes not own any retailoutlets but has appliedfor a licenseto operateone. -10 -

IV. SYSTESETY

Pricing

4.1 This Sectiondeals with the productand crude pricingsystem in effect since the Kingstonrefinery was purchasedby the Governmentof Jamaica(GOJ) in Octobar1982. The system was devisedso that the bulk of the importationand refiningwas handledby one company(Esso before 1983 and PCJ later), while ensuring equal treatment to all three marketingcompanies. This was achievedby basing the productprices on independent,publicly available sources, namely the pricesposted by Esso and Shell for productionfrom thAir Aruba and Curacao refineries, respectively.

ProductPricing System

4.2 Petroleum products in Jamaica are classified for pricing purposes into two categories-- controlled and uncontrolled. The differentiationdepends on whetheror not certainmargins, added to the price of product at the refinery gate, are regulatedby the Energy Divisionof the Ministryof Mining,Energy and Tourism(MMET).

4.3 The controlledproducts are LPG, gasoline,domestic kerosene, and auto diesel. Since the refinerybegan operatingin 1964 until Esso's shutdownof Aruba in 1984, the startingpoint for settingprices was the average of the posting of each product by Esso in Aruba and Shell in Curacao. Since the closing of Aruba, the average of Shell's Curacao postingsand Esso's Bahamaspostings has been used. 5/ However,on the instructionsof the Minister of Mining, Energy and Tourism,Petrojam's pricing has been taken off Aruba/Bahamaspostings and is now based on postingsfrom Trintoc,PDVSA, Shell International,Texaco International and Esso Bahamas. The LandedPrice is calculatedby addingthe estimated average cost of freight to Kingston,including the cost of losses and insuranceduring the voyage. It is then raised in three stages,through a series of margins, to the Retail Price. The wholesaleand retail marginson all of the productsare fixed by the MMET.

5/ Shell has recentlysold its Curacao Refineryto Governmentof the NetherlandsAntilles, which has leasedit to the Venezuelannational oil company,Petroleo de VenezuelaS.A. (PDVSA). Shell now manages the Refineryunder a managementcontract and still lists a Curacao posted price. As indicatedin Section VI, this is not, however, regardedas a realisticmarket indicator. It is recommendedthat Petrojam should use a more accuratemarker, such as PDVSA posted prices. - 11 -

4.4 In the firstpricing stage, four chargesare levied:

(a) a Terminal Fee, which represents Petrojam's charge for operatingthe refineryas a productterminal, including a fee for carryingproduct inventory;

(b) an Esso ThroughputFee for the lease of certainproduct tanks ownedby Esso Marketingand associatedwith the rack system;

(c) a Rack Fee for the use of the industryrack where productsare collected;and

(d) a Round IslandMovement (RIM) fee, which is the ocean freight, insuranceand loss paid for movinggasoline, domestic kerosene and diesel to the Montego Bay terminal, equalizedover the totalvolume of each of thoseproducts sold by the refinery.

The total of the Landed Cost and these four chargesresults in the Ex- Refinery Price. As shown in Table 4.1, these charges amount to approximatelyUS$2.00/bbl for controlledproducts and a little less for uncontrolledproducts, a substantialpart of the overallmarkup. The chargesare not auditedagainst the actualcost of servicesprovided, but are subjectto monitoringby MMET and, with the exceptionof the Esso ThroughputFee, subjectto periodicreview. The Esso ThroughputFee is renegotiatedannually. In the Bank'sview (a) auditprocedures should be introducedto provide detailed informationas to the cost incurredby Petrojam in providing these services and (b) the charges should be establishedat levelswhich would prevailin a competitivesituation. In addition,Petrojam's efforts to reduce the ThroughputFee by purchasing Esso'stanks or installingnew tanks shouldbe continued.

4.5 In the second pricing stage,excise and consumptiontaxes are levied on gasolineand diesel; LPC and kerosenereceive a subsidy. A factor 6/ is added to or subtractedfrom the Ex-RefineryPrice plus taxes,after conversionto Jamaicandollars. The Ex-RefineryPrice plus the taxes and Accord/SubsidyFactor add up to the RefineryBilling Price, the amountthe marketingcompanies pay when they collectproduct at the rack for distributionto the retail level. In 1983-1984 prompt settlementof amounts due betweenPetrojam and the Accord/SubsidyFund did not Qccur, reflecting foreign exchange difficulties. It is

6/ The purposeof this factoris (a) to maintainthe retailprice at a fixed level, irrespectiveof fluctuationsin the Landed Cost in Jamaica Dollars;and (b) to permit administrationof the subsidy program. Surplus/deficitsarising from the schemeare payableby or to Petrojam into/from a special fund designated as the Accord/SubsidyFund and administeredby MMET. The administrationof the Fund is not, however,reviewed as it fallsoutside the scopeof this report. - 12 -

understoodthat procedureshave since been introducedto determine,and ensureregular transfer of, amountsdue betweenGOJ and Petrojam.

4.6 In the third pricingstage, three furthermargins are imposed- a Marketing Margin for the wholesalers,a TransportationFee for the haulers, and a RetailersMargin. Each of these three margins are separatelyand continuallynegotiated by MMET and the wholesalers, haulers'union and retailers'representatives. The total of the margins added to the RefineryBilling Price is the RetailPrice.

4.7 The uncontrolledproducts are turbo (jet) fuel, marine diesel, fuel oil and asphalt. The Ex-RefineryPrice of each is calculatedin a manner similarto that for controlledproducts, with a TerminalFee for all, an Esso ThroughputFee for all but asphalt,and a Rack Fee for turbo fuel and asphalt. The total is the Ex-RefineryPrice. An excisetax is then added only to marine diesel to obtain its RefineryBilling Price. Turbo fuel is not subjectto tax. Except for a one month period (May 1985) when a small differencewas corrected,it has been sold at one price to all consumers. Unlikecontrolled products, the RefineryBilling Price for these productsis the final sellingprice. Since there is no Accord/SubsidyFactor, it reflectsfluctuations in the exchangerate.

4.8 Finished lubes are not subject to controls. Lube oil basestocksimported by Esso and Shell are blended;Esso exportssome of the output. Texaco importsonly finish-d lubes. Finished lubes are taxed at 401 of the importcost while basestockrate is 16%.

4.9 An exampleof how the prices are broken down is presentedin Tables4.1-4.3, where each table representsa pricingstage.

Table 4.1: JAMAICANPETROLEUM PRODUCT PRICING FIRST PRICING STAGE (Basedon the Caribbeanpostings on 1st Decembr, 1984) (In USS/bbl)

------Controlled-- Product---- Premium Regular Diesel Dlesel Gasoline Gasoline Kerosene Retail Bulk AverageFOB 32.760 31.500 33.705 33.180 33.180 Freight 1.049 1.043 1.133 1.187 1.187 Insurance 0.024 0.023 0.024 0.024 0.024 OceanLoss 0.169 0.163 0.174 0.138 0.138 LandedCost 34.002 32.729 35.036 34.529 34.529 Terminal Fee 1.138 1.138 1.138 1.138 1.138 EssoThroughput Fee 0.076 0.076 0.076 0.076 0.076 RackFee 0.440 0.440 0.440 0.440 0.440 Rim 0.301 0.544 0.362 0.489 0.489 Ex-Refinery Price 35.957 34.927 37.052 36.672 36.672 and InJS/bbl 177.987 172.888 183.407 181.526181.526 In JS/IG 5.0893 4.9435 5.2443 5.1904 5.1904 - 13 -

Table 4,1s JAMAICANPETROLEUM PROOUCT PRICING FIRST PRICING STAGE (Basedon the Caribbeanpostings on 1st December,1984) (inUSS/bbi) (con't)

-Uncontrolled Product- Marine Fuel Oil TurboFuel Dlesel JPSCP Other Asphalt LPG

AverageFOB 33.705 31.939 26.975 26.976 26.100 25.440 Freight 1.133 1.216 0.670 0.670 4.250 9.600 Insurance 0.024 0.023 0.019 0.019 0.021 0.025 Ocean Loss 0.174 0.133 0.069 0.069 0.076 0.176 LandedCost 35.036 33.311 27.733 27.734 30.447 35.241

TerminalFee 1.138 1.138 1.138 1.138 1.138 - Esso ThroughputFee 0.076 0.053 0.125 0.125 - - RackFee 0.440 - - - 0.540 - Rim _ _ _ Ex-RefineryPrice 36.690 34.502 28.996 28.997 32.125 35.241 and In JS/bbl 181.615 170.784 143.530 143.535 159.018 174.443

a/ Exchangerate Is JS4.95/USS. b/ 1 barrelIs 34.7 26 Imperloalgallons. ef FOB and freight alues shownare averageex. Arubaand Curacao. Source: Petrojam.

Table4.2: JAMAICAPETROLEUiM PRODUCT PRICING SECONDPRICING STAGE Basedon Carlbbeanpostings on 1st December,1984 (In JS/IG)

Premium Regular Domestic Diesel Diesel Gasoline Gasoline Kerosene Retail Bulk

Ex-RefineryPrice 5.0893 4.9435 5.2443 5.1904 5.1904 ExciseDuty 2.4100 2.4100 - 0.3000 0.3000 Tax/(Subsidy) 1.4910 1.4810 (1.1500) 1.0810 1.0910 Accord Factor (0.8655) (0.9898) (0.824) (1.2755) (0.9978)

Refinery Billing Price 8.1248 7.8447 3.2700 5.2959 5.5836

Notes: 1. Accord/Subsidyfactor for each productdescribed in the text Is the combinationof Tax/(Subsidy)and AccordFactor shown above. 2. Except for an excise duty of JS0.30/IGon Marine Diesel,the above taxeswere not leviedon uncontrolledproducts. Source: PetroJam. - 14 -

Table 4.3: JAMAICANPETROLEUM PRODUCT PRICING ThIRDPRICING STAGE Basedon Carlbbeanpostings on 1st December,1984 (In JS/IG)

'remium Regular Domestic Diesel Diesel Gasoline Gasoline Kerosene Retail Bulk

RefineryBilling Price 8.1248 7,8447 3.2700 5.2959 5.5836 MarketingMargin 0.3343 0.2899 0.1060 0.2234 0.2235 Transportation 0.1008 0.2003 - 0.1256 0.0929 Retaller'sMargin 0.4301 0.4151 a) 0.1940 0.3451 - b) 0,2640 FinalSelling Price 8.9900 8.7500 a) 3.5700 5.9900 5.9000 b) 3.6400

Notes: I (a)Urban (b)Rural Source: Petrojam.

4.10 The retail prices in Jamaica,being built over the imported prices,are above internationalprices exceptfor keroseneand LPG which are the only productsthat are sold with Governmentsubsidy. At a retail price of JS$3.57per imperialgallon, the keroseneprice as at December 1, 1984, was about 80X of the US East Coast harbourprice at that time of JS$4.6 per imperial gallon equivalent (US$32.5/bbl). However, the patternof consumptionof keroseneand diesel in 1983 and 1984 did not indicateany major migrationof keroseneinto diesel on account of the kerosenesubsidy.

4.11 Table 4.4, which is derivedfrom the Jamaicapetroleum product demandbreakdown shown in Table 3.2 and the price mark up structureshown in Tables4.1-4.3, sets out the derivedallocation of marketingfees and margins in 1983 and 1984. Marketingand distributionmargins for the uncontrolledproducts are not included.

Table4.4: ALLOCATIONOF CONTROLLEDFEES AND MARGINS

- 1963-- 1984--- MMUSS/yr USS/bbI MMUS$/yr USS/bbI

LandedCost 31.6 31.4 Terminal and Rack Fee 10.24 1.3 10.18 1.3 Esso ThroughputFee 0.72 0.1 0.73 0.1 G6J a/ 32.80 4.2 31.55 4.0 MarketersMargin 5.88 0.7 5.69 0.7 HaulersMargin 3.29 0.4 3.15 0.4 RetailersMargin 6.55 0.8 6.40 0.8 RetailPrice 39.1 38.7

a/ Exciseduty, Accord/Subsidy factor. Source: Tables3.2, 4.1-4.3. - 15 -

Table 4.4 shows that the Governmentreceived about 551 of the mark up between the Landed Cost and the Retail Price, the marketing and distributionsystem 251, and the refineryand terminaltogether 201.

Recom_endations

4.12 It is recommendedthat the subsidyon LPG and keroseneshould be reviewed periodically. If major migrationof kerosene into higher value productsoccurs, the subsidyshould be reducedor withdrawn. This also applies to LPG if its consumptionincreases significantlyby replacingother non subsidizedfuel such as gasoline.

4.13 The regulatorysystem is intendedto set product prices at levelswhich reflectthe costs of those productsif directlyimported and to ensure that the fees, taxes, and margins describedabove are set in accordancewith Governmentpolicies. To assist MMET to achieve this objective,it is recommendedthat:

(a) as directedby the Ministerof Mining,Energy and Tourism,the FOB price of productsshould be based on publishedsources of supplymore reflectiveof marketingconditions in the US East Coast and Europe;

(b) the Terminal,Rack and the Round Island Movement (RIM) fees payableto Petrojamshould be: (i) auditedto providedetailed informationas to the cost incurred in providing these services, and (ii) establishedat the levels which would prevail in a competitivesituation. Petrojam'sefforts to reduce the Esso ThroughputFee by purchasingthe Esso tanks or installingnew tanks shouldbe continued;and

(c) efforts should be maintainedto determineand ensure regular Accord/SubsidyFund transfersbetween GOJ and Petrojam. - 16 -

V. REFINEMYPERVORKUICE

RefineryHistory

5.1 The Kingstonrefinery was built by ArthurMcKee & Co. for Esso in 1964, on reclaimedland in Kingstonharbor. Esso sold it to COJ in 1982 and Petrojamhas operatedit since. Prior to the refinery,each of the three marketing companies had imported its own product requirements. Esso designed the refinery to meet most of Jamaica's requirements,and agreedwith the other marketers,Shell and Texaco, to supplythem productsat competitiveprices.

5.2 When operationsbegan in 1964, Esso, as refineryoperator, was grantedcertain incentives such as tax exemptionfor severalyears and a guaranteedmarket for products. The productpricing system was intended to equate refineryproduct prices with the price of equivalentproduct imports. Each refineryproduct was sold at the mean of its Aruba and Curacao posted price plus freight rate, originally based on APRA/Intascale. This basis applied independentlyof the refinery's actualcrude feedstockcosts.

5.3 The formulaallowed the refineryto recoverits costs until the mid 1970's. Esso then obtainedpermission from GOJ to levy a $2.15/bbl (smallrefinery differential) on each barrelof throughputto help cover additionalrefining costs. This fee quickly became the subject of continuousnegotiations between Esso and GOJ because of disagreements over costs. Some retroactiveclaims by Esso were granted,and in 1981 the fee was raisedto $2.50/bbl.

5.4 The eventual sale of the refineryto the GOJ was negotiated betweenthe GOJ and Esso in 1982. The GOJ paid US$15 million,on which Esso paid capitalgains tax of US$6.5 million. The GOJ also purchased the existingoil stocks at their book value on a LIFO basis at US$26 million, or US$18 million below their actual market value of US$44 million.

RefineryDescription

5.5 The refinery is a hydroskimmingoperation with a simple distillationunit, an Esso catalyticreformer ("Powerformer") and three Esso hydrotreaters("Hydrofiners") for naphtha,kerosene and diesel. A small vacuum unit providesfeed for the asphaltplant. Table 5.1 shows the capacitiesof the principal units. There are over 2.5 million barrelsof storagein about 40 tanks in the refineryand rack tankage. - 17 -

Table 5,1: KINGSTONREFINERY - REFINERYUNIT CAPACITIES

Unit DesignCapacity Current Capacity Bbls/Stream day Bbls/Calendar day

Atmosphere Pipestill 26,394 35,500 Gasoll Hydrofiner 5,650 7,200 Kerosene Hydrofiner 5,232 6,000 Naphtha Hydrofiner 5,229 6,400 Powerformor 2,800 3,540 VacuumPipestill 1,500 1,350

Source: PetroJam.

The reiineryburns refineryfuel gas and fuel oil to balance. Water and air cooling are both used. Electricpower is suppliedby the Jamaica PublicService Company (JPSCo).

5.6 The compositionof crude imports in 1983-4 is presented in Table 5.2.

Table 5.2: CRUAEIMPORTS, 1983-84

1983 1984 Source Type Bbis/day Percent BbIs/day Percent

Crudes: Nexico Maya 1412 6.9 233 1.9 Mexico Isthmus 3315 16.3 1079 8.6 Venezuela BCF 17 7655 37.7 0 0 Venezuela BCF24 0 0 4572 36.4 Iran Light 1639 8.1 1464 11.6 Ecuador Oriente 0 0 2214 17.6

Spikes: Venezuela Butane 147 0.7 55 0.4 Venezuela Naphtha 2511 12.4 1152 9.2 Venezuela Kerosene 2654 13.1 1365 10.9 Venezuela Gasoll 986 49 441 3.5 Total 20319 100.0 12575 100.0

Source: Petrojam "Statistics" 1983, 1984.

5.7 Because the refineryhas no means of adjustingthe relative yieldsof the white productsand of the residuelfuel oil, the qualityof the feedstockis tailoredby addingsome finishedproducts or "spikes"at the loadingport. This brings the refineryproduct slate into line with - 18 -

the pattern of nationaldemand (excludingfuel oil directlyimported by the alumina industry) (Table 5.3), and avoids the over- or underproductionof product requiringdirect product export or import. Before1982, Esso often obtainedspiked crude from its refineryat Amuay, Venezuelaand the practice was continuedwith Petroleosde Venezuela (PDVSA) because the proximity of its large refinery and crude production/loadingareas permits the blending of crude and product convenientlyand cheaply.

Analysisof RefineryCharacteristics

5.8 Althoughits processingability is limited,the refineryhas a numberof importantpositive aspects:

(a) there is no intermediate tankage, so loss of heat is minimized: such simplificationis attractiveon construction because the capital cost is minimized,but it becomes more difficult to maintain if the number of downstream units increasesand the operationbecomes more complex;

(b) cut points on the fuel oil are good up to 35,000 barrelsper stream day. At this capacity,overhead and sidedrawcolumn capacities are ample, meaning that the products can be withdrawnwithout meeting a limitationin the system;and

(c) the refineryemploys only 102 people,a low manning level by internationalstandards.

The negativeaspects include:

(a) reformer capacity is well below both domestic demand for gasolineand the availabilityof virgin naphtha cuts in many crudesat or above 24 API; and

(b) the wharf can take only up to 50,000 tonnesdeadweight (DWT) tankers: this is adequate for product imports/exportsat current throughput levels, but greatly reduces the competitivenessof distantsources of crude from areas such as the North Sea, Nigeriaor even the Middle East shouldthere be the opportunityto purchase large cargoes at attractiveFOB prices. Althoughcrude can be lighteredfrom bigger ships to 50,000 DWT tankers, significant increases in offloading capacityabove 80,000DWT would be expensivebecause the crude storagecapacity is about 850,000bbls and is limitedat this point: for example, assumingthe tankagewere 20X full on arrival of the vessel and was filled to 90% of capacity,it could only accommodateup to 600,000bbls or the contentsof a 80,000DWT tanker. - 19 -

5.9 With the refinery's integrated process units, purchased electricityand low manning,per barrelcosts for fuel and labor appear to be competitivewith other refineriesof similar configurationand sise, althoughfuel consumptionin 1983 and 1984 was 20-30Zhigher than normal at 3.1Z and 3.01, respectively,of the crude unit feed. Fuel lossesof 0.281 were low during the period of normal operationin 1983, but rose to 1.25X in 1984 because of the inefficiencyinherent in intermittentoperation. The refinery's fixed costs are lower by internationalstandards than expectedat US$0.70per barrel,but variable costs of US$1.43-1.71per barrelare higher,partly due to the high cost of purchasedelectricity and higherthan normalfuel consumptionin these years. Total costs are still in line with a US Gulf Coast cracking refinery.

FinancialAssessment of the RefineryOperation

5.10 Because finishedproducts are importedon a regular basis to supplementrefinery production in each year, the averagelanded cost of all productsis known at the end of that year. Thus, the derivedcost of importingthe entire refineryproduct slate can be comparedaccurately with the actual cost of producingthat slate from importedfeedstocks (crudesand spikes).

5.11 Table 5.3 shows the refinery'scontribution by productto total demandin 1983 and 1984. Suppliesof fuel to industrythat did not pass throughthe refineryare excluded.

Table5.3: PETROLEUMSUPPLY AND DEMAND3ALANCE (Barrels/day)

Domestic Refinery 1983 Demand Exports ImportsInventory _/ Losses Productlon LP6s 1089 0 532 -10 - 566 Gasollnes 4374 0 761 205 - 3409 Distillates 6130 192 295 -17 - 6043 FuelOils 9749 1180 1014 517 - 9398 O3ther 228 0 0 17 -692 903 Total 21571 1372 2603 712 -692 20319 1984 LPGs 1020 0 735 7 - 278 GasolInes 4225 0 2122 107 - 1997 Distillates 6060 402 2307 171 - 3984 FuelOils 9986 397 4734 -36 - 5685 Other 127 6 48 -13 -533 631 Total 21418 805 9945 236 -533 12575

a/ Negativefigures Indicate Increases in inventory/losses. Source:Petrojam "Statistics" 1983, 1984. - 20 -

Table5.4: REFINERYOPERATING MARGIN

1983 1984 iroduction CIF Production CIF Import/ Cost Import/ Cost b/d b/d 1. Importing 1. Prod,Costs $/bbl a/ Products LPGs 566 36.12 278 25.32-31.02 Gasolines 3409 26.43-35.12 1997 33.79-35.06 Distillates 6043 34.17-36,39 3984 34.94-35.59 Fuel Olls 9398 25.83-32.51 5685 27,82-33.55 Ashphalt 211 28.84 98 31.45 Ref.Fuel/Loss b/ 692 - 533 Obis Imported 20319 12575 Wgtd.Av.Cst. SVbbl 29.95 30,36 Sub-Total MMS 222,15 139.37 2. Handling Costs SM Pur. Utilities 0.70 0.64 Salaries c/ 0.40 0.23 Maintenance 1.35 0.77 2.45 1.63 3, Total, (1+2) SM 224.60 141.00 II. Domestic 4. Orude Costs S/bbl Refining .4aya 1412 24.37 233 26.11 isthmus 3316 29.86 1079 30.98 SWi 17 7655 24.64 0 26.21 BCF 24 0 27.83 4572 27.75 Iran Llght 1639 31.01 1464 29.70 Oriente 0 - 2214 29.11 Butane 147 26.04 55 23.74 Naphtha 2511 33.69 1152 31.44 Kerosene 2654 33,76 1365 33.59 GcAolI 966 33.71 _ 441 32.66 20319 12575 Wgtd.Av.Cst. S/bbi 28,75 29.66 Subtotal MMS 213.20 136.17 5. Rief. 2pg.Costs SM Fixed Salaries 2.01 1.13 Maintenance 2.47 1.44 Supplies 0.61 0.30 5.09 (S0.69/bbi) 2.87 (SO.63/bbl) Varlable Pur. Utilities 2.12 1.45 TEL (Lead) 1.95 0.97 4.07 (S0.55/btl)d/ 2.42 ($O.53/bbl) d/ Sub-Total 9.16 (S1.24/bbi) 3.29 (S1.16/bbl) 6. Total, (4+5), SM 222.36 141.46 111. Refinery Operating Margin, (3-6) SM 2.24 -0.46 e/ Margin US$ per bbl .3 -0.1 a/ For 1983 average exchange rates of JS1.93/JS5 and for 1984 JS3.94 were used. b/ The cost of imported products is based on the volume of crude imports less refinery fuel and losses. c/ Terminal salaries taken as 20%of refinery salaries. d/ If refinery fuel and losses of US$6.52 million (1983) and US$5.46million (1984) are added, variable costs rise to USSl.43/bbl (1983) and Sl.71/bl (1984). _/ 1984 losses of USS-0.46 MM and USS-O.l/bbl were due to low capacity utilization and intermittent operations. Source: PetroJam. - 21 -

5.12 The refineryoperated in 1983 for 326 days at an 891 operating factorand in 1984 for 220 days at 601. The declinewas due to foreign exchange constraintswhich made it difficultfor Petrojam to procure crude or products. In order to meet the demand, the local marketing companies imported the product shortfall under special financing arrangements.

5.13 The refinery operatingmargin in 1Q83 and 1984 is shown in Table 5.4, which comparesthe costs of operatingthe Kingston refinery againstthe alternativeof closingdown the refineryunits, and using the refinery and terminal systems for finished products imported at prevailing Aruba/Curacaoposted prices. The Table indicates the refinery'sprofitability, measured against the standardpricing system used for productsbased on Aruba/Curacaopostings.

5.14 Table 5.4 shows that in 1983 Petrojam'sactual feedstockand refineryoperating costs were US$2.24million (or $0.30 bbl) less than the derivedcosts of importedproducts, plus terminalcosts, although in 1984 the refineryoperators margin was negativeat $-0.46 ($-0.1/bbl), becauseof refineryclosures due to lack of feedstock. If, however,the 1984 feed and productcosts are proratedto the 1983 productionlevel and the 1983 refineryand terminalcosts are used, the 1984 refineryloss of $0.46 MM becomes a small gain of US$0.1 M1 (US$0.01/bbl). This improvementhighlights the extentof the lossesboth from inefficiencies when operatingthe refineryat low rates and from increasedcrude costs due to foreign exchange limitations. In other words the refinery operaces at a positive operating margin, providing production is uninterrupted.

5.15 Foreigncurrency constraints, particularly in 1984, also caused increaseddemurrage c3sts, when tankerswould not berth until documents were processed,and increasedletter of creditcosts of up to 4% compared to the usual 0.5%. Petrojam estimatesthat demurragecosts directly attributableto foreignexchange transfer delays amounted to US$0.24MN in 1983 and US$0.38MM in 1984, and additionalletter of credit costs to US$3.4MM in 1983 and US$4.86MM in 1984, an aggregateof US$8.8MM.

5.16 Indirect losses also arose during 1983/84 because the uncertaintysurrounding foreign exchange transfersrestricted Petrojam taking advantagesof opportunitiesto purchasespot cargoeson favorable terms. As indicatedin Annex 3, foreignexchange constraints meant that Petrojamwas unableto ta-keadvantage of favorablespot freightrates, at an estimatedcost of about US$1 millionp.a.

Recommendation

5.17 It is thereforerecommended that foreign exchange should be made availablepromptly to Petrojamwithin a pre-approvedbudgeted amount to permitcontinuous refinery operation and to enableit to make full use of occasionalprofitable spot cargoesavailable either in the Caribbean or in the US Gulf Coast. - 22 -

VI. uCoumC EVALUATION

Least Cost Comparison

6.1 This section compares the way in which Jamaica meets its productdemand through domesticrefining of crude importsagainst the alternativeof direct product imports. In Part V, the actual costs incurredby Petrojam in procuringand refiningcrude in 1983 and 1984 were examined against its direct product import costs, and a positive refinery operating margin was establishedfor both years, assuming uninterruptedrefinery operations. Each of the cost componentsin this comparisonis now examined,adjusting as necessaryto a least cost basis.

6.2 As regards the landed cost of importedproducts, the refinery operatingmargin calculation(Table 5.4) was based on Petrojam'sactual product import costs in 1983 and 1984, using Aruba and Curacao posted prices. Annex 1 examinesAruba/Curacao posted pricesagainst Caribbean spot and other posted prices. While Caribbeanspot prices in 1983 and 1984 were significantlylower then Caribbeanposted prices (exceptfor leadedgasoline), the Caribbeanspot market is too variableand, thin to be the basic source of Jamaica basic supplies. As regards other Caribbeanposted prices, PDVSA postedprices were consistentlylower then Aruba/Curacaoprices, over the same period. Weighting the various product prices to reflect the Kingston Refinery product slate, PDVSA "Realizations"were US$0.30 less per barrel in 1983 and US$1.20 per barrel less in 1984 than Aruba/CuracaoRealixations. To arrive at a least cost comparison,the refineryoperating margin in favor of domestic refining should therefore be reduced by the PDVSA product price advantage.

6.3 As regards the FOB cost of crude imports, the refinery operatingmargin calculation in Table 5.4 is based on actualprices paid by Petrojamin 1983 and 1984 for crude procuredmainly from Mexico and Venezuela. Since these sourcesare the closestcrude supply point for Jamaica and priced by reference to the internationalcrude market, Petrojam'sactual costs have been used for the least cost comparison. However,it shouldbe noted that duringthe periodunder reviewthe crude slate used in the refiningwas not optimizeddue to foreignexchange constraints. Similarly,no accountis taken of the concessionalfinance available to Jamaica from Mexico and Venezuela under the San Jose Accords,which is examinedin detailin Annex 2. Since the futurelevel of benefitsfrom these Accordsis in some doubt,given crude price trends and the prevailingAccord interestrates, no adjustmentto the refinery operatingmargin is made.

6.4 As regards crude and product transportationcosts, Annex 3 indicatesavailable freight rates for both. The transportationcost to Kingston based on Worldscalecost of January 1984 in suitable sized tankers,which is representativeof transportationcosts over 1983 and 1984, shows that although there are no savings on the dirty cargoes, - 23 -

there is a potential saving of [email protected]/bblfor clean products. Since clean products represented46% in 1983 and 50X in 1"84 of the total prouuctsconsumed, these figureshave to be adjustedto US$0.21/bbland US$0.23/bblrespectively. Furthermore, since productsare obtainedon 15 day credit vis-a-vis 30 days for crude oil, there is a US$0.09/bbl financingadvantage in the purchaseof crude. Finally,no adjustmentis made for refineryoperating costs, since these are comparableto US Gulf Refinery costs (para 5.9), even though refinery efficiencymight be further enhanced by energy conservation investments now under consideration.

6.5 Table 6.1 sets out the comparison:

Table6.1: ADJUSTMENTOF iREFINERYOPERATING MARGlNTO LEASTCOST BASIS

1963 1984a/ (USS/bbl) IUSS,hbl)

I. RefineryOperating Margin USSbbl 0.30 0.01

2. Less (a) adjustmentto reflect lowerposted product prices(PDVSA v. Aruba/ Curacao) 0.30 1.20

(b) adjustmentto reflect potentialproduct transportationsavings 0.21 0.23b/

3. Add savingsfrom fuel oil switch 0.15 O.1S (seepara. 7.7)

4. Add financingadvantage 0.09 0.09

5. Net saving(losses) In domestic refiningcompared to direct productImports (+0.03) (-1.18)

a/ Derivedfigures on theassumption of continuousproduction. b/ SeeTable A.3.1. and A.3.2. and para.3 of Annex3.

6.6 Although an economic cost differentialin favor of direct productimports of US$1.18/bblfor 1984 is significant,too much weight shouldnot be attachedto these figures,given the fact that a suboptimal - 24 -

crude slate was used in that year and reflectedin the evaluationand also given the volatilityof the petroleummarket generally,and the vulnerableposition of Jamaicaas a residualproduct market. In order, therefore,to test the conclusionbased on these figures,the competitive position of the Kingston Refinery as supplier to Jamaica's domestic market should be comparedagainst that of the next best alternative. Because of their location and key role in the internationalproduct market,these are the US Gulf Refineries(USCR).

6.7 Using 1983 cost figures (when the refinery was operating steadily) its total operating costs were US$2.12/bbl,made up of US$0.69/bblfixed costs and US$1.43/bblvariable costs (Table 5.4). These costs are higher than US Gulf refinery prices for "marginal" product barrels, i.e., production over and above their contract commitments,which is then offeredfor sale on the spot market. These marginal product barrels are generallypriced to recover the variable portiononly of the total cost, the fixed portionbeing coveredby the contract barrels, or in the range $1.20-1.50/bbldepending on the refiningcomplexity and type of crude.

6.8 Becausethe US is a net importerof crude, the USGR supplying PCJ with spot productwill, like Petrojam,be processingimported crude oil, possiblyfrom the same source. Comparingthe two alternativesof processingin Kingstonor buyingon the spot martet, it is assumedthat the USGRand Petrojam acquire the crude from the same Caribbean supplier (for example, Mexico (Mayan) or Venezuela (Tia Juana Medium)). The saving achieved by purchasingspot barrels from USGR and avoidingthe Petrojamrefinery's fixed cost elementhas to be balancedagainst the lower cost of crude freightfrom Mexico or Venezuelato Jamaicaand the need to ship spot product from the USGR to Jamaica. Table 6.2 shows that, treatingfeedstock prices as equal,the Kingstonrefinery's higher operatingcosts are substantiallycompensated for by the lower crude and avoidedtransportation costs.

Table6.2: RELATIVECOST OF REFININGAND PURCHASING AT CURRENT BPOXUCTIONLEVELS (USS/bbl)

1983-84Prices "S12/bblCase" USGR Jamaica USGR Jamaica

Cost of Crude, F.0B, -sane-- -same-- Freight to refinery a/ 0.67 0.53 0.67 0,53 US duty 0.05 - 0.05 -

ProcessingCost bl 1.30 2.12 0.79 1.64 Product Freight to Jamaicaa/ 0.90 - 0.90 - ComparativeCosts 2.92 2.65 2.41 2.17 JamaicaRefinery Cost Saving 0.27 0.24

a/ Worldscale,January 1984. b/ Includingrefinery fuel and losses- see Annex3, TablesA.3.1 andA.3.2. - 25 -

6.9 The analysisdemonstrates that the economiccosts of the system of crude procurement,transportation and refiningare slightlylower than direct product procurementfrom the least cost alternativesource of supply,at 1983-84price levels. Table 6.2 also indicatesthe effecton Kingstonrefinery economics if the price were to fall, say to $12/bbl. Petrojam'scost would still be about US$0.24/bblless for a barrel of productif it were to processit ratherthan purchaseit on the USGR spot market.

Recommendations

6.10 There is thereforeno evidence to support closure of the Petrojamrefinery. In operatingthe refinery,Jamaica should:

(a) procuredts basic crude requirementsunder contractsincluding most favored nation price protectionand otherwisebased on generallyapplicable sales terms;and

(b) supplementits basic contract source of crude by periodic interventionon the spot market,when pricesare favorable. - 26 -

VII. OUTLOOKAND OPTIONS

PetroleumPrice Outlook

7.1 The short term outlook is uncertain. Prices have recently fallen dramatically. Given the recent events, the current state of uncertaintyis likelyto continuefor some time.

7.2 Whateverthe uncertaintiesof the short term outlook,the trend in the 1990's is for significantlyhigher levels of crude and product importsinto the US throughthe Caribbeanregion.

Impacton RefinerySector

7.3 The sharp decline in crude and productprices since December 1985 affects refining prospects in several ways. First, it reduces variable costs (fuel and losses) relative to the fixed costs, strengtheningthe competitiveposition of those refinerswhose fixed costs are low. Second, the lower price encourages greater oil consumptionand increasedrefinery throughputs, particularly in the light and middle distillate product range. (By May 1986, US refinery utilizationrates, for example,had reached 83X from a low in 1982 of 701). Third, it reduces the fuel element in freight costs, making productpurchases from distantrefineries a littlemore attractive. Put to ether,the lower level of crude priceswill lead to higher capacity utilization in existing refineries, discourage investment in new refineries by independentrefiners and push spot prices closer to contractprices as refineryutilization rises.

Outlookand Optionsfor the PetrojamRefinery

7.4 As indicated in the previous section, Kingston refinery's proximityto crude oil export centers,its operatingcost levelsand the potentialmatch betweenits product slate and Jamaica'sdomestic market all contributeits competitiveposition across a wide range of crude oil prices. The rise in US refinerycapacity utilization rates and the trend for spot prices to move closer to contract prices will make it increasinglydifficult for Jamaica to obtain productsat marginalcost from exportrefineries in the regionand will thus reinforcethe Kingston refinery'sposition as the least cost reliablesource of product supply the Jamaicamarket.

7.5 Various short term measures are available to Petrojam to improveits technicaland financialperformance at zero or low capital cost. Of these,certain technical specification changes and exchangesof uncrackedfuel oil are currentlybeing implemented. In addition,major savingsare possiblefrom increasingthroughput and shiftingto unspiked heavy crude,so long as the additionalfuel oil producedcan be marketed to the privatesector alumina industry. Certainlonger term measuresare also potentiallyjustified. Petrojam is already developingvarious - 27 -

energy conservationprojects, and should continue, while carefully evaluating their economic viability in the light of lower fuel oil prices. Secondaryconversion investment may also be justifiedbut, since the return on such investmentdepends entirely on the differential between crude and product prices, further evaluationof this option should be deferred until price and market conditions become less volatile. These optionsare now consideredin more detail.

Short Term Options

7.6 Fuel Oil Switch: The refineryis producinga large amount of straightrun fuel which is used either for combustionat JamaicaPublic Service Co., the cement companies,the public sector bauxite/alumina companies,or for bunkeringpurposes. For these uses, a crackedfuel is sufficient. Markets in the US and Europe place a higher value on uncrackedtstraight-run material because it can be used as a refinery crackingunit feedstockto make the more valuablewhite products. The premiumon straight-runmaterial fluctuates with the relativestrength of gasolineand fuel oil and has reachedas high as $26/tonor $4/bblat the US-C.

7.7 Exchanging5000 b/d uncracked fuel oil out of the Kingston refineryfor the same amount of crackedfuel oil out of Corpus Christi would requirea tanker every 5-6 weeks. Assuming320 operatingdays a year and dirty freightto Corpus Christiin the range of $0.69-0.42/bbl, the switchwould save $0.5-0.9MM per year for the first $1/bblpremium and $1.6 MM per year for each additional$l/bbl premium. Such an exchangecould give rise to potentialsavings in the order of $0.15 per barrelof crude.

7.8 Modified Refinery Operations - Change in Product Specifications:Petrojam's current specificationswere set some years ago a-id,in some respects,are out of line with those in the US and Europe. The changesreferred to below will reduceprocessing costs. In particular:

(a) Petrojam should increasegasoline productionby raising the gasoline90% point and endpoint. The D-439 ASTM specification allows these to be in the ranges 365-374 F and 437 F respectively;

(b) the dieselflash point shouldbe reducedfrom 150 F to 140 F to save refineryenergy by not having to distill out the extra light ends, withoutany safetyrisk to the consumer. The ASTM specificationis 125 F for diesel (D975), 100 F for No. 2 heating oil (D396) and 140 F for No. 6 heavy burner fuel (D396). A typical range used in sales internationallyfor dieselis 140-150F;

(c) Petrojam'sproposal to raise the dieselsulfur level above 0.5% would add to pollution as well as to corrosion,the main - 28 -

objectionof the marketingcompanies, and would be a retrograde step;

(d) fuel oil viscositycould be raised from 200 SSF to 220 S8P to recover more heavy diesel. Although Petrojam's fuel oil viscosityalready exceeds the typical 380 CS at 122°F, the raise could be supportedprovided consumersare willing to adjust their burnersand heatingfacilities to accommodatethe change;and

(e) reformer capacity is below that needed to match the availabilityof naphtha from most crudes and below market demand for gasoline. The octane of the unreformednaphtha is boostedto the requiredlevels by addingtetraethyl lead which is imported. To minimizeoctane addition, Petrojam should:

(i) reduce gasolineoctane level from 95 RON down to 91 RON, to increasegasoline production; and

(ii) avoid crudeswhich have virgin naphthaswith a low clear octaneon the reformedportion.

7.9 Increasing throughput to capacity, using unspiked heavy crude: Petrojamcurrently operates the Kingstonrefinery at the level requiredto meet domesticproduct demand of about 21,500 b/d, excluding the fuel oil requirementsof the private sector alumina producers of about 13,500b/d (see Table 5.3 and para. 5.7). In order to match its productionslate to this demand, Petrojam is required to import more expensive"spiked" crude (i.e.,crude mixed with products).

7.10 The refineryproduction slate and the domesticdemand could, however, be balanced while eliminatingthe use of spiked crude, if refinery throughputwas increasedto its maximum potential of about 35,000 b/d and the resultingincreased fuel oil output of about 13,500 b/d sold to the alumina producers. Table 7.1 indicatesthe positive margin of US$0.62/bblavailable to Petrojamfrom this optionat current prices. - 29 -

Table7.1: RELATIVECOST Of REFININGAND PURCHASING AT INCREASEDPFROUCTION LEVELS Basedon UnspikedHeavy Crude

Product Price a/ MexicanCrude (17500b/d) Total VenezuelanCrude (17500b/d) USS/bbl Realiz,Price Realiz. Output Output Output Realiz, Realiz.Price USt/bbl bbl bbl bbl USS/bbl

Gasoline 19.60 2.94 15 2625 3850 1225 7 1,37 FuelOil 9,83 5,80 59 10325 22925 12600 72 7.08 Gas Oil 16,60 3,82 23 4025 7175 3150 18 2,99 TotalProd, 33950 TotalRealizo Price 12.56b/ 11,44b/

Crude Import Costs,CIF c/ 11.16 9.60

GrossMargin 1.40 1.84

RefineryOperating Costsd/ 1.00 1.00

Net Margin 0,40 0,84

AverageNet MarginS/bbl 0.62

a/ EarlyMay, 1986US Gulf Coastrefinery spot pricesadjusted for lowerfreight cost to Jamaica. b/ Refineryfuel and lossesare excluded, c, EarlyMay, 1986spot pricesfor MexicanMaya and VenezuelanBachaquero crude respectively. d/ Table 5.4, adjustedfor increasedproduction and excludingrefinery fuels and losses.

7.11 Table 7.1 shows the volume of productionfrom the refinery operating at 35,000 b/d per day capacity, processing, by way of example, equal volumes of Mexican Maya and Venezuelan Bachaquero crude. Comparison with Table 5.3, indicates that production of gasoline and distillates remains comparable to current Petrojam production levels, while fuel oil production is increased by approximatelythe amount of the alumina industry fuel oil requirement. The Petrojam refinery is, therefore, able to meet almost the entire Jamaica product demand.

7.12 Table 7.1 indicates that the Petrojam refinery can supply the Jamaica domestic market at an ex-refinery cost of US$0.62/bbl less than direct product import at prevailing crude and product prices, a significant improvement on the position at the current level of production, based on spiked crudes (Table 6.2). Table 7e1 is, however, indicative only, and further analysis is recommended to complete the - 30 -

evaluationof this option, in particularin the followingthree areas: firstly,current product prices are volatileboth in relationto crude pricesand in absoluteterms, and furtherprice and sensitivityanalysis is advisable: secondly,the Petrojam fuel oil price to the alumina industrymust be lower than the price paid by the industryfor their current direct fuel oil imports (i.e. Petrojam's terminal and distributioncosts would have to come within the net margin): and, thirdly,due considerationshould be given to the fuel oil specifications (and associated cost implications)required for alumina refinery use (comparedto boileruse where specificationsare not critical).

LongerTerm Options

7.13 Energy Efficiency: With the assistance of PetroCanada InternationalAssistance Corporation, Petrojam has been developing projects that could save energy and therefore reduce fuel uset losses and operating costs. These were originallydefined in an energy audit conductedby Exxon in October1981 when a potentialmaximum saving of 184 fuel oil equivalentbarrels/day were identified. This representsa 262 reductionin the refineryfuel loss (Table 5.4) a significantreduction in the variablecost portionof total refinerycosts.

7.14 About twentyprojects were identifiedby the Exxon audit. The largest, installationof a gas turbine generator (US$4.24 MM), has progressedthe farthest,with placing of the purchase order for the turbine; the remainingprojects ari being restudied to determinethe effectof lower oil prices,and new engineeringdesign packages, suitable for accuratecost estimating,are expectedto be ready shortly.

7.15 Petrojam should continueto develop the scope of each of the potential conservation investment, while carefully evaluating its economicviability in the light of lower fuel oil prices.

7.16 SecondaryConversion: If Petrojamis not able to increaseits production level to capacity and market the additionalfuel oil to Jamaica's domestic alumina industry, Petrojam should evaluate the alternativeof increasingproduction to capacityand installingsecondary conversionor upgradingfacilities to reprocessfuel oil productioninto white products,which can then be exported.

7.17 The Petrojam hydroskimmingrefinery is a simple distillation unit, refining crude into various petroleumproducts through a primary conversionprocess. The installationof secondaryconversion facilities would permit Petrojamto upgrade some of its fuel oil productioninto white products. The returnon the requisitecapital investment depend:, of course, on the spread between fuel oil and white product market prices. In 1979 this spreadwas over $10 per/bbl,which made secondary investment extremely attractive. In 1984 this spread had almost disappeared.In early May, 1986 the sprerdwas around$9/bbl. - 31 -

7.18 Secondary conversion facilities capable of processing Petrojam's fuel oil production cover a wide range in cost and, proportionally,in the percentageof white productswhich can be produced from that fuel oil. By way of illustration,a hydrocracker(including related servicesand facilities)might cost in the order of $80 million and convert45% of throughputinto white products. At the other end of the scale,a visbreaker(again including related services and facilities) might cost in the order of $20 millionand convert101 of throughputinto white products. Many other types of facilityincluding (in cost order) fluid catalytic crackers, delayed coking, thermal cracking and mild hydrocrackingfacilities fall in betweenthis range.

7.19 The justification of substantial secondary conversion investmentdepends on the continuanceof an appropriatespread between fuel oil and white product prices,which cannot be assured in today's volatile market. It is recommended,therefore, that Jamaica should defer. undertakingthe secondaryconversion feasibility study to evaluatethe variousconversion alternatives against marketing possibilities, until a higher degree of reliancecan be placed on the fuel oil/productprice spread. In the meantime, Petrojam may have the opportunity to substantiallystrengthen its financialand economicviability, at zero or low capital cost, by increasingproduction to capacityand sellingthe additionalfuel oil to its domesticalumina industry.

Recommendations

7.20 In summary,it is recommendedthat Petrojamshould continue its effortsto:

(a) exchange its relatively high value uncracked fuel oil, exportingit to the U.S. and Europe,for a lower value cracked fuel oil, which would still be suitablefor domesticuse;

(b) increase production and reduce costs by changing various productspecifications;

(c) evaluate with the private sector alumina industry the feasibilityof increasingproduction to capacity,35,000 b/d, based on an appropriateblend of heavy unspiked crude, for supplyto the industryof its fuel oil requirements;

(d) reduce fuel use and losses, while carefully evaluating individualinvestments against current fuel oil prices;and

(e) undertakea secondaryconversion feasibility study to upgrade its fuel oil production,as soon as the price differential betweenfuel oil and white productsstabilizes.

7.21 The conclusionsreached in this sectionof the Reportare based on prevailingconditions as they affectJamaica's petroleum procurement, refining and distributionsubsector. Close monitoringby GOJ of the - 32 -

future evolutionof these conditionsis requiredto ensurethe effective exploitationof cost savingsopportunities as they arise,and to verify that the economic costs of the domestic refining continue to remain comparablewith the alternativeof direct product importation. It is thereforealso recommeviedthat:

GOJ should undertakethis monitoringthrough MMET, and should ensurethaM; adequate resources are made availableto the Energy Divisionof MMET for this purpose. - 33 - Annex 1 Page 1 of 3

COKPARION OP POSTEDAND SPOT PUCKS IN THE CASIBBKA BRGION

1. Spot prices are barometersbut not accuratemeasures of the state of the underlyingmarket. They indicatethe strengthof demandfor product that is being sold outside the volume sold under contract arrangements.The market focus for productssupplied into the US East Coast is New York Harbor and Platt's Price Report publishesdaily its best estimateof the high and low prices of spot transactionsthat have occurredthere. No volumesare shown,although there is a discussionof this in the text. Platt'salso lists high/lowprices for spot sales in the Caribbean,an uncertainarea from which to obtain accuratL-data because of the smaller number of transactionsand limited capacity of locations.

2. Spot productprices in the US East Coast and the Caribbeanare shown for periods in 1983-85in Table A.1. Also shown in the table is the Realizationfor each period for a productbarrel which is equivalent to PCJ's refineryyield. This is a useful way of comparingthe prices, so that they are combinedin a mannerappropriate to Jamaica.

Table A.1 DIFFERENCEBETWEEN USEC AND CARIBBEAN PRICES - SPOTAND POSTED CUSS/bbl)

2.2% 2.8% Leaded Jet/ flesel SulphurFuel Sulphur Gesollne Kerosene Oil Oil FuelOil Realization

9/1983- 12/1983 USEC Spot 33.1 - 33,8 27.0 26.6 29.8 CaribbeanSpot 32.8 33.6 32.2 26.3 25.6 28.8 1983 PDVSAPosted 32.7 33.9 33,4 25,3 24.8 28,7 Aruba/Curacao Posted 35,3 35.2 33.0 - 24.8 29.0 1984 USECSpot 31.0 - 33.0 27.8 27.4 29.7 CaribbeanSpot 31.0 32.3 31.2 26.8 26.2 28,5 PDVSAPosted 30,2 33.2 32.4 27.2 26.8 29.1 Aruba/Curacao Posted 34.0 34.5 33.9 - 27.0 30.3 1985 USECSpot 31.8 - 32.1 24.0 23.6 27.5 CaribbeanSpot 31.0 31.5 30.3 22.7 22.3 26.2 PDVSAPosted 30.4 32,9 32.3 24.2 23,8 27,5 Aruba/Curacao Posted ------

Note: 1.Realization based on 17% gasolIne,30% distillateand 53% fuel oil, to approximateKingston refinery. 2. There Is no Caribbeanspot for LeadedGasoline, so Naphthaprices plusUS 5+/gal areused. Source:Platts; POVSA. - 34 - Annex 1 Page 2 of 3

3. The USEC realizationin the last quarterof 1983 was $1.0/bbl (29.8-28.8)higher than in the Caribbean,US$1.2/bbl (29.7-28.5) in 1984 and US$1.3/bbl(27.5-26.2) in 1985. USEC priceson individualproducts were higher than those in the Caribbeanto allow for the transportation cost to the US.

4. Except for leadedgasoline, the Caribbeanspot prices in 1983 and 1984 are lower than Caribbeanposted prices, so Jamaicacould have benefitedsubstantially from purchasingspot cargoes-- if the product had been availablein the correctquantities and qualitiesand at the time they were needed. This is unlikelybecause, as pointedout below, the marketin the Caribbeanis thin.

5. PDVSA postedprices in the Caribbean,while consistentlyabove Caribbeanspot prices,bear a closer relationshipto the US East Coast spot than other Caribbeanposted prices. In 1984, PdVSA prices were slightlyless than USEC spot by about the value of the freightand in 1985 were about equal. Posted prices at Aruba/Curacaothowever, moved significantlyhigher than the PDVSA prices after 1983, when Exxon lost its netback crude contract, then shut down Aruba, and when Shell's problemsin Curacaobegan to mount. In 1984 the differencewas $1.2/bbl (30.3-29.1),up from $0.30/bbl(29.0-28.7) in 1983.

6. Before 1980 and the worldwideperception of a weak oil market, posted prices at refinery centers were widely used as a sign of availability. They were generallyaccepted as a basis for negotiations rather than as true indicatorsof the real productprices. A discount (or a premium) would be applied to each product in a separate, confidentialagreement between buyer and seller. Since 1980, the decline in the price of oil because of oversupply!as meant that every extra barrel sold over the actual level of today'sdemand has had to find a home at a reducedprice in order for a buyer to take and keep it for use tomorrow. Spot has consistentlybeen at a discountto posted.

7. This situationlasted long enoughfor a wide range of buyersto make a break with the old practiceof contractingfor the bulk of their supply at some formula tied to the posted price. Instead, they have chosen to rely in varying degrees on the spot market (the degree dependingon the reliabilityof the particularmarket), causing the swing to spot purchasingdescribed earlier, and have tried to get contract suppliersto use spot prices. Sellers,of course,have resistedand many have tried based on postedprices. This minimizesrevenue loss because posted prices lag behind spot prices in a fallingmarket. In order to move the product,however, the seller has had to eventuallyinclude discountsin the formula.

8. For the Moment,posted prices play a less prominentrole in the market than spot but they still endure-and could returnas the buyer's preferenceif spot pricesbecame stronger than posted. - 35 - Annex 1 Page 3 of 3

9. While public display of the seller's price may not be appropriate,contractual agreements between buyer and seller to buy accordingto an agreed formula, linked to posted or possibly to spot prices,may well be negotiable.

10. Contract purchases should be part of Jamaica's supply package. They are universallyused for several reasons. First, they represent a transparent,arms length transactionwith a guaranteed deliveryat a price fixed by formula. Second,given the commitmentsof large marketing companiesor national economies,making frequent spot purchasesfor 100% of requirementsis unlikelyto be practicalover the long run. Spot cargoesare not always availableat attractiveprices when they are needed and are likely to vary in consistency,making it difficult to arrange the correct quality mix. As a result, certain stable relations and purchase agreements with reliable suppliers eventuallyemerge. A guaranteedsupply for a significantportion of feedstockis worth a premium. The extentof that contractualsupply and the size of the premium are both the subjectof constantnegotiation, dependingon the state of the oil market.

11. In summary,the Caribbeanspot market is too variableand too thin to be the sourceof Jamaica'sbasic supply. Havingbaseloaded the system on contractmaterial, spot purchasesfrom the Caribbeancan then play an important part in PCJ's strategy. PCJ can predict quite accuratelythe demand for petroleum,and incidentallyforeign exchange demand,on a month-by-monthbasis. It is, therefore,in a positionto negotiate for a mix of both short- and long-term contractsand to supplementthis as appropriateby spot purchaseslocally. - 36 - Annex 2

SAN JOSE ACCORDS

1. The San Jose Accordbetween countries in the Caribbeanarea and the Accord'sco-sponsors, Mexico and Venezuela,provide for the latterto supply each country with a certain quota of crude, under preferential terms. The Accordsbegan in 1976 when Venezuelaalone agreedto supply crude to the region under easy terms, under which half of the crude purchasedwas entitledto a 30% refundwhich was then repaidin ten equal installmentsover a periodof five years.

2. The first Accordsto which both Venezuelaand Mexicowere party began in August 1980 for one year and have been renewed each year since. Under these Accords,a total of 160,000b/d was to be supplied, half from each of the signatories,with 30Z of the cost of each shipment converted(by way of refund)to a loan at 4% for 5 years. The loans were appliedon a shipmentby shipmentbasis. Each recipientcould convert that short term loan into a loan at 2% for 20 years, providedthe money was used in energy projectsapproved by the two suppliers. The Accord also stipulatedthat the crude be transportedin ships belongir.gto Naviera Multinacionaldel Caribe, owned by Mexico, Venezuela and others. Unless the conversionto a long term loan occurred, the repaymentof the refundon each shipmentbegan six monthsafter delivery and lastedfor ten installmentsof interestplus principal.

3. The Accordwas renewedin 1981 and 1982 under the same terms, but in 1983 the short term rate was increasedto 8%, the long term to 6X and the portion to which it appliedwas reduced to 20%. In 1984, the ceilingwas reduced to 130,000b/d. The detailsof the payment terms were differentfor each supplierin 1983-84. The Accordwas extendedfor a sixthyear in August 1985.

4. The Accord has been very helpful in enablingJamaica to meet critical payments for oil by deferring 20-30% of the costs to the future. When the interestrate on US dollarsbasis was 14% in 1983 and Jamaicahad to borrow to pay for its oil imports,the benefitof paying an interestrate of 8% on the decliningbalance over 5 years was about 4X of the total cost (usingloan amortizationtables as an approximation)or about US$1.2/bblon each US$30 barrelimported. Althoughinterest rates have fallen to nearly 8%, the 20Z refund has continuedto have a high opportunityvalue becauseloans have been difficultto obtain.

5. However,the increaseddebt burdenof the Accordbeneficiaries, and of Mexico and Venezuela themselves,have caused strains in the administrationof the Accords in the last few years. By March, 1986, Jamaicahad accumulatedshort-term loans under the Accordsof US$150 MM, but had not been able to convert those loans into long-termdebt for approvedenergy projects. Further, short-termloans refundshave been delayed. The benefitsunder the Accordsare not, therefore,included in the analysis. - 37 - Annex 3 Page 1 of 3

MEIGHT RATES FOR "DIRTY" AND"CLEAN" CRUDE AND PRODUCTCARGOES IN THE CARIBBEANREGION

1. Estimatedfreight rates from a numberof sourcesto Kingstonin January 1984 for crude and fuel oils ("dirty"cargoes) and for white products ("clean" cargoes) are presented in Tables A.3.1 and A.3.2. These have been preparedfrom the Worldscale100 values for the period January1, 1984 - June 30, 1984 and the informationon the actualJanuary levelsof Worldscalepublished in Platt's at that time. Thus a 50,000 DWT vesseltaking crude from Amuay to Kingstoncould be charteredat 130 Worldscale for the voyage and the landed cost, according to these sources, would have been $0.53/bbl. Tanker brokers active in the Caribbeanhave confirmedthat these calculatedrates could have been expectedin practicefor spot fixtures.

2. Petrojam's landed freight costs for 1983 and 1984 averaged about US$1.10/bbl and US$0.70/bbl for clean and dirty cargoes respectively,excluding LPG. A review of the Worldscalevalues and actualchartering rates suggestthat Petrojam'scosts in these years were significantlyhigher than the calculated landed freight costs of US$0.65/bblfrom the Caribbeansources for clean cargoes in 30,000 DWT vessels (Table A.3.2) and about US$0.53/bbl(Table A.3.1) for dirty cargoesin 50,000DWT vessels.

3. As regardsclean cargoes,Petrojam's actual cost of US$1.10/bbl was higher than the calculatedcost of US$0.65/bblbecause of the smaller size cargoesreceived due to tankagelimitation at the terminal. This limitationon tankage,however, would not be applicablewhen considering the case of shuttingdown and using the refineryas a terminalonly. In this case, potentialsavings for clean cargoeswould thereforebe about US$0.45/bbl.Another reason for these higher costs on the clean cargoes was that Petrojamhad to arrangefor ships to move committedcargo but frequentlyfound itselfwithout the foreignexchange to do so until the last minute. Arrangementsmade under these conditionsgenerally result in the excessiverates. Also, Petrojamsometimes hired vesselsand was then forced to underloadthem with a smallercargo in order to fit the allotmentof currency.

4. As regards the calculatedfreight rate for dirty cargoes,the figureof US$0.53/bblhas in actualpractice to be increasedfor two port loading since the refinery uses crude and to take account of the Venezuelabar toll. Accordingto Petrojamcalculations these total about US$0.25/bblthereby removing any significantdifference between the actualand calculatedfreight rates. - 38 - Annex 3 Page 2 of 3

TableA.3.1: FREIGHTRATES FOR DIRTYCARGOES - SOURCESTO KINGSTON

Coatzo- Sullom Amuay sonny coalcas Covenas Voe

Worldscale100 2.37 12.8 3.62 3.56 11.31 Niles 526 5025 1164 1180 4500

Colombian Cargo BCF 24 Sonny Isthmus Export Brent API 24 41 33 28 39 Bbis/Longton 7.04 7.81 7.44 7.22 7.71

FOB Cost,S/bbl 27 30 30 30 30 S/bbl* WS 100 0.34 1.64 0.49 0.33 1.47 Ship,NDWT 50 50 50 50 50 Speed,Kn/Hr 10.5 10.5 10.5 10.5 10.5 Days-Transit+ Port 6 21 8 6 20 less,credit 30 30 30 30 30 Insurance,% 0.07 0.07 0.07 0.07 0.07 Losses,% 0.25 0.25 0.25 0.25 0.25

Freight,S/bbl 0.44 1.31 0.63 0.43 1.17 Insurance,S/bbl 0.02 0.02 0.02 0.02 0.02 Lightering,S/bbl 0.00 0.00 0.00 0.00 0.00 CIF cost, S/bbl 0.46 1.53 0.65 0.45 1.40

Losses,S/bbl 0.07 0.08 0.08 0.08 0.08 LandedCost, 5/bbl 0.53 1.61 0.73 0.53 1.48

Notes: 1. Worldscalevalues from January 1984 edition. Tanker rates from Platt'sSpot TankerRate Report,January 1984. 2. All unitsprices are In U.S. Dollars.

TableA.3.2: FREIGHTRATES FOR CLEANCARGOES - SOURCESTO KINGSTON (S/bbi)

To Kingston CIF to CIF Landed Corpus Phila

Amuay 0.47 0.65 1.00 1.03 Aruba 0.44 0.62 Coatzocoalcas 0.71 0.89 0.50 1.05 CorpusChrlsti 0.77 0.90 Curacao 0.48 0.66 Philadelphia 0.86 1.04 Trinidad 0.62 0.80 1.16 1.05

Note: For 30 DMWT. Source: As for TableA.3.1. - 39 - Annex 3 Page 3 of 3

5. The comparisonof freightcosts from sourcesto Kingstonand coststo othermarkets (Table A.3.2) shows that PCJ is well situatedto get attractive terms on Colombian,Mexican and Venezuelancrudes because Jamaicais geographically very much closer to the supplying countries thanthe targetmarkets, like the USGCand USEC,which set the levelof crudeprices in thesethree countries. Although its hArborlimitation allowsit to use only smll ships,most of the vesselsbetween these suppliers and the U.S. are also small ships of 30-50 MDIT. PCJ can surrendersome of this saving to negotiate for contractsbased on "spot- plus"a premiumor "posted-minus"a discount. EMNErGYSECTOR MANAGT ASSISTANCEPROGRAM

Activities Cotpleted

Date Completed Energy Assessment Status Report

Papua New Guinea July, 1983 Mauritius October, 1983 Sri Lanka January, 1984 Malawi January, 1984 Burundi February, 1984 Bangladesh April, 1984 Kenya May, 1984 Rwanda May, 1984 Zimbabwe August, 1984 Uganda August, 1984 Indonesia September, 1984 Senegal October, 1984 Sudan November, 1984 Nepal January, 1985 Zambia August, 1985 Peru August, 1985 Haiti August, 1985 Paraguay September, 1985 Morocco January, 1986 Niger February, 1986

Project Formulation and Justification

Panama Power Loss Reduction Study June, 1983 Zimbabwe Power Loss Reduction Study June, 1983 Sri Lanka Power Loss Reduction Study July, 1983 Malawi Technical Assistance to Improve the Efficiency of Fuelwood Use in Tobacco Industry November, 1983 Kenya Power Loss Reduction Study March, 1984 Sudan Power Loss Reduction Study June, 1984 Seychelles Power Loss Reduction Study August, 1984 The Gambia Solar Water Heating Retrofit Project February, 1985 Bangladesh Power System Efficiency Study February, 1985 The Gambia Solar PhotovoltaicApplications March, 1985 Senegal Industrial Energy Conservation June, 1985 Burundi Improved Charcoal Cookstove Strategy September, 1985 Thailand Rural Energy Issues and Options September, 1985 Ethiopia Power Sector Efficiency Study October, 1985 Burundi Peat Utilization Project November, 1985 Botswana Pump ElectrificationPrefeasibility Study January, 1986 Uganda Energy Efficiency in Tobacco Curing Industry February, 1986 Indonesia Power Generation Efficiency Study February, 1986 Uganda Fuelwood/ForestryFeasibility Study March, 1986 Date Completed

ProjectFormulation and Justification(cont.)

Sri Lanka IndustrialEnergy Conservation- FeasibilityStudy March, 1986 Togo Wood Recoveryin the NangbetoLake April, 1986 Rwanda ImprovedCharcoal Cookstove Strategy August,1986

Institutionaland PolicySupport

Sudan ManagementAssistance to the Ministryof Energy& Mining May, 1983 Burundi PetroleumSupply Management Study December,1983 PapuaNew Proposalsfor Strengtheningthe Guinea Departmentof Mineralsand Energy October,1984 Papua New Guinea Power TariffStudy October,1984 CostaRica RecommendedTech. Aset. Projects November,1984 Uganda InstitutionalStrengthening in the EnergySector January,1985 Guinea- RecommendedTechnical Assistance Bissau Projects April, 1985 Zimbabwe Power SectorManagement April, 1985 The Gambia PetroleumSupply Management Assistance April, 1985 Burundi Presentationof EnergyProjects for the FourthFive Year Plan May, 1985 Liberia RecommendedTechnical Assistance Proj. June, 1985 Burkina TechnicalAssistance Program March, 1986 Senegal AssistanceGiven for Preparationof Documentsfor EnergySector Donors' Meeting April,1986 Zambia EnergySector Institutional Review November,1986