US embassy cable - 05KINGSTON294

UNCLAS SECTION 01 OF 04 KINGSTON 000294 
 
SIPDIS 
 
DEPARTMENT FOR WHA/CAR (BENT), EB/ESC/IEC (GALLOGLY), 
EB/CBA (SMITH-NISSLEY) 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, JM 
SUBJECT: IN FACT IT'S A GAS: OIL COMPANIES UNHAPPY WITH 
PETROLEUM CODE OF CONDUCT 
 
 
1. (U) This is an action request; please see paragraph 20. 
 
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SUMMARY 
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2. (U) The petroleum industry has been a source of problems 
for the GOJ since it was fully deregulated in 1993.  There 
have been several price riots and threats of industrial 
action in the sector over the past decade.  To settle the 
most recent crisis, in December 2003, the GOJ promised the 
retailers' association that a new code of conduct would be 
put in place to create more favorable conditions when dealing 
with the international petroleum companies that control 65 
percent of the market.  Despite concerns raised by Exxon, 
Shell and Texaco, the Free Trade Commission implemented the 
code in December 2004.  At that time, Embassy Kingston sent a 
letter of concern to the Ministry of Commerce, Science, 
Technology and Energy (MCSTE), expressing USG support for the 
free market and private enterprise.  Following a breakdown in 
negotiations with the GOJ, representatives from the petroleum 
marketing corporations have approached Embassy Kingston and 
requested further assistance in dealing with the GOJ to get 
their concerns addressed. End Summary. 
 
 
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BACKGROUND 
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3. (U) The Jamaican gasoline industry was partially 
deregulated in 1991, and then fully deregulated in 1993. 
Since 1991, major international marketing companies have 
increased their market share from seven percent to 65 
percent. Roughly one-third of the internationally branded 
stations are dealer owned, with the rest being directly 
controlled by the marketing companies (American firms Esso 
and Texaco, and Dutch Shell).  Directly hired retail outlet 
managers receive a corporate operations manual from the 
marketing companies, but have no additional training.  Profit 
margins across the industry have fallen from 12-15 percent in 
1991 to 5-8 percent in 2004 due to increased competition and 
higher oil prices worldwide. 
 
4. (U) Though prices for unleaded and diesel gasoline on the 
island are still lower than the world average, the people of 
Jamaica are very sensitive to price shocks. Since 
deregulation, there have been three significant fuel tax 
increases (1994, 1999, 2001) in the market, resulting in 
sharp price hikes that touched off widespread protests and 
rioting, a lesson that was not lost on the ruling Peoples 
National Party (PNP).  Shortages were also threatened in 
December 2003 when the National Workers Union (NWU), which 
represents the pump attendants, threatened to organize a 
labor strike unless the attendants received a pay increase 
from the retailers, represented by the Jamaica Gasoline 
Retailers Association (JGRA).  A GOJ mediator was able to 
avert the strike by getting the JGRA to agree to raise wages 
to the attendants in return for a GOJ promise to enact a new 
code of conduct that would help retailers in their dealings 
with the international marketing companies. 
 
5. (U) In 2004, the Jamaican Fair Trade Commission (FTC), a 
GOJ institution with a mandate to regulate trade and pricing 
issues, began drafting the JGRA's requested code of conduct. 
While Minister of Commerce, Science and Technology with 
Energy (MCSTE) Philip Paulwell and FTC chairwoman Barbara Lee 
initially assured the marketing companies that the code of 
conduct would be a non-legislative, voluntary form of 
self-regulation to prevent unfair pricing and trading 
policies, the marketing companies were later informed that 
the provisions of the code were mandatory, and that 
violations would carry fines ranging from US$10,000 to 
US$200,000. 
 
6. (U) The code of conduct went into effect on December 30th, 
2004. The marketing companies are presently refusing to 
comply with the provisions of the code of conduct as written, 
since they maintain that it fails to address their concerns 
and runs contrary to existing Jamaican law. 
 
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MARKETING COMPANY CONCERNS 
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7. (U) Standardization, safety, and environmental concerns 
were raised by the marketing companies when the code of 
conduct was being drafted, but, they complain, none of their 
proposals appeared in the document as enacted.  Of primary 
concern to the marketing companies is the concept of 
lingering liabilities - provisions in Jamaican law that make 
the original owner of a property used as a petroleum retail 
outlet responsible for any contamination of the environment 
that can be traced to that outlet, even decades later.  The 
marketing companies make large capital investments in modern 
storage tanks, safety systems, and environmental protection 
procedures to safeguard themselves from future litigation. 
However, their independent competitors differentiate 
themselves primarily on the basis of price and, according to 
the marketing company representatives, often cut corners on 
safety equipment and environmental protections in order to 
stay competitive.  The JGRA opposed inclusion of 
environmental and safety standards in the code, arguing that 
the independent retailers can't afford to put in the kind of 
technology that the marketing companies use, and would view 
such standards as an unmanageable financial burden for the 
"Mom and Pop" retailers. 
 
8. (U) The marketing companies also object to stipulations in 
the code of conduct that place a five-year limit on supplier 
contracts signed between the marketing companies and 
independent retailers.  When a marketing company affiliates 
itself with a retail outlet, it is a capital intensive 
process that entails replacing the signage and replacing the 
existing fuel storage equipment with one that meets the 
marketing company's standards.  The time period required to 
generate a return on these USD 1 - 2 million investments is 
generally longer than five years, which is why the marketing 
companies prefer to negotiate contracts for 15 to 20 years in 
duration.  The provision was included in the code at the 
behest of the JGRA in order to give retailers more 
flexibility by allowing them to change suppliers more 
frequently and get better deals out of the "big three" by 
shopping around during contract renewal negotiations. 
 
9. (U) The right of first refusal is one of the key sticking 
points.  This provision of the code restricts the ability of 
the marketing companies to sell properties that are wholly 
owned by the corporation.  It gives the local retail manager 
the right of first refusal in the event that the marketing 
company chooses to sell the property.  This provision was 
designed to protect the retail outlet managers who, despite 
being contracted employees of the marketing company, view 
their jobs as a family business.  This adds an extra step in 
the selling process, and prevents property owners from 
engaging in property swaps with other marketing companies. 
It also potentially forces the corporations to sell their 
properties to individuals who may not be able or willing to 
maintain the safety and environmental protection procedures, 
placing the marketing companies at the risk of long-term 
"lingering liability" litigation. 
 
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THE GOJ PERSPECTIVE 
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10. (U) On December 28, 2004, at the request of the marketing 
companies, Embassy Kingston sent a letter to the MCSTE, 
expressing concern that the code would create inefficiencies 
in the market by artificially constraining free enterprise in 
the petroleum sector.  In a follow-up call on 18-Jan-2005, 
Econoff spoke to Conroy Watson, Energy Division Senior 
Director at the MCSTE, and asked him for an explanation of 
the MCSTE's rationale for the code of conduct, a description 
of their benchmarks for success, and the nature of the system 
in place for improving the code through feedback from the 
parties involved. 
 
11. (U) Watson replied that the MCSTE's goal is to create a 
more harmonious relationship between the marketing companies 
and the retailers, as measured by a drop in the number of 
complaints registered with the FTC and the MCSTE. He stated 
that the two sides are currently at loggerheads, a situation 
that is not in the best interests of the industry or the 
country.  The code will allow the MCSTE to intervene as a 
regulatory body, helping the retailers and marketers talk to 
each other and identify principles and guidelines for 
continuing a cordial business relationship. Enforcement will 
be handled entirely by the FTC, as the MCSTE has neither the 
personnel nor the funding to create or maintain an inspection 
and enforcement regime.  Watson suggested that if the USG was 
interested in improving that aspect, they might provide the 
necessary funds. 
 
12. (U) The MCSTE does not find it unreasonable that the 
marketing companies would want to make their money back after 
investing one or two million dollars in a retail outlet. 
However, in many cases the outlet managers have been in place 
for 10 to 15 years and consider it to be their family 
business.  They have complained to the MCSTE that the 
marketing companies are using "draconian methods" to end the 
relationship if they don't measure up to the corporate 
standards.  Watson used the analogy of Wal-Mart entering a 
small town and driving the Mom and Pop stores out of 
business.  (Note: This is a false analogy, as the local "Mom 
& Pop" station managers being forced out are contract 
employees working at stations wholly owned by the marketing 
companies.) 
 
13. (U) Asked why the MCSTE and FTC had opted for a code of 
conduct, rather than pushing forward legislation, Watson 
responded that the Ministry of Energy had been working on a 
legislative solution before the GOJ reorganized the 
ministries and transferred the energy portfolio to the MCSTE, 
but that the new ministry decided that a code of conduct 
would be a "milder approach" to resolving the situation. 
 
14. (U) Asked about the nature of the performance review 
process and the method for altering the code based on 
evaluations of its effectiveness, Watson stated that this 
would be handled through bi-monthly meetings of the MCSTE's 
advisory committee, to which representatives of the private 
sector are invited.  Complaints and problems raised during 
the meetings go directly to Minister Paulwell, and serious 
concerns about specific provisions of the code will be 
addressed on a case-by-case basis. 
 
15. (U) Asked why the code doesn't address the marketing 
companies' environmental concerns, Watson responded that the 
guidelines set down by the National Environmental Protection 
Agency (NEPA) serve to regulate all businesses on the island, 
including petroleum retail outlets.  He added the caveat that 
the regulations are fairly broad, and that specific issues 
pertaining to the petroleum industry were not spelled out in 
black and white. 
 
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BREAKDOWN IN TALKS 
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16. (SBU) On 18-Jan, Econoff contacted Brian McFarlane, 
Country Manager for Esso and related the MCSTE's position 
statement.  McFarlane related the results of a closed-door 
meeting between Minister Paulwell, the JGRA and the marketing 
company representatives on January 13th, stating that the 
meeting initially looked very promising.  Paulwell proposed 
moving the debate over the code out of the media by holding 
future bilateral and tripartite meetings behind closed doors 
and refraining from making statements to the press - a 
stipulation to which all parties agreed. 
 
17. (SBU) Paulwell asked the JGRA and the marketing companies 
if they would be willing to abandon the code of conduct and 
continue doing business under existing Jamaican law, then 
asked if the JGRA would be willing to abandon the code of 
conduct and go about their business on the basis of existing 
legislation.  The JGRA rejected that suggestion and insisted 
on marketing company compliance with the code.  The meeting 
then broke up with no agreement other than to refrain from 
speaking to the press. 
 
18. (SBU) On January 14th, a statement by Minister Paulwell 
about the code appeared in the Jamaica Gleaner, the island's 
leading newspaper.  McFarlane complained to Econoff that the 
dispute is being tried in the press, leaving consumers with a 
negative view of the petroleum industry.  As a result, said 
McFarlane, the marketing companies have lost their trust in 
the MCSTE.  He further stated that the marketing companies do 
not believe that further discussions with the Ministry and 
the FTC will bear fruit, and requested a USG intervention on 
the marketers' behalf, with an eye towards getting their 
concerns addressed in the code. 
 
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COMMENT 
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19. (SBU) It appears that the MCSTE is attempting to use the 
code of conduct as a mechanism to buy off the JGRA and 
prevent the kind of industrial action that rocked the island 
in '94, '99 and '01.  It is clear that the threatened strike 
in 2003 was averted only when the GOJ promised the JGRA a 
deal that would give its members an advantage in dealing with 
the marketing companies.  The MCSTE, as shown by Watson's 
inaccurate Wal-Mart analogy, claims that it is protecting the 
"little guy" from the big corporations, and has paid little 
attention to the long-term consequences and concerns raised 
by the marketing companies.  Indeed, the fact that the 
MCSTE's measure of success is a "reduction in the number of 
complaints" indicates that the primary rationale behind the 
code was to prevent industrial action between the NWU and 
JGRA by promising both sides a financial windfall at the 
expense of the marketing companies, and that they would now 
just like both the JGRA and the marketing companies to go 
away and stop bothering the Ministry.  End Comment. 
 
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ACTION REQUEST 
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20. (SBU) Action Request: Post has sent a letter of concern 
to the Minister Paulwell and followed up with a call to 
Senior Director Watson at the MCSTE, but the American 
marketing companies have requested stronger USG intervention. 
 Post is not satisfied that the petroleum marketing companies 
have exhausted all the legal means at their disposal, and 
requests department guidance for further action. 
TIGHE