US embassy cable - 05KINGSTON2495

UNCLAS SECTION 01 OF 03 KINGSTON 002495 
 
SIPDIS 
 
STATE FOR WHA/CAR (WBENT), EB/ESC/IEC/EPC (MCMANUS, ESSER) 
 
SANTO DOMINGO FOR FCS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EPET, ENRG, ECON, PREL, JM, Venezuela, Petrocaribe 
SUBJECT: PETROCARIBE: PUBLIC AND PRIVATE SECTOR CONCERNS 
 
REF: A. KINGSTON 2026 
 
     B. KINGSTON 2083 
 
THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE 
ACCORDINGLY. 
 
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Summary 
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1. (SBU) Under the bilateral agreement signed between 
Jamaica and Venezuela on August 23 (ref A), Jamaica receives 
21,000 barrels of petroleum products and crude oil daily. 
While the island pays market price for the products, a 
portion of the payment can be converted into a concessionary 
loan for social and economic development.  Consequently, 
Jamaicans do not realize the much-anticipated reduction in 
prices at the pump, but instead benefit from the reduced 
pressure on the country's foreign exchange reserves, a 
development welcomed by Bank of Jamaica officials.  However, 
at least one Ministry of Finance (MOF) official thinks the 
deal could have negative implications for fiscal policy. 
Likewise, opposition party members as well as 
representatives from marketing companies revealed misgivings 
about possible unintended consequences of the PetroCaribe 
deal, and expressed serious concerns about GOJ intentions in 
light of recent statements from GOJ Energy Minister Phillip 
Paulwell.  End summary. 
 
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Background 
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2. (U) On August 23 a bilateral Economic Cooperation 
Agreement was signed between Jamaica and Venezuela (although 
Jamaica started receiving shipments of petroleum products 
under the deal in July).  A Second PetroCaribe Summit was 
held in Jamaica on September 6, 2005 (ref B), jointly hosted 
and co-chaired by Prime Minister P.J. Patterson and 
President Hugo Chavez of Venezuela.  The oil initiative, 
which replaces the San Jose Accord and the Caracas Energy 
Agreement of 2001, was presented by Chavez as an alternative 
to free trade deals backed by the U.S. 
 
3. (U) Chavez found perfect allies in Caribbean leaders and 
people hurting from the effects of soaring oil prices.  The 
Jamaica summit was geared at concluding bilateral 
arrangements and establishing the Ministerial Council to 
govern the operations of PetroCaribe.  Patterson, in 
addressing the summit, pointed out that beneficiary states 
would not receive oil at concessionary prices, as under OPEC 
rules Venezuela is not allowed to sell below market prices. 
Consequently, Jamaican consumers do not see a reduction of 
prices at the pump.  Under the bilateral plan, Venezuela 
provides Jamaica with up to 21,000 barrels of crude oil and 
petroleum products per day.  In return, Jamaica pays full 
market price for the products, but the agreement allows the 
GOJ to finance a portion of the cost-per-barrel depending on 
the market price at the time of purchase. 
 
4. (U) The financing package ranges from a low of five 
percent when oil prices are greater than or equal to USD 15 
per barrel to a high of 50 percent when oil prices are 
greater than or equal to USD 100 per barrel.  The financing 
period ranges from 15 to 25 years depending on the price of 
oil.  When the price per barrel exceeds USD 40, the 
financing period will extend to 23 years plus a two-year 
grace period at one percent rate of interest.  The agreement 
also allows Jamaica to make partial payments to Venezuela in 
goods and services 'that are under threat from the trade 
policies of rich countries,' an obvious response to the 
dismantling of trade preferences for bananas and sugar.  As 
part of the agreement, the Jamaican oil refinery will be 
upgraded to increase output from 36,000 to 50,000 barrels a 
day.  The refinery will also be configured to process the 
heavier grades of crude oil that Venezuela extracts. 
 
5. (U) While Jamaican consumers do not see any reduction in 
prices, a number of benefits are expected to flow from the 
oil deal with Venezuela.  Proceeds from the concessionary 
loan are supposed to be used for social and economic 
development projects 'to improve the lives of the poor.' 
With payments for a portion of Jamaica's petroleum products 
being postponed, the country also benefits from reduced 
foreign exchange outflows of between USD 150 and 180 million 
annually, thereby reducing the pressure on foreign reserves. 
 
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Concerns from within... 
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6. (SBU) Chief Fiscal Economist at the Ministry of Finance 
Courtney Williams told emboff on October 8 that the 
PetroCaribe deal could have negative implications for fiscal 
policy through a build-up in debt.  Williams opined that the 
loan would lead to increased capital expenditure without any 
corresponding revenue flow, resulting in an increase in the 
fiscal deficit.  "I guess everything will depend on how the 
financial markets and rating agencies view the deal," 
Williams continued.  Keith Collister, of the Jamaica Chamber 
of Commerce, told emboff that from an economic perspective, 
the development had to be seen as positive.  Collister 
added, however, that: "nothing in life is free and 
preliminary discussions in the Chamber have surrounded the 
costs in terms of our relationship with the U.S." 
 
7. (U) Opposition Leader of the Jamaica Labor Party (JLP) 
Bruce Golding has also expressed concerns about the possible 
use of the funds secured under the oil deal.  Golding has 
warned the Patterson administration that the JLP would 
"scrutinize, monitor and police" the use to which the 
savings were put.  Golding, in a swipe at Finance Minister 
Omar Davies, said: "We don't want another generation to come 
and find that, in order to try to secure a fifth term, some 
Minister of Government was motivated to `run with it.'" 
(Note: Immediately after the 2002 election, Minister Davies 
admitted publicly that the administration had engaged in 
profligate pre-election spending on public projects in an 
effort to sway undecided voters.  End note.)  He suggested 
the GOJ spend the savings on education, power generation, 
energy efficiency and improving productive capacity. 
 
8. (U) Patterson nonetheless rejected a JLP proposal that 
the use of funds saved through the PetroCaribe deal be 
subject to parliamentary approval.  Instead, he announced, 
lawmakers will receive reports on fund use when the annual 
budget and supplementary budgets are presented.  Patterson 
did show fiscal prudence in noting that priority for the use 
of funds should go to those enterprises (such as increasing 
energy efficiency, or mitigating the hazards of natural 
disasters, for example), which have a capacity to repay the 
portions they borrow from the PetroCaribe fund.  It was 
important to remember that: "these amounts represent loans, 
not grant funds," he said. 
 
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...and from without 
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9. (SBU) Representatives from two of the largest petroleum 
marketing companies in Jamaica have also voiced concerns to 
emboffs.  The General Manager of Esso (ExxonMobil), outlined 
three primary - albeit hypothetical - issues: 
 
-- Supply Stability: Previously, Venezuela accounted for 
approximately 16 percent of Jamaican oil imports.  Under 
PetroCaribe, however, that figure would jump to close to 70 
percent.  McFarlane pointed out that such dependence could 
lead to supply shocks in the future, noting that 2003 labor 
unrest in Venezuela had seriously affected supply. 
 
-- Reference Prices: Venezuela does not post its crude oil 
prices, in stark contrast to all other oil-producing 
nations.  He wondered what, therefore, might happen if 
internal factors impelled Venezuela to sell its oil at over- 
market prices.  He further noted that the provision for 
repayment in the form of goods and services was post- 
scripted: "at concessionary rates," without specifying who 
sets these rates, nor by what formula. 
 
-- Corruption Issues: GOJ has worked on a 45-day rolling 
credit basis with regard to paying for crude oil.  All of 
the GOJ's financial mechanisms are established to meet this 
target.  Now, with a 25-year de facto "extension" on its 
deadline, there need to be strong disincentives to the 
misuse or misappropriation of these funds.  Historically, 
GOJ has not had a strong anti-corruption posture. 
 
10. (SBU) On October 18, EconOff spoke to both the Regional 
Manager for Policy, Government and Public Affairs, and the 
Country Manager of Texaco (ChevronTexaco).  While 
acknowledging the points above, they were less worried by 
any particular one of them.  Instead, they pointed to the 
overall uncertainty inherent in the deal.  PetroCaribe, in 
their view, is simply a financing deal, which does not 
affect their day-to-day operations.  Much detail regarding 
actual logistics is still unwritten, however, creating the 
possibility that "the playing field might not stay level," 
the concern being that the state-owned Petroleum Corporation 
of Jamaica (PCJ) may undertake arrangements that are not 
strictly free market-based.  Shortly after our conversation, 
this fear was borne out.  On October 21, GOJ Energy Minister 
Phillip Paulwell announced that Petcom, the retail 
subsidiary of the PCJ, was scouting potential sites and new 
franchisees for the Petcom brand as part of a major 
expansion under PetroCaribe.  "We want to take on the big 
boys," Paulwell said. 
 
11. (SBU) PCJ established Petcom in the 1980s as a 
stabilizing mechanism at a time when the GOJ felt that 
multinational marketing companies could hold Jamaica to 
ransom if not for a counterbalancing force.  Petcom 
currently has 20 service stations, accounting for about ten 
percent of the island's retail trade.  Under the expansion, 
these numbers would climb to 45 stations, capturing 35 
percent of the market over the next three years.  While 
noting that he "welcomed competition, which always benefits 
the consumer," Texaco's Country Manager noted that he had 
very serious concerns about how the State-owned PCJ would 
outmaneuver the private companies.  Would they receive 
preferential supply?  Beneficial pricing?  More efficient 
distribution?  "It is clear," he noted in an October 26 e- 
mail, "that the present Government wants to vertically 
integrate into the [retail] petroleum sector.  This is a 
significant policy shift which will have serious 
implications for the market." 
 
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Comment 
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12. Jamaica is suffering not only from record oil prices, 
but also from the dismantling of traditional trade 
preferences.  With many industries unable to compete with 
lower cost producers, some Jamaican leaders view Venezuela 
as a possible liberator to fill the void caused by the 
falloff in trade.  While private sector organizations 
recognize the possible economic and social benefits, some 
quarters are beginning to fear a backlash from the U.S., and 
are starting to see hidden costs and consequences that had 
been glossed over in the glow of the deal.  However, 
PetroCaribe could have a transforming effect on the Jamaican 
economy, if the GOJ puts the savings to productive use.  In 
particular, the expected foreign exchange savings should 
relieve pressure on the country's limited, albeit 
increasing, stock of net international reserves.  If the 
loan proceeds are used to finance productive enterprises, it 
will not only generate enough resources to repay the debt 
but could very well produce additional resources to finance 
other high cost debt.  However, the Opposition's fear of the 
savings being used by the current administration as a "slush 
fund" to secure a fifth consecutive term should not be 
overlooked, given the normally prudent Davies' post-election 
admission of fiscal imprudence.  Similarly, while 
representatives of both Esso and Texaco in Jamaica have 
indicated that the uncertainties have not affected their 
short- or medium-term investment strategies in the country, 
Paulwell's recent challenge to the industry has caused some 
concern among some multinational corporations about GOJ's 
intentions in this deal.  End comment. 
 
TIGHE