Risky business
Petrojam rejects ‘loss’ label after fall in oil inventory value; highlights country’s need for significant reserves
Oil refinery Petrojam has dismissed the Opposition People’s National Party’s (PNP) characterisation of the impairment of its inventory value, because of a fall in oil prices after a significant purchase of supply, as a $5-billion loss.
In a statement yesterday afternoon, Petrojam stressed that, over its 40 years, it had never failed at its mandate to ensure Jamaica never runs out of fuel.
“This requires us to maintain strategic inventory reserves higher than would obtain in a purely commercial entity,” said the oil refinery, which came under fire in Parliament on Wednesday after the revelation that it had received a $5-billion loan from the government to offset the exposure faced when oil prices fell from the US$120 per barrel at which it had purchased a large portion of the country’s reserve supply.
“Petrojam’s inventory comprises both crude oil and finished products. The current total inventory is approximately 2.3 million barrels. This represents nine weeks’ supply. Holding inventory for this purpose exposes the company to additional costs and the risks that are inherent in the petroleum industry, specifically, world market price fluctuations. This means that, when prices fall, there will be a corresponding impairment of the inventory values. This situation is usually temporary.”
The refinery added: “Petrojam does not engage in speculative purchasing of crude oil or finished products. Crude and finished products are purchased using a tender process that considers several factors, including price and appropriateness of crude.
“Crude oil, which was purchased at approximately US$120/barrel during the peak of the Russia/Ukraine war, has already been processed by the refinery to produce finished petroleum products for the Jamaican market. The average purchase price of the current crude inventory is approximately US$80/b. The company has not suffered a J$5-billion loss.
“While we continue to enjoy a strong working relationship with our financial partners, they did not have the appetite for the increased exposure.”
During Wednesday’s sitting of Parliament, however, Opposition Leader Mark Golding was adamant that the loan from the government was needed to cover a loss and that, if there had not been a loss, sums earned from Petrojam would have ended up in the Consolidated Fund.
Julian Robinson, opposition spokesman on finance, maintained that position in a release yesterday in which he indicated that an audit request had been formally submitted to the relevant authorities, and that the Opposition was awaiting the results of an investigation into the circumstances surrounding Petrojam’s oil purchase.
According to Robinson, the purchase, which exceeded ordinary inventory acquisitions, has left Petrojam facing significant financial challenges, prompting the government of Jamaica to provide a $5-billion loan, as private financiers declined to extend credit because of the impairment of the company’s financials.
“The $5-billion loss incurred by Petrojam will ultimately be borne by the country’s taxpayers, leading to a reduction in Petrojam’s distributions of surplus to the Consolidated Fund. Furthermore, the government’s need to provide a loan to cover the losses will diminish Central Government’s cash resources, impacting other critical public expenditures,” Robinson said.
In its statement, Petrojam said it was committed to continuous improvement and that an internal review of oil procurements was in progress “in order to determine any necessary steps to improve the oil procurement process to achieve the best outcomes for supply chain stability”.
The Opposition has raised several questions about the Petrojam oil purchase which resulted in an impairment of its inventory value:
When was the oil purchased?
What was Petrojam’s internal process to authorise such a large-scale purchase?
Was the ministry responsible for energy involved in making this decision?
Were the inherent risks of buying the stockpile at US$120/barrel adequately evaluated before the decision was made?
Did Petrojam consider a price-hedging arrangement to protect itself from potential losses, in case of a decline in market prices after the purchase at US$120/barrel? If not, what were the reasons?
Who was the oil purchased from, and was an intermediary/agent involved in this transaction?
Were the procurement arrangements transparent, at arms-length, and in accordance with applicable procurement laws?
How many months of inventory usage did this purchase represent, and for how long was it anticipated that this stockpile of oil would last?
Will Petrojam’s obligation to repay the J$5-billion loan over the next 18 months impact the prices it charges for its products, potentially affecting the travelling public?