published: Friday | October 6, 2006
"We are happy with Trafigura," says Dr. Raymond Wright, consultant with the Petroleum Corporation of Jamaica, seen here in an April 2005 photo taken at the Jamaica Conference Centre, Kingston. - File
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When Jamaica began negotiating its oil deal with Nigeria in 1978, it was motivated by security concerns and wanted to lock in a steady supply of crude from a trading partner it considered a friend.
The deal was secured during a turbulent period for world oil.
Volatility in the Middle East, linked to the Arab-Israeli conflict, resulted in a decision to curtail the supply of oil to the Western world in 1973, the effects of which would spill over into the 1980s - with the United States as the main target of the embargo for its support of Israel.
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Predictably inflationary
The result was predictably inflationary. Oil supplies were short, which meant world prices were high.
It was the price volatility that concerned Jamaica more, but available supplies was also a factor.
"Oil security were of great importance," said Dr. Raymond Wright, consultant with the Petroleum Corporation of Jamaica (PCJ), the state buyer of oil and regulator of the energy market.
"Michael Manley determined that his Nigerian friends could help."
So Manley, then Jamaica's Prime Minister, turned to President Olusegun Obasanjo, who was then in the process of cementing Nigeria as a powerhouse in oil.
The deal that emerged was as much a political one between friends as it was economic. PCJ has reported net income of US$4.64 million to April 2006 over 20 years of trading Nigerian oil.
Treasury
Up to 2004, the oil profits flowed to PCJ to be used for its programmes, but last year the Government laid claim to the funds and now the proceeds flow directly to the treasury.
Over the near 30 years of the arrangement, the PCJ has done business with two oil brokers who have traded the oil for Jamaica on the open market - first, Vitol SA, and later, Trafigura Limited, which is now at the centre of a firestorm created out of allegations by the Opposition that the European company had backed Prime Minister Portia Simpson Miller's party conference last month.
PCJ also worked with 'liaisons' Froyle and Bentley Oil Associates of Bermuda, Consolidated Petroleum Purchasing Company, WELBECK Petroleum Limited, and GoodWorks International of Atlanta, more specifically its president Carl Masters, a Jamaican who was also oil agent for Chevron.
In December 1978, two months after Manley approached Obasanjo, Jamaica secured an agreement to lift 5.475 million barrels of Nigerian light crude, or 15,000 barrels per day, at prices set by Nigeria.
The very next year, 1979, a second oil crisis would erupt, largely linked to troubles in oil-producing Iran, and volatility in the market would push crude prices up to US$38 per barrel.
The 'evergreen' contract secured with Nigeria was renewable annually. Eventually, supplies were boosted to 20,000 barrels per day in 1990, and the current arrangement is for 10.95 million barrels per year or 30,000 barrrels per day.
Kingston would trade the crude on the world market, and earn from the margins it made on the sales.
It turned out to be a "highly profitable" deal for Jamaica in the early years of the agreement, said Wright, largely because of the 90-day credit window that allowed time to pay for the supply.
Legal vehicle
To facilitate the arrangement, Kingston decided to create a legal vehicle, the PCJ, to act as official contractor for oil, and manage the trading of crude for Jamaica. PCJ, which was created in 1979, also had another function - to explore for commercial deposits of oil and gas inland and offshore Jamaica.
In fact, the monies made from the sale of Nigerian crude in the first two years of the agreement financed the US$14 million purchase in 1982 of the Esso refinery on Marcus Garvey Drive in the capital Kingston, which was renamed Petrojam, and also built the energy-efficient five-storey corporate headquarters of the PCJ at Trafalgar Road, New Kingston.
"We made significant profit in the early years," said Wright.
Over the years, those profits have financed large and small-scale energy-related research, the latest being the solar-powered cart now being worked on by students of the University of Technology; oil exploration; renewable tech-nology; acquisition of the Font Hill property in St. Elizabeth; energy conservation programmes; and the pre-feasibility study on LNG.
But it has also made "contributions to government", financed trips to Nigeria for contract negotiations, and paid for receptions held for the President of Nigeria.
PCJ works directly with the state-owned Nigerian National Petroleum Corporation (NNPC) on the refinement and execution of the contracts.
The deal's main drawback for Jamaica was that NNPC reserved the right to adjust volume uplifts based on production. In fact, PCJ has only lifted 40 per cent of earmarked volumes over the years.
The very first lift was in May 1979, which was sent to the Shell Refinery in Curaçao for processing.
Jamaica had made one attempt to lift the crude to Kingston, but found that the 33 API gravity crude was too light for the Petrojam refinery, whose configuration were more accommodative of the 23-28 grade. API gravity is a measure of the density of crude.
To process the Nigerian oil, Petrojam would have to blend it with other crudes in a cocktail for refining.
In 1984, the arrangement with Shell was terminated.
Jamaica then turned to international traders and liaisons, saying the logistics of lifting and shipping the product to market was beyond the technical capabilities of PCJ. The Nigerians had also required the posting of a US$1 million bond to secure the oil facility, which PCJ did not have, and had mandated that its trading partner invest in the Nigerian economy, which Jamaica could not afford.
PCJ turned to Vitol SA as its primary agent to trade the crude on the open market.
But: "Between January and October 1985, we were losing money," said Wright, explaining that the PCJ determined that the problem was linked to the pricing structure of the Nigerian contract, which it renegotiated.
Profit split
The PCJ had made a profit-sharing deal with Vitol under "variable" terms, but essentially the profit split was 50:50, said Wright.
PCJ would later commission international auditors to delve into Vitol's books, saying "there was no way to know how much was being made."
In fact, Jamaica has never been able to get a fix on how much the Nigerian oil has grossed over the life of the facility. But PCJ has reported net income of US$2.2 million on 93 million barrels lifted during phase one of the arrangement, 1979-1993, and US$2.44 million on 32.35 million barrels lifted between October 2000 and April 2006, the second phase of the arrangement.
In the first phase, Nigeria twice adjusted the credit window down to 60 days and then to 30 days in February 1987.
"When we got to that, it was then a strictly commercial arrange-ment," said Wright. "There were no more political benefits."
In 1991, Kingston attempted to expand the commercial side of the oil facility, with then Minister of Mining and Energy Horace Clarke proposing joint venture deals.
It was then that an ambitious plan was put to Nigeria for a trans-shipment hub. Kingston had already determined that shipping oil from Nigeria required super tankers and that those vessels were too large for the coastal Petrojam facility, which could only accommodate small vessels.
Clarke suggested that Nigeria bankroll a trans-shipment terminal at Petrojam for its crude, which would involve expanding facilities at Petrojam to take crude from big vessels.
But the oil producer then nixed the deal, saying it was way too costly. Wright, however, said he was unable to recall the costing on the project.
Two years later, the NNPC notified PCJ that the oil deal would be terminated in December 1993, and that Kingston and other governments with similar arrange-ments would have to renegotiate terms.
The notice coincided with a change of administration; Nigeria was now under the control of Chief Ernest Shonekan.
New deal
For seven years, PCJ attempted to renegotiate the contract, but Nigeria resisted a new deal.
Then in 1999, Obasanjo returned to power, and a year later the arrangement was back in force.
PCJ then sought out a new oil trader, securing expressions of interest from five, all with offices in London - including Chevron, Trafigura, Vitol, and Mayfield.
"We chose Trafigura and we have been happy with Trafigura," said Wright decisively, in the midst of the political controversy raging about the oil trader's financing of the ruling People's National Party.
The deal with the oil broker would, however, be different from the Vitol arrangement. Jamaica had long been unhappy with the profit-share deal, largely because it had no way of determining whether it was getting all it was due from the sales.
"We made two decisions," said Wright, "no more profit-sharing; it was too difficult to monitor. We opted for a fixed-fee arrangement with Trafigura."
The company in 2000 was operating in 48 countries and was already involved in business in Nigeria, said Wright. It is now active in 55 countries.
The initial deal with Trafigura was for US7.5 cents commission paid on each barrel of crude it lifts. PCJ now pays the company US12 cents per barrel from the margin it makes on the crude.
Trafigura, said Wright, fronts the money for the shipments from Nigeria, and passes on Jamaica's share of earnings based on number of barrels sold.
Though Jamaica has no access to a near 11 million barrels of Nigerian crude per year as per contract, it only lifted the maximum once - 10.8 million barrels from October 2000 to September 2001, in six shipments over the year.
The closest it got since was a 7.5 million lift from eight shipments from October 2004 to September 2005. But that year, PCJ saw its highest yearly income from the sales, US$748,547, a consequence of rising world oil prices, compared to the US$347,725 it earned in the first year of the new arrangement.
For the lift year to April 2006, it has done just under 1.95 million barrels and earned US$170,474.
The oil profits previously flowed to PCJ, but since April 2005, the funds have flowed directly to the Consolidated Fund on the directives of the cash-strapped Jamaican government.
The PCJ, however, retains five-10 per cent of the flows to finance its oversight of the facility and the oil trader.
"We no longer earn any money from it," said Wright.
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