High energy costs have historically hampered the competitiveness of Caribbean economies and drained government funds that could otherwise go towards social and economic development initiatives. Yet either by choice or circumstance, a shift in the way that energy is procured is likely at hand.
How has one of the Caribbean’s largest countries been bracing for impact?
With both a population and cultural influence that loom large in the region, Jamaica is, by many accounts, the de facto leader of the Caribbean Community — the Caribbean’s principal political-economic alliance of mainly English-speaking countries and territories.
Like most of its Caribbean counterparts, Jamaica relies almost entirely on imported petroleum products to generate electricity. The International Monetary Fund estimates that around 87 percent of the primary energy consumed by net-oil importers in the Caribbean such as Jamaica comes from petroleum products purchased from abroad.
The gaping trade imbalance leaves Jamaica and other Caribbean nations vulnerable to sharp price fluctuations in global energy markets. Low oil prices are currently working in their favoring by slashing the bill for imported fuels. But disruptions to supply or a shift in the market can easily erase those gains.
To procure oil supplies and minimize price risks, Jamaica, like many of its Caribbean neighbors, imports a large chunk of its energy on cheap terms from the region’s principal oil patron Venezuela.
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Since 2005 the Petrocaribe agreement offered by Venezuela has been the main source of energy for Jamaica and 16 other Caribbean countries.
Fundamentally, Petrocaribe is a credit finance arrangement that gives member countries discounts and preferential terms for the oil they purchase from Caracas. Petrocaribe countries make a partial down payment for Venezuelan oil with the balance paid back over the long term at a low interest rate. The higher the market price for oil, the lower the down payment required.
Currently Jamaica’s Petrocaribe terms require a 50 percent down payment for its oil shipments, with the remainder is paid down over 25 years at a 1 percent interest rate, Wesley Hughes, chief executive of Jamaica’s Petrocaribe Development Fund, told Devex in an exclusive interview at the Caribbean Development Bank’s recent board of governors meeting.
Since 2005, the amount of Venezuelan oil that has flowed to Caribbean states under Petrocaribe has fluctuated between roughly 86,000 and 121,000 barrels of oil per day, according to various independent assessments. Presently they stand at around 100,000 barrels per day, although precise figures from Venezuela’s oil ministry are hard to come by.
The arrangement offers clear benefits for client countries — cheap rates for expensive oil that can free up cash to be used for other means. Yet the more common scenario that often unfolds is mismanaged savings that leads to unsustainable debt burdens over the long-term.
In some instances, Petrocaribe financing can run anywhere between 10 and 20 percent of a country’s gross domestic product. And while Petrocaribe provides a large portion of a country’s oil supply, significant amounts must still be purchased on the open market.
Jamaica, for example, accumulated $3 billion of Petrocaribe debt in its first 10 years, according to Hughes, while its national GDP sits just under $14 billion. Its imports under Petrocaribe currently average around 22,000 barrels per day, making it one of the largest Petrocaribe client countries alongside Nicaragua and the Dominican Republic. But Jamaica still buys an additional 31,000 barrels per day, approximately, on normal terms from other countries.
Yet Jamaica has taken a prudent approach to managing its Petrocaribe debt compared to other countries in the region. The same year that it entered into Petrocaribe, the government established, by law, a national fund to administer and invest the country’s savings from the agreement.
The Petrocaribe Development Fund that Hughes directs sits an arm’s length away from the central government with its own independent board of directors. For every oil shipment coming from Venezuela the government makes a 50 percent down payment. The other half — officially a long-term loan owed to Venezuela — gets invested in the Petrocaribe Development Fund, converting sovereign debt into a receivable asset.
“Our fund is unique — there is no other country that has an arrangement similar to us where a fund was established by law with its own legislation and an independent board that prescribes the areas where we can lend,” Hughes noted. By contrast, most other countries manage their Petrocaribe savings through agencies and entities that sit directly with the president, leaving the cash flow open to discretionary spending and allocation.
The Petrocaribe Development Fund has rigid standards for its lending. It lends only to public bodies that invest in development projects that generate economic returns. Its mission — repay the government principal and then some by the time the bill from Venezuela comes due.
Among the fund’s main investments are port and infrastructure developments. It financed the modernization of a new international airport in Kingston and networks of highways throughout the country. Seven percent of the fund is allocated to social projects such as a public housing and funding local nongovernmental organizations.
The fund is the largest domestic investor in renewable energy and independently financed a 45-megawatt wind energy project in south-central Jamaica. Written into the Petrocaribe agreement is an objective that member states should gradually reduce their dependence on fossil fuels.
A reduction in fossil fuels from Venezuela is already underway. Low oil prices are making Petrocaribe increasingly irrelevant. Countries are now more able to pay for their own energy supplies without taking on more Petrocaribe debt. Petrocaribe shipments declined by 12 percent from 2013 to 2014, with the drop being led by Jamaica, Nicaragua and the Dominican Republic, according to a report by the Atlantic Council, a think tank based in Washington, D.C.
A lingering concern for countries to consider is whether the Petrocaribe agreement could come to an abrupt end given Venezuela’s current economic disarray. A free-falling currency, rampant inflation, food shortages and widespread social protests at home means that Venezuela can ill-afford to continue loaning generously abroad. Indeed, a potential end to Petrocaribe has been broadly rumored for several years since the steep drop in oil prices took hold.
Jamaican officials are confident in their ability to service Petrocaribe loans if they were to immediately come due. “The funds have been invested in a way that it can service the indebtedness,” Milverton Reynolds, managing director of the Development Bank of Jamaica, told Devex. “Where we would have difficulty, we would more than likely have to pay for [all] the oil when it is supplied, which would place a significant pressure on our exchange rate,” he added. “It is something the government has been planning for.”
Much of that capacity to repay was aided by a previously negotiated fire sale deal on its debt to Venezuela. In July 2015 cash-strapped Venezuela agreed to cancel Jamaica’s $3 billion of Petrocaribe debt in exchange for a lump sum payment of $1.5 billion. The 50 percent haircut wiped Jamaica’s debt slate clean. The country now owes less than $100 million to Venezuela for oil shipments received since the refinancing.
Publicly, however, Jamaica’s authorities insist that the tie that binds the country to Venezuela runs too deep for current economic woes to sever entirely.
“The government of Jamaica has a long relationship with Venezuela and the people of Venezuela — not [any one] particular government,” Hughes said, referring to the current administration that established Petrocaribe but which has grown increasingly unpopular as economic conditions worsen.
“We envisage that given the long history and necessary relationship between [Jamaica and] Venezuela as Caribbean countries … that we would continue to have relations with Venezuela. We’ve worked out scenarios, naturally. So I wouldn’t say that we are unprepared,” he said.
Part of that preparation is diversifying its energy mix towards more renewable sources. Jamaica has set a target of sourcing 30 percent of its energy capacity from renewables by 2030, compared to around 15 percent today. By most official estimates it is on track to meet that goal. The country is the only Caribbean nation to have drafted national energy efficiency standards, according to the IMF. And apart from renewables, Jamaica is repurposing a 120-megawatt diesel oil plant to run on lower-carbon emitting liquefied natural gas from the U.S.
Meeting the 30 percent target would still leave the country exposed to fluctuating fossil fuel prices. “I don’t think we can go beyond 30 percent of our energy needs from renewables at this point,” Hughes said.
More broadly, energy security has become embedded as a core priority for regional development. A network of donor agencies and regional banks including the Caribbean Development Bank, Inter-American Development Bank and the U.K.’s Department for International Development Bank have all introduced investment facilities to expand renewable energy capacity in the Caribbean.
And with small island states being on the front lines of climate change, multistakeholder initiatives such as Sustainable Energy for All have prioritized coordinating regulatory policies, finance and renewable technologies to end energy poverty in the Caribbean.
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