Webmaster, Author at SolarBuzz Jamaica

Jamaica Stands To Lose If World Bank’s Oil Price Prediction Holds

January 27, 2016 Webmaster

While Jamaica has spent US$20 million (about J$2.3 billion) to hedge against the risk of a sharp increase in oil prices, the World Bank has lowered its forecast for crude oil to US$37 a barrel from US$51 a barrel in its October 2015 predictions.

The bank, in its latest commodity markets outlook, said that oil prices fell by 47 per cent in 2015 and are predicted to decline, on an annual average, by another 27 per cent this year.

If the World Bank’s prediction prevails, it would mean that Jamaica would take a hit, given that its hedging contract, with a strike price averaging US$66.74 per barrel, started in June 2015 and is set to expire in about September this year.

Lower oil prices, as well as the ongoing economic adjustment under Jamaica’s economic support programme with the International Monetary Fund (IMF), have been attributed to the macroeconomic stability which the fund’s executive board reported last month has continued to strengthen.

Those factors have also been credited for the inflation and the current account deficit falling to historical low levels.

In the report released yesterday, the World Bank said the lower forecast for crude oil reflects a number of supply-and-demand factors.

These include sooner-than-anticipated resumption of exports by the Islamic Republic of Iran, greater resilience in United States production due to cost cuts and efficiency gains, a mild winter in the Northern Hemisphere, and weak growth prospects in major emerging market economies, according to the World Bank’s latest quarterly report.

However, from their current lows, a gradual recovery in oil prices is expected over the course of the year, for several reasons.

“First, the sharp oil price drop in early 2016 does not appear fully warranted by fundamental drivers of oil demand and supply, and is likely to partly reverse,” the report said.

“Second, high-cost oil producers are expected to sustain persistent losses and increasingly make production cuts that are likely to outweigh any additional capacity coming to the market. Third, demand is expected to strengthen somewhat with a modest pick-up in global growth,” it added.

The anticipated oil price recovery is forecast to be smaller than the rebounds that followed sharp drops in 2008, 1998, and 1986.

PROSPECT

“Low prices for oil and commodities are likely to be with us for some time,” said John Baffes, senior economist and lead author of the commodities markets outlook. “While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.”

In the IMF report submitted to the board for the 10th review in December, the Jamaican authorities also observed that despite increased surrendering requirements since the beginning of last year and reduced foreign exchange demand from public enterprises, given lower oil prices, there has not been any trend increase in the central bank’s net foreign exchange purchases. “Indeed, net purchases were negative in September and October 2015,” it added.

When Jamaica purchased hedging contracts from Citibank NA, covering six million barrels of oil imports over a 15-month period, expectations last year were that crude prices may climb back to US$75-US$80 per barrel on the world market.

However, prices have since fallen to just over US$30 a barrel.

The transaction was the Jamaican Government’s first oil-hedging arrangement, resulting from a policy decision to manage the country’s exposure to a predicted spike in oil prices from lows of about US$40 per barrel reached earlier in 2015.

The fall in world prices since 2014 has boosted Jamaica’s balance-of-payments position due to a lowering of the oil import bill – crude imports total nine million barrels per year – even as it threw tax revenue collections off-target due to lower special consumption tax receipts from the state refinery Petrojam.

Jamaica imports about nine million barrels of crude oil per year.

A new Energy Stabilisation and Energy Efficiency Enhancement Fund (ESEF) has been introduced to, among other things, finance the purchase of the hedging instruments.

Legislation and regulations governing the use of the ESEF are expected to be adopted by February this year, ahead of the parliamentary debate for the fiscal year 2016/17 Budget.

The Gleaner

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JPS, New Fortress Pursuing Separate Parts Of LNG Project

January 25, 2016 Webmaster

The oil-fired JPS power plant in Old Harbour Bay, St Catherine is to be replaced with a gas-fired plant.

The announcement of an agreement between Jamaica Public Service Company (JPS) and a Chinese firm is expected this week for the construction of the new energy plant at Old Harbour.

JPS and American company New Fortress Energy are executing separate projects at Old Harbour – the Jamaican utility company is building a new 190 MW plant, while Fortress is financing and developing the gas infrastructure to supply the plant with LNG.

Together, the projects are estimated at around US$500 million.

JPS said it will have no ownership in the gas infrastructure project nor contribute to the cost of developing it, but will solely be a client of New Fortress, which will build its pipeline to connect to the JPS plant. The same arrangement applies to the gas infrastructure under development by New Fortress in Montego Bay, which will feed gas to JPS’ Bogue plant.

The utility company said previously that the 190 MW combined cycle plant at Old Harbour is expect to cost close to US$300 million.

The name of the Chinese contractor will be disclosed only after the deal to develop the plant is finalised, JPS said. The utilitycompany had previously chosen Abengoa to develop the plant only to be embarrassed when the Spanish firm filed for bankruptcy protection in its home country just days later.

JPS is also in final negotiations with General Electric (GE) as the primary equipment supplier for the Old Harbour plant.

“JPS is currently finalising the agreements with both GE and the ‘EPC’ contractor and coordinating the start of this new generation facility with the completion of an associated LNG facility that will be built to provide gas. These two projects will total over US$500 million and begin operation in early 2018 with full commercial operation by the middle of 2018,” said JPS via email.

EPC is a categorisation, which stands for ‘engineering, procurement and construction’ contractor.

The plant’s advance GE turbines will utilise cleaner burning natural gas, replacing the heavy fuel oil currently used at Old Harbour, and will be able to integrate increased solar, wind and hydro resources as Jamaica moves towards producing more electricity from renewable resources.

“GE will provide four turbines – three gas turbines and one steam turbine the three heat recovery steam generators, the four electrical generators and the major controls,” said JPS.

Once the new Old Harbour plant is built, the current structure will be dismantled, and the property will resort to brownfield status, according to JPS spokeswoman Winsome Callum.

New Fortress is negotiating separately with the Electricity Sector Enterprise Team regarding its gas project, Callum said.

JPS has spent some US$4 million so far in preparing for the upgrade over the past 24 months.

The Gleaner

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As oil glut hits, GOJ oil hedge for 2016 set at US$65.90 strike price

January 22, 2016 Webmaster

The Bank of Jamaica (BOJ) indicated on Wednesday that to date, the Government of Jamaica (GOJ) has spent US$27.87 million or J$3.2 billion on oil hedge contracts. In total, five contracts have been signed with Citibank covering periods up to December 2016.

For the current period, the contract runs from January 2016 to December 2016 with a strike price of US$65.90.

The strike price means that Jamaica will begin to receive payouts if the price per barrel of crude hits that mark or exceeds it.

Some analysts to whom the Jamaica Observer have spoken say that it is clear a better deal could have been struck had the Government waited a while before spending money for the hedge in 2015, but they also note that it could not have been predicted that oil prices would continue to slip downwards to the extent to which they have.

Earlier this week, benchmark crude prices fell to their lowest since September 2003 on worries about a global glut.

A new drop came Tuesday after the International Energy Agency, which advises industrialised countries on energy policy, used the alarming term “drown in oversupply” in relation to the oil markets of 2016. The market has begun to react to plans by Iran to ramp up supplies to regain market share.

The West Texas Intermediate index slid 2.3 per cent to US$27.80 per barrel of crude on Tuesday, while Brent slipped 2.3 per cent to US$28.09 per barrel.

On Wednesday the downward spiral continued with Brent Crude down 5.2 per cent at US$27.28 a barrel, while WTI sunk 6.6 per cent to US$26.59.

Analysts note that oil price has plummeted 75 per cent since mid-2014 as oversupply, mainly due to US shale oil flooding the market, has driven down the cost, even while a slowdown in economic growth in China and Europe has cut demand.

Locally, technocrats had suggested a return to US$70 per barrel by year end 2016, a prediction informing the decisions by the GOJ technical committee set up to manage the hedges. The technical committee is chaired by Michael Hewitt of Petrojam and has representatives from the BOJ, the Ministry of Finance, and Development Bank of Jamaica.

One analyst in Kingston, who spoke on condition of anonymity, commented, “To be honest, hindsight is 20/20. We could not have anticipated the current prices. It is easy to say the obvious, which is that if we had waited we could have got a better deal, in the form of a lower premium. In fact, it is obvious, based on where things are, the hedge (for contract periods already covered) was not needed.”

The BOJ informed the Caribbean Business Report that the GOJ is prepared to write new contracts for the period beyond 2016, before year end.

Funds already spent on hedging, provided for in the FY2015/16 budget, were paid out of the Consolidated Fund to facilitate the upfront purchase of the hedge contracts, the central bank stated.

It said that the advance is now being repaid from the proceeds of the new special consumption tax introduced in March 2015 to pay for the hedge.

The amount paid out so far is only about half of what the Government plans to raise from the SCT of $7 per litre on petrol — about six US cents per litre — which is expected to fall in the ball park of $6.4 billion by year-end.

The five existing contracts for hedging are all with Citibank which was the successful bidder for that round of contracting.

Periods covered by the contracts range from June 2015 to May 2016 (two contracts) with a weighted average strike price of US$66.55; and September 2015 to August 2016 (two contracts) with a weighted average strike price of US$66.80. The last is the contract for January 2016 to December 2016 with a strike price of US$65.90.

Regional governments have been eyeing hedging as a new strategy to protect against changes in the price of crude. Mexico, which hedged against a fall in prices, collected US$6 billion under hedge contracts in 2015.

Jamaica Observer

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Window Tinting, Solar Panels Cut NCB Energy Bill 20%

January 18, 2016 Webmaster

NCB Group headquarters, The Atrium, at Trafalgar Road, New Kingston. The banking group’s energy initatives have cuts its electricity bill by 20 per cent across its network.

National Commercial Bank Jamaica (NCB) has cut its energy consumption by 20 per cent over the past four years and is projecting half-billion dollars of new savings over the next four.

By tinting its windows, changing its light and air-conditioning units, and installing some solar photovoltaic (PV) systems, the bank hopes to cut its electricity bill by another eight per cent in 2016.

If it achieves its latest goal, NCB would spend $140 million less on energy this year than it would if it had not implemented any of the energy-saving initiatives that started in 2011.

Back then, the financial institution forked out over $600 million to keep the lights on. Air conditioning accounted for more than 60 per cent of the energy use while lighting accounted for another 20 per cent, so it was decided that light-emitting diode (LED) lights would be installed across its locations, while high efficiency air-condition units and solar systems have been put in place at select sites, such as NCB’s head office on Trafalgar Road.

Reflective tinting on windows, roof insulation, and automated light controls have also helped protect the bank’s buildings from heat infiltration and have enhanced the energy-saving process.

This year, NCB plans to “continue implementing projects to install high-efficiency air-conditioning systems at relevant locations and increase the use of LED and PV panels,” according to the latest annual report.

So far, it has spent $500 million to implement various energy-reduction initiatives.

“We have an energy portfolio that is continuously being assessed, and our expenditure is guided by our environmental policy and, therefore, is subject to variations,” said NCB in reply to Sunday Business queries.

With the energy-saving expenditure, the banking group has so far avoided some $300 million in energy cost over the past four years, and expects to save another $500 million over the next four, based on current energy rates.

NCB can also boast a positive contribution to the environment. By reducing its energy consumption by 2.7 million kilowatt-hours – which is equivalent to the electricity used by 1,350 homes in Jamaica – it has reduced its footprint by approximately 1,800 metric tonnes of carbon dioxide annually. That’s the equivalent of the emissions given off by a plane making 25 round trips to and from New York, or by 100 cars driving from Kingston to Mandeville and back every day for a year.

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Government Oil Hedge Underwater

January 15, 2016 Webmaster

Gov’t oil hedge underwater

In June 2015, the Government of Jamaica booked a hedge transaction to buy six million barrels of oil for delivery 15 months later at a strike price of US$66.74.

The mechanism used in this kind of transaction is called a ‘call option’, which gives the purchaser of the option the right, but not the obligation, to purchase the asset at a specified price the ‘strike price’ within a specified time. A month later, it bought another 15-month futures contract for two million barrels of oil and the average strike price of the two contacts is US$66.53.

We paid about $30 million to Citibank for the privilege of placing this bet on oil prices going higher than our strike price in 15 months.

When these contracts to buy crude oil were booked, prices on the world market was trading at about US$63 a barrel and had rebounded from about US$45 in January 2015. The government placed a bet based on its belief that crude oil prices would continue to rise well above the $66.53 strike price. If that were to happen and oil prices were to increase to, say, US$80-US$90 per barrel, the Government would be in the delightful position of having to pay only about US$66.53 per barrel for oil that would be trading at the much higher spot price on the international commodity market. The Government of Jamaica, senior executives at the Bank of Jamaica, and members of the oversight and technical committees created by the Government to manage the hedges, all seem to have bought into the belief that oil prices would climb higher than US$67 before the expiry date of the options.

The oversight committee is comprised of the financial secretary, Devon Rowe; the governor of the Bank of Jamaica, Brian Wynter; the managing director of the Development Bank of Jamaica, Milverton Reynolds; the managing director the Petroleum Corporation of Jamaica, Winston Watson; and Dr Vincent Lawrence. Mr Watson is known to have experience in oil trading and markets. Only Michael Hewett, an executive at Petrojam, was named as a member of the technical committee.

Wrong direction

One has to believe that the intention of the members of the government-appointed committees and all of those involved in the hedge transaction was a good one to try and protect Jamaica against that time in the 15-month period when oil prices might spike above US$67. While there is still considerable time to the maturity of the call options, right now the bet is not looking good and the best projections are for oil prices to fall even lower than the below-US$30 they traded at this week.

This week, three important financial institutions released projections indicating that oil prices could fall to US$10-US$20 per barrel and stay there for sometime. Goldman Sachs’ projection was at US$20, Morgan Stanley’s was US$20 and Standard Chartered, a bank with strong roots and connections in the Middle East and Asia, projected US$10 a barrel oil.

In the futures trading business, which is where these call options reside, when an option is bought with the expectation that the price of the commodity will increase but the opposite occurs, the option is said to be ‘underwater’. Given that these options were booked with the expectation for oil price to rise above US$66, and they are now heading in the direction of US$20, Jamaica’s call options on oil are seriously underwater.

A better alternative

In November 2014, a public official asked me about hedging because someone had written him an email to encourage Jamaica to hedge oil transactions on the upside, based on a scenario the email writer concocted about the state of affairs in the international oil industry. The public official was aware that I had traded oil futures for many years and had lived in the Middle East for more than two decades. I share below an excerpt from my reply:

“The recommendation needs study because taking a position means the Government and Jamaica will be guessing the direction of the movement of the price of this commodity. The writer makes it sound like making money on these bets (options) is a sure thing. It is not.

“There is always a risk. Suppose we bet on a certain price increase in a specific time frame, which we would have to if we are going to hedge, and prices instead of rising to, say, US$70/bbl from US$50 falls to US$35/bbl during our hedge horizon, we would suffer an important loss depending on the size of the contract. This is what apparently happened to that forward position Jamaica took on that futures contract on aluminium with the Russians and/or Glencore, the debilitating result of which you are very familiar.

“When oil went to US$9/bbl in the 1990s, if you had dared to tell anyone about the US$147 per barrel price which occurred in July 2008 they would have declared you mad. It’s a commodity; any card can play. On review, if the writer sees the prices as going one way, down, and OPEC is ‘dead’, why hedge? Do nothing, stay addicted to imported oil and go for the lovely ride to low-oil-price nirvana.

“The better alternative is to wean ourselves off the 98 per cent dependence on petroleum-based fossil fuels for our energy supplies. We really need to develop and use renewable energy from many sources, including bagasse, garbage, wind, water and solar.”

Aubyn Hill is CEO of Corporate Strategies Ltd and chairman of the Economic Advisory Council of the leader of the opposition.

The Gleaner

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Local Oil And Gas Exploration Enters Second Phase

January 14, 2016 Webmaster

Yang Xiaorui (left) shows Phillip Paulwell, minister of science, technology, energy and mining, an area of the oil and gas exploration vessel that docked at the Port of Kingston yesterday.

International oil and gas explorers are once again in Jamaican waters with the blessing of the National Environment and Planning Agency (NEPA) and promises to the local fishing community.

This time, the explorers are venturing on a data-collection exercise.

The first exploration company in 10 years to re-energise the search for oil offshore, the United Kingdom-based Tullow Oil has brought the gamut of data-capturing equipment for the second phase of its venture.

“This is a major deal for Jamaica’s oil-and-gas exploration,” asserted Phillip Paulwell, minister of science, technology, energy and mining, during a tour of the vessel, BGP Challenger, yesterday at the Kingston Port.

Paulwell, who was accompanied on the tour by State Minister Julian Robinson, said: “For them to start this work, they had to get approval from NEPA, and they have signed an important agreement with our fisherfolk in the event of any matter for full compensation.”

In November 2014, the Petroleum Corporation of Jamaica (PCJ) signed a production-sharing agreement with Tullow Oil (Jamaica) for oil and gas exploration in Jamaica’s offshore areas.

“We first started (explorations) in the 1980s when the then Government of Jamaica was responsible for funding,” said Paulwell.

He asserted that it has gained momentum with the private sector coming on board with Tullow Oil signing an agreement.

Paulwell told The Gleaner that US$70 million was committed to the project.

“They have so far spent US$10 million, and this exercise will cost them another US$4 million to acquire additional data.”

He added: “Although we are convinced that we have oil and gas in and around Jamaica, we really have to pinpoint the location before drilling can take place.”

He continued: “They have demonstrated a firm commitment, in spite of the fact that the price of oil has plummeted.”

The minister noted that when the agreement was signed 15 months ago, the price of oil was well over US$100 a barrel.

“Today, it is about US$30, but they are still committed, and not only them, since we signed the agreement, others have approached PCJ.”

NEGOTIATIONS ONGOING

Paulwell disclosed that negotiations are ongoing with another major firm.

“Shortly, we are going to sign another agreement,” he said.

“It means that there is a high level of ‘prospectivity’ and there is tremendous confidence in what we have done so far,” he added.

John McKenna, external affairs manager of the London-based Tullow Oil, who has been involved in the project since its onset, said the second phase related to the imaging of the seabed.

“This is the second part, which is the two-dimensional seismic expedition programme.”

He noted that it involves the acquiring of more than 3,000 kilometres of additional data.

“We are focusing initially on the eastern part of the offshore where very little data has been acquired in the past.”

The Gleaner

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Electricity bills getting lighter

January 14, 2016 Webmaster

THE Jamaica Public Service Company (JPS) says its customers will see yet another reduction in bills this month, as the light and power company continues to pass on savings from falling fuel prices.

“This month, customers will see a 4.12 per cent decrease in bills as the Fuel & IPP Charge on bills for January is $10.67 per kilowatt hour (kWh), compared to the charge of $11.83 per kWh applied to December bills. This is the lowest Fuel & IPP Charge since 2005. The total cost per kWh of electricity now stands at 21 US cents or J$25.29, for residential customers,” the JPS said in a release yesterday.

It added: “Therefore, a customer who consistently uses 165 kWh per month will be paying $182.55 less for his bill this month, compared to what he paid last month. This customer will pay $4,252.41 for the 165 kWh of electricity used, as against the $4,434.96 that was paid in December 2015 for the same usage.”

According to the JPS, it has not only passed on savings from the fall in the price of oil on the world market, but has improved efficiencies in the company’s operations.

At the same time, the company has urged customers to use energy wisely, as the final bill amount depends on how much energy is used.

The Observer

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Energy And Mining Minister Welcomes Further Oil And Gas Exploration In Jamaica

January 13, 2016 Webmaster

Speaking during an oil and gas exploration tour of the vessel BGP Challenger, at the Kingston Harbour yesterday, Phillip Paulwell said this is an indication of the confidence being shown that Jamaica has gas or oil in its territory.

Minister of Science, Technology, Energy and Mining, Phillip Paulwell has welcomed the second phase of an exploration programme being undertaken by Tullow Oil out of the United Kingdom.

In November 2014, the Government of Jamaica through the Petroleum Corporation of Jamaica (PCJ) signed a production Sharing Agreement with Tullow Jamaica Limited for water and gas exploration in the island’s offshore areas.

Under the agreement, Tullow has been undertaking seismic surveys in the waters off Jamaica’s south coast.

For next three weeks, Tullow will be engaged in a comprehensive data collection exercise.

Speaking during an oil and gas exploration tour of the vessel BGP Challenger, at the Kingston Harbour yesterday, Paulwell said this is an indication of the confidence being shown that Jamaica has gas or oil in its territory.

The Gleaner

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Regulators poised to allow refinery to increase emissions

January 11, 2016 Webmaster

The Marathon refinery in Detroit is shown Monday, January 4, 2016.

Michigan, USA (AP) — Michigan environmental regulators are poised to allow the Marathon refinery in south-west Detroit to increase emissions of at least eight air pollutants.

The state Department of Environmental Quality said it proposes to approve revised permits for refinery modernisation and expansion that would increase emissions of oxides of nitrogen, carbon monoxide, volatile organic compounds, small particulate pollution and sulfuric acid mist.

This, on the heels of the Paris climate talks in December where 195 countries, including the US, agreed to reduce carbon and other greenhouse gas emission with a view to keeping global temperature rise this century well below two degrees Celsius and driving efforts to limit the temperature increase even further to 1.5 degrees Celsius above pre-industrial levels.

The proposal would increase emissions of sulfur dioxide in an area that the US Environmental Protection Agency (EPA) has designated as being out of compliance with federal air pollution standards, the Detroit Free Press reported, but the agency’s analysis of Marathon’s permit requests notes that the emissions increases all fall within allowable state and federal regulations. The permit requests involve installation of equipment by Marathon to produce lower sulfur gasoline that will meet new EPA standards.

“The project will enable the facility to produce fuels that comply with the EPA regulation by reducing sulfur dioxide emissions from gasoline,” Marathon spokesman Jamal Kheiry said in an e-mail to the Free Press.

Kheiry added that the refinery’s emission levels “will continue to be well below those allowed under its existing permit”. Changes at the facility triggered the DEQ’s permit process.

Four Detroit-area state senators — Coleman Young II, Morris Hood III, Bert Johnson and Vincent Gregory — want the DEQ to reject the permits.

“When we allow our refineries and coal-fired power plants to belch toxic fumes into our neighbourhoods, we set ourselves up for a legacy of poor health and skyrocketing medical bills,” said the lawmakers, all Democrats.

Ray Holland, 60, who has lived in a nearby neighbourhood his whole life, doesn’t like the idea of the proposed changes.

“I think they should leave it like it is — or put more pollution controls on it,” he said of the refinery.

The DEQ plans an information session and public hearing tonight at the River Rouge High School auditorium in nearby River Rouge. The agency plans to consider public comments prior to taking final actions on Marathon’s permit applications.

The Observer

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US Coal Production Falls To Lowest Level In Nearly 30 Years

January 11, 2016 Webmaster

A coal miner works to secure the roof with bolts in an underground coal mine roughly 40-inches-high. Preliminary government figures released Friday show U.S. coal production has fallen to its lowest level in nearly 30 years as cheaper sources of power and stricter environmental regulations reduce demand.

United States (US) coal production has fallen to its lowest level in nearly 30 years as cheaper sources of power and stricter environmental regulations reduce demand, according to preliminary government figures.

A report released last Friday by the US Energy Information Administration estimates that 900 million short tons of coal were produced last year, a drop from about 1 billion short tons in 2014.

That’s the lowest volume since 1986.

The slump has led to bankruptcies and layoffs at mining companies, but the effects have rippled outward, stressing state budgets and forcing layoffs in other sector, such as railroads, which are transporting less coal.

Power plants are increasingly relying on cheaper and cleaner-burning natural gas to provide electricity and comply with regulations aimed at reducing pollution that contributes to climate change.

A sweeping agreement adopted last month in Paris by nearly 200 countries determined to further reduce greenhouse gas emissions is likely to make coal an even less viable choice in the decades ahead.

The Gleaner

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