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

 

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

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

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

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

PORT OF SPAIN, Trinidad (AP) — Trinidad and Tobago’s leader has warned the Caribbean nation that it will have to adjust to making do with less amid major declines in energy revenue and declining production of natural gas and oil.

In a late Tuesday address, Prime Minister Keith Rowley said the twin-island nation must make serious adjustments if it is to avoid the kind of economic contractions it suffered during a 1980s oil bust.

He says the country could face the prospect of entering into a future loan agreement with the International Monetary Fund if it doesn’t make adjustments.

Rowley says US$1.5 billion will be taken from a stabilisation fund over the next two years. Meanwhile, the government might also explore for natural gas with Venezuela in an offshore field that straddles the two nations’ territories.

Jamaica Observer 

The Jamaica Public Service has entered into a Memorandum of Understanding (MOU) with a China-based energy company to build the 190 MW Old Harbour Bay Power Station.

The Chinese company will replace the Spanish firm Abengoa, which filed for protection from creditors a few days after it was named as the preferred bidder for the construction of the power plant.

President and Chief Executive Office of JPS, Kelly Tomblin has said that the name of the company cannot be released due to confidentiality agreements, but that the company was well known in China and within the energy sector.

“JPS, given its continuing concerns for the financial viability and strength of Abengoa and their inability to meet our financial requirements, has moved to enter into an MOU agreement with a Chinese EPC provider,” she told The Gleaner.

Meeting With ESET

She pointed out that the name of the firm and the terms of the deal will be made public once discussions are complete.

Tomblin also indicated that JPS will be meeting with the Energy Sector Enterprise Team (ESET) next week Monday to discuss the new bidder and the finer details of a possible deal between both parties.

“We plan to meet with ESET on Monday afternoon to go through final details, and we will disclose more after that meeting.”

The JPS moved to assure stakeholders that the 190 MW project remains on track for the plant’s commissioning in 2018.

JPS says it was undaunted by the financial woes being faced by Abengoa and would be looking at alternatives.

“Abengoa was selected based on its wide-ranging and impressive technical expertise. The firm has constructed several combined cycle power plants around the world, and is also well known for its construction of renewable energy power plants. JPS also had the understanding that Abengoa’s financiers were committed to the company for the long term,” the company said in a press release.

The Gleaner

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Small island states lost out to their larger, more industrialised seniors at COP21.

 

The results of the climate change conference in Paris (COP21) give no reason for small island states to cheer. The agreement reflects many promises and little action.

The one item of concrete action is merely an undertaking to evaluate carbon emissions every five years — and even that has no teeth.

What is not in the agreement is a firm, legally binding commitment to limit average global temperature increases to 1.5 degrees Celsius. Also, not in the agreement is a legally binding commitment to provide developing countries with the funds needed to adapt to, and mitigate against the effects of climate change.

There isn’t even a commitment to a fund, in the sum of US$100 billion a year, that was frequently touted before the conference began.

Once again, the industrialised nations of the world — the worst polluters — took advantage of the weakness of the smallest countries of the world, which are the least polluters and the biggest victims of climate change.

To their credit, though, through the Alliance of Small Island States (AOSIS), representatives of small states did put up a good showing in Paris. Armed with the latest statistics and bolstered by a structured expert report released by the UN Framework Convention on Climate Change, they argued for the containment of global warming to 1.5 degrees Celsius, showing that, at 2 degrees, destruction would be widespread and irreversible. But, in the end, despite all the hoopla, applause and celebration, small states lost.

Representatives of AOSIS countries might have been flattered by a brief visit to them by US President Barack Obama, when he declared: “These nations are not the most populous nations, they don’t have big armies, they have a right to dignity and sense of place.” But, while President Obama was undoubtedly sincere in what he said, he also knew, even as he was saying it, that he could not deliver ratification by the US Congress of any agreement that limited carbon emissions or bound the US legally to warming no higher than 1.5 degrees Celsius.

So, the world has a so-called agreement, still to be ratified by the 196 participating countries, that only expresses an objective to limit global warming to “well below two degrees above pre-industrial levels”. The goal of 1.5 degrees Celsius, as described by Amber Rudd, the British minister for energy and climate change, is merely “aspirational”. In making her statement that the target of 1.5 degrees is aspirational, the minister was sending a clear signal to the British industrial world that driving down carbon emissions from fossil fuels is not an immediate objective and therefore will not affect their business.

In truth, the climate change action plans submitted by 188 countries would lead to a temperature rise as high as 2.7 degrees Celsius. And, if that is not bad enough, the signatories to the Paris agreement are under no legal obligation even to meet that objective; they are legally free to enlarge carbon emissions further. So, no cause for small island states to celebrate over that one, and profound reason for them to worry.

At three degrees, the size of islands will shrink, productive areas will be under water, people will have to move habitats inland and many will be forced to migrate, legally and illegally. We have to hope that all the scientists who predict this scenario are wrong.

On the money side, the developed countries declined to insert into the Paris agreement their often-made oral commitments to transfer funds to poorer countries in order to help them adapt. Yet, all the studies show that even the US$100 billion a year that was promised would not be enough to help developing countries build up a power system quickly or cheaply enough on renewable energy sources rather than coal or oil. Incidentally, even if the US$100 billion a year fund was achieved, access to it by small states in the Caribbean would be long and arduous, particularly if the criterion of “per capita” income continues to be applied as it is now by international financial institutions. The portion available to the Caribbean region would be a small fraction of the total sum.

Some may argue that there are two aspects of the Paris agreement that are beneficial to small states, therefore, attention should be paid to them. The participating countries recognised “the importance of averting, minimising and addressing loss and damage associated with the adverse effects of climate change, including weather events and slow onset events”. But, liability is completely ignored because it was opposed by the polluting industrialised countries. Recognition of a problem is far removed from committing to action to cure it.

Then there is the single binding legal requirement in the agreement. Every country is now required to come back every five years with new targets for reducing their carbon emissions. But there is no sanction if they fail to meet their previous commitment, and no sanction if they simply carry on business as usual.

COP21 in Paris may have been a triumph for some nations, but no self-respecting small island State should claim any satisfaction.

That is why each small State, individually and within the many organisations in which they are members — including AOSIS, the Commonwealth, La Francophonie, the Organization of American States and others — must now redouble their efforts to work on the developed country governments, but also to move beyond them to the conscience of the people of the industrialised world.

This is about survival and development — two defining challenges of this century for small states. It is the work of everyone; governments, businesses and civil society, all are involved and all could be consumed.

Jamaica Observer

The biggest federal policy development of the year for renewables plays out on Congress’ last day of work in 2015.

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Lawmakers in the House and Senate passed a spending package today that includes multi-year extensions of solar and wind tax credits, plus one-year extensions for a range of other renewable energy technologies.

The pair of bills, which included tax extenders and $1.1 trillion in funding to keep the government running for the next year, passed hours before lawmakers adjourned for the holidays.

“May the force be with you,” said Senator Dianne Feinstein, urging her fellow Senators to vote in favor of the package shortly after the House approved the bills.

The force was certainly with renewables.

Under the legislation, the 30 percent Investment Tax Credit (ITC) for solar will be extended for another three years. It will then ramp down incrementally through 2021, and remain at 10 percent permanently beginning in 2022.

The 2.3-cent Production Tax Credit (PTC) for wind will also be extended through next year. Projects that begin construction in 2017 will see a 20 percent reduction in the incentive. The PTC will then drop 20 percent each year through 2020.

Also included were geothermal, landfill gas, marine energy and incremental hydro, which will each get a one-year PTC extension. Those technologies will also qualify for a 30 percent ITC, if developers choose. In addition, the bill expanded grants for energy and water efficiency.

Business groups and analysts say the extensions will support tens of billions of dollars in new investment and hundreds of thousands of new jobs throughout the U.S.

“There’s no way to overstate this — the extension of the solar ITC is the most important policy development for U.S. solar in almost a decade,” said MJ Shiao, GTM’s director of solar research.

According to GTM Research, the ITC extension will help spur nearly 100 cumulative gigawatts of solar installations by 2020, resulting in $130 billion in total investment. More than $40 billion of investment will be “directly attributable to the passage of the extension,” said Shiao.

The American Wind Energy Association expects similar growth. The group did not issue precise figures, but said the PTC extension would support tens of gigawatts of new wind projects through 2020.

The legislation also lifts a 40-year ban on exports of crude oil produced in the U.S. In exchange for lifting the ban, Democrats pushed for multi-year extensions of renewable energy tax credits and demanded that Republicans strip out any riders that would weaken environmental laws.

Both sides got what they wanted.

However, Pelosi publicly worried yesterday that she didn’t have enough votes to support the bill. Many Democrats expressed concern about the oil export ban tradeoff, saying it would increase subsidies to fossil fuels and boost carbon emissions.

Congressional leaders and the White House lobbied hard to convince the Democratic base that the bill would be a win for the environment.

“While lifting the oil ex­port ban re­mains atrocious policy, the wind and solar tax credits in the Om­ni­bus will eliminate around 10 times more car­bon pollution than the ex­ports of oil will add,” wrote Pelosi in a letter to lawmakers.

Katherine Hamilton, a partner with 38 North Solutions, called the bill “sausage-making at its most intense.”

“The product should be palatable for most parties in clean energy. Extensions for renewables and efficiency tax credits were key sweeteners. In addition, clean energy R&D funding, land and water conservation funds, and clean energy funds were included in the deal,” she said.

Other independent analysts found that the deal would be a net positive for the climate. Although emissions would increase slightly because of increased drilling activity, they would be easily offset by increasing renewable energy development and decreased coal consumption.

“Our bottom line: Extension of the tax credits will do far more to reduce carbon dioxide emissions over the next five years than lifting the export ban will do to increase them. While this post offers no judgment of the budget deal as a whole, the deal, if passed, looks like a win for climate,” wrote Council on Foreign Relations fellows Michael Levi and Varun Sivaram.

The tax credit extensions cap a big month for renewable energy policy.

In early December, world leaders agreed to a framework for lowering global greenhouse gas emissions — a deal that will leverage hundreds of billions of dollars in private investment for clean technologies.

And earlier this week, California regulators issued a new proposal on net metering that would preserve the retail rate paid to rooftop solar systems. The new rules — combined with the continued federal tax credit — will ensure strong activity in the top solar state.

National groups will now likely reset their sights on local battles around the U.S., said Hamilton.

“The renewable energy industries can turn their focus to state and local policies, siting and permitting issues, and compliance strategies for the Clean Power Plan,” she said. 

President Obama is expected to sign the bill into law today.

Greentech Media

Petrojam, the government of Jamaica and Venezuela-owned refinery in Kingston, indicated on Monday that shipments of crude oil crude from Venezuela have increased somewhat, growing from an average 313,886 barrels imported per shipment between January 1 and December 1, 2014, to 344, 000 barrels per shipment this year.

For the 2014 period, 19 shipments were accepted compared to 18 shipments in 2015.

At the same time, however, the company shows that imports from non-Venezuelan sources have also increased over the period.

Petrojam said Monday that imports from source countries outside of Venezuela and including Mexico for 2015 covered five shipments averaging 323, 000 barrels each.

This compared to three shipments averaging 310,000 barrels in 2014 and in 2013 three shipments averaging 348,000 barrels.

The data on Venezuelan crude imports nevertheless runs counter to assessments made by Barclays Bank which says export of crude to PetroCaribe signatories in the region and Cuba had been cut significantly, analysis which has been widely recycled following last week’s congressional victory by the opposition party in Venezuela.

The repetition has accompanied the position that Venezuela might change the arrangement under which 18 Caribbean countries pay into its purses about half of the cash value of oil imports, then remit the rest over 25 years as a loan repayment at one per cent interest charge.

The report said that shipments to the Dominican Republic and Jamaica, which account for about half of the programme, have dropped 56 per cent and 74 per cent compared to 2012.

But Petrojam indicated by way of data that for Jamaica, at least for the last three years, supply from Venezuela has remained consistent in the main.

Andrew Baker, writing for BNamericas online on December 8, and citing new BNamericas Intelligence Series report said oil subsidies to Caribbean neighbours through the PetroCaribe initiative have cost the country US$50bn over the last decade.

He repeated the claim that “Nicolás Maduro, has quietly halved Petrocaribe shipments to about 200,000b/d from 400,000b/d in an effort to slow the bleeding, while continuing to publicly laud the programme.”

Petrojam, while indicating that it is now lifting more crude from other sources outside of Venezuela, showed that supplies have been consistent since January 2013.

Jamaica Observer