CARIBBEAN ENERGY INFORMATION SYSTEM (CEIS) JULY 2013 ISSUE
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he PetroCaribe Agreement for over eight years has allowed Caribbean countries to benefit from a deferred payment system for the importation of oil and refined products from Venezuela at one or two percent rate of interest annually. In addition to this favourable interest rate, the arrangement also provides funds for developmental and social projects that are aimed at infrastructural strengthening of member countries, with the aim of improving the standard of living of its citizens. In a nutshell, the payment system simply means that the countries will import oil (each country is allowed a specific quota) and refined products from Venezuela and the payments are put on hold and converted to loans with an extended repayment period of up to twenty five (25) years with a two year grace period. In this issue of the Caribbean Petroleum Update we seek to explore how a potential increase in interest rates (despite how small) under the PetroCaribe Agreement could impact signatory counTo access tries. CEIS website CARIBBEAN PETROLEUM UPDATE
Despite the abundance of renewable energy sources in the Caribbean (solar, hydro, wind to name a few), the Caribbean remains heavily dependent on fossil fuel to meet the energy needs of their economy. Meeting the energy needs of many of the Caribbean countries requires significant importation of oil and by products for consumption in major petroleum consuming sectors which usually are the electricity and transportation seccontinued on page 2/ CONTACT US
Caribbean Energy Information System Scientific Research Council Hope Gardens, Kingston 6, Jamaica 1-876-927-1779 (Telephone) 1-876-977-1840 (Fax) ceis@src-jamaica.org www.ceis-caribenergy.org
is a monthly Bulletin which highlights petroleum issues affecting or relevant to the Caribbean, international developments that may affect the region’s way of life and movements in oil prices and retail prices for fuel regionally.
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Call: 1-876-927-1779 | Caribbean Petroleum Update : July 2013
Impact of a Potential Increase in Interest Rates on Caribbean Countries!‌‌.. continued from page 1 tors. Electricity and transportation in Jamaica for example consumes 60% of petroleum imported into the country. Fuel makes up a significant portion of the import bill and correspondingly contributes to the overall trade balance (surplus/deficit) of any country. Economies that are export driven usually have a trade surplus which is most desirable as production fuels growth and development. However, Caribbean countries usually suffer from a trade imbalance which simply means that they import more than they export, as such they experience what is known as a balance of trade deficit. The driving factor for most Caribbean countries trade deficit is the ever escalating fuel bill that is fuelled by high world crude oil prices. Under the PetroCaribe agreement Caribbean countries import a set quota at preferential rates and conditions. This allows Caribbean countries to obtain cheaper initial petroleum costs, but since Venezuela is not the only country from which the Caribbean imports oil, oil
imports contribute significantly to countries overall oil bill and by extension import bill. However, if there were to possibly be an increase in the interest rates of the PetroCaribe agreement, the question that comes to mind is how would this impact the trade balances and economic status of signatory countries? Based on Table 1 by applying the Deferred Financing Method and using an example of 1000 barrels per day, if the price of a barrel of oil is US$149, the percentage of cash paid up front to Venezuela for oil would be 40% (US59,600) while the remaining 60% (US$89,400) would be given to a government as loan whether or not the interest rate increases to 2% or 4%. This loan amount is then invested in infrastructural strengthening and social and developmental programmes aimed at improving the economic and social welfare of member countries. If the current interest rate of 1% remains with a moratorium period of two (2) years, the amount that would be due
Table 1: Example Petrocaribe Deffered Financing Mechanism using 1000 Barrels Per Day and prices as per Rate Current Schedule set out in Agreement Agreement - 1% Scenario - 2 % Scenario - 4 % interest Rate Interest Rate Interest Rate Price Range per Barrel of Oil US$>>> 100 - 149 100-149 100-149 % of Cash Paid to Venezuela for Oil 40 40 40 % of Cash Paid to Government as a Loan 60 60 60 % Interest Rate Applied to Loan Amount 1 2 4 Loan Repayment Moratorium Period (Years) 2 2 2 Period of Loan Repayment (Years) 23 23 23 US$ US$ US$ Assumed price per Barrel of Oil>>> 149 149 149 Upfront Payment to Venezuela for 1KBD 59,600 59,600 59,600 Loaned provided to Government on 1KBD 89,400 89,400 89,400 US$ US$ US$ Sample Invoice Date: July 2013 (Principal Loaned) 89,400 89,400 89,400 Yr 1 Principal + Interest (Moratorium Period 2014) -Compounded 90,294 91,188 92,976 Yr 2 Principal + Interest (Moratorium period 2015) - Compounded 91,197 93,012 96,695 Principal and Interest Due July 2015 91,197 93,012 96,695 Amount Paid Annually to Venezuela (US$) (4458.2) Total Amount Due over Life of Loan - Principal + Interest (US$) (102539.5) Total Interest Accrued over Life of Loan (US$) (13139.5) Total Interest Expressed as % of Loan at the end LoanTenor 14.7 Note: Interest calculated for the 2 years moratorium period is capitalized/compounded.
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(5,085) (116,950) (27,550) 30.8
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(6,508) (149,694) (60,294) 67.4
Caribbean Petroleum Update : July 2013 | Call: 1-876-927-1779
for example in July 2015 would be US$91,197. However, if the interest rate rose to 2% or 4% the amount that would be due in the same period would be US$93,012 and US$96,695 respectively. Additionally, the amount paid to Venezuela annually would increase if there was an increase in the interest rates as illustrated in Table 1.
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sumptions. In addition, a portion of most Caribbean countries budget is allocated to debt servicing, therefore an increase in the rates will only lead to a further exacerbation of the debt levels and debt servicing payments of member countries. Increasing debt levels is a sign of deteriorating economic health of a country. Such would be the impact on signatory Caribbean countries should there be an increase in PetroCaribe interest rates.
Using Tables 1 as an example, if the initial terms and conditions of the PetroCaribe agreement remains the same any potential increase in the interest rates will not necessarily affect the amount of oil imported from Venezuela or the quota allowed by each signatory country. It will also not affect the upfront payment of oil to the Venezuelan government or the loan amount expended to the receiving government as per the terms and conditions. What will be significantly impacted is the total amount due over the life of the loan and correspondingly the amount paid to Venezuela annually as loan repayment. If the terms and conditions were to change (not in the interest of Caribbean countries) along with the interest rates, then that would give rise to other as-
Using a more practical example by applying the quotas allowed under the PetroCaribe Agreement for three countries; Jamaica, Belize and Suriname and the price of oil as US$106.88, the results would be as shown in Tables 2 and Table 3. Jamaica: Using the allowed quota of 23,000 barrels of oil per day and continued on page 4/
Table 2: Example Petrocaribe Deffered Financing Mechanism using allowed quotas for three countries and prices as per Rate Schedule set out in Agreement using 1% Interest Rate Jamaica Belize Suriname Price Range per Barrel of Oil US$>>> 100 - 149 100 - 149 100 - 149 % of Cash Paid to Venezuela for Oil 40 40 40 % of Cash Paid to Government as a Loan 60 60 60 % Interest Rate Applied to Loan Amount 1 1 1 Loan Repayment Moratorium Period (Years) 2 2 2 Period of Loan Repayment (Years) 23 23 23 US$ US$ US$ Assumed price per Barrel of Oil>>> 106.88 106.88 106.88 Upfront Payment to Venezuela for Daily Quota 983,296 171,008 427,520 Loaned provided to Government on Daily Quota 1,474,944 256,512 641,280 US$ US$ US$ Sample Invoice Date: July 2013 (Principal Loaned) 1,474,944 256,512 641,280 Yr 1 Principal + Interest (Moratorium Period 2013) -Compounded 1,489,693 259,077 647,693 Yr 2 Principal + Interest (Moratorium period 2014) - Compounded 1,504,590 261,668 654,170 Principal and Interest Due July 2015 1,504,590 261,668 654,170 Amount Paid Annually to Venezuela (US$) (73553.2) (12791.9) Total Amount Due over Life of Loan - Principal + Interest (US$) (1691722.8) (294212.7) Total Interest Accrued over Life of Loan (US$) (216778.8) (37700.7) Total Interest Expressed as % of Loan at the end LoanTenor 14.7 14.7 Note: Interest calculated for the 2 years moratorium period is capitalized/compounded.
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Call: 1-876-927-1779 | Caribbean Petroleum Update : July 2013
Impact of a Potential Increase in Interest Rates on Caribbean Countries!‌‌.. continued from page 3 Table 3: Example Petrocaribe Deffered Financing Mechanism using allowed quotas for three countries and prices as per Rate Schedule set out in Agreement using 2% Interest Rate Jamaica Belize Suriname Price Range per Barrel of Oil US$>>> 100-149 100-149 100-149 % of Cash Paid to Venezuela for Oil 40 40 40 % of Cash Paid to Government as a Loan 60 60 60 % Interest Rate Applied to Loan Amount 2 2 2 Loan Repayment Moratorium Period (Years) 2 2 2 Period of Loan Repayment (Years) 23 23 23 US$ US$ US$ Assumed price per Barrel of Oil>>> 106.88 106.88 106.88 Upfront Payment to Venezuela for Daily Quota 983,296 171,008 427,520 Loaned provided to Government on Daily Quota 1,474,944 256,512 641,280 US$ US$ US$ Sample Invoice Date: July 2013 (Principal Loaned) 1,474,944 256,512 641,280 Yr 1 Principal + Interest (Moratorium Period 2013) -Compounded 1,504,443 261,642 654,106 Yr 2 Principal + Interest (Moratorium period 2014) - Compounded 1,534,532 266,875 667,188 Principal and Interest Due July 2015 1,534,532 266,875 667,188 Amount Paid Annually to Venezuela (US$) (83889.9) (14589.6) Total Amount Due over Life of Loan - Principal + Interest (US$) (1929468.4) (335559.7) Total Interest Accrued over Life of Loan (US$) (454524.4) (79047.7) Total Interest Expressed as % of Loan at the end LoanTenor 30.8 30.8 Note: Interest calculated for the 2 years moratorium period is capitalized/compounded. the price of oil as US$106.88, the government of Jamaica would be expected to pay upfront US$983,296 (40%) while the remaining US$1,474,944 (60%) would then be payable as a loan. Correspondingly, the amount due using a 1% interest rate at the end of the moratorium period would be US$1,504,590 as shown in Table 2. However, should there be an increase in interest rates to 2% Jamaica would have to pay US$1,534,532 in interest plus principal as shown in Table 3 above. Also, annual payments would increase from US$73,553.2 to US$83,889.9 should there be an increase. Belize Applying a similar scenario to Belize but applying the allowed quota of 4000 barrels of oil per day and US$106.88 as the price of oil, US$171,008 would be cash paid to Venezuela while the remaining US$256,512 is then
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given to the Belizean government as a loan. If the current interest rate of 1% is then applied, US$261,668 would be due at the end of the moratorium period as shown in Table 2. But, should there be an increase in interest rates to 2%, the amount would increase to US$266,875 as depicted in Table 3. Consequently, the amount paid to Venezuela annually would increase from US$12,791.9 to US$14,589.6. Suriname With an allowed quota of 10,000 barrels of oil per day and the price of oil as US$106.88, the Surinamese government is required to pay US$427,520 upfront for oil received from Venezuela. By applying the current interest rate of 1% on the loan amount of US$641,280, the amount payable at the end of the moratorium period would be US$654,170 with an annual payment of US$31,979.6 as shown in Table 2. However, should the interest rate in-
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crease to 2%, the interest plus principal would increase to US$667,188 with annual payments of US$36,473.9 based on Table 3.
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duced, this can aid in the reduction and ultimate dependence on oil imports.
Any increase in the interest rate will increase the cost of government interest payments. Since the PetroCaribe loan makes up a part of a country’s debt portfolio, the debt standing would likewise increase. Any increase in debt servicing means less money for government expenditure. With an increase in interest payments due to a possible rise in interest rates, the fiscal space will only get tighter. For Jamaica, reducing the debt to GDP ratio is crucial to the IMF loan agreement, however should there be an increase in the PetroCaribe interest rates, fiscal targets would be compromised. The effects of the IMF agreement will include job losses, cuts in government expenditure and a range of tax increases. Furthermore, with burgeoning national debts and an already high import bill in addition to low levels of export, this can limit the value of nation’s currency. The cost of energy is adversely affecting both the manufacturing and service industries and contributing to making the exports of Caribbean companies uncompetitive in the world market.
Conclusion The economies of many of these Caribbean states is plagued by high and rising debt to GDP ratios that only hamper the efforts of medium to long term debt sustainability and the potential for growth. Coupled with their small size and vulnerability to natural disasters, these Caribbean nations need all the assistance in terms of preferential agreements in order to compete on the global scale. With this said a potential increase in PetroCaribe interest rates will only add to the many challenges these small developing states battle with and impede any future efforts of changing their debt position. In addition, with losses in the electricity sector being between 10%-27%, it is crucial for Caribbean islands to have a renewed focus on the need for energy efficiency and the potential positive impact this can have on their economy. If losses in the electricity and transportation sectors are re-
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Call: 1-876-927-1779 | Caribbean Petroleum Update : July 2013
PETROLEUM NEWS & HAPPENINGS The Caribbean Electric Utility Services Corporation (CARILEC) tapped Miami Public Speakers Inc; for 2013 Corporate Communications Symposium [...]...Read more Electricity supply to seven a/c units disguised, JPS uncovers sophisticated device in Portmore [...]...Read more Trinidad & Tobago, China discuss LNG, CNG, and renewable energy [...]...Read more OUR gives mid-Sept deadline to reveal which entity will build new plant [...]...Read more Street Light Audit to be completed by September [...]...Read more
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Putin urges gas exporters to adopt single pricing model [...]...Read more Paulwell’s Petrojam Plan – Upgrade To Be Done By 2016 [...]...Read more Jamaican Power Plant Workers Stage Protest [...]...Read more
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REGULAR UNLEADED GASOLINE AVERAGE PRICES AT THE PUMP JULY 2013 Retail prices for Regular Unleaded Gasoline in eleven Caribbean countries reviewed at the end of July 2013 showed marginal increases in prices for Barbados, Grenada and Jamaica with Jamaica experiencing the highest increase of 1.24 % from June to July 2013. Prices in Antigua and Barbuda, Dominica, Monsterrat, St.Vincent and the Grenadines and Trinidad and Tobago remained stable. However, there were minimal decreases in prices in July 2013 of 0.52%, 0.43% and 0.31% for Bahamas, Belize and St. Lucia respectively when compared to the previous month.
Regular Unleaded Gasoline: Average Retail Price (US$/Litre) 2013 COUNTRIES
JAN
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AVG
1.23 1.37 1.58 1.33 DOMINICA 1.18 GRENADA (95 OCT) 1.29 JAMAICA 87 Octane[E10] 1.25 MONTSERRAT 1.38 ST. LUCIA 1.26 ST. VINCENT/ GRENADINES 1.22 TRINIDAD/ TOBAGO [92 OCT] 0.42
1.23 1.41 1.58 1.33 1.20 1.29 1.28 1.47 1.26 1.22 0.42
1.23 1.52 1.58 1.54 1.28 1.35 1.26 1.23 1.28 1.12 0.42
1.23 1.50 1.58 1.54 1.28 1.35 1.24 1.30 1.30 1.15 0.42
1.23 1.43 1.71 1.53 1.28 1.33 1.25 1.29 1.32 1.17 0.42
1.23 1.43 1.63 1.54 1.28 1.31 1.25 1.29 1.32 1.17 0.42
1.23 1.42 1.64 1.53 1.28 1.32 1.26 1.29 1.31 1.17 0.42
1.23 1.44 1.62 1.48 1.25 1.32 1.26 1.32 1.29 1.17 0.42
ANTIGUA/ BARBUDA BAHAMAS [91 OCT] BARBADOS BELIZE [87 OCT]
NOTE: *US Gallon = 3.785 L *Imperial Gallon = 4.546 L *As at November 1, 2009 MTBE was phased out from all gasoline blends in Jamaica and replaced with 10% Ethanol.
Comparative Retail Pump Prices Regular Unleaded Gasoline JULY Avg vs 7 Mths Avg (Jan - July 2013)
1.80
US$/Litre
1.60
1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
11 Caribbean Countries
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Analysis of the International Crude Oil prices over the three months period May - July 2013 saw prices in July averaging over US$100 per barrel at US $104.53/BBL. When compared to the average prices seen in May and June this average price was approximately 10.4% and 9.1% higher respectively. The highest weekly price seen in July for the product was US$106.88/BBL - reflected in week three while the lowest price recorded was US$100.65 seen in week one. An average of the three month’s average prices reflected US$98.32/BBL. The increase in crude oil prices in July 2013 is attributed to the ongoing political crisis in the Middle East and North Africa (Egypt), the protests in Libya and the fact that two major oil export terminals in Libya was shut down due to strike by workers. All of which have caused disruptions in the global oil supply.
Average Monthly World Crude Oil Prices (2010 - 2012) 109.61
106.0
110
US$/BBL
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Caribbean Energy Information System (CEIS) primary report of historical annual petroleum energy statistics provided for 18 Caribbean Countries. Included are data on total energy production, consumption, and trade; overviews of petroleum, natural gas, electricity, as well as financial and environmental indicators for over twenty years.
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