Petro-Caribe oil deal…Start preparing to pay more for imported oil – Sir Sanders

Feb 25, 2014 News

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As unrest continues in Venezuela, the pressure may be on Guyana and 16 other Petro Caribe nations to start thinking about buying oil at market prices.
As of yesterday, at least 13 persons have died, over 500 charged and almost 50 thrown in jail following the almost two-week-old protests in the neighbouring country. About 150 people have been injured, authorities say.

Former Caribbean diplomat and business analyst, Sir Ron Sanders, has urged  Caribbean governments that are members of the Petro Caribe Agreement with Venezuela, to start preparing for the worst case scenario, by adjusting their budgets to take account of the loss of benefits now derived from the oil arrangement.
“This is especially important for the countries of the Eastern Caribbean that appear to have made little provision for the possibility that the arrangements with Venezuela could end abruptly.”
The 10-month old Nicolas Maduro government is facing one of its worst unrests over food shortages and foreign currencies, with calls for steps to be taken to reverse the current decline of that neighbouring country’s economic decline.
Already, Guyana and the Caribbean Community (CARICOM) has called for peace, in support of Maduro, who took over from former army strongman, President Hugo Chavez, following his death in March last year.
The demonstrations are the biggest challenge to President Nicolas Maduro’s 10-month-old government. Venezuela is Latin America’s biggest exporter of crude oil and has the world’s largest petroleum reserves.
Under the Petro Caribe arrangement, several Caribbean member states, including Guyana, purchase oil on conditions of preferential payment. Launched in June 2005, the payment system allows for purchase of oil at market value for 5%-50% up front, with a grace period of one to two years. The remainder can be paid through a 17-25 year financing agreement with 1% interest if oil prices are above US$40 per barrel.
Petro Caribe accounts for 30% of Venezuela’s production, the Curacao Chronicle has reported. Twelve of the 17 countries are from CARICOM, excluding, Barbados, Montserrat and Trinidad and Tobago.
Expensive oil
Countries benefiting from the deal will have to increase their productivity dramatically and start paying market prices. This will be worrying for Guyana which is largely dependent on fossil fuel for its power and the increasing number of vehicles. Government has been subsidizing the Guyana Power and Light which has been struggling to meet growing power demands.
“The “manana mentality” of the islands is no longer sustainable. Since change of a culture takes time and leadership, it is likely that the Caribbean, consequently, will slide into a deep and lengthy economic recession,” the newspaper predicted.
Under the deal, Guyana is supplying rice and using some of the outstanding oil monies to pay local farmers, through the Ministry of Finance and the Guyana Rice Development Board. With the Venezuela market an assured one, for the time being at least, both Government and rice farmers would be nervous as the current instability spells real trouble.
“Venezuela’s economic conditions make it tough for President Nicolás Maduro to continue the largesse of Petro Caribe started by his predecessor Hugo Chávez.  Inflation is now at 56 per cent; the government’s budget deficit is almost 50 per cent…,” Sanders said in his latest commentary published Sunday in Kaieteur News.
With a sliding bolivar fuerte, Sanders said that there are real food shortages across the country – the food shortages have a worse effect on the poor who, unlike the better-off, cannot afford to pay to circumvent normal food distribution chains.
Venezuela also has debt obligations it must service.   For example, reports indicate that the government and the state-owned oil company, Petroleos de Venezuela, S.A. (PDVSA) signed loan agreements with China amounting to US$49.5B between 2007-2013. Of that sum, only US$20B – or less than half – has been repaid in oil supplies.
“These economic conditions make it difficult for Maduro, with the best will in the world, to continue the Petro Caribe arrangements as they are. His government needs to address its crucial fiscal problems as well as the performance issues that confront PDVSA which has been the source of financing not only for the social transformation measures under Chávez, but also for the Petro Caribe arrangements.”
Secret Debt
Sanders also said that the amount of the debt owed to Venezuela by many Caribbean countries is shrouded in secrecy because the process of dealing with Petro Caribe has not been transparent.
“A notable exception is Jamaica where, in January, the government publicly put its Petro Caribe debt at US$2.5 billion.  For each of the other Caribbean countries, the debt would amount to hundreds of millions of dollars that, in their current situation of very high debt and large fiscal deficits, they would find almost impossible to repay.”
According to the columnist, sources within the Venezuelan government have lamented that in many Caribbean countries not only has provisions not been made to repay the debt, but the loan component of the oil price has not been used for the social programmes for which Chávez intended it.  It has been used in one case to pay the government’s public sector wage bill and in another to meet commercial obligations.
Sanders believed that Maduro is politically committed to continuing Chávez policies of helping Caribbean countries through the low-cost loan component of oil supplied by Venezuela but as conflict and confrontation increases and intensifies within Venezuela, and economic conditions worsen for his own supporters, he may be forced to choose between them and his own political fortunes and a political commitment to Chávez’s ideas.
“They would be sensible to approach the Caribbean Development Bank for technical advice on how to alter their financial circumstances to make the transition and to propose ways in which such a transition could be accomplished with the least amount of inevitable pain; pain which would be more desirable than calamity.”
Towards the end of 2012, Guyana signed its first debt compensation agreement with Venezuela which reduced the Petro Caribe debt owed to that country by US$100.8 million, equivalent to the value of rice and paddy shipped from December 2009 to July 2011.
At the end of 2012, Guyana reportedly owed Venezuela US$364M.

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