October 28, 2005
A closer look at PETROCARIBE

by Marlon Stevenson

The PETROCARIBE agreement is an initiative of the government of Venezuela that offers oil to 14 Caribbean countries on concessionary payment terms. Hopefully, the funds freed by this initiative will assist in social and economic development of the various countries.

Some facts about the agreement: {{more}}

• The agreement recognises the need within the context of the agreement to offer special treatment to countries of the region demonstrating lesser developmental capacity.

• It guarantees the sovereignty of states and non-interference in internal affairs.

• The agreement mentions concern about global economic trends which may lead to marginalization of small third world countries who are heavily dependent foreign countries.

• The agreement recognises the importance of Trinidad and Tobago as a major Caricom energy exporter.

• The agreement acknowledges the unfair economic order inherited from colonialism… and feels that it is important for Caribbean countries to possess reliable sources of energy and the region must be assured that prices will not represent an obstacle to their development.

The Agreement:

PETROCARIBE is a body (organisation) aimed at facilitating the development of energy policies and plans for the integration of the nations of the Caribbean through the sovereign use of natural energy resources to directly benefit their people. PETROCARIBE will be responsible for managing all issues associated with the energy-related links between the signatory countries in accordance with the agreement. PETROCARIBE hopes to deliver: coordination and harmonization of energy policies, including oil and oil derivatives, gas, electricity and the efficient use of these resources. The agreement also seeks to deliver technological co-operation, training, development of energy infrastructure and the harnessing of alternative sources of energy.

Operation of PETROCARIBE:

PETROCARIBE will have a Ministerial Council set up by the Ministers of Energy. The Council will appoint a President and a Deputy. Meetings will be held once per year or as the council sees fit. There shall be an Executive Secretary attached to the Ministry of Energy and Petroleum of Venezuela. The Executive Secretary will be responsible for the day-to-day operations of the organisation – PERTOCARIBE.

Within the PETROCARIBE is a Fund called ALBA CARIBE Fund for Social and Economic Development otherwise called ALBA CARIBE Fund. This fund will be administered by PETROCARIBE. Its purpose is to foster the social and economic development of the countries of the Caribbean. The sources of this fund will be drawn from the financed portion of oil invoicing and savings from direct trade between our countries. The fund was kick-started with an initial capital of USD$50 million by the Government of Venezuela. The government of St. Vincent and the Grenadines has already tapped into this facility for the acquisition of heavy duty equipment to assist private contractors in the construction industry.

Operation highlights:

• All freight will be charged at cost – a savings for the signatories to the agreement.

• There will be no third party involvement in the transactions of PETROCARIBE. *PETROCARIBE where possible will facilitate refining and distribution of fuel and other related products.

• PETROCARIBE will promote more energy efficiency and more rational use of conventional energy and renewable energy.

The Financing Mechanism:

There is a grace period provided for in the agreement of one to two years. The portion of money to be paid in cash must be paid in thirty to ninety days.

Once the price of oil remains under $40 per barrel, the deferred payment period shall be 17 years; over $40 per barrel the payment period shall be extended to 25 years with a two-year grace period at 1% interest. Venezuela shall be able to determine the portion of the debt to be paid with goods and services. The products that are listed for Venezuela to purchase at preferential rates include: sugar, bananas, or any good or service that is believed to be affected by the trade policies of rich countries.

Energy Efficiency:

As mentioned before, one of PETROCARIBE’s essential features is the issue of energy efficiency. It is a stated policy of the agreement that assistance be given in the formulation of strategies to reduce oil consumption.

A closer look at PETROCARIBE:

These figures are to help us illustrate what PETROCARIBE may look like in dollar terms.

When oil is at $70 pb, the cost of this loan seems rather reasonable; EC $5.394m for a $40m loan over 25 years is excellent terms using a reducing balance method. That same loan will cost almost twice as much – $10,325 m when we use a straight line method. Currently our government is borrowing at higher rates than 1%. Every month for 25 years we will have to find $155,648.

Any financial planner will tell you take the cheaper loan once the terms are the same or better. However, the challenge is to use this facility (loan) to generate a return much greater than it costs – be it social or economic. We must remember that this agreement is designed to assist us as a people to eradicate social inequalities and to foster improved living standards and more effective participation by nations in our effort to shape our own destiny.