Petrojam defends pricing mechanism

Senior staff reporter

Friday, May 03, 2019

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SOME members of the Public Accounts Committee (PAC) have suggested that Petrojam should consider having its pricing mechanism technically analysed by an independent body, in order to reassure players in the petroleum market and the wider public that the process is transparent.

PAC Chairman Mark Golding expressed this view, with agreement from other members of the committee at Tuesday's meeting, where officials of Petrojam defended the reliability and transparency of the mechanism which the State oil refinery uses to arrive at prices for the retail petroleum market.

“I would like to see the pricing mechanism that you use — the most important element of it — the excel spreadsheet which derives a number that you use as a starting point for your deliberations; I would like to have that reviewed technically and commented on by an independent body that can be relied on to give some comfort that it is appropriately designed,” Golding told Petrojam General Manager Winston Watson as the committee continued discussions on the Auditor General's 2018 compendium report on the operations of Petrojam and its parent company, the Petroleum Corporation of Jamaica (PCJ).

The discussions were centred on a concern raised in the report that due to the absence of the minutes from Petrojam's pricing committee meetings, the audit team could not determine whether the market price adjustment was always determined in a transparent manner.

“I don't think minutes are going to really provide 100 per cent comfort around transparency in pricing. What really matters is how is that spreadsheet compiled; is it appropriately compiled and to what extent after it throws out a number is any subsequent discretion being applied on an objective basis (or) a consistent basis? We are concerned that the pricing formula needs to be one that protects the public [as] there is a lot of disquiet, especially from the industry, on the way in which this is applied and the reason for that is that it isn't transparent,” said Golding. “Looking at the (pricing) information now you can see that there are all sorts of inputs which go into the ultimate output and many of those are directly related to how you choose to operate, not something that is market-determined in reference to the world market,” Golding argued.

Central Manchester Member of Parliament Peter Bunting, meanwhile, challenged the argument that the basis of the local market price is the United States Gulf reference price. “I have always had the impression that this pricing formula [was based on] the US Gulf reference and whatever the freight and insurance charges, etc, were then applied on top of that. But in your pricing formula, the acquisition differential is whatever difference there is between you getting the cargo of diesel from wherever it comes from; right away negates whatever US Gulf reference price, and essentially brings up whatever that price is, to the price that you actually purchased it at,” he argued.

And Golding argued that whatever inefficiencies are contained in Petrojam's contractual arrangements with its suppliers would cause those acquisition differentials to flow through to consumers. “The consumer is not really taking exclusively the US Gulf reference price risk, they are taking on other risks as well which is the contracting arrangements that Petrojam has with its suppliers,” he stated.

But Michael Hewitt, manager for logistics and marketing at Petrojam and who is one of the three members of the refinery's pricing committee, insisted that: “What the consumer is taking is the market price in Jamaica”.

Bunting further suggested that there is a perverse commercial incentive for Petrojam to buy its products at a higher price from third parties, which would push up the cost at which it sells to the local market.

General manager of Petrojam Winston Watson, however, dismissed the suggestion, stressing that Petrojam would be pricing itself out of the local market were it to take that approach, arguing that Petrojam in fact offers the best price to the market.

Bunting said there are numerous elements of the ex-refinery billing price where inputs cannot be easily measured, against benchmarks, but that one way to overcome scrutiny is to publish the formula by which the pricing committee arrives at market prices. He said the information could be made public after a specified period of time to ensure that the company was not put at a competitive disadvantage.

“You're setting the base of the market price, and this can't be something that is left to the total judgement and discretion of three or four people; we must be able to convince ourselves that this thing is objective, that it is providing the most efficient and appropriate pricing of the product that is possible,” he stated.

The pricing committee comprises the general manager, the chief financial officer, and the manager for logistics and marketing, which according to Petrojam, reviews changes in the US Gulf Reference and other pricing elements from week to week. “In deriving a final published weekly ex-refinery price we confirm that the committee utilises a market adjustment factor which is a discretionary element to ensure that exchange in prices from week to week is contained within a certain band and is not considered excessive,” said Petrojam in its response to the concern outlined in the Auditor General's report.

The company said consultations were previously held with the marketing companies to discuss the proposed introduction of daily product pricing as in the case in the US market, which would preclude the need for the weekly pricing committee meetings, the weekly publication of prices and the application of the market adjustment, but that proposal was not favourably received and was not implemented.

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