In an effort to attract investors to Jamaica’s remaining oil and gas exploration blocks, the state-run Petroleum Corporation of Jamaica (PCJ) has dropped a requirement that the Government be paid a 12.5 per cent royalty on all petroleum recovered in Jamaican territory.

“In this round, we will be shifting to a production-sharing agreement which will be negotiated,” minister with responsibility for energy, Philip Paulwell, told the Sunday Observer.

The decision to drop the royalty requirement was made in preparation for Jamaica’s second oil and gas exploration licensing round, which will be officially announced at a seminar scheduled for January 31, 2007 in Houston, Texas.

In this round, Jamaica will negotiate individual production-sharing agreements, which would see the country earning a percentage of oil or oil revenue only after the investors reclaim their costs.

In the first licensing round in 2005, the PCJ awarded licenses for eight exploration blocks to two companies – blocks 6, 7, 10, 11 and 12 to the Australian-based Jamaica joint venture consortium of Finder/Gippsland, and blocks 9, 13, and 14 to Rainville Limited, which is based in Calgary, Canada. Both companies have since begun their search.

Those companies both agreed to a production-sharing agreement that entitled the Government to 12.5 per cent royalty, to be paid in cash or petroleum before they begin to recover their exploration and production costs. After the cost recovery, any profit from oil would be split between the Government and the contractor along a sharing scale that ranges from 30 to 60 per cent.

On Thursday, Paulwell explained the decision to drop the requirement, pointing out that the 12.5 per cent obligation was a factor that worked against Jamaica’s effort to attract investors.

“When we spoke with some major corporations and asked why they didn’t participate in the first bidding round, a number of them pointed to the royalty as a disincentive,” said Paulwell.

Most countries starting oil and gas explorations, he pointed out, had moved away from flat royalties in favour of profit-sharing agreements.

But Jamaica Labour Party spokesman on energy Clive Mullings dismissed that line of reasoning, arguing that precedent undermined the Government’s argument.

“The other licensees they got, didn’t they have that 12.5 per cent requirement?” Mullings asked rhetorically.

With the current global oil situation, said Mullings, Jamaica’s interests would be best served by waiting for the ‘right’ investor, who would have no problems meeting the royalty requirement.

“If there is any possibility of any real commercial deposits being here, word will spread in the industry,” he said. “If you go out there and announce that you are dropping the 12.5 per cent royalty, I’m sure they (investors) will come, but at the end of the day you’re in a worse off position.

“Oil is in great demand, and if you find any oil at all, we should try to maximise our benefit. There are companies willing to invest, and to pay the 12.5 per cent in royalties, so for us to say that we will forgo that 12.5 per cent is foolhardy,” he added.

Jamaica began its third major oil and gas exploration in 2005, faced with a skyrocketing post-9/11 oil bill that this year is expected to cost the country US$1.6 billion. Based on the country’s location on the edge of the Nicaraguan Rise, it is believed that there may be commercially viable quantities of oil, but not enough to attract major oil companies. At today’s record oil prices, however, Jamaica’s prospects are likely to be attractive to companies that specialise in cost-effective extraction.

Since beginning the exploration, the country has earned over $22 million, roughly half from the sale of data packs during the last licensing round, but also from the two companies that won licences. Under the agreements originally signed, the companies pay an annual surface rental of US$4 per square km of their exploration blocks, a figure that rises to US$10 if oil or gas is discovered. Oil prospectors are required to make a contribution to a training fund also managed by the PCJ.

campbello@jamaicaobserver.com