The Future of Petrocaribe

Published
American Association of Petroleum Geologists (AAPG)

In order to create political influence among countries in the Central American and Caribbean region, Hugo Chavez, the late President of Venezuela, created an energy alliance called Petrocaribe in 2005. Member countries that are currently active in the accord include: Antigua and Barbuda, Belize, Dominica, Dominican Republic, El Salvador, Grenada, Guyana, Haiti, Jamaica, Nicaragua, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, and Suriname (the Bahamas is also part of the agreement but has purchased its oil elsewhere).

As part of this agreement, Venezuela offers Petrocaribe member countries crude oil and other petroleum products at preferential terms. PDVSA, Venezuela’s, state oil company, sells these commodities on credit; it requires a partial payment of 40 -60% within 30 - 90 days, but the remainder of the financing can be due anywhere between 2-25 years with an interest rate as low as 1-2% based on an assumption that global oil prices will be at least $40 barrel of oil. Payments can also be made to Venezuela through bartering commodities and services. In return for these payments each country receives a set amount of barrels of oil per day although the various countries receive differing amounts. Currently, the largest recipients are the Dominican Republic, Jamaica, and Nicaragua. In exchange for these sweetheart deals, Petrocaribe member countries have provided Venezuela diplomatic support in forums such as the Organization of American States.

With the lack of political and economic stability in Venezuela, there is much concern that Petrocaribe is unsustainable and could spell disaster for the countries that it is subsidizing. Also, should an opposition party take power in Venezuela at some point, the program would likely end because it is extremely costly to Venezuela and it is unclear if and when it would be repaid for these loans. At the very least, Venezuela will likely have to modify the terms of loans to make them less favorable in the future. According to a recent article in The Economist, these deferred payments to member countries cost Venezuela as much as $2.3 billion in lost revenues per year between 2011 and 2013. This would spell trouble for these countries because most continue to be heavily dependent on the oil imports for most of their energy needs due to their use of oil for both electric generation and transportation. In addition, many of these countries use the loans provided through Petrocaribe for other purposes, such as long term financing of their debt. For example, Jamaica uses its loan to fund its Petrocaribe development fund, which is used for infrastructure projects on the island. As a result, many of these countries, particularly those in the Caribbean, know that they need to diversify their energy resources away from Petrocaribe, but they have been slow to do so for obvious reasons. There has been much talk of embracing renewable energy, but, to date, development in this area has been slow.

Although a collapse in Petrocaribe could spell disaster for the Caribbean, many in the U.S. see this as both a political and economic opportunity should these countries be able to move forward on fuel diversity strategies. On the energy efficiency and renewable energy front, the U.S. began the Energy and Climate Partnership of the Americas (ECPA) initiative back in 2009. The goal of this program is to provide the region technical and financial assistance to move forward with energy efficiency and renewable energy development. In addition, Vice President Biden announced the Caribbean Energy Security Initiative (CESI) in Grenada earlier this year. CESI looks to provide assistance, including loans and other financial guarantees from the Overseas Private Investment Corporation to the region in order to help these countries diversify their energy supplies.

Another way that the U.S. may be able to help the region wean itself off of Petrocaribe’s subsidies is through the utilization of natural gas from the U.S. A recent report from the Atlantic Council calls on the U.S. to develop a serious natural gas strategy for the region as part of the ECPA and CESI initiatives, which, as mentioned earlier in this piece, have generally focused on energy efficiency and renewable energy development. The InterAmerican Development Bank and the World Bank should also coordinate with U.S. efforts in this area. One of the most promising prospects is the deployment of small scale liquefied natural gas in the region which could be barged in without the need of a terminal, which would be far too expensive for many of the Caribbean islands.

Because Venezuela’s budget is tied to the amount of oil in exports, the recent dip in oil prices is really squeezing the country’s already strained internal budget and many are questioning how and why Venezuela should be sending resources to other countries in the region when they do not have adequate resources at home. Although this dip in prices may or may not be temporary, it should be of concern to those countries that do have viable alternatives to Petrocaribe.

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