Trinidad’s state-owned gas reserves

Dec 21, 2003 01:00 AM

An important overall goal of Trinidad and Tobago’s energy policy is to maximise value from both the oil and gas resources for the benefit of the citizens through strategic investments along the energy value chain. This requires moving beyond the current focus on primary production to capturing value from the wide range of production possibilities downstream and upstream.
Although such a goal is worthy and beneficial, a burning question remains. Does government have enough of its "own" gas to assiduously pursue the kind of strategic projects-manufacture of ethylene, aluminium and fabricating complex, gas to liquids, power generation-that would lay the platform for further downstream development and increasing national value added?

Apparently, these projects are not in the long-term interest of the major energy companies whose unapologetic strategic intent is to quickly maximise returns through runaway LNG trains. It is imperative, therefore, that the government takes the lead in developing these projects. Availability of an adequate gas supply is a necessary condition for success.
How much gas does the government own to satisfy the demand for strategic national projects without having to accede to the commercial terms of the de facto owners of the gas, the foreign multinationals? There is a general misconception that the government, being the sovereign owner of the resources, can do as it pleases. The facts are that blocks are leased to investors through Exploration and Production (E&P) licences or Production Sharing Contracts (PSCs).

Under an E&P licence, otherwise called a tax royalty concession, the contractor or licensee pays the government taxes and royalties in exchange for the rights to produced and sell all the hydrocarbons found in the licensed area. Under the PSCs, the government is entitled to receive a share of production after the contractor has substantially recovered allowable cost. The government’s share is equivalent in value to the taxes and royalties the Contractor would have paid.
It has been the norm, however, for the government to take its share in the form of cash, thereby leaving itself without access to gas reserves. Obviously, it cannot have its cake and eat it too. Were the state to take its share of production in molecules rather than cash it would entail foregoing substantial amounts of revenue, a scenario which may be untenable to the Minister of Finance, given the State’s penchant for spending all that is available.
Herein lies the critical importance of the state entities Petrotrin and the National Gas Company (NGC) acquiring adequate reserves to pursue strategic developments in the sector. Petrotrin formed in 1993 from the merger of two former state companies, Trintoc and Trintopec, is an integrated company engaged in the exploration and production of oil and gas, the refining of crude oil, and the marketing of refined products internationally.

The company finds itself in a cash strapped situation which impairs its ability to expand upstream. This is primarily as a result of two factors: an unfavourable tax regime and an uneconomic refinery. Although it is a vertically integrated enterprise, Petrotrin’s upstream and refining operations are taxes, paradoxically and unfairly, as two distinct entities. Undoubtedly, this is one of the main contributing factors to the organisation’s disappointing financial performance in spite of its substantial assets. It is hoped and expected that with the imminent tax revision to take effect on New Year’s day, this tax anomaly would indeed be addressed.
Apart from its tax burden, the company is also saddled with an aging and increasingly uncompetitive refinery. It was recently announced that in an effort to improve the refinery’s performance the company has undertaken another refinery upgrade for about $ 18 mm. Readers will recall that the company incurred a major $ 355 mm debt in 1995 towards a major refinery upgrade.

Notwithstanding these commitments, Petrotrin has benefited from strategic investments in upstream joint ventures, most of which predates the merger. These include its 80 % stake in Trintomar, a 4 % interest in the SECC block operated by EOG Resources, a 19.5 % share in the North Coast Marine Area (NCMA)-which provides gas to Atlantic LNG Trains 2 and 3-and a 35 % share in the onshore Central Block with Vermilion (now BG) which currently produces some 25 mm cfpd. This gas is sold directly to the refinery displacing supplies previously purchased from NGC.
It is obvious, therefore, that Petrotrin has no uncommitted gas reserves to contribute to the country’s demands. As an upstream producer it would do well to further invest in joint venture interests but given its tight capital constraints, huge debt burden and the yoke of the refinery, Petrotrin can do very little to substantially increase gas reserves under national control.

Should the onus be on NGC, therefore, to take up the mantle of acquiring national reserves? From its creation in 1975 NGC was entrusted with the key merchant role of sole purchaser, transporter and seller of natural gas in the country. Its mandate was expanded in 1992 to be the prime mover in the future development of the gas sector through the promotion of investment in the industry. The company has been easily the most profitable of the state enterprises and perhaps the most profitable national enterprise.
Its pricing strategy has allowed it to share windfall gains from a period of high petrochemical prices and to stay alive in periods of market depression. NGC has had strategic investments in infrastructure and in downstream plants, namely Phoenix Park and LNG. This has been an important aspect during the 1990s as it compensated for the state’s reluctance to invest in the industry’s growth.

Today, the NGC continues to invest heavily in pipeline expansions and port and harbour facilities to lay the foundation for further downstream development. Currently, an onshore 56 inch $ 200 mm pipeline is being constructed together with a 36 inch offshore line that is designed to augment overall transmission capacity to over two billon cfpd of gas. The company always has maintained a healthy balance sheet and has contributed significant dividends and taxes to the government’s coffers.
Strangely though, given its strong asset base, NGC has inexplicably flinched from upstream investments. Its only upstream interests are its 20 % share in Trintomar and an embarrassing 1 % share in the increasingly prolific SECC block. NGC as the only national entity with investments in LNG Trains one and four must seem to have settled for marginal returns.

With no gas reserves of its own, the company is forced to purchase gas volumes on suppliers’ terms in order to utilize its capacity rights in Train 4 liquefaction facility. It is indeed unfortunate that despite its substantial assets and decades of profitability NGC remains resource poor.
It is indeed incomprehensible why NGC has not invested in promising upstream joint ventures where the bulk of the profits along the natural gasvalue chain lie, and where technology has positively influenced the probability of success. It may well be that this was a conscious decision to restrict the company’s business focus to the downstream.
Such a decision would be inconsistent with the lessons of history which clearly shows that the strongest companies in the gas business are those with access to reserves. Has government mandated its most lucrative state enterprise to be contented with marginal returns from the liquefaction plant and pipeline transmission thus leaving the beef for the majors to feast on?

The above summarises the plight of our national companies at this critical juncture in the industry’s development when LNG trains are running away with the bulk of the country’s relatively insignificant reserves, and government seems content to harvest the royalties and taxes produced in the process.
Unless our national enterprises are allowed to invest in and win a meaningful share of the upstream pie, the government’s vision for a developed energy sector that will be the driver of sustainable economic growth may remain only a fleeting illusion.

Source: Trinidad Express
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