For the first time in ten months, the value of the Energy Commodity Price Index (ECPI) fell, declining by 2 per cent between April 2011 and May 2011. The ECPI's value slipped from 153.49 in April to 151.45 in May. This decline follows a period where the index's value grew by 46.8 per cent from August 2010 to April 2011. Weakening oil, diesel, gasoline, jet fuel and methanol prices triggered the drop in the value of the ECPI. Amidst OPEC infighting over boosting daily oil production by 1.5 million barrels and concerns over the sustainability of the United States economic recovery, the price of oil fell by US$8 per barrel during May.
The price of oil impacts on the price of other petro-products, such as gasoline, diesel and jet fuel, and its influence on the ECPI is clear. The ECPI is a summary measure of the price movement of T&T's top ten energy-based commodity exports, weighted by each commodity's relative share of its value. The commodities and their weights are: LNG (40.0 per cent); oil (16.6 per cent); ammonia (11.8 per cent); methanol (9.4 per cent); diesel (7.0 per cent); motor gasoline (4.3 per cent); natural gasoline (3.5 per cent); jet fuel (2.7 per cent); propane (2.4 per cent); and urea (2.3 per cent).
These recent developments highlight the cyclical nature of energy price fluctuations. Events such as seasonal changes, natural disasters or geo-political tensions can all affect the relative value of T&T's major energy commodity exports. And it is important to note that the country has no control over these phenomena. Analysing fluctuations in the prices of T&T's major energy commodity exports is integral to understanding not only how the Government derives the bulk of its revenue, but also sheds light on how companies operating in the sector plan their future business strategies.
Any increases or declines in the price of these commodities must be placed under a national microscope. Energy commodity price movements impact everything from the Government social safety net spending to how businesses plan their expansion priorities or short- medium- and long-term operating strategies.
LNG and crude oil: Prices not linked
Comparing LNG and crude oil prices, over the first six months of 2011, one sees further proof that LNG prices are now delinked from crude oil prices (See Table 1). For 2011, crude oil prices average US$99 while for the corresponding period in 2010 prices averaged US$78.Interestingly enough, for 2011, Henry Hub prices average US$4.27 per million British thermal units while for the corresponding period in 2010 prices averaged US$4.71. While the relatively weak price of LNG for the period is due to an oversupply of LNG on the market, there are global developments which can have a ripple effect on where LNG prices head in the near and distant future. According to Ernst and Young's fourth annual US E&P Benchmark Study, a shale gas drilling boom spurred US oil and gas reserve growth to a five-year high in 2010 and also doubled upstream spending (mainly due to shale property acquisitions).
The study stated that "natural gas reserves grew 12 per cent from 156.2 trillion cubic feet (tcf) in 2009 to 174.3 tcf in 2010, the strongest combined annual growth posted from 2006 to 2010." The US natural gas production replacement rate from all sources was 252 per cent last year, compared with 156 per cent in 2009, the study also noted.
Higher crude oil prices: A blessing and a curse?
Higher crude oil prices have both positives and negatives for the economy of T&T. One negative is that soaring oil prices translate into a greater fuel subsidy. The Ministry of Energy and Energy Affairs estimates that when the oil price is US$75.00 the fuel subsidy is about $2 billion and when it is US$100, the fuel subsidy is about $3 billion. Recently, it was revealed by the Government's Natural Gas Vehicle Task Force that once oil prices average US$97 per barrel for the remainder of 2011, then the fuel subsidy this year can rise to as high as $4.3 billion.
Higher oil prices also impact the country's refinery.
Last year T&T imported 24,944,324 barrels of crude oil and exported 16,584,513 barrels of crude oil. Crude oil is imported for the refinery and so higher crude oil prices mean greater expenditure of foreign reserves. On the positive side, petroleum products tend to closely track crude oil prices, so higher crude oil prices also mean higher export earnings from diesel, gasoline, jet fuel etc.
Price increases to spur global activity?
The general upward trend in energy commodity prices, particularly in crude oil, is driving exploration. According to Barclays Capital E&P Capital Spending Update, "worldwide exploration and production (E&P) spending in 2011 is expected to rise to 16 per cent to US$529 billion, compared with US$458 billion in 2010." In Latin America, Brazil and Colombia, two of T&T's competitors for energy investments, are driving the E&P spending, with spending in the region expected to be up 26 per cent in 2011 to US$65.5 billion from US$52.1 billion in 2010.
As always, price trends also impact on inputs and costs for services. It is important to note, however, that the rig rates and other capital costs for development have not yet increased in line with increased oil prices. As Chart 2 indicates, there has been a significant lag in the response of rig rates, with the previous peak in rates happening one year after the last peak in oil prices in mid 2008. Given the long lead time between contracting and delivering offshore rigs, this lag is not surprising. In the country's quest to stimulate activity, we must keep track of input costs and other expenditure for exploration and production. How the rig rate corresponds to the price of oil will be significant for T&T in years to come when analysing the two recent bid rounds and at what pace these blocks are to be developed.
Conclusion
With the national budget debate just a few months away, the country cannot afford to disregard the fluctuations in these commodity prices and the weight of their impact on national development. With energy commodities accounting for approximately 80 per cent of all T&T exports, 43 per cent of gross domestic product and the bulk of our foreign exchange receipts, any upswing in these prices will send positive signals to the national economy, and conversely, any downswing will have a negative impact on the national economy.
The ECPI can give an early summary indication of development in international prices of energy-based commodities, signaling along with other information, the evolution of economic growth, the fiscal accounts and the balance of payments. As always, the Energy Chamber remains committed to open, honest dialogue on the issues which impact national and business development.
ENERGY CHAMBER
Contact Sherwin Long at: sherwin@energy.tt,
or Stein Trotman at: stein@energy.tt