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Diversification vs global threats

Thursday, June 23, 2011

Vernon Paltoo, team leader, office of the president of the National Energy Corporation (NEC), at the Caribbean Investment Forum held at the Hilton Trinidad hotel, told us that T&T has to move beyond being a primary producer of natural gas and go unto the manufacture of natural gas downstream products. He premises this observation on the fact that with the availability of shale gas in the United States and other places our gas is no longer important as it used to be. So we have to look at developing our energy industry and maximising revenues and how we do this is by diversifying the energy sector.

The way Paltoo suggests we do this is through the Ministry of Energy. We are awaiting two proposals (normally foreign investment), one for a methanol to petrochemicals project, and the other for a methanol to olefins project. These, Paltoo sees as providing the building blocks to develop other energy-based manufacturing industries, like plastics and pharmaceuticals. He then gave us a list of products that our local manufacturers could make: pipes, appliance parts, bottle crates, film sheeting, carpeting, brushes, ropes, cups, toys, etc. He also sees us making from melamine, adhesives, laminates, dinnerware, etc, with little regard to, for example, economies of scale for competitive production.

He was emphatic that T&T must move beyond elementary production of commodities to more advanced and sophisticated manufacturing, (though he did not address our sources of competitive advantage), especially since lower cost locations are being established for the production of ammonia and methanol. Expansion of these plants globally could affect adversely our position as key player by saturating the market; gas prices are now low because of the global glut and the development of shale gas would adversely affect T&T’s LNG market in the US. Most of these ideas to go downstream into higher added value products have been around for decades.

The attempt by Centrin to go downstream then of Ispat was and continues to be a failure. Hence, the structure of the natural gas industry, dominated by foreign investment and the reluctance of the local private sector to even import feedstock, (eg, melamine) as others do and as recommended by bpTT long ago, suggest that this kind of diversification of the energy sector will continue to be a forlorn hope, particularly now that our reserves are low. Any new exploration prospects could provided expensive gas in a global environment of cheap gas; and the major forward thrust of the industry depends on foreign investment, for which there is severe competition globally, especially as the shale gas fracking technology develops.

But, a fundamental error that Paltoo makes, is to ring fence the energy sector in the attempt to diversify that sector. The global economy is now fundamentally different from that of 30 years ago, given the concerns of global warming, climate change, shortages of food and most other commodities. And the fact that the easiest of the commodities to get at is already used up and existing technologies can no longer keep prices down; the threat that the world is at peak oil and the immaturity of the renewable’s market imply that the global economy may keep teetering on recession in this new paradigm of very low global growth. See, for example, the state of the economies of the US and the European Union.

Hence, diversification of the energy sector has to be seen in the context of the global threats and opportunities, secondly, as but one sector in the integrated diversification of the whole of the T&T economy. Finally, the risks presented by our depleting gas resources and the high cost of any new local gas to the energy security of the country. For example, a major concern of this country is the production of food locally or in the region given its high and escalating import costs.

One of the global concerns in the agriculture sector is the increasing need for scarce fertiliser to maintain the productivity of the land that is itself being lost to urbanisation. To date, we are still talking about a foreign-owned plant importing fertiliser and its subsidy for the local market. Also, we are supposedly looking at the use of wind and solar energy. These two sources of energy are not deterministic (not precisely predictable) and, in such a small country as ours, their diversity is small. Hence, the production of electricity for local use has to depend on the use and husbanding of our depleting gas resources. Further, we will always have to import food for humans and animals. Hence, research and development (R&D) into new plant varieties and into petroleum-based proteins are crucial.

All Paltoo had to say about this is that the benefits of his proposed manufacturing in the gas downstream sector could broaden R&D potential. Economic development today depends on R&D.
This letter in no way seeks to provide any detailed answers except to recommend that the diversification of the T&T’s economy is not a series of disconnected ministerial activities: The Ministry of Trade talking about T&T being open for business and seeking foreign investment with no blueprint for economic development besides the old PNM tune of printing and packaging, etc; the Ministry of Agriculture’s plan to grow more food, to get Cepep into traditional agriculture; the Ministry of Housing reducing the availability of agricultural land and the Ministry of Education producing more and more graduates for export (there is nothing for them to do in T&T); the UWI is building a law school in Debe instead of specialist R&D institutions to support economic development.

The telecommunication industry is being allowed to go their merry way—making as much money as they could selling mobile services while they are totally incapable of providing the big broadband network that is crucial for our economic development, while we contemplate an almost useless $7 billion highway to Pt Fortin. The PNM built the energy sector, but with its demise, there is no one to whom the baton of economic development can be passed.

Victor Darceuil
Via e-mail


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