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Is our (natural) gas pain terminal?
Information from the 2012 Review of the Economy reveals that oil revenues were projected to generate some $18.6 billion for the 2012 fiscal year, which ran from October 1, 2011 to September 30, 2012. It’s estimated that oil revenues—which consist of taxes on oil companies; 15 per cent withholding tax; royalties on oil and natural gas; shares of profits from oil companies under production sharing contracts, oil imports; signature bonuses for competitive bidding and unemployment levy (Oil)—contributed 39 per cent of total revenues in the 2012 fiscal period. This is down sharply from the 2008 fiscal year, which was the peak year for energy revenues, when energy taxes generated $29.9 billion, which was 52.6 per cent of the $56.8 billion that the Government collected in the October 2007 to September 2008 period.
If my arithmetic is correct, it means that T&T’s energy revenues have declined by 60 per cent in five years. And, it must be said, that the prospect of T&T’s energy revenues staging a dramatic recovery to the halcyon days of 2008 are slim. That year, in July, was when the price of oil peaked at US$147 a barrel. It was also when the T&T economy was benefiting from historic high LNG prices in what was then its main market, which would have had a significant impact on T&T’s energy revenues. According to the 2008 Review of the Economy: “The Henry Hub price of natural gas averaged US$9.50 per thousand cubic feet during the first ten months of the fiscal 2008, compared to US$7.25 per thousand cubic feet in the first ten months of fiscal 2007. “In the current period, the average monthly price increased steadily from US$6.94 per thousand cubic feet in October 2007 to a high of US$13.06 per thousand cubic feet in June 2008, thereafter subsiding to US$11.45 per thousand cubic feet in July 2008.” That document also pointed out that T&T was the number one exporter of LNG to the United States and was recently ranked seventh in the world in terms of total LNG exports. Back in 2008, the Ministry of Finance technicians wrote: “LNG accounted for 7.8 per cent of all natural gas imported into the United States during the October 2007 to May 2008 period, as most natural gas is traditionally imported into the United States via pipeline from Canada. In the same eight month period, Trinidad and Tobago exported 191,924 million cubic feet of LNG to the United States, accounting for 87.3 per cent of all LNG imports into that country.”
Today, not only has the price of oil declined, but the country’s production of the commodity has also slumped to a multi-year low at just above 80,000 barrels of oil a day. And not only has the price of T&T’s LNG declined—from an average price of US$9.50 in 2008 to US$3.497 per 1,000 cubic feet on Tuesday, in what has been described as something of a mini-rally in the last few weeks—but T&T’s natural gas sector is expected to continue suffering from gas curtailments until 2014, when bpTT, the country’s largest producer, is expected to end its maintenance programme. Energy Minister, Kevin Ramnarine, helpfully told the Business Guardian by e-mail last week that the curtailments in natural gas supply started in late 2010 or thereabouts and intensified in early 2011 and “this situation continues to the present day and is due to maintenance works being conducted by upstream producers whose facilities are, in most cases, over 10 years old.” It seems obvious, even to a layman like myself, that there has been a dramatic and perhaps permanent transformation of the global natural gas market in the last two years.
The IMF document Trinidad and Tobago: Selected Issues, which was published along with the Article IV consultation report, states: “Recent global gas market developments have created higher short-term price uncertainty for Trinidad and Tobago’s LNG exports. “Shale gas production in the United States together with the economic slowdown have led to a collapse of the Henry Hub price to below US$3.00 per million British thermal units (MMBtu) in January 2012, down from US$8.64 per MMBtu on average in 2005....” That document continued a little later by stating: “Notwithstanding the successful diversion of (T&T’s) LNG exports to other regions, there are increased risks in the near term. On the supply side, there has been an expansion of about 40 per cent in global liquefaction capacity in the last two years, which was mainly accounted for by Qatar. Balancing this on the demand side, there was a 7.4 per cent recovery in global gas consumption in 2010 and a further increase in 2011, and LNG markets are expected to further tighten over the coming two– three years due to a strong increase in LNG demand, notably in Asia. “At the same time, it is also important to take account of trends in oil prices, because gas prices are indexed to crude oil prices in some regional markets. “Over the longer term, diffusion of shale gas technology and substantial higher production could adversely affect LNG prices worldwide. According to an initial assessment of world shale gas reserves by the US Energy Information Administration (EIA), about 6,600 trillion cubic feet (tcf) are estimated to be “technically recoverable”.
The largest identified resources were in China (1,275 tcf), followed by the United States (862 tcf), Argentina (774 tcf), Mexico (681 tcf), and South Africa (485 tcf).” In other words, the world is awash in natural gas, which is pushing down the price of the commodity in the US (but not in Europe or in Korea and Japan) at a time when there are serious questions about the competitiveness of the price of T&T’s LNG. At the same time, there are reports that the US could be an exporter of the commodity within four years which—as was hinted in last week’s commentary in this space, headlined: “Are we losing our natural gas edge?”—could mean the transplanting of the country’s methanol and ammonia industry at Point Lisas to somewhere in Louisiana or Texas. How is the Ministry of Energy proposing to deal with what could be a bleak future for T&T’s energy industry? Has he drawn together a team of energy experts who are, as we speak, working night and day to complete a plan and a strategy to ensure that T&T’s upstream as well as downstream energy sectors remain competitive? Has the Ministry of Energy got together with the Ministry of Foreign Affairs to investigate the possibility of working on bi-lateral agreements between T&T and rich energy importers such as South Korea and Japan. It is all well and good for the minister to point out that “the United States is not the only market for methanol in the world,” and to note that China is driving world demand for methanol.
That same IMF report indicated that gas producers were already looking at long-term contracts to lock in the favourable prices now because of concerns about a future glut. Has stateowned NGC been instructed to do the same? But how are T&T’s methanol producers—especially Methanol Holdings (Trinidad) Ltd, which is under the control of the State—seeking to tap the Chinese market for methanol and the Japanese market for LNG? Has the minister engaged the delightful Ambassador of the People’s Republic of China to T&T in a dialogue about the possibility of T&T exporting methanol to China? Has the minister explored the possibility of buying out the German minority co-owners of MHTL (or acquiring their 43 per cent stake by other means) and using that company as leverage in negotiations with the Chinese, the Japanese or the Koreans? Just what is the Government’s plan for MHTL, regardless of the ruling that is expected to be handed down by the arbitrators in London soon?