For T&T's energy sector, 2010 has been a year characterised by limited activity in both the upstream and downstream, cautious optimism on energy commodity price rebounds and an adjustment period associated with the mid-year change in the Government and the subsequent altering of state energy enterprise board membership.
The continued slow global economic growth and cautious approach to new investment, has placed a squeeze on the highly capital intensive projects in the energy sector. This global cutback on investment has been felt in the T&T energy sector and there has been a significant decline in investment and, consequently, on economic activity. This decline has taken place despite a generally positive movement in energy commodity prices.
Price Movements: Fourth Quarter Upswing
This year, the Energy Chamber teamed up with the Central Bank to produce the Energy Commodity Price Index (ECPI). The ECPI is an average of international commodity prices of the key energy exports of T&T weighted by each commodity's relative share of the value of energy exports. The commodities include LNG, crude oil, methanol, ammonia, urea and other petroleum products. From January 2009 to November 2010 there has been an upward trend of energy-related commodity prices when compared to the plunge in the last quarter of 2008.
The ECPI update for November 2010 also showed that aggregate prices reached their highest point in the last two years (see chart 1). These price swings have been buoyed by higher oil and petrochemical prices. The increase in the ECPI has been held back, however, by natural gas price trends. For 2010, Henry Hub gas prices have not exceeded the $5 per million British thermal unit (mmbtu) threshold and for the year the average price has been $4.40 per mmbtu. The supply side glut of gas on the market is also impacting T&T, particularly the increase of domestic gas in the United States.
According to the US EIA 2011 Energy Outlook, "the technically recoverable unproved shale gas resource soared to 827 trillion cubic feet (as of January 1, 2009) which is 474 trillion cubic feet larger than last year's estimates." With US domestic gas reserves doubling, it means T&T will have to make serious decisions on new markets as well as downstream expansion to convince upstream operators there is a secure, domestic market for their gas.
In addition to the better price environment, the capacity volume for our exports of energy related products has increase due to the coming on stream of the AUM I project. This increased capacity had a direct benefit to increases in the country's GDP in mid 2010, where there was significant growth in the petrochemical sub-sector. Despite the increases in volume and value of energy sector exports, 2010 still saw a lack of confidence in the energy sector and limited new investment.
Bid rounds:
In 2010, the Government prioritised the shallow/average water depth bid round for attracting investment into the upstream sector. The Energy Chamber played a pivotal role in this bid round by bringing together the major players in the industry, finding common positions and making constructive recommendations for reforms to the fiscal regime. These recommendations heavily influenced the fiscal regime adopted for the model Production Sharing Contracts for the bid round. Despite the significant and positive changes to the fiscal terms, the bid round achieved a limited response, especially from the larger established multinational oil and gas companies.
Only four of the seven blocks offered will be awarded production sharing contracts. Three of these blocks have been awarded to a company with limited experience in developing large offshore gas projects. Given this outcome, there must be continued concerns about the ability of T&T to attract the large sustained inflows of capital into the upstream sector that are required to extend our gas reserves and the life of our energy industry. The Ryder Scott natural gas audit report for the end of 2009 also confirms the continuing decline of T&T's natural gas reserves with proven reserves declining from 15.3 trillion cubic feet (tcf) in 2008 to 14.4 tcf in 2009.
Energy Services Sector
The lack of capital investments into the T&T energy sector has had a direct negative impact on the energy services sector. The sector has experienced a second year if very significant contraction, with many of the service companies fighting for their very survival. The slow-down has been most pronounced in the drilling and related sectors, where we have seen very limited activity over the past year, including some significant periods of time in which no offshore drilling has been taking place at all. This contrasts significantly with the situation in 2007 and early 2008, when there were as many as eight rigs operating offshore.
In the downstream plant construction related sector, the final stages of the construction of the AUM I project, the La Brea power plant and continued work on the Pointe-a-Pierre refinery meant that there was some level of activity taking place, in addition to a number of major turn-around and maintenance projects in existing plants. With the winding-up of the power plant construction project and no sign of any further major downstream projects, a slow-down in the plant construction sub-sector looks imminent in 2011. This should be balanced, however, by an upturn in the upstream sector with some new drilling activity scheduled to take place.
The issue of local content, which was more of less off the policy agenda between 2006 and May 2010, is once again under active consideration. At an Energy Chamber luncheon in June 2010, the Minister of Energy and Energy Affairs announced that the Government would place a renewed emphasis on local content. In response to the minister's request a new draft policy framework has been developed, with a lot of input from the Energy Chamber, which we anticipate will be subject to public consultation in early 2011. Diversification of exports
In response to the slow-down in activity and in an attempt to diversify our exports, the Energy Chamber's strategy has included a major push to increase the export of energy services from T&T. In 2010, the Energy Chamber hosted a very successful trade mission to East Africa, following-up on previous visits to West Africa, Cuba, Suriname and Guyana. There are significant export potentials of our service companies around the region and in both West and East Africa and we already have a number of examples of successful energy service export companies.
Alternative Energy and Energy Efficiency
The issue of alternative energy and energy efficiency came more securely on the policy agenda in 2010. In the 2010 - 11 budget statement, the Government introduced tax credits in an attempt to foster the use of alternative energy and to monitor current energy use. These include removing VAT and import duties for selected solar, wind and CNG technologies and tax credits for energy audits. It is yet to be seen whether these incentives will result in any significant new investment, but this is likely to be a key policy discussion through 2011.
Conclusion
The energy industry has been through a very tough couple of years, especially in the services sector. There is a lack of confidence in the sector and a hold on major new investments. The country's main aim should be boosting investment and rebuilding confidence. A favourable investment climate prompts businesses to improve their efficiency and, by extension, their productivity, with the end goal of increasing revenues and capital investment. This is also tied into investor confidence and encouraging inflows of investment capital.
As a country, we have to put strategies to attract investment as the focal point of our planning. These strategies are linked to social, infrastructural and educational investments as well and the Chamber has long-fostered dialogue on investment. In fact, the theme of next year's energy conference is "Energy and Investment." At the conference, the chamber plans to ventilate some of the relevant issues affecting the local and regional energy sector and provide a platform for honest dialogue which will mould some of our future energy policies and help businesses expand and incorporate international best practice into their operations.
For more information on the T&T Energy Conference please visit www.ttenergyconference.org and for more information on the article contact
Sherwin Long at sherwin@energy.tt ,
Priya Marajh at priya@energy.tt or
Stein Trotman at stein@energy.tt