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Thursday, March 22, 2018

Last week Poten and Partners confirmed that the biggest contributors to the T&T economy from the energy sector were, in order of importance, ammonia, methanol and liquefied natural gas (LNG).

Notwithstanding this ranking, more than 50 per cent of the gas produced goes to the production of LNG. Quite apart from shipment diversion or transfer pricing issues this means that T&T is locked into a configuration which does not maximise the revenue yield to the country. This issue was never addressed at the “Spotlight on Energy” last week.

There is little room to change existing contracts all of which have some secondary renewal period as did the PLNL and CNC contracts. The PLNL arbitration showed that NGC has limited manoeuvrability.

Therefore, ammonia and methanol output, the biggest contributors to GDP, cannot increase unless there are new gas finds and new plants. But talk of additional new foreign investment in T&T all but dried up after the 2013 budget statement. Since then, the focus has been on investment to reduce the gas shortage.

Gas production increased in 2017 and will improve when De Novo Iguana, Shell Starfish and BP Angelin come into production between 2018 to 2019 taking us back to 4.0 bcfd. This satisfies existing contractual demand only. Prices are not expected to improve significantly over this period given the shale revolution and new gas finds elsewhere in the world

Atlantic LNG operates four plants. Each plant is a separate company with different ownership structures and contract offtake arrangements. The government has a minor participation in trains 1 and 4 (10-11 per cent). Trains 2 and 3 are entirely private and the state’s share is limited to its tax take. The shipment diversions receiving lower reported prices refer to Trains 2 and 3, the contracts for which do not come up for renewal soon. The Train 1 contract comes up for renewal in September 2018 and is the only LNG arrangement that can be renegotiated in the short run.

Given this outlook, the projection for economic growth is modest in the run up to the 2020 election. The government is struggling to deal with the public’s expectations on a budget of $54 billion (which includes financing mechanisms as distinct from tax revenue) down from high of $62 billion under the UNC. The mid-term reviews have not been positive, as expenditure cuts have started to bite. Raising taxes on a resistant population is a guarantee of election defeat. Like Minister Howai, Mr Imbert promises to address the fiscal imbalances after the 2020 election. A Nancy story.

Altering contracts requires the consent of all contractual parties. To take unilateral action would be to expose T&T to significant risks as exemplified by Venezuela experienced when, starting in 2003, it changed the rules of the game by increasing taxes and levies on the foreign operators. The “Spotlight on Energy” therefore was a public relations exercise to galvanize public support for government in renegotiating Train 1. That is a reasonably objective position. At times, however, it appeared that Minister Khan had adopted OWTU’s more aggressive stance, perhaps to gain credibility in addressing Petrotrin’s issues?

The position is a fragile one. Finding and developing new fields of gas to maintain or increase gas output require the participation and investment of the very same multinationals. In a sense the conference was also an admission of failure. There exist several mechanisms at the behest of the Finance Minister to address his revenue shortfalls. The unrelieved tax losses carried by the energy companies can be remedied by the stroke of a pen. There are also mechanisms to deal with transfer pricing within the Petroleum Taxes Act.

In any event, increased revenue from the energy sector makes sense only if the government has a credible turnaround plan and sets clear priorities on its expenditure profile with an emphasis on value for money. If Petrotrin owes the government taxes and royalties that is the government’s fault for not setting clear rules for running the company.

We have yet to open the Couva Hospital due to budget constraints, but there are three more under construction. A contract for the establishment of an oncology center is given to one firm, whilst another firm has a similar contract (which preceded the later) and occupies another site? How are the state enterprises to be managed?

In 2009, the Prime Minister in his infamous “hell in a hand basket” speech, said that corruption was ten times worse under the PNM than under the UNC. The sea bridge is a metaphor for failure, not of management, but of a disastrous cabinet intervention. Exactly where is the corruption complained off by the PM and Minister Young?

These are difficult times, but smooth sailing never made a good captain. To quote Peter Drucker: “Effective leadership is not about making speeches or being liked; it is defined by results not attributes”.

Management is to keep us focused on the task to get those results. But what is the turnaround plan? To squeeze the energy sector? Leadership in setting the direction and management to keep us on target are sorely missing.

Mariano Browne


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