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Towards a new vision

Thursday, June 21, 2018

I have made leadership and management two key themes of my articles since January 2018 as a scan of the economic environment reveals more risks of things going wrong for T&T than going right. Even as the Finance Minister claims credit for a turnaround based on changes in the oil price and an improvement in natural gas production, there are several negative developments which cloud our horizon. Venezuela’s acceleration towards failure and the flaws in the prevailing NGC model are immediate threats. In this context it is vital to address T&T’s medium and long-term future robustly.

In April 2018 ConocoPhillips won a court ruling that says it is entitled to more than USD $2 billion from Venezuela’s state oil company, Petróleos de Venezuela (PDVSA), over the country’s expropriation of several oil projects more than a decade ago. The company has a separate, but parallel, legal action against Venezuela pending before a tribunal of the World Bank’s International Centre for Settlement of Investment Disputes. There are 20 other international companies pursuing similar action against PDVSA, including Exxon and Repsol.

In May Conoco seized the oil storage tanks held on Bonaire island by Venezuela’s state oil company, PDVSA. The Bonaire seizure followed a similar ruling which allowed Conoco to seize USD $636 million worth of assets on the nearby island of Curacao. On June 4 Venezuela’s PDVSA notified eight international customers that it will not meet its full crude supply commitments. According to S&P Global Plats, PDVSA is contractually obligated to supply 1.495 million b/d to those customers in June but only has 694,000 b/d available for export. On June 14 Venezuela also announced plans to suspend petroleum deliveries to eight Caribbean countries under its Petrocaribe agreement because of “falling crude production and low refinery utilization.”
This is further bad news for Venezuela as depletion of the foreign exchange reserves will accelerate. What does this mean in the context of the proposed plans to sign another agreement with Venezuela for the supply of natural gas? To do so means investing in Venezuela’s territorial waters. What will make T&T different from the other 21 companies that have outstanding actions against Venezuela and PDVSA? And what of the increasing vulnerability and porosity of our border as social conditions worsen in Venezuela? The loss of a police vehicle in the surf on a remote Cedros beach raises far more questions than answers.

The full meaning of “America First” was illustrated at the recent Group 7 meeting in Canada. President Trump is prepared to ignore the Western Alliance and undermine arrangements and institutions which have characterized America’s leadership of the post-World II world. He has only threatened Venezuela so far, but as things deteriorate that will change. If he was unconcerned about the remonstrations of European allies in respect of the re-imposition of sanctions against Iran, can T&T fare any better when he turns his attention to Venezuela? To think otherwise would be incredibly unrealistic.

Diversification an ‘annoying’ word

It is important to note that over 70 per cent of T&T’s foreign exchange earnings come from the energy sector (mainly natural gas). NGC’s impasse with CNC raised substantial issues about the sustainability of the NGC model. NGC is dependent on the upstreamers, BP, Shell, BHP, EOG, companies that own the concessions and supply the gas to NGC. Their preference is to supply LNG directly as this is more profitable to them. As highlighted in the “Spotlight on Energy”, more revenue is earned for the country from the petrochemical sector (producers of methanol, ammonia, urea, melamine) than from LNG. As currently configured, approximately 60 per cent of gas production goes to LNG. Having made that point, GORTT has gone silent.

Curtis Williams writing in the Sunday Guardian of June 17 quotes from an Energy Ministry report which notes that recent gas contracts are at significantly higher prices. This poses a challenge to both NGC and the petrochemical companies as higher prices significantly erode their margin and could affect their continued viability. Even if NGC were to survive, what good would that do if the petrochemical sector collapses? This is a significant threat given the availability of cheaper shale gas in the US and will have a considerable negative impact on the competitiveness of T&T based firms.

The report notes that upstream companies have made pellucid that NGC and the down-streamers have benefited disproportionately relative to the risks borne by them in exploration and production. Further, that they would not be prepared to continue on this basis. This risk reward conflict is unlikely to be resolved easily and requires hard-nosed negotiation in the short run, and ultimately, a change in NGC’s strategic positioning and current capabilities. As long as NGC has no significant gas exploration or production capacity its survival is complicated. In addition, at current rates of production, all plants (LNG and petrochemical) will not be operating at maximum capacity until 2019/20. What happens after that?

These are challenging times. The country is at an inflection point in many ways, but it is not out of the woods. It requires bold and innovative strategic decisions to address these issues. Albert Einstein famously said, “We cannot solve a problem by using the same kind of thinking we used when we created them.” That’s why leadership and management, accountability and productivity are critical. Diversification is not an “annoying” word; it is worrisome.

Mariano Browne


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