What a week it has been! The country has had the encouraging news of two major natural gas discoveries, in what experts say could mean somewhere between 5 and 7 trillion cubic feet of natural gas, and on the other hand we have had the announcement by Yara Trinidad Ltd (YTL) that it is closing its ammonia plant at Point Lisas.
In an interview with Guardian Media, YTL’s president and plant manager, Richard De La Bastide, said after 16 months of negotiations, the company could not reach agreement with the National Gas Company of T&T (NGC) for a new gas price.
He said: “We think it is highly unlikely we will get at a price that will allow us to operate the plant, therefore it is our intention to close the plant.”
YTL press release read: “This decision comes after several negotiating sessions with The NGC, which failed to reach an agreement that could sustain the operation of the Yara plant.”
The closure of the plant means five major plants that have been shut down since the Rowley administration came to power.
To be clear multinationals look at each (asset/plant), from its ability to deliver free cash flow (FCF) on a sustainable basis. FCF is significantly affected by capital expenditure (Capex) so on an old plant, it could be continuously high. Yara would have done the math at the new gas price and found FCF was not sustainable in the foreseeable future.
The NGC has insisted that it too is facing challenges from the global environment which has seen soft ammonia prices for well over three years. It has also had to deal with significantly higher domestic natural gas prices.
The company in a release said: “Like YTL, NGC has also felt the effects of the volatile and challenging environment currently facing both the local and global energy sector. NGC has used its best efforts to mitigate the effects of these challenges on its valued customers on the Point Lisas Industrial Estate.”
There are those who have also argued that the age of the Yara plant meant it was the least efficient and could not survive in the present environment.
While the efficiency adds to operational expenditure costs (Opex cost) those with knowledge of Yara say it is insufficient to cause a closure.
In addition the Yara plant is the same physical age as the Nutrien O3 plant which just had a new gas contract negotiated with the NGC. While Yara in 2015 did an upgrade, industry sources say it was not as extensive as that of Nutrien which pre-invested significantly in upgrades five years ago when FCF were better due to lower domestic gas prices and higher global commodity prices.
We must however not run the risk of losing sight of the challenge and the fact that the chickens appear to be coming home to roost.
While I disagree with Mariano Browne, who has sought to suggest that the Point Lisas model of attracting investors with low gas prices, generous tax holidays and then earning revenue from exports and higher gas production is dead, it is in danger and unless the government works with all the players to find a sustainable way forward it is doomed.
Former head of the Economic Development Board, Dr Terrence Farrel, earlier this year warned that the country was at a point of inflection and the downstream sector was in jeopardy.
In his study, Farrell said the petrochemical sector is already not returning sufficient value to its shareholders and while shortages are negatively impacting the cash flow and balance sheet, it is the new prices being demanded by the NGC that could be the death knell of the sector.
The study reads, “The downstream petrochemicals industry is at a point of inflection. In a scenario of scarce and expensive gas feedstock, the industry is set for decline and possible demise. Energy policy has not adequately addressed the challenges which the industry now faces.”
With respect to government policy, which the economist was quick to point out, has not really changed with the various governments the country has had, he feels it is not helping the sector.
The report read, “The current explicit and implicit structure of incentives would seem to encourage:
a) Upstream companies who have little or no interest in petrochemicals, to maximise the LNG value chain.
b) The government to maximise rents from natural gas to support government expenditure
c) Petrochemical companies to shift incremental investment in new plant to other locations while running down existing plants to eventual closure.
Farrell suggested that the route to closure could start with the plants at Point Lisas being turned into swing plants and then run down to eventual closure.
The government tried to rubbish the report, refusing to accept its academic rigour and saw it as an attack on the NGC and its very existence.
The country has a problem requiring a complex and thoughtful solution. The problem is simple in that the downstream sector is facing lower prices for its commodities but being asked to pay higher prices for its raw material which is not being provided in sufficient quantities.
I suspect that part of the challenge in finding a solution is the lack of transparency in the system. This colonial notion, that secret negotiations, with the population trusting blindly the politicians and their appointees, because “they have information we don’t” is at the heart of the problem.
This lack of transparency is why the NGC could next year lose money when it starts the CGCL plant due to a sweetheart gas price. The NGC being a shareholder in the very plant.
It is this lack of transparency that allows the NGC to invest in a plant to compete with its customers who have no choice but to continue buying from the monopoly that is the aggregator.
It is the lack of transparency that has the NGC having a separate gas price with each company and often for each plant.
It is the lack of transparency at the NGC that could allow it to change its dividend policy and its coffers raided by the last administration just before an election year.
It is the lack of transparency at the NGC that had it sink nearly a billion dollars in a waste water project that its own documents now say it is no longer pursuing it.
It is the lack of transparency that could lead to more Yara type closures in the future.