Cur­tis Williams

Re­port­ing on the sign­ing of the Drag­on Gas deal be­tween Venezuela and T&T, Amer­i­can out­fit, Bloomberg News de­scribed it as a life­line be­ing thrown to T&T as it strug­gles with nat­ur­al gas cur­tail­ment.

While this may be a bit of an ex­ag­ger­a­tion, it re­flects what the in­ter­na­tion­al com­mu­ni­ty sees as this coun­try’s chal­lenge to meet its gas com­mit­ments.

As we dis­cussed last week, the rea­sons for the gas short­ages are myr­i­ad and both the PNM and UNC gov­ern­ments have to take the blame. So do the up­stream pro­duc­ers who, de­spite hav­ing con­tracts were un­able to ful­fil them—and in the case of bpTT— while it has re­turned to con­tract­ed lev­els it is no longer pre­pared to have ex­cess gas be­hind pipe to sup­ply the Na­tion­al Gas Com­pa­ny on a needs ba­sis.

This short­age has cost the gov­ern­ment hun­dreds of mil­lions of dol­lars and it has led to the NGC be­ing tak­en to court by sev­er­al down­stream com­pa­nies for a breach of con­tract due to its fail­ure to de­liv­er suf­fi­cient gas to their plants.

The ques­tion to ask is: why was the NGC be­ing sued when it is not a gas pro­duc­er? The an­swer: this is due to what we call the NGC mod­el.

In this mod­el, with few ex­cep­tions, the NGC buys all the gas from the up­stream pro­duc­ers—it owns the pipeline in­fra­struc­ture— the gas is then piped to cus­tomers and sold to the petro­chem­i­cal plants at a prof­it.

There are three ex­cep­tions to this rule. In the case of At­lantic LNG, the up­stream pro­duc­ers like bpTT and Shell sell di­rect­ly to the Point Fortin plant and bpTT due to its in­ter­est in At­las methanol sells di­rect­ly to the plant as did EOG re­source to CNC am­mo­nia plant.

For a long time there has been the ar­gu­ment that the NGC mod­el was not work­ing be­cause, ac­cord­ing to com­pa­nies like bpTT, the risk re­ward was out of sync, with the state-owned en­ter­prise al­most guar­an­teed prof­its with­out tak­ing the risk of look­ing for and pro­duc­ing nat­ur­al gas.

The NGC has ar­gued dif­fer­ent­ly, say­ing it takes risks by part­ner­ing with the petro­chem­i­cal pro­duc­ers and prof­it­ing when prices are high and mak­ing lit­tle when com­mod­i­ty prices are low.

Gre­go­ry McGuire, who worked at the NGC and is a sup­port­er of the com­pa­ny re­main­ing sole ag­gre­ga­tor, ar­gues this of­fers the down­stream tremen­dous flex­i­bil­i­ty in terms of its prod­uct-re­lat­ed pric­ing mech­a­nism.

He said, “By this mech­a­nism, which is not com­mon place in the nat­ur­al gas busi­ness, NGC shares some of the mar­ket risks with the petro­chem­i­cal pro­duc­ers and re­duces their most sig­nif­i­cant op­er­at­ing costs at a time when rev­enues are rel­a­tive­ly low­er. Con­trary to the view that NGC us­es its mo­nop­oly po­si­tion for price goug­ing and prof­i­teer­ing, it is the big risk tak­en on prod­uct-re­lat­ed pric­ing that has in the past gen­er­at­ed sig­nif­i­cant sur­plus­es in pe­ri­od of high prices. This has al­lowed the en­tire in­dus­try to grow and pros­per.”

He­le­na In­nis, an en­er­gy con­sul­tant, said the NGC mod­el is best for T&T be­cause of the ver­ti­cal in­te­gra­tion of the dom­i­nant up­stream sup­pli­ers.

In­nis said the gov­ern­ment al­lows the up­stream pro­duc­ers to sell di­rect­ly to the down­stream petro­chem­i­cal com­pa­nies that could like­ly re­sult in there be­ing no down­stream do­mes­tic mar­ket.

“The prof­it mo­tive will win,” she added.

In an ar­ti­cle in the T&T Guardian, for­mer Fi­nance Min­is­ter Mar­i­ano Browne ar­gued that the NGC was do­ing a dis­ser­vice to the coun­try.

He said, “The mar­ket has now be­come more com­pet­i­tive con­tem­po­ra­ne­ous­ly with high­er prices de­mand­ed by the up­stream­ers. And sup­ply is still small­er than the de­mand. The bal­ance of pow­er has shift­ed to the up­stream­ers who con­trol over 90 per cent of the pro­duc­tion and there­fore a stran­gle hold on ca­pac­i­ty and util­i­sa­tion. And the up­stream­ers pri­or­i­ty is liq­ue­fied nat­ur­al gas, not petro­chem­i­cals.”

Browne added, “The pri­ma­ry pur­pose of a firm in a com­pet­i­tive in­dus­try is to meet the needs of its cus­tomers. There is no busi­ness if there are no cus­tomers. To do so, a busi­ness must have a unique val­ue propo­si­tion and com­pete ei­ther on cost or prod­uct dif­fer­en­ti­a­tion. When looked at in this light, NGC is in a weak po­si­tion and its crude tac­tics jeop­ar­dise the in­dus­try and the coun­try’s eco­nom­ic fu­ture.

It is clear that the NGC has served the coun­try’s in­ter­est well, but as McGuire notes it can­not re­main sta­t­ic. There are al­so ques­tions about trans­paren­cy.

Why should the NGC ne­go­ti­ate in se­cret with petro­chem­i­cal com­pa­nies when re­new­ing a con­tract?

Would it not make sense to en­sure that every­one knows there is a Point Lisas price for gas and that is the price all busi­ness­es com­ing to the NGC for gas must be pre­pared to pay and run their mod­els on?

To do oth­er­wise is to open the com­pa­ny to al­le­ga­tions of favouritism.

The oth­er re­al­i­ty is while it makes sense for ver­ti­cal in­te­gra­tion, the chal­lenge of be­ing a mid­dle­man in a pe­ri­od of gas short­age and then of­fer­ing gas to a new plant in which you have a stake reeks of con­flict of in­ter­est.

When this was put to the NGC, this was the com­pa­ny’s re­sponse, “NGC con­tin­ues to work as­sid­u­ous­ly with all stake­hold­ers to bring re­lief to the cur­rent gas sit­u­a­tion in the best in­ter­est of the in­dus­try.”

Asked if the is­sue was raised in le­gal pro­ceed­ings against it, the NGC an­swered, “All le­gal pro­ceed­ings are bound by strict con­fi­den­tial­i­ty agree­ments.”

n Next week we end by look­ing at the is­sue of con­tract trans­paren­cy and the way for­ward.