Mariano Browne
All man-made products have a finite or expected useful life. The same is true of business models. Technological advancements affect businesses at all levels, strategic, operational, financial and competitive. Its impact, therefore, is disruptive at the level of the individual firm as well as whole industries. The current focus on artificial intelligence and its business application is a case in point.
The difficulty is that businesses may not see how the change will affect them and cannot adapt, or adapt in time. Change occurs at the margins or in particular market segments and is therefore overlooked. The new product may be simpler, cheaper or more convenient, but not necessarily technically superior. But technology improves quickly (Moore’s Law) to meet the needs of the mainstream market, and once it becomes mainstream, it displaces competitors.
A textbook example is the development of the cell phone, which first disrupted the landline business and is now disrupting a wide range of business models. Early cell phones were expensive and unreliable (due to weak network infrastructure), whereas landlines were high-quality and crystal clear. However, the inferior product offered mobility and convenience that met the demands of modern life and shifted the value proposition from non-customers to mainstream customers.
The story did not end with the cell phone. It ushered in a new, more powerful wave of disruption: the “smartphone,” which affected multiple industries, including newspapers. Smartphones are now ubiquitous. New devices take high-quality photos and record short videos, with these features improving in each new model. They have become portable navigation devices, personal computers, gaming consoles, social media platforms, and tools for browsing and reading.
Trinidad and Tobago is not immune to changes in telephony and telecommunications. The closure of Newsday and Loop News illustrates this impact. Advertising amounts, direction, and placement have shifted, reducing newspaper profitability. Who wants to pay for yesterday’s news? Additionally, newspapers can be copied and distributed without generating revenue. This challenge affects newspapers everywhere.
The key point is that technological change takes place quietly, under the radar, out of sight and is often ignored by industry leaders. Even where industry leaders are involved in the change, they may misread the future or alternatively attempt to protect the existing business segment. Kodak invented the digital camera but did not adjust its business model. Similarly, the Swiss invented the digital watch, but thought it was a passing fad just as IBM did with the personal computer.
In a real sense, T&T has a dominant business model. Eighty per cent of its foreign exchange (80%) and no less than 30% of all revenue (GDP) is derived from the production and sale of our hydrocarbon (oil and natural gas) resources. This is the main reason the two key assumptions in the annual budget speech are the prices of natural gas and crude oil. Revenues derived from the export of hydrocarbons are used to fuel the rest of the economy. Hence Lloyd Best’s aphorism, “when energy sneezes, the economy catches a cold.”
There are three key challenges to this business model. First, there is the cyclicality of the energy prices. The sharp changes in energy prices have caused two depressions, one starting in 1986, which led to an IMF structural adjustment programme and the other starting in 2014, ending with the sharp rise in prices resulting from the invasion of Ukraine. Cyclicality complicates development programmes, leading to unprogrammed borrowing and thereby inflating national debt.
The second limitation concerns the extraction of mineral resources. T&T is a small geological province with less than 1% of the world’s hydrocarbon resources. Eventually, these resources will either be exhausted or the cost of extraction will rise above world prices, making them unprofitable. Upstream producers have increased petrochemical prices since 2016/17. Gas production volumes have declined since 2013. The focus on the Manatee, Cocuina, and Dragon fields reflects this reality. There is also significant hope for Exxon’s exploration efforts to succeed.
Third is the impact of climate change. There are at least ten distinct risks associated with climate change that warrant separate discussion and cannot be included here. It poses structural, financial, regulatory, and demand-side threats to the oil and gas (O&G) model. These are not cyclical risks; they are transition and physical risks that affect asset valuation, capital allocation, and long-term viability.
For example, regimes to enforce socially acceptable industrial behaviour, such as carbon pricing, increase production costs and reduce competitiveness for high-carbon producers. The European Carbon Border Adjustment Mechanism (CBAM), effective February 1, 2027, will affect T&T exports to the EU.
T&T’s business model faces existential threats. It is an unacknowledged truth that there is a large degree of policy continuity when governments change. The policy response (PNM and UNC) has been to double down on maintaining the model instead of moving away from it. A key part of any future transition is to use energy as a feedstock to boost other sectors of the economy. Instead, NGC has raised prices to local industrial consumers.
There is a fundamental difference between the energy and technology sectors. While technology can ease exploration and production, oil and gas are finite resources, whereas technology’s revenue potential is limited only by human intelligence. The country must rethink its business model and all associated policies.
Mariano Browne is the Chief Executive Officer of the UWI Arthur Lok Jack Global School of Business.
