“If you change the way you look at things, the things you look at will change.” —Wayne Dyer
Australia became an independent nation on January 1, 1901, when the British Parliament passed legislation allowing the six Australian colonies to govern themselves. Since then Australia has fought in World Wars 1 and 2, the Korean, Vietnam, Iraq and Afghanistan wars, built reputable companies with an international reach, organised an immigration system to facilitate its growth and development, dealt with an ongoing refugee crisis and has two of the largest natural gas projects in the world, Prelude and Dragon. Yet it still refers to itself as a “young” country.
T&T is 61 years younger than Australia and its post-independence generation is taking its place. It is facing its first refugee crisis (one Cabinet minister did not know there was one) and is at a significant decision-making point in the use of its gas resources. If gas prices were to rise in the near future, T&T could continue as is for a while and postpone the day of reckoning. But that would not be a long-term solution.
The basic problem is that gas is no longer cheap to produce in T&T. LNG is now a commodity in its own right as the world production capacity is now 3.6 times larger than when T&T started in 1999 (Chart 1), with increasing price volatility. Shale gas has redefined the US market, previously the primary customer for T&T's LNG (Chart 2). US LNG export capacity is expected to double from 5 Bcf/d to 11 Bcf/d by the end of 2020.
In addition, due to lower domestic gas production, ammonia and methanol now compete with LNG for gas in T&T. The upstream producers (BP, Shell et al) have major stakes in the existing LNG trains whose interests do not coincide with the ammonia and methanol (downstream) producers. Further, new markets have to be found.
NGC, the middleman, contracting with the upstreamers to sell to the downstreamers, is in a difficult position; the price negotiated by the upstreamers impacts NGC’s downstream price. To circumvent both the price and supply issue this presents, Proman (which owns 60 per cent of all the methanol plants in T&T, two of which are closed as the supply of gas is inadequate to run them) has an alternative. Together with partners, it has formed an upstream production unit, De Novo to produce gas. It wants to supply its plants directly as this will control its cost of production and eliminate or reduce the aggregator’s profits, a proposal stoutly resisted by NGC.
Proman’s proposal would result in bypassing NGC, reducing NGC to a transporter of gas, in the same way, that Shell and BP supply their trains in Atlantic (ALNG) thus creating a problem for NGC and its sole shareholder, GORTT, threatening NGC’s monopoly supplier position and associated profits.
A shift has occurred, changing the business model giving the upstream producers the upper hand thereby affecting the country’s revenue generating capacity. Policymakers must adapt quickly since these developments have been in the making for some years and we are late. NGC has used pricing formulas which are linked to final product prices achieved and this remains a technique that can be developed further.
No definitive policy change has been articulated and the impasse between NGC and CNC (Proman) last year provided no long-term solution. Similarly, despite the Finance Minister’s many statements on transfer pricing and the supplemental petroleum tax, the tax regime remains unchanged. If market arrangements have changed or are changing, then NGC/GORTT must adapt.
Muddling through or deferring a decision indefinitely (NIB?) will not do. The energy sector accounts for 36 per cent of GDP and over 80 per cent of the foreign exchange earned. Petrotrin is closed and the viability of the alternatives has not yet been determined. Many energy professionals are being lost to T&T due to the closures affecting our human capacity.
Doing nothing is not a credible option and ignoring market developments will lead to failure. The entertainment industry provides two examples. The emergence of Apple iTunes and Spotify amongst others has decimated the recording industry. Netflix is doing much the same thing to Hollywood and is winning Oscars in the process.
The energy policy framework cannot ignore market developments indefinitely. The US was once the leading exporter of ammonia. T&T entered the market and quickly became a leading exporter as T&T’s plants were more efficient. The alternatives do not promise the easy growth to which we were accustomed. By adjusting the policy framework, combined with a sensible tax regime, T&T could maintain (or improve) the revenue profile. Doing nothing is reckless and we could lose the future.
The diversification effort must be restarted and the private sector dynamised. At the moment, T&T has neither the climate for change nor the vision to create change. This requires engagement with the actors and the development of an approach which enables businesses to get on with the task. Implementing and sustaining these changes requires leadership and engagement to create the requisite enabling environment.