Mariano Browne
Last week’s column argued that Trinidad and Tobago did moderately well from its energy resources, especially gas, starting with the export of liquefied natural gas in 1999. However, it noted that the 2018 “Spotlight on Energy Conference” established that the energy sector’s business model had substantial weaknesses, resulting in significant value loss. In addition to declining production of oil and natural gas, it noted obsolete, unchanging business and legislative models that failed to keep pace with the shift from an oil-based to a natural gas-driven economy.
There are other issues. Since most of the exploration and production was financed with foreign capital, most of the monetary returns and wealth generated went to the owners of that capital and were not reinvested in the local economy. GORTT has only a minority stake in ALNG. Whilst some wealth accrued to local service providers, this benefited only a small number of persons. The most humiliating example of this failure was the closure of the state-owned Petrotrin and the creation of Heritage Petroleum. Whilst closure of the refinery operations has allowed the national oil company to survive, it is an ignominious example of state ownership.
State ownership of national oil companies does not automatically mean these companies will perform poorly. There are roughly 70 to 80 national, state-owned oil and gas companies operating across the globe. Together, national oil companies account for approximately 80 per cent of the world’s hydrocarbon reserves and about 50 per cent of the world’s production.
It is estimated that only three of the top ten oil and gas-producing companies in the world are completely private-sector-driven: Chevron, Exxon and Shell. Saudi Aramco, the largest energy sector company in the world, is also state-owned and is massively profitable. It sits atop the largest crude reserves, which are relatively cheap to extract. Petrobras, which is owned by the Brazilian government, is highly profitable, has record production, and has massive dividend potential. Both Saudi Aramco and Petrobras are publicly listed.
The implicit argument is that wealth creation requires a modicum of local ownership for the trickle-down effect to work. Local content rules are also important, and adequate licensing structures are important elements in any regulatory regime. Whilst the T&T Petroleum Act Part 1-3 provides for a licensing regime, subject-matter specialists argue that the practical enforcement of these licences is patchy. Licences are important because they determine the responsibilities of the licencees and their contributions to national output. It is doubtful whether any of the petrochemical companies have been licensed, as these licences are not publicly available.
This is not an academic point. Changes in the gas sector are at hand. In June, the Venezuela government signed five strategic agreements with Shell granting the energy major a licence for the first phase of exploration, development, and exploitation of the seven-trillion-cubic-foot Loran offshore natural gas field. This is an important development as it aligns well with the ongoing work to produce natural gas from the T&T Manatee field.
Whilst this development is useful as a portion of the Loran gas will be directed to ALNG, Venezuela also noted that it would export LNG. This approach is different to the public statements which accompanied the Dragon Gas project. This suggests that ALNG will process Venezuela’s gas from Dragon and Loran under a tolling arrangement, which is far less profitable from a T&T viewpoint. This arrangement ensures the continued viability of ALNG but generates a much smaller contribution to T&T’s taxation revenues and the national economy.
Venezuela’s agreements with Shell point to other developments that allow it to process gas currently being flared.
It must be noted that the Dragon Gas project reflects Venezuela’s ambition to monetise its substantial gas reserves to improve its economic contribution to the Venezuelan economy. Indeed, this was the intent of the Dragon project: to create a “Point Lisas” development in Sucre. Following this line of argument, and given Venezuela’s abundant natural gas reserves, the cross-border gas arrangements require a more accommodating foreign policy stance toward Venezuela beyond T&T’s relationship with the United States.
On Friday 7, NGC’s Chairman announced that Prime Minister Kamla Persad-Bissessar will unveil major energy sector developments and the actual monetisation of cross-border gas resources within days. The timing of the announcement is important as the annual budget speech is two months away and there are many unfunded and unpaid commitments which must be addressed.
What matters is not how much money will be generated by monetising gas from the Manatee, Loran and Dragon projects, but how these revenues are used. Though global fossil fuel consumption and production remain near record highs due to rising energy demands, the trend is to renewables. T&T must derive more value from that resource base and find more efficient, value-producing ways to invest the returns and transition to a different pathway, whilst controlling its expenditure.
Petrotrin’s experience is an important lesson. NGC is mainly a midstream aggregator, purchasing from upstreamers (Shell, BP, et al) and supplying downstreamers. This means it must match its upstream suppliers’ contracts to its downstream customers. This is its biggest vulnerability as it does not produce natural gas. How will this and other parts of the model be adjusted?
Mariano Browne is the CEO of the UWI Arthur Lok Jack Global School of Business.
