Opinion
- Editorial- Commentary
Mary King
:
A wealth-driven economy
(II)
Last week's article addressed the Government's option to invest in the downstream end of the LNG industry. However, our Government appears to think that our gas-based economy is somehow more robust than that which suffered such shocks in the 80s. This industry difference was also articulated in the T&T Review by Messrs Boopsingh and McGuire who were at pains to differentiate between an oil- and a gas-based economy - though McGuire did question whether we were really isolated from external shocks because of this structural difference.
One of the important differences, according to Boopsingh, is the dampened volatility of gas pricing compared to oil pricing. However, McGuire in his article pointed to the drop in oil price from US$147/bbl to around US$60/bbl at present, and a similar price drop in natural gas in the US market to US$6.3/mmBtu from a high in June 2008 of US$13.05/mmBtu. Further, McGuire noted that the petrochemical market has collapsed and since August 2008 the prices of ammonia and methanol have taken a beating - in the month of September 2008 alone the price of ammonia dropped nearly 50 per cent from the peak in July 2008.
The Pt Lisas plants, given the drop both in demand and price, have seized this opportunity to shut down for non-critical maintenance which presents a problem to NGC (with firm upstream gas contracts) since these plants will not need gas in this period. The important difference, now fast disappearing, between the oil and gas industry is the difficulty of transporting the natural gas and hence its use was localised and fostered petrochemical, aluminium and steel industries which used the stranded gas at source.
This has a severe impact on the well head price of gas locally compared to, say, that in the US where the pipeline infrastructure provides more competition and demand for gas. The US has closed down many of its natural gas petrochemical plants (high gas price) and they have migrated to the stranded and cheaper gas in the developing countries.
However, with the progressing technologies in gas transport, particularly LNG (and natural gas hydrates to come), with the re-gasification and shipping, the transportation of gas is becoming as standard as that of oil. This means that the market for natural gas in T&T is no longer completely local but extends to the US and even Spain. Hence an anomaly exists in NGC's gas pricing vis-a-vis what the suppliers can get at well head for natural gas supplied to the LNG plants and to NGC for petrochemicals.
Our Government is encouraging more FDI in gas-based industries on the condition that they also have downstream plants, e.g. plastics. This price tension will, if the market is allowed to decide, force up the local price for feedstock to the petrochemical plants as happened in the US, otherwise, as some suggest, the Government subsidises FDI. Is this why the parliamentary Joint Select Committee could not get answers on gas price to Alutrint?
With the increasing availability of natural gas in the US market and it being more environmentally friendly as a fuel than oil, more electric generating gas turbine plants with improving heat rates and household heating are migrating to gas. Burning natural gas also produces climate change pollutants, though somewhat less than oil.
The major driver of gas demand, as with oil, and thus the price of gas, is the adjustment of market inventories based both on usage, demand forecasts and price.
Mr Boopsingh suggests that the gas market also differs from that of oil since there are long term contracts between producer and purchaser, over some 15 to 20 years. However, prices even of these long term contracts are not fixed, but vary depending on spot and futures prices of natural gas in some markets. Further, with more players in the market and the investments in plant not ascribed to one customer, the length of these contracts is dropping in concert with the transaction costs.
Clients now use a mix of shorter term contracts and the spot market to cater for variable inventories which support market demand variations. Natural gas is in part a substitute for oil (or its derivatives) in certain markets and the emerging preferred fuel in others.
Economics 101 tells us that the price changes of a product and its substitutes are related and we are seeing this with oil (and its derivatives) and natural gas. In fact Hartley, Medlock and Rosthal of Rice University show both graphically and statistically that natural gas price in the US is directly related to that of residual fuel oil which in turn is directly related to the price of oil. (To be continued )
Mary King is a columnist of the Trinidad Express (maryking@tstt.net.tt). Petroleumworld does not necessarily share these views.
This
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