STCIC:
Future of energy
Trinidad Guardian
Port Spain
Petroleumworldtt.com
09 04 07
The energy sector is the engine of growth for
the T&T economy and we expect it to remain
so for some time to come. Recent events have,
however,
led to many people questioning the ability
of the sector to contribute to long-term
national
development.
The
recently released Ryder Scott audit of natural
gas reserves, the two-day consultation on the energy
sector and the Prime Minister’s national
budget presentation have sparked many commentaries
and significant debate and discussion about the
role of the energy sector in the economy and its
long-term prospects.
Among all the comments, the Government has signalled
that some elements of its energy policy will be
reviewed but the basic underlying principles remain
the same.
The
STCIC, as the representative organisation for
the T&T energy sector, does not share the
pessimism being expressed by many, but does believe
that there is a need for significant reforms in
the management of the sector and a need to take
measures to plan for the decline of oil and gas
production in T&T.
The petrochemical sector is the major contributor
to national development but the best is yet to
come.
The
petrochemical sector of T&T has been one
of the biggest success stories of the T&T economy.
The Point Lisas and adjoining estates today house
seven world-class methanol plants, ten world class
ammonia plants, a major steel mill and two industrial
gas facilities. These plants have directly provided
thousands of well-paying sustainable jobs for our
citizens and jobs for the thousands of employees
of the numerous contractors and service companies
who service the sector. The existing plants represent
many billions of US dollars of investment into
the domestic economy, and on-going plant maintenance
and upgrades represent continued massive inputs
into the local economy.
Contrary to the belief of many, these plants directly
contribute hugely to the national Treasury every
year. While the rest of the economy pays corporation
tax at 25 per cent, the Point Lisas plants and
the Atlantic LNG plants pay 35 per cent corporation
tax on profits.
The STCIC estimates that the downstream processing
plants contribute about half of the total corporation
tax collected from all companies.
Also, contrary to opinion, the gas supply contracts
that the Point Lisas plants hold with the National
Gas Company (NGC) do not, under the current market
scenario, mean that they are supplied with gas
at prices below prices realised by liquefied natural
gas (LNG). Gas prices paid to the NGC are index
linked, so when world commodity prices are high,
as they are at present, the gas price paid by Point
Lisas plants are also high.
Currently the Point Lisas plants are typically
paying gas prices at approximately the same price
as the Henry Hub gas price net-back to Point Fortin
(taking into account liquefaction and transportation).
While the petrochemical sector has already contributed
significantly to national development, future plans
for the sector promise much more.
The
STCIC fully supports the Government’s
thrust to move the petrochemical and metals sectors
further downstream, as restated in the Prime Minister’s
budget presentation on Monday. The key issue for
the T&T economy is to extract greater value-added
within the domestic economy. This can be best achieved
by the types of plants currently under construction
or due to start soon, including the MHTL’s
AUM complex, the Essar Steel mill and the Alutrint
aluminium complex. All of these plants represent
huge investments into the domestic economy, totalling
at least US$ 3.4 billion.
As
all of these investments involve significant
additional value-added downstream activity in
T&T,
they will all result in higher levels of capital
investment, high paying sustainable jobs and more
revenue per unit of gas consumed, when compared
to investments in LNG or more traditional petrochemical
plants. See Graph 3 and 4.
T&T’s
declining reserves to production (R/P) ratio,
as confirmed in the most recent Ryder
Scott report, means that it is especially important
that we get the most out of each valuable molecule
of natural gas. This can best be achieved by moving
further downstream and creating linkages with the
domestic manufacturing economy. All of the projects
outlined above, along with the planned plastics
plants, will produce commodities that will provide
valued raw materials for our local manufacturers
and open up new opportunities in a wide range of
new products.
While
the first wave of natural gas-based industrialisation
was based on the use of methane (C-1), it is proposed
that for the second wave, ethane and propane (C2
and C3) will also be utilised. This approach will
allow T&T to extract even more value from a
cubic foot of natural gas.
The second wave of gas-based development, therefore,
has the potential to generate more value and more
opportunities from a single molecule of natural
gas than has been the experience in the past.
Getting fiscal, legal regime right
The
STCIC shares the confidence expressed by the
Prime Minister in his budget presentation and
the
major oil and gas exploration companies that there
is still significant potential for new gas and
oil finds in T&T acreage.
To date only a relatively small per cent of available
acreage has been extensively explored and as the
Ryder Scott audit indicated there are still significant
potential exploration targets worth going after.
However, many of these potential targets are in
more challenging deep-water or deep-horizon locations.
Many are also smaller oil or gas fields. We need
to get the fiscal and legal regime right if we
are to encourage the right sort of oil and gas
company to go after these less profitable potential
targets.
Need
a small field’s policy
One of the most interesting findings coming from
the recent Energy Conference was the fact that
many of the major companies had found small oil
or gas fields that were uneconomic to develop.
Over the past few years the upstream energy sector
has faced significant increases in costs. Day rates
for drilling rigs have more than doubled in the
past few years, while the rapid increase in the
cost of steel has led to huge increases in the
costs associated with field development.
When
you take into account T&T’s relatively
high taxation take, these increased costs mean
that the returns from investing in developing small
fields do not fit the investment profile utilised
by big companies.
Gas fields of less than 500 billion cubic feet
(bcf) are thought by many companies to be uneconomic
to develop under the current taxation regime. The
fiscal regime needs to be amended to make sure
that these smaller oil and gas reservoirs are not
left in the ground: government revenue from oil
and gas left underground is zero.
In
addition, while smaller fields may not fit the
investment model of bigger companies they may
be attractive to smaller independent oil and gas
companies. T&T’s legal regime for managing
the sector needs to be reformed to encourage larger
companies holding acreage with undeveloped small
fields to make agreements with new smaller players
to develop these smaller potential reservoirs.
In other mature oil and gas provinces with many
smaller fields, such as the North Sea, there is
an active market in acreage between companies,
resulting in the best fit between companies and
acreage. The information and infrastructure in
blocks which are uneconomic for a large oil and
gas exploration company to develop must be available
at a reasonable price to smaller developers who
might find it profitable to produce from a relatively
small 500 bcf gas find.
Rethink deepwater regime
Table 1: Rig day rates for various rig types
Rig Type Rig Day Rate ($US/day)
Jack
Ups 100,000 – 250,000
Anchored Semi-Submersible 250,000- 450,000
Deepwater Drill ships
and Semisubmersibles 450,000- 900,000
There
are other operating costs when drilling. They
add up to between 100,000 (close to shore)
and 300,000 $US/day (deepwater).—Industry
Source
The Prime Minister clearly signaled the Government’s
intention to address this issue. The STCIC fully
supports the Government’s decision to review
this issue.
It
is also clear that the Government has to seriously
rethink the fiscal and legal regime for the deep-water
blocks. Last year’s failed deep-water bid
round should have been a wake-up call for the Ministry
of Energy.
As
long ago as February 2006, the STCIC facilitated
a panel discussion at the TTPC at which some major
companies and independent experts expressed serious
reservations about the approach being taken to
the deep-water blocks. Information presented at
the conference by internationally reputable oil
and gas consultants Wood McKenzie confirmed that
T&T’s deepwater government take is among
the highest in the world. This makes drilling in
the deep waters off T&T’s east coast
relatively unattractive and increases the level
of financial risk that companies have to carry.
These reservations did not appear to have been
fully taken on board at that time.
They
need to be taken on board now and the STCIC welcomes
the Prime Minister’s announcement
that this issue will be addressed. A breakdown
of the rig day rate for offshore drilling is contained
in Table 1.
What if the geologists are wrong and there is
no more gas?
Despite
the confidence that the geologists have in our
hydrocarbon resources it is, of course,
possible that there are no large reservoirs out
there waiting to be discovered. T&T must, therefore,
be proactive and begin to plan for a future without
massive domestic hydrocarbon production.
The first thing that must be grasped is that the
end of hydrocarbon production does not mean the
end of the energy sector.
In
fact, T&T already imports crude oil which
is refined in our Pointe-a-Pierre refinery. Likewise,
there are many other countries with significant
petrochemical industries which do not produce any
oil or gas. For example, Singapore—the country
we often like to compare ourselves to—is
a major petrochemical producer through its Jurong
Island facilities which also include an offshore
facilities fabrication yard.
Given
our huge experience and success in petrochemicals
this is the sector that we believe should be emphasised
in the “post gas” scenarios.
While the Prime Minister made it clear at the
Energy Conference that the short-term prospects
for importing gas from Venezuela do not currently
look positive, our gas-rich neighbour represents
an obvious location from which to import gas. But
we are not constrained to only import gas by pipeline.
We could even eventually become an importer of
LNG for processing in our gas-based downstream
industry.
We
have also developed significant expertise and
a great reputation in the energy services sector,
especially in drilling and related services. We
can continue to sell these services into export
markets even if there is less or limited activity
in T&T. There are active exploration programmes
underway in Jamaica, Cuba, Suriname and Guyana
and T&T service companies are well placed to
take advantage of any business opportunities in
these markets.
The
vision for the post-hydrocarbon future of T&T
should, therefore, be as the petrochemical and
energy services hub of the Americas. And this
is a vision that we can achieve whether or not
we find more gas.
Reborn state-owned company
The
State has a major role to play in encouraging
vision for the future of T&T. The new State
energy company, working on a global scale, which
has been envisaged by the Prime Minister and outlined
at the Energy Conference could play a significant
role in accessing the raw materials needed to fuel
our petrochemical industry but with two important
caveats.
Firstly, it will have to be run as a private company,
with no political interference. The board will
need to be given a free hand to make the sort of
sweeping changes to culture and business practice
that will be needed if the vision is to be fulfilled.
Secondly, the new company will have to be significantly
restructured if it is to have any impact. Its non-productive
assets would need to be disposed of and productivity
levels significantly increased.
The STCIC would like to proffer a word of caution
about the small likelihood of success of merging
disparate State companies with very different cultures
into a cohesive and efficient whole. It may be
advisable for the Government to start an entirely
new entity with significant private sector participation
so as not to waste too much time resolving cultural
issues between the different State entities.
In due course, some of these other enterprises
can either be transferred or subsumed within this
new entity, but, for the immediate future, it must
focus on the fast implementation of a very different
strategic vision to what entails in any of the
existing State energy companies.
Once
these issues are addressed the new State-energy
company could indeed venture forth into the international
market. Increasing refinery capacity in T&T,
through significant new investments with joint
venture partners, could fuel a new petrochemical
industry, using naphtha as the major raw material,
in addition to natural gas.
Need to be fast,
flexible and listen
If
T&T is to meet these objectives we will
need to be able to move fast and be flexible. Policy
decisions need to be taken and implemented fast.
We will need to respond quickly to new opportunities
and respond to changing conditions. Our reserves-to-production
(R/P) ratios have been falling since the late 1990s
and the STCIC has raised concerns about this issue
for the past few years. At the same time that concerns
about reserves were being raised, the Government
was tightening fiscal terms. The Government needs
to become quicker and more flexible at responding
to changing circumstances. Management of bid rounds
needs to be strengthened and the time between offering
acreage and signing production sharing contracts
needs to be significantly shortened.
The
Government’s willingness to consult
with the industry, as displayed by the conference,
and its willingness to change policy based on data,
as indicated in the budget presentation on Monday,
are positive indicators for the future of the energy
sector and the entire national economy. We look
forward to continuing our role in these national
debates.
Potential products from new downstream plants
Aluminium: Rims, wire, cable, rods, plates, sheets,
strips, angles, flats, billets, roofing materials,
ingots, hose, clamps, vehicle body parts, tubes,
weather-resistant composite panels, milk cans,
utensils, foil, tables and chairs, coils, electrical
conductors, bottle caps, containers, castings,
ladders, knobs, levers, latches, pipes, hardware
fittings, doors and windows, handicrafts, aircraft
parts
Iron & steel:
galvanised materials (strips, coils, wire); stainless
steel materials (strips,
coils, wire); roofing materials, wire, rods, sheets,
cable, re-bars, nails, beams (H-beams, I-beams),
coils, plates, pipes, heat-resistant grids; angles,
flats, round, squares; tools (shovels, drills,
power tools); wrought iron, cast iron, valve bodies,
skid and vessel platforms, razor wire, barb wire,
guardrails, pressure vessels, storage tanks, bearings,
balls, braided steel ropes
Methanol:
Acetic acid: pharmaceuticals, paints, fibres
(apparel & draperies); plastics, lacquer
Formaldehyde
resins: adhesive for pressed wood products—medium
density fibre board, plywood and particleboard;
laminates in the furniture industry;
coatings
Ammonia-based products: decorative laminates,
tableware, surface coatings, wood adhesive, UAN/Urea,
liquid fertilisers, solid fertilisers
Polyethylene: containers, pipes, appliance parts,
bottle crates, film sheeting, bags, bowls
Polypropylene: Carpeting, brushes, carpet backing,
rope, tape, film sheeting, containers, appliance
parts, bottles and caps, cups, toy
STCIC is Trinidad's South Chamber of Commerce
and Industry-STCIC (deven@southchamber.org).
Trinidad
Guardian
Thursday 30th August, 2007
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Guardian . All Rights Reserved.
