Gas derived revenues will drop
PORT SPAIN
Trinidad & Tobago Express
Petroleumworldtt.com
12 31 08
GAS, not oil, Government says, will drive Trinidad and Tobago's economy in the future, as it has done for several years now. In his 2007-2008 Budget presentation, Prime Minister Patrick Manning boasted: "Trinidad and Tobago is the number one exporter of ammonia and of methanol in the world; we are the number one exporter on LNG in the Western Hemisphere and a major exporter of Direct Reduced Iron (DRI)." Just how insulated are gas and downstream gas products from plummeting oil prices? Is there any indication that revenues from gas will cushion this country during a global recession that could last between one and three years?
In September 2007, at which time Atlantic LNG's Train 4 was operational, domestic gas production and consumption was close to four billion cubic feet per day (bcf/d)-half of that total converted to LNG for export. In its Review of the Economy (2007-08), the Ministry of Finance put production/utilisation in fiscal 2007 at 953bcf. That number is less than the 1.4tcf per year estimated by industry sources, taking into consideration ALNG's usage of 2bcf/d. With estimates at the time that proved reserves amounted to around 20tcf (according to a Ryder Scott audit), we were facing the prospect of gas running out in 15 years once there was no additional usage. With ongoing exploration offshore, the Government feels sure we have possible reserves to last us "at least another 30 years".
The debate over reserves, more so technically recoverable gas, will continue to rage, as will the production-to-reserves debate. In other words, with Government's insistence on adding several new gas-based downstream plants, can the country's production meet the additional demand? For how long can we sustain an increased level of consumption? Recently, Energy Minister Conrad Enill stated that the off-and-on "Train X" at ALNG remains very much on the cards. As it stands, ALNG's four trains use almost half the daily production of gas. With "Train X", consumption will increase by at least another 1bcf/d.
Dr Rafael Sandrea, a Penn State University graduate and oil and gas specialist, had this to say of the "LNG rush" in a paper he wrote a few years ago: "Undoubtedly LNG facilities are vital to the worldwide monetisation of natural gas. A typical 1Bcfd project requires a massive 15 trillion cu ft of proven reserves over 30 years. A huge 35 per cent of the wellhead gas is lost creating, transporting and re-gasifying the LNG."
Sandrea added: "Gas exporting countries are in a headlong rush to install LNG facilities and, to a lesser extent, build GTL plants to produce synthetic fuel products. These projects require major capital investments and enormous reserves. The efficiencies of these technologies range about 60-65 per cent, which implies that losses of wellhead gas and hence reserves are high, roughly one-third." Even if Sandrea is off-mark in his analysis (almost all of our offshore gas is piped directly to end users from wellheads), some loss must be incurred in the regasification process.
According to the International Energy Agency (IEA), at the end of 2007 Trinidad and Tobago had proved reserves of 17tcf. In 2000, when ALNG had only Train 1 operating (an agreement was signed that year for 2 and 3), T&T produced and utilised 494bcf of gas; by 2006, with Trains 2, 3 and 4 coming into production, annual production/utilisation escalated to 1.2tcf. In contrast, Qatar, which holds the world's third highest proved reserves (904tcf) utilised 1.4tcf annually. Admittedly, Qatar has only just begun monetising its gas with a flurry of downstream activities, the principal one being massive LNG plants targeting the increasingly hungry Far East markets. Another country we may want to look at is the UAE, which has proved reserves of 215tcf. Its utilisation in 2006 stood at 1.7tcf.
There is little doubt that T&T will continue to make new gas finds, what with exploration proceeding apace offshore. In 2005 Government adjusted its tax incentives to further stimulate exploration both offshore and on land. In his 2007 Budget presentation, Prime Minister Manning revealed, "What is needed now is a new fiscal regime of incentives to stimulate further drilling in the Deep Marine areas of East Coast, marginal fields, heavy oil and farm in and farm out arrangements. We propose to introduce this new regime in Fiscal 2008. By these new arrangements we confidently expect as has happened in the past, new discoveries of oil and gas, and the preservation of Trinidad and Tobago's position as an industrial centre in the region."
In this regard, the Government's optimism is backed by bpTT's CEO Robert Riley. At a conference in August last year, Riley pledged to continue investing heavily in natural gas exploration, dismissing a recent report that found the Caribbean nation's reserves will last only another dozen years. bpTT will spend US$1 billion each of the next five years to find more gas. "I am confident that if everything is done right, Trinidad has resources to last for another 50 years," he said.'
Last August, Challenger Energy Corporation announced that it had made a significant natural gas discovery with the drilling and production testing of the "Bounty" exploration well. "Initial test results indicate that the 'Bounty' well is capable of producing at a rate of approximately 200 mmcf/d from this high pressure zone with a natural gas resource potential of up to 2.6 TCF of natural gas from the tested structure," the company, which shares operations with Canadian Superior and British Gas, said.
And before that, in March, EOG Resources announced that the Oilbird Field came on stream adding 100mmcf/d, sending up its gross daily total production to 400mmcf/d. Also, by way of increased exploration activities, Manning said, "This year (2007-08) we will be signing nine Production Sharing Contracts for six Onshore/Nearshore and three offshore blocks which were offered in 2005." He added: "Additionally, at the end of the third quarter of 2008, we will be embarking on a round of Competitive bidding by which five offshore blocks will be offered. These blocks are located in the East Coast marine Area and North Coast Marine Area and include Block 4(b) and Block 5(d) and North Coast Marine Areas 3, 4 and 5)."
Energy Minister Conrad Enill confirmed this "bidding round" at the recent Caribbean Energy Conference held at the Hyatt Regency hotel in Port of Spain. He said, too, the exploration thrust will be sustained in 2009 "with the offer of blocks in the Deep Atlantic Area". Once government is successful in attracting "big oil" to invest in drilling on land and in
both shallow and deep waters offshore, that would be a major achievement. One fallout from the slide in oil prices is a slowdown in drilling activities and previously-committed investments in downstream activities, including additional refinery capacity. This drop, the IEA warned, could lead to low supplies when demand rebounds-hence, higher prices for both oil and gas.
The EIA (Division of America's DOE) recently stated: "Worldwide, total natural gas consumption increases from 104 trillion cubic feet in 2005 to 158 trillion cubic feet in 2030. In addition, because natural gas produces less carbon dioxide when it is burned than does either coal or petroleum, governments implementing national or regional plans to reduce greenhouse gas emissions may encourage its use to displace other fossil fuels." The EIA suggests the US economic recession is also contributing to lower natural gas wellhead prices. The Henry Hub natural gas spot price, it projects, will decline from an average of US$9.17 per Mcf in 2008 to US$6.25 per Mcf in 2009.
As the global economic recession bites into all commodity prices, several local plants that use natural gas as feedstock have scaled down production. Some have chosen to shut down and perform maintenance work while commodity prices remain low. Methanol, for example, of which T&T is the world leading exporter, has seen wild fluctuations of prices. From US$315 per tonne in 2005, prices jumped to over US$600 in 2006-07. By December, according to Methanex, the price stood at US$333 per tonne. Similar declines in prices have hot ammonia, urea and even steel. Arcelor-Mittal shut down its local operations, supposedly for two months.
The National Gas Company (NGC) is the sole supplier of gas to all downstream industries. A source at the NGC confirmed that it has had to cut back on the supply side because of these interruptions. NGC supply contracts with most of the downstream plants are linked to the prices of the end products. In essence, this means while NGC raked in huge profits during the first three quarters of the year, the 4th Quarter will see a drop in revenue.
The source said, "NGC has an obligation to purchase gas (from producers) on an annual take or pay basis. NGC does not have capability to store the gas so that if the annual volume cannot be purchased then there are contractual obligations that can be enforced by producers. Similarly, NGC has similar provisions with consumers so that there can be a mitigation of obligations."
He added: "The impact on Gas prices started late in the 4th Quarter of 2008. This can be tracked on the Henry Hub prices that impacts on LNG producers so that when the prices fell from US$8 per MMBtu to US$6.50, there was a negative impact. However, LNG producers sell LNG to the US markets as well as in Europe and the Far East. Each market is different due to supply and demand, and the linkage of gas prices to oil or on mixture of oil and gas.
"In the domestic gas market the impact has been mixed. Gas to Petrochemicals make up 60 per cent of NGC's portfolio and ammonia and methanol prices rose to a level way in excess of earlier projections. As a result, there was a significant increase in gas revenues in the first three quarters of 2008. By the end of 2008 the impact may be positive. However, from the perspective of the Government fiscal year the impact would be different."
Government's fiscal year runs from October to September. What the 4th Quarter decline in prices means is that for fiscal 2008-09, Government revenues from both oil and gas start at lower than budgeted levels. Already, it has lowered projected oil prices, but it has not cut back on the US$4 per MMBtu price for gas, since Henry Hub prices have not fallen below that. However, with prices down from US$8 to US$10 to as low as US$6, there will be a shortfall in Government revenues. These will come from lower wellhead royalties, the price gas is sold to different industries, and from a sheer drop in overall sales.
But, as stated in the previous part of this oil-gas series, there remains a silver lining around the dark cloud of lower recession prices for energy-based commodities. Unlike other countries that have cut back on many projects, from exploration to refining and petrochemical plants, T&T continues its exploration almost uninterrupted. This country will, however, need to make substantial finds of recoverable gas if it is to sustain a 4bcf/d consumption over a 30-year period. At the very least, the many wells being drilled would have to yield at least another 10tcf in proved reserves. And Government, in spite of its current bravado, would have to seriously reconsider several new heavy industrial plants it insists it will proceed with, regardless of oil and gas prices, and the country's proved reserves.
Story by Raffique Shah from Trinidad & Tobago Express
Trinidad & Tobago Express
Wednesday, December 24th 2008
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