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Trying times for downstream energy sector

Published: 
Thursday, January 11, 2018

There is increasing concern that a combination of low prices for natural gas in the United States as well as higher gas prices being demanded by the National Gas Company, (NGC) threatens to make the downstream sector uncompetitive and could lead to plants relocating to the United States with the subsequent loss of jobs and revenue to the state.

It was two weeks ago that former President of Methanex Trinidad Charles Percy sounded alarm bells when he told Business and Money that there are “rumblings in the downstream sector” over the ongoing negotiations.

At the centre of the problem is the continued depressed price for natural gas in the US.

These low prices are as a direct result of the abundance of gas from shale plays and, according to the US Energy Information Agency, the low prices are likely to continue for at least another ten years. It must be noted that the US is a key market for T&T’s methanol and ammonia exports with this country being the largest exporter of ammonia to the United States.

In addition to low gas prices in the US, local downstream companies are now facing higher gas prices because the NGC recently signed new contracts with both bpTT and EOG Resources for the supply of gas at higher prices and that is translating to increased costs for the downstream companies.

Lecturer in Energy Economics at the University of the West Indies, Gregory McGuire told Business and Money that the downstream sector was at a crossroad and that the country will have to make hard decisions to ensure it survives.

“The fact is the industry is at a very delicate stage and T&T is losing its competitiveness as a petrochemical destination,” McGuire said.

He noted that it may not be an easy decision for any company to relocate its plants from T&T since most of those plants have already been paid off for and there is also the capital cost of relocation.

But McGuire said companies will do what they have to and if they are no longer competitive in this country they will leave.

He urged the NGC and other stakeholders in both the upstream and downstream sectors to work together to find a solution.

“The gas model has evolved over time and has been triggered by fundamentals in the market that have now shifted structurally. Perhaps the time has come for a new model and the question is what should that be and who will bear the risk?”

The university lecturer said at the time he worked at the NGC, the floor price for natural gas left little room for a profit but the NGC made its money by sharing in the profits whenever product prices were high.

He said when product prices were low the NGC took the hit but had large volumes of working capital to buffer.

This, McGuire noted, was no longer available to the NGC since the last government took significant dividends from the company, leaving it cash-strapped.

He advised that the industry should work towards a solution and “soften their positions for workable solutions and survival” but also questioned who was going to treat with the issue of NGC’s additional costs such as the gas provided to T&TEC for electricity generation for which the company has not yet paid NGC.

Former Energy Ministers Kevin Ramnarine and Conrad Enill both agree that the T&T’s downstream is losing its competitive edge.

The both say the combination of higher prices for gas in T&T and the shale revolution are threatening the viability of the sector.Enill said the country’s downstream sector was built on competitive gas prices and with the higher prices being demanded by the NGC there will have to be innovation in finding markets that can accommodate products from a higher priced producer.

For Ramnarine the issue will have to be the NGC playing a crucial role of balancing the sector to ensure that upstream producers are profitable, as well as downstream players and the state gas company itself.

Ramnarine said, “The NGC should be profitable but it can’t be about profit maximisation. It must be about playing a crucial role in balancing the sector, because if companies leave and the NGC is without customers then there is no NGC.”

The former energy minister said even when he was in power there were threats to move plants.

He noted that would mean companies will have to do without production for a couple years while the plants are relocated, not to mention the other capital costs, but he insisted it still was a real risk.

Percy stated that it cannot be a situation where some in the gas value chain are profitable at the expense of others.

“This is a value chain and I have always adopted the position that all along that chain have to be profitable for it to work inclusive of those in the upstream, the aggregator, that is the NGC, and the downstream. If this does not happen then the government does not get corporation taxes, contractors and other companies do not get work and the entire chain is placed in jeopardy,” Percy said

Percy admitted that the NGC is faced with higher cost for its natural gas due to the agreements it recently signed with the upstream companies.

He added, “There is no doubt that the NGC is facing higher costs for its gas. The fact is that the weighted average price that the NGC is paying to the upstream companies for gas has increased but the government will have to decide whether the NGC is about making maximum profits or if it is about doing what is best for the entire value chain and by extension the country.”

The NGC was asked to respond to several questions surrounding the issue but declined saying it was not prepared to comment at this stage.

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