What it means for T&T
By HAYDN I. FURLONGE
According to the recently released 2011 World Energy Outlook by the International Energy Agency (IEA), there is an emergent “golden age” for natural gas. Trinidad and Tobago (T&T) is faced with a unique situation of tight proved gas reserves and limited growth in gas consumption, in the inopportune environment of rising commodity prices.
The first characteristic of the new age is that growth in world demand for natural gas is expected to surpass most other forms of energy. As the world looks for more natural gas, the IEA’s forecast is for T&T’s natural gas production to increase only marginally by 2020 and then decline to half the current level by 2035.
Local experts may justifiably have a different view, but given that a central pillar of the national economy for the past two decades has been natural gas, a thrust to avert such a scenario is critical in the interest of the sustainability of the industry. Apart from the ripple effects of the global economic downturn, much of the recent contraction in real GDP for the period 2009 to 2011 has been attributable to challenges with hydrocarbon production and volatile global prices. The recent “Stable” credit rating for T&T by Standard & Poors and its positive near term outlook do not mask the fundamental challenges of an economy heavily reliant on one sector, and the battle to sustain and grow it. We concern ourselves here with some of the dynamics taking place on the world stage which may inform how we re-model the development of our natural gas industry and its interface with the wider economy.
The usual prescription of an adaptive taxation regime and aggressive marketing of the country’s human and physical resource potential to stimulate exploration activity remains of paramount importance. However, is it that we need more of the same old strategies, or are new ones required? A realization is dawning that the very value proposition of the country must change, given that relatively cheap energy, low political risk, skilled workforce, and strategic location are not as unique as they used to be. Nothing short of a revival of the local industry is therefore required in this new era. The “fortunate” circumstance is that the climate change agenda coupled with high demand for clean fuels have caused major consuming countries (such as India and China) to pursue investment opportunities in distant lands to secure energy supply, and T&T’s status on the world stage is well recognized.
The second trend to take place is redirection of foreign direct investment (FDI). To some extent, the tried and proven model of relying on FDI will continue to serve us well. However, the fact is that foreign direct investment has historically been the “Achilles heel” of energy sector growth in developing countries the world over, due to limited host government financial resources. About two thirds of the expected US$38 trillion in energy sector investment needed over the period 2011 to 2035 will be made in non-OECD countries. The geopolitical implications of such a development are worth considering.
Unlike the situation in T&T, IEA’s forecast is that major gas production increases will be experienced by countries such as Russia, China, Qatar, USA, Brazil, Nigeria, India and Libya. As such, strategic repositioning of financial resources introduces greater competition for FDI. This exacerbates the challenge for host governments (such as T&T) in balancing an attractive enough fiscal regime with fair economic rents.
An Unconventional Future
The third fundamental game changer is unconventional natural gas resources. US proved shale gas reserves have jumped from 33 trillion cubic feet (tcf) in 2008 to 482 tcf in 2011. To put this in perspective, T&T’s total gas reserves is an order of magnitude less than the latter figure and has been heading in the opposite direction. Extraction of natural gas from shale formation involves hydraulically fracturing rock to allow trapped hydrocarbon to flow freely. Recent advances in this technology caused US shale gas production to more than double over the same period. As such, the need for LNG imports has all but diminished in most parts of the US.
Another consequence of this is that LNG re-export and liquefaction licences have been granted by the US authorities, e.g. Cheniere’s Sabine Pass, Louisiana facility. Simply put, the US which has been T&T’s largest importer of LNG, now has the approvals and the infrastructure to export LNG and therefore compete with T&T. Thus, the latest LNG import facilities in gas-guzzling Asia, South America, Europe and in the Caribbean will therefore see the US competing with traditional suppliers for market share.
In terms of the impact on price, greater gas supply may ultimately serve to dampen the current lucrative differential between European and US gas prices, all other things being equal. European prices have been over US$4.00 per MMBTU above US prices (i.e. about two times) due in part to its parity with crude oil and infrastructure limitations. High demand in Asia and fallout effects of the tsunami and nuclear power disaster in Japan have sent prices over US$8.00 per MMBTU above US gas prices. As such, any reduction in these price differentials will negatively impact netback prices to T&T, which have been buoyed by cargo diversions from USA to Europe and Asia. Bear in mind that Government revenues are roughly 15%-20% linked to LNG. To give an idea of scale, an incremental netback price to the borders of T&T (FOB) of US$1.00 per MMBTU is equivalent to roughly US$800 million per annum in sales revenues from all local LNG production, to be apportioned amongst the various parties in the LNG chain (Government included).
Apart from reduced US demand for T&T’s LNG, renewed interest in US production of petrochemicals (ammonia, methanol and other downstream derivatives) has implications for downstream expansion in T&T that has relied on North American demand growth. In fact, what has transpired in the US gas market is expected to be a global phenomenon, considering IEA estimates that over the next fifteen years unconventional gas will account for well over half of the world’s gas resources, and importantly, it will be more widely dispersed. This means that the supply picture of natural gas and its derivatives could be vastly different in the future. The near and long-term implications for growth of T&T’s energy industry are profound. Is it far-fetched that in 20 years time say, there will be a reversal, and the US could be T&T’s largest LNG supplier? Are we prepared to confront such a possibility, as remote as it may seem now, or should the foundation be expeditiously laid to avert it? Keep in mind that other productive sectors of the economy currently benefit from sub-market prices for energy, and that net energy importing countries rarely have this luxury.
Fourthly, the latest statistics out of the UN Conference on Trade and Development (UNCTAD) show that the share of global “outward” FDI by emerging countries has increased from 15% in 2007 to 28% in 2010. This trend is pronounced in the energy industry, since windfall savings have been captured by host governments with recent high commodity prices. The conditions are therefore ripe for economic growth via outward FDI by State and local private energy companies – another reversal of decades of history.
Indeed, “corporate T&T” has started exploring investment opportunities in the fast growing gas provinces around the world. However, the decision to invest “onshore” or outwardly requires a clearly articulated policy, and implementation mechanisms which consider implications for domestic capital supply, jobs creation, tax earnings and institutional capacity for such undertakings. Risks must be balanced with incentives/drivers for local State and private investors to pursue strategic opportunities in foreign lands, be it for market share, technology, expertise, natural resource access or simply rate of return on capital.
Finally, the great internal challenge is that T&T is facing a scenario of a low rate of proved gas reserves replenishment. This necessitates exploration further out at sea and at deeper drilling depths. Even with the best technology and expertise, the costs and risks are higher. Notwithstanding calculated moves to address this, the question of optimal use of limited natural resources in terms of portfolio mix of uses, and of long-term energy security can no longer be deferred.
In summary, a redrawing of the world natural gas map is currently underway, and T&T’s place in it is assured- after all, we helped draw the last one. Recent developments and plans to be outlined over the coming months should set the stage for the future of the local natural gas industry.