BUSINESS is generally about investing in a project with the hope of making and/or continuing to make a profit or get an asset delivered on time at the agreed price and specifications. Thus, there are four standard considerations in business which should be addressed when contemplating an investment. These are; the cost to the business of the project, the income or asset expected from it, the risk that all will go well and the last, ensuring the project is carried out efficiently, with as high productivity as possible.
The risk factor is of fundamental importance since it is the factor that can impact severely on the prospect of making a profit or delivery of an asset or even a loss and it is usually outside the direct control of the project managers. The risk factor deals with information on such related occurrences, events, for which a priori there is little known about them and in the worst case nothing is known. In the first case, the use of available information allows a probability figure to be put on the events, in the second there is uncertainty, nothing is known. If in carrying out the project the adverse outcomes of these events occur, income/returns could be much less than the cost of the project.
For example, an oil company may invest in the exploration of a certain area after viewing the seismic data on the area, wherein the risk can be defined by a probability figure. Notably, drilling is undertaken even with the knowledge of the probability of failure. Still, when the exploration well is actually drilled it may turn out to be a dry hole—whereby the income on the project will be less than the cost to drill the well. It is said that recently BHP drilled ten exploratory wells in our deepwaters and two of them were dry. Note that such a well in deepwaters can cost some US$100 million. However, the oil investor can claim the loss on dry holes as a tax deduction according to their contract.
Consider also the project that the NGC undertook to refurbish the Train 1 LNG compressor plant, though its partners with differing objectives (seeing that they were upstream producers of gas, which they were allowed to sell directly to the Atlantic trains while NGC has shareholding only in trains 1 and 4) it was funded solely by NGC. The risk that NGC took was that some gas would be available in the short term given that both the closure of some petrochemical plants in Pt Lisas and that small quantities of gas seem to be coming from some small upstream operators. However, no solid information was available on this supply of gas and as such, a probability figure could not be determined—in fact the supply of gas was uncertain.
Further, as Dr McGuire reminds us, if gas had become available from the upstream producers and the petrochemical plants were unable to take this gas, then NGC with the take-or-pay contracts would have no customer for this gas. Hence it was expedient to refurbish Train 1.
NGC took the decision in face of this uncertainty to go ahead, if only on gut feeling. As is now public knowledge, the flip of the loaded coin did not favour NGC and at present there is no gas available. All businesses operate with a risk factor, though one commentator tells us that the government business of tax collecting is without risk! Hence businesses are tending to the creation of risk assessment and mitigating departments. The work of such a department includes the collection of the available information that relates to the at-risk events. If such information is available a probability figure could be assigned to the event which could give an idea of losses that could occur. Also, the department can also recommend insuring the company against failures and even attempt to pass on the risk to others. These insurances clearly add to the cost of the project but mitigate losses if the feared outcome occurs. Where the project is the delivery of an asset by a contractor, she may be asked to submit a performance bond to the employer.
It is not in the public domain what mitigating cover NGC may have sought, if any, given the uncertainty of the availability of gas. Still, were it only Manatee field that was available to provide the gas, such would be available but not in the short term. Hence, the option surely existed to negotiate the sharing of the available gas in the short term such that Train 1 could operate, providing NGC and the country with some needed foreign exchange income, while promising a better deal to the partners, who are also upstream producers of gas and would benefit from the output from Manatee. Whether this was attempted before NGC made the decision to go ahead with the refurbishment is not public knowledge. What is known is that, a posteriori, negotiations are now taking place with its partners on the short term supply of gas to Train 1.
The point of all of this is that to claim that NGC wasted our money, some US$32 million, given 20-20 vision of hindsight, is to demonstrate a lack of understanding of how business operates in the normal environment of risk, in which you win some and lose some with the former hopefully being the greater. However, it is necessary to put in place mechanisms that mitigate risk losses. Still, it is noteworthy that the after tax profit made by TTNGL is $134.1 million. You win some!
Bear in mind that NGC’s intent was to earn US$s now, given the acute shortage of foreign exchange in the country at present—a powerful driving force. Keeping Train 1 in operation would have earned us foreign exchange that it is desperately needed if NGC’s gamble had paid off. However, the partners of NGC in Train 1 had no interest in whether T&T earned foreign exchange or not. Their interest was to maximise their income. With the shortage of gas this maximisation did not include sharing gas with Train 1.
Consider also the allocation by government of grants etc to some who appear to have innovative ideas and which could proceed to SMEs that export and earn foreign exchange. Experience has shown that a small proportion of such start-ups develop into successful sustainable companies. Hence government in funding such ideas is taking a risk with and maybe wasting our money. Yet this is an attempt at diversification which, diversification, must be attempted given the depletion of our petroleum resource, net-zero 2050 and our need to import. Business is about managing risk in investing. Also, our governments over the years have taken risks in investing and have lost our money: Life Sport and the wastewater plant spring immediately to mind. In the economic development of emerging countries corruption, especially in government contracts, presents an endemic risk.