Last week, the Sunday Express looked at the state of contracts between the National Gas Company (NGC) and the plants in the Point Lisas Industrial Estate after the country’s largest producer of methanol, the Switzerland-headquartered Proman group, announced it was idling its M4 and M5000 methanol plants on the Point Lisas Industrial Estate effective immediately.
This week, the Sunday Express examines whether and why Point Lisas became a difficult place to do business.
By Asha Javeed
IF the Point Lisas Industrial Estate is in a state of transition, then the company that will determine how the landscape looks is the National Gas Company (NGC).
Quite simply, it is negotiations with the NGC and the downstream companies for gas supply that has caused some stalemates, some plants being put to idle or closed.
The factors which made Point Lisas an attractive place to set up shop—principally cheap gas, markets—do not exist anymore, the NGC is not just an aggregator or just relying on margins anymore and the global energy industry itself is in transition toward decarbonisation.
The reality is that gas is more expensive to find, as the cost of upstream capital and operating costs have increased, and markets are cyclical in an industry affected by Covid-19 in 2020.
So how did Point Lisas find itself here?
1. The shale oil/gas revolution in the United States also made it attractive for new ammonia and methanol plants with product from Trinidad and Tobago having to go further away to other markets.
2. Before Covid-19 ammonia and methanol prices were declining significantly and the Covid-19 pandemic exacerbated the situation by abrupt disruptions in industrial demand.
3. Contracts were renewed and renegotiated with all Upstream companies from 2017 to 2019 as the country was faced with decisions around further decline or multi-million-dollar Upstream investments for the future. This required higher pricing based on the current realities of Upstream investment.
“The Point Lisas Industrial estate is in a period of transition, from an area that attracts investment due to low-priced gas to an area where petrochemical plants can operate reliably, efficiently and create value for their shareholders.
“The transition has not been as smooth as desired, due to the need for NGC to secure both downstream and upstream contracts in a short period of time, in a volatile and uncertain environment. The difficulty has come from the process of aligning upstream gas purchase contracts with downstream sales contracts in an environment of very narrow gas margins, collapsed commodity market prices and, in some cases (power markets), extremely suboptimal market structures.
“The transition will eventually lead the plants on the estate to be largely more carbon neutral and green producers. Initial steps in this regard (use of waste steam to improve production processes, initial memoranda of understanding with hydrogen concerns) have been already taken,” an industry source explained to the Sunday Express.
Impact on NGC
So how did this impact on NGC?
Since 2010, the NGC has executed short term supply agreements to meet domestic demand. Asked for comment, NGC’s president Mark Loquan told the Sunday Express:
“NGC in its role as aggregator has increased co-ordination between upstream and downstream gas supply, managing new supply and acquisitions and encouraged investment in small fields like Iguana, and continues to be forward looking at a difficult time. Hence the gas value chain analysis led by the MEEI with UK consultant Gas Strategies with all the players in the chain will be a critical exercise on policy going forward with a deeper sense of where value can be achieved for all parties.
“In the meantime, we have to navigate a challenging environment which is showing signs of recovery. In fact, some companies which had announced they were taking a plant down indefinitely have restarted operations, and NGC will not subsidise plants to keep running. Long-term contracts continue to be our focus. With new developments coming on stream, supply is still challenged in 2021 but is expected to improve from 2022/2023 but pricing compared to many years ago as stated will be higher for the factors mentioned before.”
Last week, the NGC issued a statement that most plants on the Point Lisas Industrial Estate are operational and under contract with NGC for the supply of natural gas. (See Table).
It noted that the following plants went offline and then were restarted on the Point Lisas Industrial Estate (since January 1, 2020):
1. Nutrien O2 Plant: Offline for market-related conditions - Shut down May 2 ,2020; restarted October 23, 2020
2. Nutrien O3 Plant: Offline for market-related conditions - Shut down August 1, 2020; restarted March 9, 2021
3. Nutrien O4 Plant: Offline for maintenance - Shut down January 1, 2021; and restarted April 5, 2021
4. M2: Temporarily offline due to market conditions from May 18, 2020; restarted September 25, 2020.
5. M3: Temporarily offline due to market conditions from April 7, 2020 to September 11, 2020.
“NGC’s contractual terms with its customers remain confidential. However, the nature of the global natural gas business has necessitated a shift from long-term natural gas supply contracts to shorter-term natural gas supply contracts, in line with proven gas reserve availability and ongoing development programmes. Extending that to the downstream, it means that those downstream natural gas sales contracts must be aligned to this reality,” the company said.
Are the plants in Point Lisas efficient?
“In the current and future world, Trinidad petrochemical product will be faced with increased competition with new plants in a market driven environment where the most efficient plants survive,” an industry source explained.
Natural gas pricing
The price of natural gas has been the sticking point in negotiations.
The Sunday Express was told that while gas was historically cheap (1990s — early 2000s), in the 2010s, but more so after 2015, the US began to produce large amounts of very cheap associated natural gas as a result of fracking for oil.
This enabled the US to become a significant gas exporter via LNG projects set up over the last decade.
“This has meant that (unlike the case in the 1980s and 1990s) the US Gulf became the place in the Western Hemisphere to site new investment relying on low-cost gas to attract investment. Between 1995 and 2004, Trinidad and Tobago were building and investing in LNG. The need to reserve resources for LNG viability meant that absent aggressive development and discoveries, natural decline would result in lower gas supply availability.
“Moreover, the ratio of exploration wells to new discoveries had begun to revert to a global mean as new gas discoveries became fewer and amounts discovered became less. As a result, companies have had to explore for oil and gas in more complex reservoirs, in an environment of more expensive development costs for less new gas,” the Sunday Express was told.
The cost of such oil and gas has thus become more expensive with the costs passed on to the buyer, in this case NGC. The Sunday Express was told that to compound matters, the relative lack of success of some upstream exploration has meant that the quantum of gas available for NGC to purchase has become constrained.
“It is no secret that the cost of gas sold to NGC has increased over time as upstream producers signed new contracts at higher prices due to higher development costs by said producers. Up to the mid-2010s, the main NGC gas business was in natural gas margins, as it was the businesses that created greatest value to the shareholder.
“With the shift in commodity markets from late 2014 to ‘lower for longer’, this has meant that NGC has had to derive its value from diverse sources (profits from subsidiaries, investments, commodity trading) even as foreign exchange earnings from gas sales continued to be under pressure.
“In 2020, the advent of the Covid-19 and the collapse of industrial demand and petroleum and petrochemical prices in 2020 (affecting NGC revenues, taxes and dividends) came at a time when all other sources of government revenue had been constrained — ironically, at a time when the added value in terms of foreign exchange earnings, dividends and taxes were needed the most by the State,” a source said.
Last week, the Sunday Express sent questions to NGC on how the price affects their negotiations with Proman.
Sunday Express: Is NGC constrained in its negotiations? If so, how?
NGC: NGC as any other commercially driven energy sector company is operating in a global environment and as such will negotiate such that it will derive maximum value for its shareholder. Its overall strategy must be in alignment with GORTT policy for the sector. As such, part of its concern must be in the overall health of the sector - something that its downstream customers may not have to be overly concerned with.
Sunday Express: Did the NGC, according to Proman, introduce a “significant increase” in its natural gas price from April 1? Is that fact or fiction?
NGC: It is the policy of the NGC to not comment on current contract negotiations however as NGC gas price is linked to petrochemical commodity prices which has jumped sharply in recent times, NGC’s acquisition costs of gas have also increased. NGC continues to successfully fulfil its other gas supply contracts with Proman-related plants, as it does with several other producers. Proman may have an opinion on what the natural gas price should be: we are still in negotiations to arrive at a mutually beneficial solution to the divergence in views.
Sunday Express: Was the NGC price increase due to a hike in the cost of gas from the upstreamers or not?
NGC: Yes. The current iteration of natural gas prices from upstream gas producers are higher than the last iteration of prices. We already spoke to some of the fundamental changes above and why. The reality is margins going forward in the current contracts will not be the same as 20 years ago, or even five years ago,
Sunday Express: Has NGC done a good-faith assessment of the impact of the new gas price on all-in cost of MHTL’s production?
NGC: It is not the policy of NGC to comment on the production or finances operations of individual companies, moreso companies they are engaged with in active negotiations.
Sunday Express: Where is NGC creating value?
NGC: With the shift in commodity markets from late 2014 to “lower for longer”, this meant that NGC has had to derive its value from diverse sources (profits from subsidiaries, investments, commodity trading) even as foreign exchange earnings from gas sales continued to be under pressure. The current NGC product portfolio is far more diverse than it was in 2010 and with other efforts at further diversification in income streams in train, it is expected to be more resilient in future.