T&T Natural Gas Value Chain

How natural gas is monetized, and the meaning of value chains.

Factors Influencing the State’s Share of Social & Economic Value

The State’s share of social and economic value may be affected by several factors, such as:

a) Tax Regime – In the early stages of establishing the gas industry, fiscal incentives in the form of tax holidays were given to investors.This was done to attract investors in order to build and develop a gas based industry in the country. Today, there is less emphasis on giving such tax holidays to investors.Today, fiscal incentives to investors include exemption from import duties as well as accelerated depreciation on plant and capital equipment.

b) Downstream Portfolio Mix – Natural gas pricing in petrochemicals in Trinidad and Tobago is partly based on the market prices of the downstream products. These prices are cyclical and sometimes unpredictable in nature. As a result, gas prices on which Government’s upstream and midstream revenues are based can be significantly volatile and subject to the natural price variability associated with these commodity chemicals. Profitability of downstream companies is also affected and so too is Government’s taxation in the downstream sector. The mix of commodities in the local downstream portfolio will therefore determine the extent of the value chain benefit that could potentially be captured by the State.

c) Greater Value Added – The further the processing that takes place locally down the value chain, the greater is the value added and the greater is the potential value that could be retained locally and by the State.

d)  Extent of Involvement by local Private Sector – There is an additional benefit to the country when there is local private sector participation in the gas industry.This provides good opportunities and likelihood for the returns from such investment to be kept within the country and reinvested in the local economy rather than to be expatriated to home countries of foreign investors.

e) Level of Participation by state- owned companies – One source of Government earnings is through dividends, which accrue to equity investment by State owned companies. Greater participation by the State and state owned entities has the potential to increase total revenue occurring to the State and thus to capture a greater portion of the value added.f) Extent of Local Content – This has to do with how much of the investment in new plants is derived from indigenous or locally produced goods, services and skills. These could include:

  • Local engineering
  • Environmental consultancy
  • Legal consultancy
  • Financial products and services
  • Materials supplies
  • Foundation and structural works
  • Plant, vessel and platform fabrication

A greater degree of local content stimulates local business activity, generates jobs for nationals and increases skills development. In effect it also improves the multiplier effect.

How natural gas is monetized

The process of deriving value from gas resources is called gas monetization. This process is not a single stage one, but involves a chain of related activities starting from the extraction of the natural gas from the ground to its transmission to various market destinations.

The meaning of value chains

A value chain is a chain of activities that processes raw material through a number of intermediate stages to a marketable end product. For instance natural gas after production must pass through a chain of activities that add value to the original material such that it is more readily usable by the final consumer. Although there is a cost attached to adding value, it is important to distinguish ‘cost’ from ‘added value’.

A diamond cutter can be used as an example of the difference.The cutting activity may have a low cost, but this activity adds much of the value to the end product, since a rough diamond taken from the ground is significantly less valuable than a cut diamond.

Natural gas needs a dedicated energy market and significant infrastructure even before it can be extracted. As a result, the gas monetization process is more complex than that of oil which can be easily loaded into a tanker and traded in mature commodity market to a number of well established market destinations.

Activities comprising the Value Chain

Broadly speaking, the natural gas value chain is comprised of the upstream, midstream and downstream.

Forms of Value

Value may be reflected in terms of either:

  1. i)  Economic or monetary value, or
  2. ii)  Social value

Economic Value

The primary form of value to all parties involved in the gas value chain is monetary in nature. To local and foreign investors, this value is in the form of dividends which provide a rate of return on the investor’s investment. With respect to investment in gas based industries, over the last thirty years or so, over US$5 billion has been invested in gas based plants at Point Lisas, and a further US$3.25 billion just in the LNG plants. To Government, revenues are collected in various forms all along the gas value chain through dividends, taxes and royalties.

Social Value

On the social side, value may be reflected mainly in terms of:

a) Job creation and skills development

Key skills, new jobs and generally economic wealth generally would have resulted from extensive growth of the industry over
its years of existence. These may include gas well services, project management, estate and marine infrastructure operation and management, plant and pipeline construction, plant maintenance and operations, gas pricing and sales negotiation, marketing, market research and corporate law. In addition a lot of new service and supply industries would have been developed as a result of having to service the main investment.These indirect or supporting economic activities is what could be referred to as the multiplier effect of the new industry.

b) Positive impact on communities – Energy sector companies have embarked on a wide range of social programmes, including development of community facilities, human capacity and skills development, enterprise development, health, safety and environmental awareness, as well as contributions to educational, social, cultural and sporting initiatives.