21 May

T&T’s Place in the New Golden Natural Gas Age

Our role in the emergent “golden age” for natural gas.

According to the recently released 2011 World Energy Outlook by the International Energy Agency (IEA), there is an emergent “golden age” for natural gas.  Key aspects include growth in demand, surge in the production of unconventional natural gas and increased competition for foreign direct investment (FDI).  Trinidad and Tobago 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. We briefly explore the implications of these global trends on Trinidad and Tobago’s gas sector and steps being taken to ensure its sustainability.

Demand Growth

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.  Figure 1 shows the projected incremental demand increase between 2009 and 2035.  China will experience the largest growth due mainly to electricity requirements.  Likewise, India is seeking to diversify its energy mix away from coal by the liberalization of hydrocarbon exploration in the 1990’s, and more recently with greater deregulation of gas pricing and development of infrastructure for importation of LNG.  Economic activity is also expected to spur high gas demand in Middle Eastern countries.

As the world is looking for more natural gas, the IEA’s forecast is for Trinidad and Tobago’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 on this outlook.  Certainly, the Ministry of Energy and Energy Affairs has indicated, in various fora, that stimulating exploration and development activity is receiving high priority.  It is expected that 15 exploration wells are to be drilled and six seismic programmes are to be undertaken in 2012. Furthermore, recent changes to the taxation regime and remodelling of the Production Sharing Contract have been aids in rekindling exploration activity.  Development drilling on producing fields is also expected to take place.  Given that the natural gas sector has been a central pillar of  Trinidad and Tobago’s economy for the past two decades, these are indeed positive signs.

Apart from this, Trinidad and Tobago remains generally attractive to foreign direct investment to stimulate the sector.  However, the value proposition of the country is facing competition, given that relatively cheap energy, low political risk, a skilled workforce, and strategic location are not as unique as they used to be.  The fortunate circumstance of this new gas age is that the climate change agenda coupled with high demand for power generation have caused major consuming countries to pursue investment opportunities in distant lands to secure energy supply, and Trinidad and Tobago’s status as a haven for FDI on the world stage is well recognized.

An Unconventional Future

The second fundamental feature of the new golden age for gas is the growth and impact of unconventional natural gas resources. US proved shale gas reserve has jumped from 33 trillion cubic feet (Tcf) in 2008 to 482 Tcf in 2011.  To put this in perspective, Trinidad and Tobago’s total 3P gas reserves is 27.237 Tcf as of end 2010, and has been declining in the recent past.  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.

With increased shale gas production, the need for LNG imports has all but diminished in most parts of the US. Further, the US has approved re-export of LNG, i.e. even in cases where LNG is imported into the US, it may be stored and reloaded onto LNG tankers for delivery to other markets. Cheniere’s Sabine Pass, Louisiana facility is one such example which has this bi-directional capability. With this virtual oversupply situation, liquefaction projects are also being developed for US gas to be liquefied and exported. Simply put, the US, which has been Trinidad and Tobago’s largest importer of LNG, now has the approvals and the infrastructure to export LNG and therefore compete with Trinidad and Tobago.

Thus, the latest LNG import facilities in gas-guzzling Asia, South America, Europe and in the Caribbean will see the US competing with traditional suppliers such as Trinidad and Tobago for market share. Not surprisingly, there has been a significant impact on US gas prices, which have plummeted to below US$3.00 per MMBTU, a level which was last experienced over ten years ago. But the impact may not be limited to the US alone.

Figure 2 shows the trends in US, European and Asian gas prices.  European prices have been over US$4.00 per MMBTU above US prices 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 well over US$6.00 per MMBTU above US gas prices.  Any significant increase in LNG supply (from US shale gas and several new LNG projects being developed worldwide) may impact these price differentials.  Note that cargo diversions from USA to Europe and Asia have been a major source of incremental netback value to Trinidad and Tobago, which can be eroded with falling price differentials.

Bear in mind that Government revenues are roughly 15 per cent-20 per cent linked to LNG.  To give an idea of scale, an incremental netback price to the borders of Trinidad and Tobago (FOB) of US$1.00 per MMBTU is equivalent to about US$800 million per annum in sales revenues from all local LNG production, to be apportioned amongst the various parties in the onshore segments of the LNG chain (Government included).

Apart from reduced US demand for Trinidad and Tobago’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.  IEA estimates that over the next 15 years unconventional gas will account for well over half of the world’s gas resources, and importantly, it will be more widely dispersed, as shown in Figure 3.

This means that the supply picture of natural gas and its derivatives could be vastly different in the future. Given high demand, growth and availability of the resource, unconventional gas production from China, India and Europe could reach up to 10.1 trillion cubic feet in 2030 (source: Wood Mackenzie, Jan. 2011, The Potential Impact of Global Unconventional Gas Growth). The near and long-term implications for growth of Trinidad and Tobago’s energy industry and its targeted export markets are profound.

 FDI Competition

The third major 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 Trinidad and Tobago well. However, the fact is that foreign direct investment has historically been the “Achilles heel” of energy sector growth in developing countries 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 Trinidad and Tobago, 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 Trinidad and Tobago) in balancing an attractive enough fiscal regime with fair economic rents.

Additionally, 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 per cent in 2007 to 28 per cent 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 Trinidad and Tobago” has started exploring investment opportunities in the fast growing gas provinces around the world, such as in Africa, India and Brazil. However, the decision to invest “onshore” or outwardly requires a clearly articulated policy, and implementation mechanisms. The goals of such a strategy must consider implications for domestic capital supply, job 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.  The National Gas Company of Trinidad and Tobago Limited has embarked upon this bold initiative and is playing a lead role.

Conclusion

A redrawing of the world natural gas map is currently underway, and Trinidad and Tobago’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 revitalizing growth and sustaining the local natural gas industry.

* Elements of this paper have been published by this author in TnT Review, Lloyd Best Institute of the West Indies, 6th February, 2012.

By Haydn I. furlonge,
Ph.D. Chemical Engineering
NGC’s Assistant Manager,
LNG & Investment Analysis