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The truth about Trinidad Atlantic LNG Train 1 and NGC's failed rescue plan

 

 

 

 

 

 

By Curtis Williams / TT Guardian

PORT SPAIN
Petroleumworld 11 09 2021

There has been a lot of spin by the Government and the National Gas Company Ltd on the failed attempt to save Atlantic LNG Train 1, including talking points like the negotiations are ongoing and must be respected and that the issues are complex and not easily understood.

The Business Guardian has broken every story as it relates to this matter and for the record and clarity, we have decided to give a chronology of how it all went down.

A major part of the consideration in the National Gas Company investing and losing a quarter billion dollars in Train 1 was the hope of keeping it running until gas from the BHP deepwater Calypso field was made available and for Shell’s Manatee gas. The trouble is those projects do not come on stream for another four to five years.

To set the stage, Train 1 is the flagship LNG plant. It started producing LNG in 1998. Train 1 is very important in the history of LNG in T&T because it showed the country can produce and export LNG at a price that could compete with piped natural gas. It started what would become increasingly a global market for LNG and it allowed T&T to become a global player in the LNG space.

At the time Train 1 was constructed, the ownership structure looked very different from today. BP was the largest shareholder and the sole natural gas supplier to the plant. Shell was not a shareholder and the second-largest shareholder was British Gas, which was eventually purchased by Royal Dutch Shell.

What was, however, clear and remains the situation today is the case for it to operate depended on bpTT.

The Train 1 (T1) contract was a 20-year deal and came to an end in 2018. After several interim extensions, T1 reached a decision point in 2020 with the shareholders holding the view that projections had shown there was no available supply of gas to continue T1 any further.

BP, which at that point was the gas supplier to T1 and the largest producer of gas in T&T, stated that it had no gas and could find no business case to justify the continuation of T1.

Shell, the largest shareholder in T1 and the other Trains and the second-largest gas producer in T&T, was of the same view as BP.

NGC, which is the Government of T&T shareholder in T1 and the sole aggregator and supplier of gas to the downstream petrochemical industry, saw this as a potential opportunity to supplement income to its fledging aggregator business which was taking a hit not just due to COVID-19, but by the fact that it was finding it increasingly difficult to conclude downstream contracts given the high price of gas that followed the Houston trip by Prime Minister Dr Keith Rowley and Energy Minister Stuart Young, when they helped secure new contracted gas from the upstream companies.

NGC president Mark Loquan and vice president, commercial Verlier Quan Vie sought then to take advantage of the fact that around this time Yara, Tringen and MHTL were all in active and advanced negotiations with NGC.

Due to COVID and the effects on methanol and ammonia prices, a couple of the plants at Point Lisas also invoked the “economic shutdown” option clause in their contracts, which allowed them to unilaterally shut down their plants for specific periods of time without any liability once methanol and ammonia prices dropped below a certain threshold.

The “economic shutdown” option itself was risky, as downstream plants can invoke it unilaterally once the pricing threshold is reached, and NGC had no coverage against this in its upstream contracts. In other words, NGC could not invoke “economic shutdown” in any of its upstream contracts but still offered this option to many of its downstream customers.

Based on the above, the NGC came up with a risky idea called the T1 Rescue Package in an effort to prevent the shareholders of T1 declaring the train closed. This idea was reportedly sold to Ministers Franklin Khan and Young and essentially proposed that NGC, as the 10 per cent shareholder of T1, would fund 100 per cent of the T1 cost for 2021, as Loquan indicated that he had sight of gas despite the fact that the two largest producers of gas thought otherwise.

The failed plan, we later learnt from the NGC’s chairman, was to “free up” gas from the downstream and divert that gas to T1 to justify the T1 Rescue Package.

The gas was to be “freed up” as it was expected by the NGC that the Yara plant, Tringen 1 plant and one of the then four operating MHTL methanol plants would remain shut down. NGC also thought that methanol and ammonia prices would remain depressed for all or most of 2021 and therefore the couple of plants that invoked “economic shutdown” would remain down for all or most of 2021.

They also assumed that the Methanex plant, which was down as they could not agree a gas price in the renewal discussions with NGC, would remain down, as internal emails showed that the NGC would not offer a better price to Methanex.

The NGC made several requests of BP and Shell (the combined 80 per cent shareholders in T1) to allow NGC the option to fund T1 beyond December 2021, as its gas volume assumptions were tenuous and they would need as much production days as possible to recoup the money they were to invest in T1.

On each occasion, both BP and Shell refused to allow this beyond 2021 unless NGC was prepared to make a longer term binding commitment, which the NGC could not do as they knew gas supply for T1 beyond 2021 would be difficult and challenging since it could not be expected the petrochemical plants would remain closed indefinitely.

The NGC has also put forward to the GORTT that T1 needs to remain an option for Calypso deep-water, Manatee and Dragon (Venezuela) gas. However, this was a major risk as neither of these three options would produce gas before 2027 or 2027 at best. With the other T1 shareholders not prepared to fund T1 beyond 2020 and with T1 having a high carbon footprint and ageing technology, NGC would not be able to keep the train idle from 2022 to 2026/2027, even if they were able to make the T1 Rescue Package work.

The cost to keep T1 alive for 2021 was US$24.7 million for the period January to March, which included the cost of the February turnaround and US$40 million for the period April to December for a combined cost of US$64.7 million (TT$440 million). To make this work, NGC needed a minimum of 150 mmscfd of gas, plus a certain number of production days, plus an LNG off-take agreement at a particular price.

The Business Guardian has the off-take break-even price which we have withheld.

The decision to proceed with the T1 Rescue Package was approved by NGC at a board meeting on December 4, 2020. NGC previously held a board meeting on December 2, 2020, in an attempt to have the T1 Rescue Package approved by the board, but the board was not at the time satisfied that the NGC had sight of the minimum 150 mmscfd to justify the decision—based on the “available” volume projections they were only able to come up with around 50 mmscfd of “freed up” gas.

It should be noted that on December 3, 2020 (one day after the first board meeting and one day before the second board meeting), BP wrote to NGC indicating that its supply to NGC for 2021 would be reduced by 100 mmscfd and BP further advised and cautioned NGC to take this shortfall in supply into consideration before making any decision to fund T1 for 2021.

Despite BP’s warning, Loquan requested the board meet on December 4, 2020 and at that meeting, the board was convinced that the NGC had sight of the minimum 150 mmscfd to justify approval of the T1 Rescue Package, which was then approved. At the time of this approval, NGC had no LNG off-take agreement as they could not even attract an off-taker at the break-even LNG price. Loquan indicated to the board that the 150 mmscfd was highly and mainly dependent on shutting down plants that were in active and advanced negotiations with NGC.

Given the extreme risks, two directors (Ganness and Balkissoon) dissented on the T1 Rescue Package decision, with director Ganness resigning a couple of weeks later. The other directors, knowing and appreciating the risks, took the decision to insist on a personal indemnity from the GORTT to protect themselves from any future liability stemming from the T1 Rescue Package decision.

NGC approved the indemnity for the directors on its subsidiary company (NGC LNG Limited), which holds the 10 per cent T1 investment and requested a personal indemnity from the Minister of Finance for the directors on the NGC board.

Now NGC’s 10 per cent shareholding in T1 is held by a company called NGC LNG Limited and this company is owned 62 per cent by NGC and 38% by NEL.

The following are directors of NGC: Conrad Enill, Ken Allum, Marcus Ganness, Howard Dottin, Dan Martineau, Sandra Fraser, Sean Balkissoon and Mark Loquan.

The following are the directors of NGC LNG Limited: Conrad Enill, Ken Allum, Marcus Ganness, Howard Dottin, Mark Loquan, Verlier Quan Vie and Narinejit Pariag.

It should be noted that Conrad Enill, Ken Allum, Marcus Ganness, Howard Dottin and Mark Loquan are directors on both boards.

All directors from both boards voted on all resolutions. There were no recusals. Marcus Ganness dissented on all resolutions before both boards and Sean Balkissoon dissented on all resolutions before the NGC board.

Based on the above, there was a situation whereby the directors of NGC sat and approved personal indemnities for the directors of NGC LNG Limited and then had substantially the same directors thereafter sitting on the board of NGC LNG Limited approving decisions based on tenuous assumptions with high risks knowing fully well they were fully and personally indemnified from any future liability. This also meant the architects of the T1 Rescue Package sat as directors on the NGC and NGC LNG Limited boards voting on and approving the very proposal that they negotiated.

The T1 Rescue Package was fully approved and NGC started funding T1 from January 2021. However, although a pivotal part of the success of the T1 Rescue Package was the shutdown of Tringen 1 and one of the MHTL plants, both of which had interim contracts expiring on January 31, 2021, NGC was prevented from shutting down these two plants.

Therefore, by the end of January 2021, circumstances had changed considerably, in that the pivotal volume presumptions of December 2020 were no longer valid and there was still no LNG off-take agreement. Therefore, NGC knew by the end of January 2021 that any money invested in T1 would be lost.

There were various circumstances that reinforced the fact that the T1 investment was not going to be viable. In an effort to mitigate this, NGC once again approached BP and Shell for an extension of the T1 arrangement to Quarter 1 2022, in an effort to increase the number of production days and to seek to engage an LNG off-taker. Once again, BP and Shell refused to approve this.

By the end of May, NGC had invested US$34.9M in T1 without supplying any gas for LNG and not only allowed itself to be exposed to further cash calls but also refused to pay the June and July cash calls in the total sum of US$6M.

NGC continued to refuse to honour cash calls and refused to terminate the T1 funding arrangement as the NGC was of the view that from a PR perspective, it would be bad for NGC to terminate an arrangement that it lobbied for and requested.

Despite being reminded of the principle of sanctity of contracts, NGC continued to breach its obligation to pay cash calls. After several exchanges among NGC, Atlantic, the GORTT and shareholders, Atlantic eventually terminated the funding arrangements by two days’ notice to NGC, effective August 5, 2021.

As owners of the entire Atlantic facility, the T1 shareholders pay the shared costs for the entire facility and receive production payments from the other trains in return. These shared costs would be transferred to the other trains (2, 3 and 4) only if the T1 shareholders declare T1 closed.

All the shareholders of T1 (except NGC) agreed to declare T1 closed. Given NGC’s position, however, the shareholders are unable to formally declare T1 closed although the train already has the blinds installed which effectively means that it is closed. As a result of NGC’s actions, BP and Shell have advised that they would not fund any future T1 shared cost until they receive greater granularity from the GORTT on the decoupling and decommissioning of T1, which is estimated to cost between US$150-$200M, which cost is supposed to be borne by the T1 shareholders in the percentage of their respective shareholdings.

BP and Shell have indicated that they are only prepared to pay the T1 specific cost until such granularity is obtained given the impending closure of T1.

Summer Soca, the 10% Chinese shareholder, has indicated that since T1 is effectively closed and is therefore no longer earning any income, there is no business case to justify any future cash injections towards T1 cost, be it shared costs, T1 specific costs, decoupling cost or decommissioning cost. The T1 specific cost for the rest of 2021 is US$27M and the shared cost for the rest of 2021 is approximately US$18M. Summer Soca has indicated that it will not contribute to any of this.

Given the current state of affairs brought about by NGC and the GORTT, Atlantic requested the sum of US$9M to fund such costs (including salaries) for the period August and September 2021.

However, under the Shareholders’ Agreement (SA), such funding can only come from the shareholders as a capital injection and further, under the SA, the resolution for such capital injection requires 100% shareholder approval before it can be passed.

With the Chinese refusing to approve or pay any further sums into Atlantic, the several attempts to pass the capital contribution resolution all failed, with the result being that none of the shareholders has injected any money into T1 to cover the US$9M expenses for August and September.

The Chinese continue to not approve any funding for T1 and therefore at present, Atlantic has no clear sight of funds to meet expenses beyond September 2021.

On another related point, it should noted that the Minister of Finance recently approved the borrowing by NGC of US$489M (TT$3.3B).

The RFP for this funding has already been issued, bids have already been approved, evaluated and approval of the preferred bidder is going through the approval process.



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