BG view
From The Editor
One
of the interesting things about writing this column
is that it generates interesting responses. Last week,
in this space, I argued that T&T can only improve
its standard of living “by ensuring that we
maximise the revenue from natural gas in order to
develop an economy that is so sustainable and sufficiently
diversified that it can survive a prolonged price
collapse or the end of gas—by developing a strong
post-gas economy.”
That
argument was based on the thinking that whether T&T
decides to go forward with aluminium should be based
primarily on whether the metal would be good for the
T&T economy.
Responding
to the BG View which was headlined, “If God
gave us limes,” a foreign reader commented that
the “simplistic comparison between what is paid
for a raw material that is being put to use, in volume,
to add value domestically and what it could fetch
from sale overseas with no value added component,
is often a source of misguided anguish.”
Given
T&T’s experience with Ispat and the failure
to create an industry using steel from that plant,
the issue of added value is one that needs some thought.
There is also the matter of measuring added value.
The
reader also asked this question: “If you pay
US$1 per lime from the plantation, how much discount
should you expect if you agree to buy one million
limes a year for 30 years?”
It’s
a good question and volume discounting is obviously
the reason why Francis Fashion (which has multiple
outlets) can afford to sell clothes cheaper than a
merchant with only one outlet.
But
what if there were three companies willing to buy
one million limes a year for 30 years? Would a volume
discount be justified then?
In
my view, a volume discount for aluminium producers
may be justified in certain circumstances, especially
if:
The
agreement to buy the natural gas is based on take-or-pay
terms so that there is some protection for tax revenues
even if the product price collapses (similar to the
arrangement that PowerGen has with T&TEC);
An
annual natural gas price escalator is built into the
contract (similar to the gas purchase agreement that
T&TEC has with NGC);
The
natural gas price is indexed to a daily benchmark
product price (it would have to be superior to the
Atlantic LNG I, II and III arrangements);
There
is some transparency in the decision-making process
such that the public can be assured that the Government
is not selling the country’s patrimony too cheaply
and that the deal can stand up to public scrutiny
(unlike the PowerGen deals);
A
volume discount would not be justified if:
It
is going to contribute to the exhaustion of T&T’s
natural gas in 13 years;
The
sale of the product to one company is going to cause
a disequilibrium in an economy.
Last
week’s column argued that the Government should
be looking to maximise T&T’s revenue from
our depleting natural gas resource as well as looking
to diversify the economy and put it on a sustainable
footing.
The
Government, it seems to me, ought to have a transparent
methodology for assessing companies that wish to invest
in T&T’s gas based on the factors of revenue
maximisation, diversification and sustainability (there
are probably others).
Sustainability
is crucial because we don’t want a situation
where the major natural gas producers (BP, BG, EOG
and Petrotrin) find little or no gas in the next five
years but the country has given commitments to so
many new gas projects that a future government is
forced to choose between electricity generation and
aluminium production, for example.
Such
a scenario could compromise future negotiations between
T&T and the foreign gas producers as well as undermine
T&T’s position in the cross-border unitisation
negotiations with Venezuela (which will take three
to five years to complete).
This
worst-case scenario (the no-gas scenario) could result
in T&T having a full slate of industries using
natural gas with no gas available.
On
the other hand, we don’t want a situation where
the major natural gas producers find a great deal
of gas in the next five years, but there are few projects
to monetise the gas because the Government has decided
to wait until the gas reserves can be proven and the
investors in industries that will diversify T&T’s
gas economy (such as UAN, gas-to-liquids and aluminium)
decide they can not wait.
This
worst-case scenario (the undiversified scenario) could
leave T&T’s future revenues at the mercy
of a possible collapse in the US natural gas market.
This will happen because the Government, having spurned
the opportunity to diversify the monetisation of T&T’s
gas, will be forced to avail itself of additional
LNG trains making the country over-dependent on LNG
revenues.
The
best-case scenario would be if:
The
gas producers continue finding big gas fields every
few years;
The
price of natural gas in the US market does not collapse
suddenly;
The
T&T economy is sufficiently diversified when the
markets for our products go soft;
The
Government wakes up to the realisation that it does
not have to find projects (some really spurious) to
spend all of the additional gas revenues in a two-year
period.
Business
Guardian is
Trinidad Guardian's Weekly Business Review. Petroleumworld
not necessarily share these views.
Editor's
Note: This commentary was published by The trinidad's
Business Guardian (Trinidad), on Thursday 2nd March
2006. Petroleumworld reprint this article in the interest
of our readers.
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Petroleumworld
03 05 06
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