national energy policy consultations · henry hub spot price is expected to average a slightly...

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National Energy

Policy CONSULTATIONS

Re-fueling T&T’s economic engine: A new policy for energy, 2011-2015

NATURAL GAS UTILISATION AND PRICING


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Natural Gas Utilisation and Pricing

Preamble

Natural gas has dominated the energy landscape in Trinidad and Tobago over the last four decades and

will no doubt continue to play a pivotal role in the future growth and development of our national

economy. In particular, the natural gas industry has exhibited phenomenal growth over the last decade

with the establishment of successive natural gas liquefaction trains, which in tandem with our well

established and expanding ammonia and methanol export business, have accelerated natural gas

production levels and generated unprecedented levels of economic activity.

Global Context

Supply/Demand

Natural gas is the fastest growing primary energy source in both the industrialized and non-

industrialized world. It currently accounts for about 20 % of world energy consumption and is expected

to increase its share relative to crude oil over the next 20 years.

Natural gas is and will continue to be an important fuel for industrial and domestic applications and

particularly for electricity generation worldwide because it is inherently more energy efficient and less

carbon-intensive than other fossil fuels.


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In the medium to long term the largest projected increase in natural gas production is forecasted for the

non-OECD regions with the major increments coming from the Middle East (an increase of 16 trillion

cubic feet (Tcf) over the period 2007 to 2035), Africa (7 Tcf), and Russia and the other countries of non-

OECD Europe and Eurasia (6 Tcf).

World natural gas trade, both by pipeline and by shipment in the form of LNG, is poised to increase in

the future. Most of the projected increase in LNG supply comes from the Middle East and Australia,

where a number of new liquefaction projects are expected to become operational within the next

decade. World liquefaction capacity is forecasted to increase by about 2.4 times, from about 8 Tcf in

2007 to 19 Tcf in 2035. In addition, new pipelines that are currently under construction or planned will

increase natural gas exports from Africa to European markets and from Eurasia to China.

Price Outlook

The EIA forecasts that gas will be in oversupply globally for the next ten (10) years primarily due to the

emergence of Shale Gas in the US and the availability of additional LNG export capability. In 2011, the

Henry Hub spot price is expected to average a slightly lower US$4.31 per MMBtu, compared to US$4.35

per MMBtu in 2010.In Europe, natural gas prices are expected to continue to be disconnected from oil

prices and the outlook is for further erosion in the traditional oil-based formula gas pricing system.

In the medium to long term, the EIA sees US prices rising to about US$7.00 per MMBtu by 2015 with

European prices rising to around US$11.60 per MMBtu over the same period.

PIRA’s outlook for the Henry Hub price for natural gas is pegged at a more conservative US$4.00 per

MMBtu in 2011 with moderate growth expected in the medium term to long term.


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Based on historical price trends the picture for the other principal commodities produced by our natural

gas-based industries in Trinidad and Tobago is expected to be similar. Demand and market prices for

Ammonia, Urea, Methanol and Metals are therefore expected to exhibit similar modest growth in the

short to medium term. It should be noted that natural gas pricing for many domestic natural gas based

industries has traditionally been indexed to the international market prices of these and other

commodities.

Regional Market [Caribbean and Latin America]

Natural gas production in the region is currently estimated at 7.8 Tcf and is forecasted to

increase by approximately 20% over the next decade with Brazil, Venezuela and Colombia

expected to show significant growth in production capacity. At present, Trinidad & Tobago is

the main producer of LNG in the region and currently supplies volumes to such locations as

Argentina, Chile, Brazil, the Dominican Republic and Mexico.

There are several proposed projects within the region which seek to interconnect natural gas

supply with demand either directly via pipeline and LNG or CNG export or alternatively by

linkages through integrated electricity transmission and distribution systems. These projects

are viewed as critical to the economic development of several regional economies as they are


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expected to reduce the exposure to energy price volatility, improve the quality and reliability of

supplies and generally contribute to national and regional energy security.

Natural Gas Utilization

Natural Gas is utilized by a diverse mix of industrial facilities and our national infrastructure

includes the following:

1 Crude Oil Refinery

1 Gas Processing Facility (PPGPL)

4 LNG Trains

10 Ammonia Plants

1 Urea Plant

7 Methanol Plants

1 Methanol to Power facility

An A-U-M Complex that comprises of :

1 Ammonia plant

1 Urea plant

1 Nitric Acid Plant

1 Ammonia Nitrate plant

2 Melamine trains

4 Iron and Steel Plants

1 cement manufacturing plant

Over 100 Light Industrial Consumers & small gas consumers (air conditioning etc)

6 Power Generation Sites [Powergen (Pt. Lisas/Penal/POS), Trinity Power (Point Lisas),

TGU (Union Estate), Cove (Tobago)]

The relative gas utilisation of these sectors is observed in the pie chart below for the period January-October 2010.


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Given the export oriented nature of the country’s gas based facilities, their commercial performance is

directly affected by global trends and fluctuations in the respective markets. Products from Trinidad &

Tobago are exported to a variety of destinations. Trinidad and Tobago is currently the #1 exporter of

Ammonia and Methanol from a single site and, notwithstanding recent trends to diversify away from its

predominant position of supply of LNG to the US market is still the leading supplier of LNG to North

America. LNG, Methanol and Ammonia are exported to more than 20 countries in Europe, Asia, Africa

and the Americas.

Future Initiatives

Trinidad and Tobago has seen the creation of various highly successful gas based sub-sectors including

LNG, petrochemicals, metal processing and power generation. The next stage of value creation and

development of gas based industry would be built on the earlier accomplishments of the country, as

well as potentially attractive areas.


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With the right positioning, Trinidad can be the manufacturing base and the commercial, trans-

shipment and financial hub of the Caribbean and the Americas. Emphasis is therefore being placed on

expanding the country´s trade frontiers and promoting investment in human capital and infrastructure

with the aim of improving overall economic efficiency.

As an example, derivatives of methanol such as formaldehyde, vinyl acetate, methyl methacrylate and

dimethyl ether (DME) can be used to manufacture a host of finished products. Similarly, derivatives of

ammonia include melamine that is used in manufacture of laminates, wood adhesives, paper and

textiles, kitchenware, fire retardant, surface coatings, concrete plasticizers; and UAN used as a source

of fertilizers for plants.

Enhancement of the downstream demand would also be a driver for increased exploration and

production activity in the upstream sector. Conditions have been created whereby companies vie

(through the Competitive Bidding process) for the award of contracts to explore and produce from

hydrocarbon acreages. In evaluating the bids proposed, the Government considers what options will be

in the best overall interest of the country.

The Government has also pursued measures for the improvement of energy efficiency in the natural

gas based industries (with gas being used as both as fuel and feedstock). Having a structured approach

to incorporation of energy efficiency programs in gas based industrial plants will extract much greater

value for every unit of gas that is produced and utilized. In the 2011 Budget, provisions in the form of tax

allowances were made for incentives to companies which institute energy audits, as well as companies

which acquire energy efficient systems.

Encompassing the above energy efficiency programs and other considerations as to what sort of

industries would be the best options for the country, the Government has favoured the impetus for

the award of approvals for projects to be objective assessments using the following criteria:

Criteria for Evaluating Gas Based Projects

Degree of value added in the production process

Environmental impact

Capital expenditure

Early construction plan in terms of utilization of natural gas

Degree of local content

Projection of local content during construction and operation of the plant

Energy efficiency measures

Extent of variation between key terms and conditions of gas contract with NGC

Extent of variation between key terms and conditions of contracts for power and water

Extent of variation between key terms and conditions of estate and pier user contracts with

NEC

Additional benefits including Corporate Social Responsibility(CSR)


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The Government has also shown favourable interest in the development of industrial projects such as

the production of inorganic chemicals that have synergies with the local manufacturing sector.

The Carisal calcium chloride/sodium hydroxide project is scheduled to begin construction in 2011, with

an estimated capital cost of US$300 million, and is to be located at the Point Lisas South and East

Industrial Estate. Products from this project include calcium chloride, sodium hydroxide, sodium

hypochlorite, and hydrochloric acid.

The above project would use natural gas mainly as a fuel as opposed to a raw material and may have

relatively smaller requirements for such aspects as plant utilities and land use.

Other chemicals that may be considered for local manufacture include calcium hydroxide, magnesium

chloride, potassium nitrate, potassium chloride, ammonium sulphate, ammonium chloride, sulphuric

acid and hydrogen peroxide.

Local manufacture of these chemicals may provide some degree of stability to volatile global prices and

enable reliable and sustainable supplies for raw materials in the creation of new and innovative

industries for Trinidad and Tobago.

From time to time, the Government has brought together stakeholders providing wide and varied views

on energy related projects from the conceptual stages in order to clearly identify areas for

improvement and to highlight potential synergies that are available. Such stakeholders have been the

state companies for e.g. the National Energy Corporation (NEC), the Ministry of Trade and Industry,

manufacturing and trade associations, project investors, business groups, non-governmental

organisations and financing institutions.

The Government has initiated conferences and seminars with key stakeholders for further discussions

on development of targets markets for new products manufactured in Trinidad. A seminar was held in

November 2010 that brought together the private and public sectors, academia and international

agencies for discussions on the potential of maximizing the downstream utilisation of melamine.

Similar events are anticipated for other new downstream projects to increase awareness and facilitate

access to information and also to encourage potential activities along these new project lines.

The table below shows an analysis of the strengths, weaknesses, opportunities and threats for the

country’s natural gas industry, with the focus on the development of the Downstream Gas Based

Sector.


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SWOT Analysis: Natural Gas Industry- development of Downstream Gas Based Sector

Strengths Weaknesses

Well educated and experienced labour force

Good transportation & communication links.

Strong legal system.

Regulated financial system.

Clear fiscal framework for the energy sector.

State agency (NGC) as an aggregator of gas for

supply and transmission.

Ample power generation capacity &

generation. Its proximity to industrial sites.

Existing and planned Ports and Industrial

Estates.

Capacity to produce downstream chemicals- such as 3rd stage chemicals (ammonium nitrate) and 4th stage chemicals (UAN, melamine).

Dependence of economy on energy (accounting for 50% of GDP, more than 80% of exports and about 60% of government revenues) renders the economy highly vulnerable to a downturn in international commodity prices.

Sufficiency of T&T reserves for meeting growing local and international demand for natural gas and gas based chemicals.

Suitable gas pricing along the value chain (e.g. margins, tariffs).

Limited access of third parties to liquefaction facilities.

Barriers to local energy participation (high risk and large capital requirements).

Opportunities Threats

Options for gas-based industries are diverse.

Possible participation of the State along the gas value chain.

Negotiations with Venezuela on development of cross-border fields.

Diversity of export of natural gas to Caribbean

Downturn in international commodity prices.

Potential for adverse gas quality from

increased numbers of gas suppliers.

Fall in upstream and downstream foreign

direct investment (FDI).


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and Latin America via pipeline, CNG, LNG or other suitable mechanisms.

Smaller gas-based industries with minimal impact on resources and infrastructure using output from primary chemical production facilities or by developing fully integrated processing plants.

Developing energy efficient industries will

optimize the use of our natural resources.

Expand to other higher value derivative

products such as plastics, iron and steel

products

The Potential for innovation, research and

development.

Increased security of supply of raw materials.

A larger and more diverse contribution to the

country’s GDP

Greater participation of more players in the

energy sector.

Regions with lower production costs of LNG and primary chemicals, e.g. Middle East, could make Trinidad less attractive.

Additional expansion in methanol and

ammonia could negatively impact our leading

position by further weakening the markets

with the addition of greater capacity.

Weaker gas import demand in the US, T&T’s

main LNG customer, owing to increased US

gas shale production.


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Questions for Comment/Discussion

The following questions are for consideration:

1. What should be the role of the government in support of programmes to encourage

research and development, technology transfer, skills development and business

incubation in the natural gas based sector?

How can we meet skills gaps?

2. What should be the role of the government in gas sector development?

3. What is the state’s role in mobilization of local financing in support of the natural gas

based industrial sector?

4. What are the clear and distinct roles and responsibilities that the MEEA, NEC and NGC

should have in the implementation of policies in the gas based industrial sector?

5. How should related party transactions, transfer pricing, conflicts of interest, potential

for abuse of monopoly power in the up-, mid- and downstream sectors be handled?

6. What is the current state of competition and opportunities within the country for:

Gas Supply

Gas Transportation

Natural Gas Liquids Extraction

LNG Production

Petrochemical Manufacture e.g. ammonia and methanol

Iron & Steel Manufacture

Power Generation

7. Is the structure of the fiscal system efficient and effective to allow for mechanisms to

encourage activities in the natural gas based sector, and how should the system be

reviewed to address changing external conditions?

8. What is the role, if any, of the reserve-to-production (R/P) ratio as a criterion in the

decision making process for gas allocation?

9. What are the key areas for future downstream development?


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10. How should the Criteria for Evaluating Gas Based Projects be weighted and should

there be differences in weighting for different industries?

11. Should there be specific requirements by Government for any Energy Efficiency and

Carbon Emissions Reduction activities/initiatives for the gas based industries?

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