Energy market challenges drive downstream innovation in Trinidad and Tobago oil

While the upstream sector is the main driving force behind the prosperity of Trinidad and Tobago’s energy industry, further efforts are needed to strengthen the downstream sector against challenging conditions. Increased shale gas output in the US has pushed down costs for processing fuel and feedstock for production, and lessened their dependence on gas imports as well as by-products such as ammonia and methanol from T&T. US import volumes of natural gas from T&T peaked in 2004 at around 462.1bn cu feet, but by 2017 it fell to 70.5bn cu feet, according to the US Energy Information Administration.

In addition, the National Gas Company (NGC) has signed new contracts with foreign upstream companies such as BP and US-headquartered EOG Resources for the supply of gas at higher prices. While those contracts are aimed at raising NGC’s profits, they may end up making the local downstream sector less competitive, which could result in some firms relocating their operations away from the country. “We are losing competitiveness as a petrochemicals destination,” Gregory McGuire, an energy economist in T&T, told local media in January 2018.

No Longer Attractive

Several players in the industry have also expressed similar views, pointing out the potential risks to T&T’s downstream sector. Kevin Ramnarine, the former minister of energy and energy affairs, told local press in January 2018 that higher gas prices in T&T, coupled with the increased shale production in the US, are threatening the viability of the island nation’s downstream sector. The higher prices in T&T could force downstream companies to seek other markets that can purchase their gas-derived products. “NGC cannot only be about profit maximisation; however, it must play a crucial role in balancing the sector,” Ramnarine said.

The risk of companies relocating was also underlined by Jerome Doke, CEO of the Caribbean Nitrogen Company (CNC), who told local media in May 2018 that T&T is no longer an attractive place for petrochemicals companies to launch new processing plants. He added that it was unlikely CNC would be starting new projects in the country, citing the growth of shale gas in the US as the culprit. “I think that capital will always follow where investments return, and in terms of new projects being built, T&T is no longer an attractive destination because the feedstock availability is questionable and the pricing is higher,” Doke said. In January 2018 CNC shut down its ammonia plant in Point Lisas as a result of NGC cutting off its gas supply, a decision Doke credited to NGC’s pricing policies, which he claimed were marginalising T&T as an ammonia-producing country. NGC resumed gas supply to CNC in April 2018 following the signing of a new long-term gas sales agreement after months of negotiations.

Innovation & Collaboration

While the country’s energy sector is currently at “a critical transition”, the way forward will be facilitated by innovation and collaboration, Mark Loquan, president of NGC, said at an energy conference in April 2018. To improve the downstream sector’s prospects, Loquan suggested that gas could be monetised in small and marginal onshore and offshore fields to increment supply. While such fields have not been acknowledged by the government as a priority, the national company is working with the Ministry of Energy and Energy Industries, state-owned oil firm Petrotrin and other upstream companies to bring those fields to production stages more quickly.

Loquan also called for greater molecular efficiency, given that some of the country’s gas processing plants are not operating at full capacity due to ageing infrastructure; however, many operators are reluctant to invest in building upgrades because of the economic losses incurred by the necessary downtime. This is an issue that can be solved through collaborative efforts, while at the same time highlighting the need for T&T to examine the efficiency of its gas-fired electricity generation.

Profits & Prospects

Despite the uncertainty surrounding activities in the downstream sector, NGC’s business model is performing well, evidenced by the finances of T&T NGL (TTNGL), a holdings company constituted by NGC in 2013 to allow public participation in an initial public offering to own equity interest in Phoenix Park Gas Processors (PPGPL), a subsidiary of NGC. TTNGL holds a 39% share in PPGPL, which operates a natural gas processing and fractionation plant – the country’s largest producer of propane, butane, isobutane and gasoline.

In the first half of 2018 TTNGL reported an after-tax profit of TT$128.5m ($19.1m), up 40.7% over the same period in 2017. Gerry Brooks, chairman of NGC, attributed the rise to a higher share of profits from TTNGL’s investment in PPGPL, while PPGPL’s improvement was a result of increased revenue from raised product prices in Mont Belvieu, Texas, and greater natural gas liquids sales volumes, despite lower volumes supplied to the Point Lisas Industrial Estate.

Outlining the company’s plans to reposition its business in order to remain competitive, Brooks was optimistic about the sector’s prospects. According to the chairman, natural gas production is projected to increase to 3.8bn standard cu feet per day (scfd) in 2018, 3.9bn scfd in 2019 and 4.1bn scfd in 2020. The rise is expected to be buoyed by enhanced methanol, ammonia and LNG prices, which bodes well for foreign investment and revenues in US dollars. The economy is also expected to benefit from a 12.5% royalty tax on the production of natural gas, crude oil and condensates, which took effect in December 2017, designed to boost government revenues from foreign oil companies operating in the country during times of low oil prices. The tax is forecast to primarily affect BP, as Shell, EOG Resources and BHP operate under production-sharing contracts, which mandate the government pay the companies’ taxes.

Brooks also called on local companies to leverage unused capacity in their manufacturing plants and explore new markets such as Cuba, the Dominican Republic and Guatemala. NGC is actively seeking opportunities abroad to secure consistently satisfactory gas supplies, while diversifying and expanding the value chain. As a result, NGC’s infrastructure budget until 2020 is likely to exceed TT$2bn ($296.7m), while $3bn ($445m) of foreign investment is earmarked for the development of new plants. While such prospects are encouraging, Brooks warned that it is necessary for businesses to break their cycle of dependence on the state and seek independent entrepreneurship.

Premium Diesel

Since 2005 the gas-to-liquids (GTL) project has been in germination, with the goal of producing high-quality diesel, given the need to meet international environmental standards. The project was to be developed by a joint venture between Petrotrin and local private firm World GTL, but it ran into delays and cost overruns. Subsequently, Petrotrin placed the joint venture into receivership in 2009, and in 2015 the unfinished plant was acquired by local operator NiQuan Energy for $35m. Construction of the plant has continued, and in June 2018 Franklin Khan, the minister of energy and energy industries, said that offtake from the plant will allow Petrotrin to meet environmental standards for gas oil. Since 2013 Petrotrin has been unable to supply the member states of CARICOM, which demand low-sulphur fuel. Additionally, if it is not successful in its GTL project, then the company will also be unable to supply bunker fuel for ships, which will be subject to a maximum sulphur level of 0.5% from January 2020. Given the need for low-sulphur fuel, in June 2018 the government agreed to supply 31m scfd to the GTL project.

Though T&T imports rather than produces low-sulphur fuels, premium diesel could be a window of opportunity given the demand for the internationally accepted products and the country’s location, according to Leon Brunings, CEO of local oil and gas firm Ventrin Petroleum. “Regional examples, such as the refinery in Suriname, show that both the market and producers have received strong bids for premium diesel, which T&T can capitalise on,” Brunings told OBG. While T&T occupies an “ideal geographical location, at the crossroads of the Caribbean Sea and the Atlantic Ocean ... substantial improvement in the business environment is required for the sector to develop further”, according to Brunings.

While 2017 and the first half of 2018 have been periods of adjustment in terms of decreasing margins for petrol distributors, Afraz Ali, chairman of local United Independent Petroleum Marketing Company, told OBG that “2018 will be marked by business development and increased diversification, moving from the transport of oil to more investment in convenience stores and service stations, as well as greater focus on the provision of services to companies”.