Published: Wednesday September 3, 2008
I was very encouraged by both the volume and quality of the enquiries I received from members of the business community and the public at large, following my recent presentation "Operating a gas business in a $100 plus barrel of oil environment" to members of the Trinidad and Tobago Chamber of Industry and Commerce at a luncheon meeting in May.
If I am to be guided by the nature of those enquiries, I can believe the national community is finally beginning to appreciate that Trinidad and Tobago is now truly a gas economy where gas production accounts for 86 per cent of total national production. The very probing, wide ranging enquires have served to convince me that perhaps I can do a little more to help the general population understand the revenue profile of this country's natural gas vs. oil and what this means to the economy and our future.
The gas vs. oil equivalency ratio is a measure of the volume of gas we produce in barrels of oil equivalent (boe), which is the conversion of cubic feet of gas into barrels of oil, based on a conversion factor of approximately 6000 cubic feet of gas to a barrel of oil. As the unit price of gas is significantly lower than the unit price of oil, when measured in barrels of oil equivalent, gas simply does not attract the kind of revenue per barrel that oil does. While oil is much more profitable, Trinidad and Tobago's gas business is good because of the high volumes we produce and because our gas markets and production are guaranteed for periods comfortably in excess of 20 years.
So let us now look for a moment at how the price of crude is determined. Crude prices are set by a series of international markers based on the quality (specific gravity and sulphur content of the crude), as well as the transportation costs to get it to suitable refineries. The value of crude is not universal. Petrotrin's crudes are heavier and attract a price that is significantly lower than the crudes produced on the east coast which are of a lower sulphur content. The crudes that are used as global benchmarks to determine crude oil prices across the world are Brent, West Texas Intermediate (WTI) and one or two others. And when, therefore, you hear of prices of US$100 or US$150 you are hearing about Brent and West Texas Intermediate.
Trinidad's crude is significantly discounted in the world market and of the 120,000 barrels we produce daily, approximately 70 per cent of it is of a lower quality and therefore does not fetch premium prices.
During my Chamber of Commerce presentation I did not try to address the near term future of gas prices. Since then however, an interesting trend of sharper gas price increases has started to emerge and this may be a positive sign for Trinidad and Tobago. But it is one that we have to watch very carefully. I believe that over the medium term the price of gas will continue to increase. Demand for energy has grown so dramatically that it is beginning to push the price of gas to parity with that of oil.
If this happens then the differential between the average domestic price of natural gas and what we get from LNG would change significantly in favour of the latter. It would exaggerate the fact that, from an upstream perspective, the value achieved by putting gas into the domestic market and the value achieved by exporting gas would significantly change and we would have to look very carefully at our options.
People outside of the energy industry should also understand some more about LNG pricing to gain a better appreciation of our options. The price of LNG is determined by Henry Hub prices. What exactly is the Henry Hub price?
Here is a brief, edited and borrowed definition from one encyclopedia: "Henry Hub is the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX). It is a point on the natural gas pipeline system in Erath, Louisiana."
"Spot and future prices set at Henry Hub are denominated in millions of British Thermal Units ($/MMbtu) and are generally seen to be the primary price set for the North American natural gas market."
Incidentally, I have noticed that the Press has been covering gas prices for the first time in their business pages and I would like to commend the news media for this. It is very relevant to our situation in Trinidad and Tobago.
So oil continues to fetch record high prices, and while I wish that we had more oil to put on the market the fact at this time is, we don't. And we must be careful about all the hype about high oil prices. While we are doing well we have to be careful not to think in oil terms because we have challenges that are very distinctive to gas. I continue to see a long stable revenue profile for the economy because we have the volume of gas to guarantee this. But I warn: In managing our gas portfolio we have to be careful not to plan for further growth beyond what we can reasonably sustain. We cannot afford to be spending income that we have not yet created.
I would like to convey to the national community that they should have more confidence about what is ahead in terms of the country's revenue. There is no need for frenetic spending, in spite of the inflationary pressures and other forces on the economy. We have a great opportunity to plan ahead while carefully and deliberately setting our long term priorities.
We are not experiencing today the kind of recession that is presently trickling its way through the United States. We are not receiving here the kinds of messages that the Governor of the Bank of England is delivering to the British public. They are being told that they cannot expect growth in their economy and that they must prepare to deal with inflation. So as difficult as things are with rising food prices and signs of inflation we are in a better place in terms of our own economy.
Yet we cannot be complacent and we must understand that prudence is important.
We are very privileged to be driving around not realizing that the price we are paying for gasoline at the pump is extremely stable because of the extent to which the government supports it. If we were like any other Caribbean island today the conversation would not just be about crime and food prices but also about the cost of gasoline at the pump. That conversation is absent here because the government is subsidizing highly both electricity and gasoline. This cannot continue forever because the subsidies are becoming increasingly costly.
Consequent on understanding that we are a gas economy, that there is a long future for gas, and that we have a period of pricing which makes this economy buoyant when many other economies are not, we now have to look carefully at how we spend our money to identify opportunities to balance our budgets much better than we are doing now.
Some of the disposable income in our hands today is a direct result of the high levels of subsidization that we receive. We need to be careful not to inflate our personal expenditures to such a level that were those subsidies removed we would find ourselves in a great squeeze as individuals. What this suggests is that some of our disposable income needs to be turned into savings and investments. There are many, many opportunities for us and all of those young citizens of Trinidad and Tobago to invest in, which would act as a countervailing force to inflationary trends and also be part of our own future nest eggs.
Source: Trinidad Express Newspapers
http://www.trinidadexpress.com/index.pl/article_business_mag?id=161371251
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