There is a great danger in groupthink and believing your own rhetoric. Groupthink is essentially the practice of thinking or making decisions as a group, resulting typically in unchallenged, poor-quality decision-making.
It is one of the challenges that the country has faced since independence when we took a position that the need for party politics meant the death of independent thought and speech.
This is the only conclusion one can come to as we saw for the first time in the history of T&T, the petrochemical sector was forced to approach the government for support in temporarily reducing the price they are paying for natural gas in an effort to keep them in business.
These are extraordinary times. The world has been plunged into a deep recession as demand has been shut in by the impact of the coronavirus and an already weak global economy brought to its knees.
Even before the advent of the COVID-19 crisis the local petrochemical sector was reeling from the relatively high price of natural gas and the continued curtailment of the main feedstock into the production of ammonia and methanol.
As far back as 2011, the petrochemical sector was complaining about natural gas shortages that was impacting its average cost of production and the reliability of operations.
The then Minister of Energy Kevin Ramnarine assured that it would be solved by 2012, eight years later the situation is still unresolved.
Speaking at a breakfast meeting of the Energy Chamber Ramnarine said, “There continues to be a shortage of natural gas to the Point Lisas Industrial Estate. This problem is not due to a lack of reserves. It is a result of poor co-ordination. In terms of a solution, there is light at the end of the tunnel. We expect that the EOG Toucan platform would commence production in mid-January to February and that this would provide relief to the problem at Point Lisas.”
This, of course, proved to be wishful thinking and when the present government took power it found an upstream woefully short of gas behind pipe and a downstream sector eager for supply.
The National Gas Company which has the role of aggregator and was expected to supply the gas to the downstream was short and facing legal challenges. It was also in negotiations with the upstream companies who insisted that they could no longer sell gas at the prices the NGC had been accustomed to and the hikes had to come before they would unlock investments.
The NGC stood its ground insisting it could not agree to the prices being demanded and the situation reached a position where contracts were coming to an end and the Upstream would be under no commitment to supply gas to the NGC.
Enter Prime Minister Dr Keith Rowley, Energy Minister Franklin Khan and Minister in the Office of the Prime Minister Stuart Young. They jetted off to Houston in what they used to call the famous Houston Trip, a phrase that has now been apparently removed from their lexicon.
He met with the leaders of the companies and when the meeting was over the NGC signed an agreement that is now proving to be unworkable.
For the record this newspaper more than a year ago warned that the agreement brokered by the Prime Minister was going to have disastrous consequences. It was a view shared by my colleague Mariano Browne.
The government led by Minister Young rubbished the concerns calling those raising the issue of the price as arm chair experts who did not know what was negotiated, but as they say time is longer than twine, and now according to the chairman of the NGC the government has had to return to the negotiating table. Young has since focused on COVID-19 and has not said a word on the re-negotiation.
It is only group think that could allow the Minister of Energy to defend a price that he must know was not workable and it shows why politicians need to stay out of commercial arrangements.
But we were warned about this eventuality. Renowned economist, Dr Terrence Farrell did a significant study about the state of the petrochemical sector and predicted it could be lost if as a country we do not make the right choices.
In his study he said: “The downstream petrochemicals industry is at a point of inflexion. In a scenario of scarce and expensive gas feedstock, the industry is set for decline and possible demise. Energy policy has not adequately addressed the challenges which the industry now faces.”
This warning was ignored by the government because in this society when red is the colour of choice all advice that does not come from that colour or is critical of it is seen as yellow and similarly when yellow rises all advice that is not yellow is seen as red.
According to Farrell, T&T has moved from being a high- reserves, low-cost gas producer and the largest exporter of LNG to the United States, to a low-reserves, high cost gas producer exporting LNG to markets in Europe and South America.
He explains that the Gas Supply Agreements with the downstream petrochemicals plants are confidential but essentially involve
(a) a floor price;
(b) a product reference price
(c) product market price
(d) a factor which is applied to the difference between the reference price and the market price when the market price exceeds the reference price.
He pointed out that the intent of the pricing arrangement is that NGC shares some of the upside of rising methanol and ammonia prices during cyclical upswings but the downstream producers have a degree of gas price certainty in respect of the cost of natural gas when methanol and ammonia prices are cyclically low.
“Each of the elements of the pricing formula is potentially problematic. The floor price needs to reflect the cost of gas to NGC from the upstream producers plus the costs of compression, transport and removal of liquids. NGC does not control the well-head price, and development costs of gas have been increasing.
“In addition, NGC purchases gas from the upstream producers on a take-or-pay basis and there is no provision for cushion gas to manage supply disruptions or scheduled turnarounds upstream. As a major source of dividends and tax revenue for the Government, apart from the subsidy which is explicitly given to the power sector, NGC will not price gas to the downstream producers that would result in a loss,” The report read.
It is therefore not an easy solution. Energy economist Gregory McGuire has suggested that the market should decide the price and the removal of the certainty that long-term contracts provide. I agree with McGuire that a T&T natural gas price will provide transparency but I suspect a better way of doing this is indexing the well head price to commodity prices so that there is risk throughout the value chain while at the same time re-examining the role of the NGC.
McGuire was confident that the NGC could survive on tolling fees and making wise investments in LNG, petrochemicals, trading and some upstream and insists that part of the company’s challenge was the raiding of its savings by the past UNC. This is true and I have condemned the party for its role in almost bankrupting the NGC and in its poor decisions in making the NGC lose opportunity with Cheniere Energy and in Ghana. But the problem is deeper and more complex than that.
Often it is difficult to really understand the importance of the sector an Farrell’s report helps us.
Over the ten-year period 2009-2018, revenues from ammonia and methanol (Corporation Tax, Business Levy and Green Fund Levy) ranged from a low of $1 billion (US$156 million) in 2009 when product prices were cyclically low, to a high of $ 3.1 billion (US$489 million) in 2012.
In that regard, the economic impact of the downstream petrochemicals industry is clearly significant. Capital employed in the industry is estimated at US$8 billion. It accounted for 3.4 per cent of GDP in 2017 down from 7.0 per cent in 2012.
“Petrochemicals contributed over 20 per cent of total export earnings since 2011, and it contributes an estimated 15 per cent of the cash inflows of foreign exchange to the banking system. While the downstream petrochemicals industry is not itself an employer of large numbers of workers, it does provide jobs demanding high levels of skill and knowledge that need to match the best in the world in a variety of technical and management disciplines.
Payment of wages and salaries and expenditure on local suppliers and inputs amount to US$400 to US$500 million and local value added amounted to between US$338 and US$415 million.
“Applying an expenditure multiplier of 1.9, local value added by the downstream petrochemicals industry is of the order of $5.3 billion or 3.5 per cent of GDP.
Over the period 2013-2017, taxes paid by ammonia and methanol companies averaged US$300 million/annum,” the report revealed.
According to Farrell these results support the conclusion that existing plants will be earning a lower than target rate of return and/or fail to generate sufficient cash flow when product prices are cyclically low and as gas inlet prices increase.
That the companies have now come to the government for temporary support and the reality that 15 per cent of the country’s production is down at least temporarily if not permanently is cause for deep worry.
Action is needed now to solve the problem before it is truly too late.