Last week was not a good one for the National Gas Company (NGC) as it received the announcement that its credit worthiness had been downgraded by the rating agency CariCris and found itself being accused by the chief executive officers of the major downstream companies of having a conflict of interest and threatening 30,000 jobs.
To be fair it has not been a good decade for the company as it suffered under the raping of its retained earnings by the UNC government; then had to deal with natural gas curtailment; several law suits for failing to provide contracted gas; found itself exposed as its lawyers failed them by signing deals with upstream providers that had no penalty clauses for failure to provide gas yet had those clauses in its own agreement with the downstream companies.
And, as if things could not get worse for the company, it now has gas agreements with the upstream companies that hang like an albatross around its neck, signed sealed and delivered by Prime Minister Dr Keith Rowley, the Minister of everything Stuart Young and the titular Minister of Energy Franklin Khan.
You add to this picture, a company that last year made its first ever loss and you can see why things are not well at the long heralded state enterprise.
Last week, CariCris lowered NGC’s ratings on its US$400 million debt issue to CariAA (foreign and local currency) on the regional rating scale, and ttAA on the T&T (T&T) national rating scale from CariAA+ (foreign and local currency) on the regional rating scale and ttAA+ (local currency rating) on the national rating scale.
According to CariCris the downgrade is driven by the higher cost of gas from upstream suppliers and historically low international commodity prices, which have resulted in compressed profitability margins, adversely impacted financial performance, and constrained debt service metrics.
CariCris noted that the NGC’s major business is the purchase of natural gas from upstream companies and then selling it for a profit to the petrochemical producers. However with the collapse of methanol and ammonia prices and the high acquisition costs of natural gas from local producers it has left the NGC and the petrochemical companies in difficulties.
CariCris also assigned a negative outlook on the lowered ratings. The negative outlook it said is predicated on the uncertainties in the global economic environment together with the changing business model that is characterised by rising natural gas supply costs and substantially reduced international energy commodity prices, which are likely to have adverse impacts on NGC’s financial performance and debt protection metrics going forward.
“These rating strengths are tempered by the company’s significantly reduced earnings and profitability due to falling commodity prices and its high vulnerability to a changing energy landscape, characterised by compressed margins on account of falling energy prices and higher upstream prices,” CariCris noted.
The downgrade came the same week as the largest Methanol producer in the world, Methanex announced that it was unlikely to reach a gas supply agreement with the NGC in the foreseeable future and therefore was sending home 60 workers. That is 60 more families who have lost an income. There is real pain happening in the energy sector and the strategy of pretending it is not so by simply not dealing with it is no strategy at all.
CariCris’ assessment is correct and rubbishes the Energy Minister and the government’s talking point that the challenges facing the downstream sector is driven by historically low commodity prices. This is simply not true and even if you repeat it time and time again, Minister, Prime Minister it does not change the fact that the acquisition costs for natural gas is simply too high and not sustainable.
It is clear in my mind that the government’s strategy in the energy sector is two fold, tax as much as you can get from a smaller pie and hope for a rebound of energy prices. Neither strategy will lead to revival of this country’s energy fortune.
Whether we like it or not the energy sector is still crucial to each national’s everyday life. The decision to raise insurance rates is driven to a large measure by the lack of forex in the system. Why is there less forex? Its caused by lower energy prices and production.
The same it true of impending increases in food prices. Until we can find things that can replace the earning capacity of the energy sector we have to do all in our power to fix and maximise returns.
I am all for a fair rent for our natural resources, but one has to consider what role tax reform, particularly the rates of taxes on natural gas production and even corporation tax may be having on the desire to fix the value chain. Government must consider what fiscal measures it has to put in place for the long term survival of the NGC and to prevent the collapse of Point Lisas.
Part of what is needed is to ensure that the NGC and its group is restructured. I have already written on the issue of the order staffing of the NGC and pointed to the communications department with its 25 employees as an example of the wastage that occurs in the monopoly. That is not unique but when the government tells the NGC it can restructure as long as it does not send home anyone it is simply playing smart with foolishness. When the government instructs the NGC to take risks and spend hundreds of millions to keep Atlantic LNG’s Train 1 going on some notion that after 2023 there will be excess gas and does not say whether such a project has a positive NPV or how tax payers are going to recover their investments or the increased gearing ratio its likely to lead to, then this government is betting the house on the assumption that it will buy enough lotto tickets to guarantee the jackpot.
The leading CEOs of the petrochemical companies are right to raise the issue of conflict of interest. More than a year ago I wrote about how the NGC is conflicted and competing with its own customers by selling gas to itself, due to its interest in the Caribbean Gas Chemical’s Methanol Plant. Yes methanol and methanol to DME.
Its venture in Train 1 is a disaster waiting to happen and while there is a temporary blip in LNG prices, unless there are major near shore gas discoveries or gigantic deep water gas we are unlikely to have prices or production levels necessary to support what the government says is its strategy.
The country has made many mistakes with the NGC, the good days of inefficient operations and poor deals, masked by large margins are over. The company must now be run as a business, because if the NGC fails we are all in trouble.