Natural gas, not oil, is the cornerstone of T&T’s economic prospects. The move to the export of liquefied natural gas in 1999 created boom conditions that lasted until 2014 when international energy prices steeply declined leading to a depression lasting from 2015 to 2021. The energy sector generates at least 80 per cent of the country’s foreign exchange earnings and accounts for 30 per cent of GDP. T&T’s GDP growth has a strong relationship with global commodity prices (gas, oil and ammonia, methanol urea). When energy prices are high, the economy does well and declines when energy prices are low.
This energy sector dependence directly impacts the country’s foreign exchange earnings and government revenue from the energy sector (petrochemicals included). This mechanism affects the rest of the economy as most inputs are imported, petrol, food, manufacturing inputs, household items, clothes, etc, and ultimately the rate of unemployment and the size of the national debt. When tax revenues fall as they did in the 2014-21 period, the Government borrows on the domestic and international markets to sustain its expenditure and this increases the national debt.
Given this background, three key data points are important. First, the volume of natural gas produced, second, the natural gas price, and third, the prices of the petrochemicals derived from the gas. The war in Ukraine and the rollback of the pandemic escalated energy prices giving the T&T economy a windfall gain in 2022 and a budget surplus. That bang has now disappeared, and the economy is running on the residual effect which will not last long.
The 2023 budget energy was based on an assumed natural gas wellhead price of USD 6 per MMBtu and an oil price of USD 92.50 and realised average market prices (not wellhead prices) are currently well below (60 per cent below) the budgeted price of natural gas and less so in the case of oil (20 per cent). The world price of ammonia, our largest petrochemical export has tanked, falling from an average of USD 1,100 per metric ton in 2022 to $335-345 per ton on the spot and contract market according to S&P Global Commodity Insights for the week ending May 4, a 70 per cent decline in prices. This price is expected to fall further.
These are current prices and suggest that the projections included in the recently released IMF Article IV consultation are unrealistic. Given that these projections were generated in December 2022 (latest January 2023) they are outdated and do not represent the current reality. The finance minister could quote these numbers to present a rosy outlook with economic growth for 2023 projected at 3.2 per cent. This growth is predicated on an energy sector growth of 2.9 per cent which is not now possible. If he were to do so that outlook would be false as the change in energy prices reported herein suggest contraction not growth.
A fuller picture could be obtained by referring to natural gas output for the first few months of 2023. Unfortunately on May 5 production data on the Energy Ministry’s website is available only for the period ended December 31, 2022. No production data is available for the period January to May 2023. The reality is that natural gas production is in long-term decline as new gas finds have failed to keep up with production. Therefore, since there have been no new finds and the level of exploration activity has been sharply curtailed by the energy majors, more gas in whatever form cannot be exported to compensate for the decline in prices.
Installed plant capacity requires a daily gas supply of approximately four billion cubic feet (bcf). In 2022 average daily production amounted to 2.7bcf. At this production volume, some plants will close. Higher prices in 2021-22 allowed companies to operate at lower throughput volumes where the operating cost is higher. In this business, companies rely on contracts that provide them with some certainty allowing them to take medium to long-term decisions. NGC supplies gas to petrochemical companies in accordance with negotiated contracts which are renewed periodically. And there are provisions for breach of contract.
In 2019 many plants were closed either because there was not enough gas to supply all the plants, or because it was cheaper to close the plants. Currently, some plants are closed for maintenance, exactly the situation in which Kevin Ramnarine found himself in 2013 when the first gas shortage came to a head. The gas supply shortage continues. The Juniper, Angelin, and Matapal projects provided only short-term relief in 2018. Now that petrochemical prices have softened dramatically the supply problem must be addressed. Since there is no new source of gas and no realistic opportunity for additional supplies of gas in the short term, there is a strong possibility that these plant closures could become permanent.
There are other knock effects. If energy plants are closed, T&TEC becomes less viable, requiring higher prices from all customers. The same is true for Desalcott. This is a troublesome outlook that requires a cool head, a strong heart, and excellent communication skills to persuade the citizenry to adapt and trim their sails to travel through the rough waters ahead.
Mariano Browne is the CEO of the Arthur Lok Jack Global School of Business.