Economic problems revolve around getting the best result from the available resources. That means choosing from the competing realities. Neoclassical economics focuses on choices that would achieve an “optimum” result.
Unfortunately, this is a theoretical concept and achievable only under perfect conditions which rarely exist in real life.
Managers (or government ministers) will never have all the information and must make the best decision with the available knowledge and information.
One knows only the “best” choice with hindsight, and we often settle on making “satisfactory” choices.
The Natural Gas Company (NGC) gas contracts were typically long-term contracts (ten years or more). Many of these long-term contracts expired in the 2015-20 period.
Then natural gas production declined and market prices fell. Contracts were renewed for shorter periods, typically three to five years.
In some instances as reported by the Energy Chamber, some plants operated with month-to-month contracts. Some plants closed. This occurred because NGC did not have the gas to supply, or product prices were too low to justify continuing to produce
Many of the recent renegotiated terms and durations have been deemed sensitive and have been kept confidential.
Methanex Corporation (the world’s largest producer and supplier of methanol) signed a new gas contract with NGC in October 2023 and disclosed that the contract duration was two years. It also signalled that it would shift production to its smaller idled “Titan” methanol plant in September 2024 and announced simultaneously that it would be idling the Atlas methanol plant in September 2024.
The reason is that its 20-year gas supply had come to an end and the new supply contract is insufficient to keep the larger plant operating efficiently and profitably.
The net result is that the annual production would decline. On January 31, Methanex reported on its operating results for the fourth quarter (December 2023). Since it only operated the Atlas plant as there was insufficient gas to operate both plants, output for 2023 amounted to 1.085 million tons or just 55 per cent of its total production capacity in T&T.
Titan’s capacity is 875,000. This means that output will fall by a minimum of 210,000 tons a year if Titan operates at maximum capacity.
Since Methanex’s T&T production is exported, this has implications for foreign exchange earnings and therefore tax revenues.
This is only one plant, but it typifies the problem that the sector faces and the importance of increasing natural gas production. There have been no new finds and no increase in production.
Therefore, the best that the country can look forward to is to maintain gas production at the current production level for the next two years at which time (2026), according to the energy minister, “first gas” will be available from the Loran Manatee field.
This is a convenient date and a good electoral carrot as elections are due in the last half of 2025. In the meantime, since there will be no significant change in natural gas production, the physical output of the petrochemical sector cannot improve.
The production of LNG is similarly constrained by weak natural gas production. The implication of the foregoing is that any bounce in the performance of either sector is dependent on market price changes. This has implications for the national budget as well as the availability of foreign exchange.
The foregoing explains the persistent pursuit of the Dragon Gas deal in the face of all that projects inherent difficulties. No one knows how it will turn out.
What is known is that T&T’s production of natural gas cannot be increased without substantial exploration which has not happened. In the circumstances, the Government has little alternative but to press ahead.
Minister Young’s visit to Venezuela last week for a working meeting with Vice President Delcy Rodriguez underlines that sense of urgency.
The difficulties with the Dragon project cannot be easily circumvented. A columnist in a rival newspaper last week in explaining the risk profile of the Dragon field confused “risk” with “uncertainty”. Risk and uncertainty are not the same. Risk is measurable and therefore can be mitigated. Uncertainty is not measurable. Firms will take on risky projects with the right incentive structure but will avoid uncertainty.
Energy companies have developed a range of risk evaluation techniques to assess projects that enable them to assess the possibility of success given all known data. This does not mean that they will always be right. The Macondo Well disaster in the Gulf of Mexico, popularised by the movie “Deepwater Horizon”, is an example of a risk that went horribly wrong and almost brought bp to its knees.
The problem with the Dragon is uncertainty and the possibility of “uncontrollable” geopolitical events. Will Venezuela be a good business partner? What of US sanctions and geopolitical implications of dealing with Venezuela? There is no insurance and little prospect of mitigating these uncertainties. As the 70 per cent investor, that decision is in Shell’s hands, not the GORTT. For the public, the issue is credibility. What to believe?
Mariano Browne is the Chief Executive Officer of the Arthur Lok Jack Global School of Business. ALJGSB is a not-for-profit corporation.
