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CNC vs the People of T&T

Sunday, February 4, 2018

The current impasse between NGC and the Caribbean Nitrogen Company (CNC) ostensibly over its gas supply contract is one with far reaching implications for the people of Trinidad and Tobago. The level of interest in this issue can be judged from the plethora of articles, news reports and social media posts over the last two weeks. Two things have become very clear. First, is that there exists a high level of unawareness about the industry in general and the dispute. Secondly, a deliberate attempt is being made by private foreign interests and local operatives to rouse emotional and political reactions among the citizenry in support of their cause.

However, as someone who spent 24 years in the gas industry, I am particularly concerned with some of the utterances from CNC and its sympathisers. I believe I have a responsibility to the people of Trinidad and Tobago to shed some light on three issues: the termination of supply, the wider role of NGC in the gas value chain; the pricing model applied in the T&T market.

The CNC press release and subsequent media reports have perpetuated the narrative that NGC has cut off gas supply to CNC. This is a highly complex situation and I think that interest groups and opinion makers in T&T should be careful not fall in the trap being set by CNC and its shareholders. While the physical cutting off supply is fact, I think it is important to look at the circumstances within which this action was taken. The pertinent facts are that CNC and NGC had been in negotiations about a revised gas supply contract for over a year. When the existing gas contract expired in October 2017, it is my understanding that the parties signed an interim agreement which allowed NGC to continue to supply gas. However, it was also agreed that should negotiations break down, the gas supply will cease, and the parties will go to arbitration. If this is correct, then CNC is deliberately misleading the public and trying to whip up sympathy for its position by crying about the plight of workers and the reputational damage for T&T industry. In other words CNC is trying to ‘mess wid we head.’

An important element of this scenario, which seems to have escaped commentators is the exceptional position of EOG Resources. The now expired contract between NGC and CNC was a unique one. In the late 1990’s EOG Resources (then Enron) had gas reserves and delivery capacity more than their contracts with NGC. To accelerate its sales of already proven reserves EOG then took 20 % of the equity in CNC. It then entered into a back to back contractual engagement with NGC. Two agreements were executed, NGC and EOG for the supply of gas and NGC/CNC for the onward sales of that special trance of gas. Interestingly, EOG Resources was the first among current suppliers to complete a new supply contract with NGC at prices higher than what obtained in previous contracts. On this occasion, however, the EOG contract made no reference to CNC. Something must be amiss.

A second issue raised by CNC and others demonstrate a complete or deliberate misunderstanding of the wider role of NGC in the gas value chain. CNC argues in its first press release that “NGC’s benefit is far more than it claims from its high prices, certainly significantly above international pricing for a gas transport pipeline company.” CNC is being a bit disingenuous here. NGC cannot be compared with a gas transport pipeline company because it is much more than that. NGC is both a gas merchant /aggregator and a pipeline company selling a bundled service. NGC the gas merchant/aggregator purchases gas in bulk from producers, thereby benefiting from lower prices because of the large volumes. This enables the downstream industries better prices than they can negotiate themselves, but also and importantly, insulates them from the supply/ reservoir risks. There is tremendous value in that service which the classification of “gas transmission company” does not cover.

Perhaps the most confusion exists over the issue of the gas price. Attempts have been made to compare gas prices in T&T with prevailing prices in the US. In one statement it was mentioned that NGC is seeking prices above $4.00 per Mmbtu. This is viewed as uncompetitive against a US gas of less than $3.00 as it has been from over the last two years.

We should note several things: Gas prices in the US are very sensitive to weather conditions. For example, in the cold weather in January prices at in North East area jumped to over $10.00. More importantly, as gas merchant, NGC offers the downstream tremendous flexibility in terms of its product related pricing mechanism. By this mechanism the gas price varies up and down with the product price.

By this mechanism, which is not common place in the natural gas business, NGC shares some of the market risks with the petrochemical producers and reduces their most significant operating costs at a time when revenues are relatively lower. Contrary to the view that NGC uses its monopoly position for price gouging and profiteering, it is the big risk taken on product related pricing that has in the past generated significant surpluses in period of high prices. This has allowed the entire industry to grow and prosper. To my knowledge this is not available to the petrochemical industry in the US and it has been one of the key elements in our competitiveness as a location for petrochemicals over the last three decades. When CNC talks about prices more than $4.00/mmbtu, it is important to assess this statement relative to an ammonia price.

Ammonia prices are currently above US$ 400/ tonne and therefore is likely to attract a higher gas price. (More on the issue of the evolution of gas pricing in T&T can be found in the book—From Oil to Gas and Beyond—A review of the Trinidad and Tobago Model and Analysis of future challenges, edited by Trevor Boopsingh and Gregory McGuire.)

Nothing in the above discourse is meant to deny that there are significant challenges facing the current gas supply chain model. The shale gas revolution has dramatically increased US reserves and lowered long term gas price expectations in the US. In contrast new supplies made available to the NGC are expected to come from deeper waters and thus likely to be more expensive than previously. These forces have eroded T&Ts competitiveness in the global petrochemical business. NGC sits in the middle of the chain and must continue to find a delicate balance between the demands of the suppliers and the downstream consumers while trying to preserve the national interest. While it sells on a product related pricing basis to the industry, as far as I’m aware, this concept has not been fully accepted by suppliers upstream. This is a recipe for tensions around price, quantity and term of agreement. With several gas purchase/ sales contracts coming up for renewal over the next two years, this dilemma is far from finished.

Gregory McGuire
Energy Industry Expert


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