Trinidad and Tobago needs new markets and production
With the loss of the US as its major market, the island nation needs a new growth strategy
As one of the world’s largest liquefied natural gas (LNG) exporters, Trinidad and Tobago is the Caribbean’s undisputed energy powerhouse. To hold on to its place, though, it will have to meet the dual challenge of finding new markets for its LNG and reversing declines in gas production and reserves.
A decade ago, Trinidad and Tobago exported around 95% of its LNG to the US and the future of the industry looked secure. US LNG imports were expected to continue their inexorable rise, fuelling the growth of Trinidad and Tobago’s LNG business.
Most re-gasification terminals along the US Gulf Coast, which once brought in Trinidadian gas, now sit idle or are being transformed into export facilities. LNG is Trinidad and Tobago’s economic engine. So the US dream of achieving energy independence could have been a nightmare for Trinidad. Instead, the surge in US shale gas production over the past five years has forced Trinidad and Tobago to think strategically.
So far, the shift is working. Surging demand from Brazil, Argentina and Chile has helped. Brazil, in particular, has emerged as an important market for Trinidad and Tobago in recent months. Severe droughts, which have restricted hydro production, and a rapid increase in power consumption ahead of the World Cup has seen demand spike and forced Petrobras onto the LNG spot market for new supply.
About half of Trinidad and Tobago’s exports now go to Latin America, while the US accounts for less than 20% of sales. The rest go to Europe and, increasingly, northeast Asia. In total, Trinidad and Tobago now exports gas to 21 countries, according to Nigel Darlow, chief executive of Trinidad and Tobago’s flagship Atlantic LNG plant. The Atlantic LNG facility has a capacity of 14.8 million tonnes per year, making it one of the largest in the world, and is operated by its stakeholders, which include BP, BG Group, Shell and state-owned National Gas Company (NGC).
The forced shift away from the US has injected uncertainty into Atlantic LNG’s business, but has brought surprising benefits, too. Trinidad has been able to sell its gas into higher-margin markets. Brazil and Argentina, for instance, are paying around $18 per million cubic feet (cf) for LNG imports, nearly as much as Japan and South Korea, which pay the world’s highest prices. Spain, a major destination in Europe for Trinidadian gas, pays around $12/m cf. By contrast, exports to the US typically go for less than $5/m cf.
The country, though, has yet to secure long-term access to new markets. That task will start in the next few years as the first wave of Atlantic LNG’s supply contracts start to expire in 2018. Although Latin America has proved an attractive short-term option, Trinidad and Tobago, like most suppliers, will be targeting lucrative Asian markets for its long-term deals.
As it does, it will face an increasingly crowded and competitive global LNG supply market. Some of the fiercest competition will come from new US Gulf Coast LNG export projects, many of which were once Trinidad’s largest customers. Only one US project has received the full regulatory approval needed to break ground, but most analysts now expect the US to emerge as a major LNG player over the next decade.
Crucially, US projects are offering prices linked to the Henry Hub benchmark rather than oil. This is a major draw for Asian buyers. Trinidad and Tobago may be forced to follow suit in order to compete with those projects.
Further afield, Atlantic LNG will face competition from a raft of new projects in Australia and East Africa. Those projects will be located closer to Asian markets, giving them an advantage on shipping costs. Atlantic LNG, however, has a much lower cost base than new projects and the expansion of the Panama Canal, it hopes, will help to cut shipping costs.
As the country approaches the next round of supply negotiations, the government hopes to play a much more active role in marketing Trinidadian gas, wresting back some control from the international oil companies (IOCs). “Historically, because of the way the LNG industry is set up, by and large, export of LNG from Trinidad is controlled by global energy giants BP, BG and now Shell,” Kevin Ramnarine, the country’s energy minister, recently told local media. “We as a government have articulated the view publicly and to the companies that we would like to have a bigger stake in the marketing of LNG. The opportunity will begin to present itself as we move forward because there are several renegotiations coming up.”
The government wants to see state-run companies NGC and Petrotrin take a bigger stake in Atlantic LNG. Whether the IOCs are willing to strike such a deal is unclear. Port-of-Prince is keen on the move largely, it appears, to help it increase LNG exports to China. The two countries have established closer ties since Chinese president Xi Jinping’s visit to Trinidad last year. “China wants LNG from us. That’s the opportunity we have but it requires a lot of work, negotiations, legal, and we start that this year,” said Ramnarine.
The industry also faces the pressing problem of gas supply. After peaking in 2010, production has slumped in the past couple of years. The government blames it on a period of heavy maintenance carried out by BP, the country’s largest gas producer. When those fields come back on stream and new wells from BP’s Savonette field start production, output is expected to stabilise, the government says.
Not everyone is as optimistic. Gas production could decline rapidly without significant new investment, from a peak of 4.5m cubic feet a day (cf/d) in 2015 to just 2.5m cf/d by 2023, according to a corporate presentation from independent producer Trinity.
Just as worrying is the long-term decline in natural gas reserves. After peaking in the mid-2000s at nearly 26 trillion cf, reserves have fallen steadily in the past decade to 13.3 trillion cf at the end of 2013. The country’s reserves-to-production ratio now stands at around 10 years, according to government data.
The government hopes more exploration will reverse this slump. The country expects to see 11 exploration wells spudded in its offshore this year, the most in a number of years, according to Ramnarine. Its reserves could also get a boost from a recent cross-border deal with Venezuela that gives it a 26.25% interest in the development of the 10 trillion cf Loran-Manatee gasfield, which spans the countries’ maritime border.
Central to the government’s strategy is getting more investment into its deep waters. After a long struggle to get investors to take interest in deep-water licensing rounds, the country appeared to make a breakthough last year when Australia’s BHP Billiton outbid a number of world-class explorers for all four blocks on offer. Improved tax and contract terms spurred more interest in the acreage, analysts said.
The country’s deep-water hopes suffered a setback this year, though, with a disappointing follow up to the deep-water licensing round. Just two of the six blocks on offer received bids, and just one block received more than one offer. BHP Billiton, which has become a major deep-water acreage holder in the country, and BG bid together on two blocks and Spain’s Repsol put forward the other submission. No more deep-water acreage is expected to be put up for auction until at least 2016.
Trinidad’s government is working on a new gas master plan to set the course of the industry for the next decade. It will need a strategy that avoids a potentially destructive dynamic: in which LNG buyers are wary of committing to Trinidad because of supply concerns while upstream investors are reluctant to commit to new exploration for fear the gas will not be able to find a market.