Thursday, February 22, 2018

Reimagining NGC’s future

Ten days ago, the natural gas supply to Caribbean Nitrogen Company (CNC) was stopped by the State-owned, gas distributor National Gas Company (NGC) because of the failure by the parties to come to an agreement on the price of the commodity used to manufacture ammonia.

The closure of the plant has short-term consequences for the T&T economy, including the fact that NGC is foregoing millions of dollars in revenue per week, CNC’s 410 employees and contractors are being deprived of salaries and the company is unable to manufacture its product to be sold on the local market.

But the long-term impacts of the ammonia plant’s closure are even more serious for T&T as its reputation as a low-cost, reliable supplier of gas to the companies on the Point Lisas Industrial Estate takes a severe pounding.

It is becoming increasingly clear that T&T is no longer a low-cost natural gas supplier and, given the gas curtailment issues the country has endured for five years, reliability of supply is now a major issue.

If not low cost or a reliable supply, what then are the competitive and the comparative advantages that T&T can leverage to retain the companies that populate Point Lisas?
This question is particularly relevant as a result of the massive increase in shale gas and oil production in the US, which has made some of the Gulf of Mexico cities in the American south increasingly attractive destinations for petrochemical plants.

NGC admits that it is faced with what it describes as “the new reality of higher gas acquisition costs,” referring to the fact that the suppliers of natural gas to T&T, namely BP, Shell and EOG Resources, are demanding more money for the gas they bring ashore.

On the other hand, there is a natural gas price above which none of the downstream producers of ammonia, methanol, urea or melamine can be competitive as all of the companies on the estate produce for global markets that have compressed petrochemical product prices in the last four years.

It may be necessary for NGC to reimagine its future as being fundamentally different from its past.  NGC’s role has been to operate as a middleman as it buys gas from suppliers and sells it downstream users. For the most part, NGC operates its middleman role as a monopoly as most of the downstream users of gas have no choice but to purchase the commodity from the State-owned company.

Given the price squeeze between the suppliers and users of gas, NGC and its shareholders—who are all of the taxpayers of T&T—need to determine whether being a State-owned, monopoly distributor of gas constitutes the greatest possible value addition from a company which has without a doubt served the population of T&T exceptionally well.

If NGC passes on the higher acquisition cost of gas to the downstream users, it risks becoming an uncompetitive source of the commodity with an inevitable result. But if it reduces its margins to a minimum, it may not be able to respond either favourably or with alacrity when some future minister of finance calls on it for some billions of dollars to address the fiscal hole.

In addressing the company’s future, policymakers must be mindful of NGC’s contribution for the next 20 years and not just the next two.