Friday, December 15, 2017

experts: not so fast


Energy economist Gregory McGuire

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Energy Chamber president Roger Packer

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Energy giant bpTT's recent announcement of a one trillion cubic feet (tcf) natural gas discovery last Monday was welcome news for the energy sector, which has over the last half decade or so been plagued by news of falling domestic output and falling international commodity prices.

So excited were many by this, the word "windfall" was applied to herald a boon to the country's coffers.

Not so fast, say some energy experts.

"I've seen commentary about a gas windfall and I don't know how people have made that leap in the logic from a discovery to a windfall. A windfall is about money—earning additional revenue you did not expect to earn. How did we reach there? I think all those statements are irresponsible," energy economist Gregory McGuire says.

He told the Business Express last week that finding one tcf of gas was obviously a good thing, because it adds to the country's reserves.

"Understand however, that this country consumes about 1.2 tcf a year so this is just about one year's additional gas we've found at today's consumption rate. So all we've done is replaced what we would consume – one year's consumption. Yes it's good news but all we've done is made sure we can continue our industry for at least one more year," he said.

He emphasised that it was all "potential" energy, because the find size is an estimate, and the announcement does not necessitate that production at the well will be immediate.

Former minister of energy Conrad Enill also erred on the side of cautious optimism.

"The reserves in Trinidad and Tobago have been depleting for some time now and this signals we are back in exploration mode and will have gas to sell. While that may be so, the fact of the matter is that we have (Atlantic) Trains 1, 2, 3 and 4 operating at 98 per cent capacity so even though we have found this new gas you really don't have any way of immediately increasing your revenue. It will have to be as part of the pool of gas in the future and that's a good thing because now you have the ability to bring into Trinidad and Tobago new downstream activity," he told the Business Express in a telephone interview last week.

Enill also noted the potential for government revenue in the future, depending on the price of gas.

The gas find means there is supply to commit to long term revenue through various options, be it through conversion to liquefied natural gas or through downstream investment and development.

Revenue through taxation he cautioned, could be iffy.

"With exploration you can write off expenses as expenditure, so the impact of the find can be written off against current expenses and profits. That money is recoverable before you pay taxes so the profit would be reduced," he said.

Then there is the issue of recouping the production costs.

"This is excellent but on the other hand the government needs to look at who is going to use this gas and who can pay for this gas, because that is the other side of the equation," he said.

The obvious solution would be for investors in the downstream energy industries—a sector the government has been trying to encourage.

"Unless you have gas no investor (in downstream) will come. The environment is good for them to do this because capital costs are not so high. I expect now there will be a cycle of additional business activity of that type," Enill said.

But president of the Energy Chamber Roger Packer would prefer that the country takes a conservative approach to just setting up various downstream shops.

"I think we have reached a stage in our history that says we need to be very careful in what projects we choose. A find of this nature could lead to the development of a plant or two for ammonia or methanol (plans for which have been on the drawing board for some time), but if we can make more finds of this nature we can get more plants on stream. But we have to make sure those plants have at least a 20-year supply. I think moving forward based on our discoveries, we will have a more controlled roll out of plants. We must have the proven reserves to expand the downstream. It has to be well thought out and for a more conservative approach," he said.

Ministry of Energy statistics showed Trinidad's natural gas output as steadily increasing a few years ago, reaching a peak in 2010, with 736,410 barrels of oil equivalent per day (BOE/d) before dropping, mainly due to maintenance work on key producers' platforms, to 705,224 BOE/d in 2011. Earlier this year, the Central Bank released the startling statistic of a 7.3 per cent contraction in the energy sector in the second quarter.

Again the contraction was due to maintenance work, and the Bank was confident that once normal production resumed, so would output, and growth in the sector.

Exploration remains key for Trinidad and Tobago finding more reserves.

"Our goal with gas exploration would be to try and replace on an annual basis what we consume and we would be very happy with that. Our main gas producing area is the Columbus channel (where bpTT's Savonette field is) and there is a lot of seismic exploration going on at present and hopefully that will lead to additional finds. Both are equally important but we certainly need the gas to shore up the various plants we have so we need a steady supply for those plants and need to at least replace the gas we use on a daily basis.

"The bright spot is there is still a lot of acreage- but especially in deepwater. We have done some work with limited success. It's always hard to get people to go into deepwater to explore because it's a lot more expensive. We still have potential acreage and in our recent bid rounds have become more attractive. But deepwater is mainly for oil. Storage is easier. Producing gas from deepwater is more of a challenge especially regarding feasibility," Packer said.

The acreage is certainly still there, with 32 per cent of Trinidad and Tobago's acreage—mainly deep water—still unexplored, as Enill pointed out.

In August, Ryder Scott, the Houston-based company which conducts annual audits on T&T's energy reserves, estimated natural gas reserves to be 25,450 bcf for 2011.

It pegged proven natural gas reserves at 13,257 bcf, probable reserves at 6,035 bcf and possible reserves at 6,158 bcf.

That's a reserve to production ratio of about 8.4 years, the lowest it has been in the past decade.

However, the country's exploration potential rose from 25,978 bcf in 2010 to 30,452 buff in 2011, according to Ryder Scott.

But, as Enill notes, Ryder Scott is mainly an inventory—there's still lots of exploration to be done.

"The Ryder Scott report is what you use to decide on the country's reserve. It's simply an audit of what the companies have done that the ministry uses to determine whether contractual licensing obligations are being met. The question of running out of gas is not the issue. The issue is if you go and find gas what are you going to do with it, because if you find gas and have no capacity to put it out to the market, in LNG for example, by putting it through a company operating at full capacity…no company is going spend money to get gas and then have to flare it off," he said.