Increased Petroleum Activity and National Prosperity
By Renuka N. Kangal, Project Coordinator, TTEITI Secretariat
(Business Guardian Article, Thursday 22nd June, 2017)
Trinidad and Tobago has enjoyed a relatively long history of hydrocarbon activity that it has leveraged as a key contributor to its growth and development. The successes from this sector can be largely attributed to deliberate strategy and policy decisions taken to stimulate value derived from the upstream, midstream and downstream sectors. While the gains have been significant, there is an intrinsic vulnerability attached as growth opportunities and profitability from this industry are hinged on exogenous factors including the international commodity pricing as well as endogenous constrains such as the quantifiable proven reserves.
As it stands today, with reference to the Trinidad and Tobago EITI Report 2014 – 2015 and according to BP Statistical Review of World Energy 2016, proven oil reserves are gauged at 0.7 (‘000 mm bbls) and gas at 11.5 tcf which accounts for 0.2% global proven gas reserves. The sector boasts of 1.1% of global gas production and 17.0 bn cubic meters of liquefied natural gas (LNG) contribution, representing 5.03% of global trade, with Central and South America representing the major trading partner with an uptake of 10.2 bn cubic meters of LNG exported.
These figures represent a noteworthy contribution to regional (and even, in some respects, global) energy quotas however, in taking a step back and amalgamating the data over the past decade, it can be seen from Figures 1A, 1B and 1C that the country is coping with declining production profiles for both upstream and downstream products.
So what does this mean for domestic macroeconomic performance? And what are the implications for long-term stability and security?
Looking at Figure 1D, there is a consequential trend observed in the contribution of the hydrocarbon industry to government revenue as well as overall GDP. Traditionally, Trinidad and Tobago has maintained a heavy reliance on this sector for financing development and as a driver for domestic prosperity.
However, the impact of the decline coupled with the effects of exogenous commodity pricing structures cannot be escaped and reinforces the question as to what does this mean for Trinidad and Tobago and where are we going next if we are to sustain a healthy economy.
The recent downturn in the economy signals the second watershed for Trinidad and Tobago bearing similarity to the bust cycle of the industry occurring in the 1980s, which was also a period of economic destabilization resulting from a drop in oil prices worldwide. As a relatively small oil and gas producer, Trinidad and Tobago is a price taker and is unable to influence global developments in the industry which results in a high degree of susceptibility. With oil and gas prices falling globally, the Trinidad and Tobago economy suffered substantial loss of revenue, leading to a weakening of the domestic economy. This has (once again) raised much discussion on the need for deepening of diversification efforts away from the oil and gas sectors so as to decrease dependency such that the country improves its resilience, flexibility as well as its insulation from external shocks associated with the volatilities of international oil and gas markets.
Even with the recent significant discovery of 2 tcf of gas from BPTT’s offshore exploration wells Savannah and Macadamia, there is not enough assurance that the challenges of economic security have been averted in the long term. The present day crises extend beyond internal resource constraints. Therefore, increasing proven reserves alone will not totally shield the Trinidad and Tobago economy from vulnerability or bring resolve to national stability and security challenges.
There is a narrowness of economic activity and revenue generation streams, a symptom of Dutch Disease, which has been the country’s reality since petroleum products became the dominant export commodity in the 1960s – 1970s. The resultant effect is that over the decades, the non-booming tradeable sectors have remained relatively underdeveloped because of the wealth and gains to be had from the hydrocarbon sector. A consequential factor of the high level of productivity and returns from the petroleum sector is that this is where most of the investment takes place creating a resultant lack of autonomy in the non-oil and gas sectors and its progress is also fundamentally underpinned by growth in the petroleum sector and petrochemical industries. This presents undeniable challenges to robust long-term growth and development and suggests that for any diversification agenda to succeed under prevailing conditions, it must not exclude the oil and gas sector entirely. In fact, diversifying within the energy sector is key, whether we look at becoming an energy commodity trading hub or energy services hub for Latin America and the Caribbean.
With these realities in mind, it is evident there must be a sustained thrust towards diversifying the economy in order to address the revenue generation challenges currently facing the country though the dimensions of diversification should not be confined to traditional arguments. A multi-pronged approach is necessary towards expanding the export-oriented sectors while directing even more deliberate development policy initiatives in tandem with strengthening of the institutional and regulatory frameworks. While there is merit in bringing increased activity to both the booming and the non-booming tradeable sectors, the short to medium term intention should not be so much in balancing the GDP across multiple sectors but rather on ensuring that the key elements that now contribute to the economy are responsive, flexible and applicable to evolving economic conditions. In other words, although there is need to incentivize non-traditional revenue generation streams, in order to achieve the level of stability as required in these present times, there is more proximate value to be derived from boosting focus on investment possibilities across upstream opportunities and downstream imperatives.
The policy framework ought therefore to speak to promoting growth oriented energy policy initiatives aimed at broadening its resource and export bases. This involves improving the performance and output of oil and gas sectors through measures such as increasing deep-water exploration, employing more Enhanced Oil Recovery (EOR) methodologies and in pursuing more heavy oil fields. For gas, this means that the capacity and capabilities of downstream industries should be advanced while simultaneously seeking to add market share. Trinidad and Tobago more than ever needs to attract greater levels of foreign investment to finance the expansion of the industry through development of new projects and improvement of infrastructure. To stimulate the level of investment necessary, the mechanisms and incentives for promoting local industries need to be such that they provide beneficial assurance to investors without compromising Trinidad and Tobago’s profit share and returns. In this way, the TTEITI Steering Committee plays a significant role where public assurance is provided that the payments made by upstream oil and gas companies correspond to Government receipts and helps us answer questions on whether we are getting our dues from the sector. Through the EITI Report, civil society as a key stakeholder in natural resource management of the country is made aware of the intricacies of financial flows which underpin the status of the national economy.
Thus, in order to build upon previous gains and reinforce national prosperity, understanding how much we earn and how it is spent is critical. Trinidad and Tobago must leverage on opportunities readily available and harness the true potential of existing industries while focusing on expansion and market growth to maximize value derived. Successful economic stabilization should be approached from the perspective of optimal production and utilization of natural resources, capturing the full range of industry capability from the upstream to downstream sectors and in doing so secure short-term successes while putting in place measures for long-term economic stability and security.