Party in Paradise? : What the increase in the oil price means for T&T
Note that this article (published on July 5 2018 in the T&T Business Guardian Newspaper) inaccurately stated that Government expenditure decreased by 72% between 2014 and 2017. Rather it should have stated that Government expenditure collapsed by 30% between the period 2014-2017. This correction will be made in the upcoming Business Guardian (July 12, 2018).
In Trinidad and Tobago, the haves and the have-nots both have one thing in common – they are concerned about the price of oil. In early May, citizens welcomed Minister Imbert’s announcement of the hike in the West Texas Intermediate (WTI) oil price from roughly US$ 30 per barrel in 2016 to US$ 70 at the time of his announcement. For some citizens, the higher price implies ‘party-time’ – a farewell to job cuts and layoffs, cuts in government spending, shortages in US foreign currency and cuts to the fuel subsidy. Other observers, who are more conservative, think that regardless of price spikes; we should be sober in our expectations and concentrate on optimizing the revenue we earn from the sector. Where should our focus lie?
Why did the oil price crash?
How did we even get to the period of low prices and belt tightening in the first place? In June 2014, the average price of crude oil was as high as WTI US$ 105.79 per barrel but then fell to US $59.29 per barrel in December. Crude oil then sold for as little at US$ 30.32 per barrel in 2016 in global markets. How did this happen?
The 2014 crash in global oil prices was triggered by 1) decreased oil demand by emerging countries (Brazil, India, Russia and China) due to slower growth, 2) increased US and Canadian oil production which cut their oil imports and 3) OPEC’s decision to keep its production stable despite lower prices, in order to retain its market share.
In addition, local oil production remained low and continued to decrease. Consider that average oil and condensate production moved from a peak of 230,000 barrels of oil per day (bopd) in 1978 to an annual of 71,811 bopd in 2017. At the same time, natural gas (Henry Hub) process decreased and T&T struggled with persistent natural gas shortages. For T&T, lower commodity process married with lower production resulted in severely less tax revenue and other payments to the government from oil and gas companies. Government expenditure then collapsed by roughly 30% between 2014 and 2017. This resulted in a depressed economy in which the Government and citizens sought to adjust to the new norm of forex shortages, lower capital investment, unemployment and other attendant effects.
What explains the increase in the oil price?
Since September 2016, OPEC announced its plan to collectively cut its oil production (with Russia) by a total of 1.8 million barrels per day to reduce global oil stocks and prop up prices. Despite this cut, prices did not budge much. However, they began creeping upward since November 2017 when OPEC reaffirmed its position to maintain its production cuts through 2018. According to Bloomberg analysis, OPEC exceeded its production cuts with compliance reaching 162% in May 2018 due to supply outages in Venezuela, Libya and Angola. At its June 2018 meeting, the cartel took the decision to return to 100% compliance with its original production cut target, which would see an increase in its oil output.
The WTI oil price stands at US$69.91 as at June 25 2018 and bullish indicators signal that the upward pressure on prices may be sustained for some time. These include OPEC’s commitment to honour its production cap, Venezuela’s production outages, US- Iran oil import sanctions, the conflict in Libya over key oil export terminals, low US crude inventories and the US-China trade dispute. Possibly the only foreseen threats to high prices are a global recession or OPEC flooding the market as it did in 2014, which may not be likely given the price it paid for doing so.
Is it all about oil?
Notwithstanding Minister Imbert’s statement that T&T’s expected recovery is also due to improvements in the natural gas sector, many are not aware that the natural sector contributes the lion’s share of T&T’s hydrocarbon revenues – T&T is no longer an oil economy. Estimates tell that T&T’s LNG export revenues surpass that of oil and that the ratio of LNG to total energy exports is much higher than that of oil.
Data from the Ministry of Energy and Energy Industries show that natural gas production figures are up by 13 %, from 3303 mmscf/d in April 2017 to 3730 mmscf/d in March 2018, due to the coming-on-stream of BPTT’s Trinidad Onshore Compression (TROC) and Juniper projects in 2017. At the 2018 Energy Resources Conference and Exhibition of the Society of the Petroleum Engineers of Trinidad and Tobago (SPETT) in June, the Minister of Energy (Mr. Franklin Khan) listed a range of projects on the horizon that would have a positive impact on the gas supply situation over the medium term. These include BPTT’s Angelin Project, Shell’s Starfish and Colibri (NCMA 4 and Block 22) Projects and DeNovo’s Iguana Project. He also stated that new gas fields beginning production would see gas production increase from 3.8 billion cubic feet in 2018 to 4.14 billion cubic feet during 2020-2022. The Government is also hopeful that the project agreement among the companies for the development of Venezuelan cross-border gas will be signed in July of this year. This agreement will see natural gas from Venezuela’s Dragon Field supplied to NGC via Shell’s infrastructure. These developments have positive implications for the revenues generated from the gas sector.
Implications for T&T?
The increase in future natural gas supply will undoubtedly help to plug the natural gas shortage that has hurt the country’s major consumers – petrochemical companies and Atlantic. In fact, in 2016 former CEO of Atlantic Nigel Darlow stated that the shortfall resulted in 75 lost LNG cargoes every year for the company. Now the national purse can expect to receive even higher dividend payments from NGC as well as higher corporation tax contributions from downstream companies, Atlantic and the NGC.
T&T can also look forward to receiving higher crude oil revenues with the increasing WTI oil prices and the Q2 2018 Shallow Water and Onshore Bid Round, if successful, may help to increase oil production. However, T&T is a mature hydrocarbon province. The stark reality is that unlike our Caricom neighbors Guyana, T&T is not likely to experience a return to peak oil production of the late 1970s when output reached 230,000 bopd.
In addition, the most certain thing about an oil price forecast is that it is not certain. As explained, energy markets are extremely volatile due to a mix of unforeseen dynamics. A lesson that citizens and the Government can attest to learning is that riding the wave of high-energy prices is not a good economic model. T&T will do well to continue discussions and efforts towards developing the non-energy sector and to cut back on wasteful spending. Reforming social programs to improve their quality and impact is also key.
The latest Trinidad and Tobago Extractive Industries Transparency Initiative (TTEITI) Report also recommends ways in which the country should optimally manage its extractive sectors that are relevant despite the energy price situation. For example, the Independent Auditor/ Administrator (IA) who authors the Report shows how the system of auditing and monitoring Production Sharing Contract (PSC) payments leaves room for revenue leakages. Currently, there are outstanding PSC payments due to the Government that are likely to be in excess of TT$ 10 million. As it relates to the mining sector, the IA points to revenue shortfalls due to the inefficient licensing allocation process, staffing constraints and the lack of a system to independently verify mineral production.
Considering the volatility of energy markets, it is too early to crow. Nevertheless, speculating energy prices should not be T&T’s focus. In our race against time, efficiency of spend and reforming systems in the extractive sector is imperative. All bets can be placed on including this in T&T’s strategy, because it will better ensure that the country’s depleting resources are optimally utilized to the benefit of all citizens. To access the latest T&T EITI Report, See: www.tteiti.org.tt/explore-data/reports/.