The National Gas Company of TT gas supply contract dispute Caribbean Nitrogen Company

The NGC/ CNC Gas dispute : The

Mariano Browne

2018 February 1

Operational issues sometimes obscure broader and deeper strategic challenges. The current impasse between CNC and NGC supposedly over the price at which NGC sells to the industry masks many difficult choices. Natural gas is critical to foreign exchange generation and national income as TT is “in the top five ammonia and methanol exporting countries and in the top seven LNG exporting countries with a proven gas reserve of a mere 0.2% of the total global natural gas reserves”.

My information is that this is the third occasion on which NGC has cut off gas supplies to companies on the Point Lisas estate, forcing the respective companies to cease operations. In negotiating terms this is equivalent to a “nuclear option”. What else is left to discuss after the company has been forced to close; the Court?

This situation is unusual. Contracts of this nature are typically negotiated long in advance to avoid confrontations. Plant shutdowns are in no one’s interest; a closed plant earns no income and pays no taxes. It seems that all the contract negotiations have been late, including agreements with the upstream producers BP, EOG, Shell, amongst others. And there are at least 10 contracts with downstream producers which must be renegotiated between 2018-19; that’s about half of the plants in Point Lisas.

Further, the LNG train 1 agreement ends in September 2018 and this throws the cat among the pigeons. The main upstreamers (BP and Shell) are the two major shareholders in Train 1. If the government does not agree to extend Train 1 we face a situation of demotivated upstreamers. And all of this is taking place in the context insufficient supply of natural gas.

At the Energy conference, Minister khan elaborated the business problem clearly noting “requests by the upstream, and rightly so, for the alignment of value with risk. This created an impasse with the natural gas aggregator, NGC, in the negotiations on the terms of new contracts for the supply of gas to downstream companies. Its resolution required the involvement of the Honourable Prime Minister, who met with senior executives of BP and EOG Resources at the now famous Houston meeting where the matter was resolved.”

In other words, the gas producers got what they wanted from the Prime Minister in Houston in March 2017. It is noteworthy that when questioned by the Opposition leader in Parliament on 26th January 2018, the Prime Minister responded that he did not get involved in the management of state enterprises. A strangely conflicted statement given that the Prime Minister, not technical personnel, resolved matters with BP and EOG in March 2017. Clearly the matter was resolved in the interest of the upstream producers, of whom the largest is BP. This is the genesis of the current difficulties.

NGC has warranted that it is acting in defense of the national interest. When taken in the context of the recent statements by the Finance Minister and the press release from the Energy Minister on the 26th January 2018 the petrochemical firms are portrayed as villains. The press release ends as follows; “Transfer pricing and avoidance of tax issues have long been part of the behavior of some in industry and these are also issues being looked at by the Government. In closing, the government encourages CNC to stop its petulant and threatening behavior and return to the negotiating table with NGC.”

The language, tone and actions are intemperate, not conducive to negotiations. It also sends warning signals to potential investors and is in sharp contrast to the positive statements of the Energy Minister. Actions count more than words.

Gas contracts are complicated; typically, there is a base price with escalation clauses. NGC’s total take is linked to the market price of the methanol or ammonia rising when the market prices rise. The gas shortage and NGC’s incapacity to deliver its contracted volumes for which it has not paid any penalties compounds the situation.

The reality is that NGC is an aggregator, a middle man, a company which transports gas. It is dependent on the upstream producers who have been dissatisfied with their returns, relative to their contribution. This business model, and NGC, is under pressure. Further, the gas master plan indicates that the net benefit to the country is greater from the petrochemical sector relative to the export of liquified natural gas. But the upstream producers are more heavily invested in LNG and make more money from LNG than the export of petrochemicals. Balancing these competing interests is challenging.

The balance of power rests with the upstream producers. They control the flow of gas and the volume of investment required to bring the gas onshore. This complicates the future for NGC and the downstream sector. In retrospect, the intervention in Houston, however well intentioned, may have been a capitulation, a game changer, and is at the root of the current impasse. This is just the beginning.