The Weekly Report: T&T Energy Sector in 2011 (Part IV)

28 December 2011


Complexity and paradigm-shifting developments were not limited to international energy markets; Trinidad had its fair share of both, and only time will tell whether the impact is positive, negative or neutral. This last article in the series will look at just a few of the major developments this year. In January we will be exploring what 2012 has in store for us, and will also be offering more regular in depth coverage of the local and global energy sector through our blog and research publications.

Recovery in Prices

One development that was definitely positive is the recovery in prices across all commodities that Trinidad produces in 2011. The Energy Commodity Price Index, which is published by the Energy Chamber, is up more than 33% this year. Even natural gas, which has been consistently low by historical standards over the past 3 years, got close to $5 USD per million BTU recently.

Cabinet Shuffle

The cabinet reshuffling announced around the first anniversary of the People’s Partnership helped kickstart an extremely active second half of the year in the local energy industry. Kevin Ramnarine, who at 39 years of age is the second youngest Minister to assume an energy portfolio, has an academic background in economics with several years spent in the private sector at BG T&T and also extensive time at the Energy Chamber conducting policy and sector research.

Maybe it is a coincidence, but since Mr Ramnarine assumed his place at the head of the Ministry, there has been a noticeable and very vigorous increase in energy sector activity, across all segments: upstream, downstream, and petrochemicals.

China Rising

Chinese energy firms and investors are becoming increasingly prominent in T&T, and 2011 was the year where significant progress was made: SOOGL Antilles’ commencement of exploratory drilling in East Brighton, and CIC’s acquisition of a 10% interest in Atlantic LNG.

SOOGL is a subsidiary of Sinopec, a giant Chinese state owned enterprise with a market capitalization close to $6 billion USD and annual production of 284 million barrels of oil. The company set down roots in Trinidad in 2009, with the $323 million USD acquisition of Talisman Energy’s interests in Trinidad. In 2010, SOOGL’s CEO mentioned that they would be looking to spend $1 billion USD over the next several years to develop their various fields and interests—they also held a seminar in conjunction with the Energy Chamber to publicize opportunities related to their capex development program. This will provide much needed liquidity and jobs to the energy services sector over the next few years.

The acronym CIC stands for China Investment Corporation; they are a sovereign wealth fund that invests in assets around the world on behalf of the Chinese government and people. CIC has $410 billion (yes, with a b) USD in assets under management, and had $51 billion in net profit in 2010. Interestingly, the bulk of its assets under management come from the sale of bonds and other debt to its citizens, who promptly scoop them up whenever there is the opportunity to do so.

CIC bought a 10% stake in Atlantic LNG, which is a prized asset and probably had a number of competitive bids submitted for that stake. This means that it is increasingly likely that more Trinidad LNG will end up in China, which has a need of the equivalent of seven billion (yes, another one with a b) barrels of oil per year to meet its domestic energy needs. This is good news because ultimately natural gas prices in Asia are between two and four times higher than prices in the US, which means more revenue for the government.

Latin America

Trinidad has also deepened its energy ties with another emerging region: Latin America. Petrobras has expressed an interest in the Soldado fields in the Gulf of Paria, and it seems it will be competing toe to toe with SOOGL to capture that very valuable field which is estimated to hold several hundred million, and possibly billions, of barrels of heavier crude. Petrobras certainly has the expertise, as they are in the midst of developing many shallow and deepwater fields in Brazil as well as Africa and other parts of Latin America. It seems as though Prime Minister Kamla Persad Bissessar’s trips to Brazil may be yielding fruit after all.

Trinidad has also begun to export increasingly large quantities of LNG to Latin American markets as well, especially Argentina and Chile. Both countries are growing economies with energy needs that surpass local supplies. They also both received natural gas from Bolivia in the past but those quantities have diminished as Bolivia seeks to use its natural gas to develop its domestic industries and generate employment (sound familiar?). Having both constructed LNG regasification facilities in the past few years, they are now eager to get more supply from Trinidad, and Qatar has also signed a massive multibillion dollar multiyear deal with Argentina to supply the bulk of their needs.

Lastly, Panama has been making strides to solidifying a relationship with Trinidad as well, as they seek to build a regasification facility. The regas facility may be partially used for domestic purposes, but may also link via pipeline to the Panamanian Pacific coast for re-export, or feed into a network of pipelines to supply other countries in Central America. The Panamanians are also eager to import large amounts of LPG from Trinidad.

The People’s Partnership has continued the efforts of the previous government to bring Trinidad and Tobago closer to its Latin American neighbours, and as these economies display robust export-led as well as internally-driven growth, the nation will be very well positioned to benefit as well.

Upstream: it was the best of (recent) times; it was the worst of times

2011 saw an increase in upstream activity, but saw two negative developments in production disruptions with BHP and an underwhelming deepwater bid round.

On the bright side, upstream exploration and drilling activity was on a definite upswing. According to statistics from the Ministry of Energy, 73 new wells were started in 2011, a very significant figure. No less than 5 offshore rigs are currently doing exploratory or expansionary drilling in T&T’s waters—the first time in more than a year that more than one rig has been operating in Trinidad. Onshore drilling has also expanded considerably with companies such as Niko, Parex, and Range vigorously exploring their acreages operated in conjunction with Petrotrin. Drilling and exploration activity is set to increase next year as SOOGL continues to ramp up exploration, as well as Centrica and a number of other more recent entrants. BPTT and BG, local veterans, are also slated to increase some exploratory drilling activity. All of this bodes extremely well for the services sector, which Firstline offers the chance to invest in through its Oil Notes (FONL).

On the not-so-bright side, crude production suffered for several months due to platform maintenance and the construction of a natural gas platform by BHP Billiton. Additionally, BPTT maintenance activities had an effect on natural gas production. Both production shortfalls affected the government’s revenues negatively as they were not able to collect royalties, taxes, and fees on that production. The temporary natural gas production decline also affected downstream petrochemical production, which uses the gas as a feedstock—and as such a few of the producers were not able to take advantage of higher prices for their commodities.

Another noteworthy adverse development was the underwhelming results of the deepwater bid round. Out of 11 blocks offered, only 3 were bid on. However, a silver lining in this process was that BP returned to bidding for the first time in many years. The other bid round for the year for non-deepwater blocks also fared significantly better, with 5 of 6 blocks receiving bids.

Conclusion

While both natural gas and crude oil production are declining, extremely vigorous activity is underway to reverse that trend. Experts know that there is much more oil and gas both onshore and offshore Trinidad, and things are finally in place to identify these new reserves and bring them on stream. This year’s surge in upstream activity and a strong slate of scheduled activities for 2012 provide an even more encouraging picture, and as Trinidad begins shifting its export focus to other growing, emerging economies, we can expect more growth in the future.

As an investor, you now have options through Firstline to invest in the local energy sector in a low risk way—you can’t afford to miss out on this type of growth, especially when other investments offer very few opportunities for yield.

If you want to find out more about FONL and other exciting products we will be offering in 2012, send me an email (michael.cooper@nullfirstlinesecurities.com) or give the office a call @ 628-1175.

Michael J. Cooper
Trading & Strategy Consultant

2 Responses to “The Weekly Report: T&T Energy Sector in 2011 (Part IV)”

  1. Senyela says:

    What would you say is responsible for the under bidding in the deep water bid rounds?

    Where do you expect local export prices of LNG to China to fall given the 4 to 1 premium differential between US and Asian prices/

    Would you say that crude futures contracts are of any use as indicative forward looking prices?

    How much do you see proposed military exercises in the Strait of Hormuz by Iran affecting oil prices?

  2. Michael Cooper says:

    Hi Senyela, those are great questions.

    I speculate that underbidding on the deepwater bid rounds can be attributed to a few different factors. Trinidad’s fiscal/taxation regime on hydrocarbons isn’t very favorable, especially when compared with other deepwater areas. Additionally I am not sure that the round was promoted as widely as it could have been; recent blocks put up for auction in Ecuador, Colombia, Angola and elsewhere were promoted with presentations in Houston, New York, London, and Switzerland, while we were not willing to go abroad to press our wares so to speak. Lastly, deepwater is extremely capital intensive, and with the more uncertain environment leading up to the bid rounds (it started in 2010 and culminated in early 2011), many companies may have been unwilling to put bids in on that basis.

    LNG prices to Asia (we don’t currently export to China, but that will change soon) are higher than in the US due to very different supply/demand dynamics. European prices are twice as high as in the US, even with all the uncertainty there. There simply is not enough gas whenever they need it, and as long as that persists, even if prices retreat temporarily, the overall long term trend will continue to slope upwards. China is working extremely hard to switch to renewable sources of energy as they recognize that it is in their longer term interest to not import 7 billion barrels of oil a year. They are also in the process of exploiting vast reserves of shale gas that may be comparable to the US’ game changing shale plays. However these scenarios are several years away from having any material impact on T&T LNG prices, and Japan and South Korea will still have to import a lot of gas because China is unlikely to export any energy they find (they just have too much local demand). In a worse case scenario Asian LNG prices will revert to twice the US price (a 50% drop) which would still make it very attractive for Atlantic.

    Futures prices are merely an indication of what the market is thinking at the moment. They are useful for figuring out what different market actors *believe* is going to happen in the future–but beliefs and facts often diverge, so making decisions based on a November 2012 crude contract price quoted in December 2011 is quite risky.

    Now I am going to go out on a limb here and say that Iran isn’t actually brash enough to block the Strait of Hormuz. It would be the one catalyst that would unite the world against them. China and Russia have expressed hesitation in imposing sanctions and other measures against Iran–but they have never explicitly supported Iran either, and they have no material or strategic interest in coming to Iran’s aid militarily. Additionally, the very well armed and well funded militaries in the Persian Gulf region would all converge on Iran, in addition to the substantial US and European military presence in the region. Even if China were to get involved, the US military’s naval, aerospace and technological advantage is tremendous.

    Oil prices would definitely spike to $150-200, but would quickly subside as the various forces respond en masse to such a threat. What ends up happening in a ‘spike’ scenario is that it will eventually go back down by more than it went up. It may remain elevated if there is an actual war, but even then I doubt that the current Iranian regime will last much longer if they suffer a major military defeat. There are already major social, economic and political faultlines that threaten the integrity of the Iranian state and a failure would simply accelerate what is already a serious decline. What we would see is a Libya-like scenario, with elevated external terrorism threats in the US, Europe and Israel. But ultimately Iran would cave under unprecedented attacks from a unified global military operation.

    Best,
    MC