By Kevin Ramnarine
By the time you read this, the Prime Minister would have addressed the nation on the state of the economy. The speech would have focused on falling revenue from the energy sector and the need for understanding and adjustments in expectations.
The reality is that at the present time the world is oversupplied with oil and natural gas. Technologies such as 3D seismic and the ever increasing power of the microprocessor have greatly reduced exploration risk. In the United States, the perfection of hydraulic fracturing coupled with horizontal drilling has unlocked vast resources of oil and natural gas trapped in shale rock. America is awash with so much oil that Congress recently voted to lift the 40-year ban on exporting crude oil. Added to that, the US will soon export its first cargo of LNG from Cheniere’s Sabine Pass facility. We are living in a vastly different world.
In the wake of this glut, prices may fall even further in 2016. The average West Texas Intermediate (WTI) price in 2015 was just above $US49 a barrel. The Brent price recently hit an 11-year low. For 2016 the PIRA Energy Group has forecast an average WTI price of $US44.35 per barrel. These low oil prices have a knock-on effect on LNG prices. In addition, both ammonia and methanol prices are forecast to fall in 2016. Lower ammonia and methanol prices mean less revenue for the National Gas Company (NGC).
In this situation, there is trepidation about the future of the T&T economy. The national conversation is dominated by talk of a recession. I first heard the word recession when I was in high school in the 1980’s. Persons 30 years or younger would have no recollection of the recession of the mid to late 1980’s. Millennials are more familiar with the period of economic expansion in 1994 to 2014 which was driven by natural gas. T&T should brace itself for a rough economic ride over the next two to three years. Even so I am confident that we will rally through this period. We are fortunate to have some strong and resilient companies in our energy sector.
But there is a positive story. Falling prices aside, 2016 is a big year for the upstream sector in T&T. The last four years have been busy for upstream companies operating in the country, particularly the multinationals. This will be yet another busy year for them.
Interestingly, while drilling is being reduced all over the world due to falling prices, here in T&T we had more drilling in 2015 than in 2014. This did not happen by magic or luck. It took planning and the creation of more competitive fiscal regime. Capitalism works on incentives. If companies are incentivised and encouraged they will reciprocate with investment.
The centrepiece of the 2016 upstream programme is the commencement of a major drilling campaign in deepwater by BHP Billiton and its partners. From 2012 and 2014 the Ministry of Energy and Energy Affairs signed nine deepwater contracts. Previous attempts to attract investment to T&T’s deepwater in 2005/2006 ended in failure due to unattractive commercial terms. The main changes that led to success in 2012 to 2014 were changes to the fiscal/tax regime and production sharing contract terms. This made the acreage more attractive and the result was investment, particularly from BHP Billiton.
The deepwater campaign in T&T comes against the backdrop of deepwater success in the region in French Guiana in 2011 and more recently in Guyana. Will 2016/2017 be T&T’s turn for deepwater success? Of course, if we find oil in deepwater in 2016/2017 it will require the price to be above $US65 a barrel to make economic sense. The promise of deepwater oil and gas in T&T is huge. If the exploration is successful this will be a major economic game changer that is unprecedented in this country’s history.
Speaking at the Hyatt in October 2014, at the launch of the book From Oil to Gas and Beyond, industry veteran and energy economist Paul Tempest made a startling and profound prediction. His exact quote taken from the Business Guardian of October 2, 2014, is as follows:
“My prediction—offered without hesitation—is that the development of the Orinoco deep-water gas resources off Trinidad could double the per capita income in these islands within ten years, from the first confirmed discoveries and development, and could double again within another ten years. This would lead to prosperity on a scale unseen in the Caribbean—at least four times the present level with a production horizon of 50 years.”
I don’t like making predictions about the oil and gas business, and as a Minister of Energy I stayed away from making them.
My own prediction, however, is that the oil price will recover since, according to Daniel Yergin, the current price cannot sustain new investment and the world will need an additional seven million barrels per day by 2020. My second prediction is that we will discover hydrocarbons in commercial quantities in our deepwater in the coming years. The deepwater campaign of 2016/2017 may prove to be the silver lining on the dark clouds that are gathering.
A happy new year to all.