The government of T&T, nearly 40 years ago, decided to commercialise the natural gas that was being flared as a waste product by the oil companies operating in the country. They took he decision to build a steel plant, ISCOTT, at Point Lisas and then a petrochemical complex—ammonia, methanol, urea. Originally all of these were mainly owned by the government and operated by locals. The marketing of the products was outsourced.
Pt Lisas was a risky venture which required the upstream oil companies to invest in the collection and processing of this waste product, natural gas. The downstream plants were new ventures and their entry into the global market was high risk. Hence an entity, NGC (National Gas Company), was created to buy the gas on long term contracts from the oil companies, ensuring that there was an assured market for the oil companies’ gas. Further the NGC resold gas to the Pt Lisas downstream plants. The upstream oil companies were, thus, relieved of the risk of the new venture.
The downturn in the economy in the late 1980’s-1990’s coupled with the poor start of ISCOTT forced the sale of the plants of the Pt Lisas initiative, encouraged by the IMF, to foreign investors. NGC continued to buy gas from the upstream oil companies and resell on contract to the downstream plants now under new owners. The petrochemical industry at Pt Lisas flourished and soon became world class exporters of methanol, ammonia and urea. ISPAT, the purchaser of the steel plant, ISCOTT, also made that plant profitable (now closed because of the current world market).
Still, NGC bore the buffer risk between the oil companies and the Pt Lisas plants even though the industry had made its mark in the world. Besides assuming this buffer risk NGC added no value to the value chain though it did build/own the pipeline system that distributed the gas.
Then we progressed to LNG (liquefied Natural Gas) and some of the investors in these LNG plants were also upstream sellers of natural gas. Eventually they (the up-streamers) got permission to sell gas directly to the LNG plants as opposed to via the NGC. The maturing of the T&T natural gas industry, which by now had overtaken the oil industry in revenue earned, reduced both market risks (supply of gas and global marketing of products) and T&T became a world class player in natural gas and petrochemicals.
The question then is: Has NGC outlived its usefulness, its purpose, as a gas purchaser and on-seller? Should the gas producers and those that use the gas be disallowed from forming product delivery contracts among themselves as the LNG industry was doing, instead of NGC acting as a middle man that added no value? NGC could of course continue as a gas transport company and even investor in the industry.
This would mean that T&T would have to forgo the middleman fee that NGC earned, but this could be made up more efficiently and effectively by aggressive taxation and royalties. (We have been told recently that there was no royalties charged on gas extraction!) However, the new gas plan as advised by the consultant, Poten and Partners, recommends instead that the delivery of gas to these plants also be via NGC so resulting in more revenue for the NCG, for the government.
The ownership of the upstream production facilities have investments also in and across the downstream plants, while others, eg the marketing companies, have also invested across the plants. Hence, there is a view that if the NGC were not in place to manage the pricing of gas across these players we run the risk of transfer pricing to the detriment of the income remaining in the country. But such a phenomenon occurs in other parts of the world which have seen the emergence in say, the OECD, of Transfer Pricing Guidelines for Multi National Enterprises and Tax Administrations. This can be utilised locally since such rules allow the tax authorities to adjust prices for cross-border and cross company transactions and so adjust taxable income.
But there have been innovative methods for these intercompany gas transactions. For example, gas was sold at prices that varied on the price of the final product in the global market with a floor price below which the price would not fall. Also in the LNG industry that NGC does not sell to, though the government has shareholding, profit is based on net back pricing where the cost of producing the product and marketing it is deducted for income and this shared among shareholders.
Care has to be taken though as to where the product is sold and where it ends up. However, NGC is faced with a further burden given that T&T is not producing enough gas to supply the down streamers and it therefore falls to NGC (the government) to go looking for new gas (Venezuela, deep water). This then brings into context the situation in the US that is a major market for petrochemicals, while the US itself is becoming a large producer and exporter of natural gas. We have already seen a plant in Chile being closed and taken to the US where the gas is available and the market is over the fence.
In summary, NGC now adds nothing to the value chain yet it still takes the responsibility to provide the gas required by the downstream industry on contract in a mature industry, a situation in which NGC has found itself in breach of contract given the drop in production of gas by the upstream industry. Indeed two of the downstream companies, Pt Lisas Nitrogen company (US$129 million claim) and Methanol Holdings (US$385 million claim), have claims against NGC for gas curtailment. Like the local LNG industry the two relevant players, gas suppliers and users, should be left to negotiate gas supply among themselves—the opposite to what Poten and Partners are recommending—while the government ensures that it gets its just due via taxes, royalties and an adequately controlled regime of transfer pricing.
Mary K King