TOGY talks to
Khan candidly touts forward motionAugust 31, 2017
Franklin Khan, minister of energy and energy industries, talks to TOGY about the variables that contributed to the ongoing gas curtailments and the recently sanctioned Angelin project. The Ministry of Energy and Energy Industries regulates activity in Trinidad and Tobago's oil and gas industry.
The government body has 100% ownership in the National Gas Company (NGC) and, by extension, the National Energy Corporation, National Helicopters, the La Brea Industrial Development, the Point Lisas Industrial Port Development Company and the Trinidad and Tobago Electricity Commission. Khan discusses the advent of renewables in Trinidad and Tobago as a means of diversification. While gas shortages are ongoing, the Ministry of Energy and Energy Industries had made efforts to address these issues through sanctioning development and encouraging upstream investment.
• On bid rounds and timing: “The ministry is going into another competitive bid round for deepwater and near shore blocks at the end of 2017. While we know it is a buyer’s market now, we still have to have these bid runs to keep the engine running, the conveyor belt flowing. If you do not make these decisions now, it hurts you in 2020.”
• On renewed interest in renewables: I will be the first to admit that this country has not done enough. We do have a plan. We want to generate 10% of our energy from renewables by 2021. That is a very ambitious target and we have no proper system in place to do that. We have gone greener in championing the use of CNG and natural gas. As we speak, all of our electricity is powered by natural gas. All of the generation is gas turbines, not fuel oil. We are making a concerted effort to convert as many of the gasoline engines to hybrid engines as we can.
Khan also discussed the the importance of forward-thinking investments to maintain market health, and the need for Trinidad and Tobago’s upcoming bid round. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Franklin Khan below.
What advances, challenges and opportunities are associated with the much-anticipated National Energy Policy?
This administration is the first administration to present a document of that nature in parliament. For all past regimes, these were considered strategic documents and were confidential. We have taken the position that it is the public’s business. Trinidad depends on energy and the country needs to be informed about the challenges that the industry faces. In that context, we are introducing a Natural Gas Master plan to parliament. Once it is introduced then, it becomes a public document. There was a great deal of opposition to that from various quarters. However, we told ourselves that we are elected into office to seek the public good.
What variables led to the current gas-supply curtailments in Trinidad?
From the late 1970s until 1986, every prospect drilled for oil found gas. We wondered what we would do with all the gas. It was so bad that under the old exploration and production licences, the royalty on gas was TTD 0.015 [USD 0.0022] per mcf, so there was essentially no state royalty for gas in effect. Gas was considered a nuisance, it was being flared as a byproduct until the formation of the Natural Gas Company, which took the flared gas, compressed it and bought it to market for electricity generation. We became a gas-based economy.
We took a very strategic decision with the formation of the NGC, which was to act as an aggregator at the Point Lisas development. Exploration was reduced over that period because the gas inventories were so high that companies were saying it would take a very long time to generate a revenue stream for all this gas. So, they stopped exploring.
We built an industry that always knew a surplus of gas. In 1999, we felt we had so much gas that we made the decision to enter the LNG industry. Upstream operators were allowed to market their gas directly to Atlantic. In fact, they were the shareholders of Atlantic. We had two systems operating in tandem, an aggregator system in Point Lisas that comes through NGC and direct marketing through Atlantic. This contributed to LNG sales; 2007 and 2008 were the years that produced the highest amounts of revenue for the country. That is when Trinidad became a downstream marketer. The gas value chain was changing. However, these changes went unnoticed by the government at the time.
What complications arose from lack of attention to upstream development?
The risk was with the downstream operators because they were investing in plants and the cheap supply of gas. They were thinking of ammonia, methanol and urea. We were finding less gas. It was more expensive to find gas, and we were finding it in smaller quantities. So, the operating cost of bringing that gas to the market became higher. The upstream operators were demanding a higher price for their gas as a result. There was logic to that.
There was literally a standoff. Unless fiscal terms were changed, unless there were better gas deals agreements with the NGC that offered upstream operators a better price, those operators were not going to spend their capital to look for gas. Around 2009, we started to see the first indications of that shortage. I do not think it was taken seriously enough by previous administrations. By 2010, under the former regime, the shortages became critical. When we took office, the greatest single challenge we faced was the gas curtailments.
How has the new government responded to the natural gas shortages?
I do not want to overpraise Prime Minister Keith Rowley, but he assumed a leadership role. His leadership skills are highlighted by two events. First, the famous Houston meeting where he closed the deal for the [BPTT-NGC] gas agreement and the sanctioning of Angelin.
We also closed the gas agreement with EOG Resources and the NGC. I have been quoted as saying that EOG Resources is the unsung hero in this gas business. They produce as much gas as Shell and all the gas is sold to the NGC. From the state’s point of view, the industry survives to a large extent because of EOG Resources. They are a low-cost operator and they are the preferred partner of BPTT for development of small fields like Sercan.
The prime minister also single-handedly brokered the Dragon-Hibiscus deal in Venezuela with President Maduro. However, given the current economic and political challenges in Venezuela, there has been some indication that the timeline of this project will be delayed. While it has gone to the governmental arrangements at the highest level, the operating entities would be PDVSA [Petróleos de Venezuela], Shell and the NGC. The project makes commercial sense for both Trinidad and Venezuela. We are confident, irrespective of who is in the governmental office of Venezuela, that when Venezuela has the opportunity to engage in much-needed foreign exchange, we will have the opportunity to deal with our gas-deficit position. It is a win-win situation. It will all depend on the gas-sales agreement and how it is constructed. However, these are commercial negotiations with specific formulas as to how to deal with them.
Is Trinidad and Tobago prepared to support the upcoming gas supply from Venezuela?
We are banking heavily on that. It is a win-win situation. We have a very advanced and sophisticated gas infrastructure on our west coast, whereas the east in Venezuela is largely undeveloped. We think we have a symbiotic relationship, especially as the deal has been brokered at the highest level between the Prime Minister and President. Sometimes to do business properly with some countries, it has to be sanctioned at the top levels. This is one project sanctioned by both leaders. I was there when we signed the agreement in Caracas a couple of months ago.
What other developments will contribute to alleviating the gas shortages? What has been the effect of curtailments?
Regarding the gas curtailment issue, Angelin is now sanctioned, Juniper is on-stream and TROC is on-stream. BP announced two new discoveries in Savannah and Macadamia. Those will be coming on-stream in 2019 and 2020 respectively. Dragon should be on line in the middle of 2019. Within two years, we will stabilise the supply and demand situation.
We are price takers. I do not lose sleep over the price of oil and gas. I would say that this is the first time in this business that pricing seems to be based on commercial and economic situations distinct from geopolitical situations.
One of the challenges we have faced is curtailments. There are numerous claims against the NGC by the downstream market, because they could not supply the gas. The claims are in excess of TTD 3.5 billion. We do not want to go into litigation or arbitration with any of the companies. We are working out commercial arrangements with them to see how we can settle the claims. Coming out of a bad situation from 2010 to 2016, I think we are starting to see light at the end of the tunnel.
How is The Gas Master Plan dealing with the critical issue of transfer price?
The state receives most of its money from taxation at the wellhead. This is currently calculated at what we call a netback pricing, which refers to what operators sell the commodity for minus Atlantic’s processing and transportation fees. Trinidad and Tobago’s largest revenue stream does not come from processing at Atlantic LNG; it comes from the wellhead at BP and at Shell. That is why it is so important that the cost structure reflects the actual cost of LNG.
Because we have offtake agreements that we cannot monitor, companies that operate in the upstream and downstream and in marketing can distribute their own costs for their own tax benefits. That is the state of play internationally. Our government has to protect the state’s resources and interests.
The gas master plan has written extensively on the issue of revenue leakages coming out of the transfer of cargoes and swapping of cargo on the high seas. It deals with the supply and demand balance over time and what incentives upstream and downstream operators are looking for. We are lucky, to some extent, that most of the plans are already being amortised. They are paid for. Possibly because of that, the downstream operators can now pay slightly more for the gas. They have already paid back for their capital.
Trinidad and Tobago has been a leader in the model for gas development. We have monetised gas more successfully than most countries through downstream petrochemicals, LNG and a proper evaluation of the value chain. Today as this evolves, we can be a world leader in understanding how the value chain is changing with the economic times. We can still be a leader crafting mature business relationships.
Which are the greatest strengths of the Trinidadian market?
One thing about this country is that we honour the sanctity of the contract. That is Trinidad’s greatest strength. No matter which regime is in power, no company has to worry about whether a new regime will not honour a contract agreed on by a previous regime. We take a very mature approach to our contract negotiations, our taxation system and to people being able to export their profits in a free market. Based on that, Trinidad is an attractive destination for investment.
On the exploration side, we have a maturing basin in what we call the Galeota Basin. With excellent science and technology, we continue to find oil and gas. As a geologist, I can tell you that nature does not give up its secrets easily. You have to search, you have to use technology and you have to use brainpower to find oil and gas.
We have a new gas province in the deep water acreage. This is largely being driven by BHP Billiton. They have drilled two wells. One was not quite successful; one did in fact find gas, estimated at around 5 tcf [142 bcm]. While that is marginal for deepwater, at least it is a good sign. BHP is committed to four additional wells; they will be drilling two at the beginning of 2018. We are hopeful that we will continue to find oil and gas.
Regarding the oil industry, how is the government planning to enhance Petrotrin´s performance in order to make it more profitable?
Our second major challenge outside of gas curtailments is Petrotrin. Over the last couple of years, they have done progressively worse as a company. They have been hampered by bad investment decisions of the past. While investment decisions were detrimental, the gas optimisation plan and the oil-sulphur for diesel were in fact well thought out projects in terms of refining optimisation. However, the project management and the cost overruns were terrible.
Added to this, there has been a constant decline in crude oil production, both onshore and in Trinmar. Here you have a company that is not producing the right slate of products at its refinery, whose crude oil production is declining and most importantly whose operating costs have gone out of whack.
The lifting costs for a barrel of crude oil in Petrotrin is approximately USD 40 per barrel. If your lifting and operating costs are USD 40 per barrel, and oils is being sold at USD 40 per barrel, how will you pay back for your investment to drill wells? The refinery’s gross margins are quite good, between USD 8 and USD 10 per barrel. But the net margin, which is gross margin minus operating costs and debt servicing, is negative. The company is in a state now where production is declining and its refinery margins are negative. This means that it is not generating working capital. It is up to its nose in debt.
To come out of that scenario, you need a substantive capital injection into the company to finish the ultra-low sulphur diesel plant and to drill new wells to increase production. This is especially true for Trinmar. Where does that capital come from? Petrotrin is not generating it internally. The company cannot borrow because it is already loaded with debt. The state has no money to give. Therefore, Petrotrin will have to engage in some innovative plans such as a joint venture or trade equity in order to inject capital.
What substantive steps have been taken to address the issues plaguing Petrotrin?
The prime minister set up a committee to look at Petrotrin. The report has been submitted and considered by the standing committee for energy. As we speak, the report is being considered by the cabinet. That is the reason I met with the union this week. I met with the board of Petrotrin and the management on Tuesday. We are on the cusp of making major decisions for the future of the company.
My personal mission as minister is to try and boost oil production. Right now we are producing around 75,000 bopd. By 2019, we want to be producing around 100,000 bopd. The key players here would be Petrotrin, Trinmar, and Perenco. It is the same team that used to produce 270,000 bopd. While there has been a natural decline in the depletion of the reservoirs, potential remains. What I like about Perenco is that it is a fit-for-purpose company. I expect some good things to come out of their ownership of the TSP assets.
We’ve discussed the serious ramifications of gas curtailments and some of the actions being undertaken to curb the shortages. Can we pivot and discuss the role of crude oil in Trinidad and Tobago’s economy?
As far as the state goes, oil is still better business than gas for three reasons. First, there is a royalty system on oil. For every barrel of oil you produce in this country, you have to pay 12.5% royalty from the top gross revenue. There is a more robust taxation regime for oil, there is a supplemental petroleum tax (SPT) and there is PPT [petroleum profits tax]. You also have a new stream that comes for the government from oil; this is still much better.
Second, there is no controversy as to how you price oil. Every single barrel of oil in this world is referenced. When you buy crude, you do not have to negotiate prices. The price is a benchmark. There is no issue of price, no issue of taxation. In that sense, it is a better business model. We have done well with gas, but gas has its challenges in terms of how you price it.
Third, the oil industry generates more business for services companies like Tucker Energy, Schlumberger, TOSL, Baker Hughes and Alli Wooden, and many others.
Most of the gas platforms are unmanned and a gas well produces trouble-free for most of its life. Oil wells you have to do workovers, maintain them, there is sand and wax production. In terms of the services industry and spin-off industries for a business multiplier effect and for labour, oil generates more. Bearing that in mind that, in a general sense, the upstream energy sector is capital-intensive; it is not labour-intensive. You put billions of dollars of investment that into it, but it doesn’t generate much employment.
What should international players expect from Trinidad and Tobago’s current taxation system?
The first tax comes off the top that is Royalty. Then there is SPT, the supplemental petroleum tax, which kicks in when oil is above USD 50 per barrel. Then there is a corporation tax, PPT, that is 50% on profits. While the percentage is high, the quantity of money you are talking about is so big that all parties can live comfortably.
We have been in this business for over 120 years. Every time we feel we are down and out, we recover. I have confidence that the industry will rebound. There are signs of it doing so. There is a lot of capital investment here, a lot of human resources investment. Speak to any multinational employee, one of the prime destinations for working in hydrocarbons is Trinidad and Tobago.
While the Ministry of Energy is not a direct investor in the energy industry, it does act as a regulatory and policy-making body on behalf of the government.
We are responsible for oversight and by extension, the Ministry of Energy is the primary economic mover. If energy is not doing well, Trinidad is not doing well. That is the importance of this industry.
How important are Trinidad and Tobago’s local companies and qualified workforce in terms of building strategic international relationships?
We have workforce capabilities in Trinidad and Tobago that are world-class. Human-resources capacity here is outstanding. As we speak there are Trinidadians who have the highest positions in the energy sector all over the world. We have done well. Successive administrations have invested heavily to ensure education and training for our people. One of our advantages is our human-resources potential; it is a source of diversification.
What opportunities is Trinidad and Tobago looking to engage in at the regional and international level?
As you know, we are trying to build strategic relationships now. There was a recent oil discovery in Guyana by Exxon. Guyana is a Caricom partner. We are the leaders in the energy sector here. We would like to establish a partnership at the governmental level. The business community is free to go out to try to access opportunities in Guyana. But Trinidad has to be careful that it does not bully Guyana, or enter its space.
In 2016, the Prime Minister went to Ghana. We had some initial contacts where we thought we would be doing some business, especially through the NGC. In December, elections were held in Ghana and a new regime came into power. I plan to visit Ghana again soon to re-engage the new administration. It has to be done at the highest level to make it work.
What do you think the Juniper development will bring to the country in the short term?
Production from the Juniper development will be online by the end of August. It will bring in 590 mcf [16.7 mcm] per day Most of it will go to Atlantic, but I think 100 mcf [2.83 mcm] will be going to NGC to assist the downstream issues. The main challenge we have now in the gas industry is how we split the gas between LNG and petrochemicals. Everybody has different vested interests. As a regulator, we want to be fair.
The upstream has their own interests and investments. They are entitled to do certain things within reason. We also have a state industry to protect. While it may not matter to BPTT whether Methanol Holdings leaves this country, it will matter to Trinidad and Tobago. We cannot sit idly by and allow that to happen.
In terms of sustainability, how do you see the renewable energies industry evolving over the next few years in Trinidad and Tobago?
I will be the first to admit that this country has not done enough. We do have a plan. We want to generate 10% of our energy from renewables by 2021. That is a very ambitious target and we have no proper system in place to do that. We have gone greener in championing the use of CNG and natural gas.
As we speak, all of our electricity is powered by natural gas. All of the generation is gas turbines, not fuel oil. We are making a concerted effort to convert as many of the gasoline engines to hybrid engines as we can. More importantly, because we have the natural gas available, we want to convert a lot of vehicular traffic to CNG. We will be announcing a policy shortly: all state vehicles will have to be CNG outfitted. We have some preliminary enterprises going on in solar and wind.
Chile is quite advanced in renewables. We do have some wind potential off the east coast. Regarding solar, we have to do the studies because cloud cover here is so abundant. The Middle East has all the sun and all the oil and gas. They could go to solar quite easily. As a country, we have to go with the flow.
We got too accustomed to being a country dependent on fossil fuels. I think we went to sleep as this whole revolution was taking place. However, it is not too late to catch up. I was a former minister of works and transport. One of our major challenges was public transport. We do not have an official public transportation system. There is a personal vehicle quality here, which, while it is justifiably based on need, it is not sustainable. It has been in a gridlock.
What developments are on the horizon that could further bolster Trinidad and Tobago’s oil and gas industry?
The ministry is going into another competitive bid round for deepwater and near shore blocks at the end of 2017. While we know it is a buyer’s market now, we still have to have these bid runs to keep the engine running, the conveyor belt flowing. If you do not make these decisions now, it hurts you in 2020. The gestation period for energy projects is five to seven years. What you do now, you will only see the benefits of it in five to seven years. These were decisions we were supposed to make in 2009, 2010. Now we are suffering for it.
For more information on The Ministry of Energy and Energy Industries in Trinidad and Tobago, including its involvement in deepwater efforts, see our business intelligence platform, TOGYiN.
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- From the field