Risk and reward in the Trinidadian market

Trinidad and Tobago

Jonathan Walker, head of dispute and risk management at M. Hamel-Smith and Company, talks to The Energy Year about the expected impact of recent fiscal revisions for petroleum activities and the factors affecting returns on downstream investments. Hamel-Smith is a full-service corporate/commercial law firm based in Port of Spain.

What impact do you expect to see from the 2023 petroleum fiscal revisions?
The government is to be congratulated for taking steps toward revising the petroleum fiscal regime, and the impact of those steps can be seen in the improved response to the bid rounds. It’s a good sign because it indicates that the government is listening and open to addressing the concerns raised by the industry. The changes are welcome, but there remains work to be done to improve the fiscal regime for fossil fuel production.
Unfortunately, the adjustments that have been made are not likely to improve the current concern around increasing gas supply levels. Firstly, the SPT [Supplemental Petroleum Tax] revision concerns oil production and does not directly concern natural gas. Secondly, the changes are relatively limited in scope – with the adjustments applying more to mature fields than to the newer provinces. While this will no doubt be of benefit to some of the smaller players, it is not likely to impact the larger producers upon whom the country relies for the majority of its production.
Accordingly, as useful as the adjustments are in helping to incentivise producers to maximise on the resources that still exist in mature fields that can only be retrieved via new technologies and techniques, there remains more that can be done, and which needs to be done as quickly as possible, to address the production of natural gas.

What key factors need to be considered when making new capital investments in the local energy market?
Capital goes where it gets the best return. The attractiveness of the return in the current industry in Trinidad and Tobago depends on a combination of different factors. One such factor is how value is shared along the value chain. There needs to be a discussion about the financial return that is generated from the ultimate sale of those molecules, and how that value is aligned with the risk that each of the entities in the value chain takes.
It is understandable and right that the nation should get a fair return from its natural resources, but we are faced with increasing competition for capital investment. A balance needs to be struck, and care must be taken to ensure that the local environment remains attractive not only to the upstream producers but also those in the downstream petrochemical sector who are taking the main operational and commercial risk.
Aside from the allocation of the commercial reward, further work can be done in terms of carbon capture, especially with the soon-to-be-introduced adjustment mechanisms which effectively impose a carbon tax on certain carbon-intensive goods entering the EU in order to encourage cleaner industrial production. The net effect is that our exports into the EU will become less competitive.
There are solutions to this challenge, many of which provide an opportunity for many of the industry’s existing stakeholders to pivot into a new but related area of operation (such as the sequestration of carbon and the storing of carbon in old, depleted fields). The good news is that the government is sensitive to the issue, though quicker action is required.

Which downstream product holds the most potential to secure the best financial returns for the local market?
Global prices are volatile and fluctuate frequently, so one can debate where there will be the best return. If we look at the commodities and the factors influencing their prices, there are questions that would need to be addressed in order to discern which is better to invest in.
The netback from LNG, on a per molecule basis, is less than from the petrochemicals sector, but the volume of LNG that is exported is higher so the aggregate revenue will undoubtedly be higher. The challenge that can result from only focusing on LNG, however, is that it uses up the natural gas resource more quickly so that the gains are likely to be more short-term gains.
Here again, a balance needs to be struck between the volumes of natural gas that are allocated toward LNG, ammonia and methanol so that each producer continues to be incentivised, the netback to the government is maximised and a hedge is maintained to protect against price fluctuations amongst each of those commodities.

What key risk factors should potential investors consider in the Trinidadian market?
At this point in time, the biggest risk for an investor looking at the Trinidadian market is the availability of a steady gas supply. Given that the average monthly volume of gas produced in 2023 was a little more than one-half the average produced in 2013, and we have witnessed the shuttering of a number of petrochemical plants, it is understandable that many would conclude that confidence in the local industry has waned. But I believe that there is cause for a measure of optimism. In particular, it is telling that multinationals have, by their actions, expressed confidence in the local industry.
If we use the Proman Group as an example, among the various downstream producers they have the most petrochemicals plants sited in Trinidad and account for more than 50% of the petrochemicals produced locally. The fact that Proman has confirmed its expected spend of USD 1.1 billion in plant turnarounds for the next 10 years is the strongest and clearest signal to an investor that Proman is confident that even though there is a gas supply challenge, there will likely be improvement and the industry will remain viable.
Their investment is therefore an expression of confidence and a signal to the global community of investors that there remains a sound basis for investing in Trinidad and Tobago.

How do you view the strides made by the minister of energy to begin cross-border gas field developments with Venezuela?
This is another area in which the government should be congratulated. No other singular event in the last decade will have the same impact on the local industry as the work that the government, and in particular the minister of energy, has done in securing the easing of sanctions against Venezuela and in negotiating terms for the development of those fields.
Developing the cross-border fields will not only boost production significantly but will hopefully return the supply to a much more stable level so that the plants can run more efficiently and are not adversely affected by fluctuations in supply. There remains an element of risk, especially when one considers the various geopolitical factors, but the minister has done a good job to date and the industry is confident that he will continue to manage these risks.

What are the benefits and concerns involved in having standardised certification requirements in the energy industry?
Standardised certification requirements assist in ensuring that there is consistent, predictable performance as well as a minimum level of quality. This is important in almost all areas of operations, but no more so than with safety. A safety incident can result in the ultimate loss, the loss of life. From an operational perspective, a lost-time incident, or anything else that halts operations due to safety concerns, has a negative economic effect for the company. It is worth investing in ensuring that those events are kept to a minimum.
Companies need to pursue continued certification, as well as education and training of their workforce to ensure that they maintain those levels of quality. Ultimately, however, no matter how many certifications are obtained, it is important that everyone has the right safety mindset at all levels of the workforce since a failure to follow the proper safety protocols and procedures can lead to serious incidents and potential fatalities.

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