Threat to gov’t gas revenues


“We can be losing up to 11 billion USD per year due to selling our Gas to low price markets and the GORTT needs to act now to rectify this”


Threat to gov’t gas revenues

Apr 17, 2012– Trinidad Express
Last Wednesday , the price of natural gas on the Henry Hub Index plunged to a ten-year low to US$1.96 per thousand cubic feet (MMBtu). It later fluctuated, hovering around the US$2 mark, where it seems destined to stay – unless unusual weather conditions drive up demand for the commodity in the United States. While Trinidad and Tobago no longer sells most of our LNG on the US market, reality is that we are very much a gas-based economy. When, therefore, prices plummet in a country like the USA, we need to understand what that could mean for us.
The above article prompted this piece which I found in my inbox this morning...PLEASE NOTE that I (Derren Joseph) did NOT write it...


Why are WE losing up to 11 billion USD per year: due to selling our Gas to low priced markets ?
Review explanation below:
·         Trinidad produces and sells approximately 4.1 billion cubic feet (bcf) or 4,100 million cubic feet (mmscf) or 4,100,000 thousand cubic feet (kcf) of gas per day.


·         This gas goes to two types of markets:


ü  Approximately 1,800,000 thousand cubic feet ( kcf) goes to the "local" market for mainly usage in the Point Lisas industrial estate at an average price of US $ 2.00 to US $3.00 per thousand cubic feet (kcf) .

ü  This gas is sold by the National Gas Company (NGC) after it buys this gas from the main Upstream producers – bpTT, bg, EOG and BHP and is equal to 44% of our gas sales.

ü  The remaining 2,300 ,000  thousand cubic feet ( kcf) goes to the Atlantic trains ( 1, 2, 3 and 4) for liquefaction and for sale to International markets and is called Export gas. This is equal to 56% of our gas sales. 

ü  Train 1 contracts ends in 2018, Train 2 in 2022, Train 3 in 2023 and Train 4 in 2027

What is the first problem:  - This export gas is sold at various prices depending on the gas sales agreements signed by various government administrations in the past.
SOLUTION: The market forces have changed considerably since these contracts were signed, and the contracts need to be reopened so that our gas price gets the best possible price.

Let’s understand gas pricing and then take a look at what these changes in the markets means for Trinidad:
What happens to our gas physically?
·         The gas goes from the well to the ALNG plant where it is liquefied and placed on ships then transported to a foreign country. Here it is regassified and then sold to a marketer of the gas who sells it to the customers in the foreign markets. 
·         The price the producer of the gas in Trinidad (bpTT, bg, Repsol ) receives is based on the price the marketer pays for the gas in the foreign country minus the re-gassification cost, minus the shipping cost minus the Atlantic liquefaction cost.
·         The upstream producer then pays taxes or share profit with the government usually in the rate of 50% to 55%. This is how we get value for our gas.  



Gas is sold in units called “million british thermal units”(mmbtu) which is closely equivalent to its volume measure thousand cubic feet ( kcf) so we can say gas is sold as a dollar per thousand cubic feet or $/kcf.
  

ü  Typically this final Marketer gas price is be based on one of three systems: 
§  the market prices in the regions where the gas is sold
§  the market prices in other regions (different from where the gas ends up depending on the specific contract that was signed) or
§  it may be based on linkages to the price of other commodities e.g. fuel oil and this type of contract is typically for long term sales. 

-          Generally gas prices linked to oil products will be higher than gas prices linked to gas or gas products because of the relationship between oil and gas in terms of energy base (which is what oil or gas is used for – energy) -:
-          Every barrel of oil is roughly equivalent to 5.60 units of gas. This means that if oil is selling at 100 $ /barrel an equivalent gas price will be (100/5.60 ) or 18 $/unit of gas which is quite high.  Currently US prices called Henry Hub is about 2$ per unit - A large difference



Let’s discuss the different pricing regions in the world:

ü  There are three main gas market regions in the world and each has a very different price. 

1.       Henry Hub or the United States market  - the lowest and currently about US 2.00 $kcf
($/ thousand cubic feet) . This market was about 4$ /kscf when the contracts were signed and was profitable. Currently the producer receives close to no cash or a negative price
(meaning the gas producer in Trinidad is literally paying the buyer  to take the gas). Luckily most contracts have a floor price of about 1$/kscf

The Henry hub is the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX). It is a point on the natural gas pipeline system in Erath, Louisiana. Spot and future prices set at Henry hub are generally seen to be the primary price set for the North American natural gas market.




2.       In Europe, the National Balancing Point (NBP) or the English market hub is the largest hub and is the mid price of the three regions and is currently about US 8.00 $kcf (thousand cubic feet ). 

NBP is a virtual trading location for the sale and purchase and exchange of UK natural gas. It is the pricing and delivery point for the ICE (Intercontinental Exchange) natural gas futures contract.

It is the most liquid gas trading point in Europe and is a major influence on the price that domestic consumers pay for their gas at home. It is similar in concept to the Henry Hub in the United States - but differs in that it is not an actual physical location.

Additionally there are by now 6-7 major gas hubs operating in Europe. Gas prices at these hubs have been 25% lower than the long term contracts prices (which are generally linked to oil prices).

Pipeline gas in Europe has been sold at oil-linked prices under long-term (20-25 years) take or pay contracts, meaning thereby that even if the buyer does not lift the gas, he pays for the gas.  Germany initiated this kind of contracts with Gazprom of Russia (Soviet Union) since the 1960s. The gas-to-oil price ratio in Europe has tended to vary between 50% and 75%; 50% at high oil prices and 75% at low oil prices.

For example, border gas prices in Germany are at 70% of the oil price which means if oil is 100$ /bbl the gas price will be 70% of (100/5.60 ) or 12.50 /unit. Again slightly higher than the trading hubs e.g. NBP but drastically higher than the US Henry hub market where most of our Trinidad contracts are linked to.



3.       Asian or Far East Markets - the highest payers for gas and currently about US 16 $ /kcf since most contracts here are linked to oil markers.

As we can see there are HUGE differences in the pricing - from 2.00  US$  to 16 US$ per unit currently and forecasted depending on smart gas contract pricing. for e.g. In June 2011,Henry Hub pricing was 4.41 USD/ unit,  Liquified Natural Gas spot prices in Europe were 9.60 USD per unit, as opposed to the contracts linked to High Sulphur Fuel Oil with prices of 16.68 USD per unit and with a crude oil linked contract on a one to one parity with prices of 22.58 USD per unit since oil was at around 125 $/bbl. (125/5.6 = 22.58 $). The corresponding marker prices in Japan in the same time period were 13.9 USD and DES India were at 13.17 USD. 
What did we get for our gas? No one in the public knows since gas contract pricing is kept a secret between the Government and the buyers of the gas. One wonders why?

This difference in pricing can be seen from the data below in the table from IHS Cambridge Energy Research Associates forward trends and Historical data derived from Intelligence Press. (Raw data in tables below).


The large difference can be seen between Henry Hub which is the red line and all of the other pricing mechanisms, the highest being JCC or Japanese Custom Crude linked contracts generally.

We can see the trend that the difference between the US markets (Henry Hub), the Europe
(Europe Contract and NBP) and Far East Markets (Japan Average, Asia Short Term and JCC Parity) is increasing. In Trinidad unfortunately a large percentage of our gas contracts are linked to the price of Henry Hub as mentioned before.

Have we reopened our contracts to maximize the value we get from our remaining limited supply?

Ø  Train 1 has two main buyers: GDF Suez and Gas Natural. Gas is sold to GDF Suez at a price of 77% of Henry Hub (US Gas price) whilst Gas Natural is sold at 69% a Henry Hub variant.

Woodmac estimates the weighted average forecast for the price BP will receive for its gas at the Train 1 plant entrance in 2011 is US$3.09/mcf under our current contracts.

Ø  In Train 2, GDF Suez in Train 2 sells for 63% of Henry Hub, Gas Natural and Gas de Euskadi sell at Gas Oil and Fuel Oil Linkages whilst gas goes to the Spanish market linked to what is called the Spanish Market Pool price. This is an interesting one and the net result is quite a low gas price even lower than Henry Hub pricing in the past. The Spanish market pool price is the price that the Spanish gas price regulator sells its gas to the power companies to regulate and control electricity price to its population.

Ø  Train 4 is linked to Henry Hub

Woodmac estimates the weighted average forecast for the price BP will receive for its gas at the Train 4 entrance in 2011 is US$2.36/mcf.




Let’s calculate the revenue for Trinidad under the different price assumptions:



*bpTT received on average 2.83 $/kscf for its gas in 2011.  Remember bpTT produces 2500 MMscfd out of 4100 MMscfd or 60% of our gas. This is still a huge difference from if they had recieved 8$/kscf or   16$ /kscf
Sample calculation for above table:
Export LNG Sales = 2300 MMcfd= 2300 * 1000 Kcfd = 2,300, 000 Kcfd
NBP Price Loss
If we assume NPB pricing at 8.00 $/kcf plus we have to pay an additional $ 1.00 for Liquefaction plus 1.00 $ shipping to get to Europe and 0.50 $ regassification, we get: 2,300,000* (8.0 -3.0) = 12,650,000 per day or 4,617,000,000 $ per year.  
ASIAN Market Price Loss
If we assume Asian pricing at 16.00 $/kcf plus we have to pay an additional $ 1.00 for Liquefaction plus 1.50 $ shipping to get to Europe and 0.50 $ regassification, we get: 2,300,000* (8.0 -2.5) = 29,900,000 per day or 10,913,500 $ per year.   
We are losing between 4.6 billion USD and 10.9 billion USD per year in cash coming into Trinidad if all of our cargoes are priced at the Henry Hub price. 
This is a huge difference for a small country like us since our entire budget is only 42 billion TTD or 7 billion USD.
This gas is the property of EVERY CITIZEN of Trinidad and Tobago and we deserve to understand why any of our gas is being sold at a lower price and even the lowest price available and not to the HIGHEST VALUE MARKET
Is this acceptable.....NO
More so because we have only about 13 years of gas remaining at the current consumption rates. - We produce 4.1 bcf per day (4100 MMCFD)  and have 19 tcf remaining we have  about 13 years gas supply as is documented by Wood Mackenzie below. We need to ACT now.
            


Additional Problems:
In 2009, the previous administration under Mr. Conrad Enill, realized another alarming situation. Our multinationals were selling the gas to their intermediate companies within their group who in turn was selling the gas or maybe diverting the cargoes to higher priced markets.
The local arm of the global multinational, say bpTT out of bP global received only what bp gas marketing company paid bpTT. The remainder of the cash was made by the group through their gas marketing affiliate. Therefore the taxes paid was not on the final sale price but on some low intermediate price.
Imagine this for operating ethically. What is sad is that our own locals who worked for these companies allowed this to happen.
In September 2009  the then Government proposed a change in the tax system whereby the Minister of Energy will determine the sale price of gas sold by Trinidad  ( and there by determine the profits to be taxed by the multinationals) calling the  “Deemed price of Gas” based on the ministry research on current pricing. This was an attempt to prevent this ethically bankrupt mode of operation.  This idea was vehemently opposed by the multinationals who promised to share the profits equally with the government going forward. The proposal was scrapped maybe because the government then was under pressure with respect to looming elections etc.

What has the developed and developing world done in terms of market changes?
·         Many countries have decided to adjust gas prices upward (Iran, Bahrain, Egypt, Brazil); others have renegotiated selected gas supply contracts on a regular basis to ensure their population gets the best value from a disappearing  resource.
·         Argentina has nationalized the Spanish owned assets of Repsol since the Spanish giant may have failed to meet contractual obligations and is not investing sufficiently but removing profits through dividends to Spain.  
·         Brazil has decided to hold multinationals accountable for their actions by deciding to prosecute acts of perceived negligence by Chevron and BP and seizing the passports of the directors so they can’t leave the country until prosecution is complete.

The US is now a NET EXPORTER of GAS and does not need our gas anymore. It will there fore not affect the US or affect relations if we move our gas to higher value markets. They DO NOT need it.





Immediate Steps:
1.       Can the readers of this article please investigate the above study and question the current decision makers as to why noting is being done.

2.        Educate the public as to what is going on with their Gas so they can begin to understand that it is their inheritance and then once educated will question why their  best interest is not being sought after.


3.       We need an Immediate Review and Termination of all sales to low price markets. Parliament can make or unmake any contract especially if it is this unfair to the owners of the resources...imagine the public does not know what is happening to our gas!!

4.       We need to sell as would any sensible and reasonable man, to the highest possible price he would get for his goods.. .....no one would sell their property to for the lowest price ......why  then have we allowed past governments to do so and present governments to continue allowing this to happen  ......especially when it is sold it is gone forever?? 

The government will say we are diverting cargoes to higher price markets since the USA does not need our gas anymore.  This is true to an extent since the USA is very recently a Net Exporter of Gas,  HOWEVER we need to be sure the gas is diverted to the highest priced markets and that fundamentally ALL is sent there now and in the long term. The public must be informed on the average gas pricing we receive each month for our Export  gas and explanations as to why we did not receive the highest value. 


Finally remember every day goes by we can be losing between 12.6 M USD (4.6 billion/ 365) and 30 MUSD (10.9 Billion / 365). This is between 80 million TT$ and 191 M TTS.
Readers please investigate and act now.











Appendix 1: – More detail on Gas Pricing in the Atlantic Export LNG Trains
1.       Train 1 : Twenty-year gas purchase agreements for 100% of Train 1 output were signed on 27 July 1995.  Cabot LNG (now part of GDF Suez) agreed to purchase 60% of output and Enagás (subsequently transferred to Gas Natural) the remaining 40%.  The gas is sold FOB on a netback basis, hence the revenues received by upstream producers is determined by the price realized in the US and Spanish markets.  The variations in FOB (Trinidad) price is shared between BP and Atlantic LNG on an approximate 55:45 split.  There is no wellhead floor price. 

The FOB netback price in Trinidad for deliveries into the Americas is generally calculated by taking into account the difference between Henry Hub and the local price of gas (the Pricing Point Differential), subtracting a regas cost of roughly US$0.35/mmbtu (depending on the terminal), a pipeline transportation and a shipping cost.  Our estimates of shipping costs vary depending on destination, but for the US Gulf Coast terminals they are in the order of US$0.45 - 0.55/mmbtu.  Regas costs are inflated at 1% and shipping costs at 0.50%.

The FOB netback price in Trinidad for deliveries into Spain are calculated by taking into account the DES (delivered ex-ship) price of the LNG in Spain, set by an oil-linked contract, and deducting a shipping cost of around US$0.80/mmbtu.
Woodmac estimates the weighted average forecast for the price BP will receive for its gas at the Train 1 plant entrance in 2011 is US$3.09/mcf under our current contracts.
2.       Trains 2 and 3 gas:  is sold under a netback mechanism in which the upstream producers and the Government carry all the price risk.  To guard against falls in upstream tax revenues during times of low gas prices, the government secured a floor price in the pricing mechanism of US$0.75/mmbtu.  The Train 2 and 3 plants do not take any price risk (unless the gas price falls below US$0.75/mmbtu).  Instead they charge a processing fee ('tolling arrangement') for the gas passing though them in order to recover costs and receive an agreed rate of return (of around 12% nominal).  The tolling fee in 2011 will average around US$0.83/mmbtu per unit of LNG sold.
The netback gas price is calculated by taking the prevailing gas price at the point of delivery of the regasified LNG into the end-user market (primarily North America or Spain) and subtracting the re-gasification cost, the cost of shipping the LNG from Trinidad, the tolling fee and plant losses.

The FOB netback price in Trinidad for deliveries into the Americas is generally calculated by taking into account the difference between Henry Hub and the local price of gas (the Pricing Point Differential), subtracting a regas cost of roughly US$0.35/mmbtu (depending on the terminal), a pipeline transportation and a shipping cost.  Our estimates of shipping costs vary depending on destination, but for the US Gulf Coast terminals they are in the order of US$0.45 - 0.55/mmbtu.

3.       Gas sold to Train 4 is sold under a similar tolling arrangement to T2 and T3.  The allowed rate of return for the plant is similar (11% nominal) but, because Trains 2 and 3 are effectively a two-train operation, they have slightly lower unit operating costs than T4.  Hence T4 needs to charge a somewhat higher tolling fee.  In 2011 the tolling fee will average around US$1.15/mmbtu per unit of LNG sold.

As with Trains 2 and 3,  the netback gas price is calculated by taking the prevailing gas price at the point of delivery of the liquefied LNG into the end-user market (primarily in North America) and subtracting the re-gasification cost, the cost of shipping the LNG from Trinidad, the tolling fee and plant losses.Fatca Law Singapore
Woodmac estimates the weighted average forecast for the price BP will receive for its gas at the Train 4 entrance in 2011 is US$2.36/mcf.


Comments

  1. dude, get your sh*t straight - NBP is not used as a benchmark for LNG contracts - European gas is sold on a Oil/fuel oil/gas oil indexation basis usually a 3 to 6 month lag and 9-12% indexation with some inflation or coal oil constant mixed in - I agree with your point to get higher prices for gas, it is very valid but with the current oversupply of LNG/gas in general in the market, best bet would be to declare force majeur and shut the gas in and wait for prices to rebound! YOu are never going to get Trini gas into EU or Asia...market forces bro, read up on that sh*t on Woodmac... And best of luck trying to get your gas to Asia, the transport diff just kills it...oh wait the Panama Canal expansion...yeah sure, maybe in 2015...not. maybe sell all the gas to Spain...oh wait all the players are diverting it away to higher priced markets in Asia, due to the lack of....wait for it GAS DEMAND! Get educated, then write some sh*t

    ReplyDelete
    Replies
    1. Hi - thank you for commenting. Perhaps you only skimmed the first paragraph. That's the one in which I explained that I did not write it.

      Someone sent it to me and I placed it here as I think some good points were made.

      I should say however, that I am not the type of person to be condescending with anyone with whom I have a difference of opinion. So do not feel that you need to hide your identity. I enjoy respectful exchanges on nation building issues.

      I do look forward to hearing more of your ideas.

      Have a good evening.

      Delete

Post a Comment

Popular posts from this blog

Perpetual Nomad? Is it possible to pay taxes nowhere?

Converting an LLC to an S Corp

Taxation of Digital Products

6 Steps to Starting Your Location Independent Business

5 Things to Consider in Choosing the RIGHT International Tax Advisor