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Who blinks first?
The public stand-off between Caribbean Nitrogen Company, and the National Gas Company came as a surprise to many casual observers of the energy sector. Truthfully, those within the sector have grown all too familiar with the current gas curtailment situation gripping the downstream segment of the industry.
Perhaps what makes this saga so interesting—beyond its sheer abruptness—is the fact that the two companies seem to be locked in a game of “chicken” over what happens next.
Stalemates between state enterprises and private sector companies always provide good theatre, and this one hasn’t disappointed. There are, however, some fundamental, if not perplexing issues that require deeper exploration.
To start with, CNC, as a downstream ammonia producer would have, for years, operated in an environment with historically cheap gas at its disposal.
The company would have reaped significant financial benefits as a result and remitted to the state its fair share. Those days are obviously over.
The era of cheap gas in T&T has effectively come to an end, as signalled by NGC chairman Gerry Brooks, and the reality is that downstream companies operating in the country will eventually have to adjust to this “new normal”, if they haven’t already. The absolute worst case scenario for the country would obviously be if they choose to deploy their capital elsewhere.
But what makes this a bit of a conundrum is that from CNC’s perspective, the company doesn’t appear to be making price its sole bone of contention with NGC. In fact, the company’s CEO has said that his company is willing and able to pay above what its American competitors currently pay for natural gas.
So if price—which is often the sticking point in many negotiations—isn’t the singular issue, then what is?
Contract negotiations will always operate within a confidential framework but CNC’s CEO’s words point to something thought-provoking when he said that his company could not accept NGC’s “final offer”—not price, but offer.
Further, his call for “NGC to be transparent and stop hiding behind vague statements that don’t have any basis in reality” strikes one as quite instructive. Pardon the suspicion but, as the saying goes, there seems to be more in the mortar than the pestle. As both companies head to arbitration in the UK, more is likely to be revealed in due time.
With regard to NGC, to say that it finds itself caught between the proverbial “rock and a hard place” would be an understatement.
Company president Mark Loquan himself signalled late last year at an Energy Chamber function that he expected 2018 to “be challenging” with gas shortfalls likely to remain.
In an environment where gas supply is reduced, having to pay more for the diminished commodity from upstreamers would certainly present its own financial challenges to the gas aggregator.
Couple this with the fact that the company has been making provisions in its financial statements for litigation by companies for whom it has not been able to supply its contractually agreed upon gas, and one gets a reasonably clear sense of the bind the company finds itself in.
Even the prime minister when asked in Parliament about whether an independent audit should be conducted into NGC’s gas supply, he said such an audit would be of interest to all to determine whether “NGC should be in business at all.”
The State’s concern is obvious. From the Government’s perspective, NGC profits have become an extremely important source of fiscal revenue.
The question that surfaces, therefore, is whether the NGC model is still a competitive one?
Incidences such as the MHTL shutdown last year and now CNC’s scenario make this question worthy of serious contemplation by those with responsibility for oversight of T&T’s patronage.
Is it that as successive gas supply contracts come up for renegotiation with the downstream players that the country should expect more stand-offs such as these?
Certainly as the “gas middleman”, NGC’s entire role in the value chain might perhaps require sober reflection—something that only tough times usually calls for.
What is also a cause for concern would be the sustainability of future or yet-to-be-completed downstream projects that require currently scarce and progressively more expensive gas.
The natural gas to chemical plant in La Brea which is expected to initially use 100 million standard cubic feet of gas per day once up and running (NGC has a 20 per cent interest in the project) comes to mind immediately. It will be interesting to see how these situations resolve themselves in the future and whether they have any impact on the perception of T&T as an attractive market for petrochemical investors.
For the time being, however, as NGC and CNC duke it out for what each party believes it is entitled to, the question of who blinks first remains.
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